“If you do build a great experience, customers tell each other about that. Word of mouth is very powerful.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
July 15, 2019
Fiat Lux
Featured Trade:
(HOW SOFTBANK IS TAKING OVER THE US VENTURE CAPITAL BUSINESS),
(SFTBY), (BABA), (GRUB), (WMT), (GM), (GS)
The man with the 300-year vision - Softbank’s Masayoshi Son.
He is the sole force exerting stultifying pressure on the venture capitalists of Silicon Valley.
What a ride it has been so far.
His $100 billion SoftBank Vision Fund has put the Sand Hill Road faithful in a tizzy – utterly revolutionizing an industry and showing who the true power resides with.
He has even gone so far as to double down on his exploits by claiming that he will raise additional $100 billion fund every few years and spend $50 billion per year.
This capital logically would flow into what he knows best – technology and the best technology money can buy.
Lately, Son said it best of the performance of the Vision Fund saying, “Results have actually been too good.”
So good that after this June, Son changed his schedule to spend 3% of his time on his telecom business down from 97% before June.
His telecommunications business in Japan has turned into a footnote.
It was just recently that Son’s tech investments eclipsed his legacy communications company.
Son vies to rinse and repeat this strategy to the horror of other venture capitalists.
The bottomless pit of capital he brings to the table predictably raises the prices for everyone in the tech investment world.
Son’s capital warfare strategy revolves around one main trope – Artificial Intelligence.
He also strictly selects industry leaders which have a high chance of dominating their field of expertise.
Geographically speaking, the fund has pinpointed America and China as the best sources of companies. India takes in the bronze medal.
His eyes have been squarely set on Silicon Valley for quite some time and his record speaks for himself scooping up stakes in power players such as Uber, WeWork, Slack, and GM (GM) Cruise.
Other stakes in Chinese firms he’s picked up are China’s Uber Didi Chuxing, China’s GrubHub (GRUB) Ele.me and the first digital insurer in China named Zhongan International costing him $500 million.
Other notable deals done are its sale of Flipkart to Walmart (WMT) for $4 billion giving SoftBank a $1.5 billion or 60% profit on the $2.5 billion position.
In 2016, the entire venture capitalist industry registered $75.3 billion in capital allocation according to the National Venture Capital Association.
This one company is rivalling that same spending power by itself.
Its smallest deal isn’t even small at $100 million, baffling the local players forcing them to scurry back to the drawing board.
The reverberation has been intense and far-reaching in Silicon Valley with former stalwarts such as Kleiner Perkins Caufield & Byers breaking up, outmaneuvered by this fresh newcomer with unlimited capital.
Let me remind you that it was once considered standard to cautiously wade into investment with several millions.
Venture capitalists would take stock of the progress and reassess if they wanted to delve in some more.
There was no bazooka strategy then.
SoftBank has promised boatloads of capital up front even overpaying in some cases in order to set the new market price.
Conveniently, Son stations himself nearby at a nine-acre estate in Woodside, California complete with an Italianate mansion he bought for $117.5 million in 2012.
It was one of the most expensive properties ever purchased in the state of California, even topping Hostess Brands owner Daren Metropoulos, who bought the Playboy Mansion from Hugh Hefner in 2016 for $100 million.
If you think Son is posh – he is not. He only fits himself out in the Japanese budget clothing brand Uniqlo. He just needed a comfortable place to stay and he hates hotels.
SoftBank hopes to cash in on its $4.4 billion investment in WeWork, an American office space-share company, proclaiming that WeWork would be his “next Alibaba.”
The company plans to shortly go public.
Son continued to say that WeWork is “something completely new that uses technology to build and network communities.”
Other additions to SoftBank’s dazzling array of unicorns is Bytedance, a start-up whose algorithms have fueled shot form video content app TikTok.
The deal values the company at $75 billion.
They have been able to insulate themselves from local industry giants Tencent and Alibaba.
Son has revealed that the Vision Fund’s annual rate of return has been 44%.
Cherry-picking off the top of the heap from the best artificial intelligence companies in the world is the secret recipe to outperforming your competitors.
At the same time, aggressively throwing money at these companies has effectively frozen out any resemblance of competition. Once the competition is frozen out, the value of these investments explodes, swiftly super-charged by rapidly expanding growth drivers.
How can you compete with a man who is willing to pay $300 million for a dog walking app?
This genius strategy has made the founder of SoftBank the most powerful businessman in the world.
Son owns the future and will have the largest say on how the world and economies evolve going forward.
