Mad Hedge Technology Letter
October 25, 2021
Fiat Lux
Featured Trade:
(HOW TO PLAY THE TECH EARNINGS SEASON)
(MSFT), (FB), (GOOGL), (AAPL), (SNAP)
Posts
The big guns of tech are coming up to the plate for earnings and they could use a strong showing as big tech’s narrative is on the ropes.
They are still the apex warriors of the stock market, and that position is hardly under threat, but there are whispers of a slowdown.
A recipe of high expectations mixed with cruddy forecasts could give us a dip to buy into.
This is what our portfolio would love to be gifted.
Don’t forget we have already seen some misses from tech companies like Snap (SNAP) which plunged 27% after warning that customers are cutting back on digital advertising spending.
The fallout sent other ad tech companies like Twitter and Google significantly lower.
This never used to happen to these companies and that’s important to point out because we just exited an era where ad tech companies could do no wrong.
Now it almost seems like they can’t do no right.
Readers got spoilt, earnings after earnings, these tech companies used to knock it out of the park and much of that high expectation is still leftover, perhaps a legacy concept from the bull market from 2008 to 2021.
These are the bellwether stocks of the broader market that have single-handedly put the rest of their market on their back and carried it higher.
Everyone wants to know if they can still hack it?
Technology companies in the S&P 500 Index are projected to report revenue growth of roughly 19% for the third quarter such as Alphabet at 38% growth, followed by Facebook at 37% and Apple (AAPL) at 31%.
I do believe that they will achieve these lofty estimates but they won’t overperform to the point where buyers line up in spades.
We aren’t in that type of environment now.
These companies have pricing power, and combined with underlying growth drivers, they generate high returns and reinvest in the business and perpetuate that strength.
The price action backs up my concerns with 85% of tech companies having beaten profit estimates, but the stocks have fallen an average of 2.4% the following day.
The lack of response means we are long in the tooth.
If this does become a “buy the rumor, sell the news” type of event, this will give us plenty of discounts to cherry-pick the next day.
The challenge of justifying their valuations means these companies aren’t getting their “free pass” that they used to pocket and manipulate.
They aren’t the darlings of the business world anymore — that title goes to cryptocurrency and bitcoin.
Facebook will tell us how badly Apple’s privacy changes are affecting its ad revenue model.
Consensus is looking for revenue growth of nearly 40% this quarter in Alphabet which in a normal year wouldn’t be that hard to beat but it’s a new normal now.
Ongoing monetization improvements in search advertising through product/AI-driven updates, along with greater-than-expected contributions from businesses like YouTube and Google Cloud can seem them meet their forecasts.
Microsoft (MSFT) expects revenue to grow around 20% in the quarter and we need to look out for if their cloud-computing business maintains strong demand.
Year-over-year comparisons get progressively tougher throughout the year which is an obstacle for MSFT’s durable growth portfolio of Azure/Security/Teams.
Apple could deliver great iPhone sales, but semiconductor shortages are a limiting factor, and the China risk is another big quagmire.
At what point will the Chinese Communist Party stop giving Apple such an easy go of it in China?
Regulatory uncertainty is an overhang — implications of the App Store ruling remain a wild variable.
Amazon is dealing with supply-chain challenges and labor shortages.
Last quarter, revenue missed expectations for the first time since 2018, and the company warned of the reverse of the pandemic-related tailwind for online retail.
Revenue is expected to grow a little more than 16%, the slowest pace since 2015.
The stock has been dead weight this year, which is unlike Amazon.
I do believe we will get a sprinkling of fairy dust that includes margin expansion, but some of these companies will experience a pullback and I will be waiting to aggressively take advantage of these deals.
Mad Hedge Technology Letter
October 22, 2021
Fiat Lux
Featured Trade:
(BOMBSHELL HITS AD TECH)
(SNAP), (FB), (GOOGL), (AAPL)
So, first the good news — SNAP expanded revenue by 57% year-over-year.
It was only a few years ago that this tech company was the backwater of social media, but it’s done its bit to catch up with the crowd.
SNAP targets the 18–29-year-olds and although not minted, there are pathways for a lifetime of revenue generation from this cohort.
