Mad Hedge Technology Letter
June 24, 2019
Fiat Lux
Featured Trade:
(YOU COULD DO A LOT WORSE THAN ADOBE)
(ADBE)
The bull rally isn’t dead – that is the biggest takeaway from Adobe’s (ADBE) overperformance and recent earnings beat.
They will keep posting positive earnings results unless there is some type of seismic shift that deteriorates its competitive advantage.
The company continues to show no mercy by expanding revenue 25% year-over-year to $2.74 billion in the quarter just reported.
Adobe’s portfolio of solutions is the gold standard for creating and managing the world’s digital experiences through its apps and cloud products.
Software stocks are the optimal late cycle stocks and I have been whacking every bush in the outback to spread the message that instead of opting for hardware, software protects investors from many of the treacherous traps out there now.
But the most regenerative trends out there are many companies are bypassing or delaying, exorbitant capital projects like new chip factories or new hardware product lines because of the high-risk nature of the economy peaking, in place of fine-tuning processes that are directly correlated to higher software procurement.
This stock fits that procurement bill with millions of consumers dependent on critical apps like Adobe Photoshop and PDF for personal and professional endeavors.
I know I am!
A ceaseless pipeline of enterprises the world over is relying on Adobe every day to help them transform their businesses and the success is vividly showing up in the numbers.
The branding power and the continuous product innovation and services, the deep investment in technology platforms, and a robust ecosystem of partners are enabling Adobe to serve millions of customers swelling the top line.
The expanding addressable markets in the creativity, document, and customer experience management categories are an opportunity that has never been greater.
Adobe Creative revenue was $1.59 billion demonstrating 22% year-over-year growth.
Mobile is the main catalyst in the Digital Media space and Adobe is experiencing significant increases in mobile traffic and member sign-ups for Adobe’s offerings.
This is the gilded age of creativity, and the vision for the Creative Cloud is to be the creativity platform for all.
This has catapulted Adobe’s creative portfolio into must-have apps for professional content creators.
And we are just skimming the surface of how deeply creative content will penetrate into users' lives.
Whether you are a burgeoning student, an experienced designer, a commercial YouTuber, or a marketer, storytelling is the focal point to the way you communicate and connect.
The key part of the Creative Cloud growth strategy is appealing to new audience of users and Adobe is executing this tactic on all levels.
Adobe Spark, a product that easily turns ideas into compelling stories, graphics, and webpages, is swiftly gaining traction among creators from the classroom to the boardroom.
Spark traffic on web and mobile has more than doubled year-over-year.
They have enhanced their vision of platforms to include social media outlets like Facebook, Instagram, and YouTube.
Premiere Rush is rapidly becoming the solution of choice for YouTubers and social video creators. Premiere Rush is now available on Android in addition to iOS, Mac, and Windows.
When we boil down the nuts and bolts to find out the growth drivers, I am convinced about the upselling and retention of assets inciting new user growth driven by numerous global initiatives to generate demand, including targeted campaigns and promotions, leveraging the funnel of users coming to Creative Cloud through mobile apps and online engagement.
This helps continue focus on new categories including immersive media and new segments such as social media creators, Creative Cloud Photography plan subscriptions, Adobe Premiere Pro single app subscriptions in the video category, and Creative Cloud enterprise.
Adobe Stock is the fast-growing service for stock images, videos, and millions of additional creative assets grew greater than 25% year-over-year.
With Adobe Document Cloud, they are reimaging how consumers can scan, edit, collaborate, sign, and share documents in the cloud and mobile era.
Document Cloud revenue in Q2 was a record $296 million and they grew Document Cloud ARR to $921 million driven by continued strength in Acrobat subscription adoption.
Mobile is the next frontier for digital documents and our flagship apps.
Adobe Reader for mobile and Adobe Scan continue to metastasize in popularity.
Adobe Scan, which allows you to capture everything from documents to forms, whiteboard sketches or business cards, and turn them into picture-perfect, high-quality PDFs, is now the leading scanning app in iOS and Android.
Adobe Sign, the cloud-based electronic signature solution, is another winner with customers including Merck, Hitachi, and Iowa State University.
They are using Adobe Sign to provide optimal customer experience, close out deals, and win business.
The quality of the company’s apps is far-reaching with many firms turning away from Amazon and joining Adobe in droves.
The Digital Media ARR growth has been leveling down from 30%-plus range in the last couple of quarters, and investors have begun to be concerned about the long-term trajectory.
Adobe still possesses the potential for unit conversions internationally, but domestic sales will drive the business in the short term.
Even more attractive, the company is insulated from the China ruckus.
The company is one of my favorite software stocks and is part of an exclusive club of 5-7 software stocks that are part of my long-term must-buys.
This is an effective bet on the expansion and continuous development of the digital content industry.
Even if certain formats were to blow up like a Facebook, content will evolve into some other form and Adobe will be on top of the game attempting to deliver a first rate of tools to support these new operations.
