Mad Hedge Technology Letter
December 7, 2020
Fiat Lux
Featured Trade:
(THE OPPORTUNITIES IN BIG DATA)
(SPLK), (WK), (MDB), (ESTC)
Mad Hedge Technology Letter
December 7, 2020
Fiat Lux
Featured Trade:
(THE OPPORTUNITIES IN BIG DATA)
(SPLK), (WK), (MDB), (ESTC)
It’s all great knowing about the cloud, but to understand the cloud more deeply, and how it affects investment trends, we need to talk about Big Data.
This is epitomized by massive data troves.
That avalanche of data on a daily basis coming from an ever-growing variety of sources is now the genesis of all and any corporate decisions.
Data sets are now decoded by processing software tools that capture, process, and curate in a timely fashion.
Let’s take an ecommerce business, their data creation and gathering process comes from sources that include wholesale or retail transactions.
Other companies look into the shipping, audio and video logs, text messaging, internet search queries, cookies, satellite imagery, and GPS data, as well as stock-market activity and financial transactions. Data is also flooding in from the Internet of Things.
The process of analyzing data sets from numerical evidence is now coined data analytics.
Extracting all manner of data in order to draw out conclusions about the information is the competitive advantage of today. In addition, it uncovers undiscovered themes or unknown correlations within the data, or unearths emerging market trends leading companies to better understand customer preferences.
The data analytics’ industry is growing by leaps and bounds, fueled by market demand for systems that tolerate the intense requirements of Big Data.
Which up and coming, second-tier tech companies have cornered the best data analysts that could boost their stock price over the medium term?
I would include a short list of firms like MongoDB (MDB), Elastic (ESTC), Workiva (WK), and Splunk (SPLK).
Big data companies can focus on various areas, including data mining and cleaning, data analysis, machine data, visualization, and storage.
The trend has also fueled an expansion in new Big Data IPOs include Alteryx (AYX), Cloudera (CLDR), Talend (TLND), and New Relic (NEWR). Splunk was among the first to come public.
Investors who want a data analyst army to drive stock performance should look no further than these companies.
Although they don’t harness the type of intellectual property (IP) of monopolists such as Apple or Google, they add specific functions to the tech industry and are rocket boosters to many business models that already are benefiting from massive secular tailwinds.
Let’s dive into a few data-based firms that I think are worth your time and attention.
MongoDB (MDB)
MongoDB provides an open-source database platform for businesses, with a subscription-based software-as-a-service business model.
MongoDB's iconic flagship application can do pretty much anything in a relational database from Oracle and the difference between relational and NoSQL databases is that the relational model is rigidly defined and difficult to change.
MongoDB's software is more flexible than traditional database models, which allows developers to complete tasks more efficiently.
NoSQL databases are easy sells in today's software development sector, so MongoDB's sales are skyrocketing. The company isn't profitable yet because management has optimized the business model for maximum top-line growth.
The company burns cash but compensates for that with elevated growth rates. MongoDB’s underlying shares are up around 90% YTD.
Splunk (SPLK)
Splunk provides intelligence software designed to aid search, correlate, analyze, monitor, and report on data in real time. The software is deployed to analyze vast amounts of historical information. They specialize in machine-data applications.
Splunk stock took a big hit when the company reported third-quarter results, and the natural consolidation of many big data stocks that have come too far, too fast will offer optimal entry points for tech investors.
Splunk reported lower-than-expected bookings and annual recurring revenue due to a drop in the rate of closing deals, especially large-sized transactions.
Poor revenue forecasts and deal weakness could be a great buying opportunity.
Elastic (ESTC)
Elastic harnesses a set of software products that ingest and store data from various sources and formats, as well as perform search, analysis, and visualization.
The company uses a cloud-based software-as-a-service business model. It has 12,900 subscribers, which accounted for 93% of total revenue in the quarter.
Elastic expects fiscal third-quarter sales in the range of $145 million to $147.0 million, above Wall Street views of $139.8 million.
Elastic stock is up over 120% this year validating the use of big data tools.
I believe this is a great buy the dip stock if shares come back down to the $120 range.
Workiva (WK)
Workiva offers a cloud-based and mobile-enabled platform used by companies to collect, analyze, and manage business data. Customers use Workiva's software to streamline complex business and reporting processes by connecting teams, documents, and data from initial sources to final reports.
The company offers Workiva platform that offers controlled collaboration, data linking, data integrations, granular permissions, process management, and full audit trail services.
They specialize in data integration and preparation tools that enable customers to connect data from enterprise resource planning, governance risk and compliance, and customer relationship management platforms.
Revenue for its third quarter climbed 19% to $88 million. It has more than 3,580 customers. The company also raised its guidance for its fourth quarter.
The underlying stock is up around 75% this year and the company is on the cusp of producing positive earnings for the first time.
