Mad Hedge Technology Letter
June 28, 2019
Fiat Lux
Featured Trade:
(THE PATH TO THE HOLY GRAIL)
(UBER), (LYFT)
The pieces are starting to fall together.
This is what Lyft and Uber were hellbent on and they will finally get their cake and eat it too.
At least one of them will.
The holy grail of Lyft and Uber is eliminating the human element to the business.
Phoenix, Arizona is the first site for Lyft’s app collaborating with Waymo’s technology to offer autonomous rides via Lyft’s platform.
This could be the beginning of the end for Uber if Lyft meaningfully pulls ahead.
Why is the human element a roadblock?
Humans complain, get sick, file lawsuits for a lack of benefits, and humans post exposes on companies running amok.
Doing away with that will not only rid Lyft and Uber of high-risk liabilities, but it will boost profitability to the point where these companies will be healthily in the green.
Uber riders were only on the hook for 41% of the actual cost of transportation in 2016, the rest was comprised of generous subsidies making up part of the payments to the driver on top of the driver’s wage.
Let me put this in perspective. Lyft made $2.2 billion in revenue last year according to the filing for their IPO, and they lost $900 million from servicing this revenue.
Everybody knows that the gig economy is just a stop-gap measure until tech companies can go full on autonomous and direct operations with one click of a button buttressed by an all-terrain algorithm.
If you thought Uber was a tad better, then you were wrong. Operating losses of $3 billion on $11.8 billion in revenue and a total debt on $8 billion is tough to stomach.
If Lyft were finally able to remove the subsidies because of cost associated with human drivers and then kick the driver to the curb, margins would explode by around 50%.
Being a public company now, the competition will rise to a fever pitch.
The first to remove the driver is effectively an existential dilemma for both companies and I believe Lyft partnering with best in class Waymo will give them the upper hand.
Giving the keys to a vaunted FANG to supercharge your business isn’t a bad idea.
And remember, if you short Lyft, you are betting against Alphabet engineers who have made Waymo into the best in show.
You could do a lot worse.
And it could so happen that Lyft might even tap more Alphabet expertise to hypercharge its business.
It’s definitely not in the realm of fantasy and I already know that Lyft is receiving substantial help from Google ad.
Pre-IPO days were all about jockeying for market share to see who could grab the most volume and now the battle stands with Lyft holding 34% of the market with Uber pocketing with the rest.
Uber has relinquished much of their dominance after bleeding users stemming from bad management decisions.
Now the pendulum is swinging towards the big question of how soon will these companies be profitable?
Luckily for Uber and Lyft, future trends are quite favorable, with data showing that by 2040, 33 million of the vehicles sold annually will be fully autonomous.
Nearly every automaker is developing self-driving systems right now, and semi-autonomous features such as automatic braking, lane-keep assist, adaptive cruise control already are complementary in new vehicles.
Now the game is to continue the subsidies in order to tighten market share but integrate autonomous cars into the business model as fast as possible.
This is all about execution and the management behind the reigns.
By doing this, Lyft and Uber will reduce its expenses and finally become profitable, it would almost be akin to if Spotify stopped paying for music royalties.
Lyft has set the first cone on the floor and I found it interesting that it was Lyft and not Uber.
When we peel back the layers, investors must understand that Alphabet made bets on both Uber and Lyft.
Six years after making what at the time was its largest venture investment ever, Google's $258 million bet on Uber has multiplied by about 20-fold to be worth more than $5 billion.
But it’s not about the appreciating assets that matter the most.
Alphabet knows that one of these platforms will dominate in the end and want to benefit from it either way.
CapitalG, the late stage investing arm of Alphabet, has almost tripled the value of its investment in Lyft at today’s prices after investing $500 million in Lyft in October 2017.
Alphabet has its fingerprints all over Uber and Lyft at this point with not only supplying the map that is displayed on these platforms through Google maps but also leading the marketing operation infusing its best of breed ad tech into these platforms.
It’s obvious that Alphabet has covered its bases with the autonomous transport services and whether its Lyft or Uber that wins out, Waymo taking the initiative to partner with these platforms will make Alphabet the clear winner.
