“I couldn't imagine a more incompetent politician than myself.” – Said Co-Founder and Co-CEO of Salesforce Marc Benioff
Own a Peloton (PTON) bike, but don’t buy the stock.
That is the conclusion after deep research into this wellness tech company.
Peloton is an American exercise equipment and media company that bills itself as a tech company.
It was founded in 2012 and launched with help from a Kickstarter funding campaign in 2013. Its main product is a stationary bicycle that allows users to remotely participate in spinning classes that are digitally streamed from the company's fitness studio and are paid for through a monthly subscription service.
Peloton is wildly overpriced with the enterprise value of each subscriber at $15,631.
Contrast that with other comparable firms such as Planet Fitness (PLNT) whose enterprise value per subscriber is $553 or even streaming giant Netflix (NFLX) whose enterprise value per subscriber comes in at $895.
There are three massive deal breakers with this company – software, hardware, and the management team.
The management team acts as a bunch of cheerleaders overhyping a simple exercise bike with a screen that has no deeper use case and in turn an unrealistic valuation that has disintermediated from all reality in the post-WeWork tech world.
What’s the deal with the hardware?
Some recognition must be given to Peloton for creating a nice bike and interactive classes that mesh with it. That idea was fresh when it came out.
The marketing campaigns were attractive and allured a wave of revenue and these customers were paying elevated prices.
But the bike itself has not developed and advanced in a meaningful way since it debuted in 2014 and back then the valuation of the company was $100 million.
The first-mover advantage was a godsend at the beginning, but the lack of differentiation is finally catching up with the business model and now you can get your own Peloton carbon copy on Amazon (AMZN) for $500 instead of $2,300.
Instead of focusing on the meat and bones of the company, Peloton has doled out almost $600 million over the last 3 years in marketing to capture the low hanging fruit that they most likely would have seized without marketing while competition was low.
Competition has intensified to the point that some of its competitors are giving away bikes for free justifying to never cough up cash for a $500 exercise bike let alone a $2,300 genuine Peloton bike.
The first-mover advantage when Peloton had the best exercise bike is now in the past and the company is attempting to move forward with a stagnant bicycle.
The Peloton treadmill came out much later but has not caught on and has many of the barriers to success I just talked about.
What about the case for owning the stock for the software?
Peloton is charging an overly expensive $39 per month for a “connected experience” to anyone who has bought the $2,300 Peloton bike.
But if the user happens to not buy the bike, they can download the digital app and pay $12.99 per month for the same connected experience.
Why would someone pay $2,300 for an overpriced exercise bike when they can just sign up to a full-service gym and just use the Peloton app with some headphones for $12.99 per month?
This illogical strategy means that less than 10% of Peloton subscribers have bought their bike.
Peloton’s competitors have shredded apart their strategy by essentially underpricing their bike and mentioning that they can use the Peloton app with their bike.
And even if you thought that Peloton’s live streaming fitness classes were the x-factor, users can just add a nice little removable iPad holder to the exercise bike and stream YouTube for free or any other digital content on demand.
The cost of adding an iPad holder is about $13-$15 which is a cheap and better option than paying $12.99 or $39 per month for Peloton’s fitness classes.
Users will eventually migrate towards cheaper packaged content because of the overpriced nature of Peloton’s digital content.
Is Management doing a good job?
Peloton’s CEO John Foley most recently told mainstream media that the company is profitable when it is not.
He has repeated this claim several times throughout the years as well. The company has never been profitable and lost $50 million on $228 million of revenue last quarter.
Each quarter before that has also lost between $30 million to $50 million as well, and Foley is outright dishonest by saying the company is profitable.
Peloton relies on top 100 billboard songs to integrate with their fitness streaming classes and the company just got slammed with a $300 million lawsuit from music publishers claiming they have never actually paid for music licensing.
Music is core to their streaming product and without the best songs, users won’t tune in just for the instructor.
Working out and live music go hand in hand and stiffing the music industry on licensing fees is just another example of poor management.
In March 2020, the lockup expires and top executives are free to dump shares which will happen in full force.
Management has one unspoken mandate now – attempt to buoy the stock any way possible until they can cash out next March.
This group of people is only a few months away from their payday.
