Mad Hedge Technology Letter
November 26, 2018
Fiat Lux
Featured Trade:
(WILL THE FAANGS FINALLY KILL OFF TELEVISION?)
(AMZN), (DIS), (FOX), (ROKU), (FB), (AAPL), (GOOGL)
Posts
Global Market Comments
October 12, 2018
Fiat Lux
Featured Trade:
(WHY THE STOCK MARKET IS BOTTOMING HERE),
(SPY), (INDU),
(NETFLIX SAYS WE BECOME A NATION OF COUCH POTATOES),
(NFLX), (M), (AMZN), (TSLA), (DIS), (GOOG)
While much of the artificial intelligence focus has been on Amazon (AMZN), Apple (AAPL), Tesla (TSLA), and Alphabet (GOOG) this year, there is another firm in the field making money hand over fist.
That would be Netflix (NFLX), whose earnings have been on a tear all year, sending the shares soaring.
By this summer the company boasted a staggering 130 million subscribers, with much of the recent growth coming from overseas.
Traders went gaga over the numbers.
Indeed, the firm tracks every keystroke you make.
Watch the sultry tropical thriller Bloodline (sadly scheduled for cancellation), and the company’s clever AI will steer you straight into a like-minded series.
It’s like the “roach motel” network. Once you check in, you can never check out.
Analysts briefly worried about Netflix when Disney (DIS) announced it was pulling its offerings from the omniscient online streaming company, a major seller.
To watch Buzz Lightyear, Woody, and an interminable number of nearly identical princesses (I have three daughters) you’ll have to seek out Disney’s own distribution channel sometime in the future.
But the firm shot back with an $8 billion budget for original content for 2018, in one fell swoop making it one of the largest Hollywood production firms.
Now Netflix is a regular feature of the annual Oscar presentations. Last month it won an impressive 23 Emmys, tying AT&T Warner Media’s HBO for the first time.
They say a picture is worth a thousand words, and I just found 3,000 of them.
Look at three stock charts and you will immediately understand some of the most important structural trends now sweeping through our economy.
Those would be the charts for Amazon (AMZN), Netflix (NFLX), and Macy's (M).
Retail Sales are clearly in a secular long-term decline. Indeed, Macy’s (M) announced last year that it is closing 100 of its 769 stores.
Are these numbers revealing a major new trend in our society? Are we soon to have our every need catered to without lifting a finger?
Have We Become a Nation of Couch Potatoes?
After spending weeks preparing a major research piece for a private client on artificial intelligence, I would have to say that the answer is an overwhelming “Yes!”
Artificial intelligence, or AI, is far more pervasive than you think. Half of all apps now rely on some form of AI, and within five years, all of them will.
Within a decade, AI will cure cancer and most other human maladies, drive our cars, decide our elections, and do our shopping.
You probably all know that Northern California has been besieged with wildfires lately.
Guess what has suddenly started populating my screen? Adds for smoke detectors!
AI has become the leading market theme for 2018.
People my age all remember George Jetson, the space age cartoon series, who only had to work an hour a day because machines did the rest of the work for him.
The modern incarnation of his ultra-light workweek will be far darker and more sinister.
Instead of a one-hour day, it is far more likely that one person will keep a full time eight-hour a day job, while another seven unfortunates become full time unemployed.
By the way, I am determined to be that one guy with a job. So should you.
Indeed, I am increasingly coming across dire predictions that 30% of all jobs will disappear within ten years.
I’m sure that they will.
The real question is whether that 30%, or more, will be replaced by jobs yet to be invented. I bet they will.
Evolution and creative destruction are now happening on fast forward.
After all, some 25% of the professions listed on the Department of Labor website did not exist a decade ago.
SEO manager? Concert social media buzz creator? Online affiliate manager? Solar panel installer? Reputation defender?
What does the stock market do in this new dystopian society? It goes through the roof.
After all, far fewer workers creating a greater output generate much larger earnings that send share prices soaring.
It is all a crucial part of my “Golden Age” scenario for the 2020s.
Having said all that, I think I’ll go binge-watch Netflix’s tropical film noir “Bloodline.” I hear it’s hot.
“Game of Thrones” and “House of Cards” don’t restart until next year.
