Mad Hedge Technology Letter
April 15, 2019
(SNAP), (FB), (PINS), (TWTR), (GOOGL)
Mad Hedge Technology Letter
April 15, 2019
(SNAP), (FB), (PINS), (TWTR), (GOOGL)
America is full – that is what domestic social media growth is telling us.
The once mesmerizing service that captured the imagination of the American public has soured in the country that created it.
Online advertising consultant emarketer.com issued a report showing that Snapchat (SNAP), the worst of the top social media outlets, will lose users in 2019.
The 77.5 million users forecasted by the end of 2019 represents a 2.8% YOY decrease.
This report differs greatly from the report eMarketer issued just past August showing that Snapchat was preparing for a rise of 6.6% YOY in 2019.
The delta, rate of change, represents a massive downshift in expectations and the sentiment stems from the widespread saturation of social media assets.
Market penetration has run its course and the players have run out of bullets mainly targeting Generation Z.
These platforms have given up on baby boomers and Snap feels that pursuing the millennial demographic would be an exercise in futility.
Even more disheartening is that between 2020-2023, there will be only a minor uptick of user growth by 600,000 users clamping down on the impetus of a comeback of sorts shackling the business model.
The trend is not mutually exclusive to Snap, Twitter or Facebook, social media as a group will only expand the overall user base by 2.4% in 2020 hardly satisfying the appetite for growth that these companies publicly advertise.
Remember that much of Instagram’s growth originates from borrowing Snapchat users by way of copying their best features.
Even with this dirty tactic, growth seems to be petering out.
Snap’s shares have made a nice double after peaking shortly over $25 after the IPO.
But the double was a case of investors believing that management and execution had hit rock bottom – the proverbial dead cat bounce in full effect.
Now investors will pause to reassess whether there is another reasonable catalyst to drive the stock higher.
First, investors will need to ask themselves, is Snap in for another double?
So where does Snap go from here?
I believe they will borrow from the playbook of Mark Zuckerberg and attempt to emphasize supercharging average revenue per user (ARPU).
Whether the company arrives at this conclusion by chance or strategy, they must confront the reality that there are almost no other levers to pull if they want to perpetuate this growth story.
M&A is also off the table because the company is burning through cash.
Facebook’s (ARPU) came in at $7.37 last quarter indicating how Snap needs to make substantial headway in this metric with last quarter’s paltry (ARPU) at $2.09.
Essentially, management will conclude that each user isn’t absorbing enough ads because of declining user engagement.
Snap CEO Evan Spiegel will need to improve the pricing power charging advertisers at higher rates.
Obviously, the lack of an attractive platform resulting from poor execution and engineering problems needs a quick turnaround.
It’s not all smooth sailing for Facebook either, they keep chopping and reshaping strategy by the day attempting to minimize costs as the regulation burdens rot at the bottom line.
On the bright side, regulation hasn’t been as bad as initially thought – usership hasn’t dropped by orders of magnitudes.
In fact, Facebook’s users have shown a resurgent indifference to Facebook chopping up their data and repackaging it to 3rd parties, meaning Facebook has come through rather unscathed in the face of a PR storm.
There have even been recent reports of Zuckerberg being persuaded to start paying journalists for original content, a vast pivot for his hyped-up propaganda machine of being in the distribution business.
Juicing up (ARPU) is the lowest hanging fruit on offer for Snapchat and Facebook right now, overperforming in this sphere will improve financials and keep the mosquitoes away while affording them time to ponder how to reaccelerate user growth.
One outsized negative trend is that 90% of user growth appears to originate from undeveloped nations with a lack of discretionary spending power showing that this strategy has its limits.
Searching for another tool in its toolkit will redefine Snapchat, Twitter, and Facebook as we know it.
I would even classify it as an existential crisis.
Instagram have bought Facebook the most time to readjust its future direction highlighting that stealing Snapchat’s audience is still effective, expecting user growth to climb to 106.7 million US users, up 6.2% from 2018.
Instagram will continue its expansion by adding nearly 19 million new US users by 2023, but as much as it adds to its new social media asset, Facebook will be struggling for new net adds.
Snapchat is in dire straits and the stock market bubble could support the share price for up to another 8-12 months, but when the guillotine drops on Snapchat, the blood will smatter everywhere.
The company also plans to introduce a gaming service to take advantage of the popularity with its core users, Generation Z.
This should be the trick that breathes life into operating margins and (ARPU) which is why I believe the stock will hold up for the next period of time.
But with the gaming initiatives also comes rampant competition with the likes of Alphabet (GOOGL) and don’t forget Fortnite is still the 800-pound gorilla.
These trends also bode negatively for Pinterest (PINS) who might be going public as the last shot of tequila is downed at the after party.
