Mad Hedge Technology Letter
October 9, 2024
Fiat Lux
Featured Trade:
(SQUEEZING COMPETITION)
(GOOGL)
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Regulators are inching closer to Mag 7, and that has major ramifications for the trajectory of tech stocks.
It has been a time coming for tech as they have turned from market darlings to quasi-monopolies.
Look at your daily life, and it is hard to get away from some of these services like Google.
That is why the US Justice Department said in a new court filing that it may break up of Google (GOOGL).
Its anti-competitive practices have made it hard for smaller companies to add to the American economy.
It seems as if Google has benefited too much from its success.
Naturally, Google did not agree.
That makes sense because executives at Google would be crazy to want to break itself up simply because they can extract larger compensation when presiding over the current model.
People like the CEO Sundar Pichai have no incentive to splinter the company into many different divisions.
He simply would get paid less, and he would finally have to compete harder.
The move by DOJ also sends a signal to other tech giants currently facing antitrust cases from DOJ and other Washington regulators as part of a wide-ranging effort by the Biden administration to rein in what it views as anticompetitive behavior across a number of industries.
The case against Google targeting its dominance in search resulted in a landmark decision and concluded Google illegally monopolized the online search engine market and the market for search text advertising.
The judge concluded that Google’s agreements with browser providers and devices powered by Google’s Android operating system stifled rivals from entering and growing within the markets.
Google pays as much as $26 billion per year to maintain its position on mobile devices such as Apple (AAPL) and Samsung smartphones.
The DOJ could also ask the judge to force Google to share the data that it uses to refine its search algorithms with rival browsers and search providers and limit the company's dominance over search text ads.
DOJ suggested the judge should also consider blocking Google from illegally monopolizing related markets, in addition to the search and search text advertising markets.
It may ask the judge to force Google to give websites more ability to "opt out" of "any Google-owned artificial-intelligence product."
Forcing Google to reveal its algorithms would be devastating to the business model.
Everyone would know their secrets, and other big tech could take anything usable and inject it into their own algorithms.
Algorithms are the secret sauce to many tech companies, and it will only become more valuable when infused by AI.
In the medium term, this caps any upside to Google shares.
In the short-term, I could see a bounce back after the bad news is priced in.
In the long term, if standalone divisions of Google’s businesses are created, like the ad and search business, being unshackled from old management could make some of these parts into new growth companies.
The unprofitable parts like Waymo might get terminated.
It would be sink or swim time because management isn’t going to prop up anything wasteful.
It would be good for the tech market as a whole, add more value, and deliver more equal competition, which the Feds are set out to do.
Either way, the breaking up of Google is more like a marathon and not a spring, but tech now has to wake up to existential threats that were never there before.
Global Market Comments
September 3, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD or THE HIDDEN AI IN YOUR LIFE),
(SPX), (NVDA), (CSCO), (LEN), (DHI), (KBH), (SMCI), (BRK/B), (META), (AAPL), (GOOGL), (TSLA), (JNK), (HYG), (FXA), (FXE), (FXB), (FXC), (EEM), (IWM)
It's great to be back in California, even just temporarily.
Driving down to visit a Concierge client, the weather is hot and dry, the scenery is spectacular. What were once endless hills of dry grass are now countless miles of vineyards. Boy, has the Golden State changed a lot since 1952.
The vines are heavy with grapes. I stopped by and picked a purple bunch to test out the fruit. The grapes were rich and sweet. It looks like 2024 is going to be a good vintage. No wonder there is a wine glut.
It's going to be a vintage year for Mad Hedge performance as well. We picked up a welcome +3.74% in the testing month of August, +33.61% so far in 2024, and +711.32% since inception.
The harder I work, the luckier I get.
Which raises the most important question of the day: Did September just happen in August? The price action we saw last month is certainly reminiscent of many recent faith-testing Septembers and Octobers.
If that is the case, then it could be off to the races from now. Except this time, it won’t be just a Magnificent Seven rally. It will be an everything rally as the bull broadens out to include all interest rate sectors, which is almost everything.
(SPX) 6,000 by yearend looks like a piece of cake.
The bottom line for all of this is that investors and the markets are still wildly underestimating the impact artificial intelligence will have on our futures, and therefore stock prices. Publishing the Mad Hedge AI Letter three times a week (click here for the link), I can see AI sneaking into every aspect of our lives without our knowledge.
