“Bigger than the world of the world is your mind.” – Said Founder and CEO of Huawei Ren Zhengfei
Mad Hedge Technology Letter
August 7, 2019
Fiat Lux
Featured Trade:
(CORD-CUTTING IS ACCELERATING)
(DIS), (T), (NFLX), (CMCSA)
Cord-cutting is picking up steam – that is the last thing traditional media want to hear.
There are several foundational themes that this newsletter has glued onto readers' foreheads.
The generational pivot to cloud-based media is one of them.
It’s easy to denominate this phenomenon down to Netflix (NFLX) but in 2019, this trend is so much more than Netflix.
E-marketer published a survey showing that cord-cutters will surpass 20% of all U.S. adults by the end of 2019.
The rapid demise of traditional television has been equally as mind-numbing with the 100.5 million subscribers in 2014 turning into 86.5 million subscribers today.
Comcast (CMCSA) has tried to buck the trend by homing in on fast broadband internet, but that strategy can only go so far.
Disney (DIS), WarnerMedia, and NBCUniversal Disney have really gotten their ducks in a row and are on the verge of launching their own unique streaming services.
Disney's service entails a 3-segment strategy bringing in Hulu and ESPN Plus to the Disney fold.
The Disney service will revolve around family content at its core so don’t expect Game of Thrones lookalikes.
WarnerMedia's hopes to cash in on its HBO brand while peppering it with original series and programming from Warner Bros. and DC.
Disney will be able to lean on family brands of Marvel, Star Wars, and Pixar, and newly acquired National Geographic.
Marvel Cinematic Universe is a growth asset pumping out more than $22 billion at the box office across 23 movies.
Disney Plus will also have a solid collection of Disney films to play with, which could make it indispensable to parents and comes with no ads making it even more appealing to kids.
Disney will also deploy some mix of bundles to diversify its offerings and personalize services for viewers who do not want its entire lineup of content.
The soon-to-be HBO Max will implement HBO original content along with WarnerMedia brands like Warner Bros., DC Entertainment, TBS, TNT, and CNN.
HBO Max will have a treasure trove of old Warner Bros. movies and TV shows, like "Friends" and "The Fresh Prince of Bel Air," that has played extremely well on Netflix.
HBO will get those titles back at the end of 2019.
HBO has also tied up with BBC Studios to stream "Doctor Who."
"You should assume that HBO Max will have live elements," said Randall Stephenson, chairman and CEO of AT&T, on the company's second quarter conference call.
This roughly translates into HBO Max snapping up live sports and music events to complement scripted content.
This is something that Netflix has shied away from and live events are best monetized through live ads.
The last big label service to go into effect is NBC’s yet to be named streaming service.
NBCUniversal will have the luxury of offering their cable subscribers a chance to pivot to an in-house online streaming service making the move seamless.
At first, the 21 million US cable-TV subscribers will receive the streaming content for free.
Some of the assets that will trot out on the NBC platform are "The Office," because NBC is removing it from Netflix for 2021.
As cord-cutters hasten their move to streaming, this trio of loaded content-creating firms will benefit as long as they maintain a high quality of content and the pipeline to please fidgety consumers.
“One of the only ways to get out of a tight box is to invent your way out.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
August 5, 2019
Fiat Lux
Featured Trade:
(THE CHINA TARIFF BOMBSHELL AND TECHNOLOGY),
(AAPL), (NVDA), (INTC), (MU), (WDC), (BBY)
With one little tweet, the state of technology and the companies that rely on the public markets that serve them went haywire.
U.S. President Donald Trump levied another 10% on the $300 billion that had not been tariffed up yet compounding the misery for anyone who has any vested interest in trade with mainland China.
The tariffs will take effect on September 1st.
How does this shake out for American technology?
Any brand tech name that has substantial supply chain operations can kiss their stay in the Middle Kingdom goodbye.
If management didn’t understand that before, then it's clear as night that they need to shift their supply chain out of the reaches of the Chinese communist party.
The U.S. Administration tripling down on China being our archnemesis means that any sort of cross-border economic trade or cultural exchange will be viewed through the prism of warped geopolitics.
The U.S. President Donald Trump has in fact taken a page out of the Chinese playbook turning everything he sees and touches into a transactional tool for what he is pursuing at the time or in the future.
Specific companies facing the wrath of the tariffs are companies as conspicuous as Apple filtering down to the SMEs that make local business local.
Semiconductor chips are a huge loser in this new development as the price of electronic goods will rise with the tariffs.
If you want a name that lies in the heart of electronic consumer goods, then BestBuy (BBY) would encapsulate this thesis and unsurprisingly they were taken out to the back of the woodshed and taught a lesson dropping 10% on the news.
Any technology outfit that imports goods from China will be hit as well and this means semiconductor chips along the lines of Nvidia (NVDA), Intel (INTC), Western Digital (WDC) and Micron (MU) among others.
Chips are the meat and bones that go into end products like iPads and a slew of smart devices.