Lyft has all its eggs in one basket with a domestic transportation app while Uber has different interests which could be dragging them away from the autonomous driving opportunity.
Uber did have major setbacks after their technology was the fault of several fatalities.
The first-mover advantage is the key to seizing the bulk of the market.
I am interested to see when Uber will partner with autonomous technology, but for the moment they aren’t because they are developing their own self-driving tech.
This is a risky strategy because Lyft has understood its shortcomings and paid heed to the more sophisticated technology being Waymo and is now actively partnering with them.
They probably understood that they would never be able to beat Waymo.
This unit started off shrouded in secrecy in 2008, a full 5-years before anyone moved a finger of autonomous driving.
Uber is developing its own autonomous fleet which in theory could become a larger business than Waymo and Lyft, but they are battling a company who had a 7-year start and the result of that is Uber trying to shortcut to the top resulting in its technology getting sidelined.
Uber’s self-driving unit is in the bad graces of safety regulators and I would only give Uber a 15% chance of usurping the leader Waymo.
To this point, I believe Lyft will be the main transport app for Waymo in the future, and Waymo having the highest chance to be rolled out nationally.
This is incredibly bullish for Lyft and Alphabet.
Uber still isn’t on the radar with its self-driving technology and being a frenemy in this sense with Alphabet will hurt Uber.
If Alphabet cashes out on its Uber shares, not only could they earn a hefty profit, but it would signal that Lyft will be their main transport app for autonomous driving and Uber has lost out on self-driving technology.
I am now bullish on Lyft and neutral on Uber but waiting on how Uber responds to this massive leg up by Lyft.
“Millennials aren't buying cars anymore. They don't want to drive. They don't want to own these cars. They don't want that inconvenience.” – Said Founder of Uber Travis Kalanick
Mad Hedge Technology Letter
June 26, 2019
Fiat Lux
Featured Trade:
(CRYPTO'S RAISON D'ÊTRE)
(BITCOIN)
In one sense, there is a relative risk premium present in the price of cryptocurrency assets because of the nature of it being an alternative from the grubby hands of sovereign governments.
If you remember correctly, the crypto diehards, on one side, labeled government and the fiat monetary system that practically controls the world we live in, an unmitigated disaster.
Ironically, the sovereign nations, in turn, pointed the finger at crypto assets attaching derogatory labels to them such as fraudulent devices or Ponzi schemes.
Over the course of the tech boom, crypto assets have transformed into an indirect store of wealth precisely because of the poor governance happening in large swaths of the world.
I believe more chaos erected by splinter or extreme groups that topple government will herd new adopters into crypto assets, and these aren’t just criminal entities looking to conceal capital.
Your average joe has a legitimate use case for this type of currency.
For example, imagine a category of countries similar to North Korea and Venezuela or even Iran.
Emerging nations where currencies have crashed like Turkey’s as well attached with populaces who have lost all sense of conviction behind their government and the economic platform they serve.
According to a survey, 81% of the global population has never bought cryptocurrencies, while only 10% of respondents said they “fully understand how cryptocurrencies work.”
The addressable market is unimaginably large but still uninformed.
This can slowly change if the external forces exist, driving the adoption of digital assets perpetuates.
Look at most emerging currencies around the world and the charts are hideous.
Take the fringes of Europe next to the Caspian Sea, an oil rich nation of Azerbaijan that has mismanaged its economy on a grand scale.
Fueled by the flames of corruption and the misallocation of resources, the currency has imploded from 0.8 Manat to 1 USD to over 1.7 Manat to 1 USD, representing depreciation of over 100%.
There are worse examples out there.
Not only is Azerbaijan going through the gauntlet, there are scores of nations in the same exact position whose populace do not trust their economic system nor their national currency and would rather build a stash of digital assets they know they can access.
The global super nations are in the midst of a giant trade war specifically about trade and technology, the chaos and dispersion companies are going through legitimizes digital currencies even more than the Obama days when everything related to geopolitics was pacifistic.
Now when you turn on the tube, news wires of the U.S. flirting with a strike on Iran, along with the trade fights against China, India, Canada, Mexico, and Japan all scream that governments have gone off their rocker and the currencies pegged to their prospects.
This all means buy crypto currency if this climate persists.