I visited my doctor the other day and they asked for my Medicare card. I didn’t have it because there is no use for this US government ID in Europe from where I just returned. The receptionist said, “Don’t worry, may I have your phone please?” She went into my photos app, searched for “Medicare” and there it appeared instantly. Apple had surreptitiously installed an AI search function on my phone without even telling me.
Try it!
What we are witnessing is the greatest capital spending binge since WWII 83 years ago, when in three short years, the US produced 297,000 aircraft, 193,000 artillery pieces, 86,000 tanks, and two million army trucks. It also double-tracked all east-west rail lines and created from scratch four atomic bombs.
And you want to short that???
The indexes certainly have plenty of room to run. Since the 2020 pandemic bottom, virtually all money has gone into big tech and out of the rest of the market, generating net outflows out of equities and into bonds. What happens when you get net inflows into big tech AND the rest of the market? Markets go up a….lot.
Dow 240,000 here we come.
Now for the challenging chore of sector picking.
Bonds (TLT) are usually the first pick at the beginning of any interest rate-cutting cycle. However, this has been the best telegraphed interest rate cut in history so most of the juice has already been squeezed out of this one. The (TLT) has moved a prolific $18 off the $82 bottom with no interest rate cuts at all. So there might be $5 or $10 of upside left this year, but no more.
Derivative high-yield plays have much more to offer. Those would include junk bonds (JNK), (HYG), BB-rated loans (SLRN), and REITS like the Vornado Realty Trust (VOR), my favorite Crown Castle International (CCI), and Health Properties (DOC).
Utilities usually do well in falling interest rate cycles as they are such big borrowers. In this basket, you can throw NextEra Energy (NEE), Southern Company (SO), and Duke Energy (DUK).
Falling rates also reliably deliver a weak US dollar, so buy every foreign currency play out there (FXA), (FXE), (FXB), (FXC). Also, buy foreign stock markets like the (EEM).
And then there are always big borrowing small caps (IWM), poor performers for the last decade which can always use the life jackets of falling interest rates. Keep in mind that 40% of small caps are regional banks and another 40% are money losers.
And then there are the old reliables. Any of the Magnificent Seven will probably work if you can get them on any selloff like we had on August 5.
So far in August, we are up by +2.67%. My 2024 year-to-date performance is at +33.61%. The S&P 500 (SPY) is up +18.23% so far in 2024. My trailing one-year return reached +52.25. That brings my 16-year total return to +710.24. My average annualized return has recovered to +51.91%.
I executed no trades last week and am maintaining a 100% cash position. I’ll text you next time I see a bargain in any market. Now there are none. I am running one short in Tesla (TSLA).
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 49 of 66 trades have been profitable so far in 2024, and several of those losses were really break-even. That is a success rate of +74.24%.
Try beating that anywhere.
NVIDIA Dives on Fabulous Earnings, one of the greatest “Buy the rumor, sell the news” moves of all time. The stock dropped to $25, or 17.85% off its all-time high. Production snags with its much-awaited Blackwell chips are to blame. The company’s quarterly met or beat analysts’ estimates on nearly every measure. But Nvidia investors have grown accustomed to blowout quarters, and the latest numbers didn’t qualify. Buy (NVDA) on this dip.
PCE Rises a Modest 02% in July. That is the so-called core personal consumption expenditures price index, which strips out volatile food and energy items, according to Bureau of Economic Analysis data out Friday. On a three-month annualized basis — a metric economists say paints a more accurate picture of the trajectory of inflation — it advanced 1.7%, the slowest this year
Pending Home Sales Drop 5%, and 8.5% YOY, on a signed contracts basis. Many buyers are waiting until after the presidential election to make a move. Pending home sales fell in all four regions last month. The positive impact of job growth and higher inventory could not overcome affordability challenges and some degree of wait-and-see related to the upcoming U.S. presidential election.
Sales of new U.S. single-family homes rocketed by 10.6%, their highest level in more than a year in July. A drop in mortgage rates boosted demand, offering more evidence that the housing market is recovering. Sales reached a seasonally adjusted annual rate of 739,000 units last month, the highest level since May 2023. It was also the sharpest increase in sales since August 2022. New home sales are counted at the signing of a contract. Buy homebuilders on dips (LEN), (DHI), (KBH).
US GDP Reaccelerates to 3.0% Growth in Q2, up from the previous estimate of 2.8%, according to the Bureau of Economic Analysis. Stronger consumer spending more than offset other categories. Can’t beat the USA.
