“When you innovate, you've got to be prepared for everyone telling you you're nuts.” Said Founder and CEO of Oracle Larry Ellison
Mad Hedge Technology Letter
March 4, 2019
Fiat Lux
Featured Trade:
(RIDING THE EBAY BOOM),
(EBAY), (ETSY), (W)
Investors following the eBay (EBAY) saga should be cheering from the sidelines as the master plan from Elliot Management and Starboard are pressuring eBay’s management into the radical changes the investors initially called out for.
Rewarding the vulture funds with two board seats along with spearheading a comprehensive review of the business model appears more probable than not.
The forced changes have imminent repercussions to the stock price as the breaking up of the company into individual pieces is seen as coaxing out more embedded value while separating out the main e-commerce platform for a long-awaited fix.
These are two highly bullish signals.
Elliot’s reasons for altering eBay’s business model were essentially blamed on two issues - shoddy management and the commingling of growth assets with its inferior e-commerce platform within the eBay umbrella hindering value appreciation.
Even though prospects look bright on this fix, Elliot doesn’t always get its way.
Four years ago, Elliot was the primary investor in Samsung's construction division and rebuffed efforts from Jay Y. Lee, the South Korean business elite and the vice chairman of Samsung Group serving as de facto head, to have another division of Samsung purchase the construction arm for $8 billion.
In 2017, Lee was convicted of bribery and imprisoned and sentenced to three years, Elliot sold their Samsung construction shares after the tide went against them and could not prevent the eventual purchase.
Lee was later set free in 2018 demonstrating the unfettered power of the ruling Korean families and Elliot was up against it in someone else’s backyard.
Even with that setback, Elliot has been ultra-successful abroad, examples are plentiful such as in May 2018, Elliott Management seized control of Telecom Italia controlling two-thirds of Telecom Italia's board seats.
This vulture fund has been specialists at pinpointing ill-ran operations and squeezing the fat off the edges to later sell off assets for a profit.
These tactics have usually centered around cost-cutting, financial engineering, or draining the upper management swamp if need be.
Personally, eBay has the foundations to be competitive with the top e-commerce companies and they need an activist investor to turn this ship around.
In this way, the turnaround will occur much quicker than an organic method because Elliot will apply pressure on all the cancerous parts of the model and stamp them out as fast as possible.
Elliot now has a golden path to two board seats and spinning off StubHub, its uber-growth online events tickets selling platform, will guarantee Elliot and Starboard walk away from this transaction with a heavy profit.
StubHub was bought on the cheap in 2007 when online assets were trading cheaply for $310 million.
The firm contributes 11% to eBay’s top line.
The classified ads business is the other part of the high-growth online portfolio that could be sold for a profit. They operate mainly in Germany and the United Kingdom and comprise almost 10% of sales.
The plan after these premium assets are sold is to focus on mending its wounded e-commerce business.
The core business would need a flushing out of current management.
Bringing in some established hands to reroute the company’s course will boost the shares another 25%.
The phrase “more efficient use of resources” or a similar version of this meaning was used six times in Elliot Management’s letter to eBay Shareholders.
They cited in the letter that EBITDA margins have declined YOY for 12 straight quarters proving that revenue-boosting initiatives have failed spectacularly.
Elliot hopes a better run company will constitute in higher operating margins to the tune of “32% in 2021.”
In the next 3 years, Elliot wants to raise operating expenses by $250 million but reduce “wasteful spend” which they outlined as one of the main reasons hamstringing the company.
Missed opportunities is another major opportunity cost contributing to the underperformance of eBay.
eBay has been left out of the niche e-commerce areas where former eBay employees exploited this untapped source of growth.
The success of Wayfair (W), the furniture e-commerce platform, and Etsy (ETSY), the personalized crafts e-commerce platform, are two glaring examples of sales that should have been registered by eBay but gobbled up by two minnows.
In short, Elliot’s flawless execution and aggressive plan are ideally playing itself out how they wrote it up from the beginning.
It’s hard not to see eBay’s stock higher a year from now as long as Elliot and Starboard get their way.
The brilliant part of this whole turnaround is that eBay doesn’t have to become Amazon to reap share appreciation, they merely need to be not as bad as they were which at the first stage of rebooting the business is the lowest hanging fruit out there.
Once the company becomes mature and more successful, growth and beating relative expectations are harder to achieve.
I am bullish eBay - buy on the next pullback.
