(AMZN) Archives

Pinterest Comes Out

The Facebook (FB) of digital images is on deck and has filed to go public.

I'll give you the skinny on it.

Pinterest (PINS) has slightly different lingo - they call digital images pins, a collection of pins, a pinboard, and the users that post pins are pinners.

Aside from this little creative wrinkle, Pinterest does little to help flow my creative juices.

That's not to say they are a bad company, in fact, it's quite refreshing that on the financial side of the equation, Pinterest is a solid financial enterprise.

They make money and aren't going to burn through their cash reserves anytime soon.

This should give some peace of mind to potential investors looking at snapping up shares of Pinterest.

Even though they are not a bad company, I cannot promote them as a firm revolutionizing technology in the way we know it, they certainly don’t, and never will, at least at the current pace of innovation.

Pinterest derives almost 100% of its revenue from digital ads à la Facebook, they do not sell anything and much like Facebook, the user is the product by way of mining private data and selling them over to third-party ad agencies who subsequently sell targeted ads on Pinterest’s platform.

As I read through Pinterest’s S-1 filing with the SEC, an overwhelming portion of the content is reserved for the litany of regulatory risks that serving digital ads, curating others' content, and the international risks that pose to Pinterest growth story.

As with most tech growth stories, this particular narrative must orbit around the strength of incessantly growing its domestic and international user base.

I surmise that part of the reason they desire to go public is because of the 265 million in global quarterly monthly users have reached the high watermark.

Therefore, this calculated risk of going public is entirely justified as the cash out for the venture capitalist and private owners that invested in this company as a burgeoning toddler.

Or the owners see catastrophic downside from the regulatory landscape which has been increasingly volatile in the past few quarters and wish to get out as soon as they can.

Let's make no mistake about this, Pinterest does not control its own destiny, and their success will be based upon external factors that they cannot control.

Some of these factors have already reared their ugly head, the most relevant example was when Google (GOOGL) changed its image search algorithm which disrupted Pinterest’s image function.

This was an example of third-party content originators clamping down on their willingness to allow Pinterest to populate content on their proprietary platform, and the lack of availability of content or the decreasing nature of it will sting the hope of increasing web traffic on Pinterest going forward.

Pinterest has clearly disclosed in its IPO filing that they are reliant on crawling third-party search engine services for third-party photos, this content is curated into their platform and credited to the original user.

I would classify this type of technology as unimpressively low grade and Pinterest will be susceptible to many more possible disruptions in the future.

In layman terms, if the stars do not align, Pinterest will be the first to feel it, and strategically speaking, this is a poor position to strategically operate from.

If Pinterest cannot serve the specific content that incites the tastes of pinners, this could destroy retention and engagement rates leading to a damaging downdraft of ad revenue.

Pinterest's feeble business model will certainly call for new investments in and around more innovative parts of technology.

What we have seen most successful technology companies flirt with are full-fledged recurring revenue models, and bluntly, Pinterest does not have one.

The likes of Microsoft, Amazon, Google, and Apple have pivoted hard towards this subscription model proving they can have their own cake and eat it too.

Funnily enough, Pinterest pays AWS, Amazon’s cloud arm, an extraordinary amount of money to store the pins or digital images on AWS Cloud platform to the tune of almost $800 million per year showing how beneficial it is to be on the other side of the equation.

Pinterest does benefit from a robust brand reputation and its footprint in America is quite large.

However, one group of potential customers have clearly been left out in the cold - Males.

The firm has been famous for being the go-to image platform for young mothers and generally speaking, American women born in the 1980s.

According to data analytics, it appears that content that males gravitate towards is not present on the platform and will need to be addressed going forward to grow users.

Another crucial problem that must be addressed is the lack of domestic growth in the user base.

In Q1 2018, Pinterest achieved 80 million monthly active users, however, fast forward to Q4 in 2018 and the number had barely inched up to 82 million monthly active users.

From Q1 to Q2, there was a dramatic deceleration in the number of monthly active users falling by 5 million to 75 million monthly active users.