There is no software or hardware advantage and management is holding out for dear life until they can kiss the company goodbye.
Do not buy shares and I would recommend aggressively shorting this pitiful attempt of a tech company.
Peloton is a $6 stock – not a $30 stock.
“Basically, we juiced our expense line but think it will pay dividends down the line.” – Said CEO of Peloton John Foley on why Peloton loses money
The house is the new smartphone and I will tell you why.
The projected market growth of 18% in smart home technology sales according to Acumen Researching and Consulting will deliver opportunities to shape and prioritize this sector.
The revenues up for grabs from the smart home mean that internet of things’ (IoT) companies will create systems that mesh together with the bare minimum human participation, meaning that tech will have a dramatic influence in our daily lives.
I get several moans and groans a day that the Mad Hedge Technology Letter only shines the spotlight on the FANGs.
But it is hard not to when it comes to the future of the home.
Just look at recent M&A activity.
Automation and connected smart appliances have consumed Amazon by recently acquiring Eero, producer of routers for apartments, houses, and multi-story homes, and after already paying $1 billion to acquire Ring, a doorbell-camera startup. It had also bought Blink, a smart camera maker in 2017.
Google hasn’t shied away either by investing in smart home products pocketing Nest, a firm producing smart home products, for $3.2 billion.
Nest took a few years to sort out its production phase but finally managed to launch new temperature sensors, a video doorbell, and an outdoor smart camera.
What are the trending IoT products now?
The flavors of the day are smart lights, security, entertainment systems, and temperature control.
They are the low hanging fruit of the smart home industry – a de facto gateway into this world.
Most of these smart devices operate with voice assistants, but because of the nature of competition, certain products are aligned with certain ecosystems and compatibility issues will persist until the competition flushes itself out.
A layman’s example would be Apple’s Homekit dovetailing nicely with Apple’s Siri.
Companies are in the first innings of the product iteration cycle and the variations of smart home products are endless stemming from showers that remember preferred water temperature and flow rates or climate-control systems that change in real-time to suit the user.
Security of home networks and connected devices are still a controversial question mark because the receiver of this type of data has the keys to the most intimate details of personal lives.
Even avid technologists are hesitant to dive in and put up smart home products all over the house, and most are being cautious.
In fact, privacy issues are the most distinct headwind to fresh adoption rates.
Many people simply aren’t willing to make the jump yet until they are more convinced of its use case.
Even with all the reservations, an alternative global shipment company believes smart home devices will post 24% in growth next year.
For the smart home device believers, this cohort averages 6 smart home devices per household and will certainly rise to 7 or 8 by the end of 2020.
Popular items include the Amazon Echo, Google Home, and Apple (AAPL) HomePod.
Smart speakers are already present in 36% of American homes and rising.
Consumers are also worried about technology invading their daily lives along with allowing artificial intelligence to dominate personal decision making.
Others have concluded that items such as smart microwaves are a waste of money and are unneeded when analog devices function admirably.
Another legitimate reason is that the software and technology involve a perceived steep learning curve to operate which many people do not have the patience for.
And some are just burnt out by the volume of technology thrown in our faces.
Who wants to operate 50 apps on their phone to control their smart home devices when there are other pressing needs in life?
Companies with skin in the game are Alarm.com (ALRM), ADT (ADT), Arlo Technologies (ARLO) and Resideo Technologies (REZI) and they will be outsized winners if they can solve many of the industries lingering issues.
The value thesis in the case of home automation companies is that they are financially efficient, time-effective, boost wellness and will be easy to use.
About 11% of U.S. broadband households have smart thermostats and Nest’s smart thermostat is the most popular.
Networked security cameras by Arlo are in 10% of homes.
Video doorbells from Amazon.com (AMZN), Google are in 8% of homes and help deter theft of e-commerce packages.
Smart light bulbs and lighting are at 8% market share while smart door locks are at 7% penetration.
There are several second derivates bet on this as well.
The most common user interface for the smart home is apps on a smartphone or tablet and voice commands to smart speakers are second.
The conundrum of installation complexities leads to the demand of professional installers.
This demand has delivered opportunities for companies like Comcast's (CMCSA) Xfinity and Vivint.
Electronics retailer Best Buy (BBY) has stepped up its footprint in this market as well.
