Mad Hedge Biotech & Healthcare Letter
April 6, 2021
Fiat Lux
FEATURED TRADE:
(HIGH-YIELD STOCK UP FOR GRABS)
(ABBV), (PFE), (BRK.B), (BLK)
Posts
Something curious is happening at the FDA, and it’s causing investors to be jittery. Drugs that are sure to gain approval keep encountering roadblocks.
What began as a handful of biotechnology stocks getting trampled is turning out to be a broader pullback caused by fears of a tougher and stricter regulatory environment for drug developers.
Following these changes, the SPDR S&P Biotech (XBI) slid by roughly 12% this month.
The idea that the somewhat predictable regulatory results in the past four or five years may no longer be as predictable obviously ramped up the perceived riskiness of this industry.
One bellwether of this change is AbbVie (ABBV), which submitted an application for the expanded use of rheumatoid arthritis Rinvoq in March. It recently announced that the regulatory board is extending the evaluation for three months.
While this isn’t a cause for alarm, it’s enough to unsettle some investors since Rinvoq is expected to replace AbbVie’s blockbuster drug Humira when the latter loses its patent exclusivity in 2023.
However, the reason behind FDA’s extension is likely because of the safety concerns found in a similar drug, Xeljanz, by Pfizer (PFE).
Considering the similarities of the two, it makes sense for the regulatory board to exercise more caution on AbbVie’s product.
The rise and fall of AbbVie has always centered on Humira, with this top-selling drug raking in $19.8 billion in sales in 2020 alone. That’s actually lower than its usual revenue a few years back.
Humira’s loss of exclusivity is projected to result in medium-term headwind to the company as more and more biosimilars pressure revenue.
However, AbbVie has been working on offsetting the estimated losses by expanding its other programs.
For instance, the revenue for AbbVie’s non-Humira immunology sector, led by Skyrizi and Rinvoq, is projected to double to reach $4.6 billion in 2021.
By 2025, AbbVie expects Rinvoq and Skyrizi sales to reach $15 billion annually.
Meanwhile, a considerable uptick is anticipated from its neuroscience division’s revenue, led by Vraylar, to generate $5.7 billion in 2021.
As for its hematologic oncology franchise, spearheaded by Imbruvica and Venclexta, this sector’s revenue is expected to increase in double digits to reach $7.5 billion this year as well.
On top of these, AbbVie has been busy looking for suitable acquisitions to diversify its revenue stream.
A notable deal it made was in 2015 with Pharmacyclics. This acquisition actually added the mega-blockbuster drug Imbruvica to AbbVie’s portfolio.
In May 2020, AbbVie completed its deal to purchase Allergan. This $63 billion merger is expected to boost the global distribution capacity of AbbVie and bolster its therapeutic sales channels.
By 2023, sales of the products acquired from Allergan’s pipeline are estimated to add at least $2 billion to AbbVie’s annual revenue.
All in all, these sectors are all well-positioned to substantially offset the fall of Humira’s revenue thanks to the rapid growth and aggressive indication expansion efforts of the company.
Nonetheless, the anxiety of the delayed FDA approval for Rinvoq’s expanded use is understandable.
After all, AbbVie expects this particular drug to contribute to doubling the 2021 sales of the franchise from $2.3 billion to $4.6 billion.
Moreover, this is a cornerstone in the company’s post-Humira era in less than two years.
However, the three-month delay will have a minimal impact on the 2021 revenues of the company and a negligible effect when we consider the long term.
Realistically, this would cost AbbVie roughly less than $1 billion in sales, which amounts to less than 2% of the total projected revenues of the company this year.
During times like these, it’s crucial to remember that the pharmaceutical industry is an extremely bumpy road.
There’s no such thing as a linear progression in this line of business, which is why it’s vital to choose companies with established track records and highly capable management teams.
If it helps ease any anxiety, then it might be useful to think that AbbVie is a favored stock by Warren Buffett’s Berkshire Hathaway (BRK.B).
The Oracle of Omaha currently holds 4.27 million shares of this company. Meanwhile, BlackRock (BLK) holds 2.41 million shares, while Ken Griffin’s Citadel Advisors has 786,000 shares.
