Mad Hedge Technology Letter
November 27, 2018
Fiat Lux
Featured Trade:
(ONLINE COMMERCE IS TAKING OVER THE WORLD)
(AMZN), (ADBE), (WMT), (KSS), (TGT), (LOW), (EA), (ATVI), (TTWO), (ETSY)
At our weekly Monday staff meeting, coworkers were griping and grimacing about their failed internet connections and annoying glitches to their favorite e-commerce sites during the mad rush to find the best deal during Black Friday and Cyber Monday.
Internet traffic was that torrential when sites were driven offline for minutes and some, hours by a bombardment of gleeful shoppers hoping to splash their credit card numbers all over the web on sweet discounts.
The crashing of system servers epitomizes the robust transition to online commerce that has most of us pinned to our devices surfing our go-to platforms all day long.
According to data from Adobe (ADBE) analytics, Black Friday sales jumped 23.6% YOY to $6.22 billion, and it was the first time in history that mobile sales broke the $2 billion threshold.
It is a clear victory for e-commerce and, in particular, mobile shopping that has become more integrated into modern tech DNA.
Mobile sales comprised 33.5% of total sales and were up from 29.1% last year, signaling that more is yet to come from this transcending movement that is shoving everything from content, digital ads, entertainment, banking and pretty much everything you can think of to your handheld smartphone.
CEO of Kohl’s (KSS) Michelle Gass confirmed the e-commerce strength by saying, “80 percent of traffic online came from mobile devices.”
The beauty of this movement is that it’s not an “Amazon (AMZN) takes all” scenario with other players allowed to feast on a growing size of the e-commerce pie.
“Click and collect” has been a strategy that has paid off handsomely with sales up 73% YOY during the shopping holidays.
This all supports my prior claim that e-commerce is one of the most innovative and dynamic parts of technology especially the grocery space, and the buckets full of capital attempting to reconfigure the e-commerce spectrum is creating an enhanced customer experience for the final buyer resulting in better products, superior delivery methods, and cheaper prices.
Some other retailers spicing up their e-commerce strategy are dinosaur big-box retailer’s intent to defend their business from the Amazon death star.
If you can’t innovate in-house, then “borrow” the innovation from somewhere else.
That is exactly what Target (TGT) has chosen to do announcing last week that it would grant free 2-day shipping with no minimum sale threshold.
The tactic is bent on undercutting Walmart (WMT) who currently operate a 2-day free shipping policy with a minimum order of $35.
Most shoppers will buy in bulk easily eclipsing the $35 per order mark minimizing the rot of small orders.
And if they aren’t eclipsing the $35 per order mark, it demonstrates the firm’s offerings lack the diversity and quality to compete with Amazon.
Capturing the incremental sale squarely rests on the e-tailers ability to coax out the buyers’ impulses to move on the can’t-miss items.
The lesser known retailers fail miserably at matching the lineup of products that Amazon can roll out.
The bountiful product selection at Amazon leads customers to pay for 3, 4, 5, 6 or more items on Amazon.com.
That said, I am bullish on Walmart’s e-commerce strategy. The “click and collect” strategy has shown to be an outsized winner increasing industry sales of this type 120% YOY.
Walmart is at the center of this strategy and they are refurbishing their supercenters to accommodate this growth in collecting from the curb.
Effectively, this gives customers the option to skip the queue instead of bracing the hoards and navigating the crowds of shoppers in the supercenter.
Other changes are minor but will help, such as offering online product location maps to customers beforehand and allowing customers to pay for large items like big-screen televisions on the spot.
The biggest windfall is derived from the cataclysmic demise of Toy “R” Us, giving Walmart a new foothold into the toy business.
Walmart is beefing up toy items by 40% in the stores and layering that addition with another 30% increase in their e-commerce division.
Adobe’s upper management recently said in an interview that interactive toys have been a wildly popular theme this year amid a backdrop of the best holiday shopping season ever recorded.
Another attractive gift selling like hotcakes are video games, titles boding well for sales at Activision (ATVI), EA Sport (EA), and Take-Two Interactive (TTWO).
Reliant IT infrastructure will be a key component to executing these holiday sales bonanzas.
Clothing retailer J. Crew and home improvement chain Lowe's (LOW) were grappling with sudden disruptions to their IT systems before they managed to get back online.
More than 75 million shoppers parade the internet to shop during Black Friday and Cyber Monday, and the opportunity cost swallowed to a tech glitch is a CEO’s worst nightmare.
