Mad Hedge Technology Letter
September 13, 2018
Fiat Lux
Featured Trade:
(THE THREAT TO YOUR DIGITAL LIFE FROM CHATBOTS),
(FB), (GOOGL), (MSFT)
Not all tech will survive.
Come hell or high water, chatbots are not going away today but have an ugly fate with the tech graveyard of past technologies in the near future.
The rise of pervasive technology has brought consumers a wave of modern technology – some useful and some that go straight rogue.
Microsoft (MSFT) was on the receiving end of tech gone bad when its Tay bot was duped into spewing anti-Semitic and racist blather.
Bill Gate’s brainchild allowed Tay to behave according to what it learned from fellow users with which it interacted.
The developers forgot that not all Internet speak is nice and bubbly.
In another humiliating episode, cyberhackers wielded a chatbot to masquerade as a woman asking men to hand over credit card information in order to become verified on the raunchy dating app Tinder.
Manipulating an app platform has been a favorite of cyberhackers where users blindly trust these brands with which they have become familiar, and barely question the motives behind these strange developments.
As cybercriminals endlessly hunt for monetization and opportunities ramp up, chatbots represent a critical vehicle to pillage prospective victims.
These examples are just two that were publicly reported.
In reality, flashpoints are widespread, and users are usually completely unaware that they are being victimized.
Some chatbots are even out just for data harvesting among other targeted activity.
The dark web is the perfect marketplace to sell hijacked data.
Many Internet users believe they can feel safe and secure behind the auspices of end-to-end encryption.
However, users seem to forget that this type of foolproof security has its limitations.
The easiest way to become exposed is by the other person on the other end of the message.
They can turn you in.
Paul Manafort found this out the hard way when the FBI seized messages from the people he sent them too.
WhatsApp, owned by Facebook, along with chat app Signal are the best ways to keep chats confidential if you trust the other party. This is where the conversation disappears in about ten seconds.
However, just because WhatsApp is secure now, does not mean it will be secure tomorrow.
WhatsApp co-founder and CEO Jan Koum quit in a vicious row against Facebook’s upper management flipping off the rogue ad-seller as the relationship came to a screeching halt.
He later said he was quitting to collect “rare air-cooled Porsches” and play “ultimate frisbee.”
Facebook plans to weaken WhatsApp’s encryption levels and is intent on harvesting the data to eventually install a digital ad business to this ad-less messenger.
Facebook has shown a blatant disregard to privacy. Plan on everything you have ever sent on WhatsApp being privy to all the workers in the Facebook office at some point in the near future.
In some eerie way, Facebook mimics the hackers that maneuvered around Tinder’s developers, but in a completely legal way showing zero concern for its end user.
That is a scary thing.
Facebook has become borderline criminal in the court of public opinion in Europe. And that sentiment has seeped into the hearts of minds of Americans as well, and rightly so.
In short, the tidal wave of junk tech such as chatbots and Facebook spinning your information to the hills will end badly.
The public has smartened up and cannot be misled by Facebook’s privileged management spouting out that its “values” are different as an excuse for obvious debacles.
The global chatbot market was $369.79 million in 2017, and by 2024, this industry will balloon to $2.17 billion.
Chatbots will have a ubiquitous presence in work and daily life.
Companies desire to curtail rising costs, and are doubling down on the chatbot revolution.
The current obstacle is that artificial intelligence (A.I.) is just not good enough yet for chatbots to comprehensively serve customers and never will be.
The chatbots rely on the data in their systems to solve problems to difficult questions, but humans need to receive answers on the fly in the case of multi-part complications.
Chatbots spectacularly fail at this endeavor.
Even worse, chatbots cannot empathize with a furious customer and feel out customers’ emotions to properly optimize the perfect solution.
And in some instances, humans do not feel at ease to discuss certain topics with software code.
Then there is the generational difference of age groups preferring to use what they are familiar with.
For older generations, this absolutely means speaking to a real human who lives, breathes, and sleeps at night.
Younger generations who grew up never going outside but instead addicted to a screen have an easier time routing their lives through technology.
Granted, chatbots are effective when answering rudimentary questions to direct the customer to a department where they will soon be talking to a human. But chatbots are not the solution to every customer service problem.
Then there is the question of whether a rogue chatbot is going to disperse your data to a nefarious hacker or even behave like Microsoft’s Tay chatbot.
Facebook is already a legal entity that disperses personal data for money.
