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Posted by Martin November 16, 2024
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Letter to Investors – October 2024


Dear Partners,

October has been a month of challenges and careful recalibration for our fund. Reflecting on this period, we faced leverage concerns and overtrading issues that tested the resilience of our strategy and brought valuable lessons about liquidity, risk management, and prudence. These experiences echo the words of renowned hedge fund manager Paul Tudor Jones, who cautioned against the dangers of leverage. His insights highlight that leverage, while a powerful tool for amplifying gains, can quickly become a risk if it forces a portfolio into unwanted selling during volatile market conditions.

As Jones emphasized, the main danger of leverage lies in its potential to compel rapid, sometimes unfavorable selling when a portfolio’s capital is stretched thin. His words serve as a powerful reminder that even seasoned managers can find themselves at the mercy of leverage. Reflecting on this, I was reminded of the saying from the Czech Republic: “Fire can be a good servant but a very bad master.” The same is true for leverage. If managed correctly, leverage can serve us well; when overused, it risks taking control of our portfolio.
 

Recognizing the Risk and Course Correction

 
This October, when the market’s volatility surged, and margin calls intensified, we had to face the reality that our use of buying power needed reassessment. Futures options differ from options on stocks or indices in that their buying power requirements fluctuate more frequently, often being marked to market daily. While I initially took the temporary release of buying power as an opportunity to add new positions, this led to a momentary strain on our account when that same BP was swept back unexpectedly due to increased volatility. This experience underscored the need for disciplined BP management, particularly with futures options.

However, a few prudent measures helped us navigate through this volatility. By maintaining cash reserves, we were able to satisfy margin calls without forced liquidations. Recognizing the potential risk early enough allowed us to take immediate steps to stabilize the portfolio.
 

High Volatility’s Role in Portfolio Stress

 
Some of the current portfolio stress has been driven by the unusually high volatility in the market, with certain indicators spiking to levels around 76%. This extreme volatility has been fueled by factors including the election cycle and broader economic uncertainties. While this heightened volatility places temporary strain on the portfolio, we anticipate that stress to ease as volatility declines, particularly after the election. If the election outcome is smooth and uncontested, we expect a decline in market volatility, which would provide relief to our portfolio. However, should the election results be contested, this high volatility—and, with it, portfolio stress—may continue or even intensify in the short term.
 

Implementing New Safeguards

 
As part of our course correction, we established new rules for trade entries. These measures are designed to prevent overexposure and include maintaining a set minimum BP, capping the number of open trades, and ensuring a minimum level of cash reserves. These reserves serve as a buffer to provide flexibility if we encounter heightened volatility, and if used, they are to be rebuilt promptly.

Additionally, we halted redemptions and distributions temporarily to protect the portfolio’s integrity during this period of recalibration. I’m encouraged to report that these adjustments have proven effective. Our buying power is gradually increasing, cash reserves are rebuilding, and our trade count is being managed within set limits. With these risk parameters now in place, we have resumed distributions and redemptions, albeit with continued caution.
 

A Path Forward

 
While we’re not entirely out of the woods, the portfolio is in a much stronger position. October’s events have underscored the value of liquidity and conservative leverage management. Our portfolio has shown resilience under market pressure, with improvements in BP and cash flow. This period has reinforced our approach to mindful trading, and I am confident these adjustments will support long-term stability.

Thank you for your patience and continued trust as we work to create a more robust and resilient portfolio.

With regards,
 

Martin Zourek
Managing Director,
ZZ Capital Management, LLC




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Posted by Martin November 15, 2024
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Consumers keep spending but worry about inflation


Schizofrenia of the American society in full display. Today’s news on Yahoo Finance delivered an article that October retail sales topped estimates in October and September sales reports were revised sharply higher. So the data shows that consumers keep spending and buying (usually what they do not need) like crazy.
 

consumers keep spending
 

On the other hand, these same consumers punished Biden-Harris (and Democrats) at the polls blaming them for “high inflation and high prices.”

Dear American consumer, you need to make you mind. You cannot be whining about high prices and then go shopping like crazy.

&nbps;
 




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Posted by Martin October 20, 2024
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What is the recommended time for someone with no investment experience to start buying individual stocks? What is a suitable initial investment amount?


The recommended time to start investing for someone with no investment experience depends on many factors. There are a few steps I would recommend doing:
 

  1. Set a goal. The goal can be created by answering questions like: Why do you want to invest? What is your time horizon? What do you want to achieve from your investments? Will you be active or passive (meaning how much time are you willing to spend monitoring your account, adjusting investments, etc.)? For example, my goal was to create a portfolio that would replace my income as soon as possible. I planned to be very active and spend an hour or two every day monitoring and analyzing my portfolio, stock market, and research stocks. This can take you a day or a week to think about your goals and objectives.
  2.  

