Mad Hedge Technology Letter
March 4, 2020
Fiat Lux
Featured Trade:
(THE BEST TECH STOCKS TO BUY AT THE BOTTOM)
(NFLX), (ZM), (PTON), (AMZN), (OKTA), (WORK), (ATVI), (EA), (TTWO)
Posts
Tech stocks that are begging to be picked up on the back of the coronavirus pandemic are Netflix (NFLX), Zoom Video Communications (ZM), workplace collaboration service Slack Technologies (WORK), and Peloton Interactive (PTON), the spin bike company.
Their short-term outperformance indicates that these stocks work well during mass pandemics shelving most outdoor activity and commerce.
The basket of 3 stocks has easily beat the S&P 500 since the coronavirus emerged as a threat in mid-January.
Home sitting doesn’t generate a net output of business activity unless that job is digital.
The majority of workers still commute in a physical car only to sit in an office, restaurant, or some other type of self-contained space.
That is the underlying problem that has no solution, and any rate cut by the Fed cannot ultimately solve consumers holed up in their house.
If the companies that could opt to go pure digital do take up the option, the number of remote workers would rise and digital products would be the ultimate beneficiary of this trend.
Companies that promote remote working such as Slack (WORK) and Google Hangouts are in pole position to reap the rewards.
These services include video conferencing software, logistical services, administrative services, network security services, ecommerce and any service that aids in generating digital content like Adobe and its umbrella of assets.
The trend was already transforming American culture, but the virus vigorously pulls forward a trend that was already in overdrive.
Enabling information workers to produce outside the traditional office environment is one of the lynchpins of the Silicon Valley model.
Companies will ultimately realize that spending big bucks on business travel to meet face to face for 30 minutes is probably not an optimal allocation of resources.
Business travel is getting cut with a cleaver such as Amazon.com (AMZN) who are forcing employees to avoid all nonessential travel for now, including within the U.S. Much of that travel could be replaced by video calls.
Other companies will get in on the action by directing their employees to work from home in the coming weeks.
Coronavirus mania has reached the U.S. shores with consumers stocking up on all the essentials at the local Costco.
If this gets worse, there is no solution unless a viable medical solution starts improving the health crisis.
There are still only 7 known fatalities from the coronavirus, all in the state of Washington, and limiting that number is critical to the health of the tech market.
Another company is Okta (OKTA), a leader in authentication security cloud software.
The company’s offering allows employees to use corporate applications on-site and remotely and protecting their access to their digital services is just as important as the work itself.
As consumer spurn movie theaters, concerts, and gyms, the entertainment space will give way to digital entertainment that includes Netflix (NFLX) and Roku (ROKU).
Roku is a great place to hide out in the world where Covid-19 meets daily consumers in the U.S. in a more meaningful way during 2020.
Netflix is a company that has defied gravity this year by bull-rushing its way through the competition and proving there is space for everyone.
The increase in incremental demand for digital content will only help Netflix claim a bigger part of the pie.
We can also lump the videogame industry into this cohort such as Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO).
They have faced serious headwinds from gaming phenomenon Fortnite, but prolonged home sitting will even boost their shares.
The spine of digital services will receive a boost as well from the usual cast of characters such as Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), and Facebook (FB).
As investors wait for the climax of the coronavirus and the Central Bank has indicated that they are open to more accommodative policy, we could be ripe for more volatility.
Chinese coronavirus cases have started to taper off and if the rest of the world trends in a similar fashion, this virus scare could be in the history books in 2-3 months.
However, the trajectory of the virus is still a massive unknown in the U.S. and winning the health battle is the only panacea to this dilemma.
Mad Hedge Technology Letter
May 9, 2019
Fiat Lux
Featured Trade:
(APEX LEGENDS TO THE RESCUE)
(EA)
Fortnite roiled the video gaming industry last year reinventing the landscape with its freemium model that is available on every platform.
Its in-game add-on revenue strategy is the new model going forward and the first major video game studio to adapt to the new status quo is Electronics Arts Inc. (EA).
The successful earnings report by a newly minted super growth driver and Fortnite competitor called Apex Legends.
Apex Legends copied Fortnite with its 'Battle Royale' format incurring outsized user growth.
Overall, EA’s player base grew to more than 500 million active player accounts in 2019.
This was driven by engagement in the top franchises and live services on major platforms, the game-changing introduction of new IP, including the free-to-play game Apex Legends, offering reach to new audiences around the world is the crux behind short-term bullish momentum in the stock.
Other releases such as "Star Wars Jedi: Fallen Order" will provide another boost to sales momentum as well.
The sports side of the company is also working miracles in a year where both FIFA 18, including World Cup content and FIFA 19 with the UEFA Champions League, had more than 45 million unique players in total playing FIFA games on console and PC.