Another stock play would be cybersecurity companies because they will win contracts protecting the software that smart home products rely on.
Hackers are getting more sophisticated and a private cybersecurity company Firewalla can track where data is flowing to and from your devices.
Firewalla management recommends buying devices from reputable home automation companies like Amazon and Google because they have more accountability and are of higher quality.
There will be a huge onramp of cybersecurity contracts doled out to the likes of Palo Alto Networks, Inc. (PANW), CrowdStrike Holdings, Inc. (CRWD), Fortinet, Inc. (FTNT), and Cisco Systems, Inc. (CSCO).
We are in the first mile of a marathon and smart home product manufacturers, cybersecurity companies, 5G internet, and semiconductor companies will all benefit from the broad-based integration of these next-generation home consumer products.
What we saw in the 4G era was enormous innovation coming with that greater coverage and that speed over 3G. It’s going to be the same with 5G for sure.” – Said CEO of Verizon Communications Hans Vestberg
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Hook Me Up to John Thomas
The valedictorian of the IPO class Zoom Video Communications, Inc. (ZM) is finally on sale at a discount.
If readers want to indulge themselves in a high caliber tech growth stock to buy and hold stock, this is the one for you.
This one has no regulatory headwinds as well as an added bonus.
Zoom’s share price has dropped 40% since hitting the heights of $102 in July which was coincidentally the high for most post-IPO tech stocks of 2019.
It’s been an elevator straight down to no man’s land since then, 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.
A few days ago, the stock slid 9% even though the company crushed expectations with its latest quarterly result and outlook.
Zoom generated revenue of $166.6 million representing a growth rate year on year of 85%.
The company then offered a forecast of $175 million next quarter when analysts only estimated $165 million.
Remember that this company grew 96% just 2 quarters ago and it would be illogical to believe that the stock is being penalized from faltering to 85% today.
Any tech company would give a left leg for 85% growth.
Zoom was trading at 33.5 times my calendar 2020 estimates compared to the fast growth software as a service (SaaS) median at 12.9 times.
Then software stocks started indiscriminately selling off on earnings over the past few weeks irrelevant to the quality of news because of worries to the broader bull market in tech stocks.
It’s true that tech stocks aren’t cheap now, and the skittishness rears its ugly head when bullet-proof earnings’ results are met with a cascade of selling.
Salesforce (CRM) was a software company that was penalized for pricey M&A because the company has been unable to organically grow forcing them to buy growth.
Buying growth is not necessarily a bad strategy 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 2-3 years.
The advancing runway is wide open with no competition in sight and a generous growth trajectory is firmly on their side.
We Company singlehandedly destroyed positive biased market momentum for any tech growth stock this summer, but on the bright side, quality post-IPO growth stocks are more reasonably priced with compelling entry points.
At around $60, Zoom looks appetizing and is a convincing buy and hold. At some point, this software company could become a takeover target for a larger corporate because companies such as Google (GOOGL) and Apple (AAPL) will need to acquire growth moving forward.
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 attractive after the 9% haircut this past week.
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.
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, and Zoom isn’t a $100 stock by yearend, then the stars should align by 2021 because the value extraction potential is substantially robust in Zoom’s business model.
We finally have a reasonable level to scale into Zoom, and if it drops into the $50 range, it’s not just a scale-in type of scenario, investors should buy as much as they can with two hands.
Growth stocks can only be pinned down for so long and the best and brightest have been unfairly penalized with the rest. And let me remind you, this patch of softness in shares is only ephemeral and now is the time to act.
“When we launch a product, we're already working on the next one. And possibly even the next, next one.” – Said CEO of Apple Tim Cook
Food tech stock Beyond Meat, Inc. (BYND) went from euphoric to absolute dud when shares surged above $240 at the end of July only to crash.
In general, tech stocks have had a successful year, but the second half of the year has been inordinately unkind to growth stocks and Beyond Meat bore the full brunt of the change in market sentiment.
Let me remind you that I am not saying this is a bad company or a bad stock like Uber (UBER) or Lyft (LYFT).
Hardly so.
Investors can take away many positives from their overarching story and even more so as the stock has come down from the heavens settling in the mid-70’s range.
First, plant-based food is not going away anytime soon and is intertwined with the Millennial ethos of living healthier and protecting the planet.
