Mad Hedge Technology Letter
February 26, 2019
Fiat Lux
Featured Trade:
(WHY THE BIG PLAY IS IN SOFTWARE),
(AMZN), (WMT), (ZEN), (FB), (TWLO)
Posts
Buy and hold domestic software companies for dear life because that is what the market is giving you.
Take them with both hands.
These revenue models should revolve around developing the lucrative North American digital consumer markets.
Tech is all about giving you pockets of dispersion and my job to herd you into these pockets of opportunity created by pockets of dispersion.
We have once again been delivered a few more poignant indicators allowing us to gauge the market appetite for certain tech barometers.
Incandescent as can be, recent news of hardware companies planning to bring exorbitant foldable phones to market has me profusely shaking my head.
Huawei announced plans to debut the Mate X foldable 5G smartphone with a price tag of a staggering $2,600.
This followed an announcement by Korean behemoth Samsung to roll out the Samsung's Galaxy Fold and the Koreans plan to sell this luxury product for $1,980.
Chinese Huawei Mate X is 5G-supported and can simply fold into a slimmer 6.6-inch smartphone or unfold into an 8-inch tablet.
This is another case of smart manufacturers overreaching for a market that doesn’t exist and shouldn’t exist.
I believe the demand for screen-related smart products at this price point is scant at best.
If you compare foldable phones to a $600 high-tier Samsung Android smartphone with a 6-inch screen, Samsung and Huawei would need to convince consumers the extra $1,500 or in Samsung’s case, $2,200 is worth the extra relative wad of cash.
My bet is that these foldable phones aren’t worth even $300 more of aggregated incremental value let alone $500 and for many consumers like me, it’s worth zilch.
In no way, aside from the gimmick of buying one of these novelties, does buying a foldable phone justify the price.
This is another example of the common-sense factor that has been completely absent from a product cycle.
Product viability and product desirability do not walk hand in hand.
The screen-related smart device market is saturated, evident by the elongated refresh cycle in smartphone usership.
Blame the expensive price tags of over $1,000 and the removal of carrier subsidies that have caused the upgrade cycle to skyrocket from 2.39 years in 2016 to 2.83 years in late 2018.
Then there is the touchy issue of cannibalizing other hardware product lines as many of the potential foldable phone customers might interchange the foldable phone with normal smartphones.
This all screams bad strategy with companies saddled in a glut of inventory.
It takes R&D years to follow through and develop the technology to bring it to market, and it is entirely conceivable this could become a big write-off.
If price cuts happen shortly after the debut, prospects look bleak.
In general, consumer sentiment has soured for more of this type of tech. Many people are just exhausted from screen time and the cycle of the newest hardware screens is failing to excite existing customers bases.
The only conclusion I can make is that tech today is about software, software, and particularly domestic software.
If you compare software to hardware head to head now, software functionality is still increasing 15% YOY juicing up efficiency and productivity.
What will foldable phones offer a digital nomad or working professional?
Not much.
It highlights the absence of a productivity or functionality boost that digital device users are scouring for now.
Stay away from hardware.
Why is domestic software preferred over international software that scales the earth five times around?
Regulation.
It has reared its ugly head again.
The avalanche of negative headlines applied to American big tech is finally becoming a self-fulfilling prophecy.
It was only a matter of time until someone took note, and in this case, various Asian governments have taken note.
In a bid to blunt American tech’s first mover advantage, the Indian government has written up a draft of regulatory measures in order to make the Indian tech landscape a fairer playground.
This will have the intended effect of creating a national powerhouse of tech firms employing local people.
India has effectively taken a page out of China’s playbook using home-field advantage to nurture homegrown talent.
Large American tech companies have made India a playground of binge investments lately with Amazon (AMZN) shelling out $5 billion and Walmart (WMT) brazenly pouring $15 billion into e-commerce heartthrob Flipkart.
This is awful news for them.
They will have to adjust to India’s new-found zeal for digital regulation and a heavy restructuring of the business model could be in the cards in 2019 along with higher costs of running these businesses.
India has followed China in its footsteps demanding data to be localized meaning data centers won’t be able to run and store Indian data abroad.
American participants will have no other choice but to pony up the extra costs.
Readers might forget that India is the current battleground of global tech growth and Amazon will not have unfettered market access like they did breaking into Europe and dominating e-commerce from the start.
Amazon and Walmart can thank Facebook (FB) which has been the main culprit in bringing wave after monstrous wave of heavy criticism on a whole industry.
Facebook has effectively brought forward the regulatory storm that otherwise would have happened a few years later down the road.
In any case, this makes life harder for data-oriented companies who wish to navigate hazardous foreign tech climates.
