Apple CEO Tim Cook pulled off a quarter to remember.
And yes, I've been hypercritical of his lack of innovation, but I can't question the way he’s insulated the company from being exposed to softness in mainland China.
Analysts expected $88 billion in revenue and Apple easily surpassed this number by posting $91 billion.
When you look under the surface, there are usually some chinks in the armor.
But this time around Apple's quarter was practically flawless albeit with some frosty guidance.
It's no secret that the quality of a Chinese smartphone has picked up and now rivals some of Apple's best products.
However, Apple turned a weakness into a strength and sales of iPhones was one of the highlights of an outstanding quarter.
In fact, it was the iPhone 11 that carried the load this time.
In total, iPhone Revenue rose 8% to almost $56 billion and they shipped 72.9 million units.
The outperformance doesn't just end there.
Wearables have become a meaningful revenue driver in itself.
Specifically, ear buds and the Apple watch have captivated Apple customers who are scooping up these products in droves.
In the prior quarter, 75% of people who bought the Apple watch were first time buyers.
This added up to wearables clocking in $7.3 billion in revenue this past quarter.
Apple’s outperformance dovetails nicely with my overarching theme of the FANG group plus Microsoft separating themselves from the other tech companies in 2020.
The network effect that these companies possess is unrivaled and the longer they stay in business, the stronger these effects seep in.
If there was a negative part of the quarter, Tim Cook failed to delve into the new Apple streaming product and avoided giving too much detail.
Fortunately, Apple has not bet the ranch on streaming and have stuck to what they know best.
Ultimately, Cook struck a lukewarm tone, especially with the spread of China’s coronavirus threatening to shut down production operations for several manufacturers.
The company has restricted employee travel and shut one store due to the outbreak.
Looking forward, management said “there will definitely be an impact on China in terms of consumption.”
Apple is slated to release its first 5G phone later this year which has been the catalyst for the price appreciation in shares.
Apple continues to be a multiprong revenue machine and any dip should be bought.
This is the type of company that should be part of any multi-asset portfolio.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-31 04:02:322020-05-11 13:09:32Apple Outshines the Rest
Russia can now “unplug” from the internet, is this a sign of things to come?
Since 2010, the internet has become the de-facto global cock pit.
A breaking up of the internet is heavily negative for American tech companies who vie for overseas revenue.
The more unified the internet is, the easier and more cost effective it is to scale up a business and sell software and hardware to the customer.
The advent of the Russian intranet could lay the groundwork for other sovereign nations to build their own version of an intranet.
This could lock out foreign companies from doing business or only allow them access if they play by unfair rules.
There is also the dual objective of keeping close tabs on local dissidents and controlling the media which countries like Iran have found convenient and mightily effective.
The internet is not a simple place anymore.
Cross border digital transactions and cooperation of it is diminishing at a rapid pace.
Take for instance Russia’s third-largest internet company Rambler which sued Amazon-owned Twitch platform for 180 billion rubles ($2.87 billion) over illegal streams of soccer matches from the English Premier League.
Russia is the third-largest user of Twitch worldwide which could eventually lead to a ban of the service.
Where does this eventually stop?
Next on the chopping block could be Google search and then YouTube.
Many of these free services make money by serving up ads and revenue would be seriously hit if a wide swath of usership are taken offline.
The announcement merely noted that Russia successfully tested a country-wide alternative to the global internet, but the devil is usually in the details.
Either way, pulling out the rug from underneath Russian netizens is a serious option for the Kremlin.
The results will now head to the higher ups to conclude when and how the new Russian intranet will be implemented.
There are still loose ends that Russia needs to sort out like integrating a separate DNS system.
A new system connecting the physical infrastructure directly to the rest, which at present must do so through international connections. And that’s just to create the basic possibility of a working Russian intranet.
Russia has taken comfort in knowing that China has its own version of the internet aptly named the Great Firewall, but China has not cut off access to abroad merely focusing on pressure points and content not supportive of its government.
Authoritarian countries want to rule with an iron fist, and this will help them do so, the added bonus is stonewalling American capitalism inside their border in digital form.
How would a domestic internet work?
By bottlenecking the points at which Russia's version of the net connects to its global counterpart.
Domestic ISPs [internet service providers] and telcos would need to route the internet only within the digital border of Russia.
This would require close partnership with domestic ISPs which would be easy to facilitate since state-owned firms have oversized clout inside of Russia.
The more networks and connections a country has, the more difficult it is to control access.
Countries receive foreign web services via undersea cables or "nodes" - connection points at which data is transmitted to and from other countries' communication networks.
These would need to be blocked too.
Then Russia would need to create something new from scratch.
In Iran, the National Information Network allows access to web services while policing any digital content and is operated by the state-owned Telecommunication Company of Iran.
