Mad Hedge Technology Letter
June 20, 2018
Fiat Lux
Featured Trade:
(GOOGLE'S GRAND CHINA PLAY),
(BABA), (JD), (GOOGL), (AAPL), (BIDU), (AMZN), (NFLX)
There is light at the end of the tunnel.
A glimmer of hope is better than nothing.
Stolen IP was yesterday's story.
The administration's attempts to stick China with the bill is a waste of time.
The stock market is forward-looking and that is what I focus on when writing the Mad Hedge Technology Letter.
American tech companies want to turn over this bitter page of history and construct a fruitful future.
Ironically, it could be no other than American large tech companies that solves this trade misunderstanding by embracing Chinese tech instead of dragging them through the embers of political chaos.
That is what this groundbreaking partnership between Alphabet (GOOGL) and China's second largest e-commerce company JD.com (JD) is telling us.
If American and Chinese tech agree to fuse together through different M&A activity, strategic partnerships, and engineering projects, slapping penalties on your own interests would be without basis.
Albeit gone are the yesteryears of complete ownership on the other's turf, a medium ground could be found to satisfy both parties.
Alphabet's $550 million investment will give it 27 million shares of JD.com Class A shares equating to a 1% stake in JD.com.
JD.com products will now be hawked on Google Shopping, a platform giving users a chance to compare different price points from various sellers.
JD.com's fresh links with Silicon Valley's original powerhouse is timely because its business-to-consumer retail sales have slightly dipped in form from 27% last year to an underwhelming 25% in the first quarter of 2018.
Alibaba (BABA), the Amazon of China, is the 800-pound gorilla in the room and has a stranglehold on this market, carving out a robust 60% of sales from business to consumer retail.
Chinese companies have never worried about foreign companies seizing market share in China because they know the rigid operating environment mixed with "cultural" barriers will lead to a rapid demise.
Chinese firms are channeling their distress toward local competitors that understand the market as well as they do and number in the 100s in any one industry.
This is also a huge bet on the Chinese consumer who has put the world economy on its back creating the lions' share of global growth for the past 10 years.
Do not bet against China and the Chinese consumer.
Alphabet is taking this sentiment to the bank by integrating part of a premium Chinese tech firm into its own top line performance.
This investment would not happen if Alphabet believed the trade war could turn draconian cannibalizing each other's profit engines.
Alphabet has obviously been reading the tea leaves from the Mad Hedge Technology Letter as I identified China's huge competitive advantage in Southeast Asia and the huge potential for Chinese companies that migrate there.
The pivot toward Southeast Asia was the deal clincher for Alphabet and rightly so.
Alphabet has also invested in opening an A.I. (artificial intelligence) lab in Beijing showing its determination to extract a piece of the pie from China and ensuring their brand power is maintained in the Middle Kingdom.
Google search has been shut down on mainland China since 2010. Therefore, Alphabet needs to find alternative ways to benefit from the Chinese consumer and increase its presence.
The writing on the wall was when Baidu (BIDU) came to the fore with its own Chinese version of Google search.
Opportunities on the mainland have been scarce ever since the appearance of Baidu.
Apple (AAPL) has been the premier role model in China successfully juggling the complexities of the Chinese market. A big part of its staying power is offering local Chinese jobs.
Not just a few jobs, but millions.
As of April 2017, an Apple press release stated, "Apple has created and supported 4.8 million jobs in China" which is almost three times more than in America.
Apple deploys much of its supply chain around the mainland and taking down Apple in a trade war would strip millions of Chinese jobs in one fell swoop.
Not only that, Apple has deeply invested in data centers located in China and opened research centers in Shanghai and Suzhou.
Foxconn, a company responsible for assembling iPhones in mainland China, employs 1.2 million alone.
Alphabet would be smart to follow in the same footsteps, effectively, morphing into a hybrid Chinese company employing locals in droves and allowing millions of Chinese to earn their crust of bread through local factories.
Let me be clear: This would not hurt its business back at home.