Aside from Splunk boasting annual revenue of $2.5 billion, the other three are diminutive in annuals sales.
Elastic, MongoDB, and Workiva only procure annual sales of less than half a billion so the jury is still out on them, where Splunk is more grandfathered into their position in the tech ecosphere.
My pick of the bunch is Workiva because their profitability and margins are trending in a better direction than MongoDB and Elastic, but I do believe that the secular trend of digital migration will help all of these companies even if management isn’t being as efficient as they could be.
Mad Hedge Technology Letter
July 6, 2020
Fiat Lux
Featured Trade:
(WHY AN OFFICE IN BELGRADE MAKES SO MUCH SENSE)
(OKTA), (SPLK), (CRM), (WKDAY), (TWLO), (NOW)
My nephew paid nothing for phone, transport, internet, utilities during the coronavirus. I’ll tell you how he did it and no, he did not live with his parents or anyone else footing the bills. The future and a massive deflationary wave of technology can be found in how my nephew lives his life.
This is a story about James.
His life is the reason why the U.S. economy will never be the same and highlights the level of metamorphosis going on in our newfound home offices.
The usual culprit of the element inciting change is tech with the aftermath a catalyst for another wave of gigantic deflation.
The statisticians need to check what they are doing because nothing adds up in the deflationary world anymore.
This downward pressure on inflation is likely to be relentless, not just transitory offering central banks more flexibility with corporate accommodative policies without threatening to invoke the specter of inflation.
This is part of the reason why the bull market in tech stocks will be infinite.
Many economists and officials are befuddled, and such worries have never been far from the surface in the period after the financial crisis, the Great Recession, and now Covid-19.
The only thing constant right now is uncertainty.
Technologies are spawning “supply side shocks” in many areas of the global economy by permitting a more intense and efficient utilization of resources.
Also, replacement often leads to the betterment of people’s lives as software disrupts and cannibalizes many established goods and services.
One recent example that couldn’t illustrate this better for the “have nots” is car rental company Hertz, who woke up one day and found their business model shattered into oblivion and obsolete.
James has a modest U.S. income of $4,000 per month, which does not get you anywhere in megacities like New York or San Francisco.
After taking into account car maintenance, gas bills, car insurance, utilities, and rent, there might be $1,000 left over if luck is on the right side.
This type of income just doesn’t cut it in many American cities.
James faced a daunting challenge to acquire the quality of life he desired in most American megacities.
James works for a small start-up tech company, and after he proved to management that he was a legitimate contributor, he quickly asserted his leverage by requesting his manager to sanction a move to a full-time remote position.
Management didn’t want to lose him and reluctantly agreed contingent on a rolling 6-month review.
But James didn’t settle on Bakersfield, California, or even Klamath Falls, Oregon where he could significantly cut his bills.
He chose to take his talents to Belgrade, Serbia.
Deflationary impulse is pervasively spread across economic sectors where its presence has been difficult to note and with James’ housing budget now abroad, his dollars are partially taken out of the U.S. financial picture.
How can such “supply-side shock” manifest itself so quickly? Surely, the supply of land is largely fixed, particularly in areas that have already been urbanized.
The answer lies with technology that created additional capacity of the second industrial revolution, such as increasingly taller high-rise buildings.
Fast forward to today.
A company like Airbnb showcases how digital technologies are allowing more intensive resource utilization. There was abundant accommodation capacity hidden in the world’s cities — but it was not accessible until the internet, smartphone adoption, and Airbnb’s founders’ ingenuity unlocked it.
James is taking advantage of these wrinkles cutting his housing and office bill and crashing his monthly budget to the bare minimum.
James didn’t even feel the need to pay a deposit on a 1-year rental lease choosing to forego rental stability for the optionality of movement.
His Belgrade Airbnb space doubled as his home office.
Airbnb usually offers a 28-day discounted price which is classified as a “long stay.”
Many of these discounts are 30% or more, meaning James only paid $350 per 28 days to live in the Belgrade city center and would move around to different neighborhoods he felt were palatable.
He especially liked the Austrian-Hungarian historical district Zemun and the hipster vibe in Dorchol near the Belgrade City Center.
After the coronavirus hit, these “long term” rentals went from $350 to $200 per 28 days as tourists fled the city centers of Europe, and Airbnb prices crashed with cratering demand.
Why doesn’t James pay for internet, phone, and utilities?
Utilities and Wi-Fi are included in the price of the Airbnb covered by the host along with the furniture and amenities like air conditioning, fully equipped kitchen, microwave, dishwasher, iron, and washing machine.
James has substituted his phone bill opting for chat apps WhatsApp, Skype, FaceTime, Signal, and calls over Wi-Fi.
He keeps a Google Fi phone account to maintain a U.S. number, but keeps it permanently “paused” and only uses it to receive security and verification codes from his U.S. bank, IRS to pay taxes, and mortgage service provider to pay his mortgage online.
