“As companies get bigger, they tend to slow down. It's a universal law.” - Said CEO of Uber Dara Khosrowshahi
Mad Hedge Technology Letter
February 13, 2019
Fiat Lux
Featured Trade:
(WHY THE FUTURE IS NOT IN FURNITURE),
(W), (NWARF), (AMZN)
Avoid online furniture e-store Wayfair (W) – it’s too expensive.
That was my conclusion after going over the company’s data with a fine-tooth comb.
The stock is up over 600% over the past 5 years, it’s certainly a performance of a rock star in retrospect but it is far from a guaranteed indicator of future success by any means.
Shares have outgained the broader market by a wide margin resulting from January’s snapback in oversold territory scorching skyward 22% compared to an 8% spike in the S&P 500.
Investors must look at the performance of the company and deduce if the path forward is littered with booby traps or if it is as smooth as a slab of granite.
I would argue the former.
Just because the company is in e-commerce doesn’t mean it gets a free pass.
When you hear the word e-commerce, the mind darts and dives to the success of Amazon (AMZN) and observers must assume that if it’s doing the same job as Amazon, cash must be falling from the sky.
Well, the truth is sometimes harsh, and unfortunately, this company is nothing close to Amazon.
Wayfair sells furniture, a tough business from the onset.
Investors must ask themselves - does Wayfair optimally sell furniture and run its company efficiently?
First, the good.
Sales have gone gangbusters the past few years and this is the catalyst driving the stock northwards.
The company presided over a 3-year sales growth rate of 44% - impressive for a cloud company, let alone an online furniture company.
In the past 3 years, the company has more than doubled sales from $2.25 billion in 2015.
Noticeably, tech growth investors have piled into this name propping it up irrespective of any problems behind the lipstick.
The knock on Wayfair is not the amount of growth but the net quality of growth.
These two must be differentiated and have ramifications affecting the firm’s ability to nurture return business down the road.
Take a quick spin on their official website by clicking here.
Right away, before the user can even take a glance at what the website has to offer, the company is vigorously fishing for an email address to allow the reader to continue.
Without entering an email, the prospective customer is stopped dead in its tracks clicking out of the website – too aggressive for my taste.
Why hand over a personal email when any Amazon prime user can just migrate to Amazon’s search bar without all these hoops that need to be jumped through?
The subsequent message attached to the email signup form says, “Up to 70% off Every Day - Shop every style of furniture and décor at up to 70% OFF. - Exclusive sales start daily.”
If you finally decide the site is worth your time and want to insert your email to move forward pass the first barrier, almost every inch of the site is peppered with over excessive 70% sales reminders.
Don’t forget the first pop-up described the same thing – and now it’s sales promotion overload.
This aggressive marketing push reminds me of a company who knows they cannot compete long-term and believes a marketing solution is the elixir to all of its ills.
Wayfair has performed admirably at growing sales the past few years, and that cannot be taken away.
But its sales success has been carried out in an over-reaching way with respect to the health of the company.
Effectively, Wayfair has been sacrificing margin and burning cash at a high rate potentially disenfranchising its shareholder base in the near future.
This will end in tears.
I cannot envision a scenario where this same business model perpetuates due to a lack of a differentiated advantage.
They do nothing more than the next guy does.
The more I use the website, the more I want to revert back to Amazon and buy furniture from Jeff Bezos.
The situation echoes the current situation with low-cost airlines Wow Airlines from Iceland and Norwegian Air Shuttle (NWARF) who doubled down on the same type of strategy that took them to the brink of solvency.
Wayfair’s advertising and marketing expenses have been growing 30-40% per year along with customer service expenses.
Net income has gotten clobbered during this time span as well.
Wayfair lost less than $50 million in 2015. The losses have racked up to almost $450 million at the beginning of 2019.
As quarterly EPS has cratered, Wayfair has missed the past 4 quarterly EPS forecasts demonstrating a continuous lack of execution from management and an inferior strategy.
