Mad Hedge Technology Letter
October 15, 2018
Fiat Lux
Featured Trade:
(FIVE STOCKS TO BUY AT THE BOTTOM),
(AAPL), (AMZN), (SQ), (ROKU), (MSFT)
You don’t want to catch a falling knife, but at the same time, diligently prepare yourself to buy the best discounts of the year.
Interest rates triggered a tsunami wave of selling tearing apart the tech sector with a vicious profit-taking few trading days.
No doubt that asset managers are frantically locking in profits for the rest of the year and protecting ebullient performance from a year to remember.
This week shouldn’t deter investors from picking up bargains that were non-existent for most of the year because the bulk of the highest quality tech names churned higher with lurching momentum.
Here are the names of five of the best stocks to slip into your portfolio in no particular order once the madness subsides.
Apple
Steve Job’s creation is weathering the gale-fore storm quite well. Apple has been on a tear reconfirming its smooth pivot to a software-tilted tech company. The timing is perfect as China has enhanced their smartphone technology by leaps and bounds.
Even though China cannot produce the top-notch quality phones that Apple can, they have caught up to the point local Chinese are reasonably content with its functionality. That hasn’t stopped Apple from vigorously growing revenue in greater China 20% YOY during a feverishly testy political climate that has their supply chain in Beijing’s crosshairs.
The pivot is picking up steam and Apple’s revenue will morph into a software company with software and services eventually contributing 25% to total revenue.
They aren’t just an iPhone company anymore. Apple has led the charge with stock buybacks and will gobble up a total of $100 billion in shares by the end of the year. Get into this stock while you can as entry points are few and far between.
Amazon
This is the best company in America hands down and commands 5% of total American retail sales or 49% of American e-commerce sales.
It became the second company to eclipse a market capitalization of over $1 trillion. Its Amazon Web Services (AWS) cloud business pioneered the cloud industry and had an almost 10-year head start to craft it into its cash cow. Amazon has branched off into many other businesses since then oozing innovation and is a one-stop wrecking ball.
The newest direction is the smart home where they seek to place every single smart product around the Amazon Echo, the smart speaker sitting nicely inside your house. A smart doorbell was the first step along with recently investing in a pre-fab house start-up aimed at building smart homes.
Microsoft
The optics in 2018 look utterly different from when Bill Gates was roaming around the corridors in the Redmond, Washington headquarter and that is a good thing in 2018.
Current CEO Satya Nadella has turned this former legacy company into the 2nd largest cloud competitor to Amazon and then some.
Microsoft Azure is rapidly catching up to Amazon in the cloud space because of the Amazon-effect working in reverse. Companies don’t want to store proprietary data to Amazon’s server farm when they could possibly destroy them down the road. Microsoft is mainly a software company and gained the trust of many big companies especially retailers.
Microsoft is also on the vanguard of the gaming industry taking advantage of the young generation’s fear of outside activity. Xbox related revenue is up 36% YOY, and its gaming division is a $10.3 billion per year business.
Microsoft Azure grew 87% YOY last quarter. The previous quarter saw Azure rocket by 98%. Shares are cheaper than Amazon and almost as potent.
Square
CEO Jack Dorsey is doing everything right at this fin-tech company blazing a trail right to the doorsteps of the traditional banks.
The various businesses they have on offer makes me think of Amazon’s portfolio because of the supreme diversity. The Cash App is a peer-to-peer money transfer program that cohabits with a bitcoin investing function on the same smartphone app.
Square has targeted the smaller businesses first and is a godsend for these entrepreneurs who lack the immense capital to create a financial and payment infrastructure. Not only do they provide the physical payment systems for restaurant chains, they also offer payroll services and other small loans.
The pipeline of innovation is strong with upper management mentioning they are considering stock trading products and other bank-like products. Wall Street bigwigs must be shaking in their boots.
The recently departed CFO Sarah Friar triggered a 10% collapse in share price on top of the market meltdown. The weakness will certainly be temporary, especially if they keep doubling their revenue every two years like they have been doing.
