“Artificial intelligence is the future, not only for Russia but for all humankind. Whoever becomes the leader in this sphere will become the ruler of the world.” – Said President of Russia Vladimir Putin
Mad Hedge Technology Letter
April 2, 2019
Fiat Lux
Featured Trade:
(HOW TO GET CONTROL OF YOUR LIFE)
(GOOGL), (FB), (LYFT)
Don’t get caught up in the cesspool of digital ads inundating your life.
I’ll teach you how to take back control of your life and even mess with these data thieves.
No need to thank me.
One of the most frequented complaints I hear today is the overflowing number of digital ads people are faced with that make you want to pull your hair out.
If you want to play your part in taking back your internet freedom, then read on.
The internet ad business is a world that borders subterfuge.
The high stakes environment is perpetuated by none other than Silicon Valley and specifically the tech heavyweights that wield capital dominating the data sphere.
Even though it sounds remarkably cliché, data is truly the new oil.
You would be surprised how many internet operations are based on the back of you, the user, and the data you generate.
Take Lyft (LYFT).
They are forced to tap the digital marketing world to attract qualified drivers.
Not only does Lyft spend ad dollars on driver recruitment, but they must spend to grow the number of passengers.
The rider base, as a result, synthetically grows which is directly attributable to paid marketing initiatives.
Lyft lays out on a platter the ways they attempt to generate new passengers and drivers, essentially becoming market makers, and it’s a mind-boggling long list including:
“referrals, affiliate programs, free or discount trials, partnerships, display advertising, television, billboards, radio, video, content, direct mail, social media, email, hiring and classified advertisement websites, mobile “push” communications, search engine optimization and keyword search campaigns.”
Even if there is only a 20% chance of breaking even, these unicorns are incentivized to lose others' money translating into poor quality growth or initiate high-risk strategies or carry out a combination of the two.
Sales and marketing costs in the year ending Dec 2018 came in at $296.6 million, meaning that over 37% of overall costs to Lyft were attributed to this one segment.
If that wasn’t bad enough, Alphabet affiliated company CapitalG took in $41.4 million, $74.4 million, and $92.4 million of ad-related services in 2016, 2017, 2018 laughing all the way to the bank.
Not only do Alphabet have a 5% stake in Lyft, but they are incentivized to bump up Lyft’s search engine optimization ranking to the top because they’ll benefit through asset appreciation if the company flourishes.
The process is rigged so what can we do about it?
Seizing control of your life and personal data first centers on installing a different browser other than a Google-based product to diversify the data out of Alphabet’s (GOOGL) iron grip.
I have chosen to use the browser called Brave, based on the Chromium web browser, it comes preinstalled with an ad blocker and disables web trackers, and most importantly, works well.
To visit their website, click here.
Make sure to import your passwords and bookmarks from your prior browser to ensure a smooth transition.
Once you are armed with a browser with a functioning ad-blocker, notice how the ad-less experience enhances your browser experience.
Try out YouTube.com, notice that ads don’t pop up in the beginning or middle of your viewing session and they do not even prompt you to disable them.
To understand which websites are hellbent on grabbing your digital ad dollar, then you will visit the odd website such as CNBC’s live TV feed which forces the user to disable the ad blocker which can be done at the top.
As much as CEO of Facebook (FB) Mark Zuckerberg has been vilified for his ad practices, he does not force users to disable ad blockers to use his platform to his credit which indicates that most users really have no idea about this stuff.
Seeking Alpha, the internet financial new site, is one of the worst eggs in the dozen, full out blocking users from even viewing the main homepage if you are accessing it with a VPN (virtual private network).
If you do access Seeking Alpha with an ad blocker, every page you click prompts an annoying reminder to “white list” the site which is polite verbiage for don’t block us or we will prevent you from using us.
Awareness and actionable methods to take back your internet freedom and personal data are vital to the health and longevity of the internet.
Instead of enriching these few Silicon Valley bullies, change your browser to an independent service, install an ad-blocker, and lastly buy a VPN.
A VPN is a software that circumvents geographical restrictions by connecting to servers in different countries effectively masking your computer’s IP address location.
This can have many different applications such as during my summer vacations in Switzerland, I can access all the US-based internet services that would require my IP address to originate from a domestic American location.
A VPN is also important in minimizing the chances of cyber threats and offers extra layers of security.
Chinese internet users often access international websites that are habitually censored through VPN software getting access to the west’s treasure trove of professional knowledge.
In many cases, a small Chinese company wielding a VPN is the difference between success and failure.
VPN software is the Chinese communist party’s worst enemy which is why they forced Apple to remove them from Apple’s app store recently.
My go-to VPN is Astrill. To visit their website, please click here.
Knowledge is power.
The masking of a computer’s geographical location will stymy digital ad crawlers diluting ad data forcing them to revalue the digital ad tools they use to charge exorbitant amounts to analog companies to digitally advertise destroying ad revenue.
I see this as a positive development as the unintended consequences of these digital ad creatures have toxified the internet for the naive user with many digital companies resorting to perverse tactics that beget even more perverse marketing tactics.