The EPS percentage change on a sequential basis was negative 97% last quarter.
This company will end up as a pump-and-dump stock, and I speculate no viable path forward to profitability unless major surgery is done to this business model.
I highly doubt that Wayfair can consistently maintain mid-40% sales expansion, and if it does, it is only a matter of time until the ripcord is pulled and the pilots abort the plane before it crashes into the ocean.
As soon as this turns sour, whether it be a recession or the sales strategy becomes impotent, shares will face Armageddon.
Ultimately, the risk/reward proposition is poor, but that doesn’t mean this stock can’t rally a further 30% on the back of a dovish Fed and kick the can down the road trade deal.
If they can clock in mid-40% sales growth, it doesn’t matter if they slaughter net income and expenses because growth investors will come out the woodwork to buttress this online furniture store.
Stay away from this high-risk company.
This is almost a tale of the emperor's new clothes.
Mad Hedge Technology Letter
February 12, 2019
Fiat Lux
Featured Trade:
(MEET YOUR HOME OF THE FUTURE),
(KASITA),
(PLEASE SIGN UP NOW FOR MY FREE TEXT ALERT SERVICE NOW)
Enter the home of the future – the iPhone of housing fused with Swedish furniture maker Ikea.
It is a progressive way to live lightly in 352 feet of space for a final bill of $139,000 or rent the space for a sum substantially lower than today’s market rates.
Sounds too good to be true?
If you look at houses now, technology is an afterthought and with the explosion of new architectural techniques and a smorgasbord of IoT products available now – why should it be?
Kasita is an Austin, Texas-based company attempting to transform housing options with one revolutionary product.
Aptly named Kasita after the company that constructs the product, this house is a rendition of a tiny home but fitted with high-end finishes and layered with all the newest tech gadgets.
The firm isn’t competing against the stereotypical urban high-rise or single-family home.
They are targeting the areas of opportunity in between.
On the software side of things, over 60 integrated IoT products deployed together provide a cozy and clutter-free experience resulting in the Marie Kondo of tiny homes.
The team has built in-house software that bridges the IoT products working together simultaneously in one cohesive manner.
Gradually, Kasita hopes to produce one microunit every 57 seconds under one roof.
The first finished units were installed in backyards in Austin and were a resounding success and that was just the beginning.
Aiming to go ultra-dense long-term will make this company and its products sustainable.
The ultimate vision entails building microunits on small parcels of lands then building vertically whether it be 10 or 100 stories high.
The vertical construction would be possible with a rack structure enabling kasita units to be interchangeably installed into the rack structure.
Think about it as an RV park that pays for each slot, but the rack structure would allow building to commence upward minimizing the allotment of required land maximizing resources.
Theoretically, since these units will be interchangeable, CEO Jeff Wilson envisions being able to transport units to other vertical racks with the ability to slot one in seamlessly.
Effectively, dwellers would no longer be bound to the land they resided on and would be able to transport a kasita unit anywhere in the world.
This company wants to remake the concept of manufacturing houses into a process that echoes the automobile or smartphone production method.
Designing the kasita from the ground up took over 5,000 man-hours of precise engineering by BMW-experienced engineers.
They borrowed the blueprint of making a finely tuned German car and instilled many elements into the kasita allowing them to build a beautiful and modern micro home.
The design has natural light, high ceilings, clean surfaces which adds up to making this space feel larger than it actually is.
Also, by designing extra high ceilings, it created additional functions such as sliding a bed underneath for pull-out as well as positioning parts of the house together without wasting space.
During the meticulous research process, engineers found they could enlarge the house by about 25% because of the space-saving methods.
The design avoids wood and is made on a production line like a model T.
Migrating to an assembly line production method able to realize the efficiency of scale will suppress manufacturing costs resulting in a profitable enterprise.
Solving the acute housing crisis on the two coasts is an imminent threat to American social stability.