  3. Once you know your goals and objectives, start searching for investment vehicles that meet those goals. Will it be growth stocks, dividend stocks, trading options, or futures? No matter what you find, paper trade it to learn the mechanics of investing/trading. Read about the vehicle you plan to use. Hang on with other investors/traders on social media and ask questions. This is the longest part, which may take months or years. That depends on what you choose to do. If, for example, you want to start building wealth right away, have a long-term horizon, and want to invest with minimal effort now and learn later, you can invest tomorrow. As Warren Buffet said, buy an index, for example, SPY, and invest regularly every month. That will take you one day to start (well, it may be more days because of waiting for your brokerage account to get open). While you are investing in SPY (in our example above), you can spend time learning about other investment vehicles like options, dividend stocks, futures, etc. You will be building your account in the meantime.
  4.  

  5. To start investing, you can start with as little as $1 these days. You need to find a broker that will allow you to buy fractional shares of a stock or index and be commission and fees-free (most of them are free today). So, buying stocks or indexes will be easy and with minimal capital. However, if you want to venture into options or futures, you will need at least $2,000 – $5,000 minimum capital (depending on a broker). This also depends on the type of account you open with a broker (cash or margin).
  6.  

  7. If I were an inexperienced investor starting my investment path, I would do the following:
     

    • Open a brokerage account.
    •  

    • Set an automatic deposit of, for example, $100 every month.
    •  

    • Set an automatic investment of $100 a month to SPY (if the broker allows automatic investing; if not, do it manually every month).
    •  

    • Let the investing go on autopilot until it grows to larger amounts. If you can afford to invest more, increase your monthly contributions as much as possible.
    •  

    • Learn about stocks while still auto-investing. Learn about other strategies. Learn about dividend stocks and growth stocks. Learn about options. Paper trade strategies you find, paper trade options, paper trade futures, and learn from it.
    •  

    • Train your mind to ignore the market’s everyday fluctuations. Subscribe to services that can help you stay informed about the market (for example, my newsletter, LOL). Learn to distinguish between pullbacks, corrections, and bear markets. I am not necessarily a buy-and-hold investor, and I developed a strategy (signals posted in my newsletter) to get out of the market when we see a bear market while ignoring pullbacks or small corrections and going back from cash when we see the end of the bear market. But if you decide to stay invested (buy and hold) all the time, be prepared to stomach large draw-downs (20% – 70% declines during violent bear markets like in 2000–2003, 2007–2009, and 2020; many investors lose money panicking and selling suddenly forgetting that they were “buy and hold” investors).

     

  8. Once you learn other strategies, understand them well (know how they make you money as well as how they can lose you money, and if they are losing you money, how you can react, adjust, or repair the trade), paper trade them, you can start using them slowly in your account too.

 




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Posted by Martin October 19, 2024
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Letter to Investors – September 2024


Dear Partners,

Reflecting on September’s trading, it is evident that we navigated a challenging yet successful month. The market offered its fair share of turbulence, with concerns about interest rates, geopolitical events, and persistent volatility. However, we ended the month in a strong position through disciplined strategy adjustments and strict adherence to our trading rules.

Portfolio Overview

Our portfolio saw significant growth in September, with profits totaling $237,540.50 for the month and $371,471.00 year-to-date. While the market threw us a few curveballs, including periods of heightened volatility and unpredictable market moves, we remained steadfast in managing risk and finding opportunities.
Throughout the month, we emphasized risk management, adjusting positions as necessary while remaining focused on our long-term objectives. The portfolio remains predominantly bullish, but we are continuously prepared to adjust positions should market sentiment shift. Our flexibility is the key to weathering uncertainty.

Key Takeaways from September

During the month, we focused on several key strategies:
 

  1. Tightening Risk Management: Volatility was a persistent theme in September. Futures volatility spiked above 70%, adding a layer of complexity to our trades. However, through diligent monitoring and pre-emptive adjustments, we were able to mitigate significant risk. One of the highlights was rolling longer-dated trades into shorter DTEs (days-to-expiration), which helped us free up valuable buying power (BP). While we successfully executed these rolls, the heightened volatility reminded us of the potential pitfalls when shortening DTE too aggressively. It’s a balancing act we’re refining as we go.
  2.  

  3. Buying Power and Overtrading Awareness: One of the most critical lessons from September was recognizing how the mark-to-market nature of futures and futures options can impact BP. With frequent fluctuations in BP throughout the trading day, we sometimes mistook short-term BP releases as fully available capital, leading to overtrading. By the end of the month, we established a new internal policy to limit the number of open trades and ensure our BP stays above a predefined threshold. As of October, new trades will only be opened if BP is above $30,000 and fewer than 35 trades are open.
  4.  

  5. Cash Reserves for Stability: As Warren Buffett famously said, “Cash is to a business as oxygen is to a body; never thought about when it is present, the only thing in mind when it is absent.” After several BP squeezes, margin calls, and volatility spikes, we have reinforced our commitment to building a solid cash reserve. Our cash reserve goal for October is $35,000, with a longer-term target of $77,000. This reserve will act as a buffer to absorb unexpected shocks and maintain trading and fund management flexibility. This strategy will help prevent any future margin-related pressures.
  6.  

  7. Performance Under Pressure: Despite the market’s erratic movements, most trades performed well, and we closed September with significant gains. Throughout the month, our risk remained well-managed, and while a few positions required adjustments, there were no significant losses to report. The adjustments we made delivered $2,400 in credits in the month’s final days, contributing to our overall success.

