Mad Hedge Technology Letter
December 9, 2022
Fiat Lux
Featured Trade:
(THE GOOD AND BAD ABOUT TECH)
(MSFT), (ATVI)
Posts
It was so easy during the 10-year technology bull market after the Great Finance Crisis (GFC).
Investors just needed to buy and go take a nap.
Not anymore.
Around November 2021 was when the tech momentum came to a screeching halt with most tech shares reversing on a dime.
Many tech stocks sit today far from their peak.
Now more than ever, active stock management will be critical to overperforming in a world where index funds are effectively dead.
Yet there is still a large risk that we need to calculate in the tech world and that is regulation.
Just in the last week or two, two of techs biggest stalwarts have been hit with turbulence from the powerful regulators.
In a world where more government from every Western country has means higher costs and more bureaucracy, even more government rules appear to be coming our way.
Microsoft, once synonymous with large antitrust cases, is being scrutinized for its execution of monopoly powers.
The US Federal Trade Commission (FTC) announced it will sue to block Microsoft’s $69 billion takeover of Activision, the video game publisher responsible for titles such as Call of Duty, World of Warcraft, Overwatch, and the mobile game Candy Crush.
If approved, the deal would enable Microsoft to corner the video game market and force all game titles on its in-house console called Xbox.
It’s likely that this is just the beginning of anti-trust issue for many strong American tech companies.
The Democrats retook the Senate, meaning that American consumers are satisfied with the status quo, actively voted for high inflationary policies and want more government in American lives.
The populace’s stamp of approval with accelerated price rises for many of our cherished tech software and services means more profits for tech companies.
Luckily for these tech companies, software such as Microsoft Office or Google’s Gmail is monopoly, and any cost explosion will be passed along to the end consumer.
Can you imagine a world where an annual Microsoft Office subscription is $400 per year?
Of course this won’t happen in one day, but I can ensure everyone that Silicon Valley giants with monopolistic products won’t reduce profit just because they feel like it.
Microsoft’s focus on enterprise software has largely kept it out of the US regulatory tussling in recent years over content moderation and predatory pricing discussions that embroil the other Big Tech companies.
Microsoft was thus able slyly close deal, including the acquisitions of:
- video-conferencing software Skype for $8.5 billion in 2011,
- multiplayer gaming company Minecraft for $2.5 billion in 2014,
- social network LinkedIn for $26 million in 2016,
- software platform GitHub for $7.5 billion in 2018, and
- the speech recognition company Nuance for $26 billion in 2021.
I do believe this is the beginning of something more insidious, where many tech companies are blocked from vanilla takeovers under the banner of anti-trust or anti-competitiveness.
To some extent, these preventative moves from the US government will stymy US tech companies from expanding through mergers and acquisition.
Therefore, the backup plan is to charge everyone more for the current products they sell now.
What’s worse, the next generation visionary technology has yet to surface that changes the rules of tech and the only hope – metaverse – appears to be a bust.
We have nothing to hang our hat on yet.
Ultimately, we are gearing up for an optimistic 2023 in the technology sector, the government won’t be able to stop revenue growth, but they will be able to stop explosive revenue growth.
The expectations of lower rates next year will finally breathe new life into technology stocks, while the government regulation and antitrust concerns will put a cap on accelerating growth.
After a terrible year in 2022, I will be more than happy to take moderate success over the demolition of 2022.
Mad Hedge Technology Letter
January 19, 2022
Fiat Lux
Featured Trade:
(MICROSOFT TAKES A GIANT LEAP FORWARD)
(MSFT), (ATVI), (PINS), (GOOGL), (AAPL), (AMZN)
CEO of Microsoft (MSFT), Satya Nadella, and his management team have made an aggressive step towards making inroads to the metaverse.
Gaming will be the launching pad to the metaverse that will first start as digital communities and later evolve into interoperable and integrated digital worlds.