More than 100 million players engaged with EA’s FIFA franchises on mobile and PC free-to-play during the year as well.
Given investor paralysis across the video game space about revenue stability, competitive moat, and changing revenue models, the predictability and stability of sports demonstrates the breadth of EA’s asset.
Apex Legends is the fastest-growing new game in the history of EA quickly reaching a milestone 50 million players and millions more have continued to participate.
It has also helped EA accumulate new player audiences as nearly 30% of Apex Legends players are new to EA.
The plan for Apex Legends is to deliver this massive global community with a long-term live service, including new seasons with more robust Battle Pass content, new legends and exciting evolutions to the in-game environment.
EA is collaborating aggressively to bring the game to more players in more markets and platforms around the world, including Korea, to take advantage of an opportunity in the market and self-publish Apex Legends via Origin.
EA expects $300 million to $400 million in net bookings for Apex Legends in the fiscal year that ends next March, though that projection doesn’t take into account potential contributions from a mobile version of the game or a version for the Chinese market.
Annual targets were met with GAAP net revenue for the fiscal year registering $4.95 billion delivering EPS of $3.33.
These results enabled EA to deliver an operating cash flow of $1.55 billion and return over $1 billion to shareholders, about 83% of free cash flow, through the ongoing share repurchase program.
The prior quarter was a robust one with EA beating on the top and bottom line.
EA easily beat on the top line with GAAP net revenue for the quarter coming in at $1.24 billion, shattering guidance by $75 million.
Turning to the key catalysts of this quarter, net bookings were $1.36 billion, well above guidance of $1.17 billion, and up from $1.26 billion last year.
To reiterate, the beat was driven by Apex Legends and the outperformance in the blockbuster sports titles.
Digital net bookings were $1.19 billion, up 14% on the year-ago period, driven by strong digital sales of Apex Legends and Anthem.
Digital net bookings represented 75% of the business on a trailing 12-month basis, a new record compared to 68% in the prior year.
Live services net bookings were up 24% to $845 million, primarily driven by Apex Legends.
Live services at EA delivered its best year on record with FIFA and Madden Ultimate Teams both closed the year very strongly.
The gaming environment shows no let up in dollar terms, expect the gaming software market to grow 7% over the calendar year, with mobile up 12%, console up 4% and PC flat.
Estimates for 2020 is for net revenues of $5.4 billion, and cost of revenue of $1.3 billion and EPS of $8.56.
Gaming is still a hot part of tech and after 2018 that crushed Fortnite competition, EA should hold its own with Apex Legends and the strength of its sports franchises.
Shares are up over 20% this year and have more room to the upside.
Mad Hedge Technology Letter
February 12, 2019
Fiat Lux
Featured Trade:
(MEET YOUR HOME OF THE FUTURE),
(KASITA),
(PLEASE SIGN UP NOW FOR MY FREE TEXT ALERT SERVICE NOW)
Mad Hedge Technology Letter
February 11, 2019
Fiat Lux
Featured Trade:
(HOW FORTNITE IS TAKING OVER THE GAMING WORLD),
(TTWO), (EA), (ATVI), (NFLX), (FORTNITE)
One idyllic content company reshaping the content landscape as we know it is Epic Games who is the producer of the video game phenomenon Fortnite.
Not only is Epic Games rapidly altering the video game industry by itself, it is also starting to take a bite out of Netflix’s subscriber growth momentum.
The company was established by Tim Sweeney as Potomac Computer Systems in 1991, originally founded in his parents' house in Potomac, Maryland.
The most fascinating nugget of information that came out of Netflix’s most recent earnings call was not that Netflix has already corralled 10% of television screen time in America, but the reason why this percentage is lower abroad is because of Fortnite taking away Netflix’s mojo.
Netflix (NFLX) has lately been asked to measure their content lead to the likes of Hulu, HBO, and the potential Disney streaming product about to hit the market.
But they explicitly confessed they were more worried about Fortnite and the revolution it is spawning.
The key takeaway is that Netflix is not only competing with fellow online content streamers, but video games are more of a threat to them than ever as they compete for the cord cutters and the elusive “cord nevers”.
Cord nevers are consumers who are digital natives who bypassed traditional media channels altogether.
Echoing the stickiness that Netflix has with its younger demographics, the company has targeted mobile screen time as a core driver usurping around 8% of American mobile phone screen time.
And if you thought Netflix was trying to sort out its own Fortnite problem, then how do you think the traditional American video game cohort felt about their own Fortnite problem?
The traditional trio of EA Sports (EA), Activision (ATVI), and Take Two Interactive (TTWO) have been shredded to bits by Fortnite.
Late last year, I gave readers a steer clear synopsis of this company and the latest dead cat bounce in EA and Take Two Interactive should be chances to cut your losses instead of putting more money to work in these names.