 

Looking Ahead

As we enter October, we carefully watch several key economic indicators, including labor market reports and global geopolitical events. While September saw fears of potential hard landings, the data on jobs and economic growth support the case for a robust market. We are cautiously optimistic and expect continued bullish momentum as the year draws closer. However, we will remain diligent in adjusting trades should market conditions change.

Closing Thoughts

September provided us with valuable lessons in discipline and risk management. We navigated the challenges by adhering to our trading plan and adjusting positions thoughtfully. Our team is confident that these actions have placed us in a stronger position. However, we are still experiencing a cash crunch due to volatility exceeding the 55% threshold. This cash crunch puts hardships on our payouts that will force us to reduce or suspend payments if not resolved next month.

At ZZ Capital Management, LLC, we are committed to transparency and professionalism in managing our investors’ capital. We are dedicated to building wealth sustainably, focusing on long-term value and mitigating short-term risks.

Thank you for your continued trust and partnership. Feel free to reach out if you have any questions about our performance or strategies. We are always happy to provide insight into our process.
 

With regards,
 

Martin Zourek
Managing Director,
ZZ Capital Management, LLC




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Posted by Martin August 08, 2024
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Why I decided to abandon dividend investing


I know, many dividend investors will disagree with me but I decided to abandon dividend investing in our business account. It was a tough decision and liquidating my dividend portfolio was hard for me – emotionally. But investing should be void of all emotions. You shouldn’t be in love with your stocks or strategy. So why I decided to abandon dividend investing?

The short answer is simple. I make more money trading futures.

I trade options against futures and futures contracts alone and I can trade both sides of the market. If the market is bad and selling, I can trade calls and call spreads. If the market is optimistic, I can trade puts and put spreads. But the biggest benefit of options against futures is that if the trade turns heavily against me, I can just roll it into the opposite trade (like calls into puts, or puts into calls), or roll it higher or lower (strikes) as needed and in many cases still as credit trades and thus for a profit. I can’t do that with stocks.

For example, I invested in Icahn Enterprises (IEP) stock. Then it got attacked by a short seller. Later on the company cut the dividend. The stock crashed more than 50% and never recovered since then. Many of these crashes happen after hours or before regular trading and when the market opens, you are already sitting on a pile of losses. And you can’t do anything about it. Although I could mitigate the losses by trading options around the position, and received plenty of dividends, that position was still under water. All you can do is “ride it through.” But this “riding through” it may take several years and in many occasions, you may never recover.

If you are going to tell me not to invest in questionable high yield “traps”, let me remind you about once dividend aristocrats and kings like AT&T (T), Disney (DIS), Walgreens (WBA), or WYNN… or some times ago, Kinder Morgan (KMI)… or Realty Income (O)… all these stocks were once shining dividend payers… then they crashed, cut the dividend, and many never recovered. Realty Income (O) is down since the end of 2021 and it may take another year or more to get back to the previous all time highs. And what do you get for it? A measle 4% dividend. Not worth it.

In the last week or two when the market crashed, trading options against futures I made more money than in regular bull market.
 

abandon dividend investing
 

All I had to do is either roll in the money puts into OTM calls, or roll expiration away and lower strikes, and start trading calls. Now, when the market is again optimistic and turning bullish again, I am changing my trading into puts and put spreads. I only have one call strikes trade that got into trouble today and I am rolling it out, away, and partially converting those calls into puts.

For example, here are all the adjustments of a call trade that got in the money thanks to market participants’ idiocy (few days ago they were freaking out about job caused recession, today they are in FOMO):
 

abandon dividend investing
 

Of course, the trade is not over yet and it will need more work, but I could roll it and improve my chances of ending this trade as a winner despite being busted. What can you do with busted stocks? Nothing. All you can do is hoping that one day (in 10 years), it will get break even. Like this guy who invested $700,000 of his grandmother’s inheritance into a single stock Intel (INTC):
 

abandon dividend investing
 

abandon dividend investing
 

That guy is not set for 10 years (could be sooner or later) of waiting to see if his investment recovers. Many times these drops happen after regular trading or at dark pools, and we, the small guys, do not have access to this trading and all we can do is to watch our positions destroyed. I had about 40 stock holdings in my dividend portfolio. And I had stocks that were doing well one season for a few months while other were destroyed and vice versa. Then you have earnings reports. Many times the stocks crash 20% on bad guidance and rarely go up. Some stocks like Netflix (NFLX) can drop huge and recover all during after hours trading (so, again, we cannot participate). Others take years to recover. Investing is not what it used to be – buy a good quality stocks and hold them. Even a good quality stocks can get crushed during earnings season thanks to the Wall Street short-sight. And I decided to be done with this.

Will I trade or invest in any stocks then?

I might, but rarely. I will be buying and selling LETF (leveraged ETFs) based on my market metrics like volatility and sentiment. The gauges I was working on work well to get me in the LETFs during bull markets and out into the safety during bear markets. That will be all I plan on trading. Other than that, I will stay with trading futures.

