Mad Hedge Technology Letter
February 28, 2019
Fiat Lux
Featured Trade:
(WHY ETSY KNOCKED IT OUT OF THE PARK),
(ETSY), (AMZN), (WMT), (TGT), (JCP), (M)
I wrote to readers that I expected online commerce company Etsy to “smash all estimates” in my newsletter Online Commerce is Taking Over the World last holiday season, and that is exactly what they did as they just announced quarterly earnings.
To read that article, click here.
I saw the earnings beat a million miles away and I will duly take the credit for calling this one.
Shares of Etsy have skyrocketed since that newsletter when it was hovering at a cheap $48.
The massive earnings beat spawned a rip-roaring rally to over $71 - the highest level since the IPO in 2015.
Three catalysts serving as Etsy’s engine are sales growth, strength in their core business, and high margin expansion.
Sales growth was nothing short of breathtaking elevating 46.8% YOY – the number sprints by the 3-year sales growth rate of 27% signaling a firm reacceleration of the business.
The company has proven they can handily deal with the Amazon (AMZN) threat by focusing on a line-up of personalized crafts.
Some examples of products are stickers or coffee mugs that have personalized stylized prints.
This navigates around the Amazon business model because Amazon is biased towards high volume, more likely commoditized goods.
Clearly, the personalized aspect of the business model makes the business a totally different animal and they have flourished because of it.
Active sellers have grown by 10% while active buying accounts have risen by 20% speaking volumes to the broad-based popularity of the platform.
On a sequential basis, EPS grew 113% QOQ demonstrating its overall profitability.
Estimates called for the company to post EPS of 21 cents and the 32 cents were a firm nod to the management team who have been working wonders.
Margins were healthy posting a robust 25.7%.
The holiday season of 2018 was one to reminisce with Amazon, Target (TGT), and Walmart (WMT) setting online records.
Pivoting to digital isn’t just a fad or catchy marketing ploy, online businesses harvested the benefits of being an online business in full-effect during this past winter season.
Etsy’s management has been laser-like focusing on key initiatives such as developing the overall product experience for both sellers and buyers, enhancing customer support and infrastructure, and tested new marketing channels.
Context-specific search ranking, signals and nudges, personalized recommendations, and a host of other product launches were built using machine learning technology that aided towards the improved customer experience.
New incremental buyers were led to the site and returning customers were happy enough to buy on Etsy’s platform multiple times voting with their wallet.
The net effect of the deep customization of products results in unique inventory you locate anywhere else, differentiating itself from other e-commerce platforms that scale too wide to include this level of personalization.
Backing up my theory of a hot holiday season giving online retailers a sharp tailwind were impressive Cyber Monday numbers with Etsy totaling nearly $19,000 in Gross Merchandise Sales (GMS) per minute marking it the best single-day performance in the company’s history.
Logistics played a helping hand with 33% of items on Etsy capable to ship for free domestically during the holidays which is a great success for a company its size.
This wrinkle drove meaningful improvements in conversion rate which is evidence that product initiatives, seller education, and incentives are paying dividends.
Overall, Etsy had a fantastic holiday season with sellers’ holiday GMS, the five days from Thanksgiving through Cyber Monday, up 30% YOY.
Forecasts for 2019 did not disappoint which calls for sustained growth and expanding margins with GMS growth in the range of 17% to 20% and revenue growth of 29% to 32%.
Execution is hitting on all cylinders and combined with the backdrop of a strong domestic economy, consumers are likely to gravitate towards this e-commerce platform.
Expanding its marketing initiatives is part of the business Josh Silverman explained during the conference call with Etsy dabbling in TV marketing for the first time in the back half of 2018, and finding it positively impacting the brand health metrics particularly around things like intending to purchase.
However, Etsy has a more predictable set of marketing investments through Google that offers higher conversion rates and the firm can optimize to see how they can shift the ROI curve up.