It is also wrong to say that China is saturating because the 6.8% annual growth rate in China is a firm vote of confidence for Chinese discretionary spenders.
However, instead of competing head to head under the scrutiny of Chinese regulators, it is much more sensical to copy SoftBank's Masayoshi Son's lead when he invested $25 million in Jack Ma's Alibaba in 1999.
SoftBank's 1999 investment is now valued at more than $30 billion as of the current share price today.
Yahoo later joined the party in 2005, investing $1 billion into Alibaba and that stake is worth many times over.
Instead of fighting through cultural norms and fighting against the throes of an exotic business environment, paying for a stake and leaving its nose out of it has shown to be demonstrably effective.
Partnerships complicate the relationship, but if management can lock down each side's commitment to the very T, collaboration could spur even more innovation benefiting both countries and bottom lines.
China has draconian Internet controls put in place. American tech companies aren't up to snuff with cultural maneuverability to navigate through these shark-infested waters.
Better to pay for a stake and pick up the check after the market close.
Another winner in this deal is tech valuations, which has been the Cinderella story of 2018.
Although American tech companies will probably never be able to own 100% of a Chinese BAT. However, allowing these types of investments to go ahead is certainly bullish for equities.
Tech is still the sector lifting the heavy weight stateside and promoting innovation through collaboration will do a great deal to win the hearts and minds of Chinese people, companies and government.
As much as China hates the stain to its image of this nebulous trade war, it still deeply respects and admires large-cap American tech companies.
Chinese Millennials particularly have a deep love affair with Tesla's Elon Musk. They are captivated by his braggadocio, which they find appealingly exotic and captivatingly un-Chinese.
Through this partnership, JD.com will learn heaps about cutting-edge ad-tech and is guaranteed to apply the know-how to its home user base. In return, Alphabet will get deep insights of how JD.com controls the entire logistical experience and how a Chinese tech behemoth operates its supply chain.
The nuggets of information pocketed will help Alphabet compete more with Amazon back at home.
This is a win-win proposition.
Adding even more cream on top, enhanced brand awareness by joining together with Google could catapult JD.com into the shop window of America's consciousness.
Up until today, JD.com is hardly known about in the West except for specialists that avidly follow technology like the Mad Hedge Technology Letter.
I reiterate my stance of not buying into Chinese tech companies, and readers would be better served buying Microsoft (MSFT), Amazon (AMZN), and Netflix. (NFLX)
It makes no sense to trade stocks mired in the heart of a trade war.
As much as I love Alibaba as a company, it has been trading in a range because of the whipsawing headlines released in the press.
However, I can stand from afar and admire how the Chinese BATs have advanced in such a short amount of time.
If American tech and Chinese tech merge to the point of unrecognizability, consolidation could create a super tech power comprising of mixed Chinese and American interests.
Instead of bickering at each other, other solutions look to be more compelling.
The world's economy needs a healthy Chinese economy and vibrant Chinese consumer.
If the Chinese economy ever fell off a cliff, you can kiss this nine-year equity bull market goodbye, and the Mad Hedge Technology Letter would turn extremely bearish in a blink of an eye.
Therefore, America has a large stake in not alienating the Mandarins to the point of disgust.
I am still bullish on equities, but vigilance is the name of the game for short-term traders.
Package Delivery!
_________________________________________________________________________________________________
Quote of the Day
"My belief is that one plus one equals three. The pie gets larger, working together," Apple CEO Tim Cook said about its operations in mainland China and working with the Chinese Communist government.
Mad Hedge Technology Letter
June 19, 2018
Fiat Lux
Featured Trade:
(TRAVIS IS BACK!),
(UBER), (RDFN), (Z), (LEN), (CRM), (MSFT), (AAPL)
Travis Kalanick is back in full force after his Uber fiasco.
His creation kicked him to the curb preferring a more rigid approach to corporate governance as the 2019 IPO draws closer.
It didn't take much time for him to take stock of his piggy bank.
Yes, the $1.4 billion payout he received means he has nothing to do with Uber anymore.
Some piggy bank.