As the tech sector advances, the weak technology will crash and burn.
Low-quality social media platforms such as Facebook and inferior technology-like chatbots will succumb to the same fate as the woolly mammoth.
Investors are experiencing this massive migration up in quality as the public and investors are doing everything to insulate themselves from the dark side of technology.
In a further blow to user-generated platforms Facebook and Alphabet’s Google (GOOGL), Brussels voted in favor of a law that would force tech companies to actively filter out copyrighted content uploaded to their platforms.
This will crimp profitability for the two giants, as the data and content received for free is being put under a stronger microscope.
Europe is doing everything it can to disrupt these two companies from their free lunch, and they are fed up with the negligence and arrogance in which they run their platforms.
This was evident when Europe slapped Alphabet on the wrist with a $5 billion antitrust penalty earlier this year.
Chatbots will eventually face the public opinion death squad, as fatigued Internet users will completely avoid chatting with software code and move their businesses to the competitor.
The ultimate problem tying chatbots and Facebook together is the utter lack of attention to the customers’ needs.
These two phenomena exist to make more corporate money in a myopic fashion.
Every shortcut available will be taken and has been taken.
Facebook will never be able to monetize its website like the pre-Cambridge Analytica scandal days. It will take a sweeping reset, most importantly dethroning Mark Zuckerberg from his perch in Menlo Park, California, to reinvigorate this lost firm.
Chatbots will not exist in a few years and technology will move on to more effective solutions.
It is the end of bad tech as we know it, as technology is evolving so fast, yesterday’s conquerors become todays pariah’s in just a few years.
Chatbots – A Flash in The Pan Tech
________________________________________________________________________________________________
Quote of the Day
"Our goal has never been to make the most. It's always been to make the best,” said CEO of Apple Tim Cook.
Mad Hedge Technology Letter
September 12, 2018
Fiat Lux
Featured Trade:
(HOW TO PLAY “SOFTWARE AS A SERVICE”),
(AMZN), (IBM), (ADBE), (CRM), (BABA), (CSCO), (SAP), (ORCL), (GOOGL)
If you have read any of our content in the first year of the Mad Hedge Technology Letter, the content is distinctly bullish technology stocks.
A fundamental driver propelling this cogent argument is the dominant Software-as-a-Service (SaaS) industry booming inside the confines of Silicon Valley.
If you want to boil down your tech investment thesis to one indispensable rule – only invest in tech companies that carve out prominent SaaS businesses.
If you stick with this nostrum, you will be delivered profits in spades.
We have recently taken in a swarm of new tech letter subscribers and understanding the panacea that is SaaS will entrench your portfolio in a glorious position to reap untold profits.
What is SaaS?
SaaS is a distribution method in which software is diffused to paid subscribers, usually on an annual, reoccurring payment plan, and the software is remotely stored on a centralized cloud platform awaiting use.
Unsurprisingly, SaaS remains the most lucrative segment of the cloud market.
In 2017, the tech industry did $60.2 billion in annual SaaS sales, that number is poised to explode to $117.1 billion in 2021.
The near doubling of sales underscores the robust nature of these tech firms setting up businesses of this ilk, and the positive effects dripping down to the bottom line.
Simply put, no SaaS business, no reason to invest.
SaaS isn’t the only cloud revenue companies can carve out. Tech firms also offer platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS).
However, SaaS is by far the prominent growth lever in the high-margin cloud industry.
The indomitable presence inside the SaaS industry is Bill Gates’ creation Microsoft (MSFT).
Microsoft leads all companies with a 17% global share of the SaaS market.
The Redmond, Washington, outfit blew past stalwart Salesforce (CRM) nine quarters ago.
Microsoft’s sizzling SaaS business is an oversized contributor to its 45% revenue growth rate, which is head-and-shoulders above the industry average.
Salesforce (CRM), Adobe (ADBE), Oracle (ORCL) and SAP (SAP) fill out the top five largest global SaaS businesses, but it is really a tale of two stories.
Oracle and SAP, which are competing in the same market, are grappling with legacy database businesses and legacy tech, which are punished by investors.
John Dinsdale, a chief analyst at Synergy Research Group, mentioned two outliers of “Cisco (CSCO) and Google too who are making ever-bigger inroads into the SaaS market” leveraging Cisco’s multitude of software assets and Google’s G Suite.
The thing that makes SaaS the x-factor for tech companies is that inevitably every company from every walk of life will adopt this mode of software, giving legs to this distribution model.