A “walled garden” would nullify the usage of virtual private networks (VPNs).
At this point, netizens can still tap outside internet sources by connecting to different servers abroad through VPNs.
Russia already has an army of tech talent it can employ through heavyweights Yandex and Mail.Ru.
The handful of entrenched behemoths would benefit greatly from Russia shutting off itself to the outside world.
Russia has even banned the sale of smartphones that do not have Russian software pre-installed and this is just the next step.
The Russian government has had their hand in online censorship before, such as its failure to block Russians from accessing encrypted messaging app Telegram.
The state-owned Tass news agency reported the tests had assessed the vulnerability of internet-of-things (IoT) devices as we step into the era of 5G.
The cybersecurity element of this cannot be diminished, and what this tells us is that your smartphone and smart home devices aren’t safe at all.
Even though American tech companies won’t be widely affected in 2020, foreign revenue will start deteriorating in piecemeal fashion.
This will likely turn into a whack-a-mole problem with American companies hoping to plug the gaps but helpless if wide audience purges ruins numerous digital audiences.
There is a reason why YouTube isn’t successful in China and there is a reason why Mail.Ru isn’t the main internet provider in the U.S.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/01/keyboard.png297700Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-29 10:02:402020-05-11 13:09:25The New Normal for the Internet
Let’s get straight to the chase – the epidemic from Wuhan is crushing tech stocks.
If you want a way to play the Chinese coronavirus outbreak, then look no further than Trip.com Group Limited (TCOM).
This company owns a series of reputable Chinese travel apps from Trip.com, Skyscanner, and Ctrip.com.
The Mad Hedge Technology Letter doesn’t tend to do tech alerts on Chinese companies listed in America as American depository receipts.
We rather not expose readers to the high risk of one of them suddenly being kicked off of one of the exchanges.
American investors have zero rights of recouping any losses if Alibaba or Baidu delists or even announces to switch its listing on the Shenzhen tech exchange.
Remember that founder of Alibaba Jack Ma signed over the PayPal of China Alipay to himself without even telling Yahoo about it.
Yahoo was also locked out of any profits from the decision as well even though they were seed investors in Alibaba.
That is China in a nutshell for you!
So what’s happening now? Tourists are staying home in droves and the ones that support the economy which are the Chinese ones during the peak travel season of Chinese New Year.
Cities are getting quarantined left and right in China and the mainland has ordered all travel agencies to suspend sales of domestic and international tours.
Chinese shares have felt the pain with shares of China Southern Airlines Co. – the carrier most exposed to the site of the outbreak – cratering 20% since the second death from the virus was confirmed.
If the situation unfolds like the SARS outbreak of 2003, things could turn bleak quickly.
Remember that in just one month of the SARS outbreak, Chinese air passenger traffic fell 71%, and Trip.com was rerated and has fell off the face of the earth.
I am predicting the same type of devastating numbers to the online travel world.
Trip.com has struggled to keep up with competition from digital rivals like Meituan Dianping and Alibaba, and even if the virus is conquered, business might never come back.
Despite the trade war and Hong Kong’s protests, the world has been held up by the Chinese tourist.
108.39 million Chinese overseas trips were taken last year, a 9.5% gain, after surging 11.7% in 2018.
Flight volume was brimming along nicely until the virus, but the hotel-booking sector is getting crowded.
Meituan Dianping has recently overtaken Trip.com as China’s top site, and now has 47% of China's market, 13% higher than Trip.com.
Now, Meituan is moving further onto Trip.com’s turf with luxury hotels, while chains like Marriott International Inc. are pushing for direct booking on their China websites.
Alibaba said part of the $13 billion it raised from its Hong Kong listing in November would go toward fliggy.com, its online travel group site.
The way the Mad Hedge Technology Letter is playing the sudden drop in overseas travel confidence is through the travel app I dislike the most – TripAdvisor (TRIP).
I actually don’t have a personal problem with the functionality, but the business behind it is terrible.
That was the main reason I strapped on a put spread and I can’t see TripAdvisor outperforming dramatically in the next few weeks in the face of a global pandemic.
This was a short-term trade that TripAdvisor won’t rise 11% in 30 day
I didn’t like this company before the coronavirus and now that Chinese tourists are home sitters for the Chinese New Year, this could put a dent into TripAdvisor’s new China initiative.
Trip.com Group had taken the lead in the day-to-day running of TripAdvisor China. It owns the majority share, with TripAdvisor claiming a 40 percent stake.
Chinese were supposed to increasingly travel the world while its customer base is also becoming more global, in particularly with Trip.com and Skyscanner.
But that is all on hold now.
Yes, it is possible that there could be a dead cat bounce in shares if the virus is tamed, but the 2-week travel season is something you can’t get back once it’s over for TripAdvisor.
