(AMZN) Archives

Go Straight To The Top With The Cloud

Dealing with the Cloud works, and for every relevant tech company, this division serves as the pipeline to the CEO position.

If this isn’t the case for a tech company, then there’s something egregiously wrong with them!

Take Andy Jassy, the mastermind behind Amazon’s (AMZN) lucrative cloud computing division and the man who succeeded company founder Jeff Bezos.

He was rewarded this important position based on his performance in the cloud and faced the daunting proposition of following Bezos as CEO.

Bezos incorporated Amazon almost 30 years ago.

Jassy developed a highly profitable and market-leading business, Amazon Web Services, that runs data centers serving a wide range of corporate computing needs.

Cloud 101

If you've been living under a rock the past few years, the cloud phenomenon hasn't passed you by and you still have time to cash in.

You want to hitch your wagon to cloud-based investments in any way, shape, or form.

Amazon leads the cloud industry it created.

It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.

Amazon relies on AWS to underpin the rest of its businesses and that is why AWS contributes most of Amazon's total operating income.

Total revenue for just the AWS division would operate as a healthy stand-alone tech company if need be.

The future is about the cloud.

These days, the average investor probably hears about the cloud a dozen times a day.

If you work in Silicon Valley, you can quadruple that figure.

So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.

Think of this as a cloud primer.

It's important to understand the cloud, both its strengths and limitations.

Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest-growing companies in the world.

Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that is where I come in.

Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.

They are built using virtualization technology, which means that storage space spans many different servers and multiple locations. If this sounds crazy, remember that the original Department of Defense packet-switching design was intended to make the system atomic bomb-proof.

As a user, you can access any single server at any one time anywhere in the world. These servers are owned, maintained, and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.

The most important features of cloud storage are:

1) It is a service provided by an external provider.

2) All data is stored outside your computer residing inside an in-house network.

3) A simple Internet connection will allow you to access your data at any time from anywhere.

4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.

Once you start using the cloud to store a company's data, the benefits are many.

No Maintenance

Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.

However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.

Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.

Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing IT staff of prima donnas.

Greater Flexibility

Today's employees want to have a better work/life balance and this goal can be best achieved by letting them work remotely which effectively happened because of the public health situation. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.

How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?

Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees.

With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.

It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.

Better Collaboration and Communication

In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.

For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.

These products, which all offer free entry-level versions, allow users to access the latest versions of any document so they can stay on top of real-time changes which can help businesses to better manage workflow, regardless of geographical location.

Data Protection

Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.

And we haven’t talked about the ransomware attacks by Eastern Europeans on energy company Colonial Pipeline and meat producer JBS Foods.

The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.

It's best to move data to the cloud, to avoid such disruptions because there your data will be stored in multiple locations.

This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.

Lower Overhead

The cloud can save businesses a lot of money.

By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.

Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.

The cloud is where you want to be.

cloud

July 13, 2022

Tech Letter

Mad Hedge Technology Letter
July 13, 2022
Fiat Lux

Featured Trade:

(HOT INFLATION NUMBER BODES POORLY FOR TECH STOCKS)
(LYFT), (UBER), (AMZN), (SHOP), (GOOGL), (SNAP), (META), (TWTR), (MELI), (EXPE), (TRIP)

Hot Inflation Number Bodes Poorly For Tech Stocks

Tech Letter

Fed swaps now fully price in 150 basis points of hikes over the next two meetings after awful inflation numbers came in showing inflation heading in the wrong direction.

The 9.1% inflation print was an acceleration of the 8.6% which was what we got last time.

I don’t want to beat a dead horse, but inflation accelerating and beating the expectations of 8.8%, is paramount to the trajectory of tech shares.

The awful number also underscores the magnitude of policy mistakes that the U.S. Fed Central Bank has overseen.

This is the only thing that matters because macro liquidity drives the trajectory of equities in the short term.

These clowns aren’t serious about tackling inflation, as I said a few times already and this proves it!

Itty bitty rate rises won’t stamp out 9.1% inflation and in fact, encourages it.

The Fed would need to raise the Fed Funds rate by 7.35% to 9.1% immediately from the current 1.75% for the real inflation rate to be non-inflationary.

According to the official Fed website, the Fed targets 2% inflation because they call this level “healthy.”