Vendors are scrambling to put together some resemblance of a SaaS product together, and this trend is a vital contributor to an industry that is growing 32% YOY worldwide.
Kevin Cochrane, chief marketing officer of SAP Customer Experience lay bare his thoughts about this type of service describing it as the “Golden Age of SaaS.”
Companies are becoming digital first from end to end, explaining the sharp rise in IT professional salaries and rise in quality software products.
As we look around the corner to the IaaS part of the cloud industry, which is growing at around 30% YOY, there is one dominant player, and everybody knows its name.
Amazon (AMZN) is the No. 1 vendor with Microsoft, Alibaba (BABA), Google, and International Business Machines Corporation (IBM) trailing behind.
The top four IaaS players have carved out a total of 73% of the global market ravaging any resemblance of competition.
Amazon is the industry standard with the best record of customer success.
If Amazon branched off into the SaaS industry, it could unlock an additional $100 billion in annual revenue.
A shift into this direction could pad Amazon’s margin’s even more after successfully boosting North American e-commerce margins from 2.4% to 4.7%.
It’s not entirely inconceivable that Amazon could break the $2 trillion valuation in three to five years, as its revved up digital ad business registered growth of 129% YOY last quarter.
Microsoft seized the runner-up position in the IaaS market to Amazon by growing 98% YOY with sales eclipsing $3.1 billion in 2017.
Wherever you turn, whether toward the cloud business or gaming, investors can find Microsoft making sales.
Microsoft has been a favorite of the Mad Hedge Technology Letter and it’s hard pressed to find a better public tech company in operation now.
The SaaS industry is not a one-size-fits-all proposition.
Thus, there is abundant room for niche offerings that quench companies’ demand for specific services.
This is the reason why cloud companies have participated in a non-stop buying binge of smaller companies that fit their needs.
Microsoft purchased developer favorite GitHub for $7.5 billion earlier this year, and similar examples are scattered all over the tech ecosphere.
Artificial Intelligence (AI) will be the kicker that powers SaaS performance to new heights because incorporating this groundbreaking technology will enhance functionality and, in return, raise profits for all involved.
The scalability of SaaS products has allowed companies to offer software for affordable prices allowing the smallest of firms to adopt a digital-first strategy.
This software connects with other software seamlessly integrating an array of productive apps that help teams overperform and overdeliver.
In the American workplace, 73% of companies will be exclusively using SaaS to function by 2020.
American companies are using 16 apps on average per day, a 33% jump in the number of apps they were using just two years ago.
The migration to mobile has swallowed up SaaS products as well with more mobile-specific software rolling out to mobile devices.
The meteoric rise of SaaS offerings has cut IT security budgets substantially as security has been delegated to the cloud instead of in expensive in-house security teams.
No longer do tech firms need to beef up guarding their own gates.
Protection is provided on a centralized cloud with a third-party company ensuring safety.
This development has helped a new industry rise – cloud security.
Whether people realize it or not, the SaaS industry is here to stay and will become more prevalent in every industry going forward.
This is incredibly bullish for companies that sell SaaS products as revenue will continue to rise.
________________________________________________________________________________________________
Quote of the Day
“Growth and comfort do not coexist,” – said CEO of IBM Ginni Rometty.
Mad Hedge Technology Letter
September 11, 2018
Fiat Lux
Featured Trade:
(IS IT TIME TO PICK UP THE SLACK?),
SLACK WORKSPACE APP
Being a stone’s throw away from the pulse of Silicon Valley, I have been showered with acute insights to which I otherwise would be oblivious.
This finely developed acumen is vital to keep my head above water and offer insights unfounded in any other newsletter.
The margins of victory and failure are becoming finer with each passing day, and that goes tenfold for the hyper-cutthroat trading world where each investor fights daily for his crust of bread.
The same thin margins apply for the tech industry whose prodigious march to profits has dwarfed any other industry.
Its far-reaching effects has brought forth social change unparallel to any other time in history.
The Mad Hedge Technology Letter has chronicled the messenger platforms rolled out by public companies such as Facebook and Snapchat, and their lust for profit extraction from every corner of the globe.
But there is another war going on in one nearby corner outside of our social lives I have yet to touch upon that will have profound consequences.
Enter the office.
The battle for hegemony in the workplace to evangelize a supreme workplace app is a big deal.