The rest of the metaverse will germinate via these gaming communities and Microsoft knows that which is why they purchased Activision (ATVI) in cash for $68 billion and change.
The price was 3X higher than what they paid for LinkedIn but equally as strategic as many tech behemoths look forward to the next “big thing.”
The deal will mean MSFT will be one of the biggest gaming companies in the world just nudging out China’s Tencent and Japan’s Sony.
In the U.S., they will be by far the biggest gaming company and Nadella has made it a point of emphasis to navigate the gaming world by tapping M&A.
Remember, it was Nadella who built the MSFT cloud from scratch and Microsoft possessing its own stand-alone cloud asset dovetails nicely with their deep dive into gaming.
There are intrinsic synergies resulting from owning both.
The lack of native cloud infrastructure was a critical reason why ATVI gave up, as Chief Executive Officer Bobby Kotick said in an interview, “You look at companies like Facebook and Google and Amazon and Apple, and especially companies like Tencent — they're enormous and we realized that we needed a partner in order to be able to realize the dreams and aspirations we have,” he said.
This was the best Kotick could have wished for and I’ve mentioned this overarching trend of the best Silicon Valley companies getting stronger and now it’s even more pronounced as we are on the verge of exiting this pandemic this year.
In a higher interest rate environment, cash hoarders like Microsoft, Apple (AAPL), and Amazon (AMZN) simply have more ammunition than these smaller outfits who get penalized because of a harder route to access cheap capital making future cash flows costlier.
Now many of these smaller companies are realizing that they need to stand on their own two feet and that’s a scary thought for many CEOs who have been accustomed to tapping the capital markets to paper over the cracks.
What’s good about ATVI?
Activision owns mobile-gaming studio King, maker of Candy Crush, one of the most popular mobile games of all time.
Microsoft has almost zero presence in mobile gaming.
Nadella wants his gaming empire to facilitate direct payment like Apple’s App Store.
That’s effectively the holy grail of today’s gaming.
Microsoft has been at war with Apple and Google, over the fees the app stores charge for games.
It’s no surprise that Microsoft wants complete control over its ability to distribute games and content.
The deal also allows Microsoft an access point to secure an influential pool of gamers creating their own gaming content and worlds.
After adding Minecraft, LinkedIn, and GitHub, Nadella has been on the hunt for a game-changing asset that will drive the bottom line of MSFT via a large community of creators.
He failed to land social video service TikTok, while negotiations with Pinterest (PINS) and Discord were rebuffed.
ATVI is really a feather in the cap for Nadella, who won’t stop there and knows it’s just one battle of a greater war for tech supremacy.
These high-quality assets don’t get cheaper over time either.
Simply put, Microsoft loves subscription businesses, and gaming is among the best of them, and they are the stickiest around with recurring revenue that makes predicting future cash flows that much easier.
The ATVI pickup will raise the price of buying gaming assets across the board as I foresee a rush into these types of assets where not only can a company purchase the content, licenses, and gaming platform, but they can also add top-notch gaming developers which are equally as important as Microsoft tries to outmuscle Apple and Google.
This move is highly bullish for MSFT, so much so, that anti-trust regulators might cast a suspicious eye on this deal.
Global Market Comments
June 23, 2020
Fiat Lux
Featured Trade:
(HERE ARE THE FOUR BEST PANDEMIC-INSPIRED TECHNOLOGY TRENDS),
(AMZN), (CHWY), (EBAY), NFLX), (SPOT), (TMUS), (ATVI), (V), (PYPL), (AAPL), (MA), (TDOC), (ISRG), (TMDI)
By now, we have all figured out that the pandemic has irrevocably changed the course of technology investment. Some sectors are enjoying incredible windfalls, while others are getting wiped out.
The digitization of the economy has just received a turbocharger. It has become a stock pickers market en extemus.
