Tech Letter Archives

The Alphabet No-Brainer

Buy Alphabet (GOOGL).

That is the obvious takeaway from the European Union disciplining Alphabet.

EU regulators levied a $1.7 billion fine because of breaches of anti-trust law.

It’s the third time the company has been caught out over unfair practices, but let's be honest about it, the internet is a dirty game and rife with firms cutting corners wherever they can get an edge.

Google search is incentivized to thwart third-party companies hoping to carve out ad revenue on the back of Google's assets.

I commend the EU for stepping up and scolding these big tech companies when stateside they have been allowed to run riot doing whatever they please.

It's gotten to the point where these companies are larger than governments themselves and hold enough power to crush small countries in its wake.

The pitiful thing about this whole ordeal is that it shows how little sway governments hold on these monster tech companies now.

Not only are they too big to fail, but too big to regulate.

Google will keep doing what it does, raking in ad revenue because of the stranglehold they have on global eyeballs.

So let’s diagnose this for what it is - a slight slap on the wrist.

There will be many more fines down the road, but who cares, Alphabet will just cut them a check.

A fine of $1.7 billion is chump change if you consider they pulled in over $32 billion in digital advertising last quarter alone.

Google was penalized for initially forcing websites to sign exclusivity contracts promising flourishing websites not to work with other search engines.

In 2009, Google upped the ante by paying off these popular third-party websites to not allow alternative search engines to display their website in searches.

Expectedly, these websites lapped up the extra revenue and had no complaints.

The last thing a dominant website wants to do is to irate Google who they are reliant on for the bulk of revenue.

Protecting your customers and shielding them from outside competition is nothing new.

This sort of business practice has been going on since the beginning of time.

Google has no incentive to change its business model to accommodate EU law because retrospective fines of this paltry amount will not force them to substantially transform their ad business.

Heftier fines could come its way in the EU as the Europeans are intent on tackling digital privacy, but the push hardly disrupts Google and the direction they are headed in.

The Android platform and Google's bundle of apps are monopolies that command 80% of the European market share on consumer devices.

Google claims that it stopped this illegal, underhanded practice in 2016. However, in the bigger scheme of things, Google will, by default, benefit naturally from the strategic position they hold in the tech ecosystem.

Therefore, this convoluted regulatory cat-and-mouse game with the European Commission will continue because at the end of the day, Google's positive network effect becomes stronger with age and assets under its umbrella of services are inclined to possess an advantage over companies that aren't linked with Google in a financially incentivized way.

This issue seeps deeper with Stadia, Google’s new attempt at revolutionizing gaming with native cloud-based gaming.

If Google directly connects with gamers via Google Chrome and is incentivized to push in-house gaming ad revenue through this platform, then why would Google search ever allow outside consumers to be able to find relevant search results about other gaming companies if they aren’t profiting directly.

It's a conflict of interest that Google will find itself knee-deep in.

For your information, Stadia will initially only be available on Google Chrome and on Android devices, you’re out of luck if you use Safari.

And what if a company such as Nintendo wants to post ads on Google Stadia via Google Chrome, can Google just say no because they don’t want to feed the enemy?

Google is on record for saying that it will give companies a fair shot to market different search engines and even give more clout to third-party shopping networks.

But by no means does this mean Google will voluntarily give up their cash cow.

Any change would be ornamental at best, and at the worst, Google would just stonewall the initiative and kick the can down the road eventually hoping the EU fine will be less than the last one.

For any small company, this would be disastrous, but Google is no peon.

Shares rose on the news of the EU fine as investors cheered from the sidelines that this chapter in Google's penalties and fines ledger is temporarily over.

It's funny to say that a $1.7 billion fine effectively meant Google came away from the situation unscathed, but that is where we are at with this type of company at this point in history.

This year is shaping up to be an overly positive year for Alphabet as they venture into gaming and have an interesting mix of high growth divisions such as YouTube.

They have even started to sell its self-driving sensors through its Waymo division.

I almost feel my spine tingle as I say this, but Google might be the most innovative company of 2019 following in the footsteps of Amazon’s innovative rampage in 2018.

