“A lot of the future of search is going to be about pictures instead of keywords. Computer vision technology is going to be a big deal.” – Said CEO of Pinterest Ben Silbermann
Mad Hedge Technology Letter
April 23, 2019
Fiat Lux
Featured Trade:
(WHY YOU SHOULD KNOW ABOUT ATLASSIAN CORPORATION)
(TEAM), (ZM),
Next on deck is Atlassian Corporation (TEAM).
What do they do?
They design, develop, license, and maintain global software products.
Part of the functions they provide are project tracking, content creation and sharing, and service management products.
The company's products include JIRA, a workflow management system that enables teams to plan, organize, track, and manage work and projects.
To complement JIRA, Confluence is a piece of software that acts as a content collaboration platform that is used to create, share, organize, and discuss projects.
Also, under its umbrella of software products is Trello, a web-based project management application for capturing and adding structure to fluid, fast-forming work for teams.
Cloud software has become ubiquitous because it is simpler to set up and operate, and benefits from the latest iterations through scheduled updates, and scales easily.
Most crucially, it allows customers to focus scarce time and resources on core businesses, instead of frittering it away solving infrastructure and hardware problems that often mutate into whack-a-mole by nature.
These collection of software products are uplifting Atlassian into a border line company that I would classify as a conviction buy.
Shares have demonstrated the success of the company by bursting with life, shares have doubled in the last 365 days and if you look at its performance all the way back to October 2015, shares have skyrocketed from 20 cents on the dollar to over $100 at the time of this writing.
I took a quick glance at the paying customer metrics to gain an insight into why Atlassian is turning into a dominant company.
In Q3 2018, Atlassian racked up paid customers totaling 119,158 and followed that up a year later by totaling 144,038 in Q3 2019.
Atlassian’s clients represent diverse industries and geographies, from start-ups to blue chip companies, the highly automated sales model has given them a chance to target the Fortune 500 for growing margins.
Even on a sequential basis, sales are looking bright with Atlassian adding 5,803 from Q2 2019, combined with the revealing fact that over 90% of new customers in Q3 2019 chose one or more of Atlassian’s Cloud products.
Let me roll through some of the highlight deals with the ink still drying on the paper as we speak.
Flagship customers added to the all-star line-up include European online consumer lending company Sun Finance Group, shipping and logistics services supplier Cosco Shipping, retailer Dollar General, automobile manufacturer Isuzu, financial services firm Wedbush Securities, and New Zealand-based technology solutions provider Spark Digital just to name a few.
These companies don’t use Atlassian products in the same way, while it would be difficult to list the thousands of use cases for Atlassian products, examples illustrate the breadth of application and versatility of Atlassian products and demonstrate how the cloud software can expand across teams, departments, customer organizations, and hemispheres.
To offer one example that encapsulates what Atlassian services can actually achieve for burgeoning companies insistent on digitizing is vehicle history provider CARFAX.
When the Delivery Team at CARFAX doubled in just four years, the weaknesses in its work management system reached an inflection point.
As the team grew, so did the demand for a more robust, integrated system and they had been using several types of tools, none of which were in-tune with each other or aligned well with CARFAX’s entrenched processes.
Product managers lacked transparency into portfolio-wide metrics making it impossible for top executives to make guided decisions on major transformative initiatives.
After collaborating with Atlassian solution partner cPrime and standardizing workflow challenges on JIRA and Confluence, CARFAX discovered the optimal way to streamline their toolkit, connect its departments and systems, and reach its goals.
CARFAX teams now operate through JIRA daily, managing backlogs and keeping afloat with projects enterprise-wide.
Confluence has mushroomed into the go-to collaboration tool, and now has almost the same number of users as JIRA at CARFAX.
The broad absorption of Atlassian tools is unlike anything CARFAX has ever experienced before.
CARFAX has been the recipient of double-digit revenue growth and close to 90% customer satisfaction while hoisting the pillars to scale in the future.
Atlassian and its makeover for CARFAX is a crucial reason for the additional engineering efficiency to more regular updates and scalability without interruption for IT, to consistent and real-time analytics for the C-suite.
The software enhancements are a valuable source of enhanced productivity, and CARFAX continues to eagerly grab new product updates from Atlassian to embed into a myriad of automated processes.
When many industries are on the brink of an earnings recession, Atlassian has bucked the trend with Q3 2018 revenues expanding 38% YOY to $309.3 million.
