(ZS) Archives

Where the Next Action is in Technology

I have been adamant that 2020 is a time to be cherry-picking the best of the 2^nd tier tech stocks like Twitter, eBay, Adobe, and Fortinet.

But investors must be aware that in the 2^nd and 3^rd tiers of the tech landscape, nothing is guaranteed, and the downside price action and the inflection points can be hard to swallow.

One stock that has been on both sides of the fence is cloud computing company Dropbox (DBX).

Dropbox shares exploded Friday morning up over 23% trending towards their best single-day performance.

Believers think this stock has finally shaken off the cobwebs.

Dropbox has it hard as it competes with the behemoths of Amazon, Google, and Microsoft for the same pie in the Cloud game.

To keep its head above water, they must tread harder than the bigger guns and the lack of traction in the past year doomed them to a -26% share return for investors.

Well, investors have gotten back their losses in one day and could close above its initial-public-offering price of $21 for the first time since September.

My underlying thesis of second-tier tech stocks either sinking or swimming partly has to do with the manner in which they are able to navigate against bigger companies who are in catch-and-kill mode via buyouts.

A highly bullish signal was when management at Dropbox decided to raise its operating-margin and free-cash outlook for 2020 and over the long term.

Superior operating margin was one of the hyped-up metrics that management tried to sell investors post-IPO but they never followed through and the stock cratered.

Dropbox has also revealed that higher margins will not be at the expense of cost cuts affecting the top line and has more to do with superior growth drivers which are always positive.

The new operating margin forecast for Dropbox is between 28% to 30% compared with a prior range of 20% to 22%, and that is a big deal.

There is a nuanced relationship between growth and profitability and Dropbox cannot lose sight of either because if top line misses badly, the operating margin beat is less meaningful.

At the bare minimum, the tone of the earnings report has investors chomping at the bit inciting a massive rally in shares and turning around the narrative for this once beleaguered company.

Many times the negativity can become a self-fulfilling prophecy.

It is difficult to break momentum in software stocks in either direction and now the onus is on Dropbox’s management to prove they can surpass margin forecasts or there could be a reverse 20% drop in the stock.

There are still bears out there who believe this wasn’t enough to convince them to change their mind.

Bears have cited a lack of sustained growth and a tendency to miss on subscriber numbers as the Achilles heel.

Because of the small nature of these companies, volatility goes hand in hand with their price action.

The Mad Hedge Technology Letter prefers to bundle itself with stocks that have more reliable price action.

A perfect example of volatility disturbing a stock would be a cybersecurity company that I have been quite bullish on named Zscaler (ZS).

The cloud security company delivered lighter-than-expected profit guidance for the third quarter and fiscal year and the stock slipped down 15%.

That would never happen to Google or Facebook shares in the same scenario.

Zscaler’s second-quarter report was robust and even had a billings’ beats of 15% year-over-year.

Meanwhile, hints of revenue deceleration and margin contraction in the second half were enough to kill shares in trading.

Traders who can filter through the bluster must time entry points in small-cap tech perfectly otherwise one mistimed word on an earnings report can sink a trade with no chance to exit.

Separating the wheat from the chaff is what we do here at the Mad Hedge Technology Letter.

February 24, 2020/by Mad Hedge Fund Trader

The Cloud Basics

Tech Letter

If you've been living under a rock the past few years, the cloud phenomenon hasn't passed you by and you still have time to cash in.

You want to hitch your wagon to cloud-based investments in any way, shape or form.

Microsoft's (MSFT) pivot to its Azure enterprise business has sent its stock skyward, and it is poised to rake in more than $100 billion in cloud revenue over the next 10 years.

Microsoft's share of the cloud market rose and is catching up to Amazon Web Services (AWS).

Amazon leads the cloud industry and still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.

Amazon (AMZN) relies on AWS to underpin the rest of its businesses and that is why AWS contributes 73% to Amazon's total operating income.

Total revenue for just the AWS division is an annual $5.5 billion business and would operate as a healthy stand-alone tech company if need be.

Cloud revenue is even starting to account for a noticeable share of Apple's (AAPL) earnings, which has previously bet the ranch on hardware products.

The future is about the cloud.

These days, the average investor probably hears about the cloud a dozen times a day. If you work in Silicon Valley, you can triple that figure.

So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.

Think of this as a cloud primer.

It's important to understand the cloud, both its strengths and limitations. Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest growing companies in the world.

Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that's where I come in.

Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.

They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy, remember that the original Department of Defense packet-switching design was intended to make the system atomic bomb-proof.

As a user, you can access any single server at any one time anywhere in the world. These servers are owned, maintained and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.

The most important features of cloud storage are:

1) It is a service provided by an external provider.

2) All data is stored outside your computer residing inside an in-house network.

3) A simple Internet connection will allow you to access your data at anytime from anywhere.

4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.

Once you start using the cloud to store a company's data, the benefits are many.

No Maintenance

Many companies regardless of their size prefer to store data inside in-house servers and data centers.

However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.

Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.

Instead, they can focus resources on the core aspects of their business where they can add the most value without worrying about managing IT staff of prima donnas.