Adobe is a core enterprise stock and most businesses from big to small pay for one of their services, for example, the bare minimum is likely to result in a company paying for Adobe’s PDF viewer to capture the best method of handling PDFs.
Adobe simply does a great job of providing and supporting creative software applications to drive productivity.
And I love that this company isn’t reliant on any one tool to drive profits, being a one-trick pony in this climate has forced other companies to seriously overreach in risk and addressable market.
Wait for shares to come down for $300, traders will need a better entry point as shares have bolted from the barn door.
“Sometimes life is going to hit you in the head with a brick. Don't lose faith.” – Said Co-Founder and Former CEO of Apple Steve Jobs
Mad Hedge Technology Letter
June 21, 2019
Fiat Lux
Featured Trade:
(THE REGULATION WARPATH TO LIBRA)
(FB)
Facebook has a 30% chance of making this work.
Those are the odds I give Facebook today from making an announcement about integrating a Facebook-branded cryptocurrency called Libra into an actual successful future business.
First of all – let’s get this straight - Libra is not a cryptocurrency in the way that Bitcoin and Ethereum are.
These two digital currencies are non-sovereign bets for people who want to entrust a store of value outside the grubby fingers of big government.
Bitcoin and Ethereum are also speculative with a zig-zagging market movement attached to it with Bitcoin at its peak up to $20,000 and currently hovers around $9,000.
Slapping cryptocurrency buzzword on Libra is another marketing razzmatazz, one of the hallmarks of Founder and CEO of Facebook Mark Zuckerberg’s tenure.
This type of technology isn’t revolutionary or creative at all – it’s a giant rip-off of China’s WeChat Pay business.
Essentially, this is a digital wallet pegged to a basket of currencies and short-term instruments and Facebook’s digital wallet coined Calibra is for users to store and exchange the currency.
Libra will not be a speculative asset and will function as a payment instrument with $1 debited meaning $1 debited but this $1 is called Libra and it can be swapped for services on Facebook’s platform.
There aren’t any closing fireworks at the end of the show.
For the people who have lived in China, they know exactly what I am talking about because habitual monetary activity starts from the WeChat platform.
The main operational duty for WeChat is to chat with friends much like Facebook chat or Google Hangouts.
But here is when things differ – users can link a bank account and transfer money from the card onto the digital wallet called WeChat Pay that sits on top of the platform.
A home screen can then populate with a grid-like option of services from transferring money, ordering ride-sharing services, restaurant delivery and so on.
Users can even dump some cash into a money market fund that returns principal plus interest after a certain amount of time.
These 3rd party services give the user a bill and then the money can be conveniently digitally transferred from WeChat Pay with a few taps.
WeChat, owned by Tencent, earns a commission on every transaction and this is the carbon copy blueprint that Facebook wants to follow even if they haven’t announced the details of it.
This is another example of China being 10 years ahead of American fintech.
The unrivaled losers if this plays out to Facebook’s fancy are the traditional banks who are bypassed and the capital that is rerouted through Calibra.
I will say that Facebook couldn’t have worse timing even if they had tried, but better late than never.
Facebook should have established and nurtured this business 5 years before the regulatory storm started to brew.
If they went ahead with this 5 years ago, I would have given this business a 75% chance of succeeding because they were the darling of the tech world with everything they touched turning to gold.
The model was even out there for everyone to see by 2011 when WeChat went live with its digital wallet, why did it take Facebook or anyone else for that matter 8 years to get the ball rolling?
Is it because Silicon Valley is so inward-looking? Perhaps.
Even at the beginning of me writing the Mad Hedge Technology Letter in early 2018, the coast was clear with regulatory winds hitting six months later with vengeance.
Let’s check another box off, Facebook absolutely possesses the technological know-how to make this a reality, that is not the question.
Now it has more to do with if outside forces with the authority will undermine the start of this digital currency business.
After the announcement, it appears the blowback from politicians and regulatory bodies will be intense and unrelenting.
To say that countries abroad will let this fly isn’t accurate either with Chairman of the Russian State Duma Committee Anatoly Aksakov sharing that Facebook’s attempt at cryptocurrency through Libra will not be legalized in Russia because of posing a direct threat to the health of the Russian financial system.
Europe will most likely become a no-go as well as they take the issue of protecting personal data more seriously than their American counterparts.
Allowing Facebook to harvest a commission through every European digital financial transaction is in the realm of fantasy today.
Facebook missed an ideal time slot to roll out this business, they could have sunk their fangs into the consumer in a way that it could not be reversed, but that ship has sailed.
This sets up a massive uphill battle against domestic regulators that were quick with responses to news regarding Libra with chair of the House Financial Services Committee Democratic Rep. Maxine Waters pushing for an immediate “moratorium” on Libra.
The latest run-up in Facebook shares was on the back of Libra, Facebook appears to be valued fairly at $200, and they are praying that Libra will become its fresh catalyst to take them to $250.
