“Our philosophy is that we care about people first.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
May 6, 2019
Fiat Lux
Featured Trade:
(PAYPAL GOES FROM STRENGTH TO STRENGTH)
(PYPL), (SQ), (GOOGL), (LYFT)
It’s time to revisit one of my favorite tech picks for 2019 that is a constant trade alert candidate.
The attention is warranted with the stock performance delivering a tidal wave of euphoria rising around 30% in the first half of 2019.
I expected PayPal to have a great year, but I didn’t expect them to perform better than Square who are growing from a lower install base.
PayPal’s overperformance signals to the wider business establishment how important a broad install base can be that can tap the network effect to reel in profits.
This is how once legacy dinosaurs can reinvent themselves in months.
The lack of entry points is a concern prodding investors to chase the stock if they want a piece of the action.
This is one of the drastic side effects of PayPal’s meteoric rise that has been buttressed by dovish Fed policy.
Investors are literally praying to the skies for any softness in tech earnings reports because for the best of the bunch, there have been no moderate pullbacks of note since last winter.
PayPal did offer a slight data point that might be construed as disappointing when total payment volume (TPV) of $161 billion was slightly lower than the consensus of $163 million for the quarter.
It’s slim pickings for the bear camp with not much to feast on in an otherwise pretty solid earnings report.
As PayPal expanded by 9.3 million new active accounts, bringing its total up to 277 million, management has super charged this legacy fintech company into an outright renaissance.
Doing even more to shed the tag of a legacy company, PayPal invested half a billion dollars at $47 per share into the upcoming Uber IPO signaling possibilities that their payment software could at some point integrate into Uber’s network down the road.
Alphabet (GOOGL) has shown that if you get in early with these Silicon Valley unicorns, synergistic effects are plenty with Alphabet lapping up revenue charging Lyft (LYFT) for providing digital ad capabilities on top of the appreciating value of their investment stake.
And if you remember that way back, PayPal was tied to eBay before it was spun out.
Better to attach future hopes and dreams to a leading visionary and innovator instead of a legacy e-commerce platform.
Illustrating the tough task of turning around eBay, eBay clocked in negative TPV growth of 4% in the past quarter.
PayPal offered us more detail into active-account numbers for its Venmo peer-to-peer service with more than 40 million people using Venmo for at least one transaction in the last 12 months.
Venmo processed $21 billion in TPV last quarter, mushrooming by 73%, while the core PayPal platform’s TPV grew 41% to $42 billion.
The success paved the way to raise its full-year EPS outlook from $2.94 to $3.01 ensuring that its prior forecast on revenue and TPV will be met.
PayPal previously guided lower with an expected $2.84 to $2.91 in adjusted EPS and $17.75 billion to $18.1 billion in revenue.
When we tally up all the positive points, it’s hard to ignore the 12% YOY increase in revenue to $4.13B and the more impressive 37% YOY rise in EPS growth signaling the company is applying its giant scale to maximum effect.
Customer engagement of 37.9 payment transactions per active account rose 9% YOY while the TPV which came in lower than consensus was still growth of 22% YOY.
I love that PayPal has migrated towards the heart of innovation while being a legacy fintech company.
Venmo and the Venmo card are rapidly infiltrating the center of consumer’s daily financial lives wielded for groceries, gas, and restaurants.
In February, PayPal introduced a limited-edition rainbow card which became the fastest adopted Venmo card.
I want to reiterate how the proof is in the pudding with Venmo volume increasing 73% to approximately $21B in the quarter.
Not only does this legacy fintech have super growth drivers, they have become quasi venture capitalists applying a horde of capital to snap up attractive assets.
An example is a $750 million investment in the e-commerce and payments leader in Latin America called MercadoLibre which creates a network effect to PayPal’s core business in the region.
If the steady drip of news wasn’t good enough, PayPal announced a partnership with Instagram to process payments when customers are shopping on Instagram in the U.S.
Management is convincingly delivering the goods with 110 basis points of operating margin expansion.
PayPal’s flawless performance is a great model in how to survive the volatile times of rapid tech shifts, and the best way to alter a model to reduce existential threats.
The company has growth drivers, have migrated capital into growth tech, are innovating with the best of them, and management is executing surgically taking advantage of a massive install base.
Buy on any weakness, entry points are few and far between.
“The big problem retailers are facing is the world is moving to mobile.” – Said CEO of PayPal Dan Schulman
Mad Hedge Technology Letter
May 2, 2019
Fiat Lux
Featured Trade:
(APPLE’S HOME RUN)
(AAPL), (CRM), (GOOGL)
The company that Steve Jobs built is an earnings thoroughbred with money growing out of their ears.