AbbVie is a mature, larger-cap biopharmaceutical stock that’s selling at an affordable price these days.
Despite the revenue declines and plunges in earnings of countless businesses in 2020, AbbVie still managed to deliver strong operating and financial results—and the company still has a long way to go.
AbbVie is expected to deliver at least 4.8% in annual earnings growth over the course of the next five years—a highly conservative estimate considering that the company reported 21.9% growth in the past five years.
Moreover, AbbVie is safely positioned to deliver 6% long-term annual dividend growth.
AbbVie was able to generate 3.3% growth in its operational revenue in 2020, recording $45.804 billion in net revenues.
In the past weeks, I’ve seen AbbVie shares go down by roughly 6%. However, I think the fear here is exaggerated and the market might be overreacting to the uncertainty caused by stricter FDA guidelines.
Instead of letting the anxiety take control, I believe it’s best to heed the advice of Warren Buffett in this situation: “The market is a device for transferring money from the impatient to the patient.”
Therefore, I think patient investors should take a look at AbbVie stock today.
Mad Hedge Biotech & Healthcare Letter
February 18, 2021
Fiat Lux
FEATURED TRADE:
(WARREN BUFFETT’S BIOPHARMACEUTICAL BETS)
(MRK), (ABBV), (BMY), (PFE), (NKTR), (VZ), (CVX), (AAPL), (BRK.B)
Aside from the recent big moves involving Verizon Communications (VZ), Chevron (CVX), and Apple (AAPL), Warren Buffett has also been busy with biopharmaceutical stocks.
Just before 2020 ended, Berkshire Hathaway (BRK.B) made notable changes in its positions particularly in Merck (MRK), AbbVie (ABBV), Bristol-Myers Squibb (BMY), and Pfizer (PFE).
Berkshire boosted its investment in Merck by 28.1% to reach 28.7 million shares.
Meanwhile, its AbbVie holdings were increased by 20% to hit 25.5 million shares.
It also added 11.2% in its investments in Bristol, totaling to 33.3 million shares.
In contrast, the company cut 3.7 million shares from its Pfizer holdings.
In terms of growth potential, these biopharmaceutical companies hold the most promising prospects in the next decade.
Merck, hailed as a vaccine stalwart, is behind the blockbuster cancer treatment Keytruda.
For context, Keytruda generated $14.4 billion in sales in 2020 alone.
Despite fears over the expiring patent exclusivity of this drug, the company still trades at roughly 11.5 times earnings and is actually projected to achieve 11% long-term EPS growth rate.
Merck also continues to leverage Keytruda in the development of the next generation of treatments in its pipeline.
In fact, the company recently sealed a clinical collaboration with Nektar Therapeutics (NKTR) to assess the effectiveness of Keytruda when combined with Nektar’s own bempegaldesleukin in the treatment of squamous cell carcinoma.
Other than expanding its oncology sector, Merck has been developing its animal health business as well. So far, this particular segment has grown by 7% year over year, reaching $4.7 billion in 2020.
If things work out, then Merck could emerge as a huge competitor against Pfizer’s own animal healthcare spinoff, Zoetis (ZTS), in the future.
To date, Merck has at least 31 candidates in Phase 2 trials and 25 more undergoing Phase 3 studies.
Needless to say, these will be valuable in enriching the company’s lineup especially with the challenges that Keytruda will face in the next years.
As for AbbVie, this company trades at approximately 8.3 times the earnings estimated in the next 12 months. This is well below its five-year average of 10.4 times earnings.
However, the company is projected to show at least 13% EPS growth rate in the long term.
Despite the challenges of 2020, with the company going down 2.6%, the long-term prospects for AbbVie remain positive.
Although AbbVie broke through the dermatology market following its acquisition of Botox-maker Allergan in the past year, it still has to contend with a major problem: arthritis medication Humira.
Humira is not only AbbVie’s top-selling treatment but also the best selling drug in the world today.
In 2020 alone, this anti-inflammatory treatment raked in $19.8 billion in sales. However, AbbVie might soon lose this edge since its exclusive rights to Humira in the US will expire in 2023.
Amidst the anxiety over this issue though, AbbVie continues to defy expectations.
Last year, the company reported a 65.9% growth in its net revenue despite the overall slowdown caused by the pandemic.