Travis intends to wield this wad aggressively using his new fund "10100" as his finance vehicle to pounce on hot, new tech names.
Travis doesn't know any other way, and investors should be alert to where he turns to find his new Uber and his new baby.
Future foes should understand Kalanick is one of the most feared disruptors on the face of the earth.
He co-founded Uber in 2009 growing it into the premier transportation platform.
The whirlwind few years launched him from a nobody to one of the premier tech names in Silicon Valley.
So, what's the deal?
What I can tell you is that house prices are about to get a whole lot pricier and there is nothing you can do about it.
Travis Kalanick's investment into house flipping app Opendoor will be the first stage of a torrential stampede of tech capital flowing into this sector.
More importantly, it's a sign of intent by Kalanick.
The real estate industry is the unequivocal prehistoric dinosaur that hasn't changed for decades.
It's almost a matter of time before the process of buying a house becomes digitized, either partially or fully.
Remember, Uber functions as a broker app matching drivers and passengers through a platform built on algorithmic software.
It would make logical sense for tech companies to attack the low-hanging fruit - meaning every industry that places brokers at the heart of business.
The broker app software is tried and tested with a gold stamp of approval. It works, and tech executives understand how to monetize the data.
Traditional brokers would get pummeled in this scenario, as the data applied to a new real estate broker app would eclipse anything a real human would be able to accomplish removing human error.
Real estate is next on disruption pecking order, and tech is coming for its bacon because of the huge sums of money associated with American real estate.
The real estate industry is not a scooter sharing business and requires boat loads of money to get ahead.
Tech has the cash but needs to figure out execution and its future road map.
The bulk of tech capital has been funneled into M&A that has seen tech companies pay multiples above what were guessed as fair value.
Share buybacks have been another hot source of investment.
Opendoor is a house-flipping firm intent on changing the status quo.
The business model entails snapping up distress properties, fixing them up, and selling them for a profit.
Opendoor receives a 6% commission for facilitating this whole process.
Opendoor has already served 20,000 customers saving more than 400,000 of prep time.
It is already on the hook for $1.5 billion in loans. SoftBank's vision fund is knocking on the door eager to become the next investor.
In 2016, this company was valued at $1 billion and after the latest round of financing giving Opendoor another $325 million, that number has crept up to $2 billion.
I have heard from solid sources that the SoftBank capital could be delivered in the next few months, likely paying another solid premium boosting tech valuations across the board.
Paying up has been a universal theme in 2018.
Microsoft's (MSFT) purchase of GitHub and Salesforce's (CRM) purchase of MuleSoft seem like overpaying but appear cheap in hindsight.
With the new cash ready to deploy, Opendoor seeks to expand to 50 cities by 2020, a swift upward jolt from its current 10 cities.
Not only will tier 1 cities feel the brunt of this new development, Opendoor plans to go into the lesser known cities and plans to double its staff from 650 to 1,300 in the upcoming year.
Kalanick caught onto this investment opportunity after one of his former Uber minions, Gautam Gupta, made the jump to Opendoor as COO and liaised CEO Eric Wu with Kalanick to hash out a deal.
It's nice to have friends in high places as Kalanick knows very well.
Even traditional home builders are getting in on the venture capitalist act.
Lennar was one of the investors in the latest round of Opendoor investment, underscoring the existential threat these traditional companies face.
It makes more sense to partner now and form a budding relationship than get utterly wiped out down the road.
Uber hopes to deploy this strategy with Waymo as Kalanick's former company knows it will never possess superior self-driving technology over Waymo.
The Lennar investment also gave Jon Jaffe, the COO of home builder Lennar, a seat on Opendoor's board.
Opendoor is the first serious tech foray into the housing business. It is initiating business on the periphery by focusing on fixer uppers.
This will allow Opendoor to cut its teeth and learn more about the industry before it migrates into higher margin business such as downtown condos that Millennials love.
A swift migration of other tech names will briskly follow into this undisrupted industry if Opendoor can pry open its floodgates.