&nbps;
 




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Posted by Martin July 08, 2024
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Started weekly options against MicroFutures /MES for weekly income


Let’s see how this trading goes from now on. I am trading all sorts of strategies and sending them all to our subscribers and you can pick up the one that works best for you. I trade regular futures, options against futures and now I am adding options against Micro-Futures for weekly income. The benefit of this trading is that it only requires $1,000 starting capital and it can be compounded to larger income.

At the beginning, we will be receiving a small income, only about $30 per week, but we will slowly scale it up. Once we double the amount allocated for this strategy, we will scale up. And we will also slow down based on the market conditions. If the market start flashing trouble, we may even stop trading and move to cash completely or trade bearish strategies instead.

 

What we will be trading to generate weekly income?

 

Mostly naked puts. Unlike other instruments, these will require $1,000 buying power. In a bear market, we may go to cash or trade naked calls. In neutral markets, we may go with Strangles.

 

Why not SPX strategies we traded before like Iron Condors?

 

The problem with SPX Iron Condors was that if a trade turned against us it was very difficult to adjust that trade. Many times, you have to close it for a loss. Some traders place a stop loss order but in bad market conditions, you can start accumulating losses before you give up and stop trading whatsoever. Micro-Futures allow to trade a naked put for only $1,000 (or less) buying power. SPX naked put would require $80,000+ buying power so you have to trade vertical spreads. Rolling spreads vs. rolling naked puts is a different story.

 

Here is our weekly income spreadsheet to start with

 

Here is a spreadsheet, let’s the journey begin. I hope, this will be way better than trading the SPX index (more capital efficient):
 

weekly income strategy

Good luck everyone!
 
 




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Posted by Martin July 04, 2024
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Why you should avoid trading debit options strategies


Recently, I came across a 1-1-2 options strategy (which is pretty much a ratio strategy). It is a debit strategy, and the explanation of the strategy is below. In this little post I will explain why I do not trade debit options strategies and why you should avoid them too.

Many investors, usually the new ones, who discover options make a huge mistake trading options as if they were stocks. And trading options as stocks never works. It may work for a while, mostly when the markets are bullish, but at some point, the strategy will stop working and losses can quickly pile up. Wallstreetbets reddit is full of people posting their “loss porn” indicating that many have lost all their savings.

So why you want to avoid debit options strategies?

One reason why you do not want to be buying options is time. Options are time sensitive instrument. They have expiration day and if your narrative was wrong, your option contract will expire worthless no matter how great your story was. Add to it that you must be right on the underlying move magnitude (the stock may move in your direction but you still can lose money) and of course, you must nail the direction.

Three aspects impact your option price: direction, time, and magnitude. Be wrong on one of those and you lose money.

The only exception to buying options is when hedging or protecting your other trades, for example when trading defined risk strategies. Otherwise, avoid trading debit options. You will lose money long term.

What is 112 strategy?

The 112 options trading strategy is a variant of the 1-1-1 options strategy, and it involves buying one call option, buying one put option, and selling two puts. Here’s a detailed explanation of how the 112 strategy works and its purpose:

Components of the 112 Strategy:

Buying One Call Option:

This gives the trader the right to buy the underlying asset at a specified strike price before the expiration date.
It provides potential for unlimited upside profit if the price of the underlying asset rises significantly.

Buying One Put Option:

This gives the trader the right to sell the underlying asset at a specified strike price before the expiration date.
It provides protection against downside risk and allows the trader to profit if the underlying asset’s price falls.

Selling Two Put Options:

 
debit options strategies
 

This obligates the trader to buy the underlying asset at a specified strike price if the buyer of the put options decides to exercise their rights.
The premium received from selling these puts helps to offset the cost of buying the call and put options.
It creates a neutral to slightly bullish bias because the maximum profit occurs if the underlying asset’s price remains above the strike price of the sold puts.

Strategy Purpose:

Income Generation: The premiums collected from selling two put options can generate income to help pay for the cost of buying the call and put options, potentially reducing the overall cost of the strategy.

Hedging: The put option provides a hedge against significant downside moves, while the call option offers unlimited upside potential.

Neutral to Bullish Outlook: This strategy is best suited for traders who have a neutral to slightly bullish outlook on the underlying asset. The strategy benefits if the asset’s price remains stable or increases moderately.

Profit and Loss Scenario:

Max Profit: The maximum profit is achieved if the underlying asset’s price increases significantly, as the call option will gain value, and the sold puts will expire worthless.

Max Loss: The maximum loss occurs if the underlying asset’s price falls below the strike price of the sold puts. The loss is limited to the difference between the strike prices of the bought put and sold puts, minus the premiums received.

Breakeven Points:

There are typically two breakeven points in this strategy:

The upper breakeven point is calculated by adding the net premium received to the strike price of the bought call.
The lower breakeven point is calculated by subtracting the net premium received from the strike price of the sold puts.

Example:

Let’s assume an underlying stock is trading at $100, and a trader sets up the 112 strategy as follows:

Buy one call option with a strike price of $110 for a premium of $2.
Buy one put option with a strike price of $90 for a premium of $3.
Sell two put options with a strike price of $85 for a premium of $1 each.

