Mad Hedge Technology Letter
December 13, 2018
Fiat Lux
Featured Trade:
(HOW PAYPAL IS DESTROYING LEGACY BANKING)
(MSFT), (TWLO), (ADBE), (PYPL), (CRM), (SQ), (ROKU), (AMZN)
Posts
Gazing into the future, investors know it’s time to deploy strategies to make money in 2019.
This year has been a bizarre one for technology stocks.
The industry was overwhelmed by a relentless geopolitical circus that had more sway on tech stock’s price action than in any year that I can remember.
Technology stocks have never been more intertwined with politics.
The so-called FANGs have really been taken out behind the woodshed and beaten, and their get-out-of-jail card is no longer free to access with politicians eyeing them as take down targets.
They are no longer invincible even if they still earn bucket loads of money.
A good amount of the public animosity towards the big tech companies has been directed to socially awkward CEO of Facebook Mark Zuckerberg and his negligence towards the concept of personal data.
Facebook was once the best company in technology to work, I can tell you now that prospective applicants are scrutinizing Facebook’s actions with a gimlet eye and turning to other opportunities.
Current Facebook employees are putting in feelers out to former colleagues planning optimal exit strategies.
Remember that it’s not my job to always tell you which tech stocks are going up, but also to tell you which tech stocks are going down.
One stock poised to outperform in 2019 is international FinTech company PayPal (PYPL).
The stock has proven to be Teflon-like deflecting the pronounced volatility that has soured the tech sector in the second half of the year.
The pendulum of regulation-flipping will concoct new winners for 2019 and I believe PayPal is one of them.
PayPal is in a dominant market position with a core customer base of 254 million users and growing.
The company is so dominant that it processes almost 30% of all global payments excluding China where foreign companies are barred from operating in the FinTech space.
The quality of the product is demonstrated by a recent note from research firm Nielsen offering data showing that on average, PayPal customers complete transactions 88.7% of the time.
This astoundingly high number for PayPal checkout conversion is about 60% better than “other digital wallets” and 82% better than “all payment types."
PayPal’s home country, United States, is still vastly unmonetized in terms of the breadth of penetration of online and e-commerce payments.
America has failed so far to adopt the amount of FinTech that Chinese consumers have rapidly embraced.
The great news is that late-stage adoption of FinTech services will offer PayPal a path to profits that bodes well for the earnings and its share price in 2019 and beyond.
Investors can expect total payment volumes (TPV) consistently nudging up in the mid-20% range.
The firm helmed by Dan Schulman is just scratching the surface on pricing power.
PayPal has changed its approach of ‘one‐size‐fits‐all’ in merchant contracts to a dynamic pricing model reflecting the value‐add of recently acquired products that are more powerful.
Jetlore, launched in 2014, is a provider of predictive artificial intelligence for retail companies able to comb through the data to help boost sales.
Hyperwallet distributes payments to those that sell online, and its purchase was centered around protecting the company's core business, enabling marketplaces to pay into PayPal accounts.
iZettle, an international mobile point-of-sale (POS) provider, is better known as the Square of Europe and has a large footprint. The relationship in PayPal has sounded alarm bells in Britain for being too dominant.
Simility, an AI-based fraud prevention specialist, round out a comprehensive list of new tools and services to PayPal’s all-star caliber lineup that can offer upgrades to businesses through a hybrid solution.
This positivity surrounding the sum of the parts will allow the company to build custom solutions for merchants of all sizes.
Augmenting a solid, stable business is a start-up inside of PayPal’s umbrella of assets with enormous growth potential called Venmo making up one of PayPal’s large future bets.
Venmo is a peer-to-peer payment app acquired by PayPal in 2013.
It is a favorite and mainstay of Millennial users who have gravitated towards this FinTech platform.
PayPal is intently focused on monetizing Venmo and the strategy is paying dividends with last quarter seeing 24% of Venmo traffic monetized which is up sequentially from 17% the quarter before.
