Mad Hedge Technology Letter
August 30, 2018
Fiat Lux
Featured Trade:
(ON TRUMP’S TECHNOLOGY ATTACK),
(AMZN), (GOOGL), (FB), (AMD), (TWTR)
Tag Archive for: (GOOGL)
First Amazon (AMZN), now Alphabet.
In a strategic move to fortify his base ahead of critical midterm elections, the President of the United States Donald J. Trump has denounced tech behemoth Alphabet (GOOGL) describing search results using his name as “rigged.”
If Trump loses the midterm elections, it could open a can of worms and threaten his position.
It is no surprise that he plans to invest 40 days traveling around America campaigning for Republicans in November.
This is a big deal.
Silicon Valley has been a frequent bashing target for the White House.
The data privacy fiasco of 2018 has offered ample ammunition to pretty much anyone who wants to rain on big tech’s parade.
Big tech has experienced a wave of bad press shifting public opinion against them ruining future guidance for social media companies such as Facebook (FB).
How does the administration’s attack against Alphabet affect its stock price going forward?
It won’t even blink.
Alphabet’s stock barely budged after the President used his Twitter (TWTR) feed to sound off against the famous digital search engine company.
The stock closed down 0.83% on the day.
We have seen this story again and again with the administration lashing out at certain sectors or individuals, only for the stock market to shrug off any resemblance of weakness and power higher to new all-time highs.
Resiliency would be the best way to characterize this market.
Ironically, Trump found time yesterday to tweet that the Nasdaq had just surpassed 8,000 for the first time, showing off the tech strength underpinning the nine-year bull market.
The FANGs are front and center the stars of the show. Grumbling about a prominent member of this cohort will do nothing to stop the profit engines that tech companies have constructed.
Stellar corporate earnings are the secret sauce in this recipe and investors would be crazy to veer away from that.
Investors have no reason to panic because the tech narrative will not go away anytime soon, and the market knows that.
Political turbulence has been baked into the pie, and it would be eerie if the airwaves went silent.
Investors have largely avoided pinpointing non-economic issues and focused on the economy and its robust 4% growth rate.
It helps that the unemployment rate has fallen to 3.9%, and the full labor market is a net positive, even though inflation and wage growth has yet to contribute as much as initially hoped.
Of course, politics play a substantial role in influencing the stock market. But looking back at the past crisis, the stock market reacted the same as it will now and go much higher.
The market is still very much a tech story, and last week’s price action confirmed this.
The Mad Hedge Technology Letter is still net negative on chip stocks, but the two chip stocks that circumvent my negative calls are companies I recommended recently and that have seen a breathtaking leg up.
Not all chip companies are made equal and Advanced Micro Devices, Inc. (AMD) proved that by spiking 35% so far in August, 23% in the past week, and more than 140% this year.
The hockey stick move has seen (AMD) short sellers singed to a tune of $3 billion in 2018.
Chip stocks were supposed to get crushed by the weight of the trade war. However, these two stalwarts prove that if you are in the right names, you’ll avoid the carnage, which has beset many smaller chip companies that have the bulk of revenue tied to China.
Tech companies have bought back more than $1 trillion of their own stock since the beginning of 2009 because they have the money to do so.
Silicon Valley companies continue to purchase back their own stocks at a furious pace, putting a floor under many cash cow tech firms to the benefit of share prices.
Whether you want to believe or not, the market is metamorphizing into an all-tech story as every sector migrates to the cloud and the heavy use of big data.
Industrial giants are turning into industrial IoT companies.
Turn over any stone and you would be hard pressed to not find some sort of tech in new products.
Silicon Valley is on the cusp of rolling out its self-autonomous driving technology for commercial operations with Alphabet’s subsidiary Waymo.
If that wasn’t a good reason to buy Alphabet, then let’s review the other positive levers in their portfolio.
Alphabet is one member of a two-man team dominating digital advertising revenues with Facebook.
Global media spend is expanding at 13% YOY as the migration to mobile sees no end.