The company is even executing more efficiently by revealing healthier gross margins that increased from 79.8% in Q3 2018 to 82.5% in Q3 2019.
Even though Atlassian guided revenue to around $330 million for next quarter’s earnings, they guided down to 16 cents per share, lower than the 19 cents per share that analysts were estimating.
The expected earnings recession has offered an opportunistic chance for management to guide down, giving shares some breathing room before they march higher again which I believe is inevitable.
Atlassian is a robust enterprise software company in the early stages of hyper-growth with a long runway.
Not every company can enter into monopolies or duopolies in the tech world like Google, but the next best thing is the enterprise software market where analog companies need help juicing up products by automating the back, middle, and front end.
Companies such as Atlassian are at the forefront of this dynamic revolution and recent tech IPOs, such as video conferencing software for business users Zoom (ZM), epitomize where the pockets of growth have nestled in the current American economy.
This year is truly the year of enterprise software so enjoy the ride with Atlassian.
“If you make customers unhappy in the physical world, they might each tell 6 friends. If you make customers unhappy on the Internet, they can each tell 6,000 friends.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
April 22, 2019
Fiat Lux
Featured Trade:
(HOW TECH IS CHANGING THE ECONOMICS OF BASEBALL),
(MAJOR LEAGUE BASEBALL ISSUE)
Several experts and even agents lament that baseball’s free agency is broken and in need of an urgent overhaul.
I would argue that baseball is merely rejigging the inefficiencies of a system from a previous broken era – a reversion back to the mean.
Technology has forced teams to evolve to survive and baseball players are divided into winners and losers with most the latter.
The digitization of baseball has given the best free agents epic paydays while feeding scraps to the rest.
Baseball is a business - they are like any firm with annual revenues, expenses, operating costs, and short-term financial goals.
This trend has picked up pace with the recent infusion of Wall Street knowledge into front offices indicating a sea of change in how management views its costs and revenues.
Expensive decisions in baseball and most any professional sport boil down to the contract length and salary of whom they employ including the groundskeeper and these decisions are made from data.
The book Moneyball by Michael Lewis was the first domino to drop and the financial side of baseball is still feeling the after-effects.
The publication became a must-read for anyone associated with professional sports and baseball with its contrarian statistic theories which promote searching a database to take advantage of unique peculiarities.
Pro sports have never looked back with many other sports taking Michael Lewis’s lead and cross-pollinating his theories into hockey, soccer, and most other industries.
Baseball’s free agency has gone through the meat grinder.
Why?
Big Data.
Superstars such as Manny Machado and Bryce Harper are the best young talents rewarded with a yearly salary of $30 to 40 million per year.
Machado was able to score a 10-year, $300 million-dollar contract with a 5-year opt out clause with the San Diego Padres, and Bryce Harper was able to land a $330 million, 13-year contract which averages over $25 million per year with the Philadelphia Phillies.
Remember that baseball contracts, unlike football contracts, are 100% guaranteed whether a player breaks a leg or not, they just need to show up to the games.
If baseball needed an encore, LA Angels capped off the shopping spree by signing baseball prodigy Mike Trout, giving him the most lucrative contract in sporting history, a 12-year, $430 million contract.
It’s no shock that the recipients are around 26-year-old because data proves this is the optimum time to make a big splash and flash the cash.
Older players aren’t so lucky.
The mid-market free agent environment has cratered, a stark difference from the Machado, Harper, and Trout market.
The hoard of data has concluded that aging 30-something baseball players post performances that deteriorate in an accelerating manner therefore are high-risk financial commitments.
Multi-year contracts are a dying breed for players who are over 30.
Veterans who were once easily commanding multi-year contracts, on the back of a famous household name, in the vicinity of $5-10 million no longer possess this type of earning power.
Aging pros in their early and mid-30s have been deemed expendable and replaced by cheaper and younger talent who teams can financially control yet produce similar stats to the aging veterans.
This development originated from teams attempting to mitigate mistakes in giving big contracts to veterans who stop producing as they got older.
Being on the hook for years of dead money has been pain points for MLB owners.
In 2019, MLB teams have never been more profitable stemming from the overall league delivering record profits from licensing advertisement, television contracts, and attendance gates.
Let me remind readers that baseball earned over $10 billion in total revenue in 2018 translating into a rise of 377% since 1992.
The teams certainly have the capacity to pay veterans more, but data suggests that only ponying up for the best and filling out the rest with younger, inexperienced players is the most prudent way to putting together a team.
