If anyone needs another AI data point, the tech market just delivered us a juicy one with an outstanding earnings call with Broadcom (AVGO) and its CEO Hock Tan.
The AI enterprise build-out has been developing in full-force and investors are pouring money into the foundation of the AI future.
That is currently where the AI profits currently lie.
The software companies have missed out on that profit in the short-term, but since many are also involved in the AI infrastructure spend, they can turn to their investors and ask for a mark-up in owned shares.
This won’t always be the case, and I do believe we are fast reaching an inflection point where shareholders will demand more from their capital and not just more AI data centers and more modern AI semiconductor chips.
I am talking about meaningful revenue growth directly tied to AI spend – we don’t have that yet.
At some point, there needs to be an application from all of this money spent and return on capital.
In the meantime, Mr. Market is cheering the success of AVGO and the stock is up 25% today at the time of this writing signaling investors will continue to back this AI infrastructure spend into 2025 and possibly beyond.
Broadcom CEO Hock Tan said the company expects its custom AI chips will generate between $60 billion and $90 billion in revenue over the next three years from its three existing hyperscaler customers, whom the company did not name. Tan reiterated his belief that each of the three hyperscalers will deploy 1 million clusters of its custom AI chips called XPUs by 2025.
Apple is reportedly working with Broadcom to develop an AI server chip. The move by tech giants to make their own server chips is meant to cut costs and scale back their reliance on Nvidia’s (NVDA) GPUs (graphics processing units).
That trend is reflected in the industry at large. The AI chip market is set to grow 74% in 2025, while the semiconductor market overall is projected to grow just 12% next year.
We are seeing this type of binary divergence in tech firms like Dell and Oracle.
Many of these legacy tech companies are attempting to wean themselves from a legacy business that is expanding in the low single digits.
From a technical perspective, any dip to the $200 level will be a strong buy for AVGO.
I believe they continue to pivot into the AI infrastructure build while partnering with companies that can aid this type of success.
They will continue to invest in products related to AI, mainly chips, which will be installed in a wide array of businesses like data centers, consumer electronics like smartphones and laptops, and electric vehicles.
AVGO has been a hot company for quite a while, and even though not quite an Nvidia, I do believe AVGO stock is a solid backup option for tech investors looking for some diversification.
It isn’t a surprise that the Department of Justice is going after Google (GOOGL) to divest its Chrome browser following a ruling in August that the company holds a monopoly in the search market.
I don’t believe this will tank the cash cow business of Google Search, and let’s not forget the most likely outcome is that Chrome is retained as a division of Google.
At worst, if it does get divested, the appeal process takes many years.
Although I do believe it will become harder for Google Search to track and monitor user behavior without Google Chrome, this is by no means a deal breaker.
Plenty of traffic comes from completely different operating systems like Apple (AAPL) iOS that don’t employ the Chrome browser.
In fact, spinning out its browser would result in a massive windfall because the current setup hides the aggregate value and synergies within a larger corporation.
Once Google Chrome is spun out, animal spirits could take hold, and the value could skyrocket.
Google will naturally profit from this as well.
Chrome, which Google launched in 2008, provides the search giant with data it then uses for targeting ads. The DOJ said in a filing that forcing the company to get rid of Chrome would create a more equal playing field for search.
The DOJ said that Google will be prevented from entering into exclusionary agreements with third parties like Apple and Samsung. The department also said that Google be prohibited from giving its search service preference within its other products.
Search advertising accounted for $49.4 billion in revenue, representing three-quarters of total ad sales in the most recent period.
The DOJ’s request represents the agency’s most aggressive attempt to break up a tech company since its antitrust case against Microsoft, which reached a settlement in 2001.
In August, a federal judge ruled that Google holds a monopoly in the search market.
Also, the DOJ suggested limiting or prohibiting default agreements and “other revenue-sharing arrangements related to search and search-related products.”
The most likely outcome is that Google will be legally forced to do away with certain exclusive agreements, like its deal with Apple. I also don’t believe that Google will be forced to divest from the Android operating system, and the chances of that happening are almost zero.