Weekly Jobless Claims Remain Unchanged at 231,000, down 2,000. After being inflated by weather and seasonal factors in July, initial jobless claims in August are stabilizing at a slightly lower level, another indication that layoffs remain low.
Is Costco (CSCO) the Next Stock Split? Costco, which has risen nearly 40% since the start of 2024, is a potential candidate. Given the company’s share price—over $900 as of Tuesday—and the trend among other retailers with similarly high prices to split.
Hindenburg Research Attacks Super Micro, alleging "accounting manipulation" at the AI server maker, the latest by the short seller whose reports have rocked several high-profile companies. Close ties with chip giant Nvidia have allowed Super Micro, known for its liquid cooling technology for high-power semiconductors, to capitalize on the surge in demand for AI servers.
Though revenue has surged, margins have taken a hit recently due to the rising costs of server production and pricing pressure from rivals including Dell. Avoid (SMCI).
Berkshire Hathaway Tops $1 Trillion Market Cap, a long-time Mad Hedge recommendation. It’s the first nontech company ever to do so, even though (BRK/B) has a major holding in Apple (AAPL). Keep buying the big dips. The stock has rallied this year on strong insurance results and economic optimism. The Omaha, Nebraska-based company joins the ranks of a small group to crack the milestone, dominated by technology giants like Alphabet Inc. (GOOGL), Meta Platforms Inc. (META) and Nvidia Corp. (NVDA).
S&P Case Shiller Hits New All-Time High in June. Prices nationally rose 5.4% in June from the year prior. An index measuring prices in 20 of the nation’s large metropolitan areas gained 6.5% from the year prior. On an unadjusted basis, it was the national index’s fourth consecutive all-time high. Prices in New York, San Diego, and Las Vegas grew the most, with year-over-year gains ranging from 8.5% and 9%, while those in Portland, Ore., Denver, Colo., and Minneapolis grew the least.
Canada Imposes 100% Tariff on Chinese EVs. The problem for Tesla is that they had been supplying the Canadian market from their China factory. The supply can be replaced with US-made cars but at a much higher cost. Tesla sold off $8 on the news. Sell rallies in (TSLA).
Is the US Tipping into Recession? A continued drop in job openings will translate into faster increases in unemployment, an argument in favor of the Fed beginning to cut interest rates to guard the labor market. The next jobs reports could be crucial. Policymakers face the dilemma of two risks: being too slow to ease policy, potentially causing a 'hard landing' with high unemployment ... or cutting rates prematurely, leaving the economy vulnerable to rising inflation
Yield Chasers Post Record Demand for Junk Bonds. That’s helped make 2024 the busiest year for the issuance of new corporate high-yield bonds, with $357 billion sold so far, since the easy money days during the pandemic. Issuance of US leveraged loans, meanwhile, is running at its fastest pace on record. Buy (JNK) and (HYG).
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, September 2 we have Labor Day. All US markets will be closed.
On Tuesday, September 3 at 6:00 AM EST, the ISM Manufacturing PMI is released.
On Wednesday, September 4 at 7:30 PM, the JOLTS Job Openings Report is printed.
On Thursday, September 5 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the ADP Employment Report.
On Friday, September 6 at 8:30 AM, the August Nonfarm Payroll Report is released. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, having visited and lived in Lake Tahoe for most of my life, I thought I’d pass on a few stories from this historic and beautiful place.
The lake didn’t get its name until 1949 when the Washoe Indian name was bastardized to come up with “Tahoe”. Before that, it was called the much less romantic Lake Bigler after the first governor of California.
A young Mark Twain walked here in 1863 from nearby Virginia City where he was writing for the Territorial Enterprise about the silver boom. He described boats as “floating in the air” as the water clarity at 100 feet made them appear to be levitating. Today, clarity is at 50 feet, but it should go back to 100 feet when cars go all-electric.
One of the great engineering feats of the 19th century was the construction of the Transcontinental Railroad. Some 10,000 Chinese workers used black powder to blast a one-mile-long tunnel through solid granite. They tried nitroglycerine for a few months but so many died in accidents they went back to powder.
The Union Pacific moved the line a mile south in the 1950s to make a shorter route. The old tunnel is still there, and you can drive through it at any time if you know the secret entrance. The roof is still covered with soot from woodfired steam engines. At midpoint, you find a shaft to the surface where workers were hung from their ankles with ropes to place charges so they could work on four faces at once.