Etsy can invest more at the same return or get better returns at the existing spend from Google, it is absolutely the firm's bread and butter for marketing, particularly in Google Shopping, and some Google product listing ads.
With all the creativity and reinvestment, it’s easy to see why Etsy is doing so well.
Online commerce has effectively splintered off into the haves and have-nots.
Those pouring resources into innovating their e-commerce platform, customer experience, marketing, and social media are likely to be doing quite well.
Retailers such as JCPenney (JCP) and Macy’s (M) have borne the brunt of the e-commerce migration wrath and will go down without a fight.
Basing a retail model on mostly physical stores is a death knell and the models that lean feverishly on an online presence are thriving.
At the end of the day, the right management team with flawless execution skills must be in place too and that is what we have with Etsy CEO Josh Silverman and Etsy CFO Rachel Glaser.
Buy this great e-commerce story Etsy on the next pullback - shares are overbought.
“Well, if you can buy 1,000 of anything, it doesn't belong on Etsy” – Said CEO of Etsy Josh Silverman
Mad Hedge Technology Letter
February 27, 2019
Fiat Lux
Featured Trade:
(HOW AUTONOMOUS DRIVING WILL CHANGE THE WORLD),
(TSLA), (GM), (GOOGL)
The car insurance industry will grapple with a massive existential crisis of epic proportions unless they evolve.
The looming threat is caused by technology and autonomous driving.
This is why parents usher their children into industries that won’t be blown up by technological disruption.
Removing the driver from the automobile industry could be the single most societal shift in our lifetimes.
This technology is getting ramped up as we speak and Waymo is the clear leader that is already collecting money for commercial rides in the state of Arizona.
Car insurers must wonder if they will be able to charge the same amount if there are no drivers?
The answer is that the liability will head from the driver to the manufacturer with companies like General Motors (GM) Tesla (TSLA) likely footing the bill while the passenger is likely to pay minimally.
We are headed towards another data war with insurers incentivized to dismiss the relevance of data in self-driving cars and devaluing it will cause the car companies’ bills to go higher.
Car insurance companies are also heavily investing in data analytics teams to see which part of the pie and how big of it they can get from self-driving technology.
This is uncharted territory.
Consensus has it that by 2035, 23 million autonomous vehicles or around 10 percent of today’s total will grace our roads and highways.
But I believe this number is understating the underlying series of generational factors at play.
It’s no secret that the majority of Millennials and Generation Z want to live in coastal urban cores participating in the heart of downtown activities mainly because of the chance to find a high-paying job.
This has exacerbated the migration from rural to metro areas around the country and sapping the need to drive or buy a car when Uber can become an almost perfect substitute.
And don’t forget that according to the latest data, cars are stationary 92% of the time signaling consumers’ intentions to stop purchasing and instead rent cars by the minute, hour, and day.
That is the beauty of the sharing economy and how self-driving cars will fit in.
This avant-garde model will emerge between 2035 and 2050 effectively reducing the value of owning a car, the self-driving car that will be bought, probably by the self-driving tech company itself, could constitute 50% of all vehicles sold globally.
The sum of the parts could mushroom into a $3 trillion addressable market, not only made up of the physical cars but the assortment of ancillary technology needed to fuel these cutting-edge machines.
Alphabet’s (GOOGL) self-driving unit named Waymo run an onboard computer that processes images in real time using its machine learnings algorithm built by the industries’ best machine learning engineers.
However, not only do these firms need an army of artificial intelligence engineers to build the algorithms that are at the fulcrum of what they do, they also need other parts that fit into the puzzle such as lidar radar technology.
Lidar is an acronym for light detection and ranging, and the physical manifestation of this technology has so far been a cone-shaped object on top of the car's roof emitting laser pulses that bounce off objects allowing the car to recreate a 3D image of its surroundings.
The advancement of this technology and the potential production of scale will cut the cost of manufacturing this technology to less than $10 per sensor.