The good news is that we are still on the ground floor of trends that have a decade to run, like working from home, more online food purchases, and a rise in touchless payments. This means there's a huge upside for investors willing to make big bets on what’s expected to become some of the most important technologies in the years ahead.
Covid-19 is a wake-up call to accelerate trends that have been around for years and are now greatly speeding up. The pandemic seems to have triggered a new survival instinct: innovate fast or die. Let me list some of the frontrunners.
1. E-commerce
E-commerce is the No. 1 shelter-in-place beneficiary by miles, as a combination of stay-at-home orders, reduced spending on dining, and government stimulus have sent Americans in search of other ways to spend their money. Even though Covid-19 restrictions are now being eased, the e-commerce industry should still see about 25% growth across all of 2020.
The estimated $60 billion spent by consumers from their stimulus checks has also been a tailwind. While the world is now re-opening, we expect these buckets of available dollars to remain e-commerce tailwinds for the foreseeable future as we expect adjusted retail and travel spend to decline an aggregate of 18% in and for as much as half of all small retail stores to potentially close this year.
When Amazon shares were at $1,000, I wrote a report calculating that its breakup value was at least $3,000 a share. It looks like Amazon may hit that target before yearend….without the breakup.
Want to know the winners? Try Amazon (AMZN), Chewy (CHWY), and eBay (EBAY).
2. Digital Entertainment
The Covid-19 pandemic has also left more Americans in search of digital, at-home entertainment, a trend that’s delivered a huge push for companies like Activision Blizzard that develop online games. New users, time spend gaming and in-game purchases are only accelerating and spell even more lasting benefit for game developers.
Content names like video streaming site Netflix (NFLX), as well as bandwidth and connectivity companies including Comcast (CMCSA) and T-Mobile (TMUS), are names to focus on.
This increased use of high bandwidth applications is likely to continue post-COVID-19 and has the impact of similarly increasing the demand for bandwidth and connectivity. This increases the value of upstream assets in the infrastructure sectors like fiber-based wireline broadband networks and nascent 5G build-outs.
Names to play the space: Netflix (NFLX), Spotify (SPOT), T-Mobile (TMUS), Activision Blizzard (ATVI).
3. Touchless payments
Another trend the stock market still underappreciated is a generational surge in contactless payments, which has recently seen a jump higher amid Covid-19 fears and efforts to minimize physical contact. Companies like Visa (V), Mastercard (MA), and PayPal (PYPL), already integral to the payments world, should be major beneficiaries in the years ahead.
The market assumes that COVID-19 related adoption of digital payments is a near-term benefit for payment service providers, offsetting some of the consumer spending headwinds. However, digitization of payments is part of a multi-year secular growth driver, with COVID-19 as just the latest accelerator.
Names to play the space: Visa (V), PayPal (PYPL), Apple (AAPL), and Mastercard (MA).
4. Telemedicine
Healthcare is one of the most inefficient industries left in the United States. I call it a 19th century industry operating with 21st century technology. While progress has been made, those massive stacks of paper records are finally disappearing, there still is a long way to go.
These days, even doctors don’t want to see patients in person, as they may contract the Coronavirus. Far better to see them online, which could address 90% of most patients. Teledoc (TDOC) does exactly that (click here for my full report).
So does Intuitive Surgical (ISRG), maker of DaVinci Surgical Systems, which enables remote operations for a whole host of maladies. Titan Medical (TMDI) is another name to look at here.
Names to play the space: (TDOC), (ISRG), (TMDI).
Mad Hedge Technology Letter
March 4, 2020
Fiat Lux
Featured Trade:
(THE BEST TECH STOCKS TO BUY AT THE BOTTOM)
(NFLX), (ZM), (PTON), (AMZN), (OKTA), (WORK), (ATVI), (EA), (TTWO)
Tech stocks that are begging to be picked up on the back of the coronavirus pandemic are Netflix (NFLX), Zoom Video Communications (ZM), workplace collaboration service Slack Technologies (WORK), and Peloton Interactive (PTON), the spin bike company.
