Mad Hedge Technology Letter
May 5, 2021
Fiat Lux
Featured Trade:
(THE BOOMING SUB-SECTOR OF ECOMMERCE FURNITURE)
(OSTK)
Posts
Mad Hedge Technology Letter
November 30, 2020
Fiat Lux
Featured Trade:
(THE GREEN LIGHT FOR E-COMMERCE)
(AMZN), (W), (OSTK), (WMT), (TGT), (MELI), (EBAY), (CRM), (ADBE)
Data from Adobe Analytics is in and it suggests that e-commerce is delivering on its expected domination over retail.
I can’t ignore the helping hand of the pandemic which has deemed pedestrian shopping malls too dangerous to set foot in and for analog businesses that survive, it is essentially coming down to whether a digital footprint has been developed or not.
There is only so much a PPP loan can do to paper over the cracks of a non-digital business.
At some point, CEOs will need to wake up and understand that survival means a migration to digital.
Forecasts show that Black Friday online sales will register between $8.9 billion and $10.6 billion, which represents growth of up to 42% year over year.
The data firm expects Black Friday and Cyber Monday to become the two largest online sales days in history as consumers shift more spending toward e-commerce amid the public health crisis.
By last Friday morning, Salesforce projected online sales in the U.S. for Black Friday to spike 15% to $11.9 billion.
The truth is that many shoppers got their shopping done even before Thursday and Friday with digital sales in the U.S. spiking 72% year over year on Tuesday and were up 48% on Wednesday.
E-commerce companies front-ran the actual holidays to eke out more profit in the anticipation of competitors offering earlier sales.
According to Adobe, Thanksgiving sales hit a record $5.1 billion, up 21.5% over 2019 and this aggressive growth rate can be considered the new normal.
Smartphones continued to account for an increasing segment of online sales, with this year’s $3.6 billion up 25.3%, while alternative deliveries — a sign of the e-commerce space maturing — also continued to grow, with in-store and curbside pickup up 52% on 2019.
Shopify said that over 70% of its sales are being made using smartphones.
What are the hot gift items?
Electronics, tech, toys, and sports goods being the most popular categories — at the right price will help retailers continue to experience elevated sales volume.
Adobe said a survey of consumers found that 41% said they would start shopping earlier this year than previous years due to much earlier discounts.
This season is headed for record-breaking levels as consumers power online sales for both holiday gifts and necessities.
Not all big-box retailers were open over the holidays and getting that extra surge from the likes of daily needs such as paper towels, cleaning products, and garbage bags has boosted the top-line growth as well.
We have seen the perfect storm of elements fuse together to help the bottom line records of the likes we have never observed.
Comps will be difficult to beat next year if the vaccine solution starts coming online by next winter and considering that the worst economic damage is behind us.
Next year, the U.S. consumer will have more to spend setting up a tough but possible beat to next year’s numbers along with the high likelihood that tech stocks will experience another leg up.
There will be a lot happening in between, such as a new U.S. administration that is primed for a different economic polic; but it’s impossible not to love the narrative of certain e-commerce companies such as Shopify (SHOP), MercadoLibre (MELI), Target (TGT), Walmart (WMT), Etsy (ETSY), Wayfair (W), eBay (EBAY), Overstock.com (OSTK), Amazon (AMZN) and the companies that measure their data like Salesforce (CRM) and Adobe (ADBE).
If we ever could anoint when a year became the year of technology, then this would be it in 2020.
The base case for next year is that the borders and states will still grapple with the virus and the knock-on effects to society, economy, and politics as the capacity to produce the virus won’t meet demand for at least a year.
Tech stocks are primed to outperform non-tech next year and even though multiples are high, the momentum suggests that this group of stocks will be the gift that keeps giving as the Fed has offered generous liquidity conditions to tech investors.