The company blamed this on Facebook changing their password security causing users who rely on Facebook passwords and username entrance data to be temporarily stonewalled from entering Pinterest.

Millions decided to avoid the hassle and just stop using Pinterest because they were unable to enter the platform, causing major carnage to Pinterest’s ad-supported revenue model because of the hemorrhaging usership.

Unfortunately, bigger platforms such as Facebook and Google are not responsible to telegraph these structural changes in policy to Pinterest which means that this type of loss of usership could be a bi-annual or annual exercise in damage control.

Losing 10% of your user base based on someone else’s systemic changes is a bitter pill to swallow.

Investors must ask themselves why a premium search engine like Google search want to allow Pinterest to continue to curate its images for ad revenue effectively skimming off of Google’s top line?

As you have seen, Google has hijacked many of these types of business initiatives by taking on these opportunities themselves, dismantling the choke points, and going in for the kill.

The main avenue of user expansion is its international audience, and sadly, the average revenue per international user is a paltry $0.09. This number was up sequentially from the prior quarter which was $0.06.

If you compare the revenue per user with America, then it's easy to understand why the company wants to go public now.

Management presided over a sequential increase of American revenue per user from $2.33 to $3.16 in the prior quarter and the same growth will be hard to maintain and replicate spurring the higher-ups to cash out.

International growth is staring down a barrel of a gun with restricted access by governments who do not allow this type of service in their countries such as China, India, Kazakhstan, and Turkey.

The impact of these broad-based bans decodes into Europe being the only possible answer to user growth in revenue terms and total usership.

To state that Pinterest is confronted by widespread global risk is an understatement.

However, the low-hanging fruit would be squeezing more revenue out of the American user and I would guess that the ceiling would be around $7 per user in the near-term.

If management hopes to eclipse the $7 per American user, they will have to migrate into more data generative strategies such as video.

March 26, 2019/by Mad Hedge Fund Trader

March 14, 2019

Diary, Newsletter, Summary

Global Market Comments
March 14, 2019
Fiat Lux

Featured Trade:

(LEARN MORE ABOUT ME THAN YOU PROBABLY WANT TO KNOW),
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March 14, 2019/by Mad Hedge Fund Trader

FireEye’s Last Line of Defense

Tech Letter

A potential cataclysmic threat potentially wreaking havoc to our financial system is no other than cybercrime – that is one of the few gems that Fed Chair Jerome Powell delivered to the American public in a historic interview with 60 Minutes this past weekend.

Powell has even gone on record before claiming that Congress should do “as much as possible (against cybercrime), and then double it.”

The Fed Chair clearly has intelligence that retail investors wish they could get their hands on.

Digital nefarious attacks have been all the rage resulting in public blowups at Equifax (EFX) and North Korea’s state-sponsored hack on International Business Machines Corporation (IBM) just to name a few.

At the bare minimum, this means that cybersecurity solution companies will be the recipients of a gloriously expanding addressable market.

Powell’s testimony to the public was timely as it provides the impetus for investors to look at cybersecurity firms that will actively forge ahead and protect domestic business from these lurking threats.

Considering a long-term investment in FireEye Inc. (FEYE) at these beaten down prices could unearth value.

For all the digital novices, FireEye offers cybersecurity solutions allowing organizations to pre-emptively plan, prevent, respond to, and remediate cyber-attacks.

It offers vector-specific appliance, virtual appliance, and a smorgasbord of cloud-based solutions to detect and thwart indistinguishable cyber-attacks.

The company deploys threat detection and preventative methods including network security products, email security solutions, and endpoint security solutions.

And when you marry this up with my 2019 underlying thesis of the year of the enterprise software subscription, this company is on the verge of a breakout.

Last year was a year full of milestones for the company with the firm achieving non-GAAP profitability for the full year for the first time and generating positive operating and free cash flow for the full year.

The company was able to attract new business by adding over 1,100 new customers.

The cloud is where the company is betting all their chips and crafting the optimal subscription-as-a-service (SaaS) product is the engine that will propel the company’s shares higher.

