Mad Hedge Technology Letter
May 2, 2019
Fiat Lux
Featured Trade:
(APPLE’S HOME RUN)
(AAPL), (CRM), (GOOGL)
Posts
The company that Steve Jobs built is an earnings thoroughbred with money growing out of their ears.
Apple’s earnings report was real confirmation that Apple’s pivot into a services company is overshadowing its drop in iPhone revenue.
They even elevated forward guidance for next quarter.
Being an economic bellwether that it is, the earnings success could point to more bullish momentum for not only the tech sector but the broader market.
The tech strength showing up in the squiggly figures of the sector’s earnings report indicates that the expected earnings recession will be more of a pause rather than a dip that was first expected.
The next bout of bullish strength that permeates through the market will take many tech stocks to higher highs.
The numbers backed up this premise with Q2 2018 revenue from the services category comprising 20% of total revenue in Q2 2019—a rubber stamp of confidence that this isn’t a false dawn after service sales only comprised of 16% of total revenue the prior year.
The death of the smartphone is upon us with most people who can afford a premium one already using one as we speak with no intentions for a quick refresh.
Apple’s strategy of selling expensive iPhones to Chinese nationals is over with iPhone sales getting slaughtered by 17% to about $31 billion—an accelerated decline for a product that has been hamstrung by smartphone rivals in China offering better phones for lower prices.
The $11.5 billion from its services division and the end result of registering revenue in the high end of its $55-59 billion projection for the quarter is a stark shift from the underperformance of 2018 when Chinese iPhones sales were so bad that they stopped reporting the segment altogether.
The $58 billion of quarterly revenue was still a drop of 5% YOY which included $31 billion in iPhone sales, a shell of its former self when they generated $37.5 billion in iPhone sales the same quarter in 2018.
The disruption in handing off the baton to the services brigade caused outsized ructions inside the company causing the stock to plummet 20% last winter.
Wearables put the cherry on top of the sundae expanding at a rate close to 50% during the quarter with AirPods and Apple Watch leading the charge as best sellers.
Apple plans to inject $75 billion on share repurchases and it also approved a 75-cent dividend per share, a 5% increase.
These repurchases could boost Apple’s stock by up to 7% per year offering investors another compelling reason to hold this stock long-term.
The upgraded dimensions of Apple’s business model could finally give investors peace of mind as they wean themselves from Chinese iPhone sales.
Moving forward, the relationship between American tech and the Chinese consumer will be contentious at best, and battling with Huawei on its turf is not a sensible strategy.
Highlighting this weakness were the Greater Chinese revenue registering only $10.2 billion in sales, down from the Q2 2018 tally of $13 billion.
On the positive side, the Chinese weakness is already baked into the pastry ceding way for the services narrative to move to the forefront.
Generating more incremental revenue from its existing base of 1.4 billion Apple accounts is the order of the day.
I initially believed Apple would make major headway in the services segment and foresaw services composing about 25% of total revenue.
However, I didn’t believe they would be able to achieve this for a few years, and the surprise to investors is the velocity of change to the upside in its services business.
Adding the new magazine subscription for $9.99 to its platform is another feather in their cap even though it doesn’t transform the industry.
Respondents to emarketer.com made it widely known that Apple as a platform was the second most important platform for news publishers behind Google offering a great opportunity to carve out more income from their new news app.
Apple is still in dire need of attractive video options for its content basket and assets on the market are plenty from live sports, shows, movies, and video games.
My money would be on Cook to prefer video games as a viable growth driver because it resonates deeply with younger audiences from abroad and avoids the polarity of controversial content which societies are increasingly sensitive to.
Another option would be to dive headfirst into the enterprise software business moving towards a Salesforce (CRM) model selecting cloud companies à la carte to integrate into a business cloud.
Many Apple device holders already wield their devices for their own online businesses, and this would represent a solid growth driver if they could make their services more business-friendly.
What can we expect moving forward?
In short, less iPhone sales and more service revenue as a proportion of total revenue.
If Apple can carefully choreograph its downshift of iPhones sales that doesn’t destroy overall revenue and profitability, they will successfully manage in transforming the company into a hybrid service company.
I believe that Apple’s services will contribute around 30% of total revenue by 2020 and this is a big deal that will buoy the stock.
Ultimately, these are happier times for Apple as their bet on services isn’t getting bogged down, eclipsing expectations, and will cement their status as a sure-fire $1 trillion market cap company.
Bravo!
Mad Hedge Technology Letter
May 1, 2019
Fiat Lux
Featured Trade:
(ALPHABET’S BIG MISS)
(GOOGL), (TSLA), (TWTR)
What comes up must come down, you didn’t expect Alphabet’s stock to explode on this earnings report, did you?
Alphabet shares have gone up in a straight line since the beginning of the year, and only a robust beat on the bottom and top line with raised guidance was going to push this stock to higher highs.
Chances of that were low.
I wouldn’t classify Q1 as an awful quarter, but Alphabet was in need of a reset and culling a few hogs from the litter is not always a bad thing.
Shares retraced more than 8% in trading which could be the beginning of a brief but much-needed mini earnings tech recession.
Tech shares have carried the load this year, every continent on the globe wishes they had a tech sector like America does.
Google still has its digital ad duopoly intact and results were driven by ongoing strength in mobile search along with important contributions from YouTube followed by Google Cloud.
Revenues of $36.3 billion, up 17% YOY did not capture the imaginations of investors and this was graded as a big miss by over $1 billion.
This signals a sharp deceleration from Q1 2018 when Alphabet posted revenue growth of 26% YOY.
Growth of over 20% cut down to the high teens is a big deal in the tech world for growth names, and this puts a cap on the price trajectory for the short-term.
Cost per click on Google properties was down 19% YOY which was extremely disappointing even though paid clicks on Google properties were up 39% YOY which somewhat softens the blow.
Most crucially, there is nothing structurally wrong with Alphabet and investors must galvanize themselves around this salient point.
Execution risk reared its ugly head with CFO of Alphabet Ruth Porat explaining “while YouTube clicks continue to grow at a substantial pace in the first quarter, the rate of YouTube click growth rate decelerated versus a strong Q1 last year, reflecting changes that we made in early 2018 which we believe are overall additive to the user and advertiser experience.”
Alphabet pulled a Twitter (TWTR), forgoing short-term profits to focus on maintaining the reputation of the platform and eradicating lingering problems with the algorithm.
The algorithm facelift will make the platform more attractive to digital advertisers going forward as their brand risk is mitigated by Alphabet optimizing their algorithms.
More specifically, this would mean identifying certain unpalatable content that needs to be flat-out removed, and certain ads that should not be bundled with certain content.
More advertisers will slash YouTube ad budgets if they aren’t satisfied with the overall product experience and cannot accumulate positive user feedback.
Getting into the weeds makes us aware that costs aren’t overly exorbitant this time around.
Total traffic acquisition costs (TAC) were $6.9 billion, 22% of total advertising revenues and up 9% YOY but down from 2% YOY from Q1 2018 reflecting a favorable revenue mix shift from network to sites as well as a decrease in the network TAC rate.
Alphabet’s TAC rate rose from the impact of the ongoing shift to mobile, which manifests with higher TAC, but was offset by the growth in TAC free sites revenue driven by YouTube.
The European Commission (EC) and its decision that certain contractual provisions in agreements that Google had with AdSense for Search partners infringed European competition law and the associated €1.5 billion fine with it didn’t help quarterly performance.
The fine, in no shape or form, is a threat to Google’s dominance in Europe.
The Google cloud services 9 of the world's 10 largest media companies, 7 of the 10 largest retailers and more than half of the 10 largest companies in manufacturing, financial services, communications, and software.
Some of the companies that will join the Google Cloud are American Cancer Society and McKesson in health care, media and entertainment companies like USA TODAY and Viacom, consumer packaged goods brands like Unilever, manufacturing and industrial companies like Samsung, logistics company UPS and public sector organizations like Australia Post.
The expansion of 2 new Cloud regions in Seoul and Salt Lake City which will open in 2020 will help build on the footprint of 19 Cloud regions and 58 data centers around the world.
Alphabet missed badly on the top line, but comps from last year because of the strength of YouTube would have been hard to eclipse.
Bask in the glory of the reset in price - now it's time to play Alphabet from the long side.
Moving forward, Alphabet has many levers to pull as CEO of Tesla Elon Musk’s rallying cry for the evolution of self-driving cars means that Waymo would reap the benefits first in automated vehicle technology.
Alphabet also has a few tools left in their toolkit such as monetizing Google Maps through selling digital ads on the Maps interface.
I expect a slow grind up for the rest of the year because Alphabet can brandish many weapons with little resistance in front of them, it’s up to them to execute.
Mad Hedge Technology Letter
April 17, 2019
Fiat Lux
Featured Trade:
(ALPHABET DOMINATES WITH GOOGLE MAPS)
(GOOGL), (AMZN), (YELP), (UBER)
Remember Google Maps?
Google will start monetizing it, let me tell you about it.
The web mapping service developed by Google gifting access to satellite imagery, aerial photography, street maps, 360° panoramic views of streets has been around since the beginning of this generation of big tech and is what I would consider legacy technology.