The office is where most semi-sober, semi-sane adults make a living, and where they allocate the lion’s share of sunlight hours before they mosey on home.
Slack, a workspace messenger app, has become the dominant way to communicate with professionals using collaborative messaging services, and offering integration with all legitimate apps that workers leverage to get work done.
After another round of fundraising, the company is now valued at more than $7 billion.
The $7.1 billion price tag is $2 billion more than the price only last September when Masayoshi Son’s SoftBank dipped its toes in to the tune of $250 million.
Overall, the company has at least 41 investors to its name.
This latest $427 million capital injection was led by Dragoneer Investment Group and General Atlantic, both private equity groups on the forefront of investing in transformative Silicon Valley firms.
Employees’ appetite for enterprise software has mushroomed in recent times, highlighting the dire need for progressive workplace apps liaising with other major productivity applications.
The smooth display interface and ease of use has spawned a monumental rush inside offices to adopt this sleek looking app called Slack.
Competition is coming with Microsoft and Facebook intent on disrupting Slack’s newfound success in the workspace area.
Slack is one of the most popular apps distributed by start-up companies and the numbers back it up.
The company has blown by 8 million daily active users (DAU).
Considering Slack only had 1 million users three years ago makes this feat even more impressive.
Of the 8 million (DAU)s, 3 million are paid subscribers.
Slack follows the freemium model such as other tech firms like Spotify, which lure customers in for free and allow access to its platform.
The free users are the biggest source of converts to its paid reoccurring subscription revenue.
Slack proves its worth by enhancing each product iteration based on diligent analyzation of customer feedback.
A no-brainer for many firms, but you would be surprised how many companies forgo this critical source of data.
Slack streamlines the process of communicating with work buddies.
No matter what industry or specialization with which you grapple, Slack makes it easy to share information over its platform.
In fact, Slack is an acronym for “searchable log of all communication and knowledge.”
Workplace portals can be initiated right away around projects or assignments, and the sense of team bred through this innovative communication channel offers the impetus for coworkers to contribute immediately.
Speed is money in tech land, and Slack gives a reason for coworkers to shun emails all together.
Being a customer-centric workplace app, any malfunctions in the harmony of its operations are met with instant patches of fixes so workers can carry out their time-sensitive tasks.
Other advanced functions aiding workers is the advanced search function allowing users to search for messages that were sent days, weeks, months, or even years ago.
Slack messages accommodate the trend for replying using a hoard of emoji’s, which has become a standard response as the emoji has taken a life of its own in the business world.
It has been found through surveys that emojis are a more effective way to respond to messages that need a blunt opinion.
Millennials are the tech-savvy generation that christened emojis as a normalized way of communication, and they are Slack’s target audience.
Another function allows users to type short code into its interface, triggering the software to remind users of a task and at a specific date and time.
Fastcompany.com smartly described Slack as “a virtual mash-up of the conference room and water cooler, with a pinch of corner office chit-chat.”
Slack is known for uber-productivity.
And if it’s something that a top-quality worker should harness such as referencing, enhancing, prioritizing, delegating, sharing, or creating - the app facilitates these traits seamlessly.
Slack certainly will boost the productivity of your team’s performance once the team gets a hang of its tools.
The emphasis of enterprise collaboration will continue as more work teams band together remotely.
This app perfectly captures functionality and meets the needs from companies where all users are online and live in different time zones.
If Slack continues evolving at its current speed, it could shortly wipe out emails.
Emails are a legacy type of communicative tool for companies, and its outdated interface is ripe for disruption.
Gmail’s disciples must have noticed that the past few iterations of Gmail have looked more and more like Slack, as it steals from other workplace app functions to upgrade its own workplace services.
All of this explains why Slack has been adding 2 million users per year and still has enormous potential for further disruption and growth.
Most early-stage companies are massive cash burners.
Reports from Didi Chuxing, the Chinese ride-sharing firm that bought out Uber in China, exposed the double-edged sword of being an up-and-coming tech firm.
Growth is often put up on a pedestal with profits relegated to the sidelines.
Even though Didi Chuxing is the dominant player in China, the exorbitant subsidies dished out to scarce drivers have devoured cash flow metrics.
Didi Chuxing has lost an astonishing $580 million in the first six months of 2018.
Slack is cash-flow positive.
An extraordinary accomplishment for an industry littered with firms exercising their industry right to spoon feed excuses of indulgent losses until their IPO day.