Mad Hedge Technology Letter
November 23, 2020
Fiat Lux
Featured Trade:
(COMMUNICATIONS HAS NEVER BEEN MORE IMPORTANT)
(TWLO), (TWTR), (CRM), (SQ), (AMZN), (OSTK), (W)
Growth is not dead as last week’s tech rally shows that tech stocks still have their allure.
One tech growth stock that I am absolutely in-love with is communications-as-a-platform cloud stock Twilio who services Airbnb and Uber as the software that connects the users to their staff.
The ability to communicate with customers in real time has never been more urgent in a fast-paced world, especially in the software-centric economy.
From food delivery to booking hotels, from customer service to password resets, literally anything revolves around the ability to connect reliably and rapidly.
Many people in 2020 still do not even know what Twilio (TWLO) does!
They are the dark horse cloud company that nobody has heard of.
The company provides the software building blocks that lets developers embed Twilio's communication technology in their apps, messaging systems, emails, and more. It also streamlines the process so it can be accomplished in a matter of hours, rather than weeks or months.
Here’s an insanely applicable example: The update you received from Lyft regarding your ride, the text messages and reservation confirmation you got from Airbnb, the customer service interactions with Disney's Hulu, and the booking confirmation from your restaurant via Yelp? These were delivered by Twilio's technology.
In pandemic third quarter, Twilio's revenue climbed 52% year over year, while also avoiding a loss, swinging from a loss in the prior-year quarter.
The company reported 208,000 active customers, up 24% year over year.
There is no mistake that these types of cloud stocks are in the vein of Twitter (TWTR), Salesforce (CRM), Square (SQ), and so on and at the vanguard of the hullabaloo of growth stocks.
Why are growth stocks so popular?
Growth stocks are companies that increase their revenue and earnings faster than average.
A growth company relentlessly develops an innovative product or service or at the top of the pack of fastest-growing industries and unsurprisingly that is technology, and that fact won’t change for generations.
Firms growing faster than average for long periods tend to be rewarded by the market, and this is why there has been a massive migration to growth stocks that has enriched shareholders of Apple (APPL), Facebook (FB), Netflix (NFLX), and so on.
Growth also begets additional growth and the faster they grow, the bigger the returns can be.
They are also more expensive than the average stock in terms of metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios, but investors look past this in an age of expanding liquidity which is the catalyst that breathes even more momentum into these stocks.
US growth stocks secure a premium just for the possibility they will fulfill their parabolic growth potential.
Capitalizing on powerful long-term trends can grow their sales and profits for many years, and the following are a list of seminal trends that all involve technology data points as the secret sauce.
- E-commerce: The massive migration to online shopping is here to stay and the coronavirus has acted like a supercharger to e-commerce company like Amazon (AMZN), Overstock (OSTK), and Wayfair (W).
- Digital advertising: The digital ad market is moving marketing budgets from TV and print to online channels.
- Digital payments: Contactless payments and fintech (through a smartphone) will eventually replace physical card transactions.
- Cloud computing: Computing power is migrating from on-premise data centers to cloud-based servers. Amazon’s (AMZN) and Alibaba’s (BABA) cloud infrastructure services help make this possible, while Salesforce.com (CRM) provides some of the best cloud-based software available.
- Cord-cutting and streaming entertainment: Millions of people are only paying for internet services that offer on-demand content and provide access to premium packages. This trend has been supercharged by the Millennial generation.
These powerful trends will last decades giving you plenty of time to claim your share of the profits they create.
Rank growth companies with strong competitive advantages. Otherwise, their business might fail.
Some competitive advantages are:
- Network effects: Facebook is a valid example that built its usership by offering other assets like WhatsApp and Instagram to snowball into a 2 billion number usership. The synergies are plentiful with the ability to cross-sell its products across platforms and aggregating data to deploy the intel in the best way it can make money.
- Scale advantages: Size can be another powerful advantage. Amazon is a great example here, as its massive global fulfillment network is something its smaller rivals will find extremely difficult to replicate.
- High switching costs: Switching costs are expenses and difficulties involved in switching to a rival product or service. Once a company begins to use e-commerce company Shopify as the core of its online operations, they are unlikely to absorb the burden of switching to another competitor.