The heart of their cloud initiative relies on Helix - a comprehensive detection and response platform designed to simplify, integrate and automate security operations.

This intelligence-led approach fuses innovative security technologies, nation-grade FireEye Threat Intelligence and world-renowned expertise from FireEye Mandiant into FireEye Helix.

By enhancing the endpoint products and email protection, sales of both products exploded higher by double digits YOY as FireEye successfully displaced incumbent vendors and legacy technology to the delight of shareholders.

As a result, the firm’s pipeline of opportunities continues to build.

As for network security, FireEye plans to extend the reach of their market-leading advanced threat protection capabilities further into the cloud with protection specifically aimed for cloud heavyweights Microsoft (MSFT) Azure, Amazon Web Services (AWS), Google (GOOGL) and Oracle (ORCL) Cloud.

They are collaborating with these major cloud providers on hybrid solutions that integrate seamlessly with their technologies so FireEye solutions will easily snap into a customer's cloud deployments.

Cloud subscriptions and managed services were the ultimate breakout performer highlighting the successful outsized pivot to (SaaS) revenue.

This segment increased 31% sequentially and 12% YOY, highlighting underlined strength in the segments of managed defense, standalone threat intelligence, Helix subscriptions, and cloud email solution.

The furious growth was achieved even though Q4 2017 billings included a $10 million plus transaction and if this deal is excluded, cloud subscriptions and managed services would have grown more than 30% YOY in Q4 2017 demonstrating the hard bias to the cloud has been highly instrumental to its success.

Recurring billings expanded 12% YOY, a small bump in acceleration from 11% in Q3, but if you remove that big deal in Q4 '17, recurring billings grew over 20% YOY in Q4 2018.

The growing chorus of product satisfaction can be found in the customer retention rate of 90%.

Transaction volume was at record levels for both deals greater than $1 million and transactions less than $1 million, signaling not only that customer renewals are expanding, but also explosion of new revenue streams captured by FireEye is aiding the top line.

This story is all about the recurring revenue and I expect that narrative to perpetuate throughout 2019 as an overarching theme to the strength of the firm’s revenue drivers.

The 10% billings growth last quarter paints a more honest trajectory of the true growth proposition for FireEye.

I believe the 6%-to-7% revenue guide for fiscal 2019 is down to the accounting technicals manifesting in the appliance revenue that is fading from the overall story.

The solid billings growth underpinning the overall business meshing with diligent expense control is conjuring up a massive amount of operating leverage.

Shares are undervalued and offer an attractive risk versus reward proposition.

If the company delivers on its core growth outlook, which I fully expect them to do plus more, shares should climb over $20 barring any broad-based market meltdowns.

I am bullish FireEye and urge readers to wait for shares to settle before putting new money to work.

March 12, 2019/by Mad Hedge Fund Trader

February 28, 2019

Tech Letter

Mad Hedge Technology Letter
February 28, 2019
Fiat Lux

Featured Trade:

(WHY ETSY KNOCKED IT OUT OF THE PARK),
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February 28, 2019/by Mad Hedge Fund Trader

Why ETSY Knocked it Out of the Park

Tech Letter

I wrote to readers that I expected online commerce company Etsy to “smash all estimates” in my newsletter Online Commerce is Taking Over the World last holiday season, and that is exactly what they did as they just announced quarterly earnings.

To read that article, click here.

I saw the earnings beat a million miles away and I will duly take the credit for calling this one.

Shares of Etsy have skyrocketed since that newsletter when it was hovering at a cheap $48.

The massive earnings beat spawned a rip-roaring rally to over $71 - the highest level since the IPO in 2015.

Three catalysts serving as Etsy’s engine are sales growth, strength in their core business, and high margin expansion.

Sales growth was nothing short of breathtaking elevating 46.8% YOY – the number sprints by the 3-year sales growth rate of 27% signaling a firm reacceleration of the business.

The company has proven they can handily deal with the Amazon (AMZN) threat by focusing on a line-up of personalized crafts.

Some examples of products are stickers or coffee mugs that have personalized stylized prints.