Yes, the momentum in Fortnite is that palpable that you stay away from any name that this phenomenon affects.
Activision had no dead cat bounce being the weakest of the three and the stock has gone awry almost halving from $83 to $43 today.
EA’s earnings report was a disaster with their lead title, Battlefield V, doing 1 million fewer sales than the 7.3 million management expected.
During the same holiday season, Take Two Interactive issued a follow-up to a classic that was better than EA’s holiday flagship game called Red Dead Redemption 2 and Activision rolled out another iteration of Call of Duty: Black Ops 4.
Even between the three, the competition was fierce, then throw Fortnite into the mix and comps are getting killed with huge earnings misses penalizing the share prices of this once-vaunted trio.
With the explosion of content in the past several years, consumers are absorbing more content than ever.
Most of this avalanche of content is consumed on mobile phones or televisions, but the behavior varies when you look closer at the different demographics.
Cord cutters total in the low 20 million and are growing 30% annually.
Cord nevers amount to about 30 million growing at 66%.
This all amounts to Americans spending about 12 hours accessing content every day running up to the barrier of natural limits.
That might give consumers some allocated time to sleep, eat, and work, but not much else. We are robotically reliant on content providers to deliver us our fill of daily content.
When automotive technology comes online, it could potentially eke out an incremental 1-2 hours that Americans can stare at their content while being chauffeured around.
How is Fortnite doing financially?
Fortnite earned $2.5 billion in 2018 from a mix of in-game items and passes.
A seasonal Battle Pass is $10, and over 30% of American gamers have purchased this product.
Unlike traditional video gamers who are tied to certain consoles, Fortnite is available on seven platforms: PlayStation 4, Nintendo Switch, Xbox One, PC, Mac, iOS, and Android.
In a time of $60 video games, this new freemium model must shake the foundations of the video gaming establishment.
The rise of freemium games could eradicate the console completely.
A $200-300 console seems expensive if games are free on your $100 Android phone.
The worst side-effect of Fortnite for the traditional video game producers is not Fortnite itself.
It’s the fact that this new model has opened up a new can of worms proving this freemium model with no consoles is the key to unlocking gaming audiences with a 24-hour battle royale, free to play, on-demand, in-game currency, season pass model that was thought to be a hopeful wish by industry analysts.
Then the next question is when will the next Fortnite-esque freemium go viral and can these legacy gaming companies alter their model to accommodate this new business model?
Indeed, management must be freaking out. They thought they had a monopoly on the gaming industry but the nimbler and forward-thinking firm has won-out.
Even the most subscribed YouTuber PewDiePie from Sweden is using Fortnite to keep him in the lead for most YouTube subscribers as Indian music YouTube channel T-Series has caught up with his subscriber count that currently totals 84.3 million.
PewDiePie’s lead was cut down to 20,000 and decided to leverage playing Fortnite squad matches to boost his subs.
The upload got over seven million views in a day backing up my thesis that Fortnite has become the hottest media content asset for cord cutters and cord nevers around the world.
As for the video game stocks, don’t touch them until Fortnite trails off.
And if another freemium game comes to the fore that they aren’t on, run for the hills.
Mad Hedge Technology Letter
December 27, 2018
Fiat Lux
Featured Trade:
(THE HIGH COST OF DRIVING OUT
OUR FOREIGN TECHNOLOGISTS),
(EA), (ADBE), (BABA), (BIDU), (FB), (GOOGL), (TWTR)
Mad Hedge Technology Letter
December 12, 2018
Fiat Lux
Featured Trade:
(WHY GAMERS ARE TAKING OVER THE WORLD)
(EA), (TTWO), (ATVI), (GME), (MSFT)
I nailed it.
The video game migration has been nothing short of bonkers for the average onlooker who has no interest in gaming.
Personally, I can’t really fathom spending every waking moment in front of a screen playing a game, but I was born in a different generation.
But for the younger generations, this is completely normal and a standard way to use extracurricular time.
This behavior is the origin hewing together a broader thesis of investing in behemoth video game companies boasting premium gameplay and high-quality content.
As the year inches closer to the finish line, I would have been proved correct if it wasn’t for one surprise that nobody could have ever predicted.
Enter Fortnite.
Fortnite has reigned supreme in 2018 and single-handedly tarnished the performance of the powerful trio of Electronic Arts (EA), Activision Blizzard (ATVI), and Take-Two Interactive (TTWO).
The multiplayer battle royale game is produced by Epic Games, an American video game developer based in Cary, North Carolina and this small town in Chatham County owns the video game world right now.
Funnily enough, the company was created by Tim Sweeney in 1991 in his parents' basement in Potomac, Maryland.
Epic Games blindsided the video game industry who believed barriers of entry were too high, and an outsider would have no chance to steal legitimate market share from the incumbents.