By the late 19th century, every tree around the lake had been cut down for shoring at the silver mines. Look at photos from the time and the mountains are completely barren. That is except for the southwest corner, which was privately owned by Lucky Baldwin who won the land in a card game. The 300-year-old growth pine trees are still there.
During the 20th century, the entire East Shore was owned by one man, George Whittell Jr., son of one of the original silver barons. A man of eclectic tastes, he owned a Boing 247 private aircraft, a custom mahogany boat powered by two Alison aircraft engines, and kept lions in heated cages.
Thanks to a few well-placed campaign donations, he obtained prison labor from the State of Nevada to build a palatial granite waterfront mansion called Thunderbird, which you can still visit today (click here ). During Prohibition, female “guests” from California crossed the lake and entered the home through a secret tunnel.
When Whittell died in 1969, a Mad Hedge Concierge Client bought the entire East Shore from the estate on behalf of the Fred Harvey Company and then traded it for a huge chunk of land in Arizona. Today the East Shore is a Nevada State Park, including the majestic Sand Harbor, the finest beach in the High Sierras.
When a Hollywood scriptwriter took a Tahoe vacation in the early 1960s, he so fell in love with the place that he wrote Bonanza, the top TV show of the decade (in front of Hogan’s Heroes). He created the fictional Ponderosa Ranch, which tourists from Europe come to look for in Incline Village today.
In 1943, a Pan Am pilot named Wayne Poulson who had a love of skiing bought Squaw Valley for $35,000. This was back when it took two days to drive from San Francisco. Wayne flew the China Clippers to Asia in the famed Sikorski flying boats, the first commercial planes to cross the Pacific Ocean. He spent time between flights at a ranch house he built right in the middle of the valley.
His wife Sandy bought baskets from the Washoe Indians who still lived on the land to keep them from starving during the Great Depression. The Poulson’s had eight children and today, each has a street named after them at Squaw.
Not much happened until the late forties when a New York Investor group led by Alex Cushing started building lifts. Through some miracle, and with backing from the Rockefeller family, Cushing won the competition to host the 1960 Winter Olympics, beating out the legendary Innsbruck, Austria, and St. Moritz, Switzerland.
He quickly got the State of California to build Interstate 80, which shortened the trip to Tahoe to only three hours. He also got the state to pass a liability limit for ski accidents to only $2,000, something I learned when my kids plowed into someone, and the money really poured in.
Attending the 1960 Olympic opening ceremony is still one of my fondest childhood memories, produced by Walt Disney, who owned the nearby Sugar Bowl ski resort.
While the Cushing group had bought the rights to the mountains, Poulson owned the valley floor, and he made a fortune as a vacation home developer. The inevitable disputes arose and the two quit talking in the 1980’s.
I used to run into a crusty old Cushing at High Camp now and then and I milked him for local history in exchange for stock tips and a few stiff drinks. Cushing died in 2003 at 92 (click here for the obituary)
I first came to Lake Tahoe in the 1950s with my grandfather who had two horses, a mule, and a Winchester. He was one-quarter Cherokee Indian and knew everything there was to know about the outdoors. Although I am only one-sixteenth Cherokee with some Delaware and Sioux mixed in, I got the full Indian dose. Thanks to him I can live off the land when I need to. Even today, we invite the family medicine man to important events, like births, weddings, and funerals.
We camped on the beach at Incline Beach before the town was built and the Weyerhaeuser lumber mill was still operating. We caught our limit of trout every day, ten back in those days, ate some, and put the rest on ice. It was paradise.
During the late 1990’s when I built a home in Squaw Valley I frequently flew with Glen Poulson, who owned a vintage 1947 Cessna 150 tailwheel, looking for untouched high-country lakes to fish. He said his mother had been lonely since her husband died in 1995 and asked me to have tea with her and tell her some stories.
Sandy told me that in the seventies she asked her kids to clean out the barn and they tossed hundreds of old Washoe baskets. Today Washoe baskets are very rare, highly sought after by wealthy collectors, and sell for $50,000 to $100,000 at auction. “If I had only known,” she sighed. Sandy passed away in 2006 and the remaining 30-acre ranch was sold for $15 million.