Even without an exclusivity agreement, most Apple users use Google Chrome because it is still the most useful search engine.
Will that be the case in the future?
With AI changing business models left and right, it is hard to say, but in the interim, it is hard to believe that a lack of exclusivity agreement will cause any meaningful change to the bottom or top line in the next few years.
Breaking up parts of Google would result in a massive windfall for shareholders, strengthen the tech ecosystem, and make Google and its spinoff entities more competitive.
However, high-up executives are wary about voluntarily dumping revenue from the mothership because it hurts negotiating leverage when agreeing on future compensation, and that is what usually standalone corporate executives care about.
I believe spinning out some of these businesses, like Waymo, Google devices, Google Maps, and YouTube, would be great for America and give an opportunity for investors to jump into great tech companies before they skyrocket.
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Best Buy (BBY) tanking their earning results is indicative of where we are right now, not only as a society but also in the tech sector.
People just don’t have that extra dollar or 2 to fund that iPhone (AAPL) upgrade, and that is why Best Buy sales are so underwhelming.
It isn’t the end of the world, but we need the consumers to stay healthy for the short-term health of the tech sector.
Sure, it is true that a great deal of spend comes from enterprise sources, but that is not the entire economy.
The U.S. economy is held up by consumers, and that isn’t the case in many other economies like China or India.
Get ready for a lukewarm Christmas season, which should manifest itself in some pretty sweet deals for the individual.
At the aggregate level, it looks quite sluggish in the mid-term as electronic retailer Best Buy ponders about how to reverse the dimming outlook.
Best Buy cut its full-year sales forecast and missed revenue targets.
Best Buy expects full-year comparable sales to decline by between 2.5% and 3.5%, compared with its prior expectations of a 1.5% to 3% drop.
Granted, the holiday season is five days shorter than last, so some of the softness is a one-off.
Management did say shoppers are responding to big deals and sales events. Management said it expects the peak in sales during times like Black Friday and Cyber Monday to be higher but the valleys before and after those to be lower.
Best Buy is waiting for a wave of shoppers to replace old devices and upgrade to new, higher-tech ones after an approximately two-year sales slump in the consumer electronics category.
Management said they anticipate this year to be one that brings “increasing industry stabilization.” They also mentioned specifically about Apple’s fresh collection of iPads, as well as artificial intelligence-enabled laptops from Microsoft, will drive sales.
Tariffs could put Best Buy’s sales at risk, too, if they result in higher costs for the company and for customers. President-elect Donald Trump said he would raise tariffs by an additional 10% on all Chinese goods and impose tariffs of 25% on imports from Mexico and Canada.
Artificial intelligence products are nowhere near the shelves of Best Buy, and nobody knows when they will debut.
A.I. continues to be strictly an enterprise build-out with a future use case, which doesn’t help companies like Best Buy and their bottom line.
Apple and its micro-improvements don’t move the needle enough for shoppers to get off the sidelines and splurge.
This type of transitory environment for consumer tech isn’t what investors like to hear.
I also mentioned earlier about the inflation effect of households redirecting funds to essentials like housing, insurance, and food.
Therefore, it is better for investors to stay out of the tech consumables and target the enterprise side of the equation.
I don’t believe the enterprise part of tech needs a reboot of growth is waning, and I am still executing bullish trades in stocks that are exposed to the A.I. story.
However, the times of the “tide lifts all boats” all long gone in the rearview mirror.
Today, I executed another bullish trade in Dell (DELL) on a monster dip of 12%. Weak guidance is another manifestation of stalling tech growth. I will exit this position before the year is over.
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At today’s Mad Hedge Biweekly Strategy Webinar, I received an excellent question: Why is the Vertical Call Debit Spread my favorite trading vehicle?
So let me ask you this: How would you like to play blackjack now that the dealer would bust 90% of the time? What if you played roulette with the assurance that the ball would land on black 90% of the time?
I bet you would be interested….very interested.