Fixing up distressed houses is the gateway into brokering and the holy grail of constructing.
Tech could eventually wipe out everyone and control the whole process just like what investors have seen in the transportation industry.
I can imagine a future where tech companies will be the best firms to construct smart houses, which all houses will eventually become.
One massive aftereffect is that the average quality of housing will rise dramatically in all metropolitan areas.
Once the data amasses, Opendoor will be able to identify every property from where it can extract value allowing America to transform into a nation of pristine, smart houses.
Renovating a house and selling it will boost the prices of current houses.
Effectively, tech with gentrify housing creating higher quality but higher priced properties.
Millennials, who have had an awful time jumping on the property ladder, will have an even more difficult task finding a starter home if every starter house turns into a beautiful Tuscan-styled villa from a shabby shed.
Vice-versa, beautiful Tuscan-styled villas that cannot be "flipped" will become smart homes creating even more demand for IoT smart products and higher prices per square foot.
Andreessen Horowitz, a venture capitalist firm based in Menlo Park, California, has been one of the avant-garde tech investors seizing stakes in Twitter, Facebook, Skype, Coinbase, and Lyft.
And these were just some of its investments before 2014!
An industry where Travis Kalanick, SoftBank, and Andreesen Horowitz are piling in must have real estate agents shivering in their wake.
If the general trend keeps up, the Oracle of Omaha Warren Buffett could be next on this powerful list.
He usually likes to buy things he understands with healthy cash flow. I am sure he understands real estate more than Apple (AAPL), in which he had no problem investing.
Traditional home builders and real estate agents aren't the only players that could be left in the dust.
Zillow (Z), the online real estate database company, reacting from the Opendoor threat launched its new business to buy and sell homes.
It was only three years ago that Zillow CEO Spencer Rascoff determinedly hunkered down telling investors "we sell ads, not houses."
Innovation, tech disruption, and competition changes everything.
The stock sold off hard due to the exorbitant costs related to buying homes on the announcement of buying and selling houses.
Margins will get massacred in this scenario, but I applaud the decision to move up higher on the value chain diminishing the existential threat.
This whole industry is about to be flipped on its head, and the winners will be the most innovative companies that incorporate data best.
Rascoff further expanded saying, "I can say without exaggeration, that no company understands the American homebuyer and home seller better than Zillow Group."
Zillow is 12 years old and the12-year treasury trove of data will give it an optimal chance to pivot from selling ads to buying and selling houses.
Seattle-based Redfin (RDFN), Zillow's arch nemesis competitor founded in 2004, has an even larger treasure trove of data dating back 14-plus years and has moved in the same direction.
Redfin was anointed the top tech company to work for in Seattle in 2017 by Hired.com.
There is enormous potential to add another monstrous business to Redfin and Zillow's top line.
The real estate industry is next in line to be digitized, and the Mad Hedge Technology Letter will be the first to know when it's time to dip your toe in.
_________________________________________________________________________________________________
Quote of the Day
"As a tech entrepreneur, I try to push the limits. Pedal to the metal," - said former cofounder of Uber Travis Kalanick.
Mad Hedge Technology Letter
June 18, 2018
Fiat Lux
Featured Trade:
(DON'T WORRY ABOUT THE BATS),
(BIDU), (BABA), (AMZN), (AAPL), (MGI), (NVDA), (AMD), (GOOGL), (FB)
The Chinese BATs (Baidu, Alibaba, and Tencent) are China's response to the American FANG group.
It's one of few sectors outperforming the vigorous American tech sector, and valuations have soared in the past year.
Former English teacher Jack Ma founded the Amazon (AMZN) of China named Alibaba in April 1999, which has grown to become one of the biggest websites on the Internet.
This company even has a massive cloud division that acts in the same way as Amazon Web Services (AWS).
Alibaba also has Alipay on its roster, the fintech and digital payments subsidiary of Alibaba.
Baidu, led by Robin Li, is the de-facto Google search of China and is entirely tailored for the Chinese market without English language support.