Greater Flexibility

Today's employees want to have a better work/life balance and this goal can be best achieved by letting them telecommute. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.

How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?

Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees. According to a recent survey, 79% of respondents already work outside of their office some of the time, while another 60% would switch jobs if offered this flexibility.

With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.

It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.

Better Collaboration and Communication

In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.

For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.

These products, which all offer free entry-level versions, allow users to access the latest versions of any document so they can stay on top of real-time changes which can help businesses to better manage workflow, regardless of geographical location.

Data Protection

Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.

The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.

It's best to move data to the cloud to avoid such disruptions because there your data will be stored in multiple locations.

This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.

Lower Overhead

The cloud can save businesses a lot of money.

By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.

Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.

October 21, 2019/by Mad Hedge Fund Trader

July 19, 2019

Tech Letter

Mad Hedge Technology Letter
July 19, 2019
Fiat Lux

Featured Trade:

(CLOUD 101)
(AMZN), (MSFT), (GOOGL), (DOCU), (CRM), (ZS)

July 19, 2019/by Mad Hedge Fund Trader

July 12, 2019

Tech Letter

Mad Hedge Technology Letter
July 12, 2019
Fiat Lux

Featured Trade:

(CLOUD SECURITY ON THE MARCH)
(OKTA), (ZS), (CRM), (AMZN)

July 12, 2019/by Mad Hedge Fund Trader

Cloud Security on the March

Tech Letter

Take a look at these beauties that I recommended at the beginning of December 2018.

At that time, Okta (OKTA) was trading at $62 and Zscaler (ZS) was at $40 on the button – fast forward to today and Okta is now over $136 and Zscaler victoriously sitting at $82.

Oh, how do times change!

That was my reaction watching their performance for the past 7 months giving belief to my assessment that second-tier cloud companies will have a field day this year.

Cloud companies aren’t going away anytime soon, please tattoo that on your forehead.

There isn’t a hotter topic circulating the gossip winds these days than digital security pressured by geopolitics.

Okta is the best in show for identity management – a snazzy term for managing employees’ passwords.

Okta’s products are built on top of the Amazon Web Services cloud.

Coincidentally, Okta was erected in 2009 by a team of former Salesforce (CRM) executives. Salesforce is one of my favorite cloud-based software companies, offering a blueprint for success to other up-and-coming software companies.

Current Okta CEO and founder Todd McKinnon previously served as the Senior Vice President of Engineering at Salesforce.

Other founders include Okta COO Freddy Kerrest who also meandered through the corridors of Salesforce.

I can tell you that you could do much worse than starting a new software company with a collection of Salesforce upper echelon talent.

This all-star team is behind the insatiable growth of Okta whose revenue has grown over 600% since establishing itself.

Okta’s first-quarter results didn’t disappoint with revenues of $125 million—a rise of 50% year-over-year beating the consensus of $117 million.

Subscription revenues comprised 94% of sales and the company expects sales of $130 million amounting to a rise of 37% year-over-year.

Okta’s subscriber base has risen over 500% in the past 5 years and annual contract value of over $100,000 has expanded 60% annually.

The company still loses money but hopes to make some headway on this issue with projected EPS estimated to grow 25% annually in the next five years.

This year spawned a massive divergence between tech who has legs and tech who will be dragged down to the depths of the ocean floor by the heavy weight of regulation, overwhelming competition, or just flat out poor management or inferior product development.

Zscaler echoed similar positive sentiment of Okta by recording a quarter to remember growing revenue by 61% year-over-year while calculated billings grew 55% year-over-year.

In addition to the top line growth, operating margins improved 14% points year-over-year to 8%.

The quarterly results demonstrate the leverage in cloud security business models and the ability to drive growth and profitability.

String together a third consecutive quarter of profitability is just part of the battle, Zscaler will continue to aggressively invest for significant market opportunity that lie ahead.

Cloud security potential means going after a $20.3 billion Total Addressable Market in calendar 2019.

Let me divulge a tad bit about the competitive landscape and why Zscaler is brilliantly positioned for success.

As organizations increasingly make the shift to the cloud, traditional firewall and VPN vendors are finally acknowledging that the legacy security appliances can secure the new digital enterprise and are attempting to build a security cloud using single tenant software designed for on-premise appliances just like you can't create a Netflix service by stacking thousands of DVD players in the cloud.

You can't offer an inline high-performance security cloud by spinning up a bunch of virtual machines in a public cloud. This is a defensive strategy of cloud imitators which, in our view, serves the self-preservation of the vendor, not the needs of the customers.

Zscaler has a significant competitive advantage as a result of the technology, architecture and maturity of cloud security platform including one, Zscaler was born in the cloud, for the cloud just like Salesforce and Workday.

Two, Zscaler has a purpose built globally distributed multi-tenant cloud for fast user experience, unlike imitation cloud, Zscaler requires no back hauling from front doors to a central computing data center of a public cloud.

Three, Zscaler performs SSL inspection at scale as a purpose-built proxy for better security.

Lastly, Zscaler continues to deliver zero trust network access that provides application access without network access reducing business risk unlike firewalls and VPNs.

The duo of Okta and Zscaler are the bright lights of the cloud generation and leading the digital economy in digital security.