Roku
Benefitting from the broad-based migration from cable tv to online streaming and cord-cutting, Roku is perfectly placed to delectably harvest the spoils.
This uber-growth company offers an over-the-top (OTT) streaming platform along with the necessary hardware and picks up revenue by selling digital ads.
Founder and CEO Anthony Woods owns 21 million shares of his brainchild and insistently notes that he has no interest in selling his company to a Netflix or Apple.
Roku’s active accounts mushroomed 46% to 22 million in the second quarter. Viewers are reaffirming the obsession with on-demand online streaming content with hours streamed on the platform increasing 58% to 5.5 billion.
The Roku platform can be bought for just $30 and is easy to set-up. Roku enjoys the lead in the over-the-top (OTT) streaming device industry controlling 37% of the market share leading Amazon’s Fire Stick at 28%.
The runway is long as (OTT) boxes nestle cozily in only 40% of American homes with broadband, up from a paltry 6% in 2010.
They are consistently absent from the backbiting and jawboning the FANGs consistently find themselves in partly because they do not create original content and they are not an off-shoot from a larger parent tech firm.
This growth stock experiences the same type of volatility as Square. Be patient and wait for 5-7% drops to pick up some shares.
“When we launch a product, we're already working on the next one. And possibly even the next, next one.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
October 11, 2018
Fiat Lux
Featured Trade:
(WHY SNAPCHAT SNAPPED),
(SNAP), (FB), (AMZN), (NFLX)
To the dismay of tech shares, the tech industry doesn’t operate in a bubble.
The broader landscape is experiencing a dose of volatility triggered by the ratcheting up in interest rates.
There’s not much tech can do to change the narrative.
The back and forth political saber rattling isn’t helping either.
Tech is experiencing a swift rotation out of hyper-growth names such as Amazon (AMZN) and Netflix (NFLX) with investors taking profits on these names that have gone up in a straight line this year.
This does not mean you should fling these stocks into tech heaven yet.
The hardest hit names will be the marginal tech firms in the marginal tech spaces headed by dreadful management.
This narrow criterion conveniently perfectly fits one company I have written about extensively.
Enter Snapchat.
It’s been a year to forget or remember - depending on how you look at it for CEO of Snapchat Evan Spiegel.
Snapchat was one of my first recommendations of The Mad Hedge Technology Letter when I told readers to run for the hills.
To read my story on Snapchat, please click here.
At that time, the stock was trading at a luxurious $19.
Lionizing this shoddy company would be a stretch as shares have parachuted down to the $6.60 level.
The latest word is that Snapchat is burning money fast.
The cash crunch will quickly force them to raise some capital and this is just one of the many litanies of spectacular misfortunes that have beset this Venice, California social media starlet.
Maybe management is spending too much time ripping the bong on Venice Beach because the decisions being made are of that ilk.
The first catastrophic move out of many was the botched redesign alienating the core base who were dazed and confused by the new interface and functionality.
Social media works poorly when you can’t find your friends on it.
Spiegel admitted the redesign was “rushed” and it behooves me to let readers know that the redesign was the worst redesign I have ever seen in my life as I tested it out in my office.
Snapchat quickly restored the previous interface calming their shrinking core audience.
The self-inflicted wound was deep, and earnings reflected the quicksand Snapchat quickly found itself in.
Snapchat announced that global daily active users (DAUs) shrank from 191 million to 188 million.
A company at this early stage in the growth cycle should be reeling in the users non-stop.
This is far from a mature company and if executed properly the company should have the ability to cast their net far and wide scooping up new users left and right.
Let’s remember that Instagram, the Facebook (FB) owned direct competitor, is growing their user base parabolically.
Simply put, Snapchat has had no answer to Instagram’s rapid rise to fame, and that was the center of my thesis to turn my back to this rapidly deteriorating company.
Snapchat has offered no meaningful innovation to combat the terrorizing force of Instagram.
The dearth of innovation has caused the average time spent on the platform to dip from 33 minutes to 31 minutes per session.