Even more impressive, Slack is only 5 years old and has already signed up more than 70,000 workgroup teams for its platform.
Slack has avoided even talking about going public, and this is bad news for retail investors hoping to get in on the action.
The carnage that tech firms have faced in front of Congress and in the press have budding tech firms rethinking if it’s worth opening themselves up to such torturous criticism.
Mark Zuckerberg is now the whipping boy on Capitol Hill.
Why risk it when bountiful funds await through venture capitalist coffers chomping at the bit to pay a premium for the latest hot tech company?
Elon Musk’s personal meltdown does not help either.
Sadly, it will be years before Slack chooses to go public - and most likely when the business becomes ex-growth.
Yes, it’s unfair to the average Joe, but life is unfair.
Money talks and as Slack feeds back its fresh capital into energizing its product, the valuation will rise to epic heights along with its DAU numbers.
If your office isn’t using Slack yet, it will soon.
Or…it’s probably not a modern place to work.
To visit its official website and sign up for free, please click here.
________________________________________________________________________________________________
Quote of the Day
“You should learn from your competitor, but never copy. Copy and you die,” – said Alibaba cofounder Jack Ma.
Mad Hedge Technology Letter
September 10, 2018
Fiat Lux
Featured Trade:
(GOOGLE’S BREAKFAST OF ROTTEN EGGS),
(TWTR), (FB), (GOOGL), (MSFT), (AMZN)
In a recent interview Google CEO Sundar Pichai admitted he is “not a morning person” and maybe that was his argument for skipping out on the grilling that his contemporaries Facebook (FB) COO Sheryl Sandberg and CEO of Twitter (TWTR) Jack Dorsey received in front of Congress.
Or maybe Pichai managed to down a rotten egg that morning when eating his favorite staple breakfast “omelet with toast," because his decision to abort his date with Congress was a shocking error of judgment for a CEO that has had a flair for controversy lately.
With the whole world watching, the empty chair with a simple name tag with Google plastered over it represents the arrogance and excesses of Silicon Valley all mixed into one incongruous mixture.
This rookie move will open a can of worms for the company made famous by its search algorithm that dominates the developed world.
Google will have a target on its back going forward while creating a massive public relations backlash for a company that must fiercely defend its ad-laden profit engine going forward.
Instead of taking it on the chin like Facebook and Twitter, Google has voluntarily veered into a sticky situation, and all to avoid a few stomach wrenching questions from Congress.
How did this all happen?
In the beginning of June, Google decided to scrap its relationship with the U.S. Department of Defense.
Project Maven, as it was known, provided Google’s artificial intelligence (A.I.) technology to systematically analyze drone footage for the U.S. government.
Pichai chose to avoid renewing the contract, and Google Cloud CEO Diane Greene agreed it was a black eye for the company that applied its own technology to conspire against damaging human life.
Throwing fat on the fire, Pichai followed up by dismantling Project Maven and giving the thumbs up for code-name Dragonfly. This was a secret project aimed at the mainland Chinese market and rolling out a censored version of Google’s search engine by altering its construction of unique search algorithms for a mainland Chinese audience.
This incensed the higher-ups on Capitol Hill, as this move was largely viewed as pandering toward the Chinese communist government for monetary purposes at an uber-sensitive time between the two powerhouse nations, which remain mired in a tumultuous trade war.
The timing couldn’t be worse for Pichai.
Dragonfly is already in beta mode and could be rolled out in the near future. However, I see it as dead on arrival, because there is no hope that Google can penetrate the fortress that is the Chinese business world.
Naturally, Google employees were dismayed and shocked by these startling revelations.
Pichai’s conspicuous no-show was in part driven by the potential wrath he would have faced by these recent reckless decisions that seemed to put the American government’s interests below the Chinese communist government.
The circus was there for everyone to see.
Sheryl Sandberg put on her bravest face.
It was obvious she had rehearsed every word to the utmost precision while Dorsey vehemently guarded his brainchild with honesty and zeal.
The testimonies made social media look perceivably criminal with a congressman even hinting the reason they aren’t allowed to do business in China was mainly a business model issue, and more specifically a legal issue.
Another congressman from West Virginia suggested Facebook’s Instagram was the source of the opioid epidemic ripping apart his state.
The only thing getting ripped apart during the intense grilling was Sheryl Sandberg’s well-practiced smile.
Dorsey and Sandberg were visibly uncomfortable with the line of questioning and rightly so.
