Mad Hedge Technology Letter
April 16, 2021
Fiat Lux
Featured Trade:
(SHOULD I BUY COINBASE TODAY?)
(COIN), (CRM), (ADBE), (PYPL), (SQ)
“The next major explosion is going to be when genetics and computers come together. I'm talking about an organic computer - about biological substances that can function like a semiconductor.” – Said American writer, futurist, and businessman Alvin Toffler
Many would believe that ad-based music streaming and the free streaming of it would represent a massive windfall in this new work-from-home economy.
And that is exactly what happened when Spotify’s (SPOT) stock rose from $121 on March 1st, 2020 and elevated to $365 just in February 2021.
The close to tripling of SPOT's shares came on the heels of a new annual year-end report by America’s Recording Industry Association showing that overall recorded music revenue increased by roughly 9.2% in 2020 to $12.2 billion.
This overperformance in music streaming was a relatively significant increase compared to 2019’s reported $8.9 billion, but the big takeaway was that two tech companies have seized the bulk of the revenue.
Both Spotify and Apple Music were the two most dominating streaming platforms, raising approximately $7 billion amongst the two, while subscriptions rose from 60.4 million to 75.5 million.
Even more unthinkable, the figures show 83% of the music industry’s revenue came as a result of streaming.
Why did 2020 work out so well for SPOT?
More time at home resulted in more people getting hooked on streaming and turning to SPOTs platform, but it also created disruption in listening habits, consumption hours and the release of new music and podcasts.
The new dynamics of music streaming is cause for belief that subscribers have been pulled forward from the back half of 2020, which could translate into underperformance for subscriber growth in the year ahead.
Long term, the trend lines are healthy as streaming from a shift from linear to on-demand has clearly accelerated and will continue to remain as a massive multi-billion user opportunity.
SPOTs stock has consolidated from highs of $365 and now trade around $270 after investors got scared hearing management’s lukewarm optimism for 2021.
The hesitation culminated when management admitted that the “full-year 2021 plan will have a higher variance than prior years.”
Uncertainty is always killer in tech and SPOTs response is to shift to more aggressive revenue growth where they know pricing power will enable SPOT to increase ARPU.
SPOT is flirting with price increases across a number of markets even if in the world’s largest music market, the company’s $10-a-month subscription cost has remained fixed for years even as Spotify added millions of podcasts and songs to the platform.
Spotify announced at the investor day that it would double the number of countries where its services are available and roll out dozens of new podcast shows from the likes of Barack Obama and Ava DuVernay.
The ultimate problem that SPOT still confronts is if music streaming can be a profitable business and I believe launching SPOT in 85 new territories across Africa, Asia, and Latin America, such as Ghana, Sri Lanka and Pakistan, will deteriorate SPOTs average revenue per user (ARPU).
ARPU has been declining steadily as the company offered promotional discounts and expanded into countries such as India, where it charges subscribers a lower price. ARPU dropped 8% in the fourth quarter from a year ago, to only €4.26.
At a broader level, the overall number of total ears is saving them but the reckoning with profitability problem could turn out to be 2021 which is inherently terrible for the underlying stock.
In the last year alone, SPOT tripled the number of podcasts on their platform, moving from about 700,000 in Q4 2019 to 2.2 million podcasts today.
Investments in originals and exclusives are creating more and more reasons for listeners to choose Spotify, and exclusive programming is already proving to be an essential part of differentiation.
But how long will they be able to burn through cash before they can scale a profit?
Even if we are in the early days of seeing the long-term evolvement of how we can monetize audio on the Internet, tech will have all business models, and that's the future for all media companies that first will have ad-supported subscription and a la carte sort of in the same space of all media companies in the future, and you should definitely expect Spotify to follow that strategy in that pattern.
Even with that tidal wave of secular positivity, Spotify’s management is modeling ARPU to be “roughly flattish” for 2021 and that’s a red flag.
The crop has already been harvested for 2020 because last year was the year that investors gave tech and all corporates a free pass to write off performance with investors only focusing on low rates, liquidity, and the overarching secular trends.
As 2021 plays out, the tech market is grappling with an undermining bond scare along with tough quarterly comparisons to last year.
It won’t be surprising to see tech growth consolidating and absorbing the higher rates and optimistic re-opening expectations.
After this dip, I expect SPOT to reaccelerate its growth contingent on increasing the ARPU that is beginning to become a sensitive spot for the company’s metrics.
“Artists work best alone.” – Said Co-Founder of Apple Steve Wozniak
I was going to hold off on writing about this streaming service, but the shares are up another 15% this morning on a down day and that has forced my hand.
Streaming platforms have done extremely well during the pandemic and it is a no-brainer to put two and two together because consumers stuck at home would obviously mean more streaming consumption.
But what about those streaming services that you have not heard about?
They do exist and now I am here to tell you about one of them.
Enter fuboTV (FUBO).
FuboTV is an American streaming television service that focuses primarily on channels that distribute live sports, including NFL, MLB, NBA, NHL, MLS, and international soccer, plus sports news, network television series, and movies.