Our Future?
Global Market Comments
August 7, 2018
Fiat Lux
Featured Trade:
(DON'T MISS THE AUGUST 8 GLOBAL STRATEGY WEBINAR),
(TAKING THE E-TICKET RIDE WITH WALT DISNEY),
(DIS), (NFLX), (FOX),
(A VERY BRIGHT SPOT IN REAL ESTATE)
I'll never forget the first time I met Walt Disney. There he was at the entrance on opening day of the first Disneyland in Anaheim, Calif., in 1955 on Main Street shaking the hand of every visitor as they came in. My dad sold the company truck trailers and managed to score free tickets for the family.
At 100 degrees on that eventful day it was so hot that the asphalt streets melted. Most of the drinking rooms and bathrooms didn't work. And ticket counterfeiters made sure that 100,000 jammed the relatively small park. But we loved it anyway. The band leader handed me his baton and I was allowed to direct the musicians in the most ill-tempoed fashion possible.
After Disney took a vacation to my home away from home in Zermatt, Switzerland, he decided to build a roller-coaster based on bobsleds running down the Matterhorn on a 1:100 scale. In those days, each ride required its own ticket, and the Matterhorn needed an "E-ticket," the most expensive. It was the first tubular steel roller coaster ever built.
Walt Disney shares have been on anything but a roller-coaster ride for the past four years. In fact, they have absolutely gone nowhere.
The main reason has been the drain on the company presented by the sports cable channel ESPN. Once the most valuable cable franchise, the company is now suffering from on multiple fronts, including the acceleration of cord cutting, the demise of traditional cable, the move to online streaming, and the demographic abandonment of traditional sports such as football.
However, ESPN's contribution to Walt Disney earnings is now so small that it is no longer a factor.
In the meantime, a lot has gone right with Walt Disney. The parks are going gangbusters. With two teenaged girls in tow I have hit three in the past two years (Anaheim, Orlando, Paris).
The movie franchise is going from strength to strength. Pixar has Frozen 2 and Toy Story 4 in the pipeline. Look for Lucasfilm to bring out a new trilogy of Star Wars films, even though Solo: A Star Wars Story was a dud. Its online strategy is one of the best in the business. And it's just a matter of time before they hit us with another princess. How many is it now? Nine?
It is about to expand its presence in media networks with the acquisition of 21st Century Fox (FOX) assets, already its largest source of earnings. It will join the ABC Television Group, the Disney Channel, and the aforementioned ESPN.
It has notified Netflix (NFLX) that it may no longer show Disney films, so it can offer them for sale on its own streaming service. Walt Disney is about to become one of a handful of giant media companies with a near monopoly.
What do you buy in an expensive market? Cheap stuff, especially quality laggards. Walt Disney totally fits the bill.
As for old Walt Disney himself, he died of lung cancer in 1966, just when he was in the planning stages for the Orlando Disney World. All that chain smoking finally got to him. Despite that grandfatherly appearance on the Wonderful World of Color weekly TV show, friends tell me he was a complete bastard to work for.
Walt Disney Earnings by Source in Fiscal 2017
Mad Hedge Technology Letter
July 25, 2018
Fiat Lux
Featured Trade:
(PICHAI YOURSELF, EARNINGS ARE REALLY THAT GOOD),
(GOOGL), (MSFT), (AMZN), (AAPL), (TWTR), (DIS), (TGT)
Google Translate, Alphabet's (GOOGL) free, multilingual machine, foreign language translation service, translates an unimaginable143 billion words per day.
These were one of the pearls divulged in the conference call from Google's CEO Sundar Pichai.
A bump in usage coincided with the 2018 World Cup in Russia, and in the age of low-cost airfare and overpopulation, it could be Alphabet's new cash cow.
Google Translate has the potential to morph into one of the premier foreign language applications used by anyone and everyone.
Forget about the Amazon effect, the Alphabet effect could be just as pungent, albeit away from the trenches of e-commerce.
Thank goodness the application is still ad-free.
No doubt it would be inconvenient to sit through a 15 second ad while interacting with a concierge at a bed and breakfast in the South of France.
Analysts did not sound out Pichai's plans for Google Translate, but he did mention there are some monetization opportunities on the horizon.