I only trade with Vertical Call Debit Spreads in my own personal account. While your broker may be recommend outright options trades to you because that’s where the volume and the commissions are, if he is smart enough, he is almost certainly executing Vertical Call Debit Spreads for his own account.
And let me tell you why.
1) A Vertical Call Debit Spread offers the most favorable risk/reward ratio of any financial instrument among the plethora out there.
2) A Vertical Call Debit Spread allows you to precisely define your risk. You can’t lose any more money that you put up. With naked short puts, for example, which most other newsletters often recommend all day long, your potential losses are unlimited
3) Vertical Call Debit Spreads allow a vast increase in profits compared to outright stocks, potentially 10X-100X. You can get a claim on $1 million worth of stock for literally only $10,000, not bad when you know the direction. Customers of mine who are nailing 1,000%-2,000% returns in a year, and I get a few every year, are executing very deep out-of-the-money Vertical Call Debit Spread LEAPS.
4) The liquidity for Vertical Call Debit Spreads is enormous for the most popular stocks, like Nvidia (NVDA) and Tesla (TSLA), with exercise values of the options more than the underlying stocks.
5) Vertical Call Debit Spreads allow you to specifically target a share price trading range (very deep in-the-money) that has the highest probability of taking place.
6) The day-to-day volatility of Vertical Call Debit Spread is very low, usually 8% or 9%. That’s because you are long on one option and short on another. This prevents traders from selling bottoms and buying tops, always fatal mistakes. When people ask me what I do for a living, I tell them I stop people from selling market bottoms and buying market tops.
7) When you have a seasoned war horse like me with 55 years of trading experience making your stock picks, Vertical Call Debit Spreads become a total no-brainer. This is why my Trade Alert service is up 68% this year, almost triple the S&P 500 (SPY).
8) Vertical Call Debit Spreads hit their maximum profit whether markets go up, sideways, or down small. It’s only the surprise out of the blue, down moves are large, triggered by black swans, that lose us money and those we stop out of immediately.
9) A Vertical Call Debit Spread benefits enormously from time decay. That is how they hit maximum profits when the underlying stock is unchanged. It gives you a cushion against mistakes and bad stock calls. That’s why I focus on the front-month expirations where time decay is accelerated.
10) Vertical Call Debit Spreads have a built-in short volatility element. If you buy a Vertical Call Debit Spread with a Volatility Index at $24, and it then drops to $14, you make a lot of money. Over the years, I have found that it is almost impossible to lose money with Vertical Call Debit Spreads when the Volatility Index is over $30.
11) OK, I thought of one more reason. Vertical Call Debit Spreads are much cheaper than outright options. That’s because you are buying one option and then receive the proceeds from selling short another option, which cuts the price by two-thirds. That lets you triple your size compared to an outright option. Triple the size, and you triple the profits.
Given all this, I think it’s time for all of you to undergo a refresher course on how to most efficiently play the market with Vertical Call Debit Spreads.
Most investors make the mistake of investing in positions that have only a 50/50 chance of success or less. They’d do better with a coin toss.
The most experienced hedge fund traders find positions that have a 90% chance of success and then leverage up on those trades. Stop out of the losers quickly, and you have an approach that will make you well into double digits, year in and year out, whether markets go up, down, or sideways.
For those readers looking to improve their trading results and create the unfair advantage they deserve, I have posted a training video on How to Execute a Vertical Bull Call Spread.
This is a matched pair of positions in the options market that will be profitable when the underlying security goes up, sideways, or down small in price over a limited period of time.
It is the perfect position to have on board during markets that have declining or low volatility, much like we have experienced in for most of the last several years and will almost certainly see again.
I have strapped on quite a few of these babies across many asset classes, and they are a major reason why I am up so much this year.
To understand this trade, I will use the example of Apple trade, which most people own and know well.
On October 8, 2018, I sent out a Trade Alert by text messages and email that said the following:
BUY the Apple (AAPL) November 2018 $180-$190 in-the-money vertical BULL CALL debit spread at $8.80 or best
At the time, Apple shares were trading at $216.17. To accomplish this, they had to execute the following trades:
Buy 11 November 2018 (AAPL) $180 calls at….…….…$38.00
Sell short 11 November 2018 (AAPL) $190 calls at…..$29.20
Net Cost:…………………….……….....……...........…….….....$8.80
A screenshot of my own trading platform is below:
This gets traders into the position at $8.80, which costs them $9,680 ($8.80 per option X 100 shares per option X 11 contracts).