Net Premium Calculation:

Total premium paid = $2 (call) + $3 (put) = $5.
Total premium received = $1 + $1 (two sold puts) = $2.
Net premium paid = $5 – $2 = $3.

Breakeven Points:

Upper breakeven point = $110 (call strike) + $3 (net premium) = $113.
Lower breakeven point = $85 (sold put strike) – $3 (net premium) = $82.
 

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
~Mark Twain

 
 




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Posted by Martin July 01, 2024
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Tech Stocks Set to Skyrocket Amid Global Labor Shortage, Says Fundstrat’s Tom Lee


In a forecast that could reshape investment strategies worldwide, Fundstrat’s Tom Lee has predicted a seismic shift in the stock market driven by an impending global labor shortage. According to Lee, technology stocks are on the brink of a parabolic rise, potentially transforming the tech sector into a dominant force within the S&P 500.
 

Lee’s analysis centers on a looming shortage of about 80 million workers by 2030, a gap he believes will be bridged by advancements in artificial intelligence (AI). “I think AI is really addressing a global labor shortage of roughly 80 million workers by the end of 2030,” Lee said, emphasizing the critical role technology will play in mitigating this workforce deficit.
 

Currently, the technology sector comprises around 30% of the S&P 500. However, Lee projects this could surge to 50%, underpinned by the expanding influence and necessity of AI technologies. This projection was shared with clients in a video last month, shortly after Nvidia’s outstanding first-quarter earnings report which catapulted its stock to unprecedented heights.

 
dividend portfolio
 

Lee asserts that the current AI narrative is only just beginning. He posits that AI will significantly enhance productivity, thereby addressing the severe labor shortage. “The prime age workforce is growing slower than the total world population and by the end of the decade that gap is around 80 million workers. So unless there is a productivity boom which is what AI will do, it’s going to create a lot of pressure on companies or incentives for them to innovate,” Lee explained. This anticipated shift from annual wage spend to ‘silicon spend’ underscores the importance of technological investment in the coming years.
 

Financially, Lee estimates a staggering $3.2 trillion per year will be directed towards AI technology by companies aiming to counteract the labor shortage. Nvidia, a leading player in AI hardware, stands to benefit enormously from this trend. With annual revenues approaching $120 billion, the company is well-positioned to capitalize on the increased spending.
 

This isn’t the first instance where a labor shortage has propelled technology stocks to new heights. Lee draws parallels to historical periods of labor scarcity and subsequent tech booms. “Between 1948 and 1967 there was a global labor shortage and technology stocks went parabolic. And between 1991 and 1999 there was a global labor shortage and technology stocks went parabolic, so this is what’s happening today,” Lee recounted.
 

Addressing concerns about potential bubbles reminiscent of the dot-com era, particularly regarding Nvidia, Lee offered a comparative perspective. “Keep in mind Nvidia sells a $100,000 chip since it’s scarce, no one else really sells it. By contrast, Cisco sold a $100 router during the internet boom, and yet they got to a 100x P/E. I think Nvidia’s 30x P/E seems pretty attractive and that’s why we think it’s early days,” he said.
 

As investors navigate this evolving landscape, Lee’s insights suggest that technology, particularly AI, will be a cornerstone of future growth. The anticipated shift in the S&P 500’s composition highlights the transformative potential of tech stocks in addressing global economic challenges. For investors, the message is clear: the dawn of a new technological era is upon us, and those who recognize and adapt to this shift stand to gain significantly.

 
 




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Posted by Martin June 26, 2024
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Is Snowflake (SNOW) a disaster or a sleeping giant?


When Snowflake (SNOW) went public in September 2020 I believed this would be a serious competitor to other established cloud providers like Amazon and Microsoft. Their cloud services were supposed to be unique allowing users variability no one offered. I hoped the investment would be similar to investing early in companies like Amazon in 1997. This hasn’t happened. So far, investing in Snowflake turned out to be a disaster. But is it just a drawback every company experiences once in a while and at some point this turns out to be a sleeping giant waiting to be woken up? Time will show but as of today, investing in this company was a disappointment.

I invested on Snowflake early when it went IPO. I expected that it may not be a smooth and easy ride up. Everyone was pointing out that the IPO is overpriced and that the company was not making enough revenue to justify it. But so was Amazon when it went IPO and it was not making money either. All its revenue and cash flow was redirected back to future growth. Today, Amazon is a giant. I hoped Snowflake would follow the same path. And it still may follow that path!

After Amazon went public in 1997 it skyrocketed about a year after that (in 1998) and went raging until 2000. Then a dot com crash sent it to abyss. It took Amazon seven years to recover and reach the previous highs. Then, housing crisis hit and AMZN crashed again. It took until 2010 for the stock to finally break the sideways move and start moving higher:

 
AMZN vs Snowflake
 

AMZN vs Snowflake
 

Snowflake may be following the same path of scepticism of investors who are concerned about multiple things as I will try to show below. Of course, I am not saying that the charts above are indicative of the same path Snowflake must and will follow. It is a completely different company and different time. All I am saying is that as Amazon back then had many naysayers and sceptics (I was one of them) who predicted AMZN bankruptcy “next year” and thus avoided investing in the company, Snowflake may have a similar sceptic’s view. I missed investing in Amazon back then, should I miss investing in Snowflake this time too?