Pockets of friction can be spotted all over the Golden State and educators in California are fed up with the status quo with rents rising faster than inflation and wages.
Sara Kimberlin, senior policy analyst at the California Budget & Policy Center, recently chimed in saying, “In every part of California, housing is unaffordable for many people.”
The urban districts closest to San Francisco and Los Angeles are the epicenters of housing unaffordability.
A recent strike of thousands of teachers in the Los Angeles Unified School District magnified the dire situation at hand.
A small one-bedroom flat is $2,000 to $3,000 per month in Los Angeles and rises to $4,000 in parts of San Francisco, equivalent to a teacher's take-home pay for one month.
Using small parcels of lands to deploy these small microunits would not entail applying for special permits for these urban spaces.
These two urban centers would relish more housing reply and could use plots of lands that currently occupy errant garbage dumpsters or space too small to develop on.
Realistically, the economics spearheading this project would gravitate towards the level of affordability to drop to the point where a person working in a fast food restaurant or as a house cleaner could afford the monthly cost of living inside of one.
At this point, suburban-type houses have been shunned by the younger generations.
Young people desire an experiential life that includes living on less but still with premium access to creative arteries in dense urban districts.
But there isn’t enough space for housing.
Clearly, this isn’t a home for a family of 5, but recent converging trends signal this is the clear-cut direction society, housing, and the economy is headed whether we love it or hate it.
The company first started selling in Texas and has recently branched off into California, and Nevada.
Will this ultimately fix the housing crisis in California?
No, but it could give single workers more options if they have a job that forces them to move around every few months and are tech savvy.
To view their official design, please click here.
“Never trust a computer you can't throw out a window.” – Co-Founder of Apple Steve Wozniak
Mad Hedge Technology Letter
February 11, 2019
Fiat Lux
Featured Trade:
(HOW FORTNITE IS TAKING OVER THE GAMING WORLD),
(TTWO), (EA), (ATVI), (NFLX), (FORTNITE)
One idyllic content company reshaping the content landscape as we know it is Epic Games who is the producer of the video game phenomenon Fortnite.
Not only is Epic Games rapidly altering the video game industry by itself, it is also starting to take a bite out of Netflix’s subscriber growth momentum.
The company was established by Tim Sweeney as Potomac Computer Systems in 1991, originally founded in his parents' house in Potomac, Maryland.
The most fascinating nugget of information that came out of Netflix’s most recent earnings call was not that Netflix has already corralled 10% of television screen time in America, but the reason why this percentage is lower abroad is because of Fortnite taking away Netflix’s mojo.
Netflix (NFLX) has lately been asked to measure their content lead to the likes of Hulu, HBO, and the potential Disney streaming product about to hit the market.
But they explicitly confessed they were more worried about Fortnite and the revolution it is spawning.
The key takeaway is that Netflix is not only competing with fellow online content streamers, but video games are more of a threat to them than ever as they compete for the cord cutters and the elusive “cord nevers”.
Cord nevers are consumers who are digital natives who bypassed traditional media channels altogether.
Echoing the stickiness that Netflix has with its younger demographics, the company has targeted mobile screen time as a core driver usurping around 8% of American mobile phone screen time.
And if you thought Netflix was trying to sort out its own Fortnite problem, then how do you think the traditional American video game cohort felt about their own Fortnite problem?
The traditional trio of EA Sports (EA), Activision (ATVI), and Take Two Interactive (TTWO) have been shredded to bits by Fortnite.
Late last year, I gave readers a steer clear synopsis of this company and the latest dead cat bounce in EA and Take Two Interactive should be chances to cut your losses instead of putting more money to work in these names.
Yes, the momentum in Fortnite is that palpable that you stay away from any name that this phenomenon affects.
Activision had no dead cat bounce being the weakest of the three and the stock has gone awry almost halving from $83 to $43 today.
EA’s earnings report was a disaster with their lead title, Battlefield V, doing 1 million fewer sales than the 7.3 million management expected.
