Mad Hedge Technology Letter
April 23, 2018
Fiat Lux
Featured Trade:
(HOW NETFLIX CAN DOUBLE AGAIN),
(NFLX), (AMZN), (IQ), (ORCL), (MU), (AMAT), (CRUS), (QRVO), (IFNNY), (NVDA), (JD), (BABA), (MSFT)
The first batch of earnings numbers are trickling in, and on the whole, so far so good.
A spectacular earnings season will further cement tech's position at the vanguard of the greatest bull market in history.
The bull case for technology revolves around two figures indicating "RISK ON" or "RISK OFF".
The first set of numbers from Netflix (NFLX) emanated sheer perfection.
Netflix has gambled on its international audience to drive its growth and unceasing creation of premium content to reach these lofty targets set forth.
It worked.
Consensus was that domestic subscription growth had peaked, and Netflix would have to lean on overseas expansion to beat earnings estimates.
American subscription growth knocked it out of the ballpark, beating expectations by 480,000 subscriptions. The street expected only 1.48 million new adds. The 1.96 million shows the American online streamer is resilient, and the migration toward cord-cutting is happening faster than initially thought.
International adds were pristine, beating the 5.02 million estimates by 440,000 million new subscribers.
Content is king as Netflix has proved time and time again (we notice that here at Mad Hedge Fund Trader, too). Netflix plans to fork out about 700 original series in 2018.
By 2023, Netflix could grow its subscriber base to close to 400 million. The potential for international advancement is immense considering foreign companies are playing catch-up and cannot compete with the level of Netflix's content.
The earnings report coincided with Netflix announcing a forceful push into Europe, doubling its allocated content-related investments to $1 billion.
All of Netflix's estimates take into consideration that it is shut out of the Chinese market. Ironically, the Netflix of China, named iQIYI (IQ), just recently went public on the Nasdaq.
Amazon Web Services (AWS), the cloud-arm of Amazon (AMZN), revenue numbers are the other numbers that are near and dear to the pulsating heartbeat of the bull market.
Jeff Bezos, Amazon's CEO, penned a letter to shareholders that Amazon prime subscribers blew past the 100 million mark.
The positive foreshadowing augurs nicely for Amazon to surprise to the upside when it reports earnings next week on April 26.
Expect more of the same from cloud companies that are overperforming.
The few glitches in tech are minor. It is mindful to stay on the right side of the tracks and not venture into marginal names that haven't proved themselves.
For instance, Oracle (ORCL) had a good, not great, earnings report but shares still cratered after CEO Safra Catz dissatisfied analysts with weak cloud forecasts of just 19%-23% growth.
The street was looking for cloud guidance over 24%. Oracle is still being punished for its legacy tech segments.
The chip sector got pummeled after several chip manufacturers announced weak supply order from Apple.
This is hardly a surprise with Apple slightly missing iPhone estimates last quarter by 1%.
Chip stocks such as Lam Research (LRCX), Micron (MU), and Applied Materials (AMAT) look like affordable bargains. They should be seriously considered after share prices stabilize buttressed by support levels.
The outsized problem is that hardware suppliers have headline risks because of large cap tech's preference toward vertically integrating.
Along with price efficiencies, vertically integration aids design aspects and streamline product production time horizons.
This is not the end of chips.
Consumers need the silicon to generate and extract all the data coming to market.
Particularly, Apple (AAPL) went over its skis trying to push expensive smartphones to a saturated market when all the rip-roaring growth is at the low end of the market.
Apple still managed to sell more than 77 million iPhones, but the trade war rhetoric will deter Chinese consumers from purchasing American tech products. Until now, Apple has counted on China as its best growth prospect. The administration had other ideas.
Any noteworthy Apple supplier has gotten punched in the nose, but crucially, investors must stay out of the SMALLER chip players that rely on narrow revenue sources to keep them afloat.
Bigger chip companies can withstand the shedding of a few revenue sources but not Cirrus Logic (CRUS).
(CRUS) shares have been beaten mercilessly the past year sliding from $68 to a horrifying $37.74 today.
(CRUS) produces audio amplifier chips used in iPhone devices, and weak iPhone X guidance is the cue to bail out of this name.
The company extracts more than 75% of its revenues by selling audio chips used in iPhone devices. Ouch!
Last quarter saw horrific performance, stomaching a 7.7% decline in revenues due to tepid demand for smartphones in Q4 2017.