The early stages of cryptocurrency adoption have been somewhat painful.
Security is one disclaimer as many crypto markets have been hijacked and gutted by hackers.
However, as the currency and the markets they trade in become more mature, I do believe the security will ameliorate and some of these critical questions will be addressed.
Bitcoin is up around 200% this year and effectively a vote of no confidence on the terrible state of governance at not only the highest level but also the central banks of the world.
If U.S. President Donald Trump wins a second term as the commander and chief, then I would expect bitcoin and other assets that benefit from a scarcity of digital supply to inflate substantially.
Now, that was the non-sovereign bull case for digital currency.
Let’s take this a step further with official assets under the umbrella of sovereign nations migrating towards the world of digital currencies.
Enter Facebook.
Legitimizing digital payments was one of the unintended consequences of Facebook’s Libra.
When a mammoth company that is actively traded on the public markets in New York, which is supported by sovereign governments, plans to create a giant digital wallet propping up the business as a cryptocurrency, it undercuts the government’s argument that crypto assets are nothing more than a digital heist.
However, I do not buy the argument that Libra users will be more prone to double dipping with Bitcoin or Ethereum along with their dollar equivalent Libra coins.
There is no way I can envision a trader holding a fund of 100% Ethereum and converting it over to Libra to buy a pizza on a Friday night.
The bull case that correlates the creation of Libra with more bitcoin and Ethereum volume and adoption is false.
I still believe there is only a 30% chance that Facebook can get this off the ground because they are one of the least trusted tech companies in the country.
In fact, people only use Facebook because there is a lack of an alternative, and employees in corporate America feel like their hands are tied because of the need to stay in touch with former colleagues and usually the only method is by Facebook.
If the government offers a superior option to Facebook, then I believe users would quit the platform in droves.
But I do believe Facebook taking the initiative to launch Libra means that crypto assets will arrive in some shape and form in the near future but not from Facebook.
It effectively hastens the mainstream adoption and integration of the idea of mainstream crypto assets along with the many other catalysts that I mentioned.
And if the Fed craters to the administration and doubles down on its rate cuts, we could eventually find ourselves in a world with zero or close to zero rates.
In a mad world with the insatiable search for yield, cryptocurrencies would benefit from these types of low rates because the prices of everything from real estate, equities, and bonds would skyrocket forcing investors to consider options with elevated risk.
The next risk level out are digital assets and I can envision a world where creditworthy investors are borrowing capital at 0% and funneling it into a crypto portfolio to find that extra beta.
Could this be the new normal for private equity?
“Bitcoin is the currency of resistance.” – Said American Broadcaster Max Keiser
Mad Hedge Technology Letter
June 24, 2019
Fiat Lux
Featured Trade:
(YOU COULD DO A LOT WORSE THAN ADOBE)
(ADBE)
The bull rally isn’t dead – that is the biggest takeaway from Adobe’s (ADBE) overperformance and recent earnings beat.
They will keep posting positive earnings results unless there is some type of seismic shift that deteriorates its competitive advantage.
The company continues to show no mercy by expanding revenue 25% year-over-year to $2.74 billion in the quarter just reported.
Adobe’s portfolio of solutions is the gold standard for creating and managing the world’s digital experiences through its apps and cloud products.
Software stocks are the optimal late cycle stocks and I have been whacking every bush in the outback to spread the message that instead of opting for hardware, software protects investors from many of the treacherous traps out there now.
But the most regenerative trends out there are many companies are bypassing or delaying, exorbitant capital projects like new chip factories or new hardware product lines because of the high-risk nature of the economy peaking, in place of fine-tuning processes that are directly correlated to higher software procurement.
This stock fits that procurement bill with millions of consumers dependent on critical apps like Adobe Photoshop and PDF for personal and professional endeavors.
I know I am!
A ceaseless pipeline of enterprises the world over is relying on Adobe every day to help them transform their businesses and the success is vividly showing up in the numbers.
The branding power and the continuous product innovation and services, the deep investment in technology platforms, and a robust ecosystem of partners are enabling Adobe to serve millions of customers swelling the top line.
The expanding addressable markets in the creativity, document, and customer experience management categories are an opportunity that has never been greater.