Tencent, created by Ma Huateng, has an assortment of businesses from social media, instant messaging, online gaming, and digital payments.
Tencent's WeChat platform is the lynchpin acting as the gateway to the robust Tencent eco-system.
The BATs have heavily invested in autonomous vehicle technology set to roll out in the coming years.
These companies are some of the biggest venture capitalists in the world throwing around capital like Masayoshi Son's SoftBank.
Alibaba has seen its share price rocket from $135 in June 2017 to $206.
Baidu has also seen huge gyrations in its share price elevating from $174 in June 2017 to $270.
Tencent, public on the Hong Kong Hang Seng Index, has gone from $273 HKD (Hong Kong dollars) to $412 HKD.
And this is all just the beginning!
An economy growing a stable 6.5% per year with companies able to scale to a mind-boggling 1.3 billion people is something of which to take notice.
China hopes to wean itself from its industrial heritage betting the ranch on a rapidly expanding tech sector.
Does this put China on a collision course steamrolling toward the American FANGs?
Highly possible but not yet.
Even though the BATs modus operandi has been to follow in the footsteps of the FANG's business model, they do not directly compete.
Ant Financial, the fintech arm of Alibaba, was blocked from purchasing MoneyGram International (MGI), effectively, closing any doors leading to the lucrative American digital payments industry.
This also meant curtains for WeChat, the multi-functional app that half of the Chinese use as a digital wallet, in the digital payments space.
The Committee on Foreign Investment in the United States (CFIUS) has made it crystal clear that BAT's capital will be scrutinized more than ever before because of China's open policy of transferring Western technology expertise to the mainland for the purpose of leading the world in technology.
China cannot have its cake and eat it.
The first stumbling block is that the American market does not suit the BAT's FANG business model with Chinese characteristics.
For example, the only other market Baidu search operates in is Brazil.
It has leveraged itself to the Chinese consumer whose purchasing power has spiked from its burgeoning middle class.
Another headwind is the lack of innovation caused by a rigid education system punishing freedom of thought in favor of rote memorization.
Innovation is American tech's bread and butter and investors pay up for this ingenuity that cannot be found elsewhere in the world.
This is also the reason why the BATs need to buy American technology and not the other way around.
Original concepts such as Uber and Airbnb were made in America first and Didi Chuxing and Tujia are rip-offs of these American companies.
The list is endless.
The BATs understand they cannot go head to head with American talent, but that does not mean they won't win out in the end.
To make matters worse, global tech talents do not want to work in China if they are reliant on America to develop something and copy it.
Why not just go work in Silicon Valley for a higher salary?
This was highlighted when the only tech talent to cross over to the other side quit in a blaze of glory.
Hugo Barra was poached from Alphabet in 2013, where he worked as vice present for the Android mobile operating system.
He was installed as the vice president of international development for smartphone maker Xiaomi, the Apple (AAPL) of China.
Barra suddenly threw in the towel at Xiaomi in 2017, offering a harsh critique stating, "What I've realized is that the last few years of living in such a singular environment have taken a huge toll on my life and started affecting my health."
Not exactly the stamp of approval the Mandarins were looking for.
In turn, China has focused its effort on recruiting Chinese-Americans who understand the working environment better and have roots or even family on the mainland.
The dire tech talent shortage is worse in China than Silicon Valley because Chinese tech companies have zero access to non-Chinese talent.
Even with a reverse in immigration policies by the administration, America continues to be the holy grail of tech jobs.
That is why you see hoards of Chinese, Indians, Russians, and every other country's best and brightest waiting in line to make the move.
Taiwanese American CEOs lead some of Silicon Valley's best companies such as the CEO for Nvidia (NVDA), Jensen Huang, and the CEO of Advanced Micro Devices (AMD), Dr. Lisa Su.
Only 1% of Baidu's revenues is extracted from American soil underscoring the BAT's China-first business model. Tencent isn't much better at 5%, and Alibaba heads the list at 11%.
Compare these statistics with Alphabet (GOOGL) making 53% and Facebook (FB) earning 56% of revenue from international sales.