Ultimately, what does this all mean?
Focusing on the positive side of the surging holiday sales is the right thing to do because the avalanche of momentum will have a knock-on effect on the rest of the economy.
Certain companies are positioned to harvest the benefits more than others.
Amazon guided its 4th quarter estimates conservatively and is in-line to beat top and bottom line forecasts.
Other pockets of strength are Walmart’s tech pivot, albeit from a low base. Walmart still has more room to maneuver and they are in the 2nd inning of their tech transformation snatching the low-hanging fruit for now.
Another interesting e-commerce company swinging its elbows around is Etsy (ETSY).
They sell vintage and handmade craft adding the personalized touch that Amazon can’t destroy.
Margins will be higher than the typical low-cost, value e-commerce platform, but scaling this type of business will be more difficult.
Sales grew 41% sequentially and just in time for a winter holiday blowout.
Etsy became profitable in 2017 after three straight loss-making years, and 2018 is poised to become its best year ever.
The profitability bug is hitting Etsy at the perfect time with its EPS growth rate up 36% sequentially.
They report at the end of February and I expect them to smash all estimates.
There are some deep ramifications for the long term of e-commerce that is beginning to suss itself out.
For one, shipping times will continue to be slashed with a machete. If you are enjoying the 2-day free shipping from Amazon and Target now, then wait until 2-day becomes 1-day free shipping.
Then after 1-day free shipping, customers will get 10-hour shipping, and this won’t stop until goods are shipped to the customer’s door in less than 1-hour or less.
This is what the massive $50 billion in logistical investments over the next five years by the likes of Uber and Amazon are telling us.
It will take years for the efficiencies to come to fruition, but it is certainly in the works.
In the next five years, America’s logistics infrastructure will have to accommodate the doubling of e-commerce packages from 2 billion to 4 billion per year.
Another trend is that omnichannel offerings are sticking and won’t go away anytime soon.
It was once premised that online sales would destroy brick and mortar, yet moving forward, a mix of different sales channels will be the most efficient way of moving goods in the future.
Pop-up stores have been an intriguing phenomenon of late, and surprisingly, 60% of consumers still require interaction with the product to be convinced it's worthy of buying.
Certain products such as fashionable dresses and designer shoes must be given a whirl before a decision can be made. This won’t change anytime soon.
The timing of the sales and marketing push has been moved forward as competitors are eager to get a jump on one another.
Management is agnostic to the timing of the sale.
Thus, discounted sales will show up a week before Thanksgiving as pre-Thanksgiving sales in the future elongating the holiday shopping season cycle by starting it early and delaying the finish of it.
Lastly, the record numbers prove that the e-commerce renaissance and the pivot to mobile is not just a flash in the plan.
What does this mean for tech equities?
The temporal tech sell-off of late is largely a result of outside macro forces and is not indicative of the overall health of the tech sector that has experienced record earnings.
If the markets can keep its head above the February lows, it sets up an intriguing December fueled by Americans flashing their digital wallets on online platforms.
“Collectively, dominant online platforms have more power to shape public opinion than newspapers or the television ever had, yet they face very little regulation or liability.” – Said CEO of IBM Ginni Romett
Mad Hedge Technology Letter
November 26, 2018
Fiat Lux
Featured Trade:
(WILL THE FAANGS FINALLY KILL OFF TELEVISION?)
(AMZN), (DIS), (FOX), (ROKU), (FB), (AAPL), (GOOGL)
If you were waiting for the other shoe to drop, well, it dropped.
That is the takeaway from finding out that Amazon (AMZN) is making a daredevil bid to pry away the last remaining crown jewels from the traditional television dinosaurs.
In the first round of bidding, Amazon has flexed its muscles and is going after live sports content which Disney (DIS) has limited time to sell off.
The package Amazon desires includes 22 regional sports TV networks that Disney must divest after acquiring Twenty-First Century Fox (FOX).
Professional sports leagues usually engage in auction-based models to sell programming rights.
This auction takes place every few years and has largely eluded the big tech firms.
This gives Amazon another chance to permanently crack the live sports market by buying up the sports networks themselves.
Amazon’s sports strategy is a work in progress.
It started when they introduced NFL’s Thursday Night Football to its prime members a few years ago.
Amazon followed that up by successfully bidding on a 20-match package of English Premier League matches in a 3-year deal thought to be around $135 million.