Yes, I must admit that fuboTV isn’t the newest company. The company was established in 2015 and some of the hardcore streamers will see this service pop up on their Roku (ROKU) amongst other platforms.
After a more focused migration into live sports television, a key deal to bring Disney’s ESPN to its platform, and a pair of acquisitions to allow sportsbook operations beginning in 2021.
FUBO has potential and is already showing robust growth backed by the kind of subscriber numbers needed to turn an eventual profit.
November’s third-quarter print showed accelerating subscriber growth from 58% to 72% and sales surging from 71% to 80%.
I am quite positive on FUBO’s ability to monetize traffic at much higher rates than its competitors.
That includes streaming hardware darling Roku, which captures less than one-third of FUBOs per user ad revenue.
FUBO had just 545,000 subscribers entering into 2021, but its free-spending audience that totals an average of four hours a day streaming the platform is a bedroom piece of foundation to this upstart company.
It is generating an average $7.50 in monthly ad revenue per user, and that's on top of the $65 monthly fee for the entry-level plan featuring 118 different channels.
The big selling point for fuboTV is that more than three dozen of those networks are dedicated sports channels.
FUBO’s capture of ESPN last summer was a coup, but it also dropped Turner's sports-heavy properties.
It’s true that it is not the perfect service, and is missing some crucial content.
They are also not carrying Sinclair's regional sports channels.
Cord cutters are helping this stock be hard to bet against after joining the services in droves in 2020.
FUBO actually was laser-focused on European soccer at the beginning but understood they needed to branch out to capture other pro sports fans and widen its audience.
Unlike Netflix, advertising is a key component in the company's revenue. It works with top ad-tech companies like The Trade Desk (TTD) and Magnite, and these partnerships are helping it with growth.
In the third quarter, ad revenue grew 153% year over year.
FUBO's ad business is already far ahead of Roku's, perhaps demonstrating the greater monetization potential of live sports and TV compared to on-demand streaming.
FUBO believes it can generate more than $20 in ARPU after paying the third-party vendors it works with.
A net loss of $402.5 million through the first nine months of 2020 is standard for most teething growth companies and the unprofitability shouldn’t stop investors from this stock.
If you do choose to dip your toe into this stock, then be aware the volatility might make you feel unsteady at night.
The wild swings are a sign of an immature company growing into its investor base.
“Any time there's significant change, there's going to be some people who embrace the change and others who are against the change.” – Said CEO of Uber Dara Khosrowshahi
Mad Hedge Technology Letter
January 22, 2021
Fiat Lux
Featured Trade:
(THE ADDITIVE MANUFACTURING BOOM)
(DM), (DDD), (SSYS), (GE)
Mad Hedge Technology Letter
January 15, 2021
Fiat Lux
Featured Trade:
(THE CHIP BONANZA)
(MU), (QCOM), (TSM)
What does it mean for companies to apply data to gain an edge?
Let me explain.
Data is best described as the oxygen that is provided to the lungs.
Competition is based on the business intelligence excavated from vast troves of data.
These insights enable companies to target proper growth drivers, migrate to revenue hotspots and add appropriate employee talent.
The data also delves into how to create product stickiness, customer loyalty, promote up-selling, and optimize operations.
It’s not me just saying this to hype up the phenomenon, and I can vouch that data-driven decisions have worked wonders for the Mad Hedge Technology Letter.
Other companies have reported robust performance in productivity and profitability margins up to 10% higher than analog companies.
A recent report showed that margins would expand wider after the first year to 10% and hit a roaring 15% after operations are further refined.
It's a world of data supremacy; it doubles in size every two years and will reach 70 zettabytes by next year.
Data is connected to every part of the model from marketing campaigns, to website traffic flow and activity engagement, to operational procedures.
Can you believe that only 10% of global data is currently being acted on?
It’s hard to digest that most companies are winging it without any rhyme or reason.
The world is way too complex to bring a knife to a gunfight.
Predictive insights used to be only reserved for Fortune 500 companies who could afford the high expense of applying these high-powered tools.
But after the recent wave of automation and cloud software, even individual proprietors can participate in this once-taboo management exercise because the costs have come down.
Going on gut instinct and best estimates can only get you so far in a rapidly digitizing world and the coronavirus has only made the volume of data explode and required insights into business that are much more important.
I would also say that companies must be vigilant in harnessing the data because the skyrocketing number of nefarious elements out there have corrupted many data forms.
Just recently, the Mad Hedge website was overpowered by a tsunami of bots scouring our website for data.
The bots overloaded our email distributer service with new subscriptions by registering 1000s of emails into our database which muddied our underlying data and our ability to glean salient insights into it.
Bots find the data needed to answer a question or solve a problem and the Mad Hedge Fund Trader website has been a target to find the best financial content in the English-speaking world.
Once the requisite data is in hand, bots identify what toolsets are needed to organize the data and produce predictive and prescriptive business insights.