As for 2021, AbbVie is anticipating an even better year thanks to its portfolio diversification efforts.
To date, the company’s lineup now spans neuroscience, immunology, eye care, women’s health, and of course, aesthetics.
Meanwhile, Bristol Myers has been pegged to achieve roughly 8% growth rate in the long term. Right now, the stock trade at 7.9 times earnings estimated over the next 12 months.
Like AbbVie and Merck, Bristol has been dealing with patent expiration issues—a problem that pushed its stock down by 4.1% so far this year.
One of the major updates involving Bristol is its massive $74 billion acquisition of Celgene in 2019.
While the deal raised a lot of eyebrows at the time, it brought cancer blockbuster Revlimid into the company’s fold.
Revlimid, which still enjoys protection from a flood of generics for a few more years, has been pumping up sales for Celgene nonstop for over a decade. The drug is expected to generate the same, if not higher, profits for Bristol.
Two more blockbuster drugs in Bristol’s lineup are facing impending patent exclusivity issues, Opdivo, which would expire in 2028, and Eliquis in 2026.
Nonetheless, the positives outweigh the negatives for Bristol. After all, this company invested so much in diversification.
Sales of Opdivo, Revlimid, and Eliquis continued to trend upwards last year.
Opdivo alone managed to generate $7 billion in annual revenue, prompting Bristol to expand the indications for this product.
However, the more promising news lies in the updates that the recently launched products, like multiple sclerosis drug Zeposia and anemia treatment Reblozyl, are gaining traction in the market.
Thanks to the development of its pipeline, the company expects that its new product lineup would account for roughly 27% of its total revenues by 2025.
Overall, Berkshire’s choice of biopharmaceutical companies are offering promising growths in the next several years despite the setbacks they are facing today.
While some investors get alarmed over negative updates, it looks like the Oracle of Omaha is following his own advice: “Whether we're talking about socks or stocks, I like buying quality merchandise, when it is marked down.”
Global Market Comments
February 10, 2021
Fiat Lux
Featured Trade:
(GET READY TO TAKE A LEAP BACK INTO LEAPS),
(AAPL), (BRK/B)
(TESTIMONIAL)
Just as every cloud has a silver lining, every stock market crash offers generational opportunities.
In a month or two, there will be spectacular trades to be had with LEAPS. What are LEAPS, you may ask?
This is the best strategy with which to cash in on the gigantic market swoons, which have become a regular feature of our markets.
Since the advent of the recent incredible market volatility, I have been asked one question.
What do you think about LEAPS?
LEAPS, or Long Term Equity Anticipation Securities, are just a fancy name for a stock option spread with a maturity of more than one year.
You execute orders for these securities on your options online trading platform, pay options commissions, and endure option like volatility.
Another way of describing LEAPS is that they offer a way to rent stocks instead of buying them, with the prospect of enjoying years’ worth of stock gains for a fraction of the price.
While these are highly leveraged instruments, you can’t lose any more money than you put into them. Your risk is well defined.
And there are many companies in the market where LEAPs are a very good idea, especially on those gut-wrenching 1,000 point down days.
Interested?
Currently, LEAPS are listed all the way out until August 2023.
However, the further expiration dates will have far less liquidity than near month options, so they are not a great short-term trading vehicle. That is why limit orders in LEAPS, as opposed to market orders, are crucial.
These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.
Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.
Like all options contracts, a LEAP gives its owner the right to "exercise" the option to buy or sell 100 shares of stock at a set price for a given time.
LEAPS have been around since 1990, and trade on the Chicago Board Options Exchange (CBOE).
To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.
If a LEAP expires "out-of-the-money" – when exercising, you can lose all the money that was spent on the premium to buy it. There's no toughing it out waiting for a recovery, as with actual shares of stock. Poof and your money is gone.
LEAPS are also offered on exchange-traded funds (ETFs) that track indices like the Standard & Poor's 500 index (SPY) and the Dow Jones Industrial Average (INDU), so you could bet on up or down moves of the broad market.
Not all stocks have options, and not all stocks with ordinary options also offer LEAPS.
Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or "writer," of the LEAP contract until the LEAP owner exercises.
Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.
They offer more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.