This navigates around the Amazon business model because Amazon is biased towards high volume, more likely commoditized goods.

Clearly, the personalized aspect of the business model makes the business a totally different animal and they have flourished because of it.

Active sellers have grown by 10% while active buying accounts have risen by 20% speaking volumes to the broad-based popularity of the platform.

On a sequential basis, EPS grew 113% QOQ demonstrating its overall profitability.

Estimates called for the company to post EPS of 21 cents and the 32 cents were a firm nod to the management team who have been working wonders.

Margins were healthy posting a robust 25.7%.

The holiday season of 2018 was one to reminisce with Amazon, Target (TGT), and Walmart (WMT) setting online records.

Pivoting to digital isn’t just a fad or catchy marketing ploy, online businesses harvested the benefits of being an online business in full-effect during this past winter season.

Etsy’s management has been laser-like focusing on key initiatives such as developing the overall product experience for both sellers and buyers, enhancing customer support and infrastructure, and tested new marketing channels.

Context-specific search ranking, signals and nudges, personalized recommendations, and a host of other product launches were built using machine learning technology that aided towards the improved customer experience.

New incremental buyers were led to the site and returning customers were happy enough to buy on Etsy’s platform multiple times voting with their wallet.

The net effect of the deep customization of products results in unique inventory you locate anywhere else, differentiating itself from other e-commerce platforms that scale too wide to include this level of personalization.

Backing up my theory of a hot holiday season giving online retailers a sharp tailwind were impressive Cyber Monday numbers with Etsy totaling nearly $19,000 in Gross Merchandise Sales (GMS) per minute marking it the best single-day performance in the company’s history.

Logistics played a helping hand with 33% of items on Etsy capable to ship for free domestically during the holidays which is a great success for a company its size.

This wrinkle drove meaningful improvements in conversion rate which is evidence that product initiatives, seller education, and incentives are paying dividends.

Overall, Etsy had a fantastic holiday season with sellers’ holiday GMS, the five days from Thanksgiving through Cyber Monday, up 30% YOY.

Forecasts for 2019 did not disappoint which calls for sustained growth and expanding margins with GMS growth in the range of 17% to 20% and revenue growth of 29% to 32%.

Execution is hitting on all cylinders and combined with the backdrop of a strong domestic economy, consumers are likely to gravitate towards this e-commerce platform.

Expanding its marketing initiatives is part of the business Josh Silverman explained during the conference call with Etsy dabbling in TV marketing for the first time in the back half of 2018, and finding it positively impacting the brand health metrics particularly around things like intending to purchase.

However, Etsy has a more predictable set of marketing investments through Google that offers higher conversion rates and the firm can optimize to see how they can shift the ROI curve up.

Etsy can invest more at the same return or get better returns at the existing spend from Google, it is absolutely the firm's bread and butter for marketing, particularly in Google Shopping, and some Google product listing ads.

With all the creativity and reinvestment, it’s easy to see why Etsy is doing so well.

Online commerce has effectively splintered off into the haves and have-nots.

Those pouring resources into innovating their e-commerce platform, customer experience, marketing, and social media are likely to be doing quite well.

Retailers such as JCPenney (JCP) and Macy’s (M) have borne the brunt of the e-commerce migration wrath and will go down without a fight.

Basing a retail model on mostly physical stores is a death knell and the models that lean feverishly on an online presence are thriving.

At the end of the day, the right management team with flawless execution skills must be in place too and that is what we have with Etsy CEO Josh Silverman and Etsy CFO Rachel Glaser.

Buy this great e-commerce story Etsy on the next pullback - shares are overbought.

February 28, 2019/by Mad Hedge Fund Trader

February 26, 2019

Tech Letter

Mad Hedge Technology Letter
February 26, 2019
Fiat Lux

Featured Trade:

(WHY THE BIG PLAY IS IN SOFTWARE),
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February 26, 2019/by Mad Hedge Fund Trader

Why the Big Play is in Software

Tech Letter

Buy and hold domestic software companies for dear life because that is what the market is giving you.

Take them with both hands.