“Try never to be the smartest person in the room. And if you are, I suggest you invite smarter people…or find a different room.” – Said Founder and CEO of Dell Technologies Michael Dell
Global Market Comments
March 1, 2019
Fiat Lux
SPECIAL FRIDAY TECH EDITION
Featured Trade:
(ABOUT THE TRADE ALERT DROUGHT),
(SPY), (GLD), (TLT), (MSFT),
Long term subscribers are well aware that I sent out a flurry of Trade Alerts at the beginning of the year, almost all of which turned out to be profitable.
Unfortunately, if you came in any time after January 17 you watched us merrily take profits on position after position, whetting your appetite for more.
However, there was nary a new Trade Alert to be had, nothing, nada, and even bupkiss. This has been particularly true with particular in technology stocks.
There is a method to my madness.
I was willing to bet big that the Christmas Eve massacre on December 24 was the final capitulation bottom of the whole Q4 move down, and might even comprise the grand finale for an entire bear market.
So when the calendar turned the page, I went super aggressive, piling into a 60% leverage long positions in technology stocks. My theory was that the stocks that had the biggest falls would lead the recovery with the largest rises. That is exactly how things turned out.
As the market rose, I steadily fed my long positions into it. As of today we are 80% cash and are up a ballistic 13.51% in 2019. My only remaining positions are a long in gold (GLD) and a short in US Treasury bonds (TLT), both of which are making money.
So, you’re asking yourself, “Where’s my freakin' Trade Alert?
To quote my late friend, Chinese premier Deng Xiaoping, “There is a time to fish, and there is time to mend the nets.” This is now time to mend the nets.
Stocks have just enjoyed one of their most prolific straight line moves in history, up some 20% in nine weeks. Indexes are now more overbought than at any time in history. We have gone from the best time on record to buy shares to the worst time in little more than two months.
My own Mad Hedge Market Timing Index is now reading a nosebleed 72. Not to put too fine a point on it, but you would be out of your mind to buy stocks here. It would be trading malpractice and professional negligent to rush you into stocks at these high priced level.
Yes, I know the competition is pounding you with trade alerts every day. If they work, it is by accident as these are entirely generated by young marketing people. Notice that none of them publish their performance, let alone on a daily basis like I do.
You can’t sell short either because the “I’s” have not yet been dotted nor the “T’s” crossed on the China trade deal. It is impossible to quantify greed in rising markets, nor to measure the limit of the insanity of buyers.
When I sold you this service I promised to show you the “sweet spots” for market entry points. Sweet spots don’t occur every day, and there are certainly none now. If you get a couple dozen a year, you are lucky.
What do you buy at market highs? Cheap stuff. That would include all the weak dollar plays, including commodities, oil, gold, silver, copper, platinum, emerging markets, and yes, China, all of which are just coming out of seven-year BEAR markets.
After all, you have to trade the market you have in front of you, not the one you wish you had.
So, now is the time to engage in deep research on countries, sectors, and individual names so when a sweet spot doesn’t arrive, you can jump in with confidence and size. In other words, mend your net.
Sweet spots come and sweet spots go. Suffice it to say that there are plenty ahead of us. But if you lose all your money first chasing margin trades, you won’t be able to participate.
By the way, if you did buy my service recently, you received an immediate Trade Alert to by Microsoft (MSFT). Let’s see how those did.
In December, you received a Trade Alert to buy the Microsoft (MSFT) January 2019 $90-$95 in-the-money vertical BULL CALL spread at $4.40 or best.
That expired at a maximum profit point of $1,380. If you bought the stock it rose by 10%.
In January, you received a Trade Alert to buy the Microsoft (MSFT) February 2019 $85-$90 in-the-money vertical BULL CALL spread at $4.00 or best.
That expired last week at a maximum profit point of $1,380. If you bought the stock it rose by 12%.
So, as promised, you made enough on your first Trade Alert to cover the entire cost of your one-year subscription ON THE FIRST TRADE!
The most important thing you can do now is to maintain discipline. Preventing people from doing the wrong thing is often more valuable than encouraging them to do the right thing.
That is what I am attempting to accomplish today with this letter.
Mad Hedge Technology Letter
February 28, 2019
Fiat Lux
Featured Trade:
(WHY ETSY KNOCKED IT OUT OF THE PARK),
(ETSY), (AMZN), (WMT), (TGT), (JCP), (M)
I wrote to readers that I expected online commerce company Etsy to “smash all estimates” in my newsletter Online Commerce is Taking Over the World last holiday season, and that is exactly what they did as they just announced quarterly earnings.
To read that article, click here.
I saw the earnings beat a million miles away and I will duly take the credit for calling this one.
