Mad Hedge Technology Letter
August 2, 2023
Fiat Lux
Featured Trade:
(SPOT ON WITH SPOTIFY)
(SPOT), (AMZN), (APPL)
Many industries have experienced consolidation in the last few years and music streaming has been no exception.
The strong emergence of a few companies running the show has resulted in these same companies wielding extraordinary pricing power.
Spotify (SPOT) has been one of the leading music streaming platforms for years, and when companies harness pricing power, they can raise prices to compensate for higher expenses.
That is exactly what Spotify did recently as their stock sold off on a wider-than-expected loss for the second quarter, even though subscribers surged.
The streaming service posted a net loss of 302 million euros.
Monthly active users (MUAs) beat estimates of 530 million to hit 551 million — a 27% improvement compared to the year-ago period. Net additions of 36 million represented Spotify's largest quarterly net addition performance in its history.
Premium subscribers also surpassed expectations of 217 million, jumping another 17% year over year to hit 220 million.
In its first-quarter report, the company said it expected to add 15 million new monthly active users in Q2, bringing its total to 530 million. It also expected revenue of 3.2 billion euros and to report 217 million paid subscribers in the quarter.
Spotify is continuing to invest in advertising, and its ad-supported revenue grew 12% year over year. The company said podcast advertising revenue growth reaccelerated to more than 30% year over year.
Spotify will increase the price of its Premium subscription offerings by as much as $2, which translates to a 20% rise for some plans.
In the U.S., Spotify’s Premium Individual offering now costs $10.99, up from $9.99, and the price of its Premium Duo plan changed to $14.99, up from $12.99. The company’s Premium Family plan is now priced at $16.99, up from $15.99, and the Student offering costs $5.99, up from $4.99.
Spotify doesn’t expect a drawdown in product demand from the price increase, and let’s face it, most people can handle paying an extra 2 bucks for something they use every day.
Music streaming is definitely close to becoming an industry participated in by just a few for as long as it’s a viable business.
That means Spotify will also have the opportunity to raise subscription prices again in the future.
The licensing issues alone are too much of a hurdle for most companies to get to launch so to really compete takes a high amount of upfront funds and in the world of high interest rates, tech firms can’t fund this type of retread business again.
Spotify isn’t a pure monopoly.
The others involved are Apple Music, Amazon, Tidal, Deezer, and Pandora.
SPOT’s stock has increased by over 85% after the earnings pullback, and at one point they were up over 100%.
Growing subscriptions at 27% is still considered something that a growth company does at a time when growth companies are hard to find.
It doesn’t matter that they aren’t profitable yet, as long as they add more subscribers, which they have strongly indicated they will.
The stock has pulled back from $175 and once the negative shakeout fades away, traders should get into SPOT while they still can.
“Never invest in a business you can't understand.” – Said American Investor Warren Buffett
Mad Hedge Technology Letter
July 31, 2023
Fiat Lux
Featured Trade:
(THE BEST OF BREED OF THE SECOND TIER)
(ADBE)
Though without the pedigree of tech blue blood such as Apple or Microsoft, Adobe (ADBE) comes close and is at the top end of that second group in Silicon Valley.
Investors need to take notice immediately of ADBE.
They don’t compete on the data center level with Microsoft or Google, but they do have room to expand in their own way through artificial intelligence which offers a wide path to a higher stock price in the short and long term.
ADBE mainly creates artist tools via software that in the future will absorb a big dose of generative artificial intelligence which will make it easier to produce more creative content in minimal time.
It’s safe to say that the chutzpah surrounding generative artificial intelligence (AI) has also overflowed into Adobe.
Ride on the bandwagon while it lasts. This year is turning into a year many will not forget.
It’s true that ADBE’s foray into AI promises to be just the tip of the iceberg in harnessing this powerful set of revenue boosters.
Adobe's Photoshop Generative Fill feature lets users edit and enhance images by just typing in the desired outcome and letting the software perform its magic easily and effortlessly.
Adobe intends to roll this feature out officially in the second half of this year through its new Firefly beta app. Its Illustrator software will also integrate Firefly to enable customers to come up with ideas faster, enhancing the creative process and saving many hours of work.
ADBE has also shown stable earnings growth albeit nothing spectacular.
Revenue came in at $4.8 billion, up 10% year over year for the quarter, while net income stood at $1.3 billion, up nearly 10% year over year.