Domestic angst against local tech has given the rubber stamp for full-on data government mandates abroad from India to Vietnam.
What does this all mean?
In 2019, data regulation could shrink expected growth levers while hardware companies are becoming even more desperate as these Hail Marys could quickly turn into liabilities.
I nailed software picks Zendesk (ZEN) and Twilio (TWLO) amongst others from a strong group of enterprise software stocks.
Twilio’s performance could potentially become my best pick of 2019, it’s on a straight line up even with all this clutter and chaos around the world.
Winter 2018 was a time to remember as American tech shares were caught up in a perfect storm of a global growth scares, interest rate gyrations, and a political tug of war that sees no end in sight.
All of this made investors run for the hills after a huge run-up of tech shares since the February correction in 2018.
Even after all the chaos, there is one tech stock that has muscled out the noise and is hovering at all-time highs.
Coincidently, this is a name that I recommended last year as a strong 2019 play and I would like to reaffirm my prognosis by doubling down on cloud communications company Twilio.
Twilio will be a darling of 2019 because it seeks to upgrade a whole swath of communications in legacy companies that are scurrying to compete with the rest who have forged ahead.
The start of 2019 has been a positive omen for Twilio shares, and are almost 10% higher in this short span of time.
It’s discernable that it is not only me who believes in this company and naysayers are few and far between.
Twilio doesn’t get as much PR as it should because making sure the back-end communication channels are executing at optimum levels is not exactly a sexy part of tech with shiny smartphones and wearable gadgets.
This company produces software and are good at what they do.
Many of you might not have even heard of them but I am sure you have heard of companies such as Uber, Lyft, and Airbnb.
Why do I mention these three private tech companies that are on the verge of going public this year?
Because this trio of unicorns is all powered by Twilio’s communication technology that is best of breed in their genre of cloud software.
More specifically, Twilio is a platform as a service (PaaS) firm offering programmatic phone call functions, can automate sending and receiving text messages, and performs other communication functions using its web service APIs.
When your shaggy-haired Uber driver calls asking you to reveal yourself out of a concrete apartment block or your lavish gated community, this is all facilitated by Twilio’s technology.
At the 2018 Twilio Signal Conference in San Francisco, Twilio indicated that its latest “call center in a box” product called Flex was up and running after announcing in March last year.
Prior to Twilio’s roll-out, this type of call center functionality was only reserved for the Fortune 500 companies that could afford expensive software to serve its minions of customers.
The small guy was left out in the cold as usual.
Twilio has reshaped the call center and, at $1 per hour or $150 per month, has made itself a gamechanger for SMEs who don’t have the manpower or capital to fund exorbitant back-end operations.
Twilio is really going after anyone with a light or bulky-shaped wallet as you see from their all-star lineup of customers. U-Haul, real estate website Trulia, and data analytic firms Scorpion and Centerfield are just a few of their customers proving the incredible flexibility and inclusive nature of the software.
It’s not a shock that this stock has gone ballistic in 2018 surging over 200% and I must admit investors need to wait for this molten hot stock to cool down.
But how can you blame a company that habitually beats any expectations by investors because of its super growth model and rapid broad-based adoption?
From the fourth quarter of last year, revenue accelerated to 48% YOY and Twilio followed that up with a blistering 54% YOY quarter.
Then they pulled a shocker guiding down only expecting 35% to 37% growth but dismantled any whiff of jangling investors' nerves by posting another quarterly growth rate of 54%.
If you average out the three-year sales growth rate, few can topple the 57% Twilio has registered.
Performance has been fantastic, to say the least, and Flex could be the product that widens their industry lead and fortifies the moat around them.
Airbnb, Uber, and Lyft will avoid tinkering with the back end of their operations before their 2019 IPOs boding well for Twilio who are on a hot streak scoring a series of big contracts.
And as their IPO dates creep closer, I firmly believe that the quiet story of Twilio will jump to the fore.
There is only so long this brilliant company can be kept under wraps.
If you take a long-term view of companies, this cloud company will be investor’s ticket to early retirement.
Even though Twilio has failed to become profitable, this year bodes well with EPS growth expected to be over 10%.
This year will be the precursor to 2020 when Twilio really invigorates earnings capability with analysts forecasting over 48% EPS growth in 2020.
Sometimes cloud companies must move mountains and absorb years of losses to finally breach the profitability marker, that time is about to come for Twilio and along with maintaining its riveting growth, the business model will become more sustainable with a vast improvement in cash flow.
Although Twilio’s competitive advantage is not as large as Microsoft (MSFT), this company has the same type of momentum going into 2019.