Shares of Etsy have skyrocketed since that newsletter when it was hovering at a cheap $48.
The massive earnings beat spawned a rip-roaring rally to over $71 - the highest level since the IPO in 2015.
Three catalysts serving as Etsy’s engine are sales growth, strength in their core business, and high margin expansion.
Sales growth was nothing short of breathtaking elevating 46.8% YOY – the number sprints by the 3-year sales growth rate of 27% signaling a firm reacceleration of the business.
The company has proven they can handily deal with the Amazon (AMZN) threat by focusing on a line-up of personalized crafts.
Some examples of products are stickers or coffee mugs that have personalized stylized prints.
This navigates around the Amazon business model because Amazon is biased towards high volume, more likely commoditized goods.
Clearly, the personalized aspect of the business model makes the business a totally different animal and they have flourished because of it.
Active sellers have grown by 10% while active buying accounts have risen by 20% speaking volumes to the broad-based popularity of the platform.
On a sequential basis, EPS grew 113% QOQ demonstrating its overall profitability.
Estimates called for the company to post EPS of 21 cents and the 32 cents were a firm nod to the management team who have been working wonders.
Margins were healthy posting a robust 25.7%.
The holiday season of 2018 was one to reminisce with Amazon, Target (TGT), and Walmart (WMT) setting online records.
Pivoting to digital isn’t just a fad or catchy marketing ploy, online businesses harvested the benefits of being an online business in full-effect during this past winter season.
Etsy’s management has been laser-like focusing on key initiatives such as developing the overall product experience for both sellers and buyers, enhancing customer support and infrastructure, and tested new marketing channels.
Context-specific search ranking, signals and nudges, personalized recommendations, and a host of other product launches were built using machine learning technology that aided towards the improved customer experience.
New incremental buyers were led to the site and returning customers were happy enough to buy on Etsy’s platform multiple times voting with their wallet.
The net effect of the deep customization of products results in unique inventory you locate anywhere else, differentiating itself from other e-commerce platforms that scale too wide to include this level of personalization.
Backing up my theory of a hot holiday season giving online retailers a sharp tailwind were impressive Cyber Monday numbers with Etsy totaling nearly $19,000 in Gross Merchandise Sales (GMS) per minute marking it the best single-day performance in the company’s history.
Logistics played a helping hand with 33% of items on Etsy capable to ship for free domestically during the holidays which is a great success for a company its size.
This wrinkle drove meaningful improvements in conversion rate which is evidence that product initiatives, seller education, and incentives are paying dividends.
Overall, Etsy had a fantastic holiday season with sellers’ holiday GMS, the five days from Thanksgiving through Cyber Monday, up 30% YOY.
Forecasts for 2019 did not disappoint which calls for sustained growth and expanding margins with GMS growth in the range of 17% to 20% and revenue growth of 29% to 32%.
Execution is hitting on all cylinders and combined with the backdrop of a strong domestic economy, consumers are likely to gravitate towards this e-commerce platform.
Expanding its marketing initiatives is part of the business Josh Silverman explained during the conference call with Etsy dabbling in TV marketing for the first time in the back half of 2018, and finding it positively impacting the brand health metrics particularly around things like intending to purchase.
However, Etsy has a more predictable set of marketing investments through Google that offers higher conversion rates and the firm can optimize to see how they can shift the ROI curve up.
Etsy can invest more at the same return or get better returns at the existing spend from Google, it is absolutely the firm's bread and butter for marketing, particularly in Google Shopping, and some Google product listing ads.
With all the creativity and reinvestment, it’s easy to see why Etsy is doing so well.
Online commerce has effectively splintered off into the haves and have-nots.
Those pouring resources into innovating their e-commerce platform, customer experience, marketing, and social media are likely to be doing quite well.
Retailers such as JCPenney (JCP) and Macy’s (M) have borne the brunt of the e-commerce migration wrath and will go down without a fight.
Basing a retail model on mostly physical stores is a death knell and the models that lean feverishly on an online presence are thriving.
At the end of the day, the right management team with flawless execution skills must be in place too and that is what we have with Etsy CEO Josh Silverman and Etsy CFO Rachel Glaser.
Buy this great e-commerce story Etsy on the next pullback - shares are overbought.
“Well, if you can buy 1,000 of anything, it doesn't belong on Etsy” – Said CEO of Etsy Josh Silverman
Mad Hedge Technology Letter
February 27, 2019
Fiat Lux
Featured Trade:
(HOW AUTONOMOUS DRIVING WILL CHANGE THE WORLD),
(TSLA), (GM), (GOOGL)