Alphabet can't stay out of the news and being berated for being too dominant in Europe is a problem that many smaller companies wish they could have.

In the short-term, I initiated a bullish call on Google and shares have run up quite significantly since that call.

Wait for a pullback to locate an entry point, but I can't imagine shares going back under $1,000 in 2019 unless there is some type of catastrophic black swan event that roils the broader market.

STAY AWAY FROM MY AD REVENUE!

March 21, 2019 - Quote of the Day

Tech Letter

“Facebook is in a very different place than Apple, Google, Amazon, Samsung, and Microsoft. We are trying to build a community.” – Said Facebook Co-Founder and CEO Mark Zuckerberg

March 20, 2019

Tech Letter

Mad Hedge Technology Letter
March 20, 2019
Fiat Lux

Featured Trade:

(LYFT), (UBER), (GRUB), (POSTMATES), (DOORDASH), (GOOGL)

Don't Pay Up for Money-Losing Lyft

Tech Letter

The imminent launch of the Lyft IPO is telling investors that the next era of technology is upon us.

Does that mean that you should go out and buy Lyft shares as soon as they hit the market?

Yes and no.

30 million shares are up for grabs and the price of the IPO appears to be pinpointed between $62 and $68.

Even though this company is a huge cash burning enterprise, the fact is that they have been catching up to industry leader Uber and snatching away market share from the incumbent.

It was only in January 2017 that Lyft had accumulated 27% of the domestic market share, and in the recent filing for the IPO, that number had exploded to 39%.

If Lyft can start to gnaw into Uber's lead even more, shares will be prime to rise beyond the likely $62 to $68 level.

Let's remember that one of the main reasons for Uber giving up ground in this 2-way race is because of the toxic work environment embroiling many of the upper management and the subsequent damage to its broad-based public image.

If you wanted the definition of a public relations disaster, Uber was the poster boy.

Story after story leaked detailing payment problems to Uber drivers, a huge data leak revealing millions of lost personal information, and even a crude video of the founder berating a driver went viral.

There might be no Cinderella ending for this ride-hailing operation as litigious time bombs stemming from an aggressive high-risk, high-reward strategy skirting local taxi laws have flaunted the feeling of corporate invincibility in the face of government.

Being the first of its kind to hit the market, I do believe the demand will outstrip the supply.

There is a scarcity value at play here that cannot be quantified.

And an initial pop from the low-to-mid $60 range to about $80 is a real possibility in the short-term.

However, expect any robust price action to be met with rip-roaring volatility, meaning there is a legitimate chance that shares will consolidate back to $50 before they head up to $100.

Some of my favorite picks have echoed this same price action with fintech juggernaut Square (SQ) and streaming platform Roku (ROKU) mimicking heart-stopping price action with 10% moves up or down on any given day.

This doesn't mean that these are bad companies, but they do become harder to trade when entry points and exit points become harder to navigate around because of the extreme beta attached to the package.

The big winner of this IPO is ultimately self-driving technology.

Let's not skirt around the issue - Lyft loses a lot of money and so does Uber and that needs to stop.

It has been customary for tech companies to go public in order for the initial venture capitalists to cash out so they can rotate capital into different appreciating assets.

When companies are on the verge of ex-growth, maintaining the same growth trajectory becomes almost impossible without even more incremental cash burn relative to sales.

This leads to an even more arduous pursuit of revenue acceleration with stopgap solutions calling for riskier strategies.

What this means for Lyft is that they will need to double down on their self-driving technology because they are incentivized to do so, otherwise face an existential crisis down the road.

The most exorbitant cost for Uber and Lyft is by far employing, servicing, and paying out the drivers that shuttle around passengers.

I cannot envision these companies becoming profitable unless they find a way to eliminate the human driver and automate the driving function.

I will say that Uber benefitting from the Uber Eats business has been a high margin bump to the top line.

Yet, food delivery is not the main engine that will spur on these IPO darlings.

This part of the business is getting more saturated with margins getting chopped down every day.