The slew of new tech IPOs is offering us inside knowledge into how enslaved tech companies are to the likes of Alphabet and Facebook digital ad apparatus.
To shake them off our tails, users on mass need to alter how they use the internet to protect from being pickpocketed in broad daylight.
Once revenue begins to suffer, they will have to act more reasonably to the betterment of the internet which we all share as a communal good.
“Move fast and break things. Unless you are breaking stuff, you are not moving fast enough.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
April 1, 2019
Fiat Lux
Featured Trade:
(THE NEXT TECH BUBBLE TOP HAS STARTED)
(LYFT), (PIN), (UBER), (AAPL), (JPM), (FB)
Don't go chasing rainbows.
That is what the current tech IPO environment is hinting.
Even though market conditions are frothy, that doesn't mean I'm calling a market top today, hardly so.
I predicted that Lyft (LYFT) would storm out of the gate like a bull on ecstasy, and I was vindicated when the stock flirted intraday with the $87 mark.
The scarcity value of these gig economy companies is hard to quantify.
Examples Uber unduly promise ambition and innovation leading to hopes of a possible air transport service and sharing network that I would need to see to believe.
The built-up expectations smell of over-promising and under-delivering, the majority won’t be able to deliver merely half of what their manifestos promulgate
As I put my analyst hat on, the 2019 IPO frenzy coming online has some of the same fingerprints of the infamous dot com bust of 2001.
The two main trends symbolic of the last time the tech industry disentangled were overly generous valuation, pricing in revenue expansion of 80% for the next five years when the leader of the pack Microsoft (MSFT) only grew at 50%.
A tantalizing clue was the utterly deficient cash flow generated back then.
The underlying premise revolved around putting the network effect on a pedestal irrespective of understanding that the network effect should have caused cash flow to accelerate which was conspicuously absent.
Losing money and losing a lot of it does lead to paralysis, examples were rife, for instance, priceline.com losing $30 on each air ticket sold.
Even more hard to fathom was that Priceline was stretching itself to the limits on the open market filling ticket orders because of a dearth of inventory steepening losses.
Priceline gushed about a unique business model of collecting excess ticket inventory that airlines couldn't sell at low cost and reskinning them to a digital audience hoping to take advantage of this price dispersion.
But in reality, this wasn’t always the case.
Priceline was on a suicide mission and expanding from 50 employees to 300 employees based upon misleading growth was madness.
In a nutshell, investors bypassed pragmatic arithmetic and were lifted by the fumes of exuberance that had manifested around the euphoria of the tech bubble.
Lyft is not revolutionary, they are a broker which occupy a low position in the spectrum of tech intellectual property.
Exploiting drivers, compensating them per hour, and letting them figure out their own cost structures for car insurance, fuel costs, and opportunity cost while offering zero benefits is a court battle waiting to happen in California.
And if your response was the way they craft value is by way of a proprietary app, well, Google, Apple, or even Netflix can produce the same type of app and quality of app in a few weeks with their legendary phalanx of top-tier engineering talent.
To Lyft’s credit, they have at least collected the treasure trove of data the app has compiled which is extraordinarily valuable.
The top of the tech bubble means that big tech is overreaching into any revenue they can get their hands on like a heroin addict yearning for the next syringe.
The environment has transformed into an eerily zero-sum game, such as Apple (AAPL) cooperating with JPMorgan Chase (JPM) to create Apple pay, and then instantly flipping around to compete with JPMorgan Chase in the credit card space with Apple Pay being an accomplice.
Big tech has sown the seeds of discord by quietly attempting to trample on any analog business they can get near.
Leveraging the network effect of billions of users in a proprietary walled garden to extract the incremental dollar for a new service is impossible to compete with for analog companies without a similar embedded on-demand audience.
Lyft co-founder and CEO Logan Green mentioned in an interview that in the next five year, he plans to deploy a subscription service coined as transportation-as-a-service like a software-as-a-service option which cloud platforms sell.
A fight to the bottom with Uber will cause major disruption in the pricing mechanisms of the subscription service and could force Lyft to earn less revenue per ride than the current pricing system.
Investors need to remember that Uber is bigger than Lyft and possessed more ammunition.
At the end of the day, the race to the bottom is never good for profitability or sustainability, and Lyft has yet to provide any substantial clues on how they will navigate through this quagmire.
My guess is that Lyft will have to do a deal with the devil of sorts to slang its branded broker app onto the cresting wave of Waymo as Waymo motors ahead and starts to materially monetize its self-driving program.
Remember that Alphabet already has a small stake in Lyft and these two could partner up with Alphabet dictating terms.
Lyft cannot compete with the holy grail of tech - self-driving technology – they are way down the tech value chain.
If we look at the bigger picture, the broader market has been riding the coattails of Federal Reserve Chairman Jerome Powell’s 180-degree turn from winter’s statement that interest rate tightening was on “autopilot.”
Now, there is only a 27% chance given by the market that the Fed will raise rates at all in 2019.
The market responded with strength begetting strength allowing the bull run to continue and even whispers of a possible rate cut later this year.