Instagram has stretched the lead on Snapchat. In fact, it was Instagram that cleverly borrowed Snapchat’s best features and integrated them into their platform.
Sentiment has turned rotten as the stock sold off when Spiegel announced that he wants the company to turn profitable in 2019.
Investors don’t believe this one iota.
Snapchat is expected to burn through $1.5 billion in 2019, and Spiegel’s pipedream of scratching out a profit is implausible.
Snapchat is not executing on the digital ad front.
It was a year and a half ago when consensus believed Snapchat was able to churn out revenue of $540 million this quarter, but it looks more likely that Snapchat is set for revenue of just a shade over $280 million.
The severe underperformance is due to a lack of advertisers causing the eventual price of digital ads to fetch a lower price in an auction-based model.
Stinging as it might be, the lower costs of ads is also caused by the average age group of Snapchat’s core base.
Snapchatters are usually teenagers and have low purchasing power.
Targeting an older user base would improve margins significantly.
However, the conundrum is that the core user base might jump ship like they did to Facebook and shifted over to Facebook-owned Instagram.
Snap doesn’t have a Facebook posing an acute problem that could likely backfire.
General Data Protection Regulation (GDPR) in the European Union made the issue of securing personal data a national issue.
Facebook poured fuel on the fire when they disclosed several breaches clobbering their share price.
Mark Zuckerberg’s company is still reeling from the series of mishaps.
Ironically, Facebook debuted a smart speaker with prime access to user’s home when trust is at its lowest ebb around Facebook’s data collection practices.
Investors really need to ask themselves if Facebook’s management has any common sense at all.
Any decent company would have halted this project and I expect it to be a complete disaster.
Part of Snapchat’s turnaround strategy involves releasing scripted shows as short as five minutes long.
Entering into the original content wars is a tough sell. The competition is becoming fiercer and this move hardly will differentiate itself from ad buyers who already avoid Snapchat. In fact, it smells of desperation.
Snapchat has seen a brutal brain drain with management leaving in droves.
They have voted with their feet.
Chief Strategy Officer Imran Khan was the latest to announce his upcoming departure.
Others to jettison are the VP of product, VP of sales, VP of engineering, and its general counsel.
The high turnover rate will make it more complicated to execute a drastic reversal of fortune.
The only silver lining is if Zuckerberg manages to screw up Instagram after forcing the creators out with his behind-the-scenes meddling, giving a glimmer of hope to Snapchat.
A stellar performance from the execution team along with a Facebook mess of Instagram could resuscitate the user base if users start to flee Instagram in droves.
There aren’t many alternatives unless a user is inclined to quit social media.
Snapchat badly needs to build up its user base or else digital ad buyers will stay away.
I am still bearish on this stock and it would take a small miracle to spruce up the share price again.
“Google's not a real company. It's a house of cards.” – Said Former CEO of Microsoft Steve Ballmer
Mad Hedge Technology Letter
October 10, 2018
Fiat Lux
Featured Trade:
(DON’T BUY SURVEYMONKEY ON THE DIP),
(SVMK), (GOOGL), (CRM)
If a company takes almost 20 years and still isn’t profitable - it probably never will.
Granted, tech firms are given a Rapunzel-length leash to collect users, scale out the product, refine algorithms to industry standard, and build up the engineering team.
I know this takes time – it doesn’t happen in one day.
After whipping up a frenzy of momentum and venture capitalists claiming stakes, tech stocks usually go public.
This is the common process of what it takes to construct a Silicon Valley tech firm, and there are no shortcuts to this long hard slog.
And if after almost 20 years, amid a nine-year bull market, a tech firm in the most dominating sector in the world cannot figure how to be in the black, investors should stay away from this company in droves.
SurveyMonkey (SVMK), who recently achieved a blockbuster IPO, were the rock stars of the tech world for one day and one day only.
The stock peaking after the first trading day is a ghastly signal and ominous sign.
Their fifteen minutes of fame is all they will get because this practically ex-growth company has no indicators of a rosier future.