Their short-term outperformance indicates that these stocks work well during mass pandemics shelving most outdoor activity and commerce.
The basket of 3 stocks has easily beat the S&P 500 since the coronavirus emerged as a threat in mid-January.
Home sitting doesn’t generate a net output of business activity unless that job is digital.
The majority of workers still commute in a physical car only to sit in an office, restaurant, or some other type of self-contained space.
That is the underlying problem that has no solution, and any rate cut by the Fed cannot ultimately solve consumers holed up in their house.
If the companies that could opt to go pure digital do take up the option, the number of remote workers would rise and digital products would be the ultimate beneficiary of this trend.
Companies that promote remote working such as Slack (WORK) and Google Hangouts are in pole position to reap the rewards.
These services include video conferencing software, logistical services, administrative services, network security services, ecommerce and any service that aids in generating digital content like Adobe and its umbrella of assets.
The trend was already transforming American culture, but the virus vigorously pulls forward a trend that was already in overdrive.
Enabling information workers to produce outside the traditional office environment is one of the lynchpins of the Silicon Valley model.
Companies will ultimately realize that spending big bucks on business travel to meet face to face for 30 minutes is probably not an optimal allocation of resources.
Business travel is getting cut with a cleaver such as Amazon.com (AMZN) who are forcing employees to avoid all nonessential travel for now, including within the U.S. Much of that travel could be replaced by video calls.
Other companies will get in on the action by directing their employees to work from home in the coming weeks.
Coronavirus mania has reached the U.S. shores with consumers stocking up on all the essentials at the local Costco.
If this gets worse, there is no solution unless a viable medical solution starts improving the health crisis.
There are still only 7 known fatalities from the coronavirus, all in the state of Washington, and limiting that number is critical to the health of the tech market.
Another company is Okta (OKTA), a leader in authentication security cloud software.
The company’s offering allows employees to use corporate applications on-site and remotely and protecting their access to their digital services is just as important as the work itself.
As consumer spurn movie theaters, concerts, and gyms, the entertainment space will give way to digital entertainment that includes Netflix (NFLX) and Roku (ROKU).
Roku is a great place to hide out in the world where Covid-19 meets daily consumers in the U.S. in a more meaningful way during 2020.
Netflix is a company that has defied gravity this year by bull-rushing its way through the competition and proving there is space for everyone.
The increase in incremental demand for digital content will only help Netflix claim a bigger part of the pie.
We can also lump the videogame industry into this cohort such as Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO).
They have faced serious headwinds from gaming phenomenon Fortnite, but prolonged home sitting will even boost their shares.
The spine of digital services will receive a boost as well from the usual cast of characters such as Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), and Facebook (FB).
As investors wait for the climax of the coronavirus and the Central Bank has indicated that they are open to more accommodative policy, we could be ripe for more volatility.
Chinese coronavirus cases have started to taper off and if the rest of the world trends in a similar fashion, this virus scare could be in the history books in 2-3 months.
However, the trajectory of the virus is still a massive unknown in the U.S. and winning the health battle is the only panacea to this dilemma.
Mad Hedge Technology Letter
March 19, 2019
Fiat Lux
Featured Trade:
(GOOGLE’S AGGRESSIVE MOVE INTO GAMING),
(GOOGL), (AAPL), (FB), (NFLX), (MSFT) (EA), (TTWO), (ATVI)
The saturation of tech is upon us.
That is the takeaway from Google’s (GOOGL) hard pivot into gaming.
The goal of their new gaming service is to become the Netflix (NFLX) of gaming allowing gamers to skip purchasing third-party consoles and playing games directly from an Android-based Google device.
Middlemen in the broad economy are getting killed and this is the beginning.