They thought wrong because Epic Games has done exactly that and more.
Instead of splurging on a pricey console and game titles, Fortnite has followed the cloud industry’s blueprint with a freemium model as an introductory way to lure in new users.
This must have Sony and Microsoft tearing their hair out because it could potentially rule the Xbox One and PS4 consoles obsolete.
How easy is it to play Fortnite?
Simply download and install the game for free on your Xbox One, Nintendo Switch, PlayStation 4, iPhone, Android, or Mac by opening the respective app store and selecting “Fortnite.”
That’s right, you can play this game on almost any platform appealing to the masses of fans.
Does this freemium model mean that Epic Games misses out on revenue?
Absolutely not.
The freemium model is just the conversional entry point to lure in new gamers.
Epic Games profits by selling in-game currency named V-Bucks or Vinderbucks used for purchasing items from the in-game Vindertech Store in Save the World, or to pocket cosmetic items from the Item Shop and the Battle Pass in Battle Royale.
V-Bucks revenue has been piling up with global gamers spending an average of $1.23 million per day in the iOS version for the month of November.
The number of total gamers recently eclipsed the 200 million mark and the previous recorded number was in June when Fortnite users totaled 125 million.
The 60% surge in five months has been the main catalyst for large video game makers to experience violent sell-offs because there is a direct correlation between growing Fortnite users and cratering usership from the traditional players.
Then throw in the mix of the secret recipe to Fortnite’s success - the mind-numbing speed and impact of the online updates enhancing the game; adding and adjusting weapons, providing new cosmetic items for players to buy and altering the game map.
Not only did Epic draw in new players in waves, it retained them just as well.
Putting the cherry on top, Fortnite made major cultural inroads into mainstream society legitimizing this title as the game of 2018.
This was evident during the Russia FIFA World Cup where star soccer players were doing Fortnite dances after scoring critical goals.
Put it this way, the game hasn’t even been allowed in China and is expected to earn over $2 billion in 2018.
As we speak, millions more plan to migrate from their former games enticed by the free battle royal platform.
The game is nothing short of a cultural phenomenon and none of the major video game developers can keep up.
Take-Two Interactive even had a smash hit come online with Red Dead Redemption 2, a Western-themed action-adventure game developed and published by Rockstar Games, lighting up screens all over the world.
Not even that could taper off the enthusiasm for Fortnite.
Activision cannot keep its gamers from jumping ship.
The mainstay game developer announced a major contraction of users from 345 million monthly active users for top games in its Candy Crush, World of Warcraft and Call of Duty franchises in the third quarter sharply down from 352 million users in the second quarter and 384 million users a year ago.
GameStop (GME) who recently slashed its full-year 2019 earnings outlook faces a grim 2019 as shares are down about 25% this year.
I perfectly predicted this and in almost every scenario, GameStop’s future looks ugly unless they do some major surgery to the business model.
There is no room for video game brokers anymore in this cloud-based world.
This is because new game studios will follow the Epic Games blueprint and bypass consoles all together and offer games for free.
The cloud will be the new go-to device for playing video games, and gamers will download games straight from the cloud via wireless broadband.
This trend is set to mushroom when 5G comes online in 2019 and 2020, connection speeds are expected to be 100 times faster than current 4G speeds.
In fact, the new consoles currently being developed by Nintendo, Microsoft, and Sony could be the last game consoles ever developed before they go extinct.
The digital revolution promises that hardware becomes incrementally slimmed down with every iteration until at some point there will be no hardware at all.
We have seen this trend in consumer devices with the smartphone, television, and desktop computer amongst other products.
This is why Microsoft (MSFT) has been busy buying up video game content producers, and confident in this sense that gold standard content truly is king.
It makes sense to put in more irons in the fire to potentially score a culture-shifting game like Fortnite. Not every video game will be a blockbuster hit, but the more video game developer Microsoft buys, there will be a higher chance of dominating the video game market.
Fortnite’s disruption of Activision, EA, and Take-Two Interactive signals a new beginning of the end for the traditional video game developers.
Darkhorse game developer could sprout up out of nowhere even more in 2019 offering console-less free games and leaner, nimbler models.
How are console manufacturers and game developers expected to keep up with the surge in gaming expectation?
The answer is they will not and look for these big three developers to attempt to stem the bleeding as Fortnite is expected to become even more thrilling next year tearing away more gamers from other systems in a dog-eat-dog world.
And then there is the possibility of the FANGs crossing over to gaming, searching for new growth drivers which would really flatten these shares like a pancake.
Microsoft is already deep into this industry, why wouldn’t their cousins follow them to profits too?
Ultimately, I am bearish on Activision, Electronic Arts, and Take-Two Interactive going into 2019 unless there is an upside catalyst that magically appears.