Sentiment will not change until we get to the point when earnings can’t surpass the expectation which have been lowered substantially.
I bet this won’t happen until late this year or next year.
This is inning 8 or 9 of the bull crusade, the closer is warming up in the bullpen.
Lyft’s opening day gallop is just one of the side effects from a market that is toppy.
“Our goal was to completely change transportation. Change traffic. And make it possible to get anywhere you want to go without owning a car.” – Said Lyft Co-Founder and CEO Logan Green
Mad Hedge Technology Letter
March 28, 2019
Fiat Lux
Featured Trade:
(MACDONALD’S GOES HIGH TECH)
(MCD)
If McDonald's is using more technology, then maybe your company should be using more too.
In its most dynamic deal since divesting from Chipotle (CMG) in 2006, McDonald’s acquired artificial intelligence software company Dynamic Yield.
The company is an Israeli startup specializing in software that customizes content to the user.
The result of this ramp up in technology means that your McDonald's experience is about to improve, become easier and faster.
This is not your father’s McDonald’s.
At handpicked locations in America last year, McDonald's tested the artificial intelligence software which provides functions such as cross-selling different items on a sidebar and taking into consideration the current weather and time of day.
For example, on hot summer days the machine learning software will most likely recommend colder items such as desserts and soft drinks, and on colder days lean towards a hotter, more filling option.
Another likely consequence is after choosing a full meal of some sort, the software will further prompt the customer of the choice of popular à la carte items via the sidebar.
The theme of digital transformation is upon us and following the lead of other fast food companies such as Domino's Pizza (DPZ) will make operations more efficient and appeal to different segments of society.
The decision to gentrify and digitize the customer experience could be a result from a stagnating fast food industry that is in a price war down to the bottom.
Did you know you that you can buy 10 chicken nuggets for $1 at Burger King now?
Or even a simple cocktail at Applebee's for just $1?
QSRs (quick service restaurants) have lagged posher establishments caused by the cutting down of immigration and the struggling of the low-income class that is squeezing out fast food restaurants’ go-to clientele base.
And as construction rates have crashed because of the surging material costs induced by tariffs and a lack of foreign workers, McDonald's has been forced to look to replace demand.
Construction workers are a healthy portion of McDonald’s domestic lunch demand.
Not only is foot traffic being affected, but the fast food industry in America is saturated and funnily enough, when I travel to Europe every summer, this is one of the first comments I get from the Europeans.
The drive-thru menu will be one of the primary beneficiaries of this new software, and the projected enhancement of customer satisfaction should drive higher retention rates.
McDonald's plans to roll out kiosks that self-serve customers which is one stop on the way to a fully automated experience.
In the next 5 or 10 years, there might be only one or two McDonald's employees running a franchise.
McDonald's is clearly trending towards reducing employee headcount evident in their strategy of deciding to halt lobbying efforts to bring down the minimum wage.
Genna Gent, McDonald’s Vice President of U.S. government relations, went on record sharing that “outlets owned by the company have an average starting wage that exceeds $10 per hour.”
Most fast-food companies would be frightened to discover the House Committee on Education and Labor advanced a bill earlier this month to increase the minimum wage from $7.25 to $15 per hour by 2024 thus incentivizing McDonald’s to pick up the pace of their digital transformation.
McDonald's is not only one of the biggest employers in America, but they are one of the largest in the world.
The company had 210,000 employees in 2018 and I believe they will be able to quickly get down to 150,000 with the new software streamlining employees’ tasks allowing franchises to reduce headcount.
Getting on top of the mobile app and optimizing delivery is another step to McDonald’s digital growth strategy.
The adoption of machine learning will at some point allow customers to reorder their favorite meals on demand or before they enter the establishment, and even possibly personalizing parts of a meal that can mix and match to create alternative meals.
And the beauty of all of this, the same software rolled out to the self-serving kiosks, drive-thru platform, and mobile app can be universally adopted and managed from the cloud causing massive savings from tech efficiencies.
McDonald’s is not without its share of difficulties, sales have been plunging since 2014 and part of the response to this was to start the digital transformation.
This is just the second step of a long drawn own process that will automate the production process and customer experience.
On the flip side, the 3-year EPS growth rate is 16% demonstrating that even with falling sales, the efficiencies are falling down to the bottom line with the company profiting over $5 billion in 2018.
Ironically enough, McDonald’s profits were substantially lower with higher sales, indicating to management that a leaner version of itself has been justified.
I believe McDonald’s will continue to gentrify its menu, digitize its customer experience and production process, and sale deceleration will slow down while profit acceleration and EPS will increase.
This is a good omen for the stock’s trajectory and the company continues to be a good buy on the dip candidate because its upward share movement is entirely correlated to the increasing profitability which it continues to deliver on.
As we inch closer to a recession, deterioration of economic conditions could push an unintended growing number of customers through McDonald’s arched doors as they usually attract customers who earn less than $45,000 per year, looking to save some extra cash.
This could set the stage for a reawakening of increased sales.
“Ultimately, what any company does when it is successful is merely a lagging indicator of its existing culture.” – Said CEO of Microsoft Satya Nadella