These revenue models should revolve around developing the lucrative North American digital consumer markets.

Tech is all about giving you pockets of dispersion and my job to herd you into these pockets of opportunity created by pockets of dispersion.

We have once again been delivered a few more poignant indicators allowing us to gauge the market appetite for certain tech barometers.

Incandescent as can be, recent news of hardware companies planning to bring exorbitant foldable phones to market has me profusely shaking my head.

Huawei announced plans to debut the Mate X foldable 5G smartphone with a price tag of a staggering $2,600.

This followed an announcement by Korean behemoth Samsung to roll out the Samsung's Galaxy Fold and the Koreans plan to sell this luxury product for $1,980.

Chinese Huawei Mate X is 5G-supported and can simply fold into a slimmer 6.6-inch smartphone or unfold into an 8-inch tablet.

This is another case of smart manufacturers overreaching for a market that doesn’t exist and shouldn’t exist.

I believe the demand for screen-related smart products at this price point is scant at best.

If you compare foldable phones to a $600 high-tier Samsung Android smartphone with a 6-inch screen, Samsung and Huawei would need to convince consumers the extra $1,500 or in Samsung’s case, $2,200 is worth the extra relative wad of cash.

My bet is that these foldable phones aren’t worth even $300 more of aggregated incremental value let alone $500 and for many consumers like me, it’s worth zilch.

In no way, aside from the gimmick of buying one of these novelties, does buying a foldable phone justify the price.

This is another example of the common-sense factor that has been completely absent from a product cycle.

Product viability and product desirability do not walk hand in hand.

The screen-related smart device market is saturated, evident by the elongated refresh cycle in smartphone usership.

Blame the expensive price tags of over $1,000 and the removal of carrier subsidies that have caused the upgrade cycle to skyrocket from 2.39 years in 2016 to 2.83 years in late 2018.

Then there is the touchy issue of cannibalizing other hardware product lines as many of the potential foldable phone customers might interchange the foldable phone with normal smartphones.

This all screams bad strategy with companies saddled in a glut of inventory.

It takes R&D years to follow through and develop the technology to bring it to market, and it is entirely conceivable this could become a big write-off.

If price cuts happen shortly after the debut, prospects look bleak.

In general, consumer sentiment has soured for more of this type of tech. Many people are just exhausted from screen time and the cycle of the newest hardware screens is failing to excite existing customers bases.

The only conclusion I can make is that tech today is about software, software, and particularly domestic software.

If you compare software to hardware head to head now, software functionality is still increasing 15% YOY juicing up efficiency and productivity.

What will foldable phones offer a digital nomad or working professional?

Not much.

It highlights the absence of a productivity or functionality boost that digital device users are scouring for now.

Stay away from hardware.

Why is domestic software preferred over international software that scales the earth five times around?

Regulation.

It has reared its ugly head again.

The avalanche of negative headlines applied to American big tech is finally becoming a self-fulfilling prophecy.

It was only a matter of time until someone took note, and in this case, various Asian governments have taken note.

In a bid to blunt American tech’s first mover advantage, the Indian government has written up a draft of regulatory measures in order to make the Indian tech landscape a fairer playground.

This will have the intended effect of creating a national powerhouse of tech firms employing local people.

India has effectively taken a page out of China’s playbook using home-field advantage to nurture homegrown talent.

Large American tech companies have made India a playground of binge investments lately with Amazon (AMZN) shelling out $5 billion and Walmart (WMT) brazenly pouring $15 billion into e-commerce heartthrob Flipkart.

This is awful news for them.

They will have to adjust to India’s new-found zeal for digital regulation and a heavy restructuring of the business model could be in the cards in 2019 along with higher costs of running these businesses.

India has followed China in its footsteps demanding data to be localized meaning data centers won’t be able to run and store Indian data abroad.

American participants will have no other choice but to pony up the extra costs.

Readers might forget that India is the current battleground of global tech growth and Amazon will not have unfettered market access like they did breaking into Europe and dominating e-commerce from the start.

Amazon and Walmart can thank Facebook (FB) which has been the main culprit in bringing wave after monstrous wave of heavy criticism on a whole industry.