 

What makes Snowflake unique?

 

There are many aspects that makes me believe that Snowflake will be a serious player in the future and that it is in fact a sleeping giant. But before we review the data and address skepticism about this company, we need to first understand what Snowflake actually does and what makes this company unique.

 

What Snowflake does

 

Snowflake is a company that provides a cloud-based data platform. Essentially, it offers a service that allows businesses to store, manage, and analyze their data in the cloud. Think of it as a super-advanced, high-tech version of a traditional data warehouse, but with several modern enhancements and capabilities.

 

Key Features and Services

 

Data Storage:

 

  • Snowflake allows businesses to store large amounts of data in the cloud. This data can be structured (like databases) or semi-structured (like JSON files).

 

Data Management:

 

  • It helps in managing data efficiently, ensuring that data is accessible, secure, and organized.

 

Data Analytics:

 

  • Snowflake provides powerful tools for analyzing data. Businesses can run complex queries on their data to gain insights, make decisions, and create reports.

 

What Makes Snowflake Unique

 

Separation of Storage and Compute:

 

  • Traditional Systems: In most traditional data systems, storage (where data is kept) and compute (where data is processed and analyzed) are tied together. This means if you need more processing power, you also need to increase storage, and vice versa.
  •  

  • Snowflake’s Approach: Snowflake separates these two components. This means you can scale up or down your compute power independently of your storage. If you need more processing power for a big job, you can add it without having to pay for additional storage you don’t need. This flexibility is a significant advantage.

 

Cloud-Native:

 

  • Built for the Cloud: Unlike some older systems that were adapted for the cloud, Snowflake was designed from the ground up to operate in the cloud. This makes it more efficient and better suited to leverage cloud benefits like scalability and cost-efficiency.
  •  

  • Multi-Cloud Compatibility: Snowflake works seamlessly across multiple cloud platforms, including AWS, Azure, and Google Cloud. This means customers aren’t locked into one provider and can operate in a hybrid or multi-cloud environment.

 

Data Sharing:

 

  • Snowflake has a unique feature called Data Sharing which allows organizations to share data in real-time with other Snowflake users without having to move or copy data. This can be very useful for collaboration between departments, partners, or clients.

 

Performance and Scalability:

 

  • Performance: Snowflake uses advanced techniques to optimize query performance, making data retrieval and analysis faster.
     

  • Scalability: The platform can scale automatically to handle increased loads, ensuring consistent performance even as data and user demands grow.

 

Why Snowflake is a Potential Competitor to AWS and Azure

 

  • Specialization: While AWS and Azure offer a broad range of cloud services, Snowflake specializes in data warehousing and analytics. This specialization allows it to innovate and optimize specifically for these use cases, often outperforming more generalist solutions.
  •  

  • Flexibility: The ability to separate storage and compute gives Snowflake a cost and performance edge in many scenarios, making it an attractive choice for businesses with significant data needs.
  •  

  • Integration: Snowflake’s multi-cloud compatibility and seamless integration with other tools and platforms make it a flexible choice for businesses already using other cloud services.

 

I invested in Snowflake (as I mentioned above) and because I expected that it may not be an easy ride as there will be a lot of skeptics, I decided to use options to lower my cost basis selling options around this company. I was selling Iron Condors and covered calls and I went aggressive. Doing so, I generated so much income that I was able to lower my cost basis to $7.86 a share! Yes, a staggering $7.86!

 
Snowflake cost basis
 

With this cost basis, it doesn’t bother me anymore where the price of this stock is. But I still want to review whether it makes sense to keep investing in this company. Let’s review the reasons for the recent decline:

 

Reasons for Snowflake price decline

 

Valuation Concerns:

 

  • High Initial Valuation: Snowflake’s IPO was one of the most hyped in recent years, leading to a high initial valuation. This often results in heightened expectations that can be challenging to meet.
  •  
    Snowflake valuation
     

  • Price-to-Sales Ratio: Despite strong revenue growth, Snowflake’s price-to-sales ratio has been exceptionally high, leading to concerns about whether its stock price is justified by its earnings potential.

 

Growth Rate Deceleration:

 

  • Slowing Revenue Growth: Snowflake’s revenue growth rate has been decelerating. Investors are cautious about companies that do not maintain high growth rates, especially when valued at premium levels.
  •  
    Snowflake revenue
     

    Snowflake free cash flow
     

  • Customer Growth: While Snowflake continues to add new customers, the pace at which it is doing so has slowed, leading to concerns about its future growth trajectory.

 

Competitive Pressure:

 

  • AWS and Azure Dominance: Snowflake faces stiff competition from well-established players like AWS and Azure, which have far more resources and established customer bases.
  • Price Competition: Aggressive pricing strategies by competitors can erode Snowflake’s market share and margins.

 

Profitability Concerns:

 

  • Lack of Profitability: Snowflake is still not profitable, and the market has become less tolerant of high-growth, non-profitable tech stocks, especially with rising interest rates.
  • High Operating Costs: The company has significant operating expenses, including research and development, and sales and marketing, which have kept it from achieving profitability.

