Mad Hedge Technology Letter
February 14, 2020
Fiat Lux
Featured Trade:
(DATA TELLS THE WHOLE STORY)
(FB), (GOOGL), (NFLX), (AMZN), (EBAY), (TWTR)
Posts
Behavioral trends have a sizable say in which tech companies will outperform the next and a recent report from SimilarWeb offers insight into how much users navigate around the monstrosity known as the internet.
The optimal way to comprehend the trends are from a top-down method by absorbing the divergence between desktop traffic and mobile traffic.
It’s no secret that the last decade delivered consumers a massive leap in mobile phone performance in which tech companies were able to neatly package applications that acted as monetization platforms by offering software and services to the end-user.
Thus, it probably won’t shock you to find out that desktop traffic is down 3.3% since 2017 as users have migrated towards mobile and the trend has only been exaggerated by the younger generations as some have become entirely mobile-only users.
All told, the 30.6% expansion in mobile traffic has penalized tech firms who have neglected mobile-first strategies and one example would be Facebook (FB), who even though has a failing flagship product in Facebook.com, are compensated by Instagram, who is showing wild growth numbers.
The fact that mobile screens are smaller than desktop screens means that users are staying on web pages not as long as they used to – precisely 49 seconds to be exact.
This trend means that content generators are heavily incentivized to frontload content and scrunch it up at the top of the page. This also means that sellers who don’t populate on Google’s first page of search results are practically invisible.
The high stakes of internet commerce are not for the faint of heart and numerous companies have complained about algorithm changes toppling their algorithm-sensitive businesses.
Even using a brute force analysis and investing in companies that are in the top 15 of internet traffic, then the companies that scream undervalued are Twitter (TWTR) and eBay (EBAY).
Twitter is a company I have liked for quite a while and is definitely a buy on the dip candidate.
The asset is the 7th most visited property on the internet behind the likes of Instagram, Google, Baidu, Wikipedia, Amazon, and Facebook.
This position puts them just ahead of Pornhub.com, Netflix, and Yahoo.
And if you take one step back and analyze traffic from the top 100 sites, traffic is up 8% since 2018 and 11.8% since 2017 averaging 223 billion visits per month.
Rounding out the top 15 is eBay who I believe is undervalued along with Twitter - these two are legitimate buy and holds.
Ebay was the recipient of poor management for many years and they are now addressing these sore points.
Certain content is suitable for mobile such as adult sites, gambling sites, food & drink, pets & animals, health, community & society, sports, and lifestyle.
And just over the last year or two, other categories are gaining traction in mobile that once was dominated by desktop such as news and media, vehicle sites, travel, reference, finance, and others.
Many consumers are becoming more comfortable at doing more on mobile and spending more to the point where people are making large purchases on their iPhones.
The biggest loser by far was news - they are losing traffic in droves.
Traffic at the top 100 media publications was down 5.3% year-over-year from 2018 to 2019, a loss of 4 billion visits, and down by 7% since 2017.
Personally, I believe the state of the digital news industry is in shambles, and Twitter has moved into this space becoming the de facto news source while pushing the relevancy of news sites down the rankings.
Facebook and Twitter are essentially undercutting the news by forcing news companies to insert them between the reader and the news company because they have strategized a position so close to the user’s fingertips.
The negative sentiment in news is broad based on popular news, entertainment news and local news all showing decreases of more than 25%.
Finance and women’s interest news categories are the only ones showing positive traffic growth.
The state of internet traffic growth supports my underlying thesis of the big getting bigger and the subsequent network effect stimulating further synergies that drop straight down to the bottom line.
The top 10 biggest sites racked up a total of 167.5 billion monthly visits in 2019, up 10.7% over 2018 and the remaining 90 largest sites out of the top 100 only increased 2.3%.
This has set the stage for just five gargantuan tech firms to become worth more than $5 trillion or 15.7% of the S&P 500’s market value and 19.7% of the total U.S. stock market’s value.
Now we have real data backing up my iron-clad thesis and these cornerstone beliefs underpins my trading philosophy.
Many of the biggest wield a two-headed monster like Google who has Google.com and YouTube video streaming and Facebook, who have Facebook.com and Instagram.
It doesn’t matter that Facebook has lost 8.6% of traffic over the past year because Instagram compensates for Facebook being a poor product.
And if you are searching for another Facebook growth driver under their umbrella of assets then let’s pinpoint chat app WhatsApp who experienced 74% year-over-year traffic.
Beside the news sites, other outsized losers were Yahoo’s web traffic shrinking by 33.6% and Tumblr, which banned adult sites in 2018, leading to a 33% loss in traffic.
If I can sum up the data, buy the shares of companies who are in the top 15 of internet traffic and be on the lookout for any dip in eBay or Twitter because they are relatively undervalued.
Mad Hedge Technology Letter
February 12, 2020
Fiat Lux
Featured Trade:
(UBER’S DARK FUTURE)
(UBER), (LYFT), (FB), (AMZN), (NFLX), (GOOGL)
Autonomous or bankrupt; that is the ultimate fate of Uber (UBER).
In the short-term, Uber is a master at moving the goalposts in order to breathe life in the stock.
CEO of Uber Dara Khosrowshahi can only pray that the Fed will continue to pump cheap money into the market because without artificially low-interest loans, tech firms like Uber would implode.
Is it really time to give Uber the benefit of the doubt?
No more hype, just profits? Is the calculus to profits legitimate?
That's what we call a bubble. Bubbles always burst. Here's the scary part.
Many people are counting on the continued existence of Uber and Lyft to provide "cheap transportation."
Commuters will have to get suddenly unused to it.
There are many companies today that are running the same scheme as Uber in the “gig economy.”
It’s true that management loves to use a lot of flowery language to disguise a lack of profitability.
But as the conditions are ripe for a leg up in tech, the tide rises, and even Uber’s boat rises with it.
I have yet to see even one realistic analysis of how Uber or Lyft is going to become profitable - not even basic math!
I have met a plethora of drivers for both companies, and hope they do well, but there is only so long that one can put lipstick on a pig.
So here we are, Uber in the green everyday because they moved the goalposts yet again and promise us earlier than expected profitability but still losing billions of dollars.
Lyft and Uber have apparently increased revenues somewhat by reducing promotional discounts to riders, but that does not project to even a breakeven point and the unit economics tell me no even if my heart says yes.
The only trick up their sleeve seems to be fare increases, but where is the roadmap detailing this treacherous path?
Once we get to the point in time when Uber is supposed to be profitable, I bet that management will call in another trick play and move the goal posts yet again.
It is quite laughable when so called “tech experts” want Uber to join the ranks of Facebook Inc. (FB), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Alphabet Inc.’s Google (GOOGL) as part of a FANGU acronym.
Reasons for this new bundle is thought to be because of the ability to take advantage of its massive scale while working toward profitability.
Uber is the global ridesharing leader and is becoming the global food delivery leader, but do they really add value?
What if the local government finally got their finger out and built a proper transport system?
They are merely taking advantage of a broken system and passing on the costs of paying drivers to the drivers themselves by designating them as hourly workers.
Are we supposed to celebrate when Uber becomes more “rational?”
Meaning that players have limited their attempts to undercut one another with the sorts of pricing and big discounts that had at one time suggested the business might be a race to the bottom.
Uber projected a lower loss than analysts were expecting for 2020, does less loss mean profits in 2020?
And I do agree that it is encouraging that the company is finally disclosing more data, but shouldn’t they be doing that in the first place?
Love it or hate it, there is a “war” going on between profitability and growth at Uber as the company manages the trade-offs.
Uber had previously talked up that it would become Ebitda profitability by the end of 2021, but Khosrowshahi now forecasts profitability for the fourth quarter of this year.
He says it is possible because Uber initiated a “belt-tightening program” in the last half of 2019, exiting unprofitable ventures and laying off about 1,000 employees.
For instance, Uber sold its food-delivery business in India to a local startup, Zomato, in return for a 9.9% stake in that company.
I do believe that they haven’t done enough to build credibility with investors and the stock’s price action is behaving as we should trust Uber’s management with whatever comes out of their mouths.
The lack of visibility and uncertainty around trends in ridesharing and Eats outside the U.S. continue to be hard to quantify.
So that sounds great! Uber is more serious than ever about becoming profitable and investors have backed them up with the stock flying to the moon.
The trend is your friend and I would suggest readers to get out of the way of this one because you could get trampled on just like the Tesla bears.
And I do support Uber in making steps in the right direction and it also can be said that stocks appreciate the fastest when they transform from a horrible company to a less horrible company.
But there is no way that I am giving Khosrowshahi a pass for Uber’s current situation and no chance I am praising him to the hills.
It is what it is, and Uber is less bad than before, and if they don’t meet their targets, I don’t think investors will believe Khosrowshahi version of a spin doctor forecast anymore.
Uber will rise in the foreseeable future and if they fail to become profitable by 4th quarter, expect a massive drawdown.
If they succeed, expect a vigorous wave of new players to buy into Uber shares.
The stakes have never been higher for Uber and Khosrowshahi.
Mad Hedge Technology Letter
January 24, 2020
Fiat Lux
Featured Trade:
(THE NETFLIX EARNINGS SHOCKER)
(NFLX)
Netflix is saying no to over $2 billion in extra digital ad revenue – that is the critical takeaway from Netflix’s earnings call that fell in line with exactly what I thought would transpire.
As Netflix’s domestic subscriptions continue to soften, this is the first of many earnings calls where management will be put to the sword on why they still haven’t swiveled to digital ads.
As you guessed right, Founder and CEO Reed Hastings pulled out all the usual excuses explaining why Netflix is leaving a massive chunk of revenue on the table.
Some of his evasive rhetoric came in the form of explaining there’s no “easy money” in an online advertising business that has to compete with the likes of Google, Amazon, and Facebook.
He continued to spruce up his excuses by saying, “Google and Facebook and Amazon are tremendously powerful at online advertising because they’re integrating so much data from so many sources. There’s a business cost to that, but that makes the advertising more targeted and effective. So I think those three are going to get most of the online advertising business.”
Even most peons would understand that Netflix’s network effect is so robust that they could turn on the digital ad revenue spigots with a flick of a wrist.
It doesn’t matter that there are also three other tech firms in the digital ad sphere.
Netflix certainly has the infrastructure in place and manpower laid out to harness the power lines of the digital ad game.
Hastings weirdly lamented that revenue would need to be “ripped away” from the existing providers, he continued. And stealing online advertising business from Amazon, Google and Facebook is “quite challenging.”
I don’t believe that is entirely accurate.
Dipping into that digital ad revenue would be quite challenging if you are a 2-man start-up, but the power centrifuge that has become to be known as Netflix is stark crazy for taking the high road on data privacy when the US government still allows tech companies to profit off of digital ads.
The musical chairs might stop in less than 3 years, but not now.
It’s hard to understand why Netflix isn’t approaching this as a short-term smash and grab type of business.
If they really wanted to, they could have layered each service into ads and non-ad subscriptions just like Spotify does.
If muddying their premium service is taboo, then there are alternative solutions.
I understand and agree with Hastings that delivering “customer pleasure” is the ultimate goal, but that doesn’t mean there can’t be an ad-based model as one of the options.
I believe this is a substantial letdown to the shareholder and the stock price would be closer to $500 if there was a realistic ad revenue option.
Even worse, Hasting’s argument for not delving into digital ads is flawed by saying, “We don’t collect anything. We’re really focused on just making our members happy.”
That is materially false.
Netflix already tracks loads of data and it doesn’t take a Ph.D. data analyst to ignore that when you are busy perusing the Netflix platform, Netflix’s are tracked non-stop.
Netflix uses algorithms to track user’s behavior through tracking viewership data in order to make critical decisions about which of its original programs should be renewed and which should be booted.
It also looks at overall viewing trends to make decisions about which new programs to pursue.
It then also tracks user's own engagement with Netflix’s content in order to personalize the Netflix home screen to user’s preference.
Netflix is already “exploiting users” and they are doing shareholders a massive disservice by not maximizing revenue to the full amount they can.
And yes, I do agree Netflix is not as good as Facebook, Google, and Amazon at tracking users, but the roadmap is certainly out there for Netflix to indulge in digital ads.
It would take less than 18 months for Netflix to be running on full cylinders if they poached a few experts.
Aside from the lack of digital ads, Netflix finally is starting to acknowledge the new competition from two major streaming services, Disney+ and Apple+ — both of which have subsidized their launch with free promotions in order to gain viewership.
Then it gets worse with streaming service Quibi, WarnerMedia’s HBO Max and NBCU’s Peacock rolling out.
The latter features a multi-tiered business model, including a free service for pay-TV subscribers, an ad-free premium tier and one that’s ad-supported.
Other TV streaming services also rely on ads for revenue, including Hulu and CBS All Access. Meanwhile, a number of ad-supported services are also emerging, like Roku’s The Roku Channel, Amazon’s IMDb TV, TUBI, Viacom’s Pluto TV, and others.
Considering much of Netflix’s rise is fueled on debt, it’s bonkers they aren’t going after every little bit of revenue that is there for the taking.
Netflix could lose 4 million subscribers this year, and sooner or later, Hastings will run out of places to hide.
Slowing domestic subscriber growth and bad guidance don’t sound like a roaring growth tech stock to me.
Global Market Comments
January 16, 2019
Fiat Lux
Featured Trade:
(WHAT THE HECK IS ESG INVESTING?),
(TSLA), (MO)
(WILL UNICORNS KILL THE BULL MARKET?),
(TSLA), (NFLX), (DB), (DOCU), (EB), (SVMK), (ZUO), (SQ),
I am always watching for market-topping indicators and I have found a whopper. The number of new IPOs from technology mega unicorns is about to explode. And not by a little bit but a large multiple, possibly tenfold.
Some 220 San Francisco Bay Area private tech companies valued by investors at more than $700 billion are likely to thunder into the public market next year, raising buckets of cash for themselves and minting new wealth for their investors, executives, and employees on a once-unimaginable scale.
Will it kill the goose that laid the golden egg?
Newly minted hoody-wearing millionaires are about to stampede through my neighborhood once again, buying up everything in sight.
That will make 2020 the biggest year for tech debuts since Facebook’s gargantuan $104 billion initial public offering in 2012. The difference this time: It’s not just one company but hundreds that are based in San Francisco, which could see a concentrated injection of wealth as the nouveaux riches buy homes, cars and other big-ticket items.
If this is not ringing a bell with you, remember back to 2000. This is exactly the sort of new issuance tidal wave that popped the notorious Dotcom Bubble.
And here is the big problem for you. If too much money gets sucked up into the new issue market, there is nothing left for the secondary market, and the major indexes can fall by a lot. Granted, probably only $100 billion worth of stock will be actually sold, but that is still a big nut to cover.
The onslaught of IPOs includes home-sharing company Airbnb at $31 billion, data analytics firm Palantir at $20 billion, and FinTech company Stripe at $20 billion.
The fear of an imminent recession starting sometime in 2020 or 2021 is the principal factor causing the unicorn stampede. Once the economy slows and the markets fall, the new issue market slams shut, sometimes for years as they did after 2000. That starves rapidly growing companies of capital and can drive them under.
For many of these companies, it is now or never. They have to go public and raise new money or go under. The initial venture capital firms that have had their money tied up here for a decade or more want to cash out now and roll the proceeds into the “next big thing,” such as blockchain, healthcare, or artificial intelligence. The founders may also want to raise some pocket money to buy that mansion or mega yacht.