Facebook has effectively brought forward the regulatory storm that otherwise would have happened a few years later down the road.

In any case, this makes life harder for data-oriented companies who wish to navigate hazardous foreign tech climates.

Domestic angst against local tech has given the rubber stamp for full-on data government mandates abroad from India to Vietnam.

What does this all mean?

In 2019, data regulation could shrink expected growth levers while hardware companies are becoming even more desperate as these Hail Marys could quickly turn into liabilities.

I nailed software picks Zendesk (ZEN) and Twilio (TWLO) amongst others from a strong group of enterprise software stocks.

Twilio’s performance could potentially become my best pick of 2019, it’s on a straight line up even with all this clutter and chaos around the world.

February 26, 2019/by Mad Hedge Fund Trader

February 22, 2019

Diary, Newsletter, Summary

Global Market Comments
February 22, 2019
Fiat Lux

Featured Trade:

(FEBRUARY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
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February 22, 2019/by Mad Hedge Fund Trader

February 20 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: If there is a China trade deal, should I buy China stocks, specifically Alibaba?

A: To a large extent, both Chinese and US stocks have already fully discounted a China trade deal, so buying up here could be very risky. The administration has been letting out a leak a day to support the stock market, so I don’t think there will be much juice left when the announcement is actually made. The current high levels of US stocks make everything risky.

Q: Is it time to buy NVIDIA (NVDA)?

A: The word I’m hearing from the industry is that you don’t want to buy the semiconductor stocks until the summer when they start discounting the recovery after the next recession (which is probably a year off from this coming summer). The same is true for Micron Technology (MU), Advanced Micro Devices (AMD), and Lam Research (LRCX).

However, if you’re willing to take some heat in order to own a stock that’s going to triple over the next three years, then you should buy it now. If you’re a long-term investor, these are the entry points you die for. Looking at the charts it looks like it is ready to take off.

Q: Should I be shorting the euro (FXE), with the German economy going into recession?

A: No. We’re at a low for the euro so it’s a bad time to start a short. It’s interest rates that drive the euro more than economies. With the U.S. not raising interest rates for six months, maybe a year, and maybe forever, you probably want to be buying the currencies more than selling them down here.

Q: Would you buy the British pound (FXB) on Brexit fears?

A: I would; my theory all along has been that Brexit will fail and the pound will return to pre-Brexit levels—30% higher than where we are at now. I have always thought that the current government doesn’t believe in Brexit one iota and are therefore executing it as incompetently as possible.

They have done a wonderful job, missing one deadline after the next. In the end, Britain will hold another election and vote to stay in Europe. This will be hugely positive for Europe and would end the recession there.

Q: What do we need to do for the market to retest the highs?

A: China trade deal would do it in a heartbeat. If this happens, we will get the 5% move to the upside initially. Then we’re looking at a double top risk for the entire 10-year bull market. That’s when the short players will start to come in big time. You’d be insane to new positions in stocks here. There is an easy 4,500 Dow points to the downside, and maybe more.

Q: Do you think earnings growth will come in at 5%, or are they looking to be zero or negative?

A: Zero is looking pretty good. We know companies like to guide conservative then surprise to the upside; however, with Europe and China slowing down dramatically, that could very well drag the U.S. into recession and our earnings growth into negative numbers. The capital investment figures have been falling for three months now. US Durable Goods fell by 1.2% in January.

This explains why companies have no faith in the American economy for the rest of this year. This was a big reason why Amazon (AMZN) abandoned their New York headquarters plans. They see the economic data before we do and don’t want to expand going into a recession.

Q: When will rising government debt start to hurt the economy?

A: It already is. Foreign investors have been pulling their bids for fear of a falling US dollar. They have also become big buyers of gold (GLD) in order to avoid anything American, so we have a new bull market there. In the end, the biggest hit is with business confidence.

Nothing good ever comes from exploding US deficits and companies are not inclined to invest going into that. That is a major factor behind the sudden deterioration in virtually all data points over the past month.

Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader