Global Market Comments
October 11, 2018
Fiat Lux
Featured Trade:
(REACHING PEAK TECHNOLOGY STOCKS),
(GOOGL), (MSFT), (NFLX), (FB), (AAPL),
(LOCKHEED MARTIN’S SECRET FUSION BREAKTHROUGH),
(LMT), (NOC), (BA)
Posts
I drove into San Francisco for a client dinner last night and had to wait an hour at the Bay Bridge toll gate. When I finally got into town, the parking attendant demanded $50. Dinner for two at Morton’s steakhouse? How about $400.
Which all underlines the fact that we have reached “Peak” San Francisco. San Francisco just isn’t fun anymore.
The problem for you is that if the City by the Bay has peaked, have its much-loved big cap technology stocks, like Facebook (FB), Alphabet (GOOGL), and Netflix (NFLX) peaked as well?
To quote the late manager of the New York Yankees baseball team, Yogi Berra, “Nobody goes there anymore because it’s too crowded.”
What city was the number one creator of technology jobs in 2017?
If you picked San Francisco, you would have missed by a mile. Anyone would be nuts to start up a new business here as rents and labor are through the roof.
Competition against the tech giants for senior staff is fierce. What, no fussball table, free cafeteria, or on-call masseuses? You must be joking!
You would be much better off launching your new startup in Detroit, Michigan. Better yet, hyper-connected low-waged Estonia where the entire government has gone digital.
In fact, Toronto, Canada is the top job creator in tech now, creating an impressive 50,000 jobs last year. Miami, FL and Austin, TX followed. Silicon Valley was at the bottom of the heap.
It’s been a long time since peach orchards dominated the Valley.
Signs that the Bay Area economy is peaking are everywhere. Residential real estate is rolling over now that the harsh reality of no more local tax deductions on federal tax returns is sinking in.
To qualify for a home loan to buy the $1.2 million median home in San Francisco, you have to be a member of the 1%, earning $360,000 a year or better.
Two-bedroom one bath ramshackle turn of the century fixer uppers are going for $1 million in the rapidly gentrifying nearby city of Oakland, only one BART stop from Frisco.
Most school districts have frozen inter-district transfers because they are all chock-a-block with students. And good luck getting your kid into a private school like University or Branson. There are five applicants for every place at $40,000 a year each.
The freeways have become so crowded that no one goes out anymore. It’s rush hour from 6:00 AM to 8:00 PM every day.
When you do drive it’s dangerous. The packed roads have turned drivers into hyper-aggressive predators, constantly weaving in and out of traffic, attempting to cut seconds off their commutes. And there is no drivers ed in China.
I took my kids to the city the other day for a Halloween “Ghost Tour” of posh Pacific Heights. It was lovely spending the evening strolling the neighborhood’s imposing Victorian mansions.
The ornate gingerbread and stained-glass buildings are stacked right against each other to keep from falling down in earthquakes. It works. The former abodes of gold and silver barons are now occupied by hoody-wearing tech titans driving new Teslas.
We learned of the young girl forced into a loveless marriage with an older wealthy stock broker in 1888. She bolted at the wedding and was never seen again.
However, the ghost of a young woman wearing a white wedding address has been seen ever since around the corner of Bush Street and Octavia Avenue. Doors slam, windows shut themselves, and buildings make weird creaking noises.
Then I came to a realization walking around Fisherman’s Wharf as I was nearly poked in the eye by a selfie stick-wielding visitor. The tourist areas on weekdays are just as crowded as they were on summer weekends 30 years ago, except that now the number of languages spoken has risen tenfold, as has the cost.
It started out to be a great year for technology stocks. Amazon (AMZN) alone managed to double off its February mini crash bottom, while others like Apple (AAPL) rocketed by 56%. But traders may have visited the trough once too often
The truth is that technology stocks have not performed since June, right when the Mad Hedge Fund Trader dumped its entire portfolio. Only Microsoft (MSFT) and Amazon (AMZN) have managed to eke out new all-time highs since then, and only just.
The rest of tech has been moving either sideways in the most desultory way possible, or suffered cataclysmic declines like Facebook (FB) and Micron Technology (MU).
Of course, the trade wars haven’t helped. It’s amazing that big tech hasn’t already been hit harder given their intensely global business models.
Nor has rising interest rates. Big cap tech companies have such enormous cash balances that they are all net creditors to the financial system and actually benefit from higher interest rates. But dear money does slow the US economy and that DOES hurt their earnings prospects.
No, I’m not worried about tech for the long term. There is no analog company that can compete with a digital company anywhere in the world.
Accounting for 26% of the stock market capitalization and 50% of its profits, it’s only a question of when we get a major new up leg in share prices, not if.
The only unknown now is whether this next leg will take place before or after the next recession. Given the rate at which interest rates and oil prices are rising in the face of a slowing global economy, it’s looking like the recession may win the race.
As our tour ended, who did we see having dinner in the front window of one of the city’s leading restaurants? A young woman wearing a white wedding dress.
Yikes! Maybe the recession is sooner than I thought.
Mad Hedge Technology Letter
October 11, 2018
Fiat Lux
Featured Trade:
(WHY SNAPCHAT SNAPPED),
(SNAP), (FB), (AMZN), (NFLX)
To the dismay of tech shares, the tech industry doesn’t operate in a bubble.
The broader landscape is experiencing a dose of volatility triggered by the ratcheting up in interest rates.
There’s not much tech can do to change the narrative.
The back and forth political saber rattling isn’t helping either.
Tech is experiencing a swift rotation out of hyper-growth names such as Amazon (AMZN) and Netflix (NFLX) with investors taking profits on these names that have gone up in a straight line this year.
This does not mean you should fling these stocks into tech heaven yet.
The hardest hit names will be the marginal tech firms in the marginal tech spaces headed by dreadful management.
This narrow criterion conveniently perfectly fits one company I have written about extensively.
Enter Snapchat.
It’s been a year to forget or remember - depending on how you look at it for CEO of Snapchat Evan Spiegel.
Snapchat was one of my first recommendations of The Mad Hedge Technology Letter when I told readers to run for the hills.
To read my story on Snapchat, please click here.
At that time, the stock was trading at a luxurious $19.
Lionizing this shoddy company would be a stretch as shares have parachuted down to the $6.60 level.
The latest word is that Snapchat is burning money fast.
The cash crunch will quickly force them to raise some capital and this is just one of the many litanies of spectacular misfortunes that have beset this Venice, California social media starlet.
Maybe management is spending too much time ripping the bong on Venice Beach because the decisions being made are of that ilk.
The first catastrophic move out of many was the botched redesign alienating the core base who were dazed and confused by the new interface and functionality.
Social media works poorly when you can’t find your friends on it.
Spiegel admitted the redesign was “rushed” and it behooves me to let readers know that the redesign was the worst redesign I have ever seen in my life as I tested it out in my office.
Snapchat quickly restored the previous interface calming their shrinking core audience.
The self-inflicted wound was deep, and earnings reflected the quicksand Snapchat quickly found itself in.
Snapchat announced that global daily active users (DAUs) shrank from 191 million to 188 million.
A company at this early stage in the growth cycle should be reeling in the users non-stop.
This is far from a mature company and if executed properly the company should have the ability to cast their net far and wide scooping up new users left and right.
Let’s remember that Instagram, the Facebook (FB) owned direct competitor, is growing their user base parabolically.
Simply put, Snapchat has had no answer to Instagram’s rapid rise to fame, and that was the center of my thesis to turn my back to this rapidly deteriorating company.
Snapchat has offered no meaningful innovation to combat the terrorizing force of Instagram.
The dearth of innovation has caused the average time spent on the platform to dip from 33 minutes to 31 minutes per session.
Instagram has stretched the lead on Snapchat. In fact, it was Instagram that cleverly borrowed Snapchat’s best features and integrated them into their platform.
Sentiment has turned rotten as the stock sold off when Spiegel announced that he wants the company to turn profitable in 2019.
Investors don’t believe this one iota.
Snapchat is expected to burn through $1.5 billion in 2019, and Spiegel’s pipedream of scratching out a profit is implausible.
Snapchat is not executing on the digital ad front.
It was a year and a half ago when consensus believed Snapchat was able to churn out revenue of $540 million this quarter, but it looks more likely that Snapchat is set for revenue of just a shade over $280 million.
The severe underperformance is due to a lack of advertisers causing the eventual price of digital ads to fetch a lower price in an auction-based model.
Stinging as it might be, the lower costs of ads is also caused by the average age group of Snapchat’s core base.
Snapchatters are usually teenagers and have low purchasing power.
Targeting an older user base would improve margins significantly.
However, the conundrum is that the core user base might jump ship like they did to Facebook and shifted over to Facebook-owned Instagram.
Snap doesn’t have a Facebook posing an acute problem that could likely backfire.
General Data Protection Regulation (GDPR) in the European Union made the issue of securing personal data a national issue.
Facebook poured fuel on the fire when they disclosed several breaches clobbering their share price.
Mark Zuckerberg’s company is still reeling from the series of mishaps.
Ironically, Facebook debuted a smart speaker with prime access to user’s home when trust is at its lowest ebb around Facebook’s data collection practices.
Investors really need to ask themselves if Facebook’s management has any common sense at all.
Any decent company would have halted this project and I expect it to be a complete disaster.
Part of Snapchat’s turnaround strategy involves releasing scripted shows as short as five minutes long.
Entering into the original content wars is a tough sell. The competition is becoming fiercer and this move hardly will differentiate itself from ad buyers who already avoid Snapchat. In fact, it smells of desperation.
Snapchat has seen a brutal brain drain with management leaving in droves.
They have voted with their feet.
Chief Strategy Officer Imran Khan was the latest to announce his upcoming departure.
Others to jettison are the VP of product, VP of sales, VP of engineering, and its general counsel.
The high turnover rate will make it more complicated to execute a drastic reversal of fortune.
The only silver lining is if Zuckerberg manages to screw up Instagram after forcing the creators out with his behind-the-scenes meddling, giving a glimmer of hope to Snapchat.
A stellar performance from the execution team along with a Facebook mess of Instagram could resuscitate the user base if users start to flee Instagram in droves.
There aren’t many alternatives unless a user is inclined to quit social media.
Snapchat badly needs to build up its user base or else digital ad buyers will stay away.
I am still bearish on this stock and it would take a small miracle to spruce up the share price again.
Mad Hedge Technology Letter
October 1, 2018
Fiat Lux
Featured Trade:
(ZINC AIR BATTERIES WILL REVOLUTIONIZE ELECTRIC CARS),
(TSLA), (NIO), (FB), (GOOGL), (NFLX)
As Panasonic ramps up its battery production at the Tesla Gigafactory 1 in Sparks, Nevada, the demand and business for renewable energy has never been more robust.
And as the world’s population balloons and man-made pollutants roil the natural ecosphere, business needs an answer to these potential apocalyptic bombshells or there will be nowhere clean enough to live.
Energy security and population growth will have a complicated relationship going forward and cannot be ignored for the sake of mankind.
This isn’t me being a tree-hugging, Birkenstock-trotting, save-the-earth, love and peace-type of guy.
This problem is real and whoever discovers the solution could reap untold profits.
The answer has been found - rechargeable zinc air batteries.
Spearheading this massive initiative is South African-born entrepreneur, sports team owner, Los Angeles Times owner, and more importantly the founder, chairman and CEO of NantEnergy Dr. Patrick Soon-Shiong.
This El Segundo, California-based company presented an utter game changer to the future of the world and the world’s economy.
NantEnergy debuted a rechargeable battery powered by oxidizing zinc with oxygen from the air for commercial use at the One Planet Summit in New York.
It also has the capability to store energy.
Not only is this technology and product cutting edge, but it has the cost basis to support broad-based scalability and adoption.
Ramkumar Krishnan, chief technology officer of NantEnergy claimed this revolutionary battery can “deliver energy for $100 per kilowatt-hour (kWh).”
Lithium-ion batteries have been the mainstay choice for clean energy or clean enough energy since 1992, and its usage varies in cost from $300 to $500 kWh.
Tesla, with its phalanx of superior engineers, has been able to suppress that cost all the way down to a level between $100 to $200 kWh level.
NantEnergy has already registered more than100 related patents in its name and envisions a $50 billion addressable market.
I believe the addressable market is substantially bigger.
For all the hoopla about lithium-ion batteries, there are severe drawbacks in its usage and application.
Let’s concisely run down the pitfalls of batteries of this ilk.
Once out the factory door, the performance starts to go downhill.
Lithium-ion batteries react poorly to high temperatures.
These batteries become inoperable if completely discharged.
There is a slight chance a battery could burst into flames and burn off your face.
Simply put, lithium-ion batteries incorporate cobalt, an extremely toxic material hazardous to human health.
If a Samsung Galaxy smartphone explodes, cover your mouth to avoid inhaling the cobalt-laced fumes.
Dr. Soon-Shiong characterized this new technology as the “holy grail” of renewable energy.
Wide-scale adoption would bring the need for cobalt to its knees.
No longer would tech companies need to scramble to secure a sufficient amount of cobalt supply from the deepest reaches of the Congo jungle.
It would be the end of cobalt as we know it.
At first, lithium would be required for a stopgap measure while engineers refine the battery on its way to a full-fledged zinc alone battery.
The lithium placeholder would only be temporary.
The clean energy movement must be grinning widely as the potential to finally do away with cobalt from renewable energy has pronounced social and economic consequences.
An estimated 1.4 billion people still live in the dark and do not have access to electricity.
This technology is being tested in villages in Africa and desolate communities in Asia as we speak.
The absence of electricity isolates these undeveloped communities in third-world Africa and Asia without access to health care, education, and technology.
It’s hard to kick-start your life as a sprouting little kid when you’re lost in the dark half the time.
Importing fossil fuel to put these communities online is unfeasible and just plain too expensive for communities that have a dire shortage of capital.
Currently, NantEnergy’s rechargeable zinc air batteries are online in 110 villages located in nine Asian and African countries.
The batteries have been combined to establish a microgrid system powering entire areas.
The company will start delivery this product next year widening its type of use to telecommunications towers.
The next step after that would be the home energy storage market targeting California and New York as the first American cities.
Engineers have pointed out that this development could transform the electric grid into a “round-the-clock carbon-free system.”
In addition, with cooperation with Duke Energy, a major utility, NantEnergy’s batteries have been powering communications towers in America for the past six years.
The design is mind-boggling utilitarian - plastic, a circuit board, and zinc oxide wrapped up in a briefcase-size shell.
One charge can offer 72 hours of battery life.
The charging process is easy - electricity from solar installations is stored by converting zinc oxide to zinc and oxygen.
The discharge process is straightforward, too - the system produces energy by oxidizing the zinc with air.
The pursuit of energy reduction is in full throttle, and this is the next leg up for energy aficionados.
Your lithium-ion-run Tesla could become a legacy company in a matter of years if this technology disrupts Elon Musk’s brainchild.
Lately, Musk has been falling behind the eight ball with fresh innovators hot on his heels.
This is the latest company to enter into its market even though still in the incubation stage.
Competitors have popped out of nowhere and are coming for his bacon.
Shanghai headquartered electric car manufacturer Nio (NIO) went public and raised more than $2 billion.
Even though it is not yet a threat to Tesla, it shows that Tesla isn’t the only game in town anymore.
In any case, NantEnergy has the magic to unlock the “holy grail” of renewable energy. And if it can promise on its cost projections, I see no reason why this won’t be furiously adopted by corporations worldwide.
As it is, America has been losing out in the Congo, as China has cornered the cobalt market there.
And, as the evolution of fracking technology quelled the Middle-East situation, it could also have the same effect in the Congo.
More excitingly, it could put online an additional 1.2 billion new customers to devour iPhones and watch Netflix (NFLX).
Companies such as Facebook (FB) and Alphabet (GOOGL) have been developing a way for these remote and poverty-prone places to use Internet from a satellite.
They would need electricity first to power their devices unless Mark Zuckerberg has found a way to use a smartphone without electricity.
NantEnergy’s renewable batteries have already cut the need of 1 million lithium-ion batteries, and warded off the need to release 50,000 metric tons of carbon dioxide since 2012.
California is the flag-bearer in renewable energy policy by forcing its populace to be at 100% carbon-free electricity by 2045.
Musk is on record by saying he expects to break the 100-kWh level, which would contribute to better power storage and expedited electric vehicle (EV) adoption.
In contrast, energy storage analyst Mitalee Gupta at GTM Research has retorted that he’s “unsure $100/kWh is achievable this year.”
Musk, being a naturally optimistic entrepreneur, sets targets then does everything he can to break them.
Either way, two South African born visionaries are doing their part to crater the cost per kWh in the renewable energy market, and Elon Musk might not be the biggest disruptor from South Africa.
Time will tell if this market will become zinc-based or lithium-based – the higher-grade technology eventually wins out spelling doom for Musk.
But it appears that Musk has other things to worry about now.
NantEnergy plans to inaugurate a battery manufacturing facility in California next year.
As for Tesla, buy the car and not the stock.
And for Nio, don’t buy the car or the stock.
Disrupting the Disrupter
Last quarter’s earnings report sent Netflix shares nosediving to the depths of the ocean floor, and the wreckage saw Netflix’s stock down 24% in 5 weeks.
The short-term weakness in shares was justified after Netflix miscalculated on their quarterly subscriber numbers.
Netflix is still a buy because the wreckage can be salvaged.
In fact, it was never a wreckage to begin with because Netflix boasts the highest grade online streaming product in the industry.
An industry that is benefitting from massive secular tailwinds at its back, from cord cutters and the widespread pivot to mobile platforms.
Netflix has the best product on the market because they have the best strategy – throw $8 billion on content alone and hire the best production team money can buy to churn out content.
The method to their madness has worked and the haul of 23 Emmy’s was a result of this winning formula.
The 23 Emmy’s tied HBO, whose premier series Game of Thrones is still captivating audiences with its mix of graphic sexual exploits and violent tropes.
Several of Netflix’s award winners saluted Netflix’s hands-off approach, who allow these highly paid production specialists the creative freedom to inspire audiences.
For all of Hollywood’s razzmatazz, director’s and actor’s number one major gripe has been that the leash is tight with minimal wiggle room.
It’s not straightforward to change a culture that has developed over a century.
Cross-pollinating Silicon Valley’s lean business model with Hollywood top-grade content was the trick that removed the shackles from the director’s ankles.
The end-product has been the main beneficiary.
Scoping out Netflix’s end of year lineup has viewers drooling.
The tail end of the year sees Netflix reintroduce some hard-hitting content from Orange Is The New Black, Ozark, Daredevil, Narcos, and Making a Murderer, side by side with fresh content involving Simpsons creator Matt Groening and blockbuster names like Jonah Hill and Emma Stone.
As well as shelling out $8 billion for original content, Netflix upped its marketing budget from $1.28 billion to $2 billion in 2018.
The $2 billion budget is a classy touch but at this point, this product more or less sells itself.
The brand awareness is that far-reaching.
The platform is optimized by tweaking Netflix’s proprietary recommendation algorithm herding the audience into viewing more content that the algorithm deems likely viewable.
The man who is in charge of this is Greg Peters - Netflix chief product officer.
Kelly Bennett, Netflix chief marketing officer, will work with Peters to wield the massive $2 billion marketing budget in the most effective way possible.
To insulate the company from any potential Facebook-like data slipups, Netflix poached Rachel Whetstone from Facebook to head up the public relations division.
Who said there were no winners from Facebook’s PR disaster?
Whetstone’s professional year of hell offers valuable insight into how not to pull another Facebook (FB) stinker.
She previously worked for Google and Uber and is a veteran PR spinner.
Earlier this year CEO Reed Hastings detailed the possibility of using ads in Netflix’s ad-less platform by saying this about why Netflix has no ads:
“It is a core differentiator and again we're having great success on the commercial-free path. That's what our brand is about. So we're going to continue to expand the relevance of a commercial free service around the world and make that so popular that consumers are very used to it and appreciate Netflix.”
The relevancy of his statement is more meaningful now after a recently released report confirming that Netflix is testing the usage of ads to promote its content.
This would be a huge shift in the company’s ethos, and if the algorithms give Hastings the green light, this could alienate a big chunk of their subscriber base.
In a survey conducted about the implementation of ads, 23% said they would quit the service if ads are rolled out onto Netflix’s platform.
Only 41% said they would “definitely” or “probably” keep Netflix if ads are introduced.
In the same survey, if Netflix lowers the monthly cost by $3 while integrating ads, the cancellation rate falls from 23% to 16%, and half said they would keep Netflix.
The most important number of the survey was that only 8% would cancel if they increased monthly prices by $2, but if it went up by $5, 23% would say goodbye to the streaming service.
All signs point to an incremental price increase in the near future, partly helping to offset the mind-boggling amount of content spend this year.
Netflix subscribers are still willing to absorb price increases which is a great sign for future profitability.
But it is also worth mentioning that Netflix is a profitable company now, and margins have been slowly creeping up for the past few years.
The tests demonstrate that Hastings is serious about profitability at a time when the premier profit machines in tech are Apple (AAPL) and Alphabet (GOOGL).
These two behemoths blaze the trail for the tech sector and offer important lessons on the potential future profitability of Netflix.
It will take time for Netflix to reach that level of profitability, but the pillars are in place to ramp up the monetization drive.
The treasure trove of data will surely help decision making for the management, but to make their platform more like Facebook (FB) would be a huge error of epic proportions.
It’s proven that digital ads are annoying like a swath of mosquitoes trapped in your bedroom at 2am.
To dilute the quality of their product would fly in the face of what the company represents.
So how on earth will Netflix’s shares go from the mid-$300’s and reach the glorious heights of $400-plus and stay there?
One word – India.
It’s no secret that Netflix has been charging hard to rev up international business.
India is the trump card.
India boasts around 78 million middle class dwellers who can afford Netflix’s service.
In the next two years, it’s feasible that 10% of this socioeconomic class could be tuning into Netflix.
That foothold into India could mushroom, and potentially expand with an audience whose DNA is comprised of a strong film culture.
As broad-brand broadband expansion and smartphone penetration heating up in India, Netflix’s timely arrival could make Netflix look genius.
Their arrival coincides with a slew of American tech companies looking to tap revenue out of the largest democracy in Asia.
The unrealized potential cannot be ignored.
Netflix has primed their strategy by focusing on locally-produced content that will resonate with the Indian viewer.
Netflix’s India strategy started red hot with crime thriller Sacred Games imbued with a level of unfiltered, real filmmaking unseen in India.
The dark crime drama is already facing a legal battle concerning its lusty, foul-mouthed content that presses on the outer limits of what modern Indian society can handle.
The stereotype breaking series directed by Vikramaditya Motwane and Anurag Kashyap is Netflix’s first Indian feather in their cap as Netflix looks to accelerate the momentum.
Netflix has not produced back to back quarters where they failed to meet subscriber growth forecasts since 2012.
I firmly believe Netflix will continue this successful streak and beat subscriber estimates in the third quarter.
Initial indications show that Indians have gravitated towards Netflix’s original content, and with the 2018 Russian World Cup in the history books, the path has opened up for some nice surprises to the upside.
NETFLIX’S FUTURE - INDIA
________________________________________________________________________________________________
Quote of the Day
"Health care and education, in my view, are next up for fundamental software-based transformation." – Said Silicon Valley Venture Capitalist Marc Andreessen
Mad Hedge Technology Letter
September 6, 2018
Fiat Lux
Featured Trade:
(THE SMART PLAYS IN FINTECH),
(SQ), (PYPL), (JPM), (COF), (WFC), (BAC),
(MGI), (GRUB), (BABA), (NFLX)
Fintech is all the rage now, and it’s time for investors to grab a piece of the action.
The tech sectors’ stellar performance in 2018 is a little taste of things to come as every industry forcibly pushes toward software and artificial intelligence to enhance products and services.
Bull markets don’t die of old age and some of these tech stalwarts are truly defying gravity.
The fintech sector is no exception.
Square (SQ) led by tech visionary Jack Dorsey has been a favorite of the Mad Hedge Technology Letter practically from the newsletter’s inception.
But another company has caught my eye that most of you already know about – PayPal (PYPL).
PayPal, a digital payments company, has extraordinary core drivers and a splendid growth trajectory.
Its arsenal of services includes digital wallets, money transfers, P2P payments, and credit cards.
It also has Venmo.
Venmo, a digital payment app, is the strongest growth lever in PayPal’s umbrella of assets right now, and was the first meaningful digital payment app in America.
It was established by Andrew Kortina and Iqram Magdon-Ismail, who were roommates at the University of Pennsylvania, and the company was bought out by PayPal for $800 million in 2014, marking a new chapter in PayPal’s evolution.
Funny enough, Venmo’s original use was to buy mp3 formatted songs via email in 2009.
Venmo is wildly popular with tech savvy millennials. A brief survey conducted illustrates how fashionable Venmo is by recording higher user statistics than Apple Pay.
The app is commonly used for ordering pizza through Uber Eats or Grubhub (GRUB), or even shelling out for monthly rent.
If you want to stir up your imagination even more, Venmo has a prominent social feed where users can view other Venmo users’ purchases.
Financial models suggest Venmo could contribute $300 million to the PayPal top line in 2021. If Venmo executes perfectly, revenue could surpass the $1 billion mark in 2021, with much higher operating margins than PayPal’s core products.
Even though management declines to speak specifically about Venmo, the dialogue in the earnings call usually provides some color into what is going on underneath the hood.
Xoom, a digital remittance distributor app with offices in San Francisco and Guatemala City owned by PayPal, along with Venmo grew payment volume by 50% YOY, surging to $33 billion annually.
Of that $33 billion in volume, $19 billion was contributed by Venmo and Xoom chipped in with $14 billion.
More than 60,000 new merchants joined PayPal’s array of platforms, adding up to more than 19.5 million total merchants.
All in all, PayPal locked in $3.86 billion of sales last quarter, which was a 23% YOY jump in revenue, at a time where widespread acceptance of fintech platforms is brisk.
PayPal raised its end-of-year forecast and rewarded shareholders with authorization of a $10 billion buyback.
Upward margin expansion, expanding market share, multiple revenue stream, and untapped pricing power is the recipe to PayPal’s meteoric rise.
PayPal’s share price has climbed higher from a base of $73 at the beginning of the year to an all-time high of more than $90.
Offering more proof fintech is alive and kicking is Jack Dorsey’s Square’s dizzying rise of more than 200% YOY in its share price.
The company is exceeding all revenue growth expectations and is poised to ramp up subscription revenue.
As with the Venmo app, Square’s Cash app has unrealized potential and will be one of the outperforming profit drivers going forward.
Square hopes to be the one-stop-shop for all types of digital payment needs including consumer finance, equity purchases, possibly international transfers, and cryptocurrency.
All of this is happening amid a robust secular story that could have seen traditional banks swept into the dustbin of history.
Rewind a few years ago, perusing the data about the movement to digital payments must have frightened the living daylights out of the executives from major Wall Street mainstays.
Digital wallets assertive migration into mainstream money payment services could have detached traditional banks’ core businesses.
Slogging your way to a physical bank to put in a wire transfer was not appealing.
Archaic methods of business are painful to see, and traditional banks were still operating this way as of 2015.
Time is money and technology has crashed the traditional waiting time to almost zero.
The way these tech companies operate is simple.
They compete to hire a hoard of advanced computer developers or shortcut the process using the time-honored tradition of poaching the competition’s best talent.
Then snatch market share at all costs and grow like crazy.
Banks badly needed introducing some functions to their array of services such as linking with third-party payment APIs to facilitate online payments and enabling cross-platform digital payments.
Other functions such as establishing modern peer-to-peer payment systems or adopting QR code technology that are wildly popular in East Asia could enhance optionality as well.
These are several instruments they could have amalgamated into their arsenal of fintech technology that could have freshened up these dinosaur institutions.
Harmonizing banking tasks with mobile functionality was fast coming and would be the standard.
Anyone not on board would sink like the Titanic.
Ultimately, banking institutions needed to up their game and acquire one of these digital wallet processors or watch from the sidelines.
They chose the former when a consortium called Early Warning Services (EWS) jointly created by behemoth American banks, including JPMorgan Chase & Co. (JPM), Capital One (COF), Bank of America (BAC), and Wells Fargo (WFC) to “prevent fraud and reduce detection risk” made a game-changing decision.
(EWS) acquired digital payment app Zelle in 2016, and this was its aggressive response to Square Cash and PayPal’s Venmo.
Results have been nothing short of breathtaking.
Leveraging the embedded base of existing banking relationships, Zelle took off like a scalded chimp and never looked back.
In a blink of an eye, Zelle had already signed up more than 30 banks and over 100 financial institutions to its platform.
Banks couldn’t bear being left out of the fintech party.
With hearty conviction, Zelle is signing up users at a pace of 100,000 per day, and the volume of payments in 2017 eclipsed $75 billion.
Zelle projects to expand more than 73% in 2018, integrating 27.4 million new accounts in the U.S., head and shoulders above Venmo’s 22.9 million and Square Cash due to add 9.5 million more users.
Make no bones about it, Zelle was in prime position to convert existing relationships into digital converts. The banks that do not have an interest in Zelle have an uphill climb to stay relevant.
The United States is rather late to this secular growth story. That being said, already 57% of Americans have used a mobile wallet at least once in their lives.
Innovative ideas bring supporters galore and even more adoptees.
That is why the strong pivot into technological enhanced ideas bear unlimited fruit.
Using a mobile platform to just open an app then send funds within a split second with minimal costs is appealing for the Netflix (NFLX) crazed generation that can hardly get off the couch.
Ironically, it’s those in the emerging parts of the world leading this fintech revolution by skipping the traditional banking experience completely and downloading digital wallet apps on their mobile devices.
It’s entirely realistic that some fresh-faced youth have never been present at a physical banking branch before in India or China.
Download an app and your fiscal life commences. Period.
The volume of funds passing through the arteries of Chinese digital wallet apps surpassed $15 trillion in 2017.
And by 2021, 79.3% of the Chinese population are projected to use digital wallets as their main source of splurging Chinese yuan.
America lags a country mile behind China, but the Chinese progress has offered American tech companies a crystal-clear blueprint to springboard digital payment initiatives.
Chinese state banks are already starting to become marginalized, and the Wall Street banks are not immune to the same fate.
Devoid of a digital strategy will be a death knell to certain banking institutions.
Compare the pace of adoption and some must question why American adoption is tardy to a fault.
Highlighting the lackadaisical pace of American fintech integration was Alibaba’s (BABA) smash-and-grab attempt at MoneyGram International Inc. (MGI), as it sought to gain a foothold into the American fintech market.
The attempt was rebuffed by the federal government.
The nascent state of the digital payment world in America must alarm Silicon Valley experts. And the run-up in Square and PayPal includes calculated bets that these two standouts will leapfrog into the future with guns blazing along with Zelle.
The parabolic nature of Square’s mystifying gap up means that a moderate pullback is warranted to put capital to work in this name.
Investors should wait for a timely entry point into PayPal as well.
These two stocks have overextended themselves.
As the fintech pie extrapolates, there will be multiple victors, and these victors are already taking shape in the form of Zelle, PayPal, and Square.
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Quote of the Day
“In the not-too-distant future, commerce is just going to be commerce. It won't be online commerce or offline commerce. It's just going to be commerce. And that will happen because of the phone,” – said CEO of PayPal Dan Schulman.
Mad Hedge Technology Letter
September 5, 2018
Fiat Lux
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