Legacy technology is often associated with failure as the out of date nature isn’t applicable to the tech scene and the commercialization of it today.
In a candid letter, Jeff Bezos wrote to shareholders that Amazon will “occasionally have multibillion-dollar failures.”
Silicon Valley tech will have its share of implosions stemming from ill-fated industry decisions correlating to heavy losses.
Google Maps won’t be one of these slip-ups.
However, a whole catalog of instances can be chronicled from Microsoft’s purchase of Nokia’s handset division to Google’s social media foray in Google Plus.
It hasn’t gone all pear-shaped for Alphabet in 2019. I strongly believe they are one of the companies of the year harnessing YouTube in ways consumers never imagined.
Adding color to the story, any remnant of apprehension to any bearish feelings about Alphabet should vanish once investors understand how lucrative Google Maps will become.
Google has spent decades and billions of capital honing the application and in terms of market share they have cultivated a monopoly.
Uber’s S-1 filing shined some light on Google Maps characterizing it as a must-have input into their business saying, “We do not believe that an alternative mapping solution exists that can provide the global functionality that we require to offer our platform in all of the markets in which we operate.”
Uber sunk $58 million integrating Google Maps into its services from 2016-2018 along with continuous payments to its Google Cloud arm to host Uber’s data.
The strong relationship with Uber shows how Alphabet is adept at milking 3rd party apps for what they are worth.
Alphabet’s stake in Uber is projected to be $5 billion from the $250 million investment in Uber in 2013.
The party doesn’t stop there with Uber paying Alphabet $631 million from 2016-2018 in digital marketing services and another $70 million for technology infrastructure.
To say that Google firmly has its tribal marks tattooed into Uber’s skin is an understatement.
Almost 80% of smartphone users regularly use navigation apps.
Google Maps is the most popular navigation app by a country mile with 67% of market share.
One billion people consistently use Google Maps.
It is the go-to navigation app for nearly 6x more people compared to the runner up app Waze with 12% market share.
The superior performance of the app has allowed it to branch off into a Yelp-like hybrid app accumulating reviews of businesses and institutions that are conveniently dotted around its map.
Multi-functional terrain was integrated to make the maps more 3D and route navigation from point A to B routes has steadily improved since its inception.
The increasing detail showing even roofs of sheds and the Google street view offering a point of view vantage point boosting the reliability of the app.
The result of making the app better is that navigators can easily discern locations and follow routes clearly.
Most would concede that they use the app to look up specific street routes.
By implementing digital ads into the experience, product and service offers will possibly populate in real time as the user glances at the app’s directions.
A vast amount of services such from food to personal grooming to even cannabis club ads could be applicable and ad companies will pay top dollar to post on Google Maps.
Google could also offer personalized recommendations to users and collect an affiliate fee if the user clicks on an attached link transferring the customer to a 3rd party landing page.
They already benefit from this strategy on Google Flights.
Google might even be tempted to implement a Groupon model with group discounts on services positioned on Google Maps.
Google Maps is hands down the most underappreciated app and most under monetized tech asset in the world.
Another possible revenue generation avenue would be the advent of Google Maps voice ads en route to a destination that would promote a 5 or 10 second voice commercial of a businesses that the user is physically passing by.
The unintended effects of Google’s audacious transformation of their proprietary Map service spells doom for Yelp’s business model.
Google’s move into digital ads of maps effectively means that Yelp will be relegated to an inferior version of Google Maps without the map technology.
Google has accumulated enough personal data to draw up any type of profile for particularly Android users voraciously consuming data on Gmail, Google Maps, Google Search and Google Chrome.
These four data generators will allow Google to formulate a shadow profile based on individual tastes with daily use of these four Google properties.
Alphabet has a time-honored model of building assets that become utilities and once they monopolize the utility, they sprinkle the digital ad pixie-dust effectively monetizing the asset that was once free of charge.
They have followed the same road map for Gmail, Google Search, YouTube, and if Waymo can become a utility, prepare from Google digital ads inside the screens of Waymo autonomous cars.
When many sulked that this could be one of those billion-dollar failures that Bezos whined about, Google has decided to supercharge Google Maps by cross-pollinating the power of Google maps with its digital advertising knowhow.
This powerful cocktail of forces working in tandem will accelerate its revenue growth along with the resurgence of its YouTube digital ad revenue.
I believe this new lever of revenue growth isn’t priced into Alphabet shares yet, and withstanding any random black swan shocks to the broader economy, Alphabet is poised to outperform the rest of the trading year.
Short Yelp on any and every rally - Google has made their business model redundant.