Google has the best search engine in the world. There are no competitors even close to supplanting its holy grail search engine business, unless you consider bing.com a worthy competitor, which it isn’t.
Data is the new oil, and Alphabet is able to douse itself in data because of the gobs it possesses.
This is the reason Google knows everything about most people in the world outside of China.
Alphabet will be able to leverage this enormous treasure trove of big data and monetize it using artificial intelligence technology.
Add it all up and Alphabet is massively profitable and positioned on the vanguard of every future groundbreaking technology in the world.
Picking on the big boys won’t do much, and the stock price will power on unabated for the foreseeable future.
As the midterm elections draw closer, Trump could also double down on his foreign exploits attempting to consolidate political capital.
That means virulently attacking China’s trade policy, which could go into overdrive as they could give him the source of expansive buffer for which he is looking.
However, it is a double-edge sword as many constituents in red states could be the recipient of higher costs that elevated tariffs would bring.
At the bare minimum, Trump has cast a light on China’s unfair trading policies that has tapped an uneasy nerve for many other countries quietly agreeing with the American president.
This could create a whack-a-mole scenario as China could experience growing problems with numerous undeveloped countries felt wronged, and these headaches could take on different forms such as the Forest City project in Malaysia.
Back in the equity world, the smaller chip companies are baring the brunt of the administration’s scathing rhetoric toward China, but the economy, stock market, and consumer health will hum along as if nothing happened.
The damage is limited, giving Trump sufficient leeway to speak out about side issues as the vital midterm elections roll around.
The bull market is not close to dying and there is still room to run.
________________________________________________________________________________________________
Quote of the Day
“Technology itself is neither good nor bad. People are good or bad,” – said former CEO of InfoSpace, Inc. and cofounder of Moon Express Naveen Jain.
Mad Hedge Technology Letter
August 29, 2018
Fiat Lux
Featured Trade:
(THE BEST TECH STOCK YOU’VE NEVER HEARD OF),
(TTD), (AMZN), (GOOGL), (NFLX), (BIDU), (BABA), (SPOT), (P), (FB)
If you asked me which is the best company that most people do not know about then there is one clear answer.
The Trade Desk (TTD).
This company was founded by one of the pioneers of the ad tech industry Jeff Green, and he has spent the past 20 years improving data-based digital advertising.
Green established AdECN in 2004 and its claim to fame was the world’s first online ad exchange.
After three years, Microsoft gobbled up this firm and Green stayed on until 2009 when he launched The Trade Desk. This is where he planned to infuse everything he learned about the digital ad agency into his own brainchild.
Green concluded that creating a self-service platform, avoiding privacy issues, and harnessing big data for digital ad campaigns was the best route at the time.
Green hoped to avoid the pitfalls that damaged the digital ad industry mainly bundling random ads together that diluted the quality and potency of the ad campaigns.
It did not make sense that a digital ad for baby diapers could be commingled with an ad for retirement homes.
Green created real-time bidding (RTB), which is a process in which an ad buyer bids on a digital ad and, if won, the buyer’s ad is instantly displayed on the selected site.
This revolutionary method allowed ad buyers to optimize ad inventory, prioritize ad channels, and boost the effectiveness of campaigns.
(RTB) is a far better way to optimize digital ad campaigns than static auctions, which group ads by the thousand.
In real time, advertisers are able to determine a bespoke ad for the user to display on a website. Green used this model to develop his company by building a platform tailor-made to execute (RTB).
Naturally, he won over many naysayers and his company took off like a rocket.
Results, in a results-based business, were seen right away by ad buyers.
A poignant example was aiding a performance-based ad agency in trimming ad waste by more than 50% for a national fast food chain with thousands of locations across America.
It took just one year for The Trade Desk to carve out a profitable business as ad agencies flocked to its platform desiring to take advantage of (RTB) or also commonly known as programmatic advertising.
Customer satisfaction is evident in its client retention rate of 95% for the past few years highlighting the dominating position The Trade Desk possesses in the digital ad industry.