These games are free of charge if you are an Amazon prime member.
The amount was quite large considering Amazon only coughed off $50 million for 10 Thursday night games.
Even more intriguing is the possibility of Amazon’s digital ad business collaborating with the live sports content.
Professional sports would serve as the ideal platform to dish out targeted digital ads to its prime viewership, and nobody has better sets of data to place the right products in front of the right eyeballs than Amazon.
Marketers would pay top dollar for this type of gilt-edged opportunity.
Half of product searches already start on Amazon and the number is rising.
Patiently, Amazon has sat back and bided its time to make a monumental splash for the right type of sports assets.
And that time has now come.
Remember that live sports are one of the last bastions of premium television content for the traditional players.
Professional sports are optimally enjoyed in the moment gripped by emotion, watching on replay doesn’t cut it in a cutthroat on-demand world.
Traditionally, advertisers have blissfully paid top advertising dollar to paint firm’s logos on television sets knowing that a guaranteed set of viewers will tune in.
This has made ESPN the most exorbitant affiliate fee of any cable network and they do not apologize for it.
It is also part of the reason why they are hamstrung by a dwindling viewer base.
ESPN has lost an astounding 11 million subscribers since 2013.
The value of ESPN has been heavily diluted because of professional sports leagues offering proprietary content directly through their own websites in a subscription style format slicing off the value of sports networks like ESPN.
ESPN is no longer the one-stop shop for live sports like it used to be.
In the past year, ESPN, owned by Disney, launched ESPN+ for $4.99 per month that signaled ESPN’s foray into online streaming that CEO of Disney Bob Iger has made the utmost priority.
The sign of intent telegraphs the beginning of traditional network television’s attempts to move into the online streaming tech ecosphere.
Disney’s ESPN+ has been tepid at best as the content is mainly second-string content of American soccer matches and alternative sports leagues.
This appears like a testing phase for Disney as they hope to smoothly roll out their flagship online content platform in 2019.
At worst, if Amazon and the rest of the FANGs pour into the auction bidding process for the sports assets, Fox or other suitors will have to pay through the nose for these regional sports networks.
Facebook (FB) was interested in the Indian Cricket League's broadcasting rights and only offered $600 million.
The winner won with a bid of over $2.5 billion.
Obviously, Facebook underestimated the level of cricket fanaticism in India. These types of assets can’t be bought at a discount.
Facebook’s consolation prize was claiming the rights to broadcast La Liga soccer from Spain in eight South Asian countries including India, Pakistan, and Sri Lanka.
These are the lengths that American tech companies will go to lure in additional users.
In fact, American tech companies do not need to profit from these live sports deals.
They merely view it as a traffic acquisition cost (TAC), in the same vein as Google (GOOGL) paying Apple (AAPL) $8 million in 2017 to plop its search engine on Apple iOS devices.
That number will rise to $12 billion in 2018, and it’s worth every penny for Google.
How can traditional linear television stations compete with tech titans who are content with losing money on live sports?
The answer is they can’t, and they should be frightened to death about these developments.
And I would argue that Facebook would much rather get into the live sports businesses than moderate fractious elections around the world which has been a suicide mission tearing apart the company.
I am completely aware that the NFL has had its issues with the kneeling of the national anthem, but in general, live sports is safer content than politics and should be the clinching reason why every FANG should migrate to live sports.
And that is what will happen.
I bet that the likes of Apple or Facebook will pony up a bid too.
CEO of Apple Tim Cook has been as stern as a prison warden overseeing Apple’s content.
He is cautious about the quality of content delivered to iOS customers and wants to avoid anything controversial.
The NFL might be too risky for Cook, but European soccer seems like it would fit the iOS ecosystem perfectly.
After all, soccer is the number one growing sport in America and is an absolute hit with the younger generation.
The real victor out of all of this is Roku (ROKU).
It could be a real high flyer in 2019 with the pivot to online streaming picking up steam.
First, Disney’s platform is coming online in a few months.
It’s a godsend that big tech is looking to dive into the live sports market for industry-leading OTT TV box company Roku.
Roku doesn’t care which company is producing content as long as it is quality online content, and it is on Roku.
At some point, Roku will be a must-have for sports fans who want to follow their favorite sports teams because the content could be spread out through a plethora of online streamers.
Roku is the best system to select a la carte content, and the dispersion of content across many online channels makes content aggregators a critical need going forward.
