“Most entrepreneurial ideas will sound crazy, stupid and uneconomic, and then they'll turn out to be right.” – Said Co-Founder and CEO of Netflix Reed Hastings
Mad Hedge Technology Letter
April 17, 2019
Fiat Lux
Featured Trade:
(ALPHABET DOMINATES WITH GOOGLE MAPS)
(GOOGL), (AMZN), (YELP), (UBER)
Remember Google Maps?
Google will start monetizing it, let me tell you about it.
The web mapping service developed by Google gifting access to satellite imagery, aerial photography, street maps, 360° panoramic views of streets has been around since the beginning of this generation of big tech and is what I would consider legacy technology.
Legacy technology is often associated with failure as the out of date nature isn’t applicable to the tech scene and the commercialization of it today.
In a candid letter, Jeff Bezos wrote to shareholders that Amazon will “occasionally have multibillion-dollar failures.”
Silicon Valley tech will have its share of implosions stemming from ill-fated industry decisions correlating to heavy losses.
Google Maps won’t be one of these slip-ups.
However, a whole catalog of instances can be chronicled from Microsoft’s purchase of Nokia’s handset division to Google’s social media foray in Google Plus.
It hasn’t gone all pear-shaped for Alphabet in 2019. I strongly believe they are one of the companies of the year harnessing YouTube in ways consumers never imagined.
Adding color to the story, any remnant of apprehension to any bearish feelings about Alphabet should vanish once investors understand how lucrative Google Maps will become.
Google has spent decades and billions of capital honing the application and in terms of market share they have cultivated a monopoly.
Uber’s S-1 filing shined some light on Google Maps characterizing it as a must-have input into their business saying, “We do not believe that an alternative mapping solution exists that can provide the global functionality that we require to offer our platform in all of the markets in which we operate.”
Uber sunk $58 million integrating Google Maps into its services from 2016-2018 along with continuous payments to its Google Cloud arm to host Uber’s data.
The strong relationship with Uber shows how Alphabet is adept at milking 3rd party apps for what they are worth.
Alphabet’s stake in Uber is projected to be $5 billion from the $250 million investment in Uber in 2013.
The party doesn’t stop there with Uber paying Alphabet $631 million from 2016-2018 in digital marketing services and another $70 million for technology infrastructure.
To say that Google firmly has its tribal marks tattooed into Uber’s skin is an understatement.
Almost 80% of smartphone users regularly use navigation apps.
Google Maps is the most popular navigation app by a country mile with 67% of market share.
One billion people consistently use Google Maps.
It is the go-to navigation app for nearly 6x more people compared to the runner up app Waze with 12% market share.
The superior performance of the app has allowed it to branch off into a Yelp-like hybrid app accumulating reviews of businesses and institutions that are conveniently dotted around its map.
Multi-functional terrain was integrated to make the maps more 3D and route navigation from point A to B routes has steadily improved since its inception.
The increasing detail showing even roofs of sheds and the Google street view offering a point of view vantage point boosting the reliability of the app.
The result of making the app better is that navigators can easily discern locations and follow routes clearly.
Most would concede that they use the app to look up specific street routes.
By implementing digital ads into the experience, product and service offers will possibly populate in real time as the user glances at the app’s directions.
A vast amount of services such from food to personal grooming to even cannabis club ads could be applicable and ad companies will pay top dollar to post on Google Maps.
Google could also offer personalized recommendations to users and collect an affiliate fee if the user clicks on an attached link transferring the customer to a 3rd party landing page.
They already benefit from this strategy on Google Flights.
Google might even be tempted to implement a Groupon model with group discounts on services positioned on Google Maps.
Google Maps is hands down the most underappreciated app and most under monetized tech asset in the world.
Another possible revenue generation avenue would be the advent of Google Maps voice ads en route to a destination that would promote a 5 or 10 second voice commercial of a businesses that the user is physically passing by.
The unintended effects of Google’s audacious transformation of their proprietary Map service spells doom for Yelp’s business model.