Part of the increase in profits can be attributed to integrating Uber Eats into the platform, tacking on a charge for instant money transfers linked to bank accounts, and a Venmo debit card rolled out to the masses.
This innovation was not organic and in fact borrowed from FinTech Square, a great company led by Jack Dorsey, but the stock is incredibly volatile scaring off a certain class of investors.
Former CFO of Square Sarah Friar left her post at Square to boldly take on a CEO job at Nextdoor, a social network app, illustrating that an executive management job at Square is a golden credential able to springboard workers to a CEO job in Silicon Valley.
Shares of Square have doubled in 2018 and 2017, and the recent weakness in shares is more of a case that Square went too far over its skis than anything materially wrong with the company as well as a harsh macro climate that stung most of tech.
The price action can sometimes be breathtaking with 7% moves up and down all in a few days.
If you are searching for a slow grinder on the way up, then Microsoft (MSFT) would be a better tech play to plop your money into.
In my eyes, Microsoft is the most durable, all-terrain tech stock that will weather any type of gale-force squall in 2019.
For me, CEO of Microsoft Satya Nadella is the best CEO out there in the tech industry minus Jeff Bezos at Amazon (AMZN).
The Azure Cloud business is ferociously nipping at Amazon’s heels and Nadella has created a subscription-based monster out of legacy components left behind by failure Steve Ballmer who almost sunk Microsoft.
The stock has risen three-fold since Nadella took the reins, and I believe that Microsoft will soon surpass the trillion-dollar market capitalization level and end 2019 as the most valuable tech company.
Microsoft is indestructible because it’s a hybrid mashup of a growth company whose legacy products are also still delivering fused with a top-notch gaming division and a chance at catching the Amazon cloud.
The only company that can compare in terms of potency is Amazon.
Microsoft is not a one-trick pony like Apple, Facebook, Netflix and the way I see it, there are only two top companies in the tech landscape that will leave the last three companies I mentioned in the rear-view mirror.
Echoing Microsoft, PayPal has adopted a similar magical formula with its legacy core growing at 20% yet has growth levers with Venmo layered with targeted add-on companies that will enhance the firm’s offerings.
Moving forward, tech companies that have one or more growth drivers funded by a successful legacy base will become the ultimate tech stocks.
Playing on the same trope, Adobe (ADBE) is another company that has a software-based iron-clad legacy twinge to it and has the potential to spread its wings in 2019.
PayPal, Microsoft, and Adobe do not have the potential to double like Square or Roku next year, but they have minimal China trade war risk if things turn ugly, highly profitable with growing EPS, and are pure software companies whose CEOs put a massive emphasis on software development.
Expect this trio to melt up in 2019, and be prepared to strap on call spreads at advantageous entry points.
Another pure software service stock I love for 2019 is Twilio (TWLO) who I chronically use when I call an Uber to shuttle me around and take weekend getaways on Airbnb.
I would also lump Salesforce (CRM) into the discussion for stocks to buy in 2019 too.
Notice that all the stocks I favor next year are heavily weighted towards software and not hardware.
Hardware is going out of fashion at warp speed, the China tariffs just exacerbated this trend since most of the hardware supply chains are based in China.
Currently, the Mad Technology Letter has open positions in Microsoft and PayPal and if you are like most people online, you will probably use their service next year and more than a few times.
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.
A CULTURAL PHENOMENON
Mad Hedge Technology Letter
December 6, 2018
Fiat Lux
Featured Trade:
(A BIG ESCALATION OF THE TRADE WAR)
(INTU), (MSFT), (HUAWEI), (SQ), (ABDE)
CFO of Huawei Meng Wanzhou was arrested transiting in Vancouver and is facing extradition to the United States to face the accusation that she violated sanctions against Iran.
This doesn’t help calm the nerves of tech investors. Not at all.
Wanzhou is the daughter of Founder and President of Huawei Ren Zhengfei who springboarded to success after his close ties to the People’s Liberation Army helped propel his career in technology when Shenzhen opened up its economy in the 1980s.