The latest earnings report is the most recent indication that the FANGs along with Microsoft are pulling away from the rest.
The equity price action in 2018 vindicates this fact with more than 80% of the gains spread around just a few high caliber tech names.
Is this fair? No. But life isn't fair.
The too slow too late regulation that was supposed to put a cap on the vaunted FANG group has had the opposite effect, squeezing the small guy out of the picture.
The runway is all clear for the FANGs, and the only way they will be stopped is if they stop themselves or an antitrust ruling.
This all adds up to why Alphabet has been a perennial recommendation for the Mad Hedge Technology Letter.
Duopolies are few and far between and monopolies even rarer.
They are great for earnings and as the global digital ad pie grows, it falls down to Google's bottom line.
On the news of stellar earnings, Facebook shares jumped higher in aftermarket trading and powered on to trade around 5% the following day.
Expect a great earnings report from Facebook with robust ad revenue growth.
Nothing less would be a failure of epic proportions.
The migration to mobile is real and investors need to understand analysts cannot keep up with the rising year-end targets in these shares.
Alphabet had a high bar over which to pole vault, and it still managed to beat it handily.
And the $5 billion fine for bundling its in-house apps on Android fell on deaf ears.
Alphabet has $102 billion in the coffers, and $5 billion will do nothing to materially affect the company.
The cash reserves are up from $34 billion in 2010.
The market trampled on any sniff of a risk-adverse sentiment and powered into the green with the Nasdaq reaching another all-time high.
Let's not get too carried away. Alphabet's bread and butter is still its digital ad business with Alphabet CFO Ruth Porat confirming this fact saying, "One of the biggest opportunities for investment continues to be in our ads business."
Alphabet still breaks off 86% of revenue from its distinguished ad business.
"Other" is a category commingling Google Cloud, Google Play, and hardware that only comprised 13 percent of total revenue.
"Other Bets" brings up the rear with 1% of total revenue comprising Waymo, Alphabet's self-driving unit, which is an industry leader putting Tesla and Uber in their place.
Waymo plans to shortly roll out a massive commercial operation. Along with Google Translate, it could carve out a nice position in Alphabet's portfolio going forward.
The most important metric was Alphabet's total ad revenue, which it locked in at $28.1 billion, a 23.9% YOY improvement.
Aggregate paid clicks, a model in which the advertiser pays Google for a user to click an ad, has been steadily rising to 58%, up from 52% from the same time last year.
The masterful efficiency circles back to Google's ad tech team, which is by far the best in the business and has outstanding management.
The Cloud is an area that Alphabet highlights as a place for improvement.
Alphabet's cash war chest allows the company to throw hoards of cash at a problem. When mixed with brilliant management it usually works out kindly.
CFO Porat mentioned that costs were particularly higher in the quarterly head count because of large investments in cloud talent.
Google is tired of playing third fiddle to Amazon (AMZN) and Microsoft (MSFT), and views enhancing the enterprise business as imperative.
This explains Alphabet's head count surge to more than 89,000 employees, sharply higher than the 75,600 employed a year earlier.
Every FANG and high-tier tech company is spending its brains out to compete with each other.
Expanding data centers is not cheap. Neither are the people to deploy it.
Alphabet has the cash to compete with the Amazons and Apples (AAPL) of the world.
They do not have to borrow.
The potential trip wire in Alphabet's earnings report was Google's traffic acquisition cost (TAC).
Alphabet's (TAC) is described as money paid to other companies to direct user traffic to its suite of Google products.
(TAC) went up to $6.4 billion, which is 23% of Google's ad revenue but down on a relative percentage basis of 24%.
This was enough to keep investors from sounding the alarm and was welcomed by analysts.
Alphabet pulled out all the stops this quarter and the momentum is palpable.
Top-line growth from its core ad business shows no sign of slowing.
Acceptable (TAC) was the cherry on the sundae for the quarter at a time when many industry insiders thought it would be around 25% or higher.
Hardware offered less punch than before, which is what all high-quality tech companies desire.
There were no obvious weaknesses and the 34 straight quarters of 23% YOY growth is hard to top.
Google pulls in 10% of all global digital ad dollars in one business.