Google’s move into digital ads of maps effectively means that Yelp will be relegated to an inferior version of Google Maps without the map technology.
Google has accumulated enough personal data to draw up any type of profile for particularly Android users voraciously consuming data on Gmail, Google Maps, Google Search and Google Chrome.
These four data generators will allow Google to formulate a shadow profile based on individual tastes with daily use of these four Google properties.
Alphabet has a time-honored model of building assets that become utilities and once they monopolize the utility, they sprinkle the digital ad pixie-dust effectively monetizing the asset that was once free of charge.
They have followed the same road map for Gmail, Google Search, YouTube, and if Waymo can become a utility, prepare from Google digital ads inside the screens of Waymo autonomous cars.
When many sulked that this could be one of those billion-dollar failures that Bezos whined about, Google has decided to supercharge Google Maps by cross-pollinating the power of Google maps with its digital advertising knowhow.
This powerful cocktail of forces working in tandem will accelerate its revenue growth along with the resurgence of its YouTube digital ad revenue.
I believe this new lever of revenue growth isn’t priced into Alphabet shares yet, and withstanding any random black swan shocks to the broader economy, Alphabet is poised to outperform the rest of the trading year.
Short Yelp on any and every rally - Google has made their business model redundant.
“If you step back and take a holistic look, I think any reasonable person would say Android is innovating at a pretty fast pace and getting it to users.” – Said CEO of Google Sundar Pichai
Mad Hedge Technology Letter
April 16, 2019
Fiat Lux
Featured Trade:
(UBER’S DARK AND DIRTY SECRETS)
(UBER), (LYFT)
The granddaddy of IPOs awaits us – Uber has filed an S-1 with the SEC detailing plans to go public.
Uber can’t do this any sooner as they preside over a decelerating ride-share operation and its high margin Uber eats division, food delivery business, that has experienced slowing margins.
Once helmed by swashbuckling entrepreneur Travis Kalanick, Uber was infamous for its cultural problems that played out in real time in the media with sexual harassment accusations amongst other things.
They were castigated for its environment of testosterone overload that current CEO Dara Khosrowshahi has rooted out.
Khosrowshahi is pinning the blame on the past leadership in the S-1 filing explaining they are still fine-tuning these problems and its inherent risk could be detrimental to the growth model.
The Iranian-American CEO needs as many outs as he can find because Uber is a high-risk, high-reward model that has revealed no possible way to becoming profitable.
Sequentially, Uber’s core growth has stagnated with revenues last quarter of 2018 coming in at $2.314 billion, decelerating from $2.315 billion in the third quarter.
This is a sensitive spot for Uber because it correlates to 91% of its revenue.
Its Uber Eats division has also presided over two sequential quarters of deceleration indicating the low-hanging fruit has been picked.
The company is shifting towards higher volume, lower margin restaurants in more competitive locations hinting that the gangbuster years of high margin food delivery service growth is over.
The proposed $90 billion IPO also marks the high-water mark to the Silicon Valley IPO parade with only smaller fish from the sea debuting after them.
Uber has altered economic and consumer habits as we know it and the size of the business means it’s no Lyft (LYFT) – Uber is global, and its revenues are six times larger than its American competitor.
Becoming an enormous start-up also means heavier losses, the company had $3 billion in operating losses last year while its smaller competitor Lyft had only $911 million.
Lyft is solely focused on the ride-share industry capping upside potential while Uber has more gunpowder to load if it wants to ammo up in the business world.
One direction Uber hopes to explore is under the banner of Uber Freight which plans to monetize the deeply fragmented logistic industry.
It can take sometimes days for suppliers to deliver shipments with most of the process conducted over the phone or by fax.
Uber Freight mitigates logistical risks by providing an on-demand platform to automate and accelerate logistics transactions end-to-end.
The software smoothly connects carriers with the most appropriate shipments available, and offers carriers upfront, transparent pricing and the ability to book a shipment with the touch of a button.
As of the end of 2018, Uber Freight delivered $125 million in annual revenue and they hope to ameliorate many of the same logistical pain points that occur around the world.