He has never looked back since then developing Huawei into one of the key cogs of the global telecommunications infrastructure.
Huawei’s rapid ascent has been the defacto Achilles heel between the United States and Chinese tech relations gone sour.
China is hell-bent on dominating 5G and beyond, and the Chinese communist views Huawei as a critical component to executing this vision.
That being said, there are plenty of tech stories out there that are worth a look irrespective of the macro headaches.
In a time like this, avoiding China-themed tech stocks would offset some volatility as shares have been on a rollercoaster because of issues unrelated to the companies themselves.
Software companies with income streams closely linked to domestic revenue is a trope that I have recommended and will outperform the pure tech growth stocks in 2019.
A company that epitomizes these traits is Intuit (INTU). The problem with it is that it is too expensive right now as well as having growth-related road bumps.
Intuit is a company your family tax accountant loves and hates.
It is a financial software taking care of financial, accounting, and tax preparation for small businesses, accountants, and individuals.
The company is headquartered in Mountain View, California.
The bulk of its revenues derive from operations within the United States and that is music to my ears right now in this climate.
Intuit also owns TurboTax which is one of the most popular domestic income tax preparation software packages in the United States.
Quickbooks Online, another type of accounting software owned by Intuit, is the firm’s bread and butter product and expanded over 40% YOY.
Even with this premium growth, the small business unit was only able to grow 11% YOY.
Quickbooks Online now has 3.6 million subscribers demonstrating the large scope of its business.
Through feast or famine, people will always need accounting and financial software even with a fractious global trade war threatening to topple global trade.
This software stock will provide stable earnings and reliable profits because of its defensive nature.
However, its 3-year revenue growth of 12% is not what premium tech companies produce. Intuit needs to ramp up its revenue drive and I believe the changing of CEO from old hand Brad Smith to his hand-picked successor Sasan Goodarzi will do the trick.
Goodarzi has indicated that he intends to migrate up the value chain into the mid-tier business revenue stream hoping to land some notable deals.
His immediate job is to identify a solution to help accelerate the firm’s top-line growth again.
The addressable market is massive, and Intuit isn’t capitalizing on its position with smaller companies, leaving the opportunity to upsell more advanced software to customers on the table.
The alarm bells should be ringing.
Intuit requires an upgrade in its software strategy in an evolve-or-die tech climate.
Nurturing small business customers is part and parcel to adopting a legitimate growth strategy as the status quo moving forward.
Weeding out one’s core customer base is a kamikaze mission.
If Intuit nails this transition, then new income streams will open up while retaining old customers.
That being said, Intuit is still a good company and could become a great company if they want to.
They even have a dividend yield of 0.8%.
Intuit is an incredibly profitable company and has increased their 3-year EPS growth rate to 27%, presiding over high-profit margins of 33%.
Financial products which include financial software are incredibly sticky and I would lump accounting software into that group too.
Accountants do not fancy switching over accounting software every year and risk fudging the numbers.
The company has made around $1 billion in profits the past three years and annual revenue has steadily climbed from $4.19 billion in 2015 to $5.96 billion in 2018.
Management indicated that 2019 revenue will come in around $6.5 to $6.6 billion, a jump of around 8-10%.
In my books, 8-10% of a company of this ilk isn’t good enough.
I am hoping new management will roll out the Microsoft (MSFT) playbook which focused on its subscription as a service (SaaS) revenue stream and reaped the untold rewards.
Intuit needs to wean itself from selling packaged products.
And the 11% growth in last season's earnings report was a pitiful deceleration from 17% the year before.
It is clear that management has not pumped enough juice out of this baby and fresh blood should invigorate management at the top level.
Highlighting the attractive possibilities to grow the existing user base is the uptick in self-employed subscribers within QuickBooks online surging to around 745,000 from 425,000 YOY.
Cross-selling to this existing subscriber base would increase average revenue per user.