Cirrus Logic provided an underwhelming outlook, and it is not the only one to be beaten into submission behind the woodshed.
Apple has signaled to its suppliers that it will view production in a different way.
Imagination Technologies, a U.K. company, was informed that its graphic chips are not needed after 2018.
Dialog Semiconductor, another U.K.- based operation, shared the same destiny, as its power management chip was cut out of the production process, sacrificing 74% of revenue.
To top it all off, Apple just announced it plans to manufacture its own MicroLED screens in Silicon Valley, expunging its alliance with Samsung, Sharp, and LG, which traditionally yield smartphone screens for Apple. And Apple plans to make its own chips, phasing out Intel's chips in Apple's MacBook by 2020.
Qorvo (QRVO), Apple's radio frequency chips manufacturer, also can be painted with the same brush.
Apple was responsible for 34% of the company's total revenues in 2017.
Weak iPhone guidance set off a chain reaction, and the trembles were most felt at the bottom feeder group.
Put Infineon Technologies (IFNNY) in the same egg basket as Qorvo and Cirrus Logic. This company installs its cellular basebands in iPhones.
FANG has split into two.
Netflix and Amazon continue producing sublime earnings reports, and Apple and Facebook have hit a relative wall.
It will be interesting if the government's harsh rhetoric toward Amazon amounts to anything.
One domino that could fall is Amazon's lukewarm relationship with the US Postal Service.
Logistics is something the Chinese Amazon's JD.com (JD) and Alibaba (BABA) have successfully adopted. Look for Amazon to do the same.
However, I will say it is unfair that most tech companies are measured against Netflix and Amazon, even for Apple, which earned almost $50 billion in profits in 2017.
It is insane that companies tied to a company that prints money are reprimanded by the market.
But that highlights investors' pedantic fascination with pandemic growth, cloud, and big data.
Making money is irrelevant today. Investors should be laser-like focused on the best growth in tech such as Amazon, Netflix, Lam Research, Nvidia (NVDA), and Microsoft (MSFT), which know how to deliver the perfect cocktail of results that delight investors.
__________________________________________________________________________________________________
Quote of the Day
"$500? Fully subsidized? With a plan? That is the most expensive phone in the world. And it doesn't appeal to business customers because it doesn't have a keyboard. Which makes it not a very good email machine." - said former CEO of Microsoft Steve Ballmer on the introduction of the first iPhone.
Mad Hedge Technology Letter
April 20, 2018
Fiat Lux
Featured Trade:
(MONDAY, JUNE 11, FORT WORTH, TEXAS, GLOBAL STRATEGY LUNCHEON),
(TUESDAY, JUNE 12, NEW ORLEANS, LA, GLOBAL STRATEGY LUNCHEON)
Come join me for lunch at the Mad Hedge Fund Trader's Global Strategy Update, which I will be conducting in Fort Worth, Texas, on Monday, June 11, 2018. An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.
I'll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I'll be throwing a few surprises out there, too. Tickets are available for $248.
I'll be arriving at 11:30 AM, and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at an exclusive downtown private club. The precise location will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research.
To purchase tickets for the luncheon, click on our online store.
Come join me for lunch at the Mad Hedge Fund Trader's Global Strategy Update, which I will be conducting in New Orleans, LA, on Tuesday, June 12, 2018. An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.
I'll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I'll be throwing a few surprises out there, too. Tickets are available for $268.
I'll be arriving at 11:30 AM, and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at an exclusive downtown restaurant. The precise location will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research.
To purchase tickets for the luncheon, click on our online store.
Mad Hedge Technology Letter
April 19, 2018
Fiat Lux
Featured Trade:
(HOW ROKU IS WINNING THE STREAMING WARS),
(ROKU), (FB), (AMZN), (NFLX), (GOOGL), (BBY), (DIS)
The whole digital ad industry dodged a bullet.
Facebook (FB) CEO Mark Zuckerberg's wizardry on Capitol Hill will stave off the data regulation hyenas for the time being.
One company in particular is perfectly placed to reap the benefits.
The Facebook of online streaming - Roku (ROKU).
Roku is a cluster of in-house, manufactured, online streaming devices offering OTT (over-the-top) content in the form of channels on its proprietary platform.
The company has two foundational drivers propelling business - selling hardware devices and selling digital ads.
It pays dividends to be entrenched at the intersection of two monumental generational trends of cord cutters' mass migration to online streaming, and the disruption of the digital ad revolution that is shaking up traditional media giants.