The average paycheck in 2018 was around $4.1 million, down $1,436 from the 2017 season hinting that data-based decisions are filtering down to the bottom line.
Adam Jones’s case who had years of success with the Baltimore Orioles as an outfielder is a sign of the times.
He grappled with an off-season attracting no offers until the last moment when the Arizona Diamondbacks offered him a 1-year, $3 million contract.
Jones admitted that he was ready to be sat at home on the couch watching his fellow ballplayers on tv if he hadn’t received the last second offer.
Jones is 33, a death sentence in the world of baseball statistics.
Data suggests that his performance will stagnate and become worse as he ages.
One-year contracts are the best he can expect moving forward.
As negotiations approach for the next collective bargaining agreement, veterans and owners are digging their heels in threatening a player strike.
But what these aging veterans don't understand is that this is just the beginning of technology permanently reshaping how sports are managed and how players are valued.
The top 1% of premium talent will continue to accumulate rich premiums to those of mediocre standard.
A massive hollowing out of the baseball middle class will continue to purge the ranks of veterans and give chances to cheap, young upcomers.
The youth have shown to replicate similar statistics of the mediocre veterans but for a fraction of the cost.
Many accuse teams of being anti-competitive, and teams in the league benefit from being a closed off nature spurning relegation and promotion.
Another contentious issue is the pressure to digitize the game because information suggests that baseball is not attracting new or young fans.
The average age of baseball fans is over 50 and creeping older every year.
I blame the slow pace of the game.
Examples are rife with pitchers being able to step off the mound multiple times before pitches, only to face one batter before being subbed out again, forcing viewers to wait for another 5 to 7 minutes before they can watch another pitch.
Content providers must be aware of viewers' shorter attention spans and adjust content models accordingly.
The league wants to implement a pitch clock, quickening the pace of the game, but the measure was rejected by the players in 2017 and 2018.
Players are resistant to new technology in the game, because of the fear it will reduce their value even more.
Umpiring is a pain point with the status quo unable to offer competent judgments on balls and strikes.
Technology offers an in-game on-demand analysis of the ball placement and some umpires are underperforming to the extent they are perverting the course of the game and the result of it.
It’s gotten so bad that some fans suggest the sport is rigged by umpires who attempt to uphold the rules of the game.
Eventually, sports will eliminate referees and only elite players will be able to play into their 30s.
Baseball will look vastly different as a future product, and my guess is that players above 30 will go extinct in 10 years.
BATTING AGAINST THE ALGOS
“I look forward to tapping into the power of technology to consider additional advancements that will continue to heighten the excitement of the game, improve the pace of play and attract more young people to the game.” – Said MLB Commissioner Robert D. Manfred, Jr.
Mad Hedge Technology Letter
April 18, 2019
Fiat Lux
Featured Trade:
(NETFLIX’S WORST NIGHTMARE)
(NFLX), (DIS), (FB), (AAPL)
Netflix came out with earnings yesterday and revealed guidance that many industry analysts were dreading.
It appears that Netflix’s relative subscriber growth rate has reached the high-water mark for now.
Competition is rapidly encroaching Netflix’s moat.
In a letter to shareholders, management opined revealing that they do not “anticipate these new entrants will materially affect our growth.”
I am quite bothered by this statement because one would have to be blind, deaf, and dumb to believe that Disney (DIS) or Apple’s (AAPL) new products will not take away meaningful eyeballs from Netflix.
These companies are all competing in the same sphere – digital entertainment.
Papering over the cracks with wishy washy rhetoric was not something I was doing backflips over.
Netflix’s management knew this earnings report had nothing to do with results because everyone wanted to reassess how bad the new entrants would make life for Netflix.
Disney has the content to inflict major damage to Netflix’s business model.
The mere existence of Disney as a rival weakens Netflix’s narrative substantially in two ways.
First, Disney’s entrance into the online streaming game means Netflix will not have a chance to raise subscription prices for the short to medium term.
The last price hike was done in the nick of time and even though management mentioned it followed through “as expected,” losing this financial lever gives Netflix less ammunition going forward and caps EPS growth potential.
Second, another dispiriting factor is the premium for retaining and acquiring original content will skyrocket with more firms jockeying for the same finite amount of actors, producers, directors, and writers.
This particular premium cannot be quantified but firms might try to bid up the cost of certain talent just so the other guy has to foot a bigger bill, this is done in professional sports all the time.