On a sour note, strength isn’t happening across the board with the desktop ecosystem revenues of $537 million sliding 4% YOY.
Intuit isn’t harnessing the tools they currently possess.
Converting the critical customer feedback into actionable results will boost the company’s products and would be a big first step in making this a premier software company along the lines of Adobe (ADBE).
They have the foundation set up to achieve an Adobe-like revenue trajectory.
A revamp to the sorely lacking functionality will drive more revenue and keep customers happy as well as pulling in more mid-tier income streams.
I wouldn’t label Intuit a strong buy at this point and short-term macro weakness is a great reason to hold off on this stock before making the plunge.
Longer term, I pray that fintech newcomer Square (SQ) won’t expand into the individual accounting software industry because the rate of innovation percolating inside of Square’s office walls is second to none.
Tax software would be on the chopping block if Square can get its act together and make a beeline towards this segment.
Technology rewards the brute force innovators and Square wants to disrupt anything that involves digital finance.
I believe Intuit has good and not great software, but the lack of innovation could decimate them down the line once a serious innovator starts to eye their addressable market.
In any case, if Intuit becomes cheaper sliding to the $150-$160 levels from the $207 today, that would serve as a smart entry point into this above average software stock.
However, there are higher quality software companies out there, especially many whose revenue isn’t decelerating and some whose annual revenue is doubling every two years like Square.
Global Market Comments
November 30, 2018
Fiat Lux
Featured Trade:
(NOVEMBER 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(VXX), (VIX), (GE), (ROKU), (AAPL),
(MSFT), (SQ), (XLK), (SPLS), (EWZ), (EEM)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader November 28 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
Q: Is it time to get out of semiconductor stocks?
A: The time to get out is before it drops 60%, not afterwards. So, if you have semiconductor stocks, I would look for the next major rally to get out. I think we will get one of those rallies into December/January. We went negative on this sector in June, took all our profits, and didn’t go back in until last week.
Q: Is it time to buy semiconductor stocks?
A: No, that is the group you want to buy at the absolute bottom of the next recession which might be next year sometime. They lead on the downside, and they will lead on the upside as soon as they sniff a recovery in the economy.
Q: I held on to my position in Square (SQ). Should I sell now for a small profit?
A: Yes, in recessions, big companies prosper much more than small companies like Square; that’s why it had such a tremendous selloff; down 55% in six weeks. A small technology stock is not what you want to own in a recession. Big companies slow down, small ones die. At least that’s how conservative investors see it.
Q: What do you make of Fed comments this morning that asset prices are high?
A: I agree with them. They were certainly overpriced with a P/E multiple of 20 that we saw in September; they’re moderately priced now with a P/E multiple of 14.9. I think real estate markets are the overpriced assets that the Fed is talking about though, far more than the stock market, and markets like San Francisco, Seattle, and Vancouver are still way too high.
Q: What are your comments on Apple (AAPL)?
A: There’s an interesting thing going on here; you’ve just had a massive move out of hardware stocks like Apple, which basically makes phones and computers, into software stocks like Microsoft (MSFT), which is growing their cloud business like crazy. You may see this as a long-term industry trend, out of hardware stocks into software stocks. It’s all about the cloud now. The future is in software and that is where Apple is going to with services like the cloud, iTunes, streaming, and advertising, although they are doing it slowly.
Q: Will Trump be able to persuade Fed Chair Powell to stop hiking interest rates?
A: He will not, Powell is one of the few principled people in the government. He’s going to stick to his discipline, only look at the data, and that is going to require him to keep raising interest rates. One of the big black swans for 2019 may be that Trump fires Powell and gets a friendly rent-a-Fed chair in there who lowers interest rates on command. If Trump can hold on for nine months though, even Powell will see the economy’s in trouble and will have to respond accordingly by capping or even lowering interest rates.
Q: Why are you not stopping out of Roku (ROKU)?