And for a moderate increase in risk, they present outsized profit opportunities.
For the right investor, they are the ideal instrument.
Let me go through some examples to show you their inner beauty.
By now, you should all know what vertical bull call spreads are. If you don’t, then please click here for a quickie video tutorial (you must be logged in to your account).
Let’s go back to February 9, 2018 when the Dow Average plunged to its 23,800 low for the year. I then begged you to buy the Apple (AAPL) June 2018 $130-$140 call spread at $8.10, which most of you did. A month later, that position is worth $9.40, up some 16.04%. Not bad.
Now let’s say that instead of buying a spread four months out, you went for the full year and three months, to June 2019.
That identical (AAPL) $130-$140 would have cost $5.50 on February 9. The spread would be worth $9.40 today, up 70.90%, and worth $10 on June 21, 2019, up 81.81%.
So, by holding a 15 month to expiration position for only a month, you get to collect 86.67% of the maximum potential profit of the position.
So, now you know why we leap into LEAPS.
When the meltdown comes, and that could be as soon as today, use this strategy to jump into longer term positions in the names we have been recommending and you should be able to retire early.
What’s out there today?
Take a look at Berkshire Hathaway “B” shares (BRK/B), one of the best plays on boring old high cash flow domestic cyclical stocks. It has a very heavy weighting in banks and has a 10% holding in Apple (AAPL) as a kicker.
Today, (BRK/B) shares were trading at $240. Let say that Berkshire shares recover to $290 by January 20, 2023. You can buy a January 2023 $280-$290 vertical bull call spread for $2.00. If Berkshire makes it to $290 by the January 20, 2023 options expiration, the LEAP will expire worth $10, an increase of 400%.
Another way of looking at this is a mere 20.8% move up in the stock in two years delivers a return of 400%, and you can't lose any more money than you put up. That implies a leverage in the position of 19.2X once the shares rise above $280.
Caution: If the shares only make it to $280 the position becomes worthless.
Now you know why I like LEAPS so much. Please play around with the names and the numbers and I’m sure you will find something you like. But remember one thing. LEAPS are only a trade to consider at long time market bottoms, not tops!
They are also the perfect positions to own if you believe we have just entered a second Roaring Twenties and a second American Golden Age, as I do.
Time to Leap Into LEAPS
Global Market Comments
August 14, 2020
Fiat Lux
Featured Trade:
(AUGUST 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (TLT), (TSLA), (AAPL), (FB), (AMZN), (VXX), (VIX), (JPM), (BAC), (GDX), (NUGT), (MRNA), (BRK/B), (SLV), (FCX)
Below please find subscribers’ Q&A for the August 12 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: I just joined your service. Can you explain the logic to your current model trading portfolio?
I always try to balance long positions with short position. That greatly mitigates the risk of an out-of-the-blue crash, like we saw in February. Also, every individual position has a long and short, further reducing volatility. And you never can lose more money than you put up, so your risk is defined. That’s another classic risk control measure.
There is a further four hedge in that the portfolio is spread across all asset classes. So, I am long banks (JPM), (BAC), short US Treasury bonds (TLT), short a basket of big tech stocks (AAPL), (AMZN), (FB) and long gold (GLD). Something is always working where you can take profits. Our proprietary Mad Hedge Market Timing Index is always a big help in judging the best time to enter and exit these asset classes.
That is the short course on hedge fund risk management 101.
Q: Is it a good time to add in gold (GLD) here?
A: Yes, my long-term target for gold is $3,000/oz, possibly higher—it’s very common once you get a breakout from a 7-year bottoming process to get a big move like that. You always go back and retest that breakout level, that’s what’s happening now. I would use this dip to buy gold. You can look at (GLD) itself, the (GDX) gold miners which will give you 4:1 leverage over gold, or any of the 2x or 3x gold leveraged ETFs like (NUGT). There are lots of ways to play gold this time left from over the last bull market in gold ten years ago. So yes, bullish on gold with a temporary pullback in store. This recovery trade, which is buying banks, casinos, hotels, restaurants, weak dollar, weak buy market, weak gold—this is all temporary, this is just a trade. Those will all reverse themselves, probably by September if not sooner. So, if you missed the first round in the gold bull market, there’s certainly another chance to get back in.