Or, perhaps they just want to start another company after a well-earned rest. Serial entrepreneurs like Tesla’s Elon Musk (TSLA) and Netflix’s Reed Hastings (NFLX) are already on their second, third, or fourth startups.
And while a sudden increase in new issues is often terrible for the market, getting multiple IPOs from within the same industry, as is the case with ride-sharing Uber and Lyft, is even worse. Remember the five pet companies that went public in 1999? None survived.
Some 80% of all IPOs lost money last year. This was definitely NOT the year to be a golfing partner or fraternity brother with a broker.
What is so unusual in this cycle is that so many firms have left going public to the last possible minute. The desire has been to milk the firms for all they are worth during their high growth phase and then unload them just as they go ex-growth.
Also holding back some firms from launching IPOs is the fear that public markets will assign a lower valuation than the last private valuation. That’s an unwelcome circumstance that can trigger protective clauses that reward early investors and punish employees and founders. That happened to Square (SQ) in its 2015 IPO.
That’s happening less and less frequently: In 2019, one-third of IPOs cut companies’ valuations as they went from private to public. In 2019, that ratio has dropped to one in six.
Also unusual this time around is an effort to bring in more of the “little people” in the IPO. Gig economy companies like Uber and Lyft have lobbied the SEC for changes in new issue rules that enabled their drivers to participate even though they may be financially unqualified. They were all hit with losses of a third once the companies went public.
As a result, when the end comes, this could come as the cruelest bubble top of all.
Mad Hedge Technology Letter
December 20, 2019
Fiat Lux
Featured Trade:
(THE BIG TECH TRENDS OF 2020)
(AAPL), (GOOGL), (FB), (AMZN), (NFLX)
The year is almost in the rear-view mirror – I’ll make a few meaningful predictions for technology in 2020.
Although iPhones won’t go obsolete in 2020, next year is shaping up as another force multiplier in the world of technology.
Or is it?
A trope that I would like to tap on is the severe shortage of innovation going on in most corners of Silicon Valley.
Many of the incumbents are busy milking the current status quo for what it’s worth instead of targeting the next big development.
Your home screen will still look the same and you will still use the 25 most popular apps
This almost definitely means the interface that we access as a point of contact will most likely be unchanged from 2019.
It will be almost impossible for outside apps to break into the top 25 app rankings and this is why the notorious “first-mover advantage” has legs.
The likes of Google search, Gmail, Instagram, Uber, Amazon, Netflix and the original list of tech disruptors will become even more entrenched, barring the single inclusion of Chinese short-form video app TikTok.
The FANGs are just too good at acquiring, cloning or bludgeoning upstart competitors.
It’s the worst time to be a consumer software company that hasn’t made it yet.
Advertising will find itself migrating to smart speakers
Amazon and Google have blazed a trail in the smart speaker market but ultimately, what’s the point of these devices in homes?
Exaggerated discounting means hardware profits have been sacrificed, and the lack of paid services means that they aren’t pocketing a juicy 30% cut of revenue either.
These companies might come to the conclusion that the only way to move the needle on smart speaker revenue is to infuse a major dose of audio ads to the user.
So if you are sick to your stomach of digital ads like I am, you might consider dumping your smart speaker before you are forced to sit through boring ads.
Amazon’s Alexa will lose momentum
In a way to triple down on Alexa, Amazon has installed it into everything, and this is alienating a broad swath of customers.
Not everyone is on the Amazon Alexa bandwagon, and some would like Amazon’s best in class products and services without involving a voice assistant.
Privacy suspicion has gone through the roof and smart speakers like Alexa could get caught up in the personal data malaise dampening demand to buy one.
Your voice is yours and 2020 could be the first stage of a full onslaught of cyber-attacks on audio data.
Don’t let hackers steal your oral secrets!