Pinpointing large addressable markets means a larger opportunity to secure higher revenue and Twilio is occupying a spot at the intersection of generational, long-term trends and almost unfair competitive advantages.
The underlying shares have rocketed this year as communications has never been more important. This is a great buy and hold stock for the long term because trading short term is difficult with its elevated volatility.
Mad Hedge Technology Letter
October 19, 2020
Fiat Lux
Featured Trade:
(ROLL OUT THE OVERSTOCK.COM PLAYBOOK)
(OSTK), (AMZN)
As the virus engulfs the U.S. once again — I can’t help but think it’s time for the 2nd wave of Overstock.com (OSTK) going ballistic again.
Highlighting the insanity of 2020, Overstock.com shares were trading at a pitiful $2 on March 11 and then lockdowns happened, and the stock never looked the same again.
To say that underlying shares went parabolic is an understatement, the meteoric rise from $2 to $115 in a 5-month span is stuff of legends.
Remember that Overstock.com was just a middling backwater stock almost as Myanmar’s mediocre geopolitical status is to the Asian continent.
In fact, shareholders were in the process of searching for a buyer — in a way waving the white flag as a resentful ending to a half-hearted try to catch Amazon’s (AMZN) e-commerce business.
Overstock.com sells everything from baby toys to wrought iron firepit décor.
If it’s for the home or something related, they probably have it in store for you and as Covid has throttled the population’s go-to shopping places from strip malls to the shopping lanes of America, Overstock.com has become an outsized winner.
Let’s get into the weeds of their business.
With the tectonic shift to e-commerce likely permanent, shares can keep rallying specifically because the risk of another lockdown is increasing and the virus spreads again.
Multiple catalysts, both on the macro and micro level that can drive continued upside to revenue meaning high estimates for Ebitda (earnings before interest, taxes, depreciation, and amortization).
Bricks-and-mortar stores will continue to bleed market share to online competition even if the virus is handled, providing a tailwind for Overstock into 2021.
The company’s improved pricing model will shoot margins higher, while it also works to broaden its target audience and expand marketing.
Overstock has evolved in recent years, thanks to new management and a new strategy, which includes a timely focus on home goods, a retail standout during the pandemic. It also has blockchain-based ventures that bulls say the market is ignoring.
The one-sentence answer to why the stock has gone ballistic is easy — 109% revenue growth year over year.
The company ended the quarter with a healthy balance sheet that included a cash balance of over $300 million.
Overstock Retail's exceptionally strong second-quarter performance was on fire supporting a 200% increase in new customers, and profitability, as measured by adjusted EBITDA, improved by $51 million year over year.
A key takeaway here is the scalability of Overstock’s pure-play e-commerce model and efficiencies created through partner drop-ship program.
Overstock’s overarching goal is to create operating leverage by growing top line at a faster pace than operating expenses.
Overstock is profitably gaining new customers and making progress toward achieving sustainable, profitable growth long term.
Last quarter, revenue from their Retail business was a record $767 million and customers are increasingly finding and purchasing products in core home furnishings categories.
Compared to the second quarter of 2019, new customer growth increased by over 200%, and Overstock has experienced strong customer purchase repeat behavior.
Gross margin improved by almost 3.5% year over year and the margin improvements were fueled largely by operational efficiencies, as well as several onetime items unique to the second quarter of 2020.
The onetime items included lower costs from being understaffed in the customer care organization as Overstock adjusted to increased sales volumes, a benefit from fulfillment-related charges as part of the service level agreements to protect customers' experience, and lower discounting activity as they strategically balanced marketing efforts against product availability and stockouts.
Operating expenses improved 5% as management was able to leverage technology expenses, illustrating the strong operating leverage inherent in an e-commerce business.
Overstock is one of a slew of internet companies that will harvest the fallout from another spread of the virus.
I believe it’s time to roll out the Overstock playbook again and buy and hold shares.