Firms might even take actors off the table with exclusive contracts just to frustrate the supply of content generators.
Uncertainty perpetuates with the future cost of content unable to be baked into the casserole yet, and represents severe downside risk to a stock which trots out an expensive PE ratio of 133.
Growth, growth, and more growth – that is what Netflix has groomed investors to obsess on with the caveat of major strings attached.
This model is highly effective in a vacuum when there are no other players that can erode market share.
Delivering on growth justifies heavy cash burn, and to Netflix’s credit, they have fully delivered in spades.
The strings attached come in the form of steep losses in order to create top of the line content.
Planning to revise down annual cash flow from $3 billion to $3.5 billion in 2019 will serve as a litmus test to whether investors are ready to shoulder the extra losses in the near term.
I found it compelling that Disney Plus will debut at $6.99 per month – add that to the price of Netflix’s standard package of $12.99 and you get a shade under $20.
Disney hopes to dictate spending habits by psychologically grouping Disney and Netflix for both at under $20.
The result of breaching the $20 threshold might push customers into ditching Netflix and sticking with the $6.99 Disney subscription.
Then there is the thorny issue of Netflix’s growth – the quality and trajectory of it.
The firm issued poor guidance for next quarter projecting total paid net adds of 5.0m, representing -8% YOY with only 300,000 adds in the US and 4.7m for the international segment.
Alarm bells should be sounding in the halls when the most lucrative segment is estimated to decelerate by 8% YOY.
Domestic subscriptions deliver higher margins bumping up the average revenue per user (ARPU).
Contrast this with Netflix’s basic Indian package costing $7.27 or 500 rupees and a mobile package of $3.63 or 250 rupees.
In my opinion, domestically decelerating in the high single digits does not justify the additional annual cash burn of half a billion dollars even if you accumulate millions of more Indian adds at lower price points.
This leads me to surmise that the quality of growth is beginning to slip, and Netflix appears to be running into the same type of quagmire Facebook (FB) is facing.
These models are grappling with stagnating or slowing North American growth and an emerging market solution isn’t the panacea.
The Netflix Indian packages are actually considered expensive by local standards meaning that Netflix’s won’t be able to crowbar in price hikes like they did in America.
On the positive side, Netflix did beat Q1 estimates with paid net adds up 9.6 million with 1.74m in the US and 7.86m internationally, up 16% YOY.
Netflix was able to reach revenue of $4.5B, a company record mostly due to the $2 price hike during the quarter in America.
The letter to shareholders simplifies Netflix’s tactics to investors explaining, “For 20 years, we’ve had the same strategy: when we please our members, they watch more and we grow more.”
What this letter doesn’t tell you is that Disney and the looming battle with Netflix will reshape the online streaming landscape.
In simple economics, an increase of supply caps demand, and don’t get sidetracked by the smoke and mirrors, Disney and Netflix are absolutely fighting for the same eyeballs no matter how much Netflix plays this down.
To highlight an example of how these two are directly competing against each other – let’s take the cast of Monica, Chandler, Rachel, Ross, Joey, and Phoebe – in the hit series Friends.
Netflix acquired the broadcasting rights from Warner Bros, who owns Disney, and it was the most popular show on Netflix.
Warner Bros, knowing that Disney were on the verge of rolling out an online streaming product, renewed Netflix for 2019 at $80 million.
Not only were they hand feeding the enemy in broad daylight, but they handicapped their new products as it is about to debut.
Whoever made that decision must go into the hall of shame of boneheaded online content decisions.
Once 2020 rolls around, Disney will finally be able to slap Friends on Disney Plus where it belongs, and the streaming wars will heat up to a fever pitch.
Ultimately, when Netflix brushes off reality proclaiming that if they please viewers with the same strategy, then everything will be hunky-dory, then I would say they are being disingenuous.
The online streaming industry has started to become more complex by the minute and the “same strategy” that worked wonders in a vacuum before must evolve with the times.
At $360, I would short Netflix in the short to medium term until they prove the headwinds are a blip.
If it goes up to $400, it’s a screaming short because accelerating cash burn, poor guidance, decelerating domestic net adds, and a jolt of new competition aren’t the catalysts that will take shares above the heavenly lands of $400, let alone $450.
Netflix is still a fantastic company though – I’m an avid viewer.
“Most entrepreneurial ideas will sound crazy, stupid and uneconomic, and then they'll turn out to be right.” – Said Co-Founder and CEO of Netflix Reed Hastings