Nonprofit organization The Good Foods Institute has forecasted that the plant-based food market is valued at more than $4.5 billion in the U.S. and grew 11% year over year.
Plant-based meat rose 10% last year, a substantial decrease of 25% year over year, but industry experts believe there is a significant pipeline of international revenue just waiting there for the taking.
More than one-third have tried at least one plant-based meat product, a low figure, but of those that have tasted, 57% make a repeat purchase.
Internationally, sales are expected to go from a $12.1 billion market in 2019 to a $27.9 billion market by 2025. In 2018, plant-based meat sales comprised 1% of all dollar sales in total retail meat in the U.S. and that number is only going to rise.
Let’s compare it with another successful plant-based product that has matured into a winner – milk.
This market has developed into a $1.86 billion market and plant-based milk is further ahead than the plant-based dairy and meat market.
Fortunately, these juxtaposed markets represent substantially overlap and positive demographic correlation of plant-based milk and meat consumers could mean that plant-based meat companies could achieve a similar rise like the plant-based milk companies experienced.
Domestically, plant-based milk now has a 13% share of the overall retail milk market, exploding by 61% from the years 2012 to 2017 and a further 6% rise in 2018.
If plant-based meat enters into the same trajectory as their cousins’ plant-based milk, grabbing 10% of market share from the overall retail meat market is feasible.
The special sauce that initially propelled the share price to the Himalayan highs of July was the insane growth rate which last quarter came in at 211.5% year-over-year.
The company is also surprisingly profitable eking out a $4.10 million performance last quarter on almost $92 million of quarterly revenue.
But I would like to bring investors back to reality and remind them that the company only does $92 million of revenue per quarter and the one before that a touch above $67 million.
This company is still in its infancy and just because it bursts with life in its formative stages does not mean investors can extrapolate that for years ahead.
What are the headwinds and how far off are they?
The most unstable variable rearing its ugly head is intense competition imminently barreling towards Beyond Meat.
An outsized dosage of competition would take an axe to profit margins with minimal chance of a quick reversal even if Beyond Meat manages to offer an outperforming product.
Beyond Meat is the disruptor and reaped a dividend from the first-mover advantage and the subsequent network effects.
But that doesn’t mean larger companies can’t copy them and that is exactly what is happening as we speak.
The competition is rapidly intensifying, specifically from big box protein processors and packaged food players who plan to undercut Beyond Meat price points using excess capacity and a lower gross margin rate profile.
The companies coming for Beyond’s bacon are Tyson Foods Inc. (TSN), Kellogg Co. (K), Hormel Foods Corp. (HRL), and Conagra Brands Inc. (CAG).
These big players will dump volume onto the plant-based food market and Kroger Co. just announced it would introduce 58 plant-based items under its private label Simple Truth in 2020.
Beyond Meat’s strategic position could suffer if consumers prove less brand loyalty and more price-conscious, then Beyond Meat’s first-mover advantage could dissipate and dynamics could revert closer to commodity industry profit margins.
Investors are laser-like focused if Beyond Meat can maintain gross margins over 35% by layering strategic partnerships with businesses that have a widespread addressable audience base.
If Beyond Meat fails in this respect, the competition will gradually destroy its competitive advantage and tank its share price.
The quality of the product has a large role to play in this too.
Another possible headwind is that Impossible Foods’ Impossible Burger is favored by many taste experts in taste tests diminishing Beyond’s product to the second tier.
But If the company can mimic the taste of a high-quality burger and replicate at least 80% of that experience, the products are likely to stick leading to more investment to capture that last 20% of the taste experience.
It is yet to be determined if Beyond Meat can muscle itself through the gauntlet of rigmaroles, and technically, its overhyped beginnings have given way to a more modest share price as of late.
If the stock enters into the $50 price range, it would be an advantageous price point to scale into this leader of food tech, but I would monitor it closely because the narrative could change on a dime and the story could sour if their strategy begins to fail.
First, what is augmented reality for all the newbies?
Augmented reality is an interactive experience of a real-world environment where the objects that reside in the real world are enhanced by computer-generated perceptual information, sometimes across multiple sensory modalities.
Augmented reality (AR) went rival in 2016 when the Pokemon Go mania captivated everyone from children to adults.