The percentage of American homes paying for an online streaming service ripped higher to 55% of households, which is up from 49% the previous year.
This $2.1 billion per month spend on streaming service is specifically as a result of access to premium content at an affordable price relative to traditional cable bundles.
Roku is a microcosm of the healthy climate for quality technology stocks in 2018.
It is among countless other firms that leverage large-scale data or cloud tools to capture profits.
Roku is best of breed of smart TV platforms and is in the early stages of robust growth.
This year will be the first year Roku's ad revenue surpasses hardware sales, indicating strong platform growth.
Roku pinpointed building account user growth, top-line gross revenue, and enhancing the platform capabilities as ways to move the business forward.
This year will also be the first year Roku posts an overall profit.
Active accounts grew 44% YOY to 19.3 million.
Roku offers consumers a cheap point of entry selling its Roku express box for only $29.99.
Its device is even free with a two-month purchase of Sling TV, which is the best online substitute to a legacy cable package. It has two sets of unique bundles available, charging $20 per month and $40 per month.
Once the Roku home screen populates, users can choose content through a la carte streaming options.
There is no monthly fee to operate Roku, and the device is used primarily by millennials.
More than 60% of 18- to 29-year-olds watch TV from online streaming, according to a Pew survey.
The quality and easy-to-use interface aids user navigation across the ecosystem.
It's the most convenient avenue to subscribe to multiple online streaming services all on one platform. It entices finicky users with extra mobility - those who love to jump around to different services based on particular upcoming content loaded up in the pipeline.
Many of these services offer no contract, cancel-anytime models that millennials love rather than the "old-school" rigid rules of cable providers that mostly charge a cancellation penalty of $300.
It is shocking how far traditional media fell behind the curve, but they are in rapid catch-up mode now.
Remember that content is king, and the overall boost in content quality has really shaken Hollywood executives to their core.
The golden age of streaming continues unabated with a Netflix 2018 annual content budget of $8 billion.
Roku does not create original content and it desires no skin in the game.
Content is expensive, and Roku would rather become the best place to host it.
Netflix's 2017 total revenue was a staggering $11.69 billion in 2017, and content costs will easily surpass 50% of total revenue in 2018. Overnight, it has become one of the biggest players in Hollywood, as its presence at the Emmy Awards amply demonstrates.
Exorbitant content costs are the new normal in 2018, and Spotify has reason to moan about the cost of content being 79% of total revenue.
Heightened content costs are the main reason why firms relying on content creation lose money each year.
However, as the overall pie grows, there is room for the tide to lift all boats. Being the premier platform to host premium content is why Roku's business model is eerily similar to Facebook's hyper-targeting ad model.
They make money the same way.
The incessant demand for online streaming functionality and smart TV operating systems show no signs of waning with Amazon (AMZN) announcing a new partnership with frenemy Best Buy (BBY) to produce smart TVs with Best Buy's in-house TV brand Insignia.
This is the first time Best Buy has been afforded a direct route to Amazon customers.
Disney (DIS) is turning around its legacy company into an online streaming behemoth announcing its first foray into online streaming with ESPN+.
Disney has tripled down on online streaming, acquiring New York-based BAMTech in late 2017, a company focused on developing streaming technology and made famous by its production of pro baseball's MLB TV.
BAMTech exudes pure quality. Anyone who has used MLB TV streaming service understands the great end-product it offers consumers.
The outstanding success with MLB TV attracted new online streaming converts to BAMTech to execute the transition to online streaming, including the WWE, Fox Sports, PlayStation Vue, and Hulu.
HBO went to BAMTech in 2014, after botching its attempt at creating a reliable stand-alone streaming service.
Disney's BAMTech-produced online streaming service will come to market in 2019, and will certainly be available on Roku TV.
Expect new blockbuster hits to debut on this new streaming service, such as new versions of Star Wars.
It is the perfect stock to mutate into an online streaming service because it possesses amazing content especially through ESPN.
The announcement of ESPN+ levitated Roku shares by 10% because investors understand this is the first baby step to shifting more of its content online.
This was on top of the announcement that Stephen A. Cohen's Point72 Asset Management had acquired a 5.1% stake in Roku for about $14 billion.
Furthermore, every major streaming service that enters Roku's system is worth an extra 5% to 10% bump in share price because of the wave of eyeballs and digital ads that grow Roku's coffers.