A: We haven't yet approached our upper strike price on the December $30-$35 vertical bull call spread. That’s usually where I bail out; I like to give stocks plenty of room to do the right thing. Stocks have to breathe and I pick strike prices to compensate for that. Otherwise, you’d be stopping out of every trade immediately.
Q: Should we close the iPath S&P 500 VIX Short Term Futures ETN (VXX) trade or leave it open?
A: I’m looking for a bit more of a rally in stocks and a drop in the Volatility Index (VIX); then we’ll try to grab whatever additional couple of pennies we can get out of that.
Q: What do you think of Brazil (EWZ)?
A: Avoid emerging markets (EEM) as long as the U.S. is raising interest rates and the dollar is strong. Rising dollar means rising debt for emerging markets and less ability to service that debt, all bad for business.
Q: Morgan Stanley (MS) says “buy emerging markets”; are they nuts?
A: For the short term yes, for the multi-year long term they are a screaming buy. They are at historical lows in terms of valuation and already have a recession priced into them. But jumping in too soon could be painful.
Q: What are your expectations for the yield curve?
A: I expect all levels of the fixed income market to drop in price and rise in yield with the sharpest move in overnight rates. This eventually leads to a very steep inverted yield curve which causes recessions and bear markets.
Q: Thoughts on Master Limited Partnerships?
A: They could be relatively safe now that oil is at $50. There have been big selloffs recently. The yield on these are high and there is going to be big infrastructure building for energy going forward. I would say don’t put all your eggs in one basket and diversify your risk. In the Great Recession, many of these went bankrupt. I would look at the Alerian MLP (AMLP), which has fallen 15% in six weeks.
Q: Should I be rotating out of the Tech (XLK) stocks on rallies into more defensive stocks like Staples (SPLS)?
A: That’s half right. You should be rotating out of Tech stocks and rotating into cash which yields up to 2-3% these days. Nothing does well in a real bear market except cash. Defensive stocks still go down, just at a slower rate.
Q: Is General Electric (GE) good for the long term?
A: Yes, if anyone can turn around GE it’s the current management. That said, it could be a long-term slog—that’s why I had a long-term leap in this thing before it collapsed. It could turn around and still go up but these are throwaway, chapter eleven level type prices that we’re getting now. And now they are going to have to do a turnaround going into a recession.
Q: Do you see GE as good for a long-term trade?
A: Long term and trade don’t belong in the same sentence; but I’d say for a long-term investment at these levels, probably yes. It certainly is a bargain from $30 down to $7.40 in a year.
Q: Is this webinar archived?
A: A: Yes, they are always posted on the website within two hours of recording. Just go to www.madhedgefundtrader.com/, login and then hover your cursor over “MY ACCOUNT” click on “GLOBAL TRADING DISPATCH,” “Mad Hedge Technology Letter” or “Newsletter” depending on your membership then click on the Webinars button. The last ten years of webinars should show up, with the most recent one at the top.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
November 29, 2018
Fiat Lux
Featured Trade:
(SALESFORCE KNOCKS IT OUT OF THE PARK)
(CRM), (AAPL), (PYPL), (ADBE), (TWLO), (MSFT), (AMZN)
It’s been a grueling winter for tech stocks and countless number of positive earnings reports have fell on deaf ears.
Will the bloodletting stop?
Not if Salesforce (CRM) has something to say about it!
And if you thought that tech’s secular tailwinds had vanished, this latest earnings report confirmed that software stocks are alive and are as potent as ever.
That is why I have identified software stocks as the best tech play in the current late-stage economic cycle.
At the Mad Hedge Lake Tahoe Conference, I clearly telegraphed that companies do not pour capital into capex for large and risky projects at this late stage, they search for the additional incremental dollar by arming their staff with optimal and efficient software programs to squeeze more juice out of the lemon.
Salesforce is a great example of this.
Moving forward, Salesforce is on the A-team of the software squad, and ideally positioned to harpoon any whales that come near their boat.