What food delivery mainstays like Doordash and GrubHub don't have, is the proprietary self-driving technology that at some point will be present in every vehicle in the United States and the world.

What we are seeing now is a race to perfect, optimize, and implement this technology in order to further license it out to food delivery operations and other logistic heavy business that focus on the last mile.

The licensing portion out of self-driving technology will become a massive revenue driver eclipsing anything that the actual ride-hailing revenue from passengers can inject.

Well, that is at least the hope.

And because Lyft going public might force the company to remove the subsidies provided to the lift operators, this could translate into higher costs per unit.

The pathway is a no-brainer – Lyft needs self-driving technology more than the technology needs them.

And even though Google is head and shoulders the industry leader with Waymo, Lyft and Uber don't have a world-famous search engine that they can fall back on if the sushi hits the fan.

I believe Lyft passengers will have to pay more for rides in the future because of the demand for meeting short-term targets incentivizing management to raise fares.

Going public first will allow them to set the industry standards before Uber can participate in the discussion gifting a tactical advantage to Lyft.

That is why Uber is attempting to go public as fast as possible because every day that Lyft is a public company is every day that they can push their unique narrative and standardize what is a nascent industry that never existed 20 years ago with their new capital.

If high risk is your cup of tea, then buy shares when you get the first crack at it, otherwise, take a backseat with a bag of popcorn and watch history unfold.

This trade is not for the faint of heart and until we can get some more color on the business model and the ability or not of management to meet quarterly or annual expectations, there will be many moving parts with cumbersome guesswork involved.

To read up on Lyft’s IPO filing on the SEC website, please click here.

LYFT’S ARRAY OF SERVICES

March 20, 2019 - Quote of the Day

Tech Letter

“Any time there's significant change, there's going to be some people who embrace the change and others who are against the change.” – Said CEO of Uber Dara Khosrowshahi

March 19, 2019

Tech Letter

Mad Hedge Technology Letter
March 19, 2019
Fiat Lux

Featured Trade:

(GOOGLE’S AGGRESSIVE MOVE INTO GAMING),
(GOOGL), (AAPL), (FB), (NFLX), (MSFT) (EA), (TTWO), (ATVI)

Google’s Aggressive Move Into Gaming

Tech Letter

The saturation of tech is upon us.

That is the takeaway from Google’s (GOOGL) hard pivot into gaming.

The goal of their new gaming service is to become the Netflix (NFLX) of gaming allowing gamers to skip purchasing third-party consoles and playing games directly from an Android-based Google device.

Middlemen in the broad economy are getting killed and this is the beginning.

What we are really seeing is a last-ditch effort to protect gaming consoles - these devices will become extinct in less than 20 years boding ill for companies such as Sony and Nintendo

The cloud is still all the rage and companies such as Microsoft (MSFT), Alphabet (GOOGL), and Apple (AAPL) have the natural infrastructure in place to offer cloud-based gaming solutions.

Phenomenon such as internet game Fortnite have shown that consoles are outdated and relying on the cloud as a fulcrum to extract gaming revenue by way of add-ons and in-game enhancements will be the way forward

Another key takeaway from this development is that passive investment is dead, even more so in tech, where these big tech companies are starting to bleed over into each other's territory.

This dispersion will create opportunity and pockets of weakness.

I blame this on a lack of innovation with companies still trying to extract as much as they can from the current smartphone-based status quo which has pretty much run its course.

Technology is itching for something revolutionary and we still have no idea what that new idea or device will be.

The rollout of 5G is promising and companies will need some time to adapt to this super-fast connection speed.

In either case, I can tell you the revolution won’t include foldable smartphones.

In 2018, the gaming industry flourished on accelerating momentum by registering over $136 billion in sales, and the revenue growth rate is already about 15% and increasing.

Naturally, companies such as Amazon and Google want a piece of this action and are hellbent on making inroads in the gaming environment such as Amazon's ownership of Twitch, which is a game streaming service where viewers can watch live tournament-style competitions proving extremely popular with Generation Z.

I applaud this move by Google because they already have proved they can execute on certain mature assets such as YouTube which has become the Netflix replacement of 2019.