I believe this will come out in the numbers along with details about Google’s algorithms further destroying TripAdvisor’s relevancy in the online travel industry.
Then take into account that the company just announced a 200-employee purge for the explicit reason of increased competition from Google and things seem to be going from bad to worse.
The company has done a proverbial deal with the devil by positioning itself to be utterly tied to Google’s search algorithm while Google is going head-to-head with them.
Google has upgraded its travel search tools recently to turn the screws on several trip booking websites like TripAdvisor, Booking.com and Priceline.
In its last earnings release, TripAdvisor noted that Google has placed ads at the top of its search results, forcing companies like it to buy more ads.
The company had a rough last quarter, reporting adjusted earnings of 58 cents a share, down from 72 cents a year earlier and short of analysts’ estimates of 69 cents.
Rhetoric from management was equally as disappointing with them saying, “Google (is) pushing its own hotel products in search results and siphoning off quality traffic that would otherwise find TripAdvisor via free links and generate high margin revenue in our hotel click-based auction.”
“Google has got more aggressive. We’re not predicting that it’s going to turn around.” TripAdvisor CEO Stephen Kaufer said at the time and I don’t see how our put spread will lose money in the short-term.
I will advise readers to take profits when the time comes. Be aware that TripAdvisor also has an earnings report coming up in 2 weeks that could gyrate the stock.
I expect broad-based weakness in guidance and poor performance last quarter in the report.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/01/sightseeing.png539974Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-27 11:02:512020-05-11 13:08:59How to Play the Chinese Pandemic
Netflix is saying no to over $2 billion in extra digital ad revenue – that is the critical takeaway from Netflix’s earnings call that fell in line with exactly what I thought would transpire.
As Netflix’s domestic subscriptions continue to soften, this is the first of many earnings calls where management will be put to the sword on why they still haven’t swiveled to digital ads.
As you guessed right, Founder and CEO Reed Hastings pulled out all the usual excuses explaining why Netflix is leaving a massive chunk of revenue on the table.
Some of his evasive rhetoric came in the form of explaining there’s no “easy money” in an online advertising business that has to compete with the likes of Google, Amazon, and Facebook.
He continued to spruce up his excuses by saying, “Google and Facebook and Amazon are tremendously powerful at online advertising because they’re integrating so much data from so many sources. There’s a business cost to that, but that makes the advertising more targeted and effective. So I think those three are going to get most of the online advertising business.”
Even most peons would understand that Netflix’s network effect is so robust that they could turn on the digital ad revenue spigots with a flick of a wrist.
It doesn’t matter that there are also three other tech firms in the digital ad sphere.
Netflix certainly has the infrastructure in place and manpower laid out to harness the power lines of the digital ad game.
Hastings weirdly lamented that revenue would need to be “ripped away” from the existing providers, he continued. And stealing online advertising business from Amazon, Google and Facebook is “quite challenging.”
I don’t believe that is entirely accurate.
Dipping into that digital ad revenue would be quite challenging if you are a 2-man start-up, but the power centrifuge that has become to be known as Netflix is stark crazy for taking the high road on data privacy when the US government still allows tech companies to profit off of digital ads.
The musical chairs might stop in less than 3 years, but not now.
It’s hard to understand why Netflix isn’t approaching this as a short-term smash and grab type of business.
If they really wanted to, they could have layered each service into ads and non-ad subscriptions just like Spotify does.
If muddying their premium service is taboo, then there are alternative solutions.
I understand and agree with Hastings that delivering “customer pleasure” is the ultimate goal, but that doesn’t mean there can’t be an ad-based model as one of the options.
I believe this is a substantial letdown to the shareholder and the stock price would be closer to $500 if there was a realistic ad revenue option.
Even worse, Hasting’s argument for not delving into digital ads is flawed by saying, “We don’t collect anything. We’re really focused on just making our members happy.”
That is materially false.
Netflix already tracks loads of data and it doesn’t take a Ph.D. data analyst to ignore that when you are busy perusing the Netflix platform, Netflix’s are tracked non-stop.
Netflix uses algorithms to track user’s behavior through tracking viewership data in order to make critical decisions about which of its original programs should be renewed and which should be booted.
It also looks at overall viewing trends to make decisions about which new programs to pursue.
It then also tracks user's own engagement with Netflix’s content in order to personalize the Netflix home screen to user’s preference.
Netflix is already “exploiting users” and they are doing shareholders a massive disservice by not maximizing revenue to the full amount they can.
And yes, I do agree Netflix is not as good as Facebook, Google, and Amazon at tracking users, but the roadmap is certainly out there for Netflix to indulge in digital ads.
It would take less than 18 months for Netflix to be running on full cylinders if they poached a few experts.
Aside from the lack of digital ads, Netflix finally is starting to acknowledge the new competition from two major streaming services, Disney+ and Apple+ — both of which have subsidized their launch with free promotions in order to gain viewership.