"We are unicorn hunters." - Said Founder and CEO of SoftBank Masayoshi Son
Mad Hedge Technology Letter
July 12, 2019
Fiat Lux
Featured Trade:
(CLOUD SECURITY ON THE MARCH)
(OKTA), (ZS), (CRM), (AMZN)
Take a look at these beauties that I recommended at the beginning of December 2018.
At that time, Okta (OKTA) was trading at $62 and Zscaler (ZS) was at $40 on the button – fast forward to today and Okta is now over $136 and Zscaler victoriously sitting at $82.
Oh, how do times change!
That was my reaction watching their performance for the past 7 months giving belief to my assessment that second-tier cloud companies will have a field day this year.
Cloud companies aren’t going away anytime soon, please tattoo that on your forehead.
There isn’t a hotter topic circulating the gossip winds these days than digital security pressured by geopolitics.
Okta is the best in show for identity management – a snazzy term for managing employees’ passwords.
Okta’s products are built on top of the Amazon Web Services cloud.
Coincidentally, Okta was erected in 2009 by a team of former Salesforce (CRM) executives. Salesforce is one of my favorite cloud-based software companies, offering a blueprint for success to other up-and-coming software companies.
Current Okta CEO and founder Todd McKinnon previously served as the Senior Vice President of Engineering at Salesforce.
Other founders include Okta COO Freddy Kerrest who also meandered through the corridors of Salesforce.
I can tell you that you could do much worse than starting a new software company with a collection of Salesforce upper echelon talent.
This all-star team is behind the insatiable growth of Okta whose revenue has grown over 600% since establishing itself.
Okta’s first-quarter results didn’t disappoint with revenues of $125 million—a rise of 50% year-over-year beating the consensus of $117 million.
Subscription revenues comprised 94% of sales and the company expects sales of $130 million amounting to a rise of 37% year-over-year.
Okta’s subscriber base has risen over 500% in the past 5 years and annual contract value of over $100,000 has expanded 60% annually.
The company still loses money but hopes to make some headway on this issue with projected EPS estimated to grow 25% annually in the next five years.
This year spawned a massive divergence between tech who has legs and tech who will be dragged down to the depths of the ocean floor by the heavy weight of regulation, overwhelming competition, or just flat out poor management or inferior product development.
Zscaler echoed similar positive sentiment of Okta by recording a quarter to remember growing revenue by 61% year-over-year while calculated billings grew 55% year-over-year.
In addition to the top line growth, operating margins improved 14% points year-over-year to 8%.
The quarterly results demonstrate the leverage in cloud security business models and the ability to drive growth and profitability.
String together a third consecutive quarter of profitability is just part of the battle, Zscaler will continue to aggressively invest for significant market opportunity that lie ahead.
Cloud security potential means going after a $20.3 billion Total Addressable Market in calendar 2019.
Let me divulge a tad bit about the competitive landscape and why Zscaler is brilliantly positioned for success.
As organizations increasingly make the shift to the cloud, traditional firewall and VPN vendors are finally acknowledging that the legacy security appliances can secure the new digital enterprise and are attempting to build a security cloud using single tenant software designed for on-premise appliances just like you can't create a Netflix service by stacking thousands of DVD players in the cloud.
You can't offer an inline high-performance security cloud by spinning up a bunch of virtual machines in a public cloud. This is a defensive strategy of cloud imitators which, in our view, serves the self-preservation of the vendor, not the needs of the customers.
Zscaler has a significant competitive advantage as a result of the technology, architecture and maturity of cloud security platform including one, Zscaler was born in the cloud, for the cloud just like Salesforce and Workday.
Two, Zscaler has a purpose built globally distributed multi-tenant cloud for fast user experience, unlike imitation cloud, Zscaler requires no back hauling from front doors to a central computing data center of a public cloud.
Three, Zscaler performs SSL inspection at scale as a purpose-built proxy for better security.
Lastly, Zscaler continues to deliver zero trust network access that provides application access without network access reducing business risk unlike firewalls and VPNs.
The duo of Okta and Zscaler are the bright lights of the cloud generation and leading the digital economy in digital security.
"Software is like Lego. You can make anything with it, but it may not be appropriate." - CEO of IMC Worldwide Stuart Sherman
Mad Hedge Technology Letter
July 10, 2019
Fiat Lux
Featured Trade:
(THE LOPSIDED WORLD OF TECH)
(FB), (GOOGL)
Is it unfair?
No, technology is afforded higher multiples than other industries and it’s completely justified.
Don’t allow anyone to convince you that tech companies are expensive because there are plausible reasons why they are expensive and will get even more expensive.
Technology sits on its perch as the single best investment opportunity of not only our lifetime but our children’s lifetime as well.