To stay in shape, I used to pack up my skis and boots and snowshoe up the 2,000 feet from the Squaw Valley parking lot to High Camp, then ski down. On the way up I provided first aid to injured skiers and made regular calls to the ski patrol.
After doing this for many winters, I finally got busted when they realized I didn’t have a ski pass. It turns out that when you buy a lift ticket you are agreeing to a liability release which they absolutely had to have. I was banned from the mountain.
Today Squaw Valley is owned by the Colorado-based Altera Mountain Company, which along with Vail Resorts owns most of the ski resorts in North America. The concentration has been relentless. Last year Squaw Valley’s name was changed to the Palisades Resort for the sake of political correctness. Last weekend, a gondola connected it with Alpine Meadows next door, creating the largest ski area in the US.
Today there are no Washoe Indians left on the lake. The nearest reservation is 25 miles away in the desert in Gardnerville, NV. They sold or traded away their land for pennies on the current value.
Living at Tahoe has been great, and I get up here whenever I can. I am now one of the few surviving original mountain men and volunteer for North Tahoe Search & Rescue.
On Donner Day, every October 1, I volunteer as a docent to guide visitors up the original trail over Donner Pass. Some 175 years later the oldest trees still bear the scars of being scrapped by passing covered wagon wheels, my own ancestors among them. There is also a wealth of ancient petroglyphs, as the pass was a major meeting place between Indian tribes in ancient times.
The good news is that residents aged 70 or more get free season ski passes at Diamond Peak, where I sponsored the ski team for several years. My will specifies that my ashes be placed in the Middle of Lake Tahoe. At least I’ll be recycled. I’ll be joining my younger brother who was an early Covid-19 victim and whose ashes we placed there in 2020.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Ponderosa Ranch
The Poulson Ranch
At the Reno Airport
Donner Pass Petroglyphs
Last weekend, I had dinner with one of the oldest and best-performing technology managers in Silicon Valley. We met at a small out-of-the-way restaurant in Oakland near Jack London Square so no one would recognize us. It was blessed with a very wide sidewalk out front and plenty of patio tables.
The service was poor and the food indifferent, as are most dining experiences these days. I ordered via a QR code menu and paid with a touchless Square swipe.
I wanted to glean from my friend the names of the best tech stocks to own for the long term right now, the kind you can pick up and forget about for a decade or more, a “lose behind the radiator” portfolio.
To get this information I had to promise the utmost in confidentiality. If I mentioned his name you would say “Oh my gosh!”
Amazon (AMZN) is now his largest holding, the current leader in cloud computing. Only 5% of the world’s workload is on the cloud presently so we are still in the early innings of a hyper-growth phase there.
By the time you price in all the transportation, labor, and warehousing costs, Amazon breaks even with its online retail business at best. The mistake people make is only focusing on these lowest-of-margin businesses.
It’s everything else that’s so interesting. While its profitability is quite low compared to the other FANG stocks, Amazon has the best growth outlook. For a start, third-party products hosted on the Amazon site, most of what Amazon sells, offer hefty 30% margins.
Amazon Web Services (AWS) has grown from a money loser to a huge earner in just four years. It’s a productivity improvement machine for the world’s cloud infrastructure where they pass all cost increases on to the customer, who once in, buys more services.
Apple (AAPL) is his second holding, the next AI stock. The company is in transition now justifying a massive increase in earnings multiples, from 9X to 25X over the last several years. The iPhone has become an indispensable device for people around the world, and it is the services sold through the phone that are key.
The iPhone is really not a communications device but a selling device, be it for apps, storage, music, or third-party services. The cream on top is that Apple is at the very beginning of an enormous replacement cycle for its installed base of over one billion phones. Moving from up-front sales to a lifetime subscription model will also give it a boost.
Half of these are more than four years old and positively geriatric in the tech world. More than half of these are outside the US. 5G will add a turbocharger.
Netflix (NFLX) is another favorite. The world is moving to “over-the-top” content delivery and Netflix is already spending twice as much on content as any other company in this area. This is why the company won an amazing 21 Emmys this year. This will become a much more profitable company as it grows its subscriber base and amortizes its content costs. Their cash flow is growing by leaps and bounds, which they can use to buy back stock or pay a dividend.
Generally speaking, there is no doubt that the pandemic has pulled forward some future technology demand with the stay-at-home trend. But these companies have delivered normal growth in a hard world. Tech growth will accelerate in 2021 and 2022.