Then it gets worse with streaming service Quibi, WarnerMedia’s HBO Max and NBCU’s Peacock rolling out.
The latter features a multi-tiered business model, including a free service for pay-TV subscribers, an ad-free premium tier and one that’s ad-supported.
Other TV streaming services also rely on ads for revenue, including Hulu and CBS All Access. Meanwhile, a number of ad-supported services are also emerging, like Roku’s The Roku Channel, Amazon’s IMDb TV, TUBI, Viacom’s Pluto TV, and others.
Considering much of Netflix’s rise is fueled on debt, it’s bonkers they aren’t going after every little bit of revenue that is there for the taking.
Netflix could lose 4 million subscribers this year, and sooner or later, Hastings will run out of places to hide.
Slowing domestic subscriber growth and bad guidance don’t sound like a roaring growth tech stock to me.
The Davos World Economic Forum is the optimal place to get a snapshot of the state of the American technology sector and apply its underpinnings to an overall trading strategy for 2020.
Stepping back, one clear theme is the lasting effects of the trade war and how that will manifest itself in the broader tech sector.
We got some serious sound bites from CEO of Microsoft Satya Nadella at Davos who is convinced that mutual economic saber-rattling between the US and China will show up in higher costs because of the misallocation of resources.
The most critical point of contention is the development in the semiconductor space as we move into the 5G world and this $470 billion industry which realizes cost savings from scaling by global supply is splintering off as we speak into two separate industries.
This just translates into higher costs to source components for your Microsoft Surface laptop or your Apple Ear Buds.
The follow-through effect is ultimately bludgeoning global growth rates and tech intermediaries will be forced to pick up the extra tab or face the looming decision to pass costs on to the consumer.
As we move forward, the administration is considering more limits to US semiconductor companies’ access to the Chinese consumer market.
The scaremongering fueled by the rise and threat of Huawei has reached fever pitch.
Remember that even with the aggression of the American administration hoping to cap Huawei’s revenue explosion, Huawei still managed to grow sales 18% last year to $122 billion.
I can tell you that if the U.S. administration came after the Mad Hedge Technology Letter guns blazing, we wouldn’t be sitting here growing 18% annually!
The U.S. administration hasn’t stopped at Huawei and is putting in shifts attempting to convince other nations to avoid using Chinese infrastructure equipment for the 5G revolution.
The “Phase One” of the trade agreement is largely seen as a moot point in the technology community and in some cases can be argued as a net negative to component makers whose access to the local Chinese market has narrowed.
The agreement signed also delivered no meaningful protection to intellectual property for US technology companies working with China which was largely viewed as the main catalyst provoking a geopolitical fight.
The trade war has sped up the bifurcation of internets, better known as “splinternet,” and I believe that sometime in the near future, you will need to download Chinese software and platforms to function inside of China.
Much of these misunderstandings stem from the lack of trust that has accumulated between the two parties.
The American tech sector and Wall Street have indirectly subsidized China’s technological rise to this point and now they must go head-to-head in every future technology such as artificial intelligence, 5G, fintech, augmented reality, and virtual reality.
This appears to be the new normal - a frosty and adversarial tech relationship.
There is now zero good will between each other.
The trust of tech on American shores could almost be ironically argued that it is worse than the trust level with China.
Edelman’s 20th annual trust barometer surveyed more than 34,000 adult respondents in 38 markets around the world.
It found that 61% of participants said the pace of change in technology is too fast and government does not fully understand emerging technologies enough to regulate them efficiently.
Trust in tech from 2019 to 2020 declined the most significantly in France, Canada, Italy, Russia, Singapore, the U.S. and Australia.
Much of the narrative has been about the domination of American tech by a handful of actors that has seen American companies go up against foreign governments.
France and America recently announced a temporary truce after the French President Emmanuel Macron reached out by phone to President Trump hoping to end the threat of tariffs while they work out a broader accord on digital taxation.
The French leader agreed to postpone until the end of 2020 a tax that France levied on big tech companies last year and in turn, the U.S. will delay the counter-tariffs that were in the works set to be levied on the French.
And it’s not just the French.
India has taken heed from the brooding trouble between the encroachment on sovereignty and American tech giants by adopting an aggressive stance towards Amazon.
Amazon CEO Jeff Bezos' lowlight of a recent India work trip came in the form of being snubbed by the Indian government.
India’s commerce minister Piyush Goyal said, “It’s not as if they (Amazon) are doing a great favor to India when they invest a billion dollars.”
He called Amazon a capital guzzler equating its mounting losses up to “predatory pricing or some unfair trade practices.”
India is on the verge of turning protectionist on foreign tech and this flies in the face of the tech atmosphere even just a few years ago.
Governments have come to realize that America’s FANGs are too dominant and entrenched often resulting in a net negative to the local populace.