By their own measure, to achieve this 2% inflation, they would still need to raise rates by 5.35% immediately, but they absolutely won’t because Powell simply has no interest in doing his job, period.

These core expenses skyrocketing is why I keep and kept mentioning that Americans have less money to splurge on tech gadgets and software and again, this inflation report validates my thesis.

Think about pitiful tech stocks that didn’t work in bull markets like ride chauffeurs Lyft (LYFT) and Uber (UBER), I fully expect these companies to perform terribly over the next 6 months amid a rising rate backdrop.

Not only are they growth tech, but their business is directly tied to energy prices.

They are the poster boys for the pain tech companies will feel from hyperinflation.

The outlook is quite poor for technology in the short term, and we are still waiting to form a bottom. It will come back but we need a capitulation.

The accelerated rate of inflation means that we push back the big recovery in tech stocks.

Ecommerce stocks will suffer like Amazon (AMZN), Shopify (SHOP), and MercadoLibre (MELI) because of the decline in discretional spending for the consumer.

Digital ad giants like Google (GOOGL), Snap (SNAP), Meta (META), and Twitter (TWTR) will need to reckon with smaller ad budgets from 3^rd party ad purchasers as companies cut back on marketing spend.

Don’t need to increase marketing spend when people have no money to spend on products.

Travel tech stocks like Expedia (EXPE) and Tripadvisor (TRIP) can expect summer to mark peak travel as Americans get more concerned about food and oil budgets after the summer of travel revenge from the arbitrary lockdowns.

It also means there will be a meaningful next leg down for tech stocks as many CFOs are now furiously crunching the new revenue and margin downgrades to reflect this heightened risk.

The new re-rating isn’t reflected yet in tech shares.

It’s already been a few months on the trot where many analysts say this is the top, they have been inaccurate every time.

Even if it is the top, inflation will stay higher for longer and stagflation is the consensus for 2023.

The clowns at the Fed not doing their job means that economic cycles will be shorter and a great deal more volatile because the smoothing effect of moderated inflation is now stripped out of calculations. This effectively means a contracted boom-bust trajectory for tech stocks which is unequivocally what we are seeing in market behavior.

July 5, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 5, 2022
Fiat Lux

Featured Trade:

(AN AAA-RATED STOCK POISED TO DELIVER MARKET-BEATING RETURNS)
(JNJ), (AAPL), (GOOGL), (AMZN), (MSFT), (TSLA), (META), (BRK.A)

An AAA-Rated Stock Poised to Deliver Market-Beating Returns

Biotech Letter

More than six months after what appeared to be a never-ending assault on the biotechnology and healthcare industries, the sector seems to be slowly reviving.

While it is still too early to declare the pullback over, there are a few companies that provide a ray of hope for investors.

In the US, only four stocks have recorded a market capitalization of $1 trillion or higher: Apple (APPL), Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT). This year's market crash saw Tesla (TSLA) and Meta Platforms (META) departure from this elite group.

The market-wide selloff also made it more difficult for stocks to reach the $1 trillion mark. However, this does not necessarily preclude them from achieving this goal in the future.

Companies are rapidly expanding and equipped with the right tools and strategies to capitalize on growth opportunities, making them prime candidates to make the $1 trillion cut in a couple of years.

One of them is Johnson & Johnson (JNJ).

Almost everyone is familiar with JNJ's century-old brands, such as Band-Aids and Listerine. What many people probably do not realize is that the company's med-tech and pharmaceutical segments account for the vast majority of its total revenue.

In 2021, its pharmaceuticals segment alone comprised 55% of JNJ sales, while its medical devices unit contributed 29% to the company’s top line.

So far, the most promising drug in JNJ’s pharmaceutical segment is Tremfya. First-quarter sales for this psoriasis treatment jumped to a whopping 41% year over year to record an annualized $2.4 billion.

Meanwhile, JNJ's med-tech segment is poised for massive growth as a result of the strong demand for its electrophysiology products. These devices, used to keep hearts beating normally, have been identified as lucrative revenue streams and growth drivers in the long run.

The company has been working on spinning off its consumer segment into a separate publicly traded entity in the following months. This means that investors with JNJ stock will eventually end up owning shares of two different companies by 2023.