Many of these bots use content to create trading algorithms based on stand-alone content from the Mad Hedge Fund Trader that acts as a direct input into the database.
This new form of business intelligence deploys machine learning software as a question or problem and generate actionable solutions.
They can categorize base cases, outliers, marginal cases, and errors that require further data cleaning, additional reporting, and queries.
Ultimately, these bots are the vehicles in which a final answer is populated such as whether or not to buy Amazon stock today or tomorrow and so on.
As we push into the 5G era, this same technology will be repurposed for the internet of things (IoT) translating into another wave of products being groomed and fine-tuned by machine learning.
Internet of Things (IoT) is the fastest-growing segment of data and already comprises 15% of total global data.
Physical products will need embedded sensors that will monitor the performance and send terabytes of data back to the data servers for data analysts to pick apart.
One example is a Geared Turbo Fan engine which requires 5,000 sensors that generate up to 10 GB of data per second.
Now you can understand why the volume of data is literally about to mushroom as 5G takes hold and why Amazon has been so hellbent in penetrating the smart home market.
Bots facilitate conversations between systems and data silos and allow your decision-makers to have the keys to the Ferrari.
Bots enable an easy view of displaying key performance indicators (KPIs) and alerts on the run with simple charts and graphs.
As the coronavirus offers us glimpses into the world tomorrow, data analysts embedded all over the world will be harnessing bots to maintain your home thermostat or upgrade software in the rear of your smart microwave.
As we speak, the Mad Hedge Fund Trader website is gearing up for the next wave of data supremacy and I advise everyone else to get with the program.
This is the world of the future and for companies who don’t adapt, they will be swept into the dustbin of history.
The x-factor for the last tech generation has been none other than – the cloud.
Any portfolio manager that hasn’t aligned performance with this transformational phenomenon is most likely not a portfolio manager anymore.
Now, as we enter into an unknown world, if you thought the cloud was the x-factor of the tech in the last generation, then the 2020s will make the cloud contributions to growth in the last generation appear meek.
About 1/3 of small businesses recently surveyed admitted there is really no path back to reopening. Who would really want to shoulder financial risk in an economic environment that outwardly punishes businesses that operate around anonymous customers in close proximity?
Many of these owners, even with generous government funding, have chosen not to fight against the path of strongest resistance.
When the dust settles, even if a vaccine arrives out of thin air tomorrow, the work at home thing, or should I say the work from anywhere but the office phenomenon will persist like a bad flu, no pun intended.
The Cloud is the winner, and everything associated with it will drive the economy forward.
It has emerged as the cog in the works, that no company can live without.
Not only is the cloud highly effective but it's also cheaper than traditional systems.
It also provides nimbleness in scaling up or down computing capacity according to business requirements.
Search for growth companies that do not deploy the cloud as a critical pillar of operational execution.
They hardly exist now.
Whether it’s the vanguard of the cloud plays such as Amazon (AMZN), the second in show nipping at Amazon’s heels, Microsoft’s (MSFT), or any other small cloud play, they are all profiting off the monstrous pivot to digital commerce and cord-cutting.
In China, Tencent, Alibaba, and Huawei are cloud companies doing so well that the U.S. government has tried to shut them down to allow a wider moat around U.S. companies.
What’s the simplest way to carve out significant exposure to cloud equities?
A barrage of ETFs (exchange-traded funds) has come online to serve your needs.
They are also durable enough to endure stormy and uncertain times.
Here are three that should whet your appetite.
The First Trust Cloud Computing ETF (SKYY) tracks a modified equal-weighted index of infrastructure, platform, and software cloud companies. Microsoft, Amazon, and Alphabet are its secret sauce.
The Global X Cloud Computing ETF (CLOU) consists of companies that are positioned to benefit from the increased usage of cloud computing. While Amazon, Microsoft, and Alphabet are included in the portfolio, the fund’s top holdings are pure-play cloud companies like Zscaler (ZS) and Shopify (SHOP).
The WisdomTree Cloud Computing ETF (WCLD) tracks an equal-weighted index of emerging companies with DocuSign (DOCU) and RingCentral (RNG) among the largest holdings.
What’s more, let’s remember that every cloud company is about to embark on a massive round of expense cuts by getting rid of the physical office.
Twitter (TWTR) even has allowed workers to work from home on a permanent basis.
Yes, this means San Francisco commercial real estate prices are about to nosedive, but as it relates to the tech industry, operation costs will benefit in one fell swoop boosting earnings.
This also paves the way for many tech companies to re-establish tax headquarters in Nevada, Texas, or Florida which will act as another supercharger to growth.
Elon Musk has called out the Bay Area politicians in Alameda County, California because of a convoluted response and conflicting rules with regards to restarting the Fremont, California factory.
Covid-19 is most likely the straw that breaks the camel’s back as many Bay Area tech workers start to question what on earth they are doing paying $4,000 per month to rent a “cozy” 400 square foot apartment in Cupertino or San Francisco.
The mass exodus from high tax states to low tax states is just another supercharger out of many cloud superchargers on top of growth.
What more can I say?