Google would have looked worse if it showed up. But it managed to look 10 times worse than that by stonewalling the government’s invitation.
In a recent Pew Survey, data revealed 44% of youth between 18 to 29 last year deleted Facebook on their mobile phones.
Facebook is already a legacy platform in the throes of disruption cannibalized by its own asset - Instagram.
Instagram will be the sole survivor of Facebook by taking out Facebook itself, and that is bearish for overall business.
And that is if social media can hang on that long before it’s taken down by the hawks circling above in Washington.
When Facebook’s Cambridge Analytica scandal broke, the government was at sixes and sevens at attempting to figure out what on earth was going on behind the smoke and mirrors of the big data theatrics.
CEO Mark Zuckerberg was let off the hook with questions he wriggled out of, and Facebook shares powered on unabated.
This time it’s different.
Regulation is an imminent threat to social media revenues and could hurt earnings this quarter.
Investors need to migrate to higher tide, meaning Amazon (AMZN) and Microsoft (MSFT), because the waves still aren’t yet reaching those levels.
Amazon and Microsoft need to send a thank you note to Alphabet for screwing the pooch.
The administration has felt it convenient to barrage Silicon Valley to solidify the Republican base, and this tactic has resonated with the administration’s diehards.
A smorgasbord of FANG-bashing was the recipe to this madness. But now sights will be zoned in on dismantling Google, and Microsoft and Amazon will benefit from avoiding nasty, gut-churning headlines that turn up in the form of Twitter blitzkrieg.
Yes, Sheryl Sandberg, Facebook was “too slow” to react to foreign interference in the elections. But it is more accurate to characterize the battle social media faces against outside nefarious forces as impossible.
It is impossible for these social media platforms to police themselves while policing the whole world.
The incessant whack-a-mole scenario is the best-case outcome for the self-policing prospects of social media.
Once social media algorithms figure out how to stopgap one method of circumvention, the bad actors will move on to a more advanced way to manipulate the algorithmic police.
What does this mean for social media?
Costs are going up and will seep into profit margins.
Highlighting the upward trend of rising expenses for social media platforms is the daily cost of keeping CEO Mark Zuckerberg safe.
And remember, he lives in Palo Alto, California, one of the safest places on planet earth with a medium household income of $137,000.
In 2017, Facebook divvied up $7.3 million for Zuckerberg’s security detail and costs associated to it.
In 2018, shareholders approved a $10 million security package to keep Facebook’s head honcho safe. This underscored the ballooning risk of leading this controversial technology forum littered with conflict of interests, and on the verge of potentially perverting western democracy.
By the end of 2018, Facebook will increase its security division from 10,000 employees to 20,000.
And that is just the beginning.
Facebook’s security division is the fastest-growing division of fresh hires at Facebook.
Before Facebook and Twitter can ring in the profits, they face an exorbitant war against foreign “bot armies” intent on muddying the free flow of accurate information on domestic shores that target individuals deemed unaligned to the foreign actor’s interests.
There will be collateral damage and lots of it.
This does not sound like an easy road to profits, and it is not.
As midterm elections creep closer and closer, Facebook and Twitter must confront elevated headline risk, and any trading day could see shares wacked with a 10% haircut.
Following the government question-and-answer period, Twitter and Facebook will be designing a new resistance to stymie villainous foreign infiltration.
Ultimately, spending the bulk of employees’ work days realigning their business models to protect democracy, instead of creating new growth drivers, is not bullish for the stock price.
It is hard to breed much confidence in social media stock’s long-term narrative after listening to Dorsey and Sandberg speak.
They kept touching on needing help from government intelligence sources to aid them in catching the miscreants.
It makes sense to gradually nationalize social media platforms to unite the disconnect between social media’s war against foreign forces and the intelligence communities war against them.
It is clear hackers are exploiting the dislocation in cohesiveness between the cracks in social media and government intelligence.
But if that ever happens, it would be the end of Facebook and Twitter as we know it, as normal users would be averse to providing free content on a government-enabled platform as well as a strong blow to democracy itself.
It all makes sense now why Dorsey and Sandberg gave the answers they gave.
Their answers were akin to a faint plea for help while appearing contrite, hoping to persuade Congress to give them more time to figure it out.
This thinly veiled attempt to elongate the profit-making process and find a solution for a problem with no solution could end badly for these two companies.
Migrate to higher quality tech names in the short-term.