Amazon is still very much an American business but 32% of revenue comes from international sales.
The bulk of this revenue is mainly from Europe where American large-cap tech companies are staunch mainstays.
China has focused on building out its business in Southeast Asia instead.
Those governments are cozy with Beijing and are willing to relinquish some sovereign influence to develop its poor digital infrastructure.
The nail in the coffin for potential BAT companies doing business in America is the total lack of data protection in China.
If you think what Facebook is doing doesn't make you sleep at night, the BATs are running riot with personal data in China.
Expect multiple attempts of hackers breaking into your email while your phone number is constantly harassed by spam messages and robo-calls galore.
This is a normal day in the life of a Chinese national and they are used to it.
China understands they are not ready to eclipse the juggernaut that is Silicon Valley.
The BATs are biding their time organically growing by investing into American tech firms helping their overall products and services.
The past five years have seen a gorge of American investment amounting to 95 deals totaling $27.6 billion.
However, this smash-and-grab investment party is effectively over because CFIUS has clamped down on exporting local technology.
Consequently, the BATs will continue to focus on what they know best - the Chinese market.
Southeast Asia is also ripe to become the next stomping ground for the BATs. Expect them to dominate in this region for years to come.
The runway is long in domestic China. The 6.5% annual growth is entirely biased toward these three companies to prolong their hearty growth trajectories.
The communist party even has a seat on the board at each of these companies highlighting another area of conflict if these companies dive head into the American market.
Let's just say corporate governance in China is a shell of what it is in America.
One day there could be an all-out battle for tech supremacy, but these Chinese companies would need some assurances they would likely come out on top.
That is hardly the case yet and they make way too much money by copying Silicon Valley.
_________________________________________________________________________________________________
Quote of the Day
"The leader of the market today may not necessarily be the leader tomorrow," - said Tencent founder and CEO Ma Huateng.
Mad Hedge Technology Letter
June 15, 2018
Fiat Lux
Featured Trade:
(DINNER WITH LAM RESEARCH),
(LRCX), (AMAT), (ASML), (TOELY)
It was one of those normally mundane seasonal events.
But what I heard blew my mind and will substantially shape my trading and investment strategy for 2018.
By now you already know that I used some of my stock market winnings this year to buy a vintage Steinway concert grand piano (click here for "The Great Inflation Hedge You've Never Heard Of."
Well, you can't own a Steinway without a recital, and ours was held last weekend.
After listening to an assortment of children display their skills with Pachelbel, Ode to Joy, and The Entertainer, we adjourned for a celebratory buffet dinner.
Making small talk with the other parents, I asked one particularly articulate gentleman what he did for a living. He, too, had enjoyed an excellent year, and also used his profits to buy a Steinway, although his was a cheaper upright model.
It turned out that he was the chief technology officer at LAM Research (LRCX).
Had I heard of it?
Not only did I know the company intimately, I had recommended it to my clients and caught the better part of the nearly 400% move since the beginning of 2016. Furthermore, I was expecting another double in the share price in the years ahead.
Was I right to be so bullish?
The man then launched into a detailed review of the company's prospects for the next three years.
The blockbuster development that no one outside the industry sees coming is China's massive expansion of its semiconductor production.
More than a dozen gigantic fabrication plants are planned, the scale of which is unprecedented in history. Some of these fabs are 10 times larger than those built previously.
This is creating exponential growth opportunities for the tiny handful of companies that produce the highly specialized machines essential to the manufacture of cutting-edge semiconductors, including Applied Materials (AMAT), ASML (ASML), Tokyo Electron (TOELY), KLA-Tencor, and LAM Research (LRCX).
Everyone in the industry has boggled minds over the demand they are seeing for their products.
The reality is the artificial intelligence is rapidly working its way into all consumer and industrial products far faster than anyone realizes, creating astronomical demand for the chips needed to implement it.
Bitcoin mining is also creating enormous new demand for chips that no one remotely imagined possible even two years ago.