It is certain that 2018 and 2019 will sway more cord cutters to adopt Roku TV as this cohort approaches 70 million in 2018 on its way to 80 million in 2019.
The critical growth lever is its digital ad business as it hopes to take home a slice of this $70 billion per year business that is 75% controlled by Alphabet (GOOGL) and Facebook.
Roku has made great strides with half of Ad Age's top 200 advertisers already on the Roku interface.
Roku is taking the playbook right out from under Facebook's nose, piling funds into further enhancing its ad-tech division.
The blood, sweat, and tears shed is showing up in the financials with ARPU (Average Revenue per User) rocketing by 48% YOY, and more than 65% of this gap up is attributed to digital ad revenue.
Total revenue was up 29% YOY to $513 million, and platform revenue grew 129% in Q4 2017 to $85.4 million.
It is estimated that ad revenue will surpass $300 million in 2018, up from around $200 million in 2017.
Roku expects total revenue to grow 32% in 2018, approaching $700 million.
Profit margins are thriving under the platform segment, pumping out a stellar 74.6% in gross margin.
Roku does not make money on the hardware. Its push into ad distribution will ramp up as its digital ad revenue beelines toward an expected $700 million windfall by 2020.
Roku has a fantastic growth trajectory relative to other tech companies. Heightened volatility will make sell-offs hard to swallow but give fabulous entry points into a budding business.
The fertile path of international user adoption has barely scratched the surface. However, Netflix's successful foray abroad will inject confidence that Roku will have no problem expanding to greener pastures overseas as domestic account growth is always first to mature.
__________________________________________________________________________________________________
Quote of the Day
"AI is one of the most important things humanity is working on. It is more profound than electricity or fire." - said Google CEO Sundar Pichai
Mad Hedge Technology Letter
April 18, 2018
Fiat Lux
Featured Trade:
(WHY YOU SHOULD STILL BE BUYING FACEBOOK ON THIS DIP),
(FB), (GOOGL), (AMZN), (NFLX)
He did just enough.
He did 5% enough, but it should have been 10%.
That was the performance of the highly controversial data company Facebook (FB) in the wake of Mark Zuckerberg's (the aforementioned "he") testimony in front of politicians who failed to correctly pronounce his name let alone understand his business model.
But Zuckerberg did well.
Well enough that investors approved in droves.
Facebook shares tanked after the Cambridge Analytica scandal was disclosed, and the stock traded 16% below its February high.
The FANG stocks lost more than $200 billion in market value at one point when the headlines went viral.
Amazon (AMZN) and Netflix (NFLX) accounted for more than 30% of the S&P 500's 2018 gains in February, and their contribution has dipped to about 24% as of early April.
The leadership burden for large-cap tech is a resilient pillar propping up the equity market.
Let's get this straight - there has been no regulation as of yet but this moves forward any regulation that eventually was going to happen.
However, it could be a highly diluted version of any worst-case scenarios of which one could think.
The big question: Will earnings and guidance be sideswiped because of higher data costs?
And how many of the 2.2 billion MAU (Monthly Active Users) permanently deleted their Facebook accounts?
Facebook profile removals surged to 4,000 to 5,000 the first few days after the news hit and decreased to 2,000 per day in late March. The numbers further subsided to 1,000 at the start of April.
Deletions around the political testimony were clocking in between 1,000 to 2,000 per day.
To put this into perspective, the extirpation of accounts was only about 30% of the Snapchat rebellion where users quit in hoards because of a sub-optimal design refresh.
The media has done its best to sensationalize events and avoid the fact that hyper-targeting ad models has been around for years and has been used by various companies.
Facebook is not the only one.
Bottom line, there has been no material damage to user volume, and the testimony will empower tech because of Washington's botched question session.
Most of Facebook's profits come from less than 10% of user accounts.
Facebook is a one-trick pony with 98% of profits coming from ad revenue.
To add granularity, the bulk of revenue derives from developed nations mainly from North America, which make up more than 50%, and Europe at about 30% of total revenue.
Falling user engagement from the developed English speaking world would be a canary in the coal mine.
I am not talking about a few thousand profile deletions. However, a mass removal of 50,000 profiles or 100,000 profiles per day would throw Mark Zuckerberg into a tizzy.
If Facebook can convince users to stick around then Mark Zuckerberg is the ultimate winner.
With all the fearmongering, some facts get swept under the carpet. And it could be the case that many users are fine with Facebook possessing large swaths of their personal data.
In reality, users might prefer Facebook to Washington when it comes to possessing their personal information.