In a rough environment battling Google (GOOGL) and Facebook (FB) and despite these challenges, they crossed $1 billion in quarterly revenue for the first time.
That was the good news and now you might want to cover your ears so put on those earmuffs.
The reason SNAP missed guidance by $3 million was because there have been changes to advertising tracking in Apple’s iOS system.
These ongoing changes to digital advertising were introduced as part of iOS 14.5 and were announced ahead of time, and now that move is started to suppress the bottom line for the social media giants.
SNAP anticipated some degree of business disruption, and unfortunately, their provided measurement solution did not scale as expected.
Basically what’s happening is that it’s more difficult for advertising partners to measure and manage ad campaigns for iOS.
Advertisers are no longer able to understand the impact of their unique campaigns based on things like the time between viewing an ad and taking an action or the time spent viewing an ad.
Real-time campaigns and creative management are hindered by extended reporting delays and advertisers are unable to target advertising based on whether or not people have already installed an app.
Without these business analytics, SNAP’s platform is less attractive because sale conversions are a great deal lower.
This impact was compounded by the ongoing macroeconomic effects of the global pandemic with advertising partners facing a variety of supply chain interruptions and labor shortages.
The ongoing magnitude and duration of these global supply and labor disruptions are inherently unpredictable.
Also, businesses do not have the inventory or operational capacity to support incremental demand.
SNAP expect customers to cut marketing budget given the diminished need to drive incremental demand at a time when supply chains are not able to operate at peak capacity.
This in turn that reduces their short-term appetite to generate additional customer demand through advertising at a time when their businesses are already supply-constrained.
The big question is: how bad will the Apple changes impact SNAP in the future?
SNAP is down 25% in today’s trading and that’s just them.
Facebook is down around 6% and Google is also off 3%.
Apple has signaled that they aren’t willing to accommodate the tracking techniques of the social media companies.
Clearly, investors are worried about the magnitude of the drop in shares, and this does a great deal to kill the momentum in the stock.
This isn’t the end of the world because I would like to point out that these changes happened in June and July, yet SNAP was still able to grow revenue by 57% year over year.
But I will say this will crimp the growth elements in the business model and lower the ceiling.
Growth rates of high 50% could start trending towards the lower 40% and investors hate that.
The company is still quite small — less than $90 billion of market cap.
This is exactly what SNAP didn’t want because comparatively speaking, Google and Facebook will be able to absorb this better with their war chest of capital readying itself to plug in the gaps.
The stock essentially gave back a year of performance in one morning, but I do view this as a buying opportunity and readers who have a long-term view will certainly profit once SNAP work itself through this problem, but it will be closer to a crawl up than big gaps up in prices.
Global Market Comments
October 13, 2021
Fiat Lux
Featured Trade:
(THE BRAVE NEW WORLD OF ONLINE RETAILING),
(SNAP), (GPRO), (APRN), (SFIX)
I was flying on first class flight on Virgin America from New York to San Francisco last year, and all I can say is that you meet the most interesting people in first class.
The woman sitting next to me was dark-haired, rail-thin, elegantly dressed, and utterly gorgeous. She addressed the flight attendant in a heavy Italian accent.
I hadn’t been to the former Roman empire since the summer, so I thought I would give my Italian a workout.
What I learned was amazing and opened up nothing less than a peek into the future of retailing.
I am always on the lookout for the next “big thing” than can generate a great Trade Alert, and suddenly here was a golden opportunity
It turned out that the woman was a senior executive with the fashion house Prada, based in Milan. Why was a fashion executive flying to a city where the hoodie and torn designer jeans were the primary means of dress?
She was flying halfway around the world to develop a relationship with Stitch Fix (SFIX), the hottest new concept in online apparel retail.
The fact that major companies were flying people in from Europe to check out a small startup said a lot right there.
The company’s business model is very simple, if not brave.
Consumers fill out a personal profile that includes every conceivable measurement, preference, and lifestyle. A personal stylist is then assigned to you who mails you a monthly box of items they think you would like.
For this service, you are charged a “stylist” fee of $20, which can then be applied as a credit towards any purchases.