As a result, the industry has been caught flat-footed with severe capacity shortages. They are all racing to add capacity as fast as they can. Profit margins are exploding.
On October 17, (LRCX) announced Q3 revenues of $2.48 billion, a staggering increase of 51.84% over the previous year, and a gross margin of 46.4%. The operating margin was 28%, generating net income of $591 million.
That gives the shares a very reasonable price earnings multiple of 16.95X, a 10% discount to the 18X multiple for the S&P 500. That is an incredible deal for one of the fastest growing companies in America.
Samsung of South Korea was far and away its largest customer, accounting for 38% of total sales.
On November 14, the company announced an eye-popping $2 billion share repurchase program that is certain to drive the price higher.
If there is one dark cloud on the horizon, it is the loss of the research and development tax credit embedded deep in the proposed Republican tax bill.
This will have a noticeable and negative impact on (LRCX)'s bottom line. Still, my friend thought that the company could offset this loss with faster sales growth and margin expansion.
However, many other technology companies in Silicon Valley won't be able to bridge that gap. It is a hugely anti-technology move for the government to take.
My fellow Steinway owner thought that LAM Research could easily see sales double in three years as long as there is no recession, which I believe is at least two years off. As for the share price, he couldn't comment, but remained hopeful, as he was a large owner himself.
Of course, the trick is how to buy a stock that has just risen by 400% in two years. So, you could start scaling in here, and build a larger position over time.
You only get opportunities like this a couple of times a decade, and it's better to be too aggressive than too cautious.
To learn more about LAM Research, please click here to visit the company website.
A Steinway Model D
_________________________________________________________________________________________________
Quote of the Day
"The market always gets it right," said Jim O'Neill, the chairman of Goldman Sachs International, who coined the term "BRIC."
Mad Hedge Technology Letter
June 14, 2018
Fiat Lux
Featured Trade:
(THREE RULES FOR JACK DORSEY),
(TWTR), (SQ), (MSFT), (FB)
I am Jack Dorsey's biggest fan.
If he has an entourage, I would like to be part of it.
Even if he just needs a chauffeur, I would be willing to drive for free just to pick up little pearls of wisdom percolating through his brain.
He is perhaps the biggest name outside the vaunted FANG group that is not Microsoft (MSFT) CEO Satya Nadella.
The special Jack Dorsey issue (click here for the link https://www.madhedgefundtrader.com/a-straight-line-to-profits-with-square/) gloating about his company Square was not a misjudgment.
I am supremely bullish on his other company Twitter (TWTR) too.
Like I said last time about Dorsey, do not bet against Jack Dorsey.
Rule No. 2 don't bet against Jack Dorsey.
If he has a heartbeat, then success will follow him wherever he goes.
Dorsey co-founded Twitter in 2006 and was sacked, later to return in a blaze of glory seven years later ala Steve Jobs.
Evan Williams, the other co-founder of Twitter, got rid of Jack after he found out Jack slipped out of work each day at 6 p.m. for drawing classes, hot yoga sessions, and fashion classes where he learned how to design mini-skirts.
Williams reportedly told Dorsey, "You can either be a dressmaker or the CEO of Twitter, but you can't be both."
Williams replaced Dorsey as the CEO of Twitter in 2007.
Dorsey's dismissal led him to Mark Zuckerberg's doorstep where he was practically hired at the Menlo Park offices but could not find a suitable role at the company.
What a legendary exclusion if there ever was one!
Out of options at the time, Dorsey summoned his inner genius and created a new company named Square (SQ) in 2009. Ironically, he was rehired at Twitter as CEO in 2015 and currently runs both companies at the same time.
Apparently, his dressmaking career died before it could take off.
Dorsey is such a stud, he does not even have an office or a desk at his corporate offices.
He simply roams around the office wielding an iPad solving problems that need solving.
He starts his day at Twitter and walks across the street to Square after lunch.
How convenient!
In 2015, Twitter was having growing pains. User growth stagnated in Q4 2015 at 305 million users, down from the 307 million users in Q3.