 

Macroeconomic Factors:

 

  • Interest Rate Environment: Rising interest rates have impacted high-growth tech stocks, as future earnings are discounted more heavily.
  • Market Sentiment: General market sentiment has shifted towards value stocks and away from high-growth tech stocks due to concerns about inflation and economic slowdown.

 

Insider Selling:

 

  • Selling Pressure: There has been significant insider selling, which can be perceived negatively by the market as a lack of confidence by those closest to the company.

 

Future Prospects and Considerations

 

Innovation and Product Development:

 

  • Snowflake’s continued innovation in data warehousing and analytics could drive future growth. Their ability to integrate with other platforms and provide unique solutions will be crucial.

 

Expansion into New Markets:

 

  • Expanding into new markets and industries can provide new growth avenues. Their strategic partnerships and international expansion efforts will be key areas to watch.

 

Cost Management:

 

  • Improving operational efficiency and managing costs will be essential for Snowflake to achieve profitability and sustain investor confidence.

 

Adoption of New Technologies:

 

  • Leveraging emerging technologies like artificial intelligence and machine learning can provide competitive advantages and drive future growth.

 

All these are worries investors and naysayers are using to justify Snowflake as bad investment and reasons for declining price of the stock. They compare it to SNOW’s competitors and point out losses and lack of revenue. So let’s review the data side-by-side with Amazon and Microsoft to see how Snowflake is doing:

 

Metric Snowflake (SNOW) Amazon (AMZN) Microsoft (MSFT)
Revenue (FY 2023) $2.07 billion $514 billion $198.3 billion
    $80.1 billion (AWS) $75.3 billion (Intelligent Cloud)
Recent Quarterly Revenue $774.7 million $21.35 billion (AWS) Azure: 27% growth YoY
Revenue Growth Rate 66% YoY 29% YoY (AWS) 27% YoY (Azure)
Net Income (FY 2023) -$679 million (net loss) $33.4 billion $72.7 billion
Gross Profit Margin 70% High (AWS-specific not detailed) High (cloud services)
Operating Income (FY 2023) N/A $22.8 billion (AWS) N/A (Intelligent Cloud contribution)

 

Snowflake has shown impressive growth and potential, particularly in the niche market of cloud data warehousing. However, it is still in the growth phase, focusing on expanding its market presence and achieving profitability. Amazon’s AWS and Microsoft’s Azure are much larger, more diversified, and profitable segments within their respective companies, with strong market positions and steady growth rates. Snowflake’s future success will depend on its ability to innovate, manage costs, and compete effectively against these cloud giants.

 
It is true that when we put the numbers next to each other we see that Snowflake is not doing well and the price decline is justified. Right?
 

If you believe that, you have been fooled. Comparing SNOW with AMZN and MSFT like that is comparing apples and oranges. We are looking at companie in completely different stages of their development. Snowflake went public in 2020, Amazon went public in 1997 and Microsoft in 1986. We need to look at the data within the same range of development to truly compare how Snowflake is doing vs. Amazon and Microsoft. Snowflake is just three years old, so let’s compare it to Amazon and Microsoft when these companies were three years old:

 

Financial Performance Comparison

 

1. Revenue

 

Snowflake (2023)

 

  • Annual Revenue: $2.07 billion
  • Recent Quarterly Revenue: $774.7 million

 

Amazon (2000)

 

  • Annual Revenue: $2.76 billion
  • Recent Quarterly Revenue: $672 million

 

Microsoft (1989)

 

  • Annual Revenue: $804 million
  • Recent Quarterly Revenue: $233 million

 

2. Net Income

 

Snowflake

 

  • Net Income: -$679 million (net loss)

 

Amazon

 

  • Net Income: -$720 million (net loss)

 

Microsoft

 

  • Net Income: $170 million

 

3. Growth Rate

 

Snowflake

 

  • Revenue Growth Rate: 66% year-over-year

 

Amazon

 

  • Revenue Growth Rate: Rapid, doubling year-over-year in early years

 

Microsoft

 

  • Revenue Growth Rate: Significant, revenue increased by more than 100% in the first three years post-IPO

 

Let’s put these key metrics side-by-side for better comparison:

Metric Snowflake (SNOW)
(2023)
Amazon (AMZN)
(2000)
Microsoft (MSFT)
(1989)
Annual Revenue $2.07 billion $2.76 billion $804 million
Recent Quarterly Revenue $774.7 million $672 million $233 million
Revenue Growth Rate 66% YoY Rapid growth Significant growth
Net Income -$679 million (net loss) -$720 million (net loss) $170 million
Market Position Niche in data warehousing Emerging e-commerce, starting cloud Leading software company
Focus Areas Data warehousing, analytics E-commerce, beginning of cloud Operating systems, software

 

Comparing Snowflake’s financials and growth metrics three years after its IPO with those of Amazon and Microsoft at similar stages, it is clear that all three companies experienced rapid growth and faced profitability challenges early on. Snowflake’s current growth rate is robust, similar to Amazon’s and Microsoft’s early years. However, the competitive landscape and market dynamics differ significantly, making direct comparisons challenging but still insightful. Snowflake is positioning itself in a niche market with potential, similar to how Amazon and Microsoft carved out their dominant positions over time.