More often than not, American tech found ways of rerouting local revenue to coffers of a few billionaires while paying zero local tax.
The easy money has been made and now the Tim Cooks and Sundar Pichais of the world will have to fight tooth and nail with not only the U.S. antitrust regulators, but foreign governments.
This is why a handful of tech companies this dominant has been the outsized winners over the past generation as their share prices have gone from the lower left to the upper right but now command minimal consumer trust.
The ultimate Davos message is that big tech continues to grind higher, but alarm bells have started to ring.
There’s only so much friction they can handle before investors pull the rug.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-22 04:02:102020-05-11 13:08:46The Hollow Victory for Tech in the China Trade Deal
A report from a prominent new source reveals that in the past 12 months, 40% of all US-listed companies were losing money and of these, 17% were tech firms, the highest level since the Dot Com bubble.
That is why software gems like Zoom Video Communications, Inc. (ZM) should be bought and held, never to see the light of day ever again.
The company makes money at such an early stage of their development that it's hard not to get excited about the future.
Readers can indulge themselves in this high caliber tech growth stock, especially after they demonstrated that they are hitting on all cylinders after a high-flying earnings report.
Another prominent new source recently said that this company’s products are “changing the entire landscape” of U.S. business.
Just one instance they have infiltrated deep into real American business is the U.S. Postal Service.
They are starting to deploy Zoom Meetings more broadly across the organization after an extensive proof-of-concept.
The USPS is Zoom’s first major agency and major business win since they received FedRAMP approval in May.
Why did they pick Zoom?
Easy! Simply for Zoom’s high-quality video and audio.
Zoom’s share price cratered 40% since hitting the heights of $102 in July 2019 which was coincidentally the high for most post-IPO tech stocks of 2019.
It was an elevator straight down to no man’s land – but investors would be foolish to paint all hyper-growth companies with the same brush.
Filtering out the wheat from the chaff is critical and Zoom is the stock that still has the gloss on its outside package buttressed by its best-in-show video conferencing software.
There are no other proper alternatives in this sub-sector of software.
The volatility can be extreme making this name difficult to trade and constantly has dips of 7% even though the company crushes expectations.
I called for readers to scoop up shares in the low $60s and the stock is now healthily trading in the upper $70s as we hit the back half of January.
Remember that this company grew 96% just 3 quarters ago and it would be illogical to believe that the stock is being penalized from faltering to 85% today.
The report on January 6th showed a strong quarter as evidenced by a combination of high revenue growth of 85%, with increased profitability and free cash flow of $54.7 million.
They continue to have success with customers of all sizes and one metric that has continued to stick out is customers with more than $100,000 of trailing 12 months revenue – that metric grew 97% from Q3 last year.
Any tech company would give a left thigh for 85% growth in this climate which is why many have resorted to inorganic growth.
Buying growth is not necessarily a bad strategy now but buying growth at this point in the economic cycle naturally means that companies will need to overpay for growth because of expensive valuations.
Zoom is perfectly positioned to outperform in the next 1-3 years.
The advancing runway is wide open with no competition in sight and a generous growth trajectory is firmly on their side.
At some point, this software company could become a takeover target for a larger corporate.
I am impressed with Zoom's superior products, growth prospects, and scalable business model, and the stock’s near-term risk/reward trade-off is mildly bullish after the jump from $62.
There is an actionable and manageable clear path to a $2 billion revenue run rate with strong margin expansion potential and with its flagship product growing around 80-90%, its next growth driver in Zoom Phone could translate well into a meaningful revenue stream.
Zoom Phone is the next springboard to further success for this company, meaning there won’t be any cliff edge with future revenue streams.
Anyone that has used Zoom as a product can confirm the veracity of its superior performance standards.
This isn’t the type of stock to trade short-term - the volatility undermines any potential entry points.
If the broader market holds up in 2020, Zoom’s value extraction potential is substantially robust, and shares should reach $90.
Growth stocks can only be pinned down for so long before the beast is unleashed.
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Why has there been a dearth of Mad Hedge Tech trade alerts to start the year?
Let me explain.
Love it or hate it – earnings' season is about to kick off.
And now, this is the part where it starts to get ugly with consensus of a 2% year-over-year decline in fourth-quarter S&P 500 earnings.
Banks are expected to be a rare bright spot and JPMorgan (JPM) delivered us stable results as one of the first to report.
The unfortunate part of the equation is that a lot has to go right for tech shares to go unimpeded for the rest of the year.
What we have seen in the first 2 weeks of the year is a FOMO (fear-of-missing-out) environment in which valuations have lurched forward to 20 times forward earnings.
Tech is overwhelmingly carrying the load and I have banged on the drums about this thread advising readers to be acutely aware of a heavy positive bias towards the FANGs in 2020.