Take Amazon, for instance, the bulk of the 20 English Premier League matches will be broadcasted during Boxing Day holiday in England.
This would give the British massive incentive to sign up for Amazon prime for one month during the winter holidays to watch the matches while using Amazon’s free 2-day shipping to buy gifts on Amazon’s e-commerce platform.
Effectively knocking out two birds with one stone.
A substantial percentage of British soccer viewers will presumably retain Amazon Prime the following months as the soccer package concludes ushering in a new wave of prime converts.
Roku makes watching Amazon Prime for just a month less painful because habitual Roku viewers are familiar with the Roku platform and can sign up quickly.
This will be the new way of enticing viewers with luxury on-demand content enabling the cross-selling of other services on offer.
After all, Amazon cares deeply about growing prime members that effectively bring down the cost of executing the free 2-day shipping because of the massive economies of scale.
This all bodes well for Roku to outperform in 2019.
“I’m a big believer in the free market. But we have to admit when the free market is not working. And it hasn’t worked here. I think it’s inevitable that there will be some level of regulation.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
November 21, 2018
Fiat Lux
Featured Trade:
(FIVE TECH STOCKS TO SELL SHORT ON THE NEXT RALLY)
(WDC), (SNAP), (STX), (APRN), (AMZN), (KR), (WMT), (MSFT), (ATVI), (GME), (TTWO), (EA), (INTC), (AMD), (FB), (BBY), (COST), (MU)
Next year is poised to be a trading year that will bring tech investors an added dimension with the inclusion of Uber and Lyft to the public markets.
It seemed that everything that could have happened in 2018 happened.
Now, it’s time to bring you five companies that I believe could face a weak 2019.
Every rally should be met with a fresh wave of selling and one of these companies even has a good chance of not being around in 2020.
Western Digital (WDC)
I have been bearish on this company from the beginning of the Mad Hedge Technology Letter and this legacy firm is littered with numerous problems.
Western Digital’s structural story is broken at best.
They are in the business of selling hard disk drive products.
These products store data and have been around for a long time. Sure the technology has gotten better, but that does not mean the technology is more useful now.
The underlying issue with their business model is that companies are moving data and operations into cloud-based products like the Microsoft (MSFT) Azure and Amazon Web Services.
Why need a bulky hard drive to store stuff on when a cloud seamlessly connects with all devices and offers access to add-on tools that can boost efficiency and performance?
It’s a no-brainer for most companies and the efficiency effects are ratcheted up for large companies that can cohesively marry up all branches of the company onto one cloud system.
Even worse, (WDC) also manufactures the NAND chips that are placed in the hard drives.
NAND prices have faltered dropping 15% of late. NAND is like the ugly stepsister of DRAM whose large margins and higher demand insulate DRAM players who are dominated by Micron (MU), Samsung, and SK Hynix.
EPS is decelerating at a faster speed and quarterly sales revenue has plateaued.
Add this all up and you can understand why shares have halved this year and this was mainly a positive year for tech shares.
If there is a downtown next year in the broader market, watch out below as this company is first on the chopping block as well as its competitor Seagate Technology (STX).
Snapchat (SNAP)
This company must be the tech king of terrible business models out there.
Snapchat is part of an industry the whole western world is attempting to burn down.
Social media has gone for cute and lovable to destroy at all cost. The murky data-collecting antics social media companies deploy have regulators eyeing these companies daily.
More successful and profitable firm Facebook (FB) completely misunderstood the seriousness of regulation by pigeonholing it as a public relation slip-up instead of a full-blown crisis threatening American democracy.
Snapchat is presiding over falling daily active user growth at such an early stage that usership doesn’t even pass 100 million DAUs.
Management also alienated the core user base of adolescent-aged users by botching the redesign that resulted in users bailing out of Snapchat.
Snapchat has been losing high-level executives in spades and fired a good chunk of their software development team tagging them as the scapegoat that messed up the redesign.
Even more imminent, Snapchat is burning cash and could face a cash crunch in the middle of next year.
They just announced a new spectacle product placing two frontal cameras on the glass frame. Smells like desperation and that is because this company needs a miracle to turn things around.
If they hit the lottery, Snap could have an uptick in its prospects.
GameStop (GME)
This part of technology is hot, benefiting from a generational shift to playing video games.
Video games are now seen as a full-blown cash cow industry attracting gaming leagues where professional players taking in annual salaries of over $1 million.