You simply buy the items that appeal and mail the rest back. An artificial intelligence-driven algorithm records your picks and returns and then predicts what you are most likely to buy next time.
After several of these cycles, the algorithm knows what you like better than you do and will even mail you special offerings at a discount.
Along the way, Stitch Fix will introduce you to styles and brands that you never would have thought of. In order words, it does all the thinking for you.
The company has already clocked $1 billion in revenues in 2017 and is on an exponential growth trajectory.
Stitch Fix boasts an operating gross margin of 44%, well in excess of traditional retailers like Macy’s (M), Kohl’s (KSS), The Gap (GPS), and JC Penny (JCP).
Originally targeting Millennials, it quickly learned that its real market was with middle-aged professional women who don’t have time to shop.
It is already marketing 700 brands and is working to establish its own brands where the real margins are.
Some 95% of the firm’s employees are women.
The recent history of tech IPOs has not been great ((SNAP), (GPRO), (APRN), etc.). However, given the current online retail explosion, I have great hopes for (SFIX).
Just to have some fun, I filled out a profile but listed my age as 25. I can’t wait to see what they send me.
Hopefully, I won’t blow up their algorithm.
To place your first order with Stitchfix, please visit their website by clicking here.
Mad Hedge Technology Letter
August 30, 2021
Fiat Lux
Featured Trade:
(A GREAT ALTERNATIVE IN THE AD TECH SPACE)
(SNAP), (AMZN), (FB), (GOOGL), (SDC)
I know many readers gripe about certain tech stocks being too expensive like Google (GOOGL), Facebook (FB), or even Amazon (AMZN), but that’s not the case for all high-quality tech names out there.
There are still deals to be had.
An undervalued tech name in the same industry, albeit more diminutive than the three I just mentioned, is ad revenue platform Snap Inc. (SNAP).
Their story is a good one and their revenue model appears to be maturing at an optimal time while still exhibiting many elements of explosive growth.
To see what I mean — Snap grew both revenue and daily active users at the highest rates they have achieved in the last four years.
Daily active users grew 23% year-over-year to 293 million — expanding revenue by 116% year-over-year to $982 million.
This outperformance reflects the momentum in SNAP's core advertising business and the positive results of their team serving ad partners helping them to generate a return on investment.
SNAP benefited from a favorable operating environment and continued success with both direct response and large brand advertisers — continue to leverage performant ad products to grow an advertiser base globally.
Adjusted EBITDA improved by $213 million compared to last year, marking the third adjusted EBITDA profitable quarter in the last 12 months as SNAP continues to demonstrate the leverage in their business as they scale.
They are also fully absorbed in making progress against revenue and Average Revenue Per User (ARPU) opportunities, which I believe will be driven by three key priorities.
First, driving ROI through measurement, ranking, and optimization.
Second, investing in aggressive sales and marketing functions by continuing to train, hire, and build for scale.
And third, building innovative ad experiences around video and augmented reality, with a focus on shopping and commerce.
The commitment to these three priorities, along with a unique reach and large, engaged community, allows SNAP to drive performance at scale for businesses around the world.
They have proven through results in North America that with a robust team, surrounding resources, and a local focus, they can accelerate revenue.
They are now taking that model and replicating it in several markets that they have identified as having a large digital advertising market and significant levels of existing Snapchat adoption.
It’s true to say they still have a lot of room to grow in some of the world's most established ad markets outside of North America, especially in Europe.
For example, in the UK, France, and the Netherlands, SNAP reaches over 90% of 13- to 24-year-olds — 75% of 13- to 34-year-olds.
SNAP continues to invest heavily in video advertising, with the goal of driving results for advertising partners and connecting them to the Snapchat Generation.
For example, SNAP worked with Nielsen to help U.S. advertisers understand how to more efficiently reach their target audiences via Snap Ads.
The Total Ad Ratings study analyzed how over 30 cross-platform advertising campaigns reached people on both Snapchat and television.
The analysis showed that Snapchat campaigns contributed an average of 16% incremental reach to advertisers' target audiences, and over 70% of the Gen Z audience that was reached by Snapchat was not reached by TV-only campaigns.