A full-blown lidar unit costs $75,000 at current market prices, but luckily the phenomenon of deflationary technology always drives the prices down to bare bones.
Cameras, sensors, cooling systems, and GPU chips are other products that must be heavily developed to accommodate self-driving technology.
GM is another prominent player in this field, and they have already outfitted close to 200 cars for testing.
The firm transformed its Orion Assembly plant in Michigan to accommodate cameras, lidar, and other sensors to its Chevrolet Bolt.
Whoever masters the lidar technology the quickest will have an inside edge to grab market share once this industry explodes and a lower insurance bill.
Waymo won’t be the only player usurping market share even though they are the brightest name out there, and there is room for others to crash the party.
GM invested $500 million into Lyft which could act as a gateway path into outfitting Lyft cars with GM’s proprietary technology.
Whoever specializes in the art of licensing self-driving technology to companies will ring in the register as well and the opportunities abroad are endless because emerging economies aren’t players in this industry.
GM’s Cruise AV has opened eyes with GM removing pedals or a steering wheel for this electric car.
It’s under testing in select cities and GM plans to integrate it into its ride-sharing program.
Investors are still waiting for companies to telegraph meaningful revenue to the top line, and this teething phase could cause the impatient to bolt for greener pastures.
Waymo has claimed it will be able to deliver up to 1 million trips per day by 2022 signaling that real top line revenue appears a few years off at the earliest.
This trade isn’t for the smash-and-grab type, but this is the future and it will be a slow crawl to broad-based adoption and material revenue.
The death of the car insurance industry is still years away and insurers still have time to save their bacon.
Data at the Association for Safe International Road Travel (ASIRT) shows that nearly 1.25 million people die in road crashes each year, on average 3,287 deaths a day and another 20-50 million are injured or disabled.
Technology is on the move and will try to correct this awful trend in road safety and human fatalities.
These years could be the high-water mark for car insurance and as self-driving technology continues to seep deeper into the public consciousness, it could snatch revenue from the coffers of the insurance companies.
But if these legacy companies become nimble and embrace the changes, they could potentially be at the vanguard of a highly lucrative industry charging the likes of GM and Tesla to ferry around humans.
“Incentive structures work, so you have to be very careful about what you incent people to do because various incentive structures create all sorts of consequences which you can’t anticipate,” said Apple founder Steve Jobs.
Mad Hedge Technology Letter
February 26, 2019
Fiat Lux
Featured Trade:
(WHY THE BIG PLAY IS IN SOFTWARE),
(AMZN), (WMT), (ZEN), (FB), (TWLO)
Buy and hold domestic software companies for dear life because that is what the market is giving you.
Take them with both hands.
These revenue models should revolve around developing the lucrative North American digital consumer markets.
Tech is all about giving you pockets of dispersion and my job to herd you into these pockets of opportunity created by pockets of dispersion.
We have once again been delivered a few more poignant indicators allowing us to gauge the market appetite for certain tech barometers.
Incandescent as can be, recent news of hardware companies planning to bring exorbitant foldable phones to market has me profusely shaking my head.
Huawei announced plans to debut the Mate X foldable 5G smartphone with a price tag of a staggering $2,600.
This followed an announcement by Korean behemoth Samsung to roll out the Samsung's Galaxy Fold and the Koreans plan to sell this luxury product for $1,980.
Chinese Huawei Mate X is 5G-supported and can simply fold into a slimmer 6.6-inch smartphone or unfold into an 8-inch tablet.
This is another case of smart manufacturers overreaching for a market that doesn’t exist and shouldn’t exist.
I believe the demand for screen-related smart products at this price point is scant at best.
If you compare foldable phones to a $600 high-tier Samsung Android smartphone with a 6-inch screen, Samsung and Huawei would need to convince consumers the extra $1,500 or in Samsung’s case, $2,200 is worth the extra relative wad of cash.