Doubling down in the gaming sector would be a bonus as they search a second accelerating revenue driver that will dovetail nicely with the overperformance in YouTube this year.

It’s even possible that YouTube could be modified to support live stream gaming, certainly various synergistic dynamics are at play here.

Even if they fail - it's worth the risk.

Revenue extraction will be painful for certain companies like Facebook (FB) in this new environment, who has seen a horde of top executives abort after the company drastically changed directions, believing the company is on a suicide mission to fines and more regulatory penalties.

I've mentioned in the past that Facebook no longer commands the same type of employee brand recognition they once cultivated.

Facebook will find a tougher time to find the right people they need to execute their private chat plan, by linking the likes of WhatsApp, Instagram, and Facebook Messenger.

This is a high-risk high-reward proposition that could end up with Facebook's co-founder Mark Zuckerberg in tears if regulators give him the cold shoulder, and that is why many executives who are risk-adverse want to cash in now because they sink with the Titanic.

Not only are gaming assets becoming saturated, but the general online streaming environment is attracting a tsunami of supply all at one time.

Online content is already veering into the same type of pricing structures that cable offered traditional customers.

Investors will have to ask themselves, how much will the average consumer spend in content-based entertainment per month?

My guess is not more than $100 per month.

The saturation will cause tech companies to become even more draconian.

Be prepared for some more epic in-fighting until a new gateway of internet monetization opens up.

There has never been a better time to be a tactical and active investor in tech.

The Fang trade has splintered off with each company facing unpredictable futures.

Unearthing value will become more difficult because these traditional bellwether tech stocks have decoupled and aren't going straight up anymore.

Those zigs and zags will still be buttressed by a secular tailwind of the migration to digital, but there are certain winners and losers that will result of this.

Apple announcing a new streaming product is proof that these Silicon Valley tech firms are desperate for new profit drivers as the woodchips that fuel the fire start to run noticeably short on supply.

At the bare minimum, this looks disastrous for the traditional gaming companies of Electronic Arts (EA), Take-Two Interactive (TTWO), and Activision (ATVI) whose shares have been effectively shelved due to the Fortnite revolution.

EA has fought back with their own Fortnite lookalike called Apex Legends which showed a Fortnite-like trajectory sucking in 10 million players in the first 72 hours.

The stock exploded 16%, signaling this is the new way forward for gaming companies.

As a whole, these traditional gaming studios simply don’t have the firepower to compete with the big boys, let alone possess a strong cloud infrastructure.

March 19, 2019 - Quote of the Day

Tech Letter

“Success is a lousy teacher. It seduces smart people into thinking they can't lose.” – Said Founder and Former CEO of Microsoft Bill Gates

March 18, 2019

Tech Letter

Mad Hedge Technology Letter
March 18, 2019
Fiat Lux

Featured Trade:

(WHY ALPHABET IS THE BEST FANG TO BUY NOW),
(GOOGL), (NFLX), (FB), (TWTR), (DIS)

Why Alphabet is the best FANG to Buy Now

Tech Letter

Why am I bullish on Alphabet (GOOGL) short-term?

Video has muscled its way to the peak of the digital content value chain.

If you don't have video streaming, then you are significantly depriving yourself of the necessary ammunition capable of battling against legitimate content originators.

The optimal type of content is short form yet engaging.

Interesting enough, the format method integrated into systems of Facebook (FB) and Twitter (TWTR) has experienced unrivaled success.

They have been leaning on this model as growth levers that will take them to the next stage of revenue acceleration and rightly so.

This has seen smartphone apps such as Instagram become game-changing revenue machines destroying all types of competition.

The x-factor that stands out in Instagram's, Facebook’s, YouTube’s model is that it's free and they do not absorb heavy expenses from content creation.

It’s certainly cheap when the user is the product.

Google’s YouTube service has morphed into something of a phenomenon.

Its interface is easy to use, and followers have a simple time navigating around its platform.

Familiar news outlets such as Sky News, Bloomberg News, and even CNBC news have recently installed their live feeds on YouTube's main platform scared of losing aggregate eyeballs.