Well, that is already panning out in the first two weeks.
Examples are widespread with Facebook (FB) up over 8% and Apple (AAPL) already topping 6% to start the year.
It would be farfetched to believe that the tech sector can keep pilfering itself higher in the face of negative earnings growth.
However, behind the scenes, relations between China and America are improving, the threat of war with Iran is subsiding, and the Fed continues strong support tempering down risk to tech shares.
The situation we find ourselves in is that of an expensive tech sector that will again guide down on upcoming earnings’ reports telegraphing softness moving into the middle part of the year.
The ensuing post-earnings sell-off in specific software stocks will offer optimal short-term entry points.
The current risk-reward of chasing FANGs at these levels is unfavorable.
Another glaring example of the FANG outperformance is Alphabet who rose 26% last year.
They are on the brink of joining the $1 trillion club that Apple and Microsoft (MSFT) have joined.
Its market value currently sits idling at $985 billion and its surge towards the vaunted trillion-dollar mark is more of a case of when than if.
Alphabet (GOOGL), more or less, still expands at the same rate of low-20% annually that it did 10 years ago.
Sales have ballooned to $160 billion annually and they sit at the forefront of every cutting-edge sub-sector in technology from artificial intelligence, autonomous driving, and augmented reality.
The engine that drives Google is still its core advertising business and strategic premium acquisitions like YouTube and penetration into other fast-growing areas such as cloud computing.
It has rounded out into a broad-based revenue accumulator.
Apple was the first public company to surpass a $1 trillion market cap and ended the year up 86% in 2019, and it has only gone up since then currently checking in at a $1.36 trillion market cap.
Microsoft followed Apple, hitting the $1 trillion mark during the first half of 2019, and it is now worth $1.23 trillion.
Amazon fell back after surging past the $1 trillion mark but inevitably will achieve it on the next heave up.
Amazon shares have been quickly heating up since its capitulation from $2,000 in July 2019 and round out the group of overperforming tech behemoths.
Although the rush into big-cap tech stocks in the first two weeks has been a bullish signal, it still doesn’t marry up with the lack of earnings growth in the overall tech sector.
Companies beating meager expectations will experience strong share appreciation although not at the pace of last year and will still serve investors pockets of overperformance.
We will find our spots to trade shortly, but better to keep our gunpowder dry at the moment.
That is the latest takeaway from a slew of negative news overflowing the news wires lately.
As many of you know, I hate this niche of tech with a passion, and it has been discovered as nothing more than a marginal fly-by-night sub-sector passing off the cost of employees and their wages to the investor.
They also contribute no meaningful technology that moves the needle.
When the hammer fell on Adam Neumann’s WeWork, the hammer fell equally as hard on the gig economy business model that brought public markets the likes of Uber and Lyft.
The path to venture capitalist’s cashing in abruptly closed off was the end development to all this mayhem.
So I was not surprised when online food deliverer Grubhub (GRUB) had a dead cat bounce after rumors of them looking for a sale to their badly run company.
Then last Friday was the day the chickens came home to roost with Grubhub shares cratering over 8%.
If there is a sale, at what heavily discounted price will it go for?
We could see a marked down shell of its former self.
Grubhub naturally came out and rejected the notion that they are about to be sold off.
Where there is smoke – there is fire.
They did, however, admit they are in the process of “consulting” about certain acquisitions which could mean purchasing inorganic growth to juice up their numbers ahead of a sale.
There are four market leaders who control roughly 80% of the food delivery service business.
But the food war is far from over as competitors undercut each other time after time.
Competition in the food delivery market is driving down the unit economics of online food delivery to a nadir at a time when they can least afford it.
The other three involved are Uber Eats division of Uber (UBER) as well as Postmates and DoorDash.
Grubhub mentioned that there will likely be opportunities to acquire market share, but at what cost?
Acquiring inorganic revenue is at peak cost in 2020.
Cost per unit matters more now than any other time in the past 10 years boding ill for Grubhub and its competition.
And until they adequately address the unit economics in detail, readers must assume that Grubhub is on a suicide mission and you won’t know how close they are to the end until there is a dramatic announcement describing it.
The big takeaway here is that conditions are ripe for consolidation in the online delivery business.
As we go further out on the risk curve, private unicorns are in dire straits too.
Taking a barometer of this subsector allows investors to digest the level of risk premium in the overall markets that can be applied to safer parts of the tech ecosphere through extrapolation techniques.
Venture capitalist Masayoshi Son is infamous for overpaying a slew of tech growth firms and in 2020, so far, it has not been kind to him.
Oyo allows customers to book hotel rooms in more than 80 countries through its app.
It even converts struggling local hotels into Oyo franchises, puts up some money to remodel the interior, and takes commission on every booking.
The startup is dumping 5% of its staff in China and another 12% of employees in India, as part of a reorganization.