“A squirrel dying in front of your house may be more relevant to your interests right now than people dying in Africa.” – Said Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
June 19, 2019
Fiat Lux
Featured Trade:
(FREELANCING TO THE TUNE OF THE GIG ECONOMY)
(FVRR), (LYFT), (UBER), (UPWK)
The company who exploits workers in the gig economy, Fiverr International Ltd. (FVRR), went public and is a terrible long-term buy and hold for investors.
I’ll tell you exactly why you should stay away from it like the plague.
Take a look at one of the sad side effects of the tech industry – 58% of full-time gig workers said they would have a hard time finding $400 to cover an emergency bill compared to 38% of people who don’t work in the gig economy.
The large discrepancy indicates that the informal economy is far more destabilized from Silicon Valley than investors care to admit.
And in many cases, the brutal economic conditions don’t underline the lack of upward mobility too.
While some are drawn to flexible roles, the gig-economy has faced condemnation, particularly because it has enabled companies to marginalize workers as contractors rather than employees who would be entitled to benefits and wage protections.
What about the risks of Washington smushing their business models?
Fiverr confesses that policy changes could destroy their business model if the ability to designate their workers as contractors is banned.
The freelance model could also become less attractive if it means higher regulatory risk or even higher perceived regulatory risk.
Another stain on Fiverr’s reputation is that, like many other tech companies of its ilk, it is loss-making.
Fiverr posted a net loss for 2018 of $36.1 million, compared to a net loss of $19.3 million in the prior year.
The lack of profitability is absorbed for the ultimate goal of gouging a total addressable market within the U.S. of $100 billion.
Fiverr's $82.5 million in trailing revenue is less than a third of fellow freelance platform operator Upwork (UPWK) at $263.1 million.
Uber (UBER) and Lyft (LYFT), ridesharing services, are considerably larger than that as Uber and Lyft command trailing top-line results of $11.8 billion and $2.5 billion, respectively.
Revenue expanded 45% last year and this year 42% annualized through the first three months of 2019.
Fiverr is growing faster than Upwork with just a 16% top-line gain in the first quarter and Uber which decelerated to a 20% increase in the same reporting period.
But all three gig-economy players still trail behind Lyft with its first-quarter revenue surge of 95%.
None of these companies are currently profitable.
Is it worth it to pay a premium for cash burners?
Fiverr, Upwork, Uber, and Lyft are fetching between six- and nine-times trailing revenue.
Fiverr shares are 50% above its IPO price after just two days of trading and is somewhat misleading but mister market is always right.
Lyft and Uber have been losers this year after going public and the jury is out to whether they are really worth a long-term duration trade.
It can be argued that Uber is a better bet long-term bet because of a bold aerial service that could eventually unlock massive value, but I would say its current model is somewhat underwhelming and could be called a fancy taxi service.
The best type of tech companies right now are software companies insulated from the turmoil of the trade war.
If you are interested in pure software companies, there are a handful of names out there that fit the bill, but if you are looking at a company attempting to crowbar itself into the idea of a software company then Fiverr is it.
That unflattering description is entirely justified as well.
Don’t forget they have real competition in the marketplace to supply freelance jobs in Upwork who has a bigger market share.
These type of broker apps do not have much pricing power and their only sell is the prospect of scaling as fast as possible meaning a volume play.
I can honestly ask, why buy Fiverr when there is a much better option out there?
The success of Fiverr is reliant on maintaining and expanding the scale of operations to generate a sufficient amount of revenue to offset the associated fixed and variable costs.
In my eyes, growing the number of users to benefit from the scale might happen after it does not exist anymore.
Investors must really ask themselves if gig workers will even be around in 8-10 years.
Why is that?
The gig economy is a battle down to zero and as tech companies become more sophisticated with expanding their artificial intelligence capabilities, it will remove the demand for gig economy taking away a huge swath of the addressable market with it.
This stock is a bet against artificial intelligence and the application of it, and if anyone has been reading this newsletter, they know it would be akin to throwing your hard-earned money down the toilet.
Specifically speaking, every cornerstone industry from national defense, consumer products, the trappings of Wall Street, industrial production, robotics, autonomous driving technology, and transportation is moving full speed ahead with implementing and harnessing artificial intelligence.
The technology isn’t quite there yet and humans are just a quick stop-gap until the optimal technology can be achieved.
Then it will be arrivederci to the human element, stripped away like my innocence in high school.
This is a bet on the upward trajectory of gig economy workers and the fate of them and that is a bad gamble to make long-term.
“10 to 20 years out, driving your car will be viewed as equivalently immoral as smoking cigarettes around other people is today.” – Said American Venture Capitalist Marc Andreessen
Mad Hedge Technology Letter
June 17, 2019
Fiat Lux
Featured Trade:
(THE FLIGHT PATH OF UBER)
(UBER)