This is especially important as people are increasingly cutting the cord, and mobile content consumption continues to grow, presenting SNAP with a large opportunity to help advertisers reach the Snapchat Generation at scale.
Augmented reality advertising is delivering a return on investment that is measurable and repeatable, which is encouraging the incremental businesses to invest in AR.
For example, Smile Direct Club (SDC) leveraged a Goal-Based Bidding Click optimization for Augmented Reality (AR), which drove 49% of Snap customer leads in Q2 and was the most effective ad unit at driving traffic for their business compared to other social channels.
The success of the Lens ultimately encouraged Smile Direct Club to include AR Lenses as part of their long-term business strategy.
SNAP is betting the ranch on efforts to help advertisers improve conversions and ROI, and recently launched optimization for AR, which allows advertisers to optimize their AR campaigns for down-funnel purchases and fits well into the broader shopping strategy.
SNAPs bread and butter region of North America is hitting on all cylinders with revenue growing 129% year-over-year in Q2, while ARPU grew 116% year-over-year as they continue to benefit from significant investments made in sales teams and sales support in the prior year.
At a 30-thousand-foot level, the global internet services market was valued at over $450 billion in 2020, the year in which the pandemic fundamentally altered how society functions, accelerating a push towards digital offerings.
The internet market is expected to grow at a compound annual growth rate of 5% through 2027 and reach a value of $652 billion. US-based equities presently control close to 30% of the total global market share in the industry.
My takeaway from this is that even though there is GOOGL and FB in this space, the pie is growing so fast that there is easily room for others like SNAP.
One must believe that if SNAP keeps operating anywhere close to its pandemic performance relative to other companies, they are surely guaranteed to be a buy-the-dip company.
In terms of price action, that’s exactly what we have witnessed as the price has zig-zagged up by 300% — the stock price goes two levels up and retraces back one — rinse and repeat.
Just view the big down days as optimal entry points into a burgeoning social media platform and deploy capital.
In the short term, on the monetization side, I have to note that the fiscal comparisons will be more challenging in the second half as SNAP begins to lap the acceleration in top-line growth that they experienced in the prior year.
Once that sell-off gets baked into the equation via a 3-5% sell-off, readers should jump back into SNAP.
Mad Hedge Technology Letter
December 23, 2020
Fiat Lux
Featured Trade:
(HOW SILICON VALLEY STAYS AHEAD)
(MSFT), (ORCL), (FB), (SNAP), (QCOM), (TWTR)
Northern Californian tech companies stopped innovating because of the monopolistic nature of their current business models.
They keep one principle close to their vest – to crush anything that remotely resembles competition.
This has been going on in Silicon Valley for years and the government still hasn’t taken their finger out to do much about it.
The end result is an ever-growing impoverished U.S. middle class and bleak prospects for their children.
Why does the U.S. government largely sit on the sidelines and turn a blind eye?
If I deploy the concept of Occam's razor to this situation, a philosophical rule that entities should not be multiplied unnecessarily which is interpreted as requiring that the simplest of competing theories be preferred, my bet is that most of U.S. Congress own stock portfolios and these portfolios are spearheaded by the likes of Apple (AAPL), Facebook (FB), Amazon (AMZN), Google (GOOGL), Netflix (NFLX), and of course Tesla (TSLA).
This has come into the open frequently with members of Congress even front-running the March sell-off with their own portfolios like U.S. senator Kelly Loeffler from Georgia selling $20 million in stock after attending special intelligence briefings in the weeks building up to the coronavirus pandemic.
It’s a direct conflict of interest, but that's not surprising for politics in 2020, is it?
It’s also why Congress hasn’t acted on Silicon Valley’s excessive abuse of power.
The government likes to jawbone to the public saying they will make competition a level playing field, but actions show they are doing the opposite.
The Silicon Valley oligarchs are whispering in the ear of Congress and they listen.
Well, what now?
Fast forward to the future – and it was only in mid-September, TikTok — the Chinese-owned, video-sharing phenomenon — was being forced to sell its U.S. operations.
The situation is still pending, and TikTok has asked for extensions hoping to arrive at the next administration.