Gaming is not going away but the method of which gaming is consumed is changing.
Gamers no longer venture out to the typical suburban mall to visit the local video games store.
The mushrooming of broad-band accessibility has migrated all games to direct downloads from the game manufacturers or gaming consoles’ official site.
The middleman has effectively been cut out.
That middleman is GameStop who will need to reinvent itself from a video game broker to something that can accrue real value in the video game world.
The long-term story is still intact for gaming manufactures of Activision (ATVI), EA Sports (EA), and Take-Two Interactive (TTWO).
The trio produces the highest quality American video games and has a broad portfolio of games that your kids know about.
GameStop’s annual revenue has been stagnant for the past four years.
It seems GameStop can’t find a way to boost its $9 billion of annual revenue and have been stuck on this number since 2015.
If you do wish to compare GameStop to a competitor, then they are up against Best Buy (BBY) which is a better and more efficiently run company.
Then if you have a yearning to buy video games from Best Buy, then you should ask yourself, why not just buy it from Amazon with 2-day free shipping as a prime member.
The silver lining of this business is that they have a nice niche collectibles division that hopes to deliver over $1 billion in annual sales next year growing at a 25% YOY clip.
But investors need to remember that this is mainly a trade-in used video game company.
Ultimately, the future looks bleak for GameStop in an era where the middleman has a direct path to the graveyard, and they have failed to digitize in an industry where digitization is at the forefront.
Blue Apron
This might be the company that is in most trouble on the list.
Active customers have fallen off a cliff declining by 25% so far in 2018.
Its third quarter earnings were nothing short of dreadful with revenue cratering 28% YOY to $150.6 million, missing estimates by $7 million.
The core business is disappearing like a Houdini act.
Revenue has been decelerating and the shrinking customer base is making the scope of the problem worse for management.
At first, Blue Apron basked in the glory of a first mover advantage and business was operating briskly.
But the lack of barriers to entry really hit the company between the eyes when Amazon (AMZN), Walmart (WMT), and Kroger (KR) rolled out their own version of the innovative meal kit.
Blue Apron recently announced it would lay off 4% of its workforce and its collaboration with big-box retailer Costco (COST) has been shelved indefinitely before the holiday season.
CFO of Blue Apron Tim Bensley forecasts that customers will continue to drop like flies in 2019.
The company has chosen to focus on higher-spending customers, meaning their total addressable market has been slashed and 2019 is shaping up to be a huge loss-making year for the company.
The change, in fact, has flustered investors and is a great explanation of why this stock is trading at $1.
The silver lining is that this stock can hardly trade any lower, but they have a mountain to climb along with strategic imperatives that must be immediately addressed as they descend into an existential crisis.
Intel (INTC)
This company is the best of the five so I am saving it for last.
Intel has fallen behind unable to keep up with upstart Advanced Micro Devices (AMD) led by stellar CEO Dr. Lisa Su.
Advanced Micro Devices is planning to launch a 7-nanometer CPU in the summer while Intel plans to roll out its next-generation 10-nanometer CPUs in early 2020.
The gulf is widening between the two with Advanced Micro Devices with the better technology.
As the new year inches closer, Intel will have a tough time beating last year's comps, and investors will need to reset expectations.
This year has really been a story of missteps for the chip titan.
Intel dealt with the specter security vulnerability that gave hackers access to private data but later fixed it.
Executive management problems haven’t helped at all.
Former CEO of Intel Brian Krzanich was fired soon after having an inappropriate relationship with an employee.
The company has been mired in R&D delays and engineering problems.
Dragging its feet could cause nightmares for its chip development for the long haul as they have lost significant market share to Advanced Micro Devices.
Then there is the general overhang of the trade war and Intel is one of the biggest earners on mainland China.
The tariff risk could hit the stock hard if the two sides get nasty with each other.
Then consider the chip sector is headed for a cyclical downturn which could dent the demand for Intel chip products.
The risks to this stock are endless and even though Intel registered a good earnings report last out, 2019 is set up with landmines galore.
If this stock treads water in 2019, I would call that a victory.
“If you can’t tolerate critics, don’t do anything new or interesting.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
November 20, 2018
Fiat Lux
Featured Trade:
(A LESSON IN BLITZSCALING)
(UBER), (LYFT), (GRUB), (DPZ), (AMZN), (BABA), (SQ), (PYPL), (NFLX)