My bet is that these foldable phones aren’t worth even $300 more of aggregated incremental value let alone $500 and for many consumers like me, it’s worth zilch.
In no way, aside from the gimmick of buying one of these novelties, does buying a foldable phone justify the price.
This is another example of the common-sense factor that has been completely absent from a product cycle.
Product viability and product desirability do not walk hand in hand.
The screen-related smart device market is saturated, evident by the elongated refresh cycle in smartphone usership.
Blame the expensive price tags of over $1,000 and the removal of carrier subsidies that have caused the upgrade cycle to skyrocket from 2.39 years in 2016 to 2.83 years in late 2018.
Then there is the touchy issue of cannibalizing other hardware product lines as many of the potential foldable phone customers might interchange the foldable phone with normal smartphones.
This all screams bad strategy with companies saddled in a glut of inventory.
It takes R&D years to follow through and develop the technology to bring it to market, and it is entirely conceivable this could become a big write-off.
If price cuts happen shortly after the debut, prospects look bleak.
In general, consumer sentiment has soured for more of this type of tech. Many people are just exhausted from screen time and the cycle of the newest hardware screens is failing to excite existing customers bases.
The only conclusion I can make is that tech today is about software, software, and particularly domestic software.
If you compare software to hardware head to head now, software functionality is still increasing 15% YOY juicing up efficiency and productivity.
What will foldable phones offer a digital nomad or working professional?
Not much.
It highlights the absence of a productivity or functionality boost that digital device users are scouring for now.
Stay away from hardware.
Why is domestic software preferred over international software that scales the earth five times around?
Regulation.
It has reared its ugly head again.
The avalanche of negative headlines applied to American big tech is finally becoming a self-fulfilling prophecy.
It was only a matter of time until someone took note, and in this case, various Asian governments have taken note.
In a bid to blunt American tech’s first mover advantage, the Indian government has written up a draft of regulatory measures in order to make the Indian tech landscape a fairer playground.
This will have the intended effect of creating a national powerhouse of tech firms employing local people.
India has effectively taken a page out of China’s playbook using home-field advantage to nurture homegrown talent.
Large American tech companies have made India a playground of binge investments lately with Amazon (AMZN) shelling out $5 billion and Walmart (WMT) brazenly pouring $15 billion into e-commerce heartthrob Flipkart.
This is awful news for them.
They will have to adjust to India’s new-found zeal for digital regulation and a heavy restructuring of the business model could be in the cards in 2019 along with higher costs of running these businesses.
India has followed China in its footsteps demanding data to be localized meaning data centers won’t be able to run and store Indian data abroad.
American participants will have no other choice but to pony up the extra costs.
Readers might forget that India is the current battleground of global tech growth and Amazon will not have unfettered market access like they did breaking into Europe and dominating e-commerce from the start.
Amazon and Walmart can thank Facebook (FB) which has been the main culprit in bringing wave after monstrous wave of heavy criticism on a whole industry.
Facebook has effectively brought forward the regulatory storm that otherwise would have happened a few years later down the road.
In any case, this makes life harder for data-oriented companies who wish to navigate hazardous foreign tech climates.
Domestic angst against local tech has given the rubber stamp for full-on data government mandates abroad from India to Vietnam.
What does this all mean?
In 2019, data regulation could shrink expected growth levers while hardware companies are becoming even more desperate as these Hail Marys could quickly turn into liabilities.
I nailed software picks Zendesk (ZEN) and Twilio (TWLO) amongst others from a strong group of enterprise software stocks.
Twilio’s performance could potentially become my best pick of 2019, it’s on a straight line up even with all this clutter and chaos around the world.
“A squirrel dying in front of your house may be more relevant to your interests right now than people dying in Africa.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
February 25, 2019
Fiat Lux
Featured Trade:
(THE CLEANEST INTERNET PLAY OUT THERE),
(GDDY), (WIX), (CSCO),