Oyo is the third company in SoftBank's portfolio to shed jobs in a week, following the layoffs at robotic pizza startup Zume and car rental company Getaround.
Oyo has sucked in more than $3 billion in capital and the last insane tranche of investment values the company at more than $10 billion.
SoftBank has been throwing money at the company since 2015.
The firm is otherwise known as the "SoftBank's jewel in India" for being one of the country's most valuable private companies.
However, there has been a recent barrage of sub-optimal reports suggesting they have accelerated sales by underhanded business practices.
A peek into the firm showed explicit evidence that Oyo rented thousands of rooms at unlicensed hotels and guesthouses then allowing police and other officials use the service for free to avoid trouble with the authorities.
The pain for Softbank doesn’t just stop at Oyo, Rappi has been dragged down as well.
The Latin American delivery startup is laying off 6% of its workforce, less than a year after Japan’s SoftBank Group pumped in nearly $1 billion in the company.
Softbank is putting pressure on local management to trim the fat off their models and forcing them to become profitable now.
Rappi has expanded to nine countries since its founding in 2015.
It plans to be the swiss army knife of online deliveries by getting into groceries, restaurant meals, medication, furniture, and has even foolishly branched out into scooter rental, travel, and basic banking services.
Softbank plans to pour another $4 billion into South American startups but one must beg to ask, are they throwing good money on top of bad money?
Certainly seems so.
When asked how soon Rappi would turn in a profit, co-founder Sebastian Mejia was adamant that his sole priority was to grow fast, and that investors were on board with the plan.
This is code name for NEVER!
Softbank and its vision fund are set for more death by a thousand cuts in 2020, and being in the wrong place at the wrong time aggravates the mess they find themselves in.
Short all companies reliant on gig economy workers in the public markets and prepare for a gloomy IPO pipeline that will last through the end of 2020.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/01/oyo-jan13-e1578921112729.png250450Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-13 08:02:552020-05-11 13:07:57The Death of the Gig Economy
Last year was the year of Fintech and 2020 is the year when this industry goes into overdrive.
Let’s take a look at one of my top choices, PayPal (PYPL).
Millennials are the primary customer demographics to the main platform, but the attractiveness of peer-to-peer payment system Venmo is gaining momentum.
PayPal should be on a short list of fintech stocks for investors and there is certainly more room to run for the share price.
Last quarter’s numbers of 9.8 million net new actives mean that PayPal now has 295 million active accounts across all platforms.
Engagement continues to be a bright spot growing by 9% to almost 40 transactions per active account.
Mobile is a major contributor to success with 172 million consumers and 13.8 million merchants.
Venmo processed more than $27 billion in volume for the quarter, growing 64%.
They are doing $300 million in payments per day and an annual run rate that now exceeds $100 billion.
The Venmo team recently inked a deal with Synchrony to provide a Venmo credit card.
Credit products continue to be another gateway to more success with new consumer installment plans in the United States and Germany which allow PayPal customers to pay with streamlined monthly payments.
This capability is already leading to incremental sales and led to signing a long-term strategic partnership agreement with Citi Australia to develop consumer credit products for PayPal's customers in Australia.
Additional relationships were further expanded with Walmart launching PayPal Checkout as the sole payment instrument for its online grocery business in Mexico.
In Japan, PayPal is one of the official partners for the Japanese government's plan to promote cashless payments throughout the country.
PayPal now offers account linking through mobile devices with Capital One and PNC Bank in the United States.
If you thought their international strategy stopped there, there are other irons in the fire.
PayPal became the first non-Chinese payments company to be licensed to provide online payment services in China.
They announced in September that the People's Bank of China has approved a 70% equity interest in GoPay, a license provider of online payment services.
China is a tricky revenue proposition and it’s not guaranteed to flourish on the mainland, but this shows the pro-active way that PayPal seeks to expand its total addressable market and long-term growth prospects.
The license enables PayPal to expand upon relationships with existing partners like China Union Pay and AliExpress and forge fresh partnerships with China's financial institutions and technology platforms.
PayPal’s success has so far depended on innovation and acquisitions - I fully expect this trend to continue in 2020.
PayPal announced it was buying shopping and rewards platform Honey Science Corporation for $4 billion.
This year is the beginning of another compelling one-year bull case aided in part by higher expectations from those diverse set of partnerships, such as with MercadoLibre Inc. and Uber Technologies Inc., along with PayPal’s pricing, Honey online coupon transaction, and Venmo monetization.
I anticipate further sustained overperformance in margin expansion as well.
I expect an overall payments industry-wide volume growth of 11% in 2020 and PayPal will grow into its position in a still healthy broader economy.
Payment sector operating metrics, from credit card volume growth, to enterprise IT budget growth, to U.S. employment growth, are robust supporting the bull case for PayPal in 2020.