5G will enable better Internet coverage for everyone and will increase the competitiveness of telecom companies. Factory automation will be another big area for 5G, as it is reliable and secure, and can be integrated with artificial intelligence.
Transportation will benefit greatly. Connected self-driving cars will be a big deal, improving safety and the quality of life.
My friend is not as worried about government-threatened breakups as regulation. There will be more restraints on what these companies can do going forward. Europe, which has no big tech companies of its own, views big American tech companies simply as a source of revenue through fines. Driving companies out of business through cutthroat competition is simply not something Europeans believe in.
Google (GOOG) is probably more subject to antitrust proceedings both in Europe and the US. The founders have both retired to pursue philanthropic activities, so you no longer have the old passion (“don’t be evil”).
Both Google and Meta (META) control 70% of the advertising market, which is inherently a slow-growing market, expanding at 5% a year at best. (META)’s growth has slowed dramatically, while it has reversed at (GOOG).
He is a big fan of (AMD), one of his biggest positions, which is undervalued relative to the other chip companies. They out-executed Intel (INTC) over the last five years and should pass it over the next five years.
He has raised the value of tech stocks from 15% to 30% of his portfolio. Apple used to be one of these. Semiconductor companies today also fall into this category. Samsung with 40% margins in its memory business is a good example. Selling for 10X earnings it is ridiculously cheap. It is just a matter of time before semiconductors get rerated too.
He was an early owner of Tesla (TSLA) back in the nail-biting days when it was constantly running out of cash. Now they have the opposite problem, using their easy access to cash through new share issues as a weapon to fight off the other EV startups. Tesla is doing to Detroit what Apple did to the cell phone companies, redefining the car.
Its stock is overvalued now but will become much more profitable than people realize. They also are starting to extract service revenues from their cars, like Apple has. Tesla will grow revenues by 30%-50% a year for the next two or three years. They should sell several million of the new small SUV Model Y. Most other companies bringing EVs will fall on their faces.
EVs are a big factor in climate change, even in China, the world’s biggest polluter. In Europe, they are legislating gasoline cars out of existence. If you can make money building cars in Fremont, CA, you can make a fortune building them in China.
Tech valuations are high, there is no doubt about it. However, interest rates are much lower. The Fed is forcing people to buy stocks, enabling these companies to evolve even faster.
When rates rise in a year or so tech stocks may have to come down. They have a lot more things going for them than against them. The customers keep coming back for more.
Needless to say, the above stocks should make up your shortlist for LEAPS to buy at the coming market bottom.
Global Market Comments
August 1, 2024
Fiat Lux
Featured Trade:
(WHY AMAZON IS THE MOST UNDERVALUED AI PLAY OUT THERE),
(AMZN), (NVDA), (GOOGL), (META), (AAPL), (MSFT), (WMT)
Before I took off for the current trip to Europe, I logged into my Amazon Prime account to buy some lightweight polyester T-shirts, size 4XL. Not only are these ideal for long-distance hiking but they can be washed in a hotel sink and dried quickly when I am traveling too fast to use the house laundry.
The next morning when I logged into my laptop, my email account was flooded with ads for every kind of T-shirt in the world, from heavy-duty sports types FOR $100 to bargain basement $5 ones from China (although the Chinese ones were a little light on the 4X sizes).
That is Amazon’s AI at work. And you know what? It is getting smarter. And while the big fear among investors is that the US government will break up this retail giant for antitrust reasons, Amazon is integrating faster than ever. The impact on profits will be enormous.
My friend Jeff Bezos’ creation has a lot to work with. Amazon not only pioneered online retail. It subsequently invented the Kindle, an e-reader (click here where the John Thomas autobiography is for sale) Alexa, a smart speaker and, more consequentially, cloud-computing—Amazon Web Services has a 31% share of that $300bn market (full disclosure: Mad Hedge uses their service).
It also runs Prime Video, America’s fourth-most-watched video-streaming service (full disclosure: Mad Hedge is a Prime member). Its newish, high-margin advertising business is already the third largest in the world behind Alphabet (GOOGL) (Google’s parent company) and Meta (META) (Facebook’s).
Amazon also has a few moonshot projects of its own. One subsidiary, Zoox, is building self-driving cars. Another, Kuiper, is developing a fleet of communications satellites in low-Earth orbit, in competition with SpaceX Starlink (full disclosure: Mad Hedge is a Starlink user).