The comparison indeed shows that Snowflake (SNOW) is performing reasonably well considering its stage of growth. Here’s a more detailed analysis of why investor skepticism might be overblown:

 

Key Points of Comparison

 

Revenue Growth:

 

Snowflake’s revenue growth rate of 66% year-over-year is impressive. This rapid growth is comparable to the early years of both Amazon and Microsoft, indicating a strong demand for its services.

 

Market Position:

 

Although Snowflake operates in a niche market, its focus on data warehousing and analytics positions it well against larger competitors. Amazon and Microsoft, despite their broader scope now, also started with niche focuses (e-commerce for Amazon, operating systems for Microsoft) and expanded over time.

 

Profitability:

 

Like many tech companies in their early stages, Snowflake is not yet profitable. This mirrors Amazon’s situation three years after its IPO when it also faced significant losses as it invested heavily in growth. Microsoft, being an exception with profitability early on, still invested significantly in growth and expansion.

 

Strategic Positioning and Innovation:

 

Snowflake’s innovation in data management and cloud computing makes it a strong contender in its sector. With strategic partnerships and continuous product development, it has the potential to capture more market share.

 

Long-term Perspective

 

Investment in Growth: Snowflake’s substantial investment in technology and infrastructure is geared towards long-term growth. This strategy, although impacting short-term profitability, is essential for establishing a solid market position.

Market Potential: The demand for cloud computing and data analytics continues to rise. Snowflake’s specialized solutions cater to this growing market, suggesting substantial growth potential.

Comparative Performance: When comparing Snowflake’s current performance with Amazon and Microsoft at similar stages, it’s evident that all three companies faced significant challenges but had strong growth trajectories. This comparison helps underline that early skepticism might not reflect Snowflake’s long-term potential.

 

Investor Sentiment

 

Skepticism and Volatility: Early-stage companies often face skepticism due to high valuations and initial losses. However, historical comparisons with Amazon and Microsoft show that early challenges and skepticism are common, and overcoming these can lead to substantial long-term success.

 

Conclusion

 

Snowflake’s current performance and growth strategy are indicative of a company with significant potential. While investor skepticism is not uncommon for companies at this stage, the historical context of Amazon and Microsoft suggests that early-stage challenges do not preclude long-term success. Snowflake is well-positioned in a growing market, and its innovative approach could see it becoming a major player in the cloud computing and data analytics industry. The current selling although typical to Wall Street spookiness with everything and every time, is not justified and the current prices are a great opportunity to invest in Snowflake.

It always amazes me that investors are looking for a holy grail of finding future Amazon and when they have one right under their noses, they reject it. Of course, this analysis (if we can call it one) is not a guarantee of success, Snowflake may fail and never emerge, but the opportunity is here. If you decide to invest at the current price levels, be prepared for long time while your investment may be doing nothing or even losing you money. Remember, if you invested in Amazon it took 10 years before your investment started showing some profits. Snowflake may be offering the same path.

Don’t let naysayers shake your confidence. I still think Snowflake is a sleeping giant that is waiting to be awaken. This investment is a long run and if you stay invested, you will be rewarded.

 
 




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Posted by Martin June 25, 2024
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I hopped on the NVDA bandwagon, too


Today (July 1st, 2024), the sky was falling and I got stopped out from my NVDA position in the morning. I set my stop loss at $120 a share. But later, buyers stepped in and started buying. So, the doom and gloom hasn’t happened (it still may happen but at this point it is less likely), so I re-entered the position.
 

Everybody is crazy about Nvidia (NVDA) stock and everyone wants to own it. I was a bit cautious buying it because in my opinion, the stock is parabolic. But there were two things happening recently, and both events made me to reconsider.

 
NVDA
 

One event just happened – sell off. NVDA was selling recently and corrected almost 10% (not exactly but close). Today, big money are buying back. So I decided to do the same and bought 50 shares today. Nothing crazy like the guys from WallStreetBets who go all in (and usually lose all), but enough to make me happy.

I also checked the stocks valuation (this was sparked by Tom Lee from Fundstrat and his few interviews on YouTube and MSN). And when checking the valuation of NVDA, we can see that today, and per today’s metrics, NVDA is overvalue, but when looking into the near future, we see that the stock is fairly valued and slightly undervalued (yes, it sounds weird but it is undervalued).

 
NVDA valuation
 

The second event that happened last week was NVDA announcing going into cloud business, creating its own cloud service equipped with their own chips and hardware but also developing a software that will run the cloud. This literally shifts NVDA from a hardware maker to a service provider (and along the way bullying big players like Amazon into allowing them to use their facilities). This is a big deal. It is the similar Apple (AAPL) used before shifting from a phone maker to a service provider (and Apple today has ever growing service segment that is now as large as the phones segment). This will make NVDA surviving the tough competition once the IA chip making segment loses steam (which it will eventually do).

Today, I bought 50 shares of NVDA and later on, I may buy more.

 
 




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