Demand will be hit because of the cost of producing these types of consumer products will rise.
The softness is showing up in the numbers with Apple’s iPhone revenue down 12% year-over-year.
Samsung of Korea also showed that this isn’t just an American problem with their semiconductor division’s operating profits down 71% year-over-year.
The Korean conglomerate is in a spat with the Japanese government over war crimes from the second world war causing the Japanese government to bottleneck the supply of chemicals needed to produce high-level semiconductor chips.
The export restriction will drag down SK Hynix display business who is one of the largest producers of DRAM chips and also a Korean company.
Consumers are also using their phones longer with Apple iPhone customers holding their device up to 4 years delaying the refresh cycle.
The company that Steve Jobs built will have to repurpose themselves for a brave new tech landscape that includes heavier regulation, trade tariffs, and device saturation.
When investors talk about the “low hanging fruit,” at this point, Apple isn’t one of them.
And if you think the services business is a cakewalk, ponder about how many apps and behemoths that spit out a whole lineup of apps.
Apple still has its ecosystem and should guard it with its life, this is the same ecosystem that can charge Google around $10 billion per year to slap on Google search as the primary search engine on Apple devices.
Expect tech to telegraph a deceleration in revenue for the last quarter and next year.
The tech environment is brittle at this point and uncertainty wafts in the air like a hot stack of pancakes.
“It's really hard to design products by focus groups. A lot of times, people don't know what they want until you show it to them.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
August 2, 2019
Fiat Lux
Featured Trade:
(THE GREAT LATIN AMERICAN INTERNET PLAY),
(MELI), (PYPL), (AMZN), (EBAY)
How do you get exposure to the e-commerce story in Latin America?
The best way to do that is to dive into Mercado Libre (MELI), meaning “free market” in Spanish, an Argentine company incorporated in the United States that operates online marketplaces dedicated to e-commerce and online auctions, including mercadolibre.com.
Mercado Libre was established as an Argentine company in 1999 and Founder & CEO Marcos Galperin, while attending Stanford University, acquired funding from HM Capital Partners co-founder John Muse to start his brainchild.
Mercado Libre received additional funding from JPMorgan Partners, Flatiron Partners, Goldman Sachs, GE Capital, and Banco Santander Central Hispano.
The company has used M&A along with organic growth to drive the company.
Relevant examples are of eBay (EBAY) buying a 19.5% stake in the company and then selling its stake in Mercado Libre in 2016, but the companies continue to expand eBay sellers into Latin America.
The cooperation remains strong with eBay opening its first branded store on the Mercado Libre marketplace from Chile in March 2017.
Mercado Libre has acquired iBazar Como, the Brazilian subsidiary of eBay's earlier acquisition, iBazar S.A.
The success culminated with becoming the first Latin American technology company to be listed on the NASDAQ, under the ticker symbol MELI.
The firm offers investors a way to invest in one of the fastest-growing e-commerce markets in the world.
The company has 280 million registered users out of 644 million people who live in Latin America.
The stock has soared 543% in the last five years making the firm one of the fastest growing e-commerce companies in the world by many metrics.
The main drag is that the valuation looks frothy at these price levels.
Mobile payments have mushroomed naturally because of its title, the "eBay of Latin America."
They can also claim to be the PayPal of the region, thanks to robust growth happening in the MercadoPago digital payments business.
In the first quarter, total payment volume rose 82.5% year-over-year.
Off-marketplace payment volume is up 194% – accelerating each and every quarter.
Off-marketplace payments now comprise 45% of the company's total payment volume, and management sees high penetration trends happening in certain areas.
PayPal (PYPL) have become huge supporters of MercadoLibre with an investment of $750 million into MercadoPago.
The deal will join the firms together to work on the shared vision to digitize the economy, especially for the underbanked, in Latin America.
It's a stamp of approval of Mercado's brand recognition in the region that PayPal chose to invest in the company instead of competing.
How fast is the addressable market growing?
Investors have been seduced by the company's impressive growth in payments, but the core marketplace business is still doing backflips.
Gross merchandise volume (GMV) expanded 27% year-over-year in the first quarter, driven by 70% growth in Mexico.
Brazil is the largest market and expanded GMV by 18% year-over-year in the quarter.
Management referenced supermarket items in Mexico and increasing apparel selection as two areas that are showing strong results.
Apparel is the fastest-growing category, up 79% year-over-year last quarter.
With signs that new development is headed in the right direction, new categories and the company expanding its logistics footprint, the market will definitely expand.
MercadoLibre can grow beyond the marketplace business to become a formidable fintech company.
As it expands into other services, Mercado is fortifying its strong brand across Latin America.
Even as Amazon.com (AMZN) enters the high stakes industry, Mercado's first mover advantage can’t be underestimated.
The stock is pricey so lay off it for the time being but add with any major dips.
“We're very simple people at Apple. We focus on making the world's best products and enriching people's lives.” – Said CEO of Apple Tim Cook