The decision to spin off its consumer health segment is part of the company's effort to shed a cyclical segment and become a health pure play focused on pharmaceuticals and medical devices.

Hence, now is an excellent time to buy JNJ shares.

While JNJ isn’t known as a high-growth stock, the company’s strategies have the potential to spur exponential growth and send shares soaring.

The next decade will be crucial for the company's success as it transforms. If the company executes its plans successfully, its current market capitalization of $467 billion could slowly but steadily increase to approximately $1 trillion.

J&J will be able to invest and concentrate its resources on segments with high sales and margins, which should increase the company's income and cash flows at a faster rate than at present.

Furthermore, JNJ's plan is expected to increase shareholder returns through higher dividends and share repurchases because of its growing cash flow. With these factors combined, JNJ's stock price will undoubtedly rise, as will its market cap.

On top of these, JNJ offers a 2.6% dividend yield. Admittedly, this isn’t remarkably high. However, investors can rely on its steady rise. Moreover, JNJ is a Dividend King. In fact, it recently raised its payout for the 60th year in a row.

If these aren’t enough to cement the company’s reputation as a solid investment, consider the fact that JNJ is one of the largest holdings in Warren Buffett’s (BRK.A) portfolio.

It’s also one of the only two publicly traded companies with the coveted AAA credit rating from S&P. For context, the US government only has an AA rating. Needless to say, this makes JNJ one of the safest—if not the safest—income stock to date.

Overall, JNJ has been diligent in getting all of its ducks in a row and is poised to provide market-beating returns to patient investors.

May 27, 2022

Tech Letter

Mad Hedge Technology Letter
May 27, 2022
Fiat Lux

Featured Trade:

(ECOMMERCE PLATEAUS)
(AMZN)

eCommerce Plateaus

Tech Letter

Amazon’s decision to look for subletters of 10 million square feet of warehouse space means they don’t believe ecommerce growth will migrate into the extra space they planned for.

This is a big deal because it takes a long time to acquire the extra footage to expand capacity.

It doesn’t happen in one day.

It’s almost a surrender of sorts that this short-term pandemic ecommerce bump had no legs.

It’s over like it almost never existed, sort of like the health crisis.

So why is this a problem?

Amazon’s ecommerce investors' main reason for investing in Amazon is to earn money through appreciating shares.

This only comes about if their businesses are growing and behind their cloud division called Amazon Web Services (AWS), ecommerce is the second most important.

This is why Amazon has seen such as epic selloff in the first half of the year.

I do believe the negativity has somewhat overshot which is why I executed a deep-in-the money bull call option spread on this stock.

It’s not the death of Amazon, hardly so, but it’s been really painful for shareholders.

It was just in 2020 when Amazon added warehouse space faster than it ultimately needed in response to the challenges of the pandemic, outpacing consumer sales and resulting in an extra $2 billion in costs in the first quarter.

However, given the extraordinary demand and uncertainty Amazon was seeing at the time, there’s not much else the company could have done.

This is not what management describes as “right sizing capacity” and in fact is an error in capacity expectations.

Companies don’t spend an extra $2 billion in capacity when they don’t need to.

It would cripple many small ecommerce companies.

Amazon’s online sales fell 3% for the quarter to $51 billion, as shoppers relied less on the company for critical purchases.

Amazon’s recent announcement of a “Buy with Prime” program, serving ecommerce sites other than Amazon.com, takes the company further down the path of using its fulfillment and delivery network to offer shipping as a service, generating additional revenue and potentially competing with UPS and FedEx.

It’s similar to what Amazon did with Amazon Web Services, using its online expertise and cloud infrastructure as a starting point for a business that generated $18.4 billion in revenue in the first quarter.

The company has spent the past few years creating its own last-mile delivery network, known as “AMZL,” leveraging a network of dedicated Amazon Delivery Service Partners and reducing its dependence on third-party delivery companies such as UPS and the U.S. Postal Service.

The 45% selloff in Amazon has been quite overdone bringing the PE ratio all the way down to around 50.

If energy prices and inflation can moderate somewhat in the back half of the year, AMZN would be the first candidate to extend this dead cat bounce into a real bounce back to $3,000 per share.