“People are going to copy your product if you build great stuff. Just because Yahoo has a search box doesn’t make it Google.” – Said Founder and CEO of Snapchat Evan Spiegel
Mad Hedge Technology Letter
April 11, 2019
(THE MEANS TO A FRIGHTENING END)
(AMZN), (FB), (GOOGL), (AAPL)
Death of websites.
I love doing presentations to small businesses on my free time, partly to stay in touch with the pulse of the Davids who have the unenviable task of fighting uphill against the Goliaths.
It’s bad enough that the tech giants have scaled locally turning one’s local playground into a disadvantage.
The presentation is aptly titled “Content is King… But Only Through One’s Ownership” where the same parallels are explored and unpacked for my audience.
Proprietary Content – must be yours and you must own it on your own turf – your blog, your vlog, your app, and so on, it goes for everything.
Repurposing content on other platforms as a supplement to your own is one thing, but the moment you adopt an enemy platform as your main platform, that’s your coup de grâce.
SMEs (small businesses enterprise) believe it’s plausible to work with the higher ups, but don’t forget they have every incentive to cut you off from the fountain of youth.
One could say the best skill big tech has today is undermining their competition.
Facebook doesn’t allow posting content that criticizes Facebook, have you ever wondered why?
Website innovation has grinded to a halt because of the PageRank algorithm from Google, everybody is making websites the same, a top nav, descriptive text, a smattering of images and a handful of other elements arranged similarly.
Google’s algorithms and the self-regulating nature of their ecosystem have perverted the chance to have a unique online experience.
Most internet users have probably discovered that most websites don’t work well and the execution of them is lousy.
Many companies are not contributing enough resources to build out their site properly, or just don’t have the cash to fund it or a mix of the two.
About 95% of customer service calls originate from the company’s webpage because of payment problems, disfunction, misleading content, or simply because the website is down.
Ask any small business and they will tell you they deal with their domain being down for hours at a time because of some unknown server problem.
Not only is capitalism only working for a small group of Americans, but so are websites, such as massive companies like Amazon.com who have worked wonders with its e-commerce site.
Because the internet and namely websites are the key to building businesses, Silicon Valley is now using the concept of websites and their position as de-facto moderators to prevent others from developing proper websites, killing off the competition.
Alphabet is notorious for ranking their own products at the top of page one of any Google search.
Amazon has followed the same practice by sticking their in-house brands at the top of any Amazon search on Amazon.com.
And remember that none of this can be called “antitrust” because these borderline tactics offer consumers lower prices but that is only because consumers are brainwashed to believe Amazon offers the lowest price.
What if the same products are available for half of Amazon’s in-house brands, would Amazon volunteer to post their in-house brands on the second page, the graveyard of search results?
I would guess no.
Websites used to give businesses a chance, remember in the mid-90s when a website of any ilk was impressive as if someone was walking on water.
What can we expect next?
Amazon, Google, and Apple are taking their shows to artificial intelligence voice platforms.
SMEs could at least throw hail marys on standard internet searches with visual screens, but once content migrates over to voice platforms owned by Silicon Valley, then its game, set, and match.
For instance, a local business such as Joe’s Furniture Moving Business who, with the internet and visual screens, is searchable through search engines and can be even located on Google Maps with a concrete address.
Once we migrate the lions share of content to voice platforms over the next 15 years, Google Home, Apple HomePod, or Amazon Alexa could easily choose to remove Joe’s Furniture Moving Business information because they make more money offering you information of a moving service they own or have a stake in.
The advent of 5G will refine the voice technology and enhance the machine learning techniques needed to complete the migration of content.
Once the world crosses an inflection point where the technology and volume of content on smart speakers outweigh the hassle to use a keyboard or mobile screen, this effectively makes these smart speaker manufacture Gods of the World because they will own the voice-based internet.
They will be the gatekeepers of all global information, business, and development in the world and we will need to satisfy their algorithms to get our own content uploaded on their voice platforms.
And because of the nature of voice, users cannot see what else is out there, users will only hear what these companies tell us offering an outsized opportunity to manipulate the user experience generating more dollars for these powerful platforms.
By the end of 2019, 74 million Americans will be using smart speakers, giving these smart speaker firms adequate data to fine tune their products.
Eventually, all Americans will be forced to use it or will not be able to function, similar to the effects of a laptop, email, and smartphone combination now.
Once these voice platforms become ubiquitous, websites will be deemed irrelevant – consumers will simply have a choice of Google Home, Amazon Alexa, and Apple HomePod and blindly trust what they tell you is in your best interests.
Pick your poison.
That’s right, users won’t control content in about 15 years, a scary thought, and now you understand why these companies will even give their voice A.I. platforms for free if they have to and probably will in the future.