Adobe Creative revenue was $1.59 billion demonstrating 22% year-over-year growth.
Mobile is the main catalyst in the Digital Media space and Adobe is experiencing significant increases in mobile traffic and member sign-ups for Adobe’s offerings.
This is the gilded age of creativity, and the vision for the Creative Cloud is to be the creativity platform for all.
This has catapulted Adobe’s creative portfolio into must-have apps for professional content creators.
And we are just skimming the surface of how deeply creative content will penetrate into users' lives.
Whether you are a burgeoning student, an experienced designer, a commercial YouTuber, or a marketer, storytelling is the focal point to the way you communicate and connect.
The key part of the Creative Cloud growth strategy is appealing to new audience of users and Adobe is executing this tactic on all levels.
Adobe Spark, a product that easily turns ideas into compelling stories, graphics, and webpages, is swiftly gaining traction among creators from the classroom to the boardroom.
Spark traffic on web and mobile has more than doubled year-over-year.
They have enhanced their vision of platforms to include social media outlets like Facebook, Instagram, and YouTube.
Premiere Rush is rapidly becoming the solution of choice for YouTubers and social video creators. Premiere Rush is now available on Android in addition to iOS, Mac, and Windows.
When we boil down the nuts and bolts to find out the growth drivers, I am convinced about the upselling and retention of assets inciting new user growth driven by numerous global initiatives to generate demand, including targeted campaigns and promotions, leveraging the funnel of users coming to Creative Cloud through mobile apps and online engagement.
This helps continue focus on new categories including immersive media and new segments such as social media creators, Creative Cloud Photography plan subscriptions, Adobe Premiere Pro single app subscriptions in the video category, and Creative Cloud enterprise.
Adobe Stock is the fast-growing service for stock images, videos, and millions of additional creative assets grew greater than 25% year-over-year.
With Adobe Document Cloud, they are reimaging how consumers can scan, edit, collaborate, sign, and share documents in the cloud and mobile era.
Document Cloud revenue in Q2 was a record $296 million and they grew Document Cloud ARR to $921 million driven by continued strength in Acrobat subscription adoption.
Mobile is the next frontier for digital documents and our flagship apps.
Adobe Reader for mobile and Adobe Scan continue to metastasize in popularity.
Adobe Scan, which allows you to capture everything from documents to forms, whiteboard sketches or business cards, and turn them into picture-perfect, high-quality PDFs, is now the leading scanning app in iOS and Android.
Adobe Sign, the cloud-based electronic signature solution, is another winner with customers including Merck, Hitachi, and Iowa State University.
They are using Adobe Sign to provide optimal customer experience, close out deals, and win business.
The quality of the company’s apps is far-reaching with many firms turning away from Amazon and joining Adobe in droves.
The Digital Media ARR growth has been leveling down from 30%-plus range in the last couple of quarters, and investors have begun to be concerned about the long-term trajectory.
Adobe still possesses the potential for unit conversions internationally, but domestic sales will drive the business in the short term.
Even more attractive, the company is insulated from the China ruckus.
The company is one of my favorite software stocks and is part of an exclusive club of 5-7 software stocks that are part of my long-term must-buys.
This is an effective bet on the expansion and continuous development of the digital content industry.
Even if certain formats were to blow up like a Facebook, content will evolve into some other form and Adobe will be on top of the game attempting to deliver a first rate of tools to support these new operations.
Adobe is a core enterprise stock and most businesses from big to small pay for one of their services, for example, the bare minimum is likely to result in a company paying for Adobe’s PDF viewer to capture the best method of handling PDFs.
Adobe simply does a great job of providing and supporting creative software applications to drive productivity.
And I love that this company isn’t reliant on any one tool to drive profits, being a one-trick pony in this climate has forced other companies to seriously overreach in risk and addressable market.
Wait for shares to come down for $300, traders will need a better entry point as shares have bolted from the barn door.
“Sometimes life is going to hit you in the head with a brick. Don't lose faith.” – Said Co-Founder and Former CEO of Apple Steve Jobs
Mad Hedge Technology Letter
June 21, 2019
Fiat Lux
Featured Trade:
(THE REGULATION WARPATH TO LIBRA)
(FB)