Management wrote an investment letter promising it will "fix the broken windows and confusing parts" and boy, did they.
Fast forward to today and Twitter just nailed down its second profitable quarter in a row. Monthly active users (MAU) topped 336 million in Q1 2018, up from 330 million in Q4 2017.
Management projects (MAU) to increase at a nice 6% per year clip.
The lion's share of the growth derives from the mass migration of advertisement dollars to social media platforms, the same reason why Facebook (FB) harvests spectacular profits.
Video content has transformed into a robust growth engine carving out more than half of Twitter's revenue.
This is something that never could have been envisaged in 2015. As the quality of broadband develops, more video will be splashed across its platform.
Twitter considers video as a vital part of the road map moving forward.
Video is a better way for advertisers to engage users. Plain and simple.
Summer projects to be an exciting one with the biggest entertainment every four years, the 2018 FIFA World Cup in Russia, set to invigorate Twitter feeds throughout the world.
America missed out on World Cup qualification on the last day of qualifiers because it could not salvage a draw against a second-string Trinidad and Tobago team.
It doesn't matter.
Eyeballs will be glued to the matches in Russia and the audience will vent, cry for joy, and express their emotions on Twitter feeds.
Live events energize Twitter feeds, and advertisers will be throwing money at Twitter to put themselves in the store window for targeted Twitter followers.
Twitter will stream every goal from the World Cup, which is a nice coup.
In total, Twitter has 30 live partnerships and hopes to expand.
MLB, Major League Soccer, and People TV are other live programming that will integrate with Twitter's live feed.
Twitter's total ad revenue is expected to grow by 6% in 2018, which is a nice feather in its cap compared to 2017 when revenue dipped by 6%.
As the pie for ad revenue grows, it will not be one winner takes all.
Facebook, Google, Amazon, and Twitter are strategically positioned to benefit from this mass migration to digital ad spend.
Twitter is a unique product that cannot be undermined. The platform is the mouthpiece for every notable person in their world to speak their piece.
No other platform gains this type of trust from the elite in the world.
That won't change anytime soon.
What's more, Twitter has morphed into a reliable news feed. Its nimbleness is reflected with breaking news flowing into the Twitter channels first, even before the traditional news media can get a sniff.
The agility of tech companies continues to be a huge competitive advantage versus the stalwarts of antiquity that move at sloth-like speeds.
Dorsey epitomizes this ethos by his systematic efficiency, making him view a corner office as a physical and psychological barrier to preventing him from success.
Financials back up my diagnosis. Total revenue increased last quarter 21% YOY.
Twitter has little exposure to data regulations as the data is posted in the public. It does not sell any individual personal information.
A year and a half of continuous double-digit daily active user (DAU) growth resonates with advertisers.
Twitter continues to enhance the core products and executes in fine fashion. This outperformance feeds back into the quality of products basking in advertisers' satisfaction.
Moving forward, expect video to extract a higher percentage of revenue because of the attractiveness to advertisers.
In addition, expect moderate growth from daily active users and more live events integrated into the Twitter platform.
Video has been a salient reason for the great success in the past year and a half. The Twitter management, led by Dorsey, has a great handle on the steps it must take going forward.
Jack Dorsey is the preeminent CEO of his day. A bigger problem is finding an entry point into Twitter or Square.
Granted, Twitter climbed from a low base after Dorsey was reinstalled in 2015 as the CEO. It took him a few years to figure out how to briskly execute and to harness the potential of Twitter.
Both companies have shot to the moon in 2018. Waiting for macro sell-offs to get into these stocks makes more sense than chasing the fumes.
Dorsey is on record saying Square will be bigger than Twitter because it speaks the language everyone understands - money.
Twitter, Square, and Jack Dorsey are the real deal.
Rule No. 3: Don't bet against Jack.
_________________________________________________________________________________________________
Quote of the Day
"You are the product on Facebook, Facebook is a data company by its very nature of mass surveillance, collective manipulation and hacking the attention economy for profit," - said cofounder of Apple Steve Wozniak when talking about Facebook's business model.