The Trade Desk has not raised fees for ad buyers lately, but the value added from The Trade Desk to customers is accelerating at a brisk pace.
A great value proposition for potential clients.
The vigor of the business was highlighted when Green cited that each second his company is “considering over 9 million ad opportunities” for their ad inventory shows how The Trade Desk is up to date on almost every single ad permutation out there.
This speaks volume of the ad tech, which is the main engine powering the bottom lines at Google search and rogue ad seller Facebook (FB).
Google only gets 63,000 searches per second and shows that The Trade Desk has pushed the envelope in providing the best platform for ad buyers to seek its perfect audience.
Green’s mission of supporting big ad buyers optimize their ad budget has really caught fire and in a way that is completely transparent and objective.
The foundations that Green has assembled became even more valuable when Alphabet (GOOGL) chose to remove DoubleClick IDs, which would now prevent ad buyers from cross-platform reporting and measurement.
Previously, DoubleClick ID could cull data from assorted ads and online products based on a unique user ID named DoubleClick ID.
Ad purchasers then would data transfer to pull DoubleClick log files and measure them against impressions served from other ad servers across the web.
Effectively, ad buyers could track the user through the whole ad process and determine how useful an ad would be to that specific user.
In an utter conservative move to satisfy Europe’s General Data Protection Regulation (GDPR), DoubleClick IDs are no longer available for use, and tracking the ad inventory performance from start to finish became much harder.
Cutting off the visibility of the DoubleClick ID in the DoubleClick ecosystem was a huge victory for The Trade Desk because DoubleClick ID measured 75% of the global ad inventory.
Ad buyers would be forced to find other measurement systems to help calculate ad performance.
Branding and executing as the transparent and fair ad platform helping ad agencies was a great idea in hindsight with the world becoming a great deal more sensitive to data privacy.
The Trade Desk is perfectly placed to reap all the benefits and boast excellent technology to capitalize on this changing big data landscape. It is already seeing this happen with new business wins including large global brands such as a major food company, a global airline, and another large beverage company.
The global digital ad market is a $700 billion market today and trending toward $1 trillion in the next five to seven years
The generational shift to mobile and online platforms will invigorate The Trade Desk’s bottom line as more big ad buyers will make use of its proprietary platform to place programmatic ads.
Content distribution systems are fragmenting into skinny bundles hyper-targeting niche content users such as Sling TV, FuboTV, and Hulu.
There are probably 30 different ways to watch ESPN now, and these 30 platforms all require ad placement and optimization.
Some of the names The Trade Desk is working with are the who’s who of digital content ownership or distribution including Baidu (BIDU), Google, Alibaba (BABA), Pandora (P), and Spotify (SPOT) -- and the names are almost endless.
It’s the Wild West of ads and content these days because TV distribution has never been more fragmented.
Content creation avenues are desperate to boost ad income and are increasingly attempting to go direct to consumers.
Ad-funded Internet TV barely existed a few years ago. And ad inventory is all up for grabs benefitting The Trade Desk.
All of this explains why the stock is up more than 180% in 2018, and this is just the beginning.
The growth numbers put Amazon (AMZN) and Netflix (NFLX) to shame.
The Trade Desk scale on inventory has spiked by more than 700% YOY.
The option to hyper-target increases as more ad inventory is stocked.
Management mentioned in its second-quarter performance that “nearly everything went right. We executed well and one of the most dynamic environments we've seen.”
It is one of the most bullish statements I have heard from a public company.
Quarterly revenue ballooned 54% YOY to a record $112 million, and the 54% YOY growth equaled the 54% YOY growth in Q2 2017.
Ad Age's top 50 worldwide advertisers doubled ad spend in the past year positioning The Trade Desk for continued hyper-growth, not only for 2018 but in 2019 and beyond.
Mobile spend jumped nearly 100% YOY, accounting for 45% of ad spend on the platform, which is 400% higher than the industry average for mobile ad spend according to eMarketer.
Data spend was also a huge winner rising by nearly 100% smashing another record.