Apple’s earnings report was real confirmation that Apple’s pivot into a services company is overshadowing its drop in iPhone revenue.
They even elevated forward guidance for next quarter.
Being an economic bellwether that it is, the earnings success could point to more bullish momentum for not only the tech sector but the broader market.
The tech strength showing up in the squiggly figures of the sector’s earnings report indicates that the expected earnings recession will be more of a pause rather than a dip that was first expected.
The next bout of bullish strength that permeates through the market will take many tech stocks to higher highs.
The numbers backed up this premise with Q2 2018 revenue from the services category comprising 20% of total revenue in Q2 2019—a rubber stamp of confidence that this isn’t a false dawn after service sales only comprised of 16% of total revenue the prior year.
The death of the smartphone is upon us with most people who can afford a premium one already using one as we speak with no intentions for a quick refresh.
Apple’s strategy of selling expensive iPhones to Chinese nationals is over with iPhone sales getting slaughtered by 17% to about $31 billion—an accelerated decline for a product that has been hamstrung by smartphone rivals in China offering better phones for lower prices.
The $11.5 billion from its services division and the end result of registering revenue in the high end of its $55-59 billion projection for the quarter is a stark shift from the underperformance of 2018 when Chinese iPhones sales were so bad that they stopped reporting the segment altogether.
The $58 billion of quarterly revenue was still a drop of 5% YOY which included $31 billion in iPhone sales, a shell of its former self when they generated $37.5 billion in iPhone sales the same quarter in 2018.
The disruption in handing off the baton to the services brigade caused outsized ructions inside the company causing the stock to plummet 20% last winter.
Wearables put the cherry on top of the sundae expanding at a rate close to 50% during the quarter with AirPods and Apple Watch leading the charge as best sellers.
Apple plans to inject $75 billion on share repurchases and it also approved a 75-cent dividend per share, a 5% increase.
These repurchases could boost Apple’s stock by up to 7% per year offering investors another compelling reason to hold this stock long-term.
The upgraded dimensions of Apple’s business model could finally give investors peace of mind as they wean themselves from Chinese iPhone sales.
Moving forward, the relationship between American tech and the Chinese consumer will be contentious at best, and battling with Huawei on its turf is not a sensible strategy.
Highlighting this weakness were the Greater Chinese revenue registering only $10.2 billion in sales, down from the Q2 2018 tally of $13 billion.
On the positive side, the Chinese weakness is already baked into the pastry ceding way for the services narrative to move to the forefront.
Generating more incremental revenue from its existing base of 1.4 billion Apple accounts is the order of the day.
I initially believed Apple would make major headway in the services segment and foresaw services composing about 25% of total revenue.
However, I didn’t believe they would be able to achieve this for a few years, and the surprise to investors is the velocity of change to the upside in its services business.
Adding the new magazine subscription for $9.99 to its platform is another feather in their cap even though it doesn’t transform the industry.
Respondents to emarketer.com made it widely known that Apple as a platform was the second most important platform for news publishers behind Google offering a great opportunity to carve out more income from their new news app.
Apple is still in dire need of attractive video options for its content basket and assets on the market are plenty from live sports, shows, movies, and video games.
My money would be on Cook to prefer video games as a viable growth driver because it resonates deeply with younger audiences from abroad and avoids the polarity of controversial content which societies are increasingly sensitive to.
Another option would be to dive headfirst into the enterprise software business moving towards a Salesforce (CRM) model selecting cloud companies à la carte to integrate into a business cloud.
Many Apple device holders already wield their devices for their own online businesses, and this would represent a solid growth driver if they could make their services more business-friendly.
What can we expect moving forward?
In short, less iPhone sales and more service revenue as a proportion of total revenue.
If Apple can carefully choreograph its downshift of iPhones sales that doesn’t destroy overall revenue and profitability, they will successfully manage in transforming the company into a hybrid service company.
I believe that Apple’s services will contribute around 30% of total revenue by 2020 and this is a big deal that will buoy the stock.
Ultimately, these are happier times for Apple as their bet on services isn’t getting bogged down, eclipsing expectations, and will cement their status as a sure-fire $1 trillion market cap company.
Bravo!
“I think the iPhone is the best consumer product ever. That's what I feel about it. And it's become so integrated and integral to our lives, you wouldn't think about leaving home without it.” – CEO of Apple Tim Cook
Mad Hedge Technology Letter
May 1, 2019
Fiat Lux
Featured Trade:
(ALPHABET’S BIG MISS)
(GOOGL), (TSLA), (TWTR)
What comes up must come down, you didn’t expect Alphabet’s stock to explode on this earnings report, did you?