AMZN is one of the beneficiaries of lower inflation because of its high reliance on fuel to deliver products the last mile.

That cannot be substituted at all so the stock market is reflecting the short-term pain.

The energy having such a stronghold over the tech market is quite unprecedented and don’t expect AMZN to start their oil refiner business.

However, I do expect choppy trading as rising rates and lower purchasing power for Americans do a dirty job on the AMZN bottom line.

May 23, 2022

Tech Letter

Mad Hedge Technology Letter
May 23, 2022
Fiat Lux

Featured Trade:

(ONSHORING GETS CLOSER)
(AAPL), (AMZN)

Onshoring Gets Closer

Tech Letter

The end of globalization is accelerating as the iPhone company, Apple (AAPL), has indicated to close sources that they no longer wish to manufacture products in mainland China.

If many might remember, it was Apple CEO Tim Cook who often visited China for a victory lap while simultaneously keeping his mouth shut about the atrocities occurring in the Muslim region of China.

Not only that, zero covid policy in China has served as a political stage for something that appears much more insidious brewing in the Middle Kingdom.

Cook and many other multinational CEOs, selling out their own country, might have finally realized that doing business in totalitarian countries is a bad idea.

Starbucks even shut down in Russia.

There are network costs and brand damage that are hard to recover from.

Truth be told, Apple laughed all the way to the bank with this China arrangement, and their stock price is an indication the strategy worked like clockwork.

Well, it works until it doesn’t.

China was also a great place to live, until it’s not.

Also, China was a great place to manufacture cheap products, until it’s not.

That’s what happens in a country that presides over arbitrary laws which in fact means that the country has no laws.

Now Chinese residents are locked up with robot police dogs barking out orders to stay inside from the street.

What does this mean for Apple’s stock?

Short-term lower if interest rates continue to rise, but very positive long term.

Also, Apple’s equipment might not secure a proper “exit visa.” We also left our military equipment in Afghanistan too.

At least Tim Cook wasn’t locked inside an Apple factory in China like some American CEOs in the past.

At a product level, Apple phones will become more expensive because Apple won’t be able to ignore worker rights and pay them peanuts in producing these shiny gadgets.

Materials will also be harder to source in large quantities.

Remember, China has access to nickel and cobalt.

If they are able to produce in a poorer country like Cambodia, there are transitional costs along with slippage costs.

China’s Foxconn and Pegatron facilities will suffer the fate of many other trade war pawns and I believe this is the end of offshoring for America inc.

Here's another idea, get Foxconn to build an Apple factory in Phoenix and deliver work visas to the best Chinese workers.

Tell them they don’t even need to sleep on the factory floor and don’t need to work 14-hour shifts too. They would take the next plane to the desert.

Apple production partners like Foxconn have already established facilities in India to help produce iPhones for the domestic market there. A further expansion would see iPhones made in India and then exported for global sale.

However, is India sustainable as well? They banned wheat exports to the chagrin of the American government and even worse, they refused to ban Russian energy.

India’s behavior suggests they are working for themselves and not for Ukraine which can be perceived in many coastal American cities as undemocratic.

Either way, Apple’s stock is around 22% from its highs and that’s a victory when we consider stocks like Amazon (AMZN) are down around 45%.

Even if Apple’s stock sustains 30% losses at the time the US Fed starts to lower rates, possibly in 2023, then I would also consider that a resounding success.

Long term, manufacturing in America makes sense not only politically, but economically.

Automation is getting that good too which will soften the blow.

Apple does $365 billion in sales and the natural growth rates suggest it will break half a trillion in sales in 3 years.

However, if Apple wants to do $1 trillion of annual sales, they are going to have to produce the literal iPad on wheels, the Apple EV.

If Apple can pull off an Apple EV while maintaining the high level of quality they are known for, they are guaranteed to clock $1 trillion per year in sales no questions asked meaning the stock should go to $300 per share.

May 20, 2022

Diary, Newsletter, Summary

Global Market Comments
May 20, 2022
Fiat Lux

Featured Trade:

(MAY 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(C), (FXI), (BABA), (TSLA), (AAPL), (AMZN), (TGT), (FLR), (QQQ),
(FB), (ARKK), (TSLA), (WYNN), (UAL), (ALK), (DAL)

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