Mad Hedge Technology Letter
April 15, 2019
Fiat Lux
Featured Trade:
(XXXXX)
(SNAP), (FB), (PINS), (TWTR), (GOOGL)
America is full – that is what domestic social media growth is telling us.
The once mesmerizing service that captured the imagination of the American public has soured in the country that created it.
Online advertising consultant emarketer.com issued a report showing that Snapchat (SNAP), the worst of the top social media outlets, will lose users in 2019.
The 77.5 million users forecasted by the end of 2019 represents a 2.8% YOY decrease.
This report differs greatly from the report eMarketer issued just past August showing that Snapchat was preparing for a rise of 6.6% YOY in 2019.
The delta, rate of change, represents a massive downshift in expectations and the sentiment stems from the widespread saturation of social media assets.
Market penetration has run its course and the players have run out of bullets mainly targeting Generation Z.
These platforms have given up on baby boomers and Snap feels that pursuing the millennial demographic would be an exercise in futility.
Even more disheartening is that between 2020-2023, there will be only a minor uptick of user growth by 600,000 users clamping down on the impetus of a comeback of sorts shackling the business model.
The trend is not mutually exclusive to Snap, Twitter or Facebook, social media as a group will only expand the overall user base by 2.4% in 2020 hardly satisfying the appetite for growth that these companies publicly advertise.
Remember that much of Instagram’s growth originates from borrowing Snapchat users by way of copying their best features.
Even with this dirty tactic, growth seems to be petering out.
Snap’s shares have made a nice double after peaking shortly over $25 after the IPO.
But the double was a case of investors believing that management and execution had hit rock bottom – the proverbial dead cat bounce in full effect.
Now investors will pause to reassess whether there is another reasonable catalyst to drive the stock higher.
First, investors will need to ask themselves, is Snap in for another double?
Absolutely not.
So where does Snap go from here?
I believe they will borrow from the playbook of Mark Zuckerberg and attempt to emphasize supercharging average revenue per user (ARPU).
Whether the company arrives at this conclusion by chance or strategy, they must confront the reality that there are almost no other levers to pull if they want to perpetuate this growth story.
M&A is also off the table because the company is burning through cash.
Facebook’s (ARPU) came in at $7.37 last quarter indicating how Snap needs to make substantial headway in this metric with last quarter’s paltry (ARPU) at $2.09.
Essentially, management will conclude that each user isn’t absorbing enough ads because of declining user engagement.
Snap CEO Evan Spiegel will need to improve the pricing power charging advertisers at higher rates.
Obviously, the lack of an attractive platform resulting from poor execution and engineering problems needs a quick turnaround.
It’s not all smooth sailing for Facebook either, they keep chopping and reshaping strategy by the day attempting to minimize costs as the regulation burdens rot at the bottom line.
On the bright side, regulation hasn’t been as bad as initially thought – usership hasn’t dropped by orders of magnitudes.
In fact, Facebook’s users have shown a resurgent indifference to Facebook chopping up their data and repackaging it to 3rd parties, meaning Facebook has come through rather unscathed in the face of a PR storm.
There have even been recent reports of Zuckerberg being persuaded to start paying journalists for original content, a vast pivot for his hyped-up propaganda machine of being in the distribution business.
Juicing up (ARPU) is the lowest hanging fruit on offer for Snapchat and Facebook right now, overperforming in this sphere will improve financials and keep the mosquitoes away while affording them time to ponder how to reaccelerate user growth.
One outsized negative trend is that 90% of user growth appears to originate from undeveloped nations with a lack of discretionary spending power showing that this strategy has its limits.
Searching for another tool in its toolkit will redefine Snapchat, Twitter, and Facebook as we know it.
I would even classify it as an existential crisis.
Instagram have bought Facebook the most time to readjust its future direction highlighting that stealing Snapchat’s audience is still effective, expecting user growth to climb to 106.7 million US users, up 6.2% from 2018.
Instagram will continue its expansion by adding nearly 19 million new US users by 2023, but as much as it adds to its new social media asset, Facebook will be struggling for new net adds.
Snapchat is in dire straits and the stock market bubble could support the share price for up to another 8-12 months, but when the guillotine drops on Snapchat, the blood will smatter everywhere.
The company also plans to introduce a gaming service to take advantage of the popularity with its core users, Generation Z.
This should be the trick that breathes life into operating margins and (ARPU) which is why I believe the stock will hold up for the next period of time.
But with the gaming initiatives also comes rampant competition with the likes of Alphabet (GOOGL) and don’t forget Fortnite is still the 800-pound gorilla.
These trends also bode negatively for Pinterest (PINS) who might be going public as the last shot of tequila is downed at the after party.