I believe many institutional investors have yet to hear this name echo around investment offices, and if any tech stock is going to be the darling of 2019, it will be Twilio.
I expect Twilio shares to shortly eclipse the $100 mark and maintain that level with an infusion of zeal that mimics Microsoft’s share price.
Notice that through hell and high water, any massive sell-off that crushes Microsoft swan diving below $100, shares find itself above $100 again in a jiffy.
I expect Twilio to exude similar characteristics, albeit with more volatility.
Twilio has the ability to rise 10% or even 15% on any given day on good news.
Being at all-time highs again only illustrates the attractiveness of the name.
In general, this should really be a software-as-a-service (SaaS) year for investors as the migration to these services picks up speed.
Any meaningful dip that can be attributed to outside forces should be bought because there are no fundamental problems with Twilio.
Don’t chase the stock here because it’s up almost 300% in the past 365 days - wait for it to fall into your wheelhouse.
To add the cherry on top, this company is far away from the geopolitical trade winds.
And even though fundamental differences have yet to be hashed out, at least it debugs one potential headwind to the fundamental story.
Twilio should outperform this year relative to the large tech stocks, it’s up to you if you want to ride on the coattails of this story or try your luck on less qualified names.
And not to toot my own horn, but this stock is already up almost 30% since I urged readers to pile into it.
I am strongly bullish Twilio.
Mad Hedge Technology Letter
January 9, 2019
Fiat Lux
Featured Trade:
(TOP 8 TECH TRENDS OF 2018),
(GOOGL), (FB), (WMT), (SQ), (AMZN), (ROKU), (KR), (FDX), (UPS), (CRM), (TWLO), (ADBE), (PYPL)
As 2019 christens us with new technological trends, building our portfolio and lives around these themes will give us a leg up in battling the algorithms that have upped the ante in our drive to get ahead.
Now it’s time to chronicle some of these trends that will permeate through the tech universe.
Some are obvious, and some might as well be hidden treasures.
- Smart Areas Will Conspicuously Advance
American consumers will start to notice that locations they frequent and the proximities around them will integrate more smart-tech.
The hoards of data that big tech possesses and the profiles they subsequently create on the American consumer will advance allowing the possibilities of more precise and useful products.
These products won’t just accumulate in a person’s home but in public areas, and business will jump at the chance to improve services if it means more revenue.
Amazon and Google have piled money into the smart home through the voice assistant initiatives and adoption has been breathtaking.
The next generation will provide even more variety to integrate into daily lives.
- Location-based Dispersion Will Ramp Up
The gains in technology have given the consumer broader control over their lives.
The ability to practically manage one’s life from a remote location has remarkably improved leaps and bounds.
The deflation of mobile phone data costs, the advancement of high-speed broadband internet services in developing countries, more cloud-based software accessible from any internet entry point, and the development of affordable professional grade hardware have made life easy for the small business owners.
What a difference a few years make!
This has truly given a headache for traditional companies who have failed to evolve with the times such as television staples who rely on analog advertising revenue.
Millennials are more interested in flicking on their favorite YouTuber channel who broadcast from anywhere and aren’t locally based.
Another example is the quality of cameras and audio equipment that have risen to the point that anybody can become the next Justin Bieber.
Music executives are even using Spotify to target new talent to invest in.
- Overhyped Bitcoin Will Finally Take A Siesta From The Mainstream
Blockchain technology has the makings of transforming the world we live in.
And the currency based on the blockchain technology had a field day in the press and backyard summer barbecues all over the country.
Well, 2019 will finally put this topic on the backburner even though Bitcoin won’t disappear into irrelevancy, the pendulum will swing the other direction and this digital currency will become underhyped.
The rise to $20,000 and the catastrophic selloff down to $4,000 was a bubble popping in front of us.
It made a lot of people rich like the Winklevoss brothers Cameron and Tyler who took the $65 million from Facebook CEO Mark Zuckerberg and spun it into bitcoin before the euphoria mesmerized the American public.
On the way down from $20,000, retail investors were tearing their hair out but that is the type of volatility investors must subscribe to with assets that are far out on the risk curve.
The volatility that FinTech leader Square (SQ) and OTT Box streamer Roku (ROKU) have are nothing compared to the extreme volatility that digital currency investors must endure.
- E-Sports Will Become Even More Popular
Video games classified as a spectator sport will expand up to 40% in 2019.
This phenomenon has already captivated the Asian continent and is coming stateside.
This is a bit out of my realm as standard spectator sports don’t appeal to me much at all, and watching others play video games for fun is something I am even further removed from.
But that’s what the youth like and how they grew up, and this trend shows no signs of stopping.