Q: Do you think Biden and Harris will crash the stock market if elected?
A: No, since Biden started to run away in the polls, the stock market basically went straight up every day, and I prefer the stock market’s judgment on these things to opinion polls or talking heads. As far as Harris is concerned, she was the most middle of the road conservative pick of the 12 or so people they were looking at for vice president. Certainly, she’s a favorite with Wall Street, and isn’t it interesting they’re looking for the talents of a prosecutor in the White House? Who do you think they have in mind? So yes, that’s a net positive for the market. If anything, a new administration will bring a whole new round of Quantitative Easing and deficit spending, except it will be focused on bailing out Main Street, not Wall Street.
Q: Is the vaccine drug maker Moderna (MRNA) overbought here at 70?
A: Yes, I think to get any more appreciation you need to get an actual result on the many vaccines that are out there.
Q: Will Tesla (TSLA) pass 2,000 by year end?
A: I tend not to think so; Tesla had a once-in-a-lifetime 10-fold increase over a year. That is a very big move to digest, and while I’m saying people should keep their Tesla longs for the long term, short term you want to be selling calls against your long positions to hedge any downside and to take in some extra income.
Q: What caused ten-year US Treasury yields (TLT) to jump 14% yesterday? What will yields do from here?
A: Yields will go up and retest the 95-basis point level we saw a couple of months ago. That means we’re going to have a clear shot at adding shorts, probably for the next several weeks or months.
Q: I got the first TLT trade, but when I added the second one, I had to automatically close out my 175 short position to add the long 175 put position.
A: That is the correct way to do this. And what you end up with is a wider spread with a much larger size. So, you take all three positions we currently have, and you now have a (TLT) August $170-177.5 bear put spread in triple the original size and triple the profit, which expires in 5 trading days. It’s a trade with a very high return over a very short time frame. It’s the kind of trade that’s only available with very high volatilities in the market—at $25 in the (VIX), and you get very high accelerated time decay going into the close. So, it really was a two-week expiration play on the (TLT).
Q: Apple (AAPL) has been able to avoid any major damage in its share price in this trade war. How long can it last?
A: It can last 3 more months, until the election. It’s really quite amazing that the Chinese have not retaliated against Apple in all of these trade wars, and the reason for this is that Apple employs a million people in China, and they make a ton of money out of it. Apple has also managed their relationship with the communist government perfectly. So, that’s why they haven’t been hit. General Motors, other US companies—they could get expropriated. If the US can expropriate TikTok, what’s to stop China from expropriating General Motors, Starbucks, or even Apple for that matter?
Q: How do we know who has a real vaccine and who has a fake one? There’s so much information out there, I have a hard time filtering through what is real.
A: Wait for 100,000 people to try it out first—that’s what my plan is. That will be the safe way to do it. And if that means quarantining another couple of months to make sure you get the real deal, it’s worth the investment. Most industry safety standards, like animal trials, have been ditched by the FDA in order to get Trump a vaccine before the election. Putin is doing the same in Russia.
Q: Why is Warren Buffet buying back shares of Berkshire Hathaway (BRK/B) in record amounts? Is it because he sees no good investments?
A: He’d rather buy his own shares at parity or at a small premium than pay record PE multiples for essentially anything else in the market. Because the government rushed in so quickly to support the stock market, there never were any real deals in stocks, they never really got cheap. Yes, it sounds like down 40% in 2 months is cheap, but stocks weren’t, not even close to cheap, on a PE multiple basis. We never got close to the 9 ½X we saw in 2009. Also, if you believe in a recovery play, the ultimate recovery play is Berkshire Hathaway because they own predominantly old-line industrial cash flow stocks, which will lead any real recovery in the economy. So, at this point, Berkshire Hathaway will probably get you a higher return on a 12-month view than say Apple, Facebook or Amazon.
Q: Gold (GLD) vs Silver (SLV)? Which is better? And what about Copper (FCX)?
A: Silver always outperforms gold by at least 2 to 1 in any real economic recovery. Copper prices have risen 30% in 4 months; that is discounting a real economic recovery someday, so I would be buying copper on dips also.
Q: How do we learn more about options?