The performance of politicians lined up to interrogate Mark Zuckerberg was an unmitigated disaster for the political elite.
It is clear there is a competency issue with politicians. The generation bias has given us a fleet of politicians who have almost zero grasp of technology and its pervasive use in America's economy.
Many politicians showed a weak grasp of Facebook's profit engine.
Some politicians were more focused on Facebook's diversity policy than the real issue at hand.
Let's not forget Zuckerberg also controls 60% of voting rights through his accumulation of Facebook Class B shares and has an iron grip on any direction where the company traverses.
Any meaningful regulation costs will be passed onto the advertisers as a cost of doing business.
This is the key lever investors don't fully understand.
Facebook currently uses an auction-based system for ad pricing but could easily slip in stand-alone regulatory fees to compensate the extra costs.
The industries move from CPC (cost per click) to CPM (cost per impression) including duopoly playmate Alphabet (GOOGL) is a great strategy to pad profits.
The only real incurred cost to Facebook is the in-house DevOps team responsible for platform enhancement.
Facebook tried to experiment in 2016 by charging Facebook-owned smartphone messaging service WhatsApp users a $1 per year fee to use the messaging service.
It has done the groundwork to roll out a mass paid service.
Facebook later decided against this move as many users of WhatsApp are from undeveloped countries with no access to credit card payment services.
Zuckerberg is awkward. However, he has come a long way since his hoody days, even using smoke and mirrors to wriggle out of probing questions.
Half the "grilling" he received in Washington was met with the same vanilla answer saying that his team will get back to them.
The peak of evasiveness was Zuckerberg's response to a question about the willingness to change the business model in the interest of protecting individual privacy.
Zuckerberg stated he was "not sure what that means."
The hammering in Facebook shares was overdone.
It is obvious Washington is no match for large cap tech.
Facebook's upside trajectory has been sacrificed in the short term, but one could argue regulation was on the way - regardless of this data breach.
Regulation is a natural progression for an industry with almost no meaningful regulation.
Therefore, a little regulation for tech does not mean the end of tech.
Facebook is not going out of business. Not anytime soon.
Facebook earned revenue of $27.64 billion in 2016, on the back of $40.65 billion in 2017.
Facebook does not need to be "fixed" - it just needs a few bandages in place before it goes back onto the field.
These bandages will damage operating margins that are currently at 57% in Q4 2017, but their long-term fundamentals are still intact.
The wall of worry is unfounded and ad engagement is still solid.
Facebook is in store for record bottom- and top-line numbers when earnings come out. Ad revenue numbers and the guidance will be the key metric to digest.
Investors might want Zuckerberg to kitchen sink the quarter because most of the bad news is already priced into the stock and might as well dig out all the skeletons in the closet.
Regulation is positive for Facebook because Facebook and the rest of the FANGs are in the best position to confront the regulations. The worst case scenario is finding a backdoor way to navigate through the new rules just as the backdoor way of profiting through ad distribution.
The headline hysteria makes it seem like Facebook is about to go under and file Chapter 11.
The bar has been set so low for upcoming earnings that any reasonable guidance will be seen as a victory.
Advertisers have no choice but to pay for Facebook ads if they want to grow business - that has not changed.
Facebook is growing so fast that the CEO could not name the competition when he was asked at the hearing.
There is a huge short squeeze setting up for the next earnings report due out on April 25, 2018.
Lastly, WhatsApp recently surpassed 1.5 billion MAU with users sending more than 60 billion messages every day.
Remember that Mark Zuckerberg purchased WhatsApp when it had around 500 million MAU back in February 2014.
This service hasn't even started to monetize yet and was a genius piece of business for $19.3 billion in 2014.
The valuation is at least double to triple the price of purchase now but seemed ludicrously expensive when Facebook snapped it up at the time.
Facebook has bottomed out, and the added bonus is it is quite insulated from all the tariff chaos whipsawing the equity markets.
__________________________________________________________________________________________________
Quote of the Day
"I'm on the Facebook board now. Little did they know that I thought Facebook was really stupid when I first heard about it back in 2005."- said founder and CEO of Netflix Reed Hastings
Mad Hedge Technology Letter
April 17, 2018
Fiat Lux
Featured Trade:
(WHY THE CLOUD IS WHERE TRADING DREAMS COME TRUE),
(ZS), (ZUO), (SPOT), (DBX), (AMZN), (CSCO), (CRM)