For short time traders, this is a beast of a stock to execute short-dated trades on because of the elevated volatility, but in general, I am bullish on this company through 2021.
Mad Hedge Technology Letter
July 8, 2020
Fiat Lux
Featured Trade:
(THE ONLY RETAIL PLAY YOU WANT TO KNOW)
(OSTK), (W)
As U.S. virus cases explode, the shelter-in-home trade is back in full force, meaning investors need to look at Overstock.com, Inc. (OSTK).
We are talking about parabolic action in a stock price with shares up 16% yesterday alone and even doubling in the last 40 days.
The U.S. is now hugging that 50,000 cases per day mark and it is only a matter of time until the health crisis spirals so far out of control that everybody will be back inside online shopping again on their touchpads.
And if it doesn’t get that bad, it certainly will trend in that direction which is why Overstock.com will be back in vogue.
The short-term performance validates my thesis that Overstock.com is going through a renaissance as it goes from the edge of the periphery to a tech darling.
Revenue in April and May were up 120% year-over-year as the company expects to see continued momentum in the near-term, Overstock CEO Jonathan Johnson remarked during a Fox Business interview.
Consumers "still aren't ready" to return to furnishing stores to test couches, beds, and other furniture due to the coronavirus pandemic, Johnson said. The online venue clearly remains "the place" to buy home furnishing items.
Overstock.com wholeheartedly believes they will experience "strong" double-digit growth rate through the summer.
The mother of all tailwinds has legs and you might think of Overstock as a smaller e-commerce store in the mold of Amazon.com, but they have really taken the business model up a notch.
Overstock started out as a pure play on online retail operations, based on a low-cost business model that involves the selling of excess inventory from factories and other retailers at discounted prices.
Overstock.com Inc. became a household name as an e-commerce pioneer, but in recent years, excitement in the investment community was focused more on the company’s blockchain efforts.
The pandemic changed the world and the company is dusting off its e-commerce playbook.
Mushrooming sales at Overstock’s retail business have helped transform a timid stock to one of the Covid-era’s best performers, an irony for a division that had long been considered for sale.
Overstock shares have gained nearly 11-fold since closing at a record low on March 16, and this is just the beginning as the administration hopes to convince the population that the virus doesn’t need any managing.
Sweeping the carnage of the virus under the carpet makes no sense, and with the internet disseminating information and disinformation, will Americans be inclined to believe the virus has no teeth?
It’s hard to wrap our heads around the US government’s response to a global health crisis and the bountiful harvest the tech sector is collecting.
They hardly needed it.
Tech was crushing it before the pandemic.
If you strip out the earnings of the Big 6 of Facebook, Amazon, Apple, Microsoft, Netflix, and Google, there is no earnings growth for the last five years in any sector.
Stocks went up purely based on excess liquidity and a monstrous corporate tax break.
Then the administration’s disregard of the health crisis gifted accelerating revenue to the tech sector while every other sector was cruelly pillaged.
Granted, the U.S. administration had no intention to hammer non-tech businesses, but that is exactly what is playing out.
So now this is what you get – a once sluggish tech stock like Overstock.com turning into an e-commerce pandemic play on steroids overnight.
The stock is frantically gapping up almost every day and it was just a few years ago when the company was really grasping at straws by jumping on the cryptocurrency bandwagon.
The U-turn by CEO Jonathan Johnson says it all as he has “no interest” in selling the e-commerce business which he was desperate to sell last month.
And just based on the news that Johnson didn’t sell the e-commerce unit last month, the stock doubled.
It’s unfathomable times in the tech sector.
The decor and home improvement market could end up benefiting from a total of $200 billion in an annual tailwind because of the pandemic’s effect on consumers.
If consumers are looking for a similar e-commerce play, then Wayfair (W) should fit the bill.
It’s getting to the point where if the late first wave or early second wave hits harder than the initial wave in March, there might be nowhere else to buy home furnishings and décor but at e-commerce stores.
I am bullish Overstock.com