During the same holiday season, Take Two Interactive issued a follow-up to a classic that was better than EA’s holiday flagship game called Red Dead Redemption 2 and Activision rolled out another iteration of Call of Duty: Black Ops 4.
Even between the three, the competition was fierce, then throw Fortnite into the mix and comps are getting killed with huge earnings misses penalizing the share prices of this once-vaunted trio.
With the explosion of content in the past several years, consumers are absorbing more content than ever.
Most of this avalanche of content is consumed on mobile phones or televisions, but the behavior varies when you look closer at the different demographics.
Cord cutters total in the low 20 million and are growing 30% annually.
Cord nevers amount to about 30 million growing at 66%.
This all amounts to Americans spending about 12 hours accessing content every day running up to the barrier of natural limits.
That might give consumers some allocated time to sleep, eat, and work, but not much else. We are robotically reliant on content providers to deliver us our fill of daily content.
When automotive technology comes online, it could potentially eke out an incremental 1-2 hours that Americans can stare at their content while being chauffeured around.
How is Fortnite doing financially?
Fortnite earned $2.5 billion in 2018 from a mix of in-game items and passes.
A seasonal Battle Pass is $10, and over 30% of American gamers have purchased this product.
Unlike traditional video gamers who are tied to certain consoles, Fortnite is available on seven platforms: PlayStation 4, Nintendo Switch, Xbox One, PC, Mac, iOS, and Android.
In a time of $60 video games, this new freemium model must shake the foundations of the video gaming establishment.
The rise of freemium games could eradicate the console completely.
A $200-300 console seems expensive if games are free on your $100 Android phone.
The worst side-effect of Fortnite for the traditional video game producers is not Fortnite itself.
It’s the fact that this new model has opened up a new can of worms proving this freemium model with no consoles is the key to unlocking gaming audiences with a 24-hour battle royale, free to play, on-demand, in-game currency, season pass model that was thought to be a hopeful wish by industry analysts.
Then the next question is when will the next Fortnite-esque freemium go viral and can these legacy gaming companies alter their model to accommodate this new business model?
Indeed, management must be freaking out. They thought they had a monopoly on the gaming industry but the nimbler and forward-thinking firm has won-out.
Even the most subscribed YouTuber PewDiePie from Sweden is using Fortnite to keep him in the lead for most YouTube subscribers as Indian music YouTube channel T-Series has caught up with his subscriber count that currently totals 84.3 million.
PewDiePie’s lead was cut down to 20,000 and decided to leverage playing Fortnite squad matches to boost his subs.
The upload got over seven million views in a day backing up my thesis that Fortnite has become the hottest media content asset for cord cutters and cord nevers around the world.
As for the video game stocks, don’t touch them until Fortnite trails off.
And if another freemium game comes to the fore that they aren’t on, run for the hills.
Mad Hedge Technology Letter
February 7, 2019
Fiat Lux
Featured Trade:
(THE DEATH OF THE COLLEGE DEGREE),
(GOOGL), (IBM), (AAPL), (BABA), (BIDU)
If you’re an educator not at a top 25 American university, you might want to stop reading right now.
Disruption.
You’re either on the right or wrong side of it.
I’ve detailed numerous subsets of the economy and society that have been transformed by sharp shifts in technological innovation.
But the one industry that has stealthily moved into the heart and center of technological disruption is education.
For centuries, universities and higher learning institutions had a stranglehold on critical information required to successfully perform in the cutting-edge knowledge economy of those times.
Then on September 15, 1997, a mere 21 years ago, Google search launched its free services to the world and grabbed the monopoly of information away from the college system.
This website effectively caused the cost of information to crater to zero and its free website is ranked #1 as of February 2019 with over 4.5 billion monthly active users.
The ensuing 21 years has been a renaissance in the ability to distribute information propelled by this one platform, and the result is that billions have the ability to study and read up on what they want and when they want.