Industry experts believe that the U.S. is at an inflection point and adoption will accelerate.
Remember that kids don’t play physical sports anymore because of the risk to head trauma, blown ligaments, and the sheer distances involved traveling to and from venues turn participants away.
Franchise rights, advertising, and streaming contracts will energize revenue as a ballooning audience gravitates towards popular leagues, tapping into the fanbase for successful video game series such as Overwatch.
The rise of eSports can be attributed to not only kids not playing physical sports but also younger people watching less television and spending more time online.
Soon, there will be no difference in terms of pay and stature of pro athletes and video gaming athletes.
The amount of money being thrown at the world’s best gamers makes your spine tingle.
- Data Regulation Will Tighten
The era of digital data regulation is upon us and whacked a few companies like Google and Facebook in 2018.
Well, this is just the beginning.
The vacuum that once allowed tech companies to run riot is no more, and the government has big tech in their cross-hairs.
The A word will start to reverberate in social circles around the tech ecosphere – Antitrust.
At some point towards the end of 2019, some of these mammoth technology companies could face the mother of all regulation in dismantling their business model through an antitrust suit.
Companies such as Amazon and Facebook are praying to the heavens that this never comes to fruition, but the rhetoric about it will slowly increase in 2019 because of the mischievous ways these tech companies have behaved.
The unintended consequences in 2018 were too widespread and damaging to ignore anymore.
Antitrust lawsuits will creep closer in 2019 and this has spawned an all-out grab for the best lobbyists tech money can buy.
Tech lobbyists now amount to the most in volume historically and they certainly will be wielded in the best interest of Silicon Valley.
Watch this space.
- Software Favored To Hardware
The demand for smart consumer devices will fall off a cliff because most of the people who can afford a device already are reading my newsletter from it.
The stunting of smart device innovation has made the upgrade cycle duration longer and consumers feel no need to incrementally upgrade when they aren’t getting more bang for their buck.
The late-cycle nature of the economy that is losing momentum because of a trade war and higher interest rates will see companies look to add to efficiencies by upgrading software systems and processes.
This bodes well for companies such as Microsoft (MSFT), Salesforce (CRM), Twilio (TWLO), PayPal (PYPL), and Adobe (ADBE) in 2019.
- Logistics Gets A Boost From Technology
This is where Amazon has gotten so good at efficiently moving goods from point A to point B that it is threatening to blow a hole in the logistic stalwarts of UPS and FedEx.
Robots that help deploy packages in the Amazon warehouses won’t just be an Amazon phenomenon forever.
Smaller businesses will be able to take advantage of more robotics as robotics will benefit from the tailwind of deflation making them affordable to smaller business owners.
Amazon’s ramp-up in logistics was a focal point in their purchase of overpriced grocer Whole Foods.
This was more of a bet on their ability to physically deliver well relative to competition than it was its ability to stock above average quality groceries.
If Whole Foods ever did fail, Amazon would be able to spin the prime real estate into a warehouse located in wealthy areas serving the same wealthy clientele.
Therefore, there is no downside short or long-term by buying Whole Foods. Amazon will be able to fine-tune their logistics strategy which they are piling a ton of innovation into.
Possible new logistical innovations include Amazon attempting to deliver to garages to avoid rampant theft.
This is all happening while Amazon pushes onto FedEx’s (FDX) and UPS’s (UPS) turf by building out their own fleet.
Innovative logistics is forcing other grocers to improve fast giving customers better grocery service and prices.
Kroger (KR) has heavily invested in a new British-based logistics warehouse system and Walmart (WMT) is fast changing into a tech play.
- Tech Volatility Won’t Go Away
Current Chair of the Federal Reserve Jerome Powell unleashed a dragon when he boxed himself into a corner last year and had to announce a rate hike to preserve the integrity of the institution.
Markets whipsawed like a bull at a rodeo and investors lost their pants.
Tech companies who have been leading the economy and trot out robust EPS growth out of a whole swath of industries will experience further volatility as geopolitics and interest rate rhetoric grips the world.
Apple’s revenue warning did not help either and just wait until semiconductors start announcing disastrous earnings.
The short volatility industry crashed last February, and the unwinding of the Fed’s balance sheet mixed with the Chinese avoiding treasury purchases due to the trade war will insert even more volatility into the mix.
Powell attempted to readjust his message by claiming that the Fed “will be patient” and tech shares have had a monstrous rally capped off with Roku exploding over 30% after news of positive subscriber numbers and news of streaming content platform Hulu blowing past the 25 million subscriber mark.
Volatility is good for traders as it offers prime entry points and call spreads can be executed deeper in the money because of the heightened implied volatility.