The resilient American economy powers on with the heavy lifting done by Silicon Valley albeit it with fewer lifters.
If social media stocks can get through the midterm elections unscathed, there is a trade on the table for these beleaguered companies rounding out a tumultuous year.
But getting to that point will be volatile, as this group of stocks have a rocky road ahead of them for the rest of the year.
I’m Not A Morning Person
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Quote of the Day
“I'm not a regular smoker of weed. Almost never,” – said CEO of Tesla Elon Musk on The Joe Rogan Experience podcast.
Mad Hedge Technology Letter
September 6, 2018
Fiat Lux
Featured Trade:
(THE SMART PLAYS IN FINTECH),
(SQ), (PYPL), (JPM), (COF), (WFC), (BAC),
(MGI), (GRUB), (BABA), (NFLX)
Fintech is all the rage now, and it’s time for investors to grab a piece of the action.
The tech sectors’ stellar performance in 2018 is a little taste of things to come as every industry forcibly pushes toward software and artificial intelligence to enhance products and services.
Bull markets don’t die of old age and some of these tech stalwarts are truly defying gravity.
The fintech sector is no exception.
Square (SQ) led by tech visionary Jack Dorsey has been a favorite of the Mad Hedge Technology Letter practically from the newsletter’s inception.
But another company has caught my eye that most of you already know about – PayPal (PYPL).
PayPal, a digital payments company, has extraordinary core drivers and a splendid growth trajectory.
Its arsenal of services includes digital wallets, money transfers, P2P payments, and credit cards.
It also has Venmo.
Venmo, a digital payment app, is the strongest growth lever in PayPal’s umbrella of assets right now, and was the first meaningful digital payment app in America.
It was established by Andrew Kortina and Iqram Magdon-Ismail, who were roommates at the University of Pennsylvania, and the company was bought out by PayPal for $800 million in 2014, marking a new chapter in PayPal’s evolution.
Funny enough, Venmo’s original use was to buy mp3 formatted songs via email in 2009.
Venmo is wildly popular with tech savvy millennials. A brief survey conducted illustrates how fashionable Venmo is by recording higher user statistics than Apple Pay.
The app is commonly used for ordering pizza through Uber Eats or Grubhub (GRUB), or even shelling out for monthly rent.
If you want to stir up your imagination even more, Venmo has a prominent social feed where users can view other Venmo users’ purchases.
Financial models suggest Venmo could contribute $300 million to the PayPal top line in 2021. If Venmo executes perfectly, revenue could surpass the $1 billion mark in 2021, with much higher operating margins than PayPal’s core products.
Even though management declines to speak specifically about Venmo, the dialogue in the earnings call usually provides some color into what is going on underneath the hood.
Xoom, a digital remittance distributor app with offices in San Francisco and Guatemala City owned by PayPal, along with Venmo grew payment volume by 50% YOY, surging to $33 billion annually.
Of that $33 billion in volume, $19 billion was contributed by Venmo and Xoom chipped in with $14 billion.
More than 60,000 new merchants joined PayPal’s array of platforms, adding up to more than 19.5 million total merchants.
All in all, PayPal locked in $3.86 billion of sales last quarter, which was a 23% YOY jump in revenue, at a time where widespread acceptance of fintech platforms is brisk.
PayPal raised its end-of-year forecast and rewarded shareholders with authorization of a $10 billion buyback.
Upward margin expansion, expanding market share, multiple revenue stream, and untapped pricing power is the recipe to PayPal’s meteoric rise.
PayPal’s share price has climbed higher from a base of $73 at the beginning of the year to an all-time high of more than $90.
Offering more proof fintech is alive and kicking is Jack Dorsey’s Square’s dizzying rise of more than 200% YOY in its share price.
The company is exceeding all revenue growth expectations and is poised to ramp up subscription revenue.
As with the Venmo app, Square’s Cash app has unrealized potential and will be one of the outperforming profit drivers going forward.
Square hopes to be the one-stop-shop for all types of digital payment needs including consumer finance, equity purchases, possibly international transfers, and cryptocurrency.
All of this is happening amid a robust secular story that could have seen traditional banks swept into the dustbin of history.
Rewind a few years ago, perusing the data about the movement to digital payments must have frightened the living daylights out of the executives from major Wall Street mainstays.
Digital wallets assertive migration into mainstream money payment services could have detached traditional banks’ core businesses.
Slogging your way to a physical bank to put in a wire transfer was not appealing.