And even more intriguing is that YouTube has become a legitimate competitor to Netflix's (NFLX) online video streaming platform.

YouTube has sensed the outsized pivot to their free platform and has double down hard by installing 5-second ads at the front end and middle of videos.

Of Alphabet’s total $39.3 billion revenue pocketed in Q4 2018, ads constituted 83% or an astounding $32.6 billion.

I feel that Alphabet shares are currently undervalued, and I believe that we will see outperformance from Alphabet shares for the rest of 2019 based on YouTube's performance relative to expectation.

YouTube’s ever-growing presence showing up in the top line will offer the growth investors desire to pile into these shares as the company wrestles with future projects such as Waymo.

That's not to say that their traditional advertisement business of Google Search is failing.

Investors can expect continuous 20% to 25% growth in this cash cow business, but the reason why Alphabet share has not been able to break out is that investors have baked this into the pie.

Therefore, YouTube is really the X Factor and will take them to this new promised land with shares surging past the $1,250 mark and more importantly, staying at that level.

YouTube brought in about $15 billion in 2018 and that consisted of about 10% of Alphabet’s total annual revenue.

However, the company is just scratching its surface of what it can accomplish with this fast-growing revenue driver and I can extrapolate this growth segment turning into 20% or 25% of the company’s annual revenue in the next few years.

Google does not strip out YouTube revenue in its reporting, therefore, it's difficult to put my finger on exactly how much YouTube is carving out in terms of revenue.

I can also assume that if Netflix continues to raise the cost of monthly subscription, this strategy will directly hurt its revenue acceleration ability as it relates to competing with Google's YouTube because YouTube's free service is demonstrably attractive to viewers hoping to discover high-quality content relative to a $20 per month Netflix subscription.

I do agree that Netflix is a great company and a great stock, but as they slowly raise the price of content, this will gift YouTube a huge chunk of Netflix’s marginal audience freeing itself from the shackles of Netflix’s price rises.

At some point, online video streaming will become as expensive as the cable bundles now, and at that point, we know that saturation is imminent boding negative for Netflix.

What I do envision in the short-term future are consumers in America will pay into several unique bundles such as Netflix, maybe Disney (DIS), ESPN and merely stick with these as their base content generators as more consumers cut their cord and hard pivot from traditional cable packages that are becoming less appealing by the day.

And don't forget that at some point, Netflix will have to demonstrate profitability and the huge cash burn that permeates throughout the business will be exposed when subscription growth starts to fade away.

In every possible variant, YouTube will become an outsized winner in the media wars because the quality of the free content keeps improving, the cost for consumers stays at 0, and their best of breed ad tech migrating from their Google search into YouTube just keeps getting more surgical and efficient.

Not only are the positive synergies from the best of breed ad tech aiding YouTube’s model, but just think about YouTube having access to the Google cloud and saving expenses by accessing this function to store data onto the Google Cloud.

If this was a standalone service, they would have to subcontract cloud storage functions to third-party cloud company causing the content service to spend millions and millions of dollars per year in expenses.

This would have the potential of crushing the bottom line.

That is just one example of the synergies that Google can take advantage of with YouTube under its umbrella of assets.

And think about self-driving vehicles, Google could potentially equip YouTube as a pre-programmed application inside of autonomous vehicle platform tech with YouTube popping up on the multiple screens.

I assume that there will be multiple screens inside of cars with self-phone driving technology because of the lack of driving required.

The worst maneuver that Alphabet could do right now is spinoff YouTube into its own company, and if that happens, YouTube won't be able to take advantage of the various synergies and benefits of being an Alphabet asset.

We are just scratching the surface of what YouTube can accomplish, and I believe this upcoming overperformance isn’t in the price of the stock yet.

If the Fed continues its “patient” strategy towards interest rates at a macro level, Alphabet will easily soar past $1,250 and it can easily gain another 10% in 2019.

If any “regulation” risk as a result of extremist content rears its ugly head, buy shares on the dips because the algorithms are in place to eradicate this material and any fine will be manageable.