The company went public at $12 per share and even that was too generous.
The stock took off like a banshee, on the verge of overshooting the $20 level before falling back to grace.
The stock is now trolling around $13, and on the verge of heading to the purgatory of single digits.
What caused such a swan dive after such a promising start?
On the surface, everything looks like peaches and daffodils – a growing Silicon Valley cloud company even with Facebook spin doctor Sheryl Sandberg on the board.
The optics pass all the marks.
But wait a second, looking at the nuts and bolts, it’s crystal clear why this stock has been throttled back.
The first half of 2018, SurveyMonkey presided over a tepid 3% of paid user growth.
Yes, SurveyMonkey is growing, but not by much.
In this same period, the company lost $27.2 million and this was after an annual 2017 loss of $24 million.
Profitability isn’t exactly their forte.
The 14% of revenue growth the company secured was done after taking a machete and gutting margins to appear pretty for the IPO.
And it’s painfully obvious that SurveyMonkey is failing at converting the freemium users into paid converts.
The online survey doesn’t exactly have the highest barriers of entry.
Google (GOOGL) Forms is the competitor in this space offering straightforward free surveys with basic analysis.
The tool is highly functional.
The pricing structure to SurveyMonkey’s individual membership is presented as a luxury service like the US postal service.
The individual service costs $384 per year and rises all the way up to the bloated price of $1,188 per year.
Any individual paying $1,188 per year for this needs to check themselves into a mental hospital.
Google Forms could easily undercut this pricing model by offering survey tool packages for a fraction of this amount.
The “team plan” is also laughable by charging $75 per month for up to three users, and this type of plan is capped at an exorbitant $225 per month.
Let’s remember that Microsoft offers Microsoft Office 365 Personal for an annual total of $59.99 and is million times more useful.
This annual subscription comes with premium versions of Word, Excel, PowerPoint, OneDrive, OneNote, Outlook, Publisher, and Access.
The OneDrive cloud service includes 1 terabyte (TB) of cloud storage.
Just by this simple comparison, it is easy to see which service is of value and which service is building castles in the sky.
With the explosion of service-as-a-software (SaaS) apps flooding desktops, I imagine the paid version of SurveyMonkey would be first on the chopping block due to its overly ambitious pricing.
In this strategy, the company is more concerned about milking as much as they can from each existing paid user instead of juicing up the core user base.
Effectively, this is a poor management decision, and the company is harming the growth of the potential paid usership base by robbing all incentive to convert to the paid version.
As Netflix masterfully proved, draw in the eyeballs at a lower price, build up the service to an optimum quality level, and subscribers never leave.
The opposite strategy is an indirect way of management believing the product is not good enough or the niche is too small to perpetualize a solid relationship.
And since growth numbers aren’t accelerating, there is infinitesimal reason to even consider investing in this fading company.
SurveyMoney has also racked up the debt - $317 million of it to be precise putting its debt $100 million over total revenue in 2017.
They were burning cash quickly and only had $43 million left in the coffers.
Part of the rationale for going public was a way to pay down debt.
Another chunk of proceeds from the IPO will be used to pay taxes.
The company has no innovative roadmap going forward and using the cash to pay down existing obligations shows the anemic level of intent from this company.
The silver lining in this company is that the losses of $76.4 million in 2016 were pared back in 2017.
In the IPO prospectus, SurveyMonkey noted that most unpaid customers do not become paid customers.
Even though the product is useful and it’s a long-time favorite of mine, the stock is a different animal.
There was not much meat in the prospectus and most of it were dry bones.
The IPO day was buoyed by the $40 million in stock venture-capital arm of Salesforce (CRM) pocketed, but that short-term boost has faded quickly as investors have dissected this company in every which way.
Use their free survey tools but avoid paying for the paid version and don’t buy the stock.
There are many other fishes in the sea.
NO IPO FOR GOOGLE FORMS
“Will the social networking phenomenon lessen? I don't think so.” - Said Former CEO of Yahoo Marissa Mayer
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more