Archaic methods of business are painful to see, and traditional banks were still operating this way as of 2015.
Time is money and technology has crashed the traditional waiting time to almost zero.
The way these tech companies operate is simple.
They compete to hire a hoard of advanced computer developers or shortcut the process using the time-honored tradition of poaching the competition’s best talent.
Then snatch market share at all costs and grow like crazy.
Banks badly needed introducing some functions to their array of services such as linking with third-party payment APIs to facilitate online payments and enabling cross-platform digital payments.
Other functions such as establishing modern peer-to-peer payment systems or adopting QR code technology that are wildly popular in East Asia could enhance optionality as well.
These are several instruments they could have amalgamated into their arsenal of fintech technology that could have freshened up these dinosaur institutions.
Harmonizing banking tasks with mobile functionality was fast coming and would be the standard.
Anyone not on board would sink like the Titanic.
Ultimately, banking institutions needed to up their game and acquire one of these digital wallet processors or watch from the sidelines.
They chose the former when a consortium called Early Warning Services (EWS) jointly created by behemoth American banks, including JPMorgan Chase & Co. (JPM), Capital One (COF), Bank of America (BAC), and Wells Fargo (WFC) to “prevent fraud and reduce detection risk” made a game-changing decision.
(EWS) acquired digital payment app Zelle in 2016, and this was its aggressive response to Square Cash and PayPal’s Venmo.
Results have been nothing short of breathtaking.
Leveraging the embedded base of existing banking relationships, Zelle took off like a scalded chimp and never looked back.
In a blink of an eye, Zelle had already signed up more than 30 banks and over 100 financial institutions to its platform.
Banks couldn’t bear being left out of the fintech party.
With hearty conviction, Zelle is signing up users at a pace of 100,000 per day, and the volume of payments in 2017 eclipsed $75 billion.
Zelle projects to expand more than 73% in 2018, integrating 27.4 million new accounts in the U.S., head and shoulders above Venmo’s 22.9 million and Square Cash due to add 9.5 million more users.
Make no bones about it, Zelle was in prime position to convert existing relationships into digital converts. The banks that do not have an interest in Zelle have an uphill climb to stay relevant.
The United States is rather late to this secular growth story. That being said, already 57% of Americans have used a mobile wallet at least once in their lives.
Innovative ideas bring supporters galore and even more adoptees.
That is why the strong pivot into technological enhanced ideas bear unlimited fruit.
Using a mobile platform to just open an app then send funds within a split second with minimal costs is appealing for the Netflix (NFLX) crazed generation that can hardly get off the couch.
Ironically, it’s those in the emerging parts of the world leading this fintech revolution by skipping the traditional banking experience completely and downloading digital wallet apps on their mobile devices.
It’s entirely realistic that some fresh-faced youth have never been present at a physical banking branch before in India or China.
Download an app and your fiscal life commences. Period.
The volume of funds passing through the arteries of Chinese digital wallet apps surpassed $15 trillion in 2017.
And by 2021, 79.3% of the Chinese population are projected to use digital wallets as their main source of splurging Chinese yuan.
America lags a country mile behind China, but the Chinese progress has offered American tech companies a crystal-clear blueprint to springboard digital payment initiatives.
Chinese state banks are already starting to become marginalized, and the Wall Street banks are not immune to the same fate.
Devoid of a digital strategy will be a death knell to certain banking institutions.
Compare the pace of adoption and some must question why American adoption is tardy to a fault.
Highlighting the lackadaisical pace of American fintech integration was Alibaba’s (BABA) smash-and-grab attempt at MoneyGram International Inc. (MGI), as it sought to gain a foothold into the American fintech market.
The attempt was rebuffed by the federal government.
The nascent state of the digital payment world in America must alarm Silicon Valley experts. And the run-up in Square and PayPal includes calculated bets that these two standouts will leapfrog into the future with guns blazing along with Zelle.
The parabolic nature of Square’s mystifying gap up means that a moderate pullback is warranted to put capital to work in this name.
Investors should wait for a timely entry point into PayPal as well.
These two stocks have overextended themselves.
As the fintech pie extrapolates, there will be multiple victors, and these victors are already taking shape in the form of Zelle, PayPal, and Square.
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Quote of the Day
“In the not-too-distant future, commerce is just going to be commerce. It won't be online commerce or offline commerce. It's just going to be commerce. And that will happen because of the phone,” – said CEO of PayPal Dan Schulman.