Alphabet shares have gone up in a straight line since the beginning of the year, and only a robust beat on the bottom and top line with raised guidance was going to push this stock to higher highs.
Chances of that were low.
I wouldn’t classify Q1 as an awful quarter, but Alphabet was in need of a reset and culling a few hogs from the litter is not always a bad thing.
Shares retraced more than 8% in trading which could be the beginning of a brief but much-needed mini earnings tech recession.
Tech shares have carried the load this year, every continent on the globe wishes they had a tech sector like America does.
Google still has its digital ad duopoly intact and results were driven by ongoing strength in mobile search along with important contributions from YouTube followed by Google Cloud.
Revenues of $36.3 billion, up 17% YOY did not capture the imaginations of investors and this was graded as a big miss by over $1 billion.
This signals a sharp deceleration from Q1 2018 when Alphabet posted revenue growth of 26% YOY.
Growth of over 20% cut down to the high teens is a big deal in the tech world for growth names, and this puts a cap on the price trajectory for the short-term.
Cost per click on Google properties was down 19% YOY which was extremely disappointing even though paid clicks on Google properties were up 39% YOY which somewhat softens the blow.
Most crucially, there is nothing structurally wrong with Alphabet and investors must galvanize themselves around this salient point.
Execution risk reared its ugly head with CFO of Alphabet Ruth Porat explaining “while YouTube clicks continue to grow at a substantial pace in the first quarter, the rate of YouTube click growth rate decelerated versus a strong Q1 last year, reflecting changes that we made in early 2018 which we believe are overall additive to the user and advertiser experience.”
Alphabet pulled a Twitter (TWTR), forgoing short-term profits to focus on maintaining the reputation of the platform and eradicating lingering problems with the algorithm.
The algorithm facelift will make the platform more attractive to digital advertisers going forward as their brand risk is mitigated by Alphabet optimizing their algorithms.
More specifically, this would mean identifying certain unpalatable content that needs to be flat-out removed, and certain ads that should not be bundled with certain content.
More advertisers will slash YouTube ad budgets if they aren’t satisfied with the overall product experience and cannot accumulate positive user feedback.
Getting into the weeds makes us aware that costs aren’t overly exorbitant this time around.
Total traffic acquisition costs (TAC) were $6.9 billion, 22% of total advertising revenues and up 9% YOY but down from 2% YOY from Q1 2018 reflecting a favorable revenue mix shift from network to sites as well as a decrease in the network TAC rate.
Alphabet’s TAC rate rose from the impact of the ongoing shift to mobile, which manifests with higher TAC, but was offset by the growth in TAC free sites revenue driven by YouTube.
The European Commission (EC) and its decision that certain contractual provisions in agreements that Google had with AdSense for Search partners infringed European competition law and the associated €1.5 billion fine with it didn’t help quarterly performance.
The fine, in no shape or form, is a threat to Google’s dominance in Europe.
The Google cloud services 9 of the world's 10 largest media companies, 7 of the 10 largest retailers and more than half of the 10 largest companies in manufacturing, financial services, communications, and software.
Some of the companies that will join the Google Cloud are American Cancer Society and McKesson in health care, media and entertainment companies like USA TODAY and Viacom, consumer packaged goods brands like Unilever, manufacturing and industrial companies like Samsung, logistics company UPS and public sector organizations like Australia Post.
The expansion of 2 new Cloud regions in Seoul and Salt Lake City which will open in 2020 will help build on the footprint of 19 Cloud regions and 58 data centers around the world.
Alphabet missed badly on the top line, but comps from last year because of the strength of YouTube would have been hard to eclipse.
Bask in the glory of the reset in price - now it's time to play Alphabet from the long side.
Moving forward, Alphabet has many levers to pull as CEO of Tesla Elon Musk’s rallying cry for the evolution of self-driving cars means that Waymo would reap the benefits first in automated vehicle technology.
Alphabet also has a few tools left in their toolkit such as monetizing Google Maps through selling digital ads on the Maps interface.
I expect a slow grind up for the rest of the year because Alphabet can brandish many weapons with little resistance in front of them, it’s up to them to execute.
Mad Hedge Technology Letter
April 30, 2019
Fiat Lux
Featured Trade:
(AMAZON’S NEW GAME CHANGER)
(AMZN), (WMT), (TGT), (UPS), (FDX)