SNAPCHAT ARPU
Mad Hedge Technology Letter
April 11, 2019
Fiat Lux
Featured Trade:
(THE MEANS TO A FRIGHTENING END)
(AMZN), (FB), (GOOGL), (AAPL)
Death of websites.
I love doing presentations to small businesses on my free time, partly to stay in touch with the pulse of the Davids who have the unenviable task of fighting uphill against the Goliaths.
It’s bad enough that the tech giants have scaled locally turning one’s local playground into a disadvantage.
The presentation is aptly titled "Content is King... But Only Through One’s Ownership" where the same parallels are explored and unpacked for my audience.
Proprietary Content – must be yours and you must own it on your own turf - your blog, your vlog, your app, and so on, it goes for everything.
Repurposing content on other platforms as a supplement to your own is one thing, but the moment you adopt an enemy platform as your main platform, that’s your coup de grâce.
SMEs (small businesses enterprise) believe it’s plausible to work with the higher ups, but don’t forget they have every incentive to cut you off from the fountain of youth.
One could say the best skill big tech has today is undermining their competition.
Facebook doesn’t allow posting content that criticizes Facebook, have you ever wondered why?
Website innovation has grinded to a halt because of the PageRank algorithm from Google, everybody is making websites the same, a top nav, descriptive text, a smattering of images and a handful of other elements arranged similarly.
Google’s algorithms and the self-regulating nature of their ecosystem have perverted the chance to have a unique online experience.
Most internet users have probably discovered that most websites don’t work well and the execution of them is lousy.
Many companies are not contributing enough resources to build out their site properly, or just don’t have the cash to fund it or a mix of the two.
About 95% of customer service calls originate from the company’s webpage because of payment problems, disfunction, misleading content, or simply because the website is down.
Ask any small business and they will tell you they deal with their domain being down for hours at a time because of some unknown server problem.
Not only is capitalism only working for a small group of Americans, but so are websites, such as massive companies like Amazon.com who have worked wonders with its e-commerce site.
Because the internet and namely websites are the key to building businesses, Silicon Valley is now using the concept of websites and their position as de-facto moderators to prevent others from developing proper websites, killing off the competition.
Alphabet is notorious for ranking their own products at the top of page one of any Google search.
Amazon has followed the same practice by sticking their in-house brands at the top of any Amazon search on Amazon.com.
And remember that none of this can be called “antitrust” because these borderline tactics offer consumers lower prices but that is only because consumers are brainwashed to believe Amazon offers the lowest price.
What if the same products are available for half of Amazon’s in-house brands, would Amazon volunteer to post their in-house brands on the second page, the graveyard of search results?
I would guess no.
Websites used to give businesses a chance, remember in the mid-90s when a website of any ilk was impressive as if someone was walking on water.
What can we expect next?
Amazon, Google, and Apple are taking their shows to artificial intelligence voice platforms.
SMEs could at least throw hail marys on standard internet searches with visual screens, but once content migrates over to voice platforms owned by Silicon Valley, then its game, set, and match.
For instance, a local business such as Joe’s Furniture Moving Business who, with the internet and visual screens, is searchable through search engines and can be even located on Google Maps with a concrete address.
Once we migrate the lions share of content to voice platforms over the next 15 years, Google Home, Apple HomePod, or Amazon Alexa could easily choose to remove Joe’s Furniture Moving Business information because they make more money offering you information of a moving service they own or have a stake in.
The advent of 5G will refine the voice technology and enhance the machine learning techniques needed to complete the migration of content.
Once the world crosses an inflection point where the technology and volume of content on smart speakers outweigh the hassle to use a keyboard or mobile screen, this effectively makes these smart speaker manufacture Gods of the World because they will own the voice-based internet.
They will be the gatekeepers of all global information, business, and development in the world and we will need to satisfy their algorithms to get our own content uploaded on their voice platforms.
And because of the nature of voice, users cannot see what else is out there, users will only hear what these companies tell us offering an outsized opportunity to manipulate the user experience generating more dollars for these powerful platforms.
By the end of 2019, 74 million Americans will be using smart speakers, giving these smart speaker firms adequate data to fine tune their products.
Eventually, all Americans will be forced to use it or will not be able to function, similar to the effects of a laptop, email, and smartphone combination now.
Once these voice platforms become ubiquitous, websites will be deemed irrelevant – consumers will simply have a choice of Google Home, Amazon Alexa, and Apple HomePod and blindly trust what they tell you is in your best interests.
Pick your poison.
That’s right, users won’t control content in about 15 years, a scary thought, and now you understand why these companies will even give their voice A.I. platforms for free if they have to and probably will in the future.