A: I suggest you go to the “How to Trade” section on our website, and that has links. Every trade alert we send out also has a link to a video that tells you exactly how to do the options part of that trade. And if you don’t want to do options, we also propose ETF and single stocks.
Q: What year end effect on the market do you see from a Biden tax plan on long term capital gains and qualified dividends at the ordinary income rate?
A: Well, if he actually proposes that, there will be a rush to sell assets by the end of the current year so people can take advantage of the very favorable capital gains tax that exist now. However, it’s not known whether that is actually the tax increase he’s proposing; it’s more likely he’ll simply return to the pre-Trump tax rates. However, I do expect him to come up with highly punitive tax rates on any real estate-related investment as a way of getting back at Trump. And that’s like loss carry forwards, steps up in the cost basis, 1031 exchanges—things specific to the real estate industry.
Q: If you think markets are going to come off, why aren’t you more aggressive buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?
A: (VXX) has become such a professional market it really has become a day trading vehicle. It’s hard to get customers in and out of this thing fast enough to make them money, as most of my followers are not set up to be day traders. It’s a market where 90% of the professionals are playing from the short side, so when you get moves up, they essentially happen over 1 or 2 days, and then they spend weeks or months bleeding off. It really is a tough trade for a retail trader to do; and it is an area where the insiders in Chicago trade this thing and really do have an in-house advantage that I would rather not try to bet against.
Q: I sold the top on all precious metals positions and started buying back today. Was that the right thing to do?
A: Yes, I have a feeling it is. Start scaling in—if you’re nervous about buying gold here, buy a third of a position now, a third if it’s higher or lower, and a third if it’s higher or lower again. That’s what any pro would do.
Q: Do you see another big economic crisis in 2021?
A: I don’t think so; I think any continued weakness will be hit with massive liquidity from the Fed and more government spending. Now that they found the model to keep the economy going, they’re going to just keep at it, no matter who is in power. Roosevelt kept at it for 5 years to end the Great Depression, until he was bailed out by WWII, so hopefully we don’t have to bail our economy out the same way with WWIII.
Q: What about Bitcoin here?
A: We don’t trade Bitcoin as we think the whole thing is a giant scam. There’s also no value added by anyone. Insiders have a huge advantage, the people who are creating the bitcoin to sell. So, it’s a security with no fundamentals—thus unanalyzable.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
September 5, 2018
Fiat Lux
Featured Trade:
(WARREN BUFFETT’S GREAT TECH FIND IN INDIA),
(BRK/B), (AAPL), (GOOGL), (MSFT), (BABA), (NFLX)
Warren Buffett preaches searching among your “circle of competence” to find those gems of companies that will offer abundant value in the far future.
His time horizon has always been long – 10, 20, 30 years where a company has sufficient time to execute its business strategy.
The celebrated investor’s track record is unrivaled.
Another critical rule to his playbook of uncanny success is to invest in companies within your area of expertise to avoid erroneous investment decisions.
If an investor is uncertain if a company is within its “circle of competence,” then it is likely outside the circle and best to skip investing in the company for now.
The Oracle of Omaha has taken his investment playbook to the chicken tikka masala-loving country of India, dropping a few Benjamín’s on One97 Communications Ltd., the parent company of Paytm, an Indian fin-tech firm.
This disrupting digital payments company based in Noida, India, is the nation’s largest mobile-payments firm and quite an achievement in a country that loves paper cash.
It boasts a popular smartphone app used in daily lives, and mirrors digital payment businesses of the likes of China’s Alipay or Tencent’s WeChat payment platform.
When the Indian government laid down the heavy hand of fiscal regulation on the paper currency market with an eye toward the digital currency market, an outsized winner was Paytm.
The cost of printing paper money in India per year is more than $90 million by itself.
I am not saying that the Indian government is going into overdrive adopting bitcoin tomorrow, but its pivot toward fin-tech mobile payments and Buffett’s vote of approval show where all the deep lying tech value is marinating in the world.
It is not Silicon Valley that gets more expensive by the day.
Silicon Valley is largely saturated with venture capitalist firms cherry-picking the best firms before they go public and making many times their investment once they hit the New York public markets.