The ability to learn for free combined with a tight labor market is a promising landscape for job seekers, with analysts forecasting more opportunities for professionals without a degree.
Job-search site Glassdoor amassed a list of various employers no longer bound by requiring applicants to possess a 4-year bachelor’s degree.
These firms aren’t your second-rate companies either made up of gold standard workplaces such as Google, Apple, and IBM.
In 2017, IBM's vice president of talent Joanna Daley confided that about 15% of IBM’s new hires don't have a four-year bachelor qualification.
She emphasizes hands-on experience through coding boot camp or industry-related vocational classes as explicit criteria to get hired.
This development bodes poorly for the future of universities and boosts the prospects of alternative education.
Online college offers working adults ample flexibility in furthering their education.
According to the most recent federal statistics from 2016, roughly one out of every three, or 6.3 million college students learned online.
Even though online courses are becoming more widespread, the best and brightest aren’t attending these schools.
However, it did hijack the marginal student that was on the fence for a 4-year university and brought them into the orbit of for-profit online courses and the revenues that came with it.
That was the first stage of online forces imposing financial pressure on the education marketplace.
Now analysts are discovering the second major trend with higher rated students opting out of the university system altogether.
In many cases, a 4-year university degree is a bad value proposition.
Why is that?
Costs.
In a capitalistic economy that lives and dies by the mantra of buy low and sell high – universities seem to be getting sold short lately.
The exorbitant costs to obtain a 4-year degree has led to an outsized student debt bubble and removed the mystique of this once treasured qualification.
A growing chorus of bipartisan voices has pigeonholed student debt as a major problem across the country.
In the previous presidential election, Democratic candidate Bernie Sanders called this situation “outrageous” as national student debt has spiraled out of control to the amount of $1.5 trillion.
This has been a terrible commercial for the younger generations to follow in the footsteps of the indebted Millennial generation.
And with Generation Z tech savvy at building stand-alone firms buttressed by Instagram and YouTube platforms, why go to college anymore?
Or to nail one of those jobs developing iPhones in Cupertino, why not take a few coder boot camps and self-develop a portfolio impressive enough to score an Apple interview?
The bottom line is that there are workarounds for a fraction of the price.
And because tech firms have outpaced analog companies in salaries and hiring for the past two decades, there is an outsized bias on compiling technical skills that will lead a candidate down a path to a salary of over $100,000 quicker than a 4-year degree can.
Not many other industries can claim the same.
The cracks are beginning to reveal themselves in the overall university apparatus.
Universities had years of record revenue that they reinvested into the system to enhance programs, staff, buildings, stadiums, and infrastructure.
The financial catalyst was the rise of the Chinese college student.
The latest statistics nailed the number of Chinese nationals in America studying for 4-year degrees at over half a million.
Many of those were trained up with engineering-related degrees and bolted back home to find jobs at Baidu (BIDU), Tencent, or Alibaba (BABA) powering Chinese Inc.
However, the drop off in demographics from young Chinese and Americans are forcing universities to fight for a shallower pool of candidates with less attractive degrees relative to the value of degrees of past generations.
The second-tier universities are hardest hit with examples galore.
Alcorn State University in Mississippi saw a dramatic 69.45% decrease in applications in 2018 and its rural location didn’t help either.
Alabama State University is feeling the pinch with a 33.06% drop in application in recent years.
If you thought the University of New Orleans was clawing its way back to relevancy after Hurricane Katrina, you are mistaken with its 38.23% drop in applications.
Military schools haven’t been spared either with applications to The United States Air Force Academy crashing 28.12% over the past ten years.
A confluence of deadly trends is about to beset the university system and schools will likely go bust.
Technology is giving a reason for students to bypass the system while also speeding up the financial timebombs many universities are about to confront.
Then we must ask ourselves, will universities even exist in the future?
Probably, but perhaps just the top 25 elite schools that are still worth the high costs.