Other highlights were Waymo eclipsing the 8-million-mile mark of self-driving on public roads as it is the next business to come to the fore.
Google cloud is at an inflection point attempting to win over corporate management.
It has already won contracts with heavy hitters such as Twitter (TWTR) and Disney (DIS).
Pichai mentioned Target (TGT) as a key new cloud client that just signed on with Google last quarter.
More importantly, Alphabet's brilliant quarter bolsters the macroeconomic picture heavily reliant on tech earnings to usher the market through the gauntlet.
Regulation has proved irrelevant. Whatever fine they are slapped with does not change that Google reaps the benefits from its market position as one of the duopolies in the global ad business.
Alphabet has been trading from the bottom left to the upper right via a consistent channel.
Do not chase the new all-time high of $1,270. Use any weakness around the $1,100 level to initiate new positions.
Owning a company this dominant has little downside. The regulatory burden was a myth and Pichai has handled this operation beautifully.
I am bullish on Alphabet and its partner in crime Facebook.
________________________________________________________________________________________________
Quote of the Day
"Man is still the most extraordinary computer of all," said the 35th President of the United States John F. Kennedy.
Mad Hedge Technology Letter
July 18, 2018
Fiat Lux
Featured Trade:
(IS NETFLIX DEAD?),
(NFLX), (AMZN), (FB), (TWTR), (DIS), (GOOGL), (QQQ)
Too far out over their skis.
For the first time in five quarters, Netflix (NFLX) was unable to eclipse the alpine level like expectations prognosticated by its own senior management.
Netflix and Amazon (AMZN) have been given luminary status at the Mad Hedge Technology Letter because the straight-line price action offers such agonizing entry points for investors, along with the best business growth models in the American economy.
Chasing this stock has usually worked out for the better, but leading up to the latest quarterly earnings report, Netflix started to scrunch up.
The firing squad loaded up its bullets and after Friday's close, shots were rained down on Netflix's parade as it failed to beat the only metric significant to Netflix investors - new subscribers.
The numbers were not even close.
Netflix fizzled out on its domestic subscriber's growth metric by 560,000, when 1.23 million new subscribers were expected.
International numbers succumbed to the inevitable, but less in percentage terms, failing to surpass the expected 5.11 million, only successfully adding 4.47 million new subscribers.
The 5.2 million adds out of the expected 6.3 million expected is the best news that has happened to Netflix in a long time if you are underinvested in this name.
Ravenous investors looking to jump on Netflix's bandwagon are licking their chops.
After-hours trading saw the stock tank, falling down the rabbit hole by almost 15%.
The stock had only recently been trading around an all-time high of $419. Fluffing their lines has given investors a much-awaited entry point into one of the creme de la creme growth stories in the vaunted tech sector.
Let's get a little more granular, shall we?
Even for high-flying tech stocks, the velocity of the price surges has put off many investors calling the stock "overbought."
Netflix shares were up 108% in 2018 before profit taking commenced before the earnings call. It was unusual to see Netflix intraday slide of 4%.
Investors smelled a rat.
It was only a matter of time before normal investors were finally given a chance to swiftly pile into this precious gem of a stock.
That time is now.
UBS analyst Eric Sheridan recently declared Netflix's growth story as "all priced in."
I don't buy it.
Yes, the shares got ahead of itself, but the Netflix narrative is still intact.
Over the earnings call, Netflix CEO Reed Hastings gushed about the current state of the company remarking that "fundamentals have never been stronger."
The bad news is that it missed on overzealous estimates; the good news is it added 5.2 million new subscribers.
Don't forget that in Q1 2018, Netflix beat total estimates by a herculean 920,000 subscribers, which is around what it missed by in Q2 2018.
The most recent quarter was overwhelmed by World Cup 2018 fever, with audiences migrating toward probably the most dramatic and exciting World Cup in history and the first to be streamed.
The most popular sporting event in the world gave Netflix a short-term kick in the cojones, delaying many new subscription sign-ups until after France lifted the trophy for the second time in its illustrious history.
The Twitter (TWTR) and Facebook (FB) numbers back up this thesis, experiencing explosive engagement and ad buying over the monthlong tournament boding well for their next earnings results.