This division of Uber is one that Lyft lacks, thus Uber should be granted a higher multiple when shares go public.
A huge addressable market awaits Uber Freight, but as many know, logistic routes have been formed over many years, and disruptors won’t be able to come in overnight and sign up new contracts.
Revenue should be slow but steady, and not the sugar high rush of revenue management is wishing for.
Uber’s heavy cash burning enterprise needs to offer some glimmer of hope of becoming profitable in the future whether it's five or twenty years out.
Without this x-factor of potential profitability, committed capital could become strained as investor will shy away knowing that a solid balance sheet might be a pie in the sky.
Since 2015, Uber has paid drivers $78.2 billion in renumeration - Uber will need to curtail heavy costs like these to raise operating margins.
One upside to its model is that its software platform possesses synergetic effects cutting costs for rolling out newer software for Uber Freight and Uber Eats.
Uber is still growing, albeit at a slower rate, 2018 Gross Bookings grew to $49.8 billion, up 45% from $34.4 billion in 2017.
The growth contributed to revenues of $11.3 billion in 2018. While a mammoth number, Uber still needs to absorb capital hits from M&A when they acquired Careem, the Uber of Middle East, North Africa, and Pakistan, for $3.1 billion last year.
Uber clearly choreographed a future strategy in the S-1 filing saying, “Our strategy is to create the largest network in each market so that we can have the greatest liquidity network effect, which we believe leads to a margin advantage.”
Details of this strategy include more drivers, more riders, more rides per hour, lower fares, and smaller waiting times.
I believe Uber is biting off more than they can chew on this front.
To overcome the regulatory hurdles and the social backlash while offering cheaper fares and simultaneously increasing driver payout will be impossible unless drivers start shuttling around 5 or 6 people in one ride.
I do acknowledge that Uber has massive scale, first move advantage, and a handsome margin advantage working on their side.
But will this be enough if Uber adds more drivers and effectively piles more money into the same strategy?
I would say no and that could mean that growth rates could slip severely which leads me to suggest that Uber has a problem with the quality of growth.
On the bright side, the business model with be compensated by enhancements in the routing algorithms, payment technologies, in-car user experience, and user interface.
These incremental gains won’t help offset the relative weakness in the growth numbers that possess less and less quality in them.
The overarching theme of what to do when the low-hanging fruit is picked off the branch is a tough one, because any further incremental gain is negated by higher costs or competition.
Uber’s get out of jail free card is the eventual paradigm shift to aerial ride sharing, and if they are the leaders in that transition, it could offer another massive pay day and steeper growth trajectory that would propel the company into a realm of many more possibilities.
Whether Uber can complete this tectonic shift is too far away to predict, time could become a significant headwind in this case since mainstream adoption of autonomous driving has been relatively sluggish.
Expect heightened volatility as the main characteristics of Uber’s price action - it’s certain to be a bumpy ride.
Abstaining from Uber shares would be the smart play here while some more detective work can be deployed.
“Put the right people in the right places, and then you trust them to do the right stuff.” – Said CEO of Uber Dara Khosrowshahi
Mad Hedge Technology Letter
April 15, 2019
Fiat Lux
Featured Trade:
(XXXXX)
(SNAP), (FB), (PINS), (TWTR), (GOOGL)
America is full – that is what domestic social media growth is telling us.
The once mesmerizing service that captured the imagination of the American public has soured in the country that created it.
Online advertising consultant emarketer.com issued a report showing that Snapchat (SNAP), the worst of the top social media outlets, will lose users in 2019.
The 77.5 million users forecasted by the end of 2019 represents a 2.8% YOY decrease.
This report differs greatly from the report eMarketer issued just past August showing that Snapchat was preparing for a rise of 6.6% YOY in 2019.
The delta, rate of change, represents a massive downshift in expectations and the sentiment stems from the widespread saturation of social media assets.
Market penetration has run its course and the players have run out of bullets mainly targeting Generation Z.