The vertical part of the description of this trade refers to the fact that both options have the same underlying security (AAPL), the same expiration date (November 16, 2018), and only different strike prices ($180 and $190, or a “spread”).
“Bull” (as opposed to “Bear”) means you receive the maximum profit in a rising market as opposed to a falling one.
“Debit” refers to the fact that you have to pay money to obtain this position rather than receive a credit.
The maximum potential profit can be calculated as follows:
+$190.00 Upper strike price -$180.00 Lower strike price
+$10.00 Maximum Potential Profit at expiration
Another way of explaining this is that the call spread you bought for $8.80 is worth $10.00 at expiration on November 16, giving you a total return of 13.63% in 27 trading days. Not bad!
The great thing about these positions is that your risk is defined. You can’t lose any more than the $9,680 you put up.
If Apple goes bankrupt, we get a flash crash, or suffer another 9/11 type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like vertical bull call spreads so much.
As long as Apple traded at or above $190 on the November 16 expiration date, you will make a profit on this trade.
As it turns out, my take on Apple shares proved dead on, and the shares rose to $222.22, or a healthy $32 above my upper strike.
The total profit on the trade came to:
($10.00 expiration - $8.80 cost) = $1.20
($1.20 profit X 100 shares per contract X 11 contracts) = $1,320.
To summarize all of this, you buy low and sell high. Everyone talks about it, but very few actually do it.
Occasionally, Vertical Bull Call debit Spreads don’t work, and the wheels fall off. As hard as it may be to believe, I am not infallible.
So if I’m wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a LOT, you will lose money. On those rare cases when that happens (about 10% of the time), I’ll shoot out a Trade Alert to you with STOP-LOSS instructions before the damage gets out of control.
I start looking at a stop loss when the deficit hit 10% of the size of the position or 1% of the total capital in my trading account. It’s easier to dig yourself out of a small hole than a big one.
And why do I execute Vertical Call Debit Spreads rather than Vertical Call Debit Spreads like most professionals do? Because Vertical Call Debit Spreads are easier for beginners to understand.
To watch the video edition of How to Execute a Vertical Bull Call Spread, complete with more detailed instructions on how to execute the position with your own online platform, please click here.
Good luck and good trading.
Vertical Bull Call Spreads Are the Way to Go in a flat to Rising Market
One of the reasons I believe this AI narrative will continue in the short-term is because cash cow tech firms like Meta (META) are pouring cash into AI infrastructure.
There is a lot we still don’t know about the direction of AI – the future is uncertain.
However, the one takeaway is that the AI infrastructure spend continues right now unabated, and we know that because Meta raised capital expenditures guidance for the 2024 fiscal year to between $38 billion and $40 billion, up from $37 billion to $40 billion previously.
They also expect capital expenditures to continue to grow significantly in 2025 due to an acceleration in infrastructure expenses.
Founder Mark Zuckerberg is desperate to not miss out on the “next big thing.” Remember, he whiffed big time at the smartphone, and he will never stop blaming himself for it. Apple has been a constant pain in the ass for his company because Meta still needs to go through Apple management and their app store to get their platform to users. They also changed the privacy settings, which were directly targeted at Meta.
Zuckerberg is also on record for saying that Meta would be twice as profitable if he could remove the costs of going through Apple.
Meta is still growing at 19% year over year, and that is quite impressive for a company this big.
The company reported 3.29 billion daily active people for the third quarter. That was up 5% year over year, and we can expect that percentage point to stick in the single digits.
Zuckerberg has been pointing to the company’s massive investments in artificial intelligence, which includes spending billions of dollars on Nvidia’s popular graphics processing units, as helping improve the company’s core online ad business in the aftermath of Apple’s 2021 iOS privacy update. The company has been improving upon and building more data centers to help provide the technology infrastructure needed for its AI strategy.