Don't worry investors.
These eyeballs are just temporary.
The tournament offering a short-term bump to social media stocks clearly is just a one-off event that happens one summer out of every four.
Any recent profit taking will see the same investors eyeing a lower cost basis after this share dump.
Netflix won't be down for long.
Let's briefly review some of Netflix's cornerstone advantages:
The massive user migration from linear television to over-the-top content (OTT) led by cord-cutting millennials, responsible for a growing slice of domestic purchasing power.
The inherent advantages of a global over-the-top content (OTT) streaming model, applying massive scale with the cheap marginal cost of current technology.
The first-mover advantage that has allowed Netflix to have its own cake and eat it.
And the competition's laggardly response to Netflix eating its own cake.
Netflix CFO David Wells' take on the missed targets was "lumpiness" in the business and brushed it off like a bug crawling up your leg.
Hastings also chimed in about the increased competition shaping up and Disney (DIS), HBO, and other players finally getting their act together.
He mentioned there is room for multiple players in this industry, but they better not show up to the gunfight with a knife.
Netflix has been weaning itself from Disney's, Fox's and other third-party content for years, along with spending 50% more on marketing in 2018.
Ted Sarandos, chief content officer of Netflix, let it be known that 85% of new spending will be on original content in 2018.
Out of $8 billion earmarked for content in 2018, a colossal $6.8 billion is set to be splashed on in-house productions.
Compare this with the competition of Amazon, which plans to spend $4.5 billion on original content in 2018 and Hulu's plan to spend $2.5 billion in 2018.
Down the road, Netflix will have greater ability to finance its expensive content spend as it has flipped to a profit-making entity.
Amazon uses its AWS (Amazon Web Services) arm to fund its various subsidiaries.
The high level of quality content is reflected in the 40 Emmy nominations garnered by Netflix, in effect crushing stalwart HBO.
Netflix is aggressively courting Hollywood's A-list and poaching them in droves.
Proven content creators such as Ryan Murphy, Shonda Rhimes, Shawn Levy and Jenji Kohan are now on Netflix's payroll, and are a vital reason for the uptick in quality programming.
This successful harvest will result in added brand recognition and elevated prestige for current and future eyeballs.
Netflix will push out around 1,000 original programs in 2018. More than 90% of Netflix's subscribers habitually watch its vast portfolio of original programming.
The only way Netflix can be stopped is if it stops itself.
The pipeline is plush, and it is not all priced into the stock yet.
Next year could be the year India and Japan massage the bottom lines to greater effect, as Netflix double downs on the international arena.
Netflix's first original Indian series "Sacred Games" has been a winner, and its first original movie "Lust Stories" is creating a stir among avid Indian movie followers.
CEO Hastings has gone on record stating the "next 100 million" Netflix subscribers will derive from the land of Taj Mahal and chicken tikka masala.
Netflix has a lot of work to do to catch up with entrenched leaders Hotstar and Alphabet's (GOOGL) YouTube India.
About 800 million Indians have never been online before. The screaming potential India offers cannot be found elsewhere, especially with films historically, deeply embedded inside India's ancient culture.
Next month will see the release of "Ghoul," based on critically acclaimed work by authors Salman Rushdie and Aravind Adiga.
Slated for imminent release is also Mumbai Indians, a documentary about a top team in the locally obsessed Indian Premier League cricket tournament.
GBH Insights' internal research has found that Netflix is watched 10 hours per week in American households.
That number will inevitably grow as the quality of content goes from strength to strength for this first-rate company.
And how did Netflix's shock miss affect the Nasdaq (QQQ) on the next trading day?
It showed the resiliency and intestinal fortitude that has been a hallmark of the tech sector bull market.
The latest earnings result snafu is a surefire chance to finally have a little taste of Netflix. It will be back over $400 in no time.
________________________________________________________________________________________________
Quote of the Day
"If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner," - said retired U.S. Army General Omar Bradley.
Mad Hedge Technology Letter
June 27, 2018
Fiat Lux
Featured Trade:
(DON'T NAP ON ROKU)
(MSFT), (ROKU), (AMZN), (AAPL), (CBS), (DIS), (NFLX), (TWTR), (SQ), (FB)