Companies are looking to double down on software initiatives at this point which is another reason why annual IT budgets have shot through the roof.
I have met countless CEOs who guide thousands of staff throughout branches around the world and they told me that one of the big in-house additions has been integrating Salesforce as the main customer relationship management system deleting legacy systems of yore that have pooped out.
The switch bears fruits immediately with operations supercharged like a 5-star high school football prospect on his first month of ‘roids.
Simply put, everything just works a lot better with access to this software.
What CEO wouldn’t want that?
Even more salient is that Salesforce has promoted itself as the emblematic tech growth stock promising to smash $16 billion of annual revenue by next year.
I love that Salesforce commits to ambitious sales targets and always delivers the goods.
A talking head on a prominent financial TV show went on record saying that Apple is the key to the tech narrative perpetuating, I would completely disagree with this statement.
Everyone and his mother have absorbed that Apple iPhones sales have plateaued, I am honestly sick of hearing the same story in the news over and over again.
That is why Apple has been trying to morph into a software and service stock. They are doing a great job at it by the way.
The real conclusive acid test to the tech story are these high growth software stocks because they should be the ones outperforming at this stage in the economic cycle.
If companies tilted towards software like Salesforce, Twilio (TWLO), PayPal (PYPL), Microsoft (MSFT), and Adobe (ADBE), just to name a few of the crown jewels of software stocks, start laying eggs then I would admit the tech story is dead.
But it’s not.
Salesforce is poised to continue its ascent and that basically means quarterly sales growth in the mid-20s for the foreseeable future.
There is an addressable market of $200 billion and the pipeline is rich as ever could be.
Salesforce has really turned the corner with free cash flow and profitability. It was only a few years ago they were turning in heavy losses, but this new Salesforce will be even more profitable as the network effect makes the sum of the parts and each add-on cloud-based software tool even more valuable.
Companies just love the breadth of functionality that Salesforce offers and their pension for product enhancement is really owed to CEO Marc Benioff who never shies away from calling his peers out and never cuts corners.
In fact, Marc Benioff is one of the good guys in an increasingly rotting Silicon Valley, part of this has to do with him growing up as a local lad in Burlingame, just a stone throw from his newly built palatial Salesforce Tower gracing downtown San Francisco’s picturesque skyline.
Benioff has more skin in the game as a local and publicly supported Proposition C, effectively a bill that would charge a homeless tax on big earning corporations in San Francisco.
Benioff has also promised to fund any subsequent legal attack that attempts to unravel this homeless tax putting his money where his mouth is.
Benioff noted that he has seen no softness in the macro spending environment.
And even with all the crazy headlines spinning around in the media, there has been no material impact from any supposed peak or downshift in the business environment.
Not only is Salesforce dredging up SME deals at a fast rate, they are quickly targeting the big kahunas.
The number of deals generating more than $1 million was up 46% YOY in the third quarter.
The volume of $20 million-plus relationships is also growing significantly.
In the past quarter, Salesforce renewed and expanded a 9-figure relationship with one of the largest banks in the world.
Salesforce is able to upsell their cloud tools to customers and these firms eat up the Einstein built-in functionality that uses artificial intelligence to improve the existing software.
North America comprised 71% of total revenue which is why this software company will reap the rewards for any extension of this economic cycle because they are largely domestic and best in show.
Salesforce beat and raised its outlook calming the frayed nerves of investors looking to dump software stocks.
Just look at the billings growth that was anticipated at 19%, Salesforce smashed it by 8% coming in at 27%.
Not only are they scooping up new customers, but renewals have been just as robust.
The truth is that Salesforce can’t roll out enough cloud-based software products to meet the insatiable demand.
All of this backs up my thesis that software stocks will be the outsized winners of 2019.
The FANGs are not dead, I rather hold an Amazon (AMZN) or Apple (AAPL) long term if I had the choice.
But at this stage, investors should be piling into all the crème de la crème software stocks.
Avoid them at your peril.