He manages to log on to these important portals via a virtual private network (VPN) that routes through a U.S.-based server.
He leases his U.S. house, which he owns, out to a tenant who covers 100% of James’ monthly mortgage costs and handed over his property to a local property manager to be managed.
James doesn’t pay for any transport fees because his city center apartment is walking distance to every main artery in Belgrade giving him access to Turkish-style coffee houses, to Cevapi grilled barbecue shops, to designer Hookah lounges all within a 15-minute walk.
The 2 to 3 times he needs to jump on the tram network to attend a party or night event, he borrows his friend’s yearly transit pass or just skips the fare completely. If he needs to pay, it is 75 cents for a 1-way ticket anywhere in Belgrade.
James has been living out of 2 suitcases for as long as I can remember and has never owned a car, despite growing up in the U.S. and graduating high school and university here.
Although many in the family think he is overly extreme, his intensely minimalistic lifestyle is food for thought; even though he was the first I had ever seen live in such a simplistic, draconian way.
The fallout from the coronavirus and the trends of deflationary technology show that James was ahead of his times when nobody knew it and recently accelerating trends validate his life choices.
James has effectively been planning for a pandemic his whole life which is why he has successfully navigated it, while many Millennials his age have been wiped out, drowned into debt they can never get out of.
If the U.S. suddenly gets tens of millions of James living a variation of his life, many services and products just wouldn't sell in the U.S. anymore. And if they are as extreme as James, housing will crash in all American megacities.
The reality is somewhere in between.
Reinvention is the U.S.’s strong point, but now young people are arbitraging literally everything in their lives, applying a global perspective with a good dose of software to support ultimate goals.
I will assume that most goals end up with obtaining a higher life quality.
Moving forward, investors will need to reprogram their technology compasses around firms that support a “James” type of lifestyle simply because there will be more people like this every day.
Software companies that mesh with this overarching thesis are Okta (OKTA), Splunk (SPLK), Salesforce (CRM), Workday (WKDAY), Twilio (TWLO), and ServiceNow (NOW).
The broader conclusion is that high-quality software stocks will outperform any other sub-sector or sector from now until forever.
As for James, I heard he finally decided to cough up money for local phone data which comes in at a mind-boggling $1 per 1 GB in Belgrade only 10% the cost of the same GB in inexpensive western countries.
Mad Hedge Technology Letter
August 23, 2019
Fiat Lux
Featured Trade:
(SPLUNK’S SWAN DIVE)
(SPLK)
The data analytics stock Splunk (SPLK) was downgraded from outperform to neutral with a $127 target by an analyst yesterday morning.
On Wednesday, Splunk reported Q2 beats with upside revenue outlook and announced the $1.1B acquisition of SignalFx.
The stock was down 11% yesterday morning offering investors a good entry point.
Data and the analytics needed with it is all the rage and here to stay, yesterday was a good day to strap on a call spread, a bet that the stock will stay above $100 by September 20th.
Splunk Inc. provides software solutions that enable organizations to gain real-time operational intelligence in the United States and internationally.
Its products enable users to investigate, monitor, analyze, and act on data regardless of format or source.
Splunk yesterday announced that it had acquired SignalFx for a total price of about $1.05 billion.
Approximately 60% of this will be in cash and 40% in Splunk common stock. The companies expect the acquisition to close in the second half of 2020.
SignalFx, emerged from stealth in 2015, provides real-time cloud monitoring solutions, predictive analytics and more.
This acquisition will give Splunk an edge in observability and actions per minute (APM) for organizations at every stage of their cloud journey, from cloud-native apps to homegrown on-premise applications.
Splunk will become a power player in the cloud space as it expands its support for cloud-native applications and the modern infrastructures and architectures those rely on.
Big data generates revenue in modern business period.
Dealing for SignalFx directly lifts Splunk in position at the cutting edge of monitoring and observability at massive scale.
SignalFx will support the continued commitment to giving customers one platform that can monitor the entire enterprise application lifecycle.
This deal is about growing a larger pie for everyone, so it's a commendable move that should help Splunk maintain its sales momentum.
Splunk is in an industry expanding fast with global spending on cloud services and infrastructure set to double by 2023, again according to IDC.
Splunk faces a few headwinds such as negative free cash flow and part of the reason is the result of a transition in renewable licensing contracts and subsequent revenue recognition.
Splunk will soon debut their new pricing plans, reducing the cost of its data volume-dependent model to help its customers run more information through the Splunk system.
Free cash flow is now at negative $120 million so far this year, compared to positive $102 million through the first half of last year.
Mushrooming top-line growth for this software company and management giving another upgrade to full-year expectations are the short-term catalysts boosting shares.
Splunk is one of the premium data analytics play out there and a compelling long-term buy.
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