No sooner than 2021, the AR addressable market is poised to mushroom to $83 billion - a sizeable increase from the $350 million in 2018.
Much like machine learning, corporations are learning to marry up this technology with their existing products supercharging the performance.
Ulta Beauty, for example, has acquired AR and artificial intelligence start-ups to help customers digitally test the final appearance of makeup before users purchase the product.
That is just one micro example of what can and will be achieved.
Looking deeper into the guts, Qualcomm (QCOM) is hellbent on making their chips a critical part of the puzzle.
The company is better known for a telecom and a semiconductor play, not often lumped in with a list of AR stocks.
Qualcomm is strategically positioned to capitalize on the integration of augmented reality in mainstream corporate business embedding their chips into the devices.
Maximizing Qualcomm’s future role in the industry, the company announced in 2018 that it would be developing a chipset specifically for AR and VR applications.
This broad-based solution will make it easier for other developers to bring new glasses to the marketplace.
Autodesk (ADSK) is one of my favorite software stocks and a best of breed of industry design.
They sell 3D rendering software to designers and creators by offering a platform in which they can transform 2D designs into digital models that are both interactive and immersive, creating compelling experiences for end-users.
Autodesk has an array of powerful software suites to augment virtually any application, such as 3ds Max, a 3D modeling program; Maya LT game development software; its automotive modeling program VRED; and Forge, a development platform for cloud-based design.
Facebook (FB) has been piling capital into AR for years.
CEO Mark Zuckerberg wants to create an alternative profit-driver and is desperate to wean his brainchild from the digital ad circus.
One example is Facebook’s Portal TV and its Spark AR which is the platform responsible for mobile augmented reality experiences on Facebook, Messenger, and Instagram.
It supplies the virtual effects for consumers to play around with, but it is yet to be seen if consumers gravitate towards this product.
Lumentum (LITE) is the leader in 3D-sensing markets developing cloud and 5G wireless network deployments.
They manufacture 3D sensor lasers that can be used with smartphones to turn handsets into a sort of radar. Sensors are clearly a huge input in how AR functions along with the chips.
CEO of Apple (AAPL) Tim Cook put it best when he earlier said, “I do think that a significant portion of the population of developed countries, and eventually all countries, will have AR experiences every day, almost like eating three meals a day, it will become that much a part of you.”
He said that in 2016 and AR has yet to mushroom into the game-changing sector initially thought partly because the roll-out of 5G is taking longer than first expected.
Apple consumers will need to then adopt a 5G device or phone to really get the AR party started and that won’t happen until the backend of next year.
My initial channel checks hint that the Cupertino firm is planning a 5.4-inch model, two 6.1-inch devices, and one 6.7-inch phone, all of which will support 5G connectivity.
I surmise that Apple’s two premium devices will feature “world-facing” 3D sensing, a technology that could help Apple boost its augmented-reality capabilities and support other feature improvements on its priciest devices.
Apple has had a big hand in Lumentum's growth and will continue to buy their sensors, but other key component suppliers will get contracts such as Finisar, a manufacturer of optical communication components and subsystems.
Apple planned to debut AR glasses by 2020, but the rollout is now delayed until 2022.
They are clearly on the back foot with Microsoft (MSFT) further along in the process.
Microsoft already has a second iteration of its AR headset, HoloLens, and is compatible with several apps and has integration with Azure as well.
The head start of 2 years could really make a meaningful impact and might be hard for Apple to recover.
Facebook isn’t the only social media company going full steam into AR, Snap (SNAP) recently unveiled its newest spectacles, which feature AR elements.
Another application of AR is autonomous driving with Nvidia working on improving the driving experience by fusing AR with artificial intelligence.
Nvidia (NVDA) is already thinking about the next generation of AR technologies with varifocal displays, which improve the clarity of an object for a user.
It will take time to transform our relationship with AR, the infrastructure is still getting built out and many people just don’t have a device that will allow us to tap into the technology.
Investors must know that AR-related stocks will start to appreciate from the anticipation of full sale adoption and there could be a killer app that forces the mainstream user to take notice.
Until then, companies jockey for position and hope to be the ones that take the lion’s share of the revenue once the technology goes into overdrive.