“It’s the first inning. It might even be the first guys up at bat. We’re on the edge of the golden age [of AI].” – Said Amazon Founder and CEO Jeff Bezos when talking about Amazon Alexa
Mad Hedge Technology Letter
March 28, 2019
(MACDONALD’S GOES HIGH TECH)
If McDonald’s is using more technology, then maybe your company should be using more too.
In its most dynamic deal since divesting from Chipotle (CMG) in 2006, McDonald’s acquired artificial intelligence software company Dynamic Yield.
The company is an Israeli startup specializing in software that customizes content to the user.
The result of this ramp up in technology means that your McDonald’s experience is about to improve, become easier and faster.
This is not your father’s McDonald’s.
At handpicked locations in America last year, McDonald’s tested the artificial intelligence software which provides functions such as cross-selling different items on a sidebar and taking into consideration the current weather and time of day.
For example, on hot summer days the machine learning software will most likely recommend colder items such as desserts and soft drinks, and on colder days lean towards a hotter, more filling option.
Another likely consequence is after choosing a full meal of some sort, the software will further prompt the customer of the choice of popular à la carte items via the sidebar.
The theme of digital transformation is upon us and following the lead of other fast food companies such as Domino’s Pizza (DPZ) will make operations more efficient and appeal to different segments of society.
The decision to gentrify and digitize the customer experience could be a result from a stagnating fast food industry that is in a price war down to the bottom.
Did you know you that you can buy 10 chicken nuggets for $1 at Burger King now?
Or even a simple cocktail at Applebee’s for just $1?
QSRs (quick service restaurants) have lagged posher establishments caused by the cutting down of immigration and the struggling of the low-income class that is squeezing out fast food restaurants’ go-to clientele base.
And as construction rates have crashed because of the surging material costs induced by tariffs and a lack of foreign workers, McDonald’s has been forced to look to replace demand.
Construction workers are a healthy portion of McDonald’s domestic lunch demand.
Not only is foot traffic being affected, but the fast food industry in America is saturated and funnily enough, when I travel to Europe every summer, this is one of the first comments I get from the Europeans.
The drive-thru menu will be one of the primary beneficiaries of this new software, and the projected enhancement of customer satisfaction should drive higher retention rates.
McDonald’s plans to roll out kiosks that self-serve customers which is one stop on the way to a fully automated experience.
In the next 5 or 10 years, there might be only one or two McDonald’s employees running a franchise.
McDonald’s is clearly trending towards reducing employee headcount evident in their strategy of deciding to halt lobbying efforts to bring down the minimum wage.
Genna Gent, McDonald’s Vice President of U.S. government relations, went on record sharing that “outlets owned by the company have an average starting wage that exceeds $10 per hour.”
Most fast-food companies would be frightened to discover the House Committee on Education and Labor advanced a bill earlier this month to increase the minimum wage from $7.25 to $15 per hour by 2024 thus incentivizing McDonald’s to pick up the pace of their digital transformation.
McDonald’s is not only one of the biggest employers in America, but they are one of the largest in the world.
The company had 210,000 employees in 2018 and I believe they will be able to quickly get down to 150,000 with the new software streamlining employees’ tasks allowing franchises to reduce headcount.
Getting on top of the mobile app and optimizing delivery is another step to McDonald’s digital growth strategy.
The adoption of machine learning will at some point allow customers to reorder their favorite meals on demand or before they enter the establishment, and even possibly personalizing parts of a meal that can mix and match to create alternative meals.
And the beauty of all of this, the same software rolled out to the self-serving kiosks, drive-thru platform, and mobile app can be universally adopted and managed from the cloud causing massive savings from tech efficiencies.
McDonald’s is not without its share of difficulties, sales have been plunging since 2014 and part of the response to this was to start the digital transformation.
This is just the second step of a long drawn own process that will automate the production process and customer experience.
On the flip side, the 3-year EPS growth rate is 16% demonstrating that even with falling sales, the efficiencies are falling down to the bottom line with the company profiting over $5 billion in 2018.
Ironically enough, McDonald’s profits were substantially lower with higher sales, indicating to management that a leaner version of itself has been justified.
I believe McDonald’s will continue to gentrify its menu, digitize its customer experience and production process, and sale deceleration will slow down while profit acceleration and EPS will increase.
This is a good omen for the stock’s trajectory and the company continues to be a good buy on the dip candidate because its upward share movement is entirely correlated to the increasing profitability which it continues to deliver on.
As we inch closer to a recession, deterioration of economic conditions could push an unintended growing number of customers through McDonald’s arched doors as they usually attract customers who earn less than $45,000 per year, looking to save some extra cash.
This could set the stage for a reawakening of increased sales.
“Ultimately, what any company does when it is successful is merely a lagging indicator of its existing culture.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
March 27, 2019
(THE DEATH OF ANOTHER STARTUP)