These platforms have given up on baby boomers and Snap feels that pursuing the millennial demographic would be an exercise in futility.
Even more disheartening is that between 2020-2023, there will be only a minor uptick of user growth by 600,000 users clamping down on the impetus of a comeback of sorts shackling the business model.
The trend is not mutually exclusive to Snap, Twitter or Facebook, social media as a group will only expand the overall user base by 2.4% in 2020 hardly satisfying the appetite for growth that these companies publicly advertise.
Remember that much of Instagram’s growth originates from borrowing Snapchat users by way of copying their best features.
Even with this dirty tactic, growth seems to be petering out.
Snap’s shares have made a nice double after peaking shortly over $25 after the IPO.
But the double was a case of investors believing that management and execution had hit rock bottom – the proverbial dead cat bounce in full effect.
Now investors will pause to reassess whether there is another reasonable catalyst to drive the stock higher.
First, investors will need to ask themselves, is Snap in for another double?
Absolutely not.
So where does Snap go from here?
I believe they will borrow from the playbook of Mark Zuckerberg and attempt to emphasize supercharging average revenue per user (ARPU).
Whether the company arrives at this conclusion by chance or strategy, they must confront the reality that there are almost no other levers to pull if they want to perpetuate this growth story.
M&A is also off the table because the company is burning through cash.
Facebook’s (ARPU) came in at $7.37 last quarter indicating how Snap needs to make substantial headway in this metric with last quarter’s paltry (ARPU) at $2.09.
Essentially, management will conclude that each user isn’t absorbing enough ads because of declining user engagement.
Snap CEO Evan Spiegel will need to improve the pricing power charging advertisers at higher rates.
Obviously, the lack of an attractive platform resulting from poor execution and engineering problems needs a quick turnaround.
It’s not all smooth sailing for Facebook either, they keep chopping and reshaping strategy by the day attempting to minimize costs as the regulation burdens rot at the bottom line.
On the bright side, regulation hasn’t been as bad as initially thought – usership hasn’t dropped by orders of magnitudes.
In fact, Facebook’s users have shown a resurgent indifference to Facebook chopping up their data and repackaging it to 3rd parties, meaning Facebook has come through rather unscathed in the face of a PR storm.
There have even been recent reports of Zuckerberg being persuaded to start paying journalists for original content, a vast pivot for his hyped-up propaganda machine of being in the distribution business.
Juicing up (ARPU) is the lowest hanging fruit on offer for Snapchat and Facebook right now, overperforming in this sphere will improve financials and keep the mosquitoes away while affording them time to ponder how to reaccelerate user growth.
One outsized negative trend is that 90% of user growth appears to originate from undeveloped nations with a lack of discretionary spending power showing that this strategy has its limits.
Searching for another tool in its toolkit will redefine Snapchat, Twitter, and Facebook as we know it.
I would even classify it as an existential crisis.
Instagram have bought Facebook the most time to readjust its future direction highlighting that stealing Snapchat’s audience is still effective, expecting user growth to climb to 106.7 million US users, up 6.2% from 2018.
Instagram will continue its expansion by adding nearly 19 million new US users by 2023, but as much as it adds to its new social media asset, Facebook will be struggling for new net adds.
Snapchat is in dire straits and the stock market bubble could support the share price for up to another 8-12 months, but when the guillotine drops on Snapchat, the blood will smatter everywhere.
The company also plans to introduce a gaming service to take advantage of the popularity with its core users, Generation Z.
This should be the trick that breathes life into operating margins and (ARPU) which is why I believe the stock will hold up for the next period of time.
But with the gaming initiatives also comes rampant competition with the likes of Alphabet (GOOGL) and don’t forget Fortnite is still the 800-pound gorilla.
These trends also bode negatively for Pinterest (PINS) who might be going public as the last shot of tequila is downed at the after party.
SNAPCHAT ARPU
“People are going to copy your product if you build great stuff. Just because Yahoo has a search box doesn't make it Google.” – Said Founder and CEO of Snapchat Evan Spiegel