Cyber Warfare and AI
Hackers have long been experimenting with automatic tools for breaking into and exploiting corporate and government networks, and AI is about to supercharge this trend.
If you don’t know about deep fakes, then that is another thorny issue that could turn into an existential threat to the internet.
Not only could 2020 be the year of the cloud, but it could turn into the year of cloud security.
That is how bad things could get.
A survey conducted by Cyber Security Hub showed 85% of executives view the weaponization of AI as the largest cybersecurity threat.
On the other side of the coin, these same companies will need to use AI to defend themselves as fears of data breaches grow.
AI tools can be used to detect fraud such as business email compromise, in which companies are sent multiple invoices for the same work or workers duped into releasing financial information.
As AI defenses protect themselves, the sophistication of AI attacks grows.
It really is an arms race at this point with governments and private business having skin in the game.
Facebook gets out of the hardware game because consumers don’t trust them
Remember Facebook Portal – it’s a copy of the Amazon Echo Show.
The only motive to build this was to bring it to market and expect Facebook users to adopt it which backfired.
Facebook will find it difficult convincing users to use more than Facebook and Instagram software apps.
Don’t wait on Facebook to roll out some other ridiculous contraption aimed at stealing more of your data because there probably won’t be another one.
This again goes back to the lack of innovation permeating around Silicon Valley, Facebook’s only new ideas is to copy other products or try to financially destroy them.
China continues to out-innovate Silicon Valley.
The rise of short-form video app TikTok is cementing a perception of China as the home of modern tech innovation, partly because Silicon Valley has become stale and stagnated.
China has also bolted ahead in 5G technology, fintech payment technology, unmanned aerial vehicle (UAV) and is giving America a run for their money in AI.
China’s semiconductor industry is rapidly catching up to the US after billions of government subsidies pouring into the sector.
Silicon Valley needs to decide whether they want to live in a tech world dominated by Chinese rules or not.
Augmented Reality: Is this finally the real deal?
Augmented reality (AR) is still mainly used for games but could develop some meaningful applications in 2020.
Virtual Reality (VR) and AR will play a big role in sectors such as education, navigation systems, advertising and communication, but the hype hasn’t caught up with reality.
One use case is training programs that companies use to prepare new workers.
However, AR applications aren't universally easy or cheap to deploy and lack sophistication.
AR adoption will see a slight uptick, but I doubt it will captivate the public in 2020 and it will most likely be another year on the backburner.
Apple’s New Projects
Apple has two audacious experimental projects: a pair of augmented-reality glasses and a self-driving car.
The car, for now, has no existence outside of a few offices in California and some hires from companies like Tesla.
And, at the earliest, the glasses won’t hit shelves until 2021,
The car is likely to fizzle out and Apple will be forced to double down on digital content and services to keep shareholders happy which is typical Tim Cook.
The 5G Puzzle
Semiconductor stocks have been on fire as investors front-run the revenue windfall of 5G and the applications that will result in profits.
Select American cities will onboard 5G throughout 2020, but we won’t see widespread adoption until later in the year.
5G promises speeds that are five times faster than peak-performance 4G capabilities, allowing users to download movies in five seconds.
With pitiful penetration rates at the start, the technology will need to grow into what it could become.
The force multiplier that is 5G and the high speeds it will grace us with probably won’t materialize in full effect until 2021.
Each of the nine tech developments in 2020 I listed above negatively affects US tech margins and that will follow through to management’s commentary in next year’s earnings and guidance.
Tech shares are closer to the peak and the bull market in tech is closer to the end.
Innovation has ground to a halt or is at best incremental; companies need to stop cloning each other to death to grab the extra penny in front of the steamroller.
Profit margins will be crushed because of heightened regulation, transparency issues, monitoring costs, and the unfortunate weaponizing of tech has been a brutal social cost to society.
Tech is saturated and waiting for a fresh catalyst to take it to the next level, but that being said, tech earnings will still be in better shape than most other industries and have revenue growth that many companies would cherish.