The company’s Reality Labs hardware unit posted an operating loss of $4.4 billion in the third quarter, which was less than analysts’ expectations of $4.68 billion.
Facebook Reality Labs is a research and business unit of Meta Platform that develops virtual reality (VR) and augmented reality (AR) products and technologies.
I do believe the jury is still out on the Facebook Google story. It is not a given that consumers will just adopt some ridiculously looking VR headset and venture off into daily life with that thing on. The over $4 billion of losses points to a challenging time to turn the VR business into something legitimate.
Apple has also had some issues with its VR headset as well.
In the short term, Meta is still highly profitable, and they roll these profits into trying out new businesses.
It only takes one new killer business for the stock to explode again, much like what happened when Zuckerberg doubled down in social media through the acquisition of Instagram.
Investors need to be patient and keep a hold of META stock as it grinds higher.
In the event the stock does experience a mild sell-off, I am certain dip buyers will come to the rescue because of the nature of the stock being high quality.
Although digital ads aren’t the growth engine it once was, they are giving time and money for META to find the next path forward. 99% of tech companies don’t have that luxury.
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Warren Buffett shedding millions of Apple (AAPL) stock, and the stock to subsequently avoid a meaningful dip is an inherent victory for Apple and big tech.
In almost any other stock, the price action would be sharp and damaging to the underlying stock, and Apple had a wave of buyers to pick up all the shares Buffett unloaded.
Buffett and his flagship investment company, Berkshire Hathaway (BRK-B), did really well in their Apple investment, where they loaded the boat with Apple stock.
Taking profits is never a bad thing, but I do believe Buffett had a feeling that Apple started getting too ahead of itself.
The company still has not done enough since creating the iPhone, and Buffett certainly was not impressed by the latest “upgrade” to the flagship device.
Apple shares are flat over the past 4 months after a sharp 22% rise in the summer starting from May.
I believe that the sideways price corrections will start to drag out even longer for many big tech companies as their growth engines start to fizzle out.
AI is also due another sideways correction after gangbuster returns.
It is becoming quite evident that “corrections” in big tech aren’t that damaging, and as long as investors can ride out the sideways move, the next move after that is usually to the upper right-hand corner.
Buffett has sent over 515 million shares of Apple to the chopping block since October 2023
Amid Warren Buffett's selling spree, top-holding Apple has been meaningfully reduced. In a three-quarter period from Oct. 1, 2023 through June 30, 2024, Berkshire's stake in Apple declined by more than 515 million shares, or 56%, to precisely 400 million shares.
During Berkshire Hathaway's annual shareholder meeting in early May, he opined that the corporate tax rate would likely climb in the future. With his company sitting on a mammoth unrealized gain in Apple, he suggested that locking in some gains now at a lower tax rate would, eventually, be viewed favorably by Berkshire Hathaway's shareholders.
Apple has done well to engineer the stock higher with its heavy involvement in shareholder returns, particularly buybacks.
Since initiating share repurchases in 2013, Apple has bought back $700.6 billion worth of its common stock and reduced its outstanding share count by 42.2%. This has had a decisively positive impact on the company's earnings per share (EPS).
Sales of its physical devices, including iPhone, iPad, and Mac, have been weak for much of the last two years. If a growth company's sales stall, it can expose its valuation premium.
The Oracle of Omaha's broad-based selling also alludes to the lack of value on Wall Street. This is one of the priciest stock markets in history, and Berkshire's record cash pile of $276.9 billion plainly suggests that Buffett and his team are struggling to find attractive deals.
Big tech is increasingly finding it hard to move the needle.
Anti-trust has also been a thorn in their sides lately as the Fed close it on them from a litigious angle.
In the short term, even without its next growth engine, I do believe Apple and certain big tech companies have the opportunity to experience a winter rally into yearend.
First, we need to get through the election, but the US economy is still running hot at 3%, and tech will do like it usually does, harvest the majority of the gains from the overall economic expansion in the United States.
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