Well, we are still in the early stages of India’s rapidly developing tech scene. And 2018 has seen some blockbuster cash injections such as Walmart’s investment in e-commerce juggernaut Flipkart.
Buffett has championed investing into companies with a “margin of safety,” allowing him to buy stakes at levels he believes that are well below market value.
This allows him to sleep at night because even if the company tanks short-term, he knows that eventually it will pull it together.
India can now lay claim to more than 390 Internet users, and 300 million of those use Paytm.
When 77% of a country’s population is using an app, you know there is some staying power, as the first mover advantage in the tech world has a powerful and long-term network effect such as the AWS’s foray into the cloud business.
Paytm does have a crowded lineup of heavyweights breathing capital into its company in the form of investments from Masayoshi Son’s SoftBank Vision Fund and Jack Ma’s Alibaba (BABA).
China’s presence in the Indian tech scene is strong, but it has not doubled down there as it has in Southeast Asia, where it enjoys a healthier political connection that is largely void of border skirmishes.
India is the largest democracy in Asia and a strong ally of the United States. Although American tech companies won’t be welcomed with a pristine red carpet, they do have ample opportunity to invest in the burgeoning Indian tech scene.
Buffett’s stake amounts to a 3% to 4% stake in Paytm, and the valuation has spiked to more than $10 billion.
This comes on the heels of Buffett’s adding to his position in Apple (AAPL) that sees him now own 5%.
Apple’s services division is its new cash cow and is on track to eclipse $50 billion in annual revenue next year.
Apple’s services division surpassed $30 billion in the first three quarters of 2018. Its evolution comes at a timely period where smartphone growth has peaked while invaded by low-quality Chinese substitutes.
After sliding to annual low’s in April 2018 of $160, Apple has literally gone ballistic, powering past the $1 trillion valuation mark and is trading at all-time highs around $230.
Apple is another example of why this bull market is predominantly propped up by tech companies that continue to grow earnings at an insane pace.
Only a few companies have fallen into booby traps set forth by the regulatory hurdles first set by the Europeans and General Data Protection Regulation (GDPR).
Apple is losing its smartphone battle in India, but Indians can’t afford iPhones yet and even Netflix (NFLX) is seen as an expensive streaming service.
The average Indian does not possess the purchasing power that North America and Europe have.
Apple has only extracted 1% of smartphone sales in India compared to leader Xiaomi, which leads the market with a 28% share. Further down-market Chinese phone maker Oppo lags with 10% and Vivo with 12%.
It doesn’t matter for Apple.
Apple continues to milk the North American and European markets to great effect padding profits with its high-quality services business.
China was the undeveloped market that launched Apple’s profits sky high. And American tech companies are ostensibly using this same strategy in India and hoping to cement the best strategy for revenue down the road.
Buffett’s investment is finally a green light for India if there ever was one, and every Silicon venture capitalist has to be licking their chops to squeeze value out of India.
The value is deep lying, but it will pay dividends within five to 10 years as India’s economy rises with its citizen’s discretionary income.
With every Tom, Dick, and Harry lusting after the India market, it will drive valuations firmly higher for the foreseeable future.
The fear of missing out (FOMO) will expedite the pivot toward India where many of the most conservative investors could ironically end up.
The tech relationship between America and India is demonstrably synergistic with Indian born CEOs heading Google (GOOGL) and Microsoft (MSFT) among other influential tech companies.
Berkshire’s (BRK/B) funds join the Chinese, Japanese, and Silicon Valley venture capitalist’s capital queuing at India’s front door awaiting to unlock value.
Buffett even opted out of investing in ride-sharing behemoth Uber, because apparently the “margin of safety” was not sufficient enough in the proposal.
Buffett was even quoted on a local Indian television station gushing about the country saying, “If you’ll tell me a wonderful company in India that might be available for sale, I’ll be there tomorrow.” That day has surfaced in the form of his investment in Paytm.
Apparently, Buffett’s expertise lies in India now and Indian-born Ajit Jain is one of four Berkshire executives running the company on a day-to-day basis.
This will pave the way for more tech investments in the swiftly evolving Indian tech scene, and Berkshire will ring in the profits of these Indian assets down the road.
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Quote of the Day
“Our favorite holding period is forever,” – said legendary American investor Warren Buffett.