Aside from PayPal, my alternative favorites in the payments space that could see anywhere from 7%-20% share appreciation in 2020 are Square (SQ), Mastercard Inc. (MA), and Visa Inc. (V)
It is likely that 2020 will signal a new decade of super growth for the digital payments market.
And I expect PayPal to increase its solid footprint in web, in mobile app platforms, and in retail stores globally through organic growth, acquisitions, and partnerships.
PayPal’s profitable business model and pro-active management will help the share price reach new highs.
However, not only for fintech stocks, but the overall market is ripe for some profit-taking in the short-term because of the recent melt-up.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-10 04:02:442020-05-11 13:07:47Fintech is Going Into Overdrive
Tech shares are pricey, but that doesn’t mean they can’t get more expensive.
Strength often begets strength.
Let’s take for instance Apple (AAPL) – it delivered investors 86% in 2019 and that was their best performance in the past 10 years.
This was on the heels of a tumultuous 2018 where Apple sank 6%.
Many of the best of brightest of the tech industry beat the S&P last year, which itself gained 29%.
And as Apple leapfrogged into the software as a service business, they find themselves shunning China hardware revenue that got themselves into the 2018 mess.
Apple is betting that the confines of stateside consumer culture will offer greener pastures.
Overall, the market is pricing in a lukewarm 2020 for tech earnings boding well for the elite tech stocks that celebrated touchdown after touchdown in 2019.
Surpassing low expectations could be another rewind back to Q4 2019 which was a time that offered tech shares a platform to surge to all-time highs.
The worrying development for 2020 is that poorer-rated tech corporations won’t have the same access to cheap debt as they did in 2018 or even 2019.
The chapter of loose credit is about to close stymying loss-making tech companies who thought they could use subsidies to achieve success.
The prices of CCC-rated European bonds have declined immensely in the past year showing investors' lack of appetite for the riskier part of the corporate debt market.
Venture capitalists aren’t going to foot the bill for the next big thing in Silicon Valley at this point in the economic cycle unless the unit economics are too good to be true.
The story of 2020 will be the intensification between the haves and have nots in tech.
This is the case of the market putting a premium on time-honored tech brands and bulletproof balance sheets that they have cultivated.
On a broader level, the Fed who has presided over a $600 billion expansion in their balance sheet in the last four months offers yet another tailwind to tech shares in the short-term.
The Fed’s decision in the last few months to re-start large-scale asset purchases will help keep a foot under tech shares in early 2020 and responds like a de facto QE.
If you thought 2019 was a bad year for Uber and Lyft, then wait until this year plays itself out.
The gig economy stocks are in the direct firing line with nowhere to run and other non-sensical profit models will find it costly to search for debt alternatives in which to service their visions.
If the tech sector does become a war of attrition between the FANGs staving off one another by acquiring inorganic growth, then marginal tech players will get squeezed because they don’t have the capital bazookas to compete with the likes of Facebook (FB) and Google (GOOGL).
This is the year that we could see a slew of fringe tech companies go bust as debt markets sour on false narratives of future profits and equity markets turn against them.
The feast versus famine theme is also aligned with 5G, with many of the same cast of characters such as Apple, Alphabet posed to usurp revenue when this new technology finally becomes pervasive in consumer culture.
The Apple refresh cycle will dust off its playbook for another blockbuster rollout later this year when Apple debuts its much-awaited 5G phone.
Much of the share appreciate in Apple of late can be attributed to the anticipation of the new iPhone and the fresh infusion of revenue that branches off from it.
The applications that result from the new 5G Apple phone is seen as a luscious force multiplier to many 3rd party companies as well.
Chip stocks will be counted on as the ones lifting the tech foundations and just looking at shares in China, demonstrations of frothiness are running wild throughout their markets.
The Chinese government, to counteract the trade war, has been on a mission to flood its tech sector with unlimited capital as a catchup mechanism to overcome its inferior domestic chip industry.
Will Semiconductor, a supplier of integrated circuit products for telecommunications and electronics for cars, delivered a 390% performance in 2019 ranking it as the best performer in the Chinese stock market.
Luxshare Precision Industry and GoerTek, suppliers of consumer electronics products supplying Apple, and GigaDevice Semiconductor, producing flash chips, weren’t too shabby either each eclipsing at least 193% last year.
Even though 5G construction isn’t fully operational, I can attest that revenue creation for the companies involved are in full swing.
Investors must narrow their pickings to the biggest and financially resilient; this is not the time to expose oneself to the ugly trepidations of the mood-sensitive tech market.
For investors who can balance the delicate relationship of risk and surgical maneuvering, this year will end positive.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/01/tech-valuation.png708972Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-08 07:32:202020-05-11 13:07:40The Top Is Not In For Tech Stocks
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