Free cash flow for the quarter came in at $2 billion, 5.4% higher than the $1.9 billion reported in the prior year.
One big highlight is the profitability of what ADBE does.
Earnings per share are expected to be between $11.15 for the next quarter.
On a down note, ADBE may encounter a stumbling block in its bid to acquire Figma, a cloud-based design platform.
Its $20 billion bid for the software company is being scrutinized by the European Union antitrust regulators. The European Commission will decide whether to clear Adobe's bid by August 7 as it was concerned that the deal may stifle competition.
There is still a great deal of upside to ADBE’s stock and I do believe it is one of the more robust franchises in software paving the way for its Creative Cloud to capitalize on the integration of generative AI functionality into existing workflows.
It’s hard to put an exact number on the level of efficiencies but I do believe artists will show around 50% increased productivity using this new software.
This would translate into multi-thousands of dollars in cost savings for individual content creators who effectively will be able to run a professional artist studio from their own iPhone.
It’s never been a better time to own a brand because to run it and promote it, is easier than ever.
This is why the stock is defying gravity this year, so I predict that ADBE shares will be a lot higher than today a year from now.
Mad Hedge Technology Letter
July 28, 2023
Fiat Lux
Featured Trade:
(ANOTHER IMPLOSION BEGGING TO HAPPEN)
(RAPPI), (SOFTBANK)
There’s a reason why Softbank lost $32 billion in technology investments last quarter, and it stems mostly from terrible investment decisions.
Most of Masayoshi Son’s Softbank targets are at the small time level where a few hundred million of revenue per year is something they are interested in.
The thinking behind this is to hit those 10 baggers, and to his credit, he did pocket some of those like Alibaba and Uber in the days of yore.
A broken clock is right twice a day.
Do Son’s actions signal a turning of the corner from his hefty losses?
I would strongly suggest he is doubling down on his losing strategy based on what he’s green-lighted in South America.
Take for instance the recent news of his investment in Rappi, a food delivery app that has grown into one of Latin America’s most-valuable startups.
They just announced they will offer loans to restaurants in Mexico and Colombia.
The plan is to offer loans to restaurants that have been selling via the app for at least three months.
The foray into commercial lending shows how Rappi has adapted its business model to add more revenue streams in the eight years since it started as a grocery delivery business.
Facing stiff competition from the likes of Naspers Ltd’s iFood and UberEats, Rappi has increasingly embraced financial technology as it expands in the region.
In its latest push, Rappi is targeting $60 million in loans across the two countries.
Rappi didn’t disclose the terms of the loans it will offer. The credits will be repaid through the restaurants’ sales via the app.
The company could expand the loan business to some of the other nine countries where it has operations as soon as this year.
This strategy screams desperation and low-quality decision-making.
Restaurant revenue isn’t stable enough to base a loan on a highly changeable industry.
There are no fixed contracts as to how many tacos per month are sold and the hilarious concept of offering loans based on 3-months of operating the app is irresponsible.
The company wouldn’t comment on what type of terms they would offer because they most likely will be highly predatory because this maneuver is highly risky.
Don’t expect Japanese bond levels of 0% and think of something more like 18% similar to Russian mortgage rates.
My understanding here is that management is trying to pump up revenue in the short term just to shine up the business metrics for the IPO.
After the IPO, the management will be able to cash out, and then management can throw the business to the wolves for all they care.
The great news here is that Softbank funding this type of weak tech business model is good for the entire tech ecosystem because tech needs that sucker that juices up the purses.
If other parts of tech didn’t get any investment, then there wouldn’t be the top 7 big tech stocks that boss the S&P.
Much of the reason tech shares have reached Himalayan highs is because a stream of short-sellers must cover their shorts with every explosion to the upside.
Son subsidizing the bottom feeders of global tech apps is in fact positive for Silicon Valley as a whole.
Tech needs guys like him to get stuck with the bill so people like us cash out at the top.
It’s a dog-eat-dog world.
Unfortunately for Rappi, the restaurant loan business is ripe to implode betting on a financially unproven population to power this app to the public market.
Rappi’s management better hope they can unload vested shares before the whole game is up.
“Once a new technology rolls over you, if you're not part of the steamroller, you're part of the road.” – Said Writer Stewart Brand
Mad Hedge Technology Letter
July 26, 2023
Fiat Lux
Featured Trade:
(GOOD SIGNS FOR TECH)
(GOOGL), (APPL), (CHATGPT)