What we are really seeing is a last-ditch effort to protect gaming consoles - these devices will become extinct in less than 20 years boding ill for companies such as Sony and Nintendo
The cloud is still all the rage and companies such as Microsoft (MSFT), Alphabet (GOOGL), and Apple (AAPL) have the natural infrastructure in place to offer cloud-based gaming solutions.
Phenomenon such as internet game Fortnite have shown that consoles are outdated and relying on the cloud as a fulcrum to extract gaming revenue by way of add-ons and in-game enhancements will be the way forward
Another key takeaway from this development is that passive investment is dead, even more so in tech, where these big tech companies are starting to bleed over into each other's territory.
This dispersion will create opportunity and pockets of weakness.
I blame this on a lack of innovation with companies still trying to extract as much as they can from the current smartphone-based status quo which has pretty much run its course.
Technology is itching for something revolutionary and we still have no idea what that new idea or device will be.
The rollout of 5G is promising and companies will need some time to adapt to this super-fast connection speed.
In either case, I can tell you the revolution won’t include foldable smartphones.
In 2018, the gaming industry flourished on accelerating momentum by registering over $136 billion in sales, and the revenue growth rate is already about 15% and increasing.
Naturally, companies such as Amazon and Google want a piece of this action and are hellbent on making inroads in the gaming environment such as Amazon's ownership of Twitch, which is a game streaming service where viewers can watch live tournament-style competitions proving extremely popular with Generation Z.
I applaud this move by Google because they already have proved they can execute on certain mature assets such as YouTube which has become the Netflix replacement of 2019.
Doubling down in the gaming sector would be a bonus as they search a second accelerating revenue driver that will dovetail nicely with the overperformance in YouTube this year.
It’s even possible that YouTube could be modified to support live stream gaming, certainly various synergistic dynamics are at play here.
Even if they fail - it's worth the risk.
Revenue extraction will be painful for certain companies like Facebook (FB) in this new environment, who has seen a horde of top executives abort after the company drastically changed directions, believing the company is on a suicide mission to fines and more regulatory penalties.
I've mentioned in the past that Facebook no longer commands the same type of employee brand recognition they once cultivated.
Facebook will find a tougher time to find the right people they need to execute their private chat plan, by linking the likes of WhatsApp, Instagram, and Facebook Messenger.
This is a high-risk high-reward proposition that could end up with Facebook's co-founder Mark Zuckerberg in tears if regulators give him the cold shoulder, and that is why many executives who are risk-adverse want to cash in now because they sink with the Titanic.
Not only are gaming assets becoming saturated, but the general online streaming environment is attracting a tsunami of supply all at one time.
Online content is already veering into the same type of pricing structures that cable offered traditional customers.
Investors will have to ask themselves, how much will the average consumer spend in content-based entertainment per month?
My guess is not more than $100 per month.
The saturation will cause tech companies to become even more draconian.
Be prepared for some more epic in-fighting until a new gateway of internet monetization opens up.
There has never been a better time to be a tactical and active investor in tech.
The Fang trade has splintered off with each company facing unpredictable futures.
Unearthing value will become more difficult because these traditional bellwether tech stocks have decoupled and aren't going straight up anymore.
Those zigs and zags will still be buttressed by a secular tailwind of the migration to digital, but there are certain winners and losers that will result of this.
Apple announcing a new streaming product is proof that these Silicon Valley tech firms are desperate for new profit drivers as the woodchips that fuel the fire start to run noticeably short on supply.
At the bare minimum, this looks disastrous for the traditional gaming companies of Electronic Arts (EA), Take-Two Interactive (TTWO), and Activision (ATVI) whose shares have been effectively shelved due to the Fortnite revolution.
EA has fought back with their own Fortnite lookalike called Apex Legends which showed a Fortnite-like trajectory sucking in 10 million players in the first 72 hours.
The stock exploded 16%, signaling this is the new way forward for gaming companies.
As a whole, these traditional gaming studios simply don’t have the firepower to compete with the big boys, let alone possess a strong cloud infrastructure.