Given the app’s 100 million U.S. users, this forced divestment by President Trump triggered a delirious auction pitting tech giants Microsoft (MSFT), Oracle (ORCL), and Twitter (TWTR) against one another.
The White House and Big Tech are boiling the free for all down to a combined story of national security and opportunistic capitalism amid unfortunate geopolitical tension between the U.S. and China.
But the ultimatum for ByteDance, TikTok’s Chinese Mainland owner, is more accurately understood as a dark window into Silicon Valley’s utter failure to innovate, and a warning signal of its transformation into a mere protector of long-established turf.
If you don’t have it, claim national security threats, and steal it.
Silicon Valley has long adhered to the motto, “Move fast and break things” – but that was long ago when Steve Jobs was busy making the first iPod and iPhone.
That was a time when Silicon Valley headed by luminaries like Jobs was actually innovating.
Tech has now turned mostly into a digital marketing lovefest with cheap shortcuts and big swaths of the internet corrupted.
The truth is Silicon Valley couldn’t be more corporate and monolithic than it is now, and they use the corporate machine to serve the ends they desire for their shareholders to the devastation of the majority of U.S. society.
Big Tech is just in love with buybacks like the rest of corporate America and the only reason they avoid it now is to appear as if they are in tune with public discourse and not tone-deaf.
I believe that once 2021 rolls around, a floor will be set with U.S. tech because they will initiate a new wave of buybacks.
Huawei, another punching bag of the Trump administration’s tech war with China, is just an externality to Silicon Valley’s inability to innovate.
In remarks to reporters in March 2019, Chinese politician Guo Ping said, “The U.S. government has a loser’s attitude. They want to smear Huawei because they can’t compete with us.”
It’s sadly true that the U.S. has fallen so far behind the Chinese in 5G development that they have opted to scratch and claw back their position through geopolitics.
Huawei not only possesses more 5G-related patents than any other company (some 13,474). It also holds a larger share of standard-essential patents (or SEPs) – about 19% of them to be precise versus 15% for Samsung, 14% for LG, 12% for each of Nokia and Qualcomm, and just 9% for Ericsson.
The writing is on the wall that Silicon Valley is falling behind and that gap is accelerating.
ByteDance produced the hottest new social media platform on a global scale, and Facebook, in typical fashion, responded by brazenly copying TikTok, adding a feature called Reels to Instagram.
Facebook has also tapped the political back channels to encourage the U.S. government to ban TikTok not because it threatens Facebook’s model but because Facebook is concerned about national security.
What a joke.
Don’t forget that Mark Zuckerberg has been attempting to destroy Snapchat (SNAP) for years after CEO Evan Spiegel refused to sell it to Zuckerberg.
The rest of the tech ecosphere has given a free pass to the anti-trust violations because they don’t want to be the next takeout target.
Make no bones about it, Silicon Valley, aided by the Trump administration, is about to do a smash and grab job on China’s best tech growth asset then do the same thing to Huawei’s 5G apparatus.
This cunning maneuver alone has the knock-on effect of not only extending the tech rally in U.S. public markets but increasing the scarcity value and emboldening the Silicon Valley oligarchs.
The de-facto robbing of Chinese tech in broad daylight is overwhelmingly bullish for the U.S. tech sector and that is why no foreign tech player will be able to compete again in the U.S.
So why innovate? Why deploy capital into research and development when you can just nick a foreign company's crown jewel?
Exactly, so innovation does not happen and will not happen.
We, as consumers, have been thrust into the cluster of ever-degrading smartphone apps that offer less and less utility.
But ultimately, even if you hate Silicon Valley at a personal level, it is literally impossible to short them, and now they are resorting to adding foreign companies on the cheap, what other passes will government, society, and corporate America give American tech?
In either case, it’s not for me to judge, and as a technology analyst - I am bullish U.S. tech because love it or hate it, revenue is still growing and relative to the rest of the U.S. economy, they are still growth dominators.
However, one must ponder when these actions will come back to bite, if it ever does. Even though integrity has been sacrificed for profits, 2021 is poised to be the most exciting tech year with the sector usurping an even bigger portion of the broader U.S. economy.