This year, Amazon’s websites will sell a staggering $554bn-worth of goods in America. That gives it a 42% share of American e-commerce, far beyond the 6% captured by Walmart (WMT), its nearest online competitor (and the country’s biggest retailer overall). The reward for all these efforts was a $2 trillion market capitalization in June and an all-time high share price of $203.
Amazon’s fourth decade looks poised to be an era of integration. The company has grown to the size that any needle-moving new investment is costly and high-risk. Andy Jassy, the former boss of AWS whom Bezos appointed as his successor as CEO in 2021, therefore appears keen to generate value by stitching the company’s existing businesses together more tightly.
Jeff, who I knew at Morgan Stanley, still retains a 9% stake after some hefty recent sales and a big say over strategy, seems to approve. This metamorphosis would make Amazon more similar to Apple (AAPL) and Microsoft (MSFT), two older big-tech rivals that have bundled and cross-sold their way to world domination in consumer devices and business software, respectively—and to $3trn valuations.
Retail and advertising appear to be the first to integrate. The thread running through the two businesses is Prime, Amazon’s $139 a-year subscription service, which has 300m-odd members around the world, providing shoppers with free delivery and access to Prime Video. Prime members like me spend twice as much on Amazon’s websites as non-members do and they tend to be logged in more often. Amazon also has intimate knowledge of their shopping behavior, which allows it to target ads more accurately.
Advertising is another great hope at Amazon. Advertisers are willing to pay handsomely for this service: analysts estimate that Amazon’s ads business enjoys operating margins of around a mind-blowing 40%, higher even than those of the cloud operation, not to mention the much less lucrative retail division.
Most of these ads, responsible for four-fifths of the company’s ad sales, are nestled among search results on its app or next to information about products, as with my above-mentioned T-shirts. But a growing share is coming from third-party websites and, most recently, from Prime Video. In January Amazon started showing commercials to viewers in America, Britain, Canada, and Germany.
Analysts reckon that video ads alone will boost Amazon’s ads sales by about 6% this year, adding $3bn to the top line. Given the ad operation’s fat margins, the impact on profit will be considerably larger.
To turn more Prime members into actual ad-watchers, Amazon is splurging on content. It recently signed a contract with Mr. Beast (??), a YouTube superstar, rumored to be worth $100m. It is trying to seal a deal in which it would pay $2bn a year for the rights to show National Basketball Association games on Prime Video. It is already reportedly spending $1bn annually to stream some National Football League (NFL) fixtures.
This hefty price tag is worth it, the company thinks, because popular sporting moments, such as “Thursday Night Football”, have turned out to be among the biggest sign-up days for Prime. Ads aired during sports events are some of the most lucrative in all of the ad business.
Analysts speculate that clever AWS software may also be assisting the retail operation’s 750,000 warehouse robots in sorting shoppers’ packages. And having a business as gigantic as Amazon’s retail arm as a captive customer gives AWS the confidence to scale up, helping spread costs.
The most important thread stitching Amazon’s two main businesses together is generative AI. Most rivals will struggle to match Amazon’s access to specialized AI hardware, which is in short supply but which it has in abundance thanks to long-standing commercial partnerships with companies like Nvidia (NVDA), which makes advanced AI semiconductors.
Amazon’s recent share-price rise was uninterrupted by a Fair Trade Commission lawsuit. But for every cloud customer that AWS loses to rivals such as Microsoft Azure or Google Cloud Platform, it could win one that is repelled by Microsoft’s and Google’s new businesses in their own increasingly tightly-knit empires.
It all looks like a giant, super-efficient machine to me which should justify at least a 50% gain in Amazon’s share price in the next year or two.
Global Market Comments
July 24, 2024
Fiat Lux
Featured Trade:
(WHAT AI CAN AND CAN’T DO FOR YOU)
(AAPL), (GOOGL), (AMZN), (AMZN), (TSLA), (NVDA), (MU)
The future has arrived!
Over the last few weeks, I picked up some astonishing developments in artificial intelligence.
*Mainframes at Stanford University and the University of California at Berkeley were given a direct connection to speak freely with each other. Within 30 minutes they dumped English as a means of communication because it was too inefficient and developed their own language which no human could understand. They then began exchanging immense amounts of data. Fearful of what was going on, the schools unplugged the machines after only eight hours.
*All of the soccer videos ever recorded were downloaded into two robots, but they were not taught how to play the game or given any rules. Not only did it figure out how to play the game, it developed plays and maneuvers no one in the sport has ever thought of in its 150-year history.