Huge capital investment is pouring into this glorious opportunity from gleaming offices on Wall Street to Sand Hill Road venture capitalists and even the Saudi Royal Family.
What is money not going into?
If you drive around the urban and suburban roads of America, it’s obvious that not much is going into new infrastructure.
America hasn’t even built a new airport for the past 30 years which CEO of JP Morgan loves to remind his followers of.
The sad truth is that capital is spilling over into the technology sector.
Eclipsing anything that you might believe, technology provides the optimal vehicle to innovate and evolve while offering a platform to incite a surge in performance and profitability.
The agent that is being harnessed to innovate and evolve is the software that is being programmed up to help a slew of other sectors.
Even if a sector hasn’t been touched by the tentacles of software innovation, they rarely stay virgin for long.
Much of the incubator stage capital is funnelled into considerable expenditures on research and development by technology companies, but also the capital is the catalyst to a reactionary tale of steroidal growth fueled by a pipeline of innovative products, services, and unique features.
These products and services are then spread through and delivered to ancillary arteries that serve the subset of the broader economy.
The result is a massive tsunami in incremental productivity when high grade software supercharges every business that implements and integrates the software inside the confines of their business structure.
The supercharge effect of software rapidly forces companies to either evolve fast or go extinct, meaning that whole industries are transformed overnight when they get a whiff of what is happening with their competitor.
Computers and hardware used to take up entire warehouses - they were oversized, bloated, and tended to perform poorly at first.
The evolution of hardware has delivered shiny, modern pocket-sized devices packed with potency.
CEOs are able to manage companies of 10,000 employees just on a screen the size of a wallet all harnessed by, you got it - software.
Even more unbelievable is that the concept of technology must outdo itself, upgrading with every iteration in an increasingly short amount of time, or be cannibalized by a competitor in a blink of an eye.
In the survival of the fittest, the tech industry is the alpha male industry of the American economy.
Nobody understands in what form or shape it will manifest itself in just down the road but it will be the 800-pound gorilla in the room.
Even though software is the fulcrum of the tech industry today, it doesn’t mean it will always be that way.
Trends diverge quickly and you can even ask a semiconductor executive facing a bout of weakness stemming from geopolitical one-upmanship.
Semiconductor companies have been dragged into the middle of a hegemonic battle between the two most dominant economies in the world and revenues will degenerate short term.
Key semi products will not be relinquished because the artificial intelligence that complements these high-grade chips will be the crucial element that determines who runs the world once 5G networks are erected.
Taking away the building blocks that facilitates the artificial intelligence will make it more difficult to produce the finished product.
Handheld devices are another product that has been sidelined for the time being because the global market is currently saturated by smartphones and tablets.
Software has been a key theme for the Mad Hedge Technology Letter and there are no signs of abatement for the foreseeable future.
The truth is that the world will not function without software as we know it and the omnipresence of software stems from the need to automate everything from healthcare devices down to autonomous vehicles.
Even better, software can withhold devastating economic capitulation as many of these companies have bought in to the software miracle and is a fixed part of their model that can’t be replaced.
Just the bare bones type of model badly needs sufficient IT functions to survive.
Then consider that cybersecurity is more and more a part of management’s plan to protect the digital fort from the back to front.
Software requires minimal infrastructure and is difficult to protect via patents or copyright to any effective degree signaling that if software isn’t perpetually improving, they are at risk of being disrupted.
The low barriers of entry consequently mean grassroots start-ups with innovative, game-changing products can appear with a wave of a wand.
After-sales support of the software is becoming a critical part of revenue as software is becoming more complex and requires granular consultation to apply the full range of capabilities demanded of it.
Software as a service (SaaS) is the new payment model that has also poured gas onto the revenue flames.
Software programs used to be purchased once for a fixed price.
The exchange of tender resulted in the consumer obtaining CDs that they inserted into a personal computer hard drive then installed on the desktop.
The technology industry shaped up and realized it could not only extract a one-time fee for software services but accrue an annual fee with the promise of timely and prompt upgrades via the cloud.
A win-win situation unfolded.
In some cases, this has allowed the same companies to make 500% more from the same product and deliver higher performance through enhanced functionality by deploying frequent updates.
And yes, the trade war is stealing some of the tech industries mojo, but software stocks will be most insulated.
The long-term trends are still intact and investors must understand these stocks have had incredible run-ups the past few years, not to mention a great first half of 2019 that saw most software stock rise over 30%.
Investors should be patient and advantageous entry points will be served on a platter but also differentiate between good and bad software stocks.
“Our production system was based on knowledge from former Toyota engineers and we've incorporated a Japanese quality control system too.” – Said CEO of Huawei Ren Zhengfei