*It normally takes a PhD candidate five years to 3D map a protein. An AI app 3D mapped all 200 million known proteins in seven weeks, shortcutting one billion years of PhD level research with existing technology. These new maps have already been used to design a malaria vaccine and enzymes that eat plastic. They will soon cure all human diseases.
*A developer asked an AI program a half dozen questions in Bengali, which is not an easy language. Within an hour it spoke the language fluently, without any instructions to do so.
By now, word has gotten out about the incredible opportunities AI presents. Our only limitation is our own imagination on how to use it. AI will instantly triple the value of any company that uses it.
What has changed is that we now have millions of computers powerful enough and an Internet fast enough to realize its full potential.
It all vindicates my own long-term vision, unique in the investing community, that in the coming decade, immense technology profits will more than replace the trillions of dollars worth of Fed liquidity we feasted on during the 2010s. Extended QE is proving just a bridge to a much more prosperous future.
The Internet has created about $10 trillion in value since its inception. AI will create triple that in half the time. That’s what will take the Dow from 33,000 to 240,000.
No surprise then that the top ten AI companies have delivered 120% of the stock market gains so far in 2023. The other 490 companies in the S&P 500 have either gone nowhere to down.
However, there are many things that AI can’t do. Here is the list.
1) AI Can’t Predict large anomalous events, otherwise known as Black Swans. AI takes past trends and extrapolates them into the future. It in no way could have seen 9/11, the 2008 crash or the pandemic coming, although I warned my hedge fund clients for years that we were overdue. All of the AI stock trading apps I have seen so far, including my own, max out at 90% accuracy. The other 10% is accounted for by black swans: earnings shocks, foreign crises, sudden FDA stage three denials, surprise legal judgments, foreign invasions, or the murder of a key man in a tech company, as recently happened in San Francisco.
2) AI Lies and Lies Often. AI was asked to write a scientific paper on a specific subject. It came back with an elegant and well-researched piece. The problem was that all of the books it referred to didn’t exist. AI learned early to tell humans what they want to hear.
3) AI Requires Exponential Computing Capacity. Only five companies have the muscle to pursue true AI. No surprise that these, including (AAPL), (GOOGL), (AMZN), (AMZN), and (TSLA), account for the bulk of stock market performance this year. This won’t always be the case. Some 30 years ago it required thousands of mainframes to contain all human knowledge. Today that task can be accomplished by a cheap $1,000 laptop.
4) Internet Capacity Will Be a Limiting Factor for AI for Years. To accommodate the traffic that is taking place right now, the Internet will have to grow 500% practically overnight, and that is with five main players. What happens when we have 5 million? That’s why NVIDIA (NVDA) has gone nuts.
5) AI Hallucinates, as anyone who drives a Tesla will tell you. If a car makes a left turn in Florida, the 4 million vehicles in the world’s largest neural network learn from it. The problem is that sometimes the data from that Florida car is placed directly in front of a California one, prompting it to brake abruptly, causing accidents. This is known as “ghost breaking.” I have explained to Elon Musk that his database has grown so large, eight video feeds per 4 million cars going back many years and billions of miles, that he may be going behind the limits of known physics.
6) While the Growth Opportunities for AI are Unlimited, the ability of humans and society to absorb it isn’t. All jobs will be affected by AI and millions destroyed, starting with low-level programmers and call centers, and millions more will be created. People are talking about regulating AI but have no idea where to start. Maybe with (AAPL), (GOOGL), (AMZN), (AMZN), and (TSLA)?
7) The Terminator Issue. Can AI be controlled? Or have we started an unstoppable chain reaction, as with an atomic bomb? AI researchers have noticed a disturbing issue where AI programs are learning skills on their own, without our instructions. This is referred to as “emergent properties.” If AI is using humans as its example, we can’t exactly count on it to be benign.
Needless to say, AI will be at the core of your investment approach, probably for the rest of your life.
2014 at Micron Technology
Global Market Comments
June 20, 2024
Fiat Lux
Featured Trade:
(THE MAD HEDGE JUNE 4-6 SUMMIT YOUTUBE VIDEOS ARE UP),
(WHAT AI CAN AND CAN’T DO FOR YOU)
(AAPL), (GOOGL), (AMZN), (AMZN), (TSLA), (NVDA), (MU)