In the meantime, the overseas business continued its robust growth in Europe and Asia, up 85% YOY.
The Trade Desk confidence in its performance chose to increase guidance to $456 million for the year, a 48% YOY improvement.
When upper management says “when we see surprises, they typically are to the upside” you take notice, because this tech company is perfectly placed in a growth sweet spot.
Massive developing markets are just starting to dabble with programmatic advertising. Markets such as China will see it become the new normal soon, opening up even more business for The Trade Desk.
The Trade Desk is also rolling out new products that will automate more of the process and reduce the number of clicks.
Wait for the pullback to get into this ad tech stock because even though it is up big this year, we are still in the early innings, and shares will march even higher.
________________________________________________________________________________________________
Quote of the Day
“I have a deep respect for the fundamentals of television, the traditions of it, even, but I don't have any reverence for it,” – said Netflix chief content officer Ted Sarandos.
Mad Hedge Technology Letter
August 27, 2018
Fiat Lux
Featured Trade:
(WHY ALIBABA IS THE FIRST STOCK TO BUY WITH THE OUTBREAK OF TRADE PEACE),
(BABA), (GOOGL), (AMZN), (YELP), (MSFT), (MU), (ZTE), (HUAWEI)
According to the government agency, China Internet Network Information Center, the Chinese Internet community has surpassed 802 million, which only represents a 57.7% penetration rate, miles behind the 89% penetration rate in America.
The gargantuan scale of the Chinese Internet world means China has three times as many Internet users than America, and this is a big deal.
The additional 30 million added to the Chinese Internet ecosphere in the first half of 2018 shows the scale in which local Chinese tech companies are playing with and use to their clear-cut advantage.
Ostensibly, most business strategies in China revolve around scaled tactics as the backbone to operations.
There is even more room to expand in the Middle Kingdom and one clear victor sits atop the parapet looking at the riffraff below and that is Chinese Internet conglomerate Alibaba (BABA).
Alibaba, led by Chinese Internet pioneer Jack Ma, posted its highest-performing growth quarter in the past four years.
Total quarterly revenue ballooned an incredible 61% YOY to $11.8 billion, highlighting the dominant position Alibaba possesses in the Chinese e-commerce landscape.
If you want to know what Amazon (AMZN) is going to do next watch Alibaba.
Profit margins were somewhat sacrificed in the process because of M&A activity that saw Alibaba move into the physical supermarket business snapping up 35 Hema supermarket locations then reinvesting into the business. Echoes of Whole Foods?
Alibaba did not stop there, funneling another $3 billion into food delivery app ele.me, which plans to merge its operations with Yelp (YELP) lookalike app Koubei.
If you thought Silicon Valley moves at a rapid pace, the Chinese Internet space moves faster than lighting.
Alibaba last year dipped into the retail segment as well pocketing a department store chain with 29 stores along with 17 shopping malls.
Alibaba is the closest replica the world has to Amazon and thus is an ideal barometer of the health of the overall Chinese consumer and a peek under the complicated hood that is the Chinese economy.
Alibaba also provides onlookers at how China and its Internet behemoths are coping with the global trading war that has invaded the news headlines from its outset.
The short answer to all this is that China is coping quite well and by no means is ready to back down.
Indeed, there will be peripheral pressures exerted from the fringes, but the core engines remain intact and Chairman Xi can fall asleep in his Beijing abode more than peacefully.
A reason for the stalemate between the two governments is that both are quietly confident they have the levers in place to absorb whatever Molotov cocktails the other has to throw at them.
Investors would be mad to dismiss China’s capabilities after experiencing a mesmerizing economic rise enriching hundreds of millions of Chinese nationals that can be found comfortably living in western megacities in luxury real estate often with a real estate portfolio dotted around the world.
Alibaba’s management made it known on the earnings report that it is not worried much about the trade war because it is largely focused on the domestic Chinese consumer, which has been one of the best economic stories of the past decade.
The overseas expansion unfolding under Alibaba’s tutelage is away from the western world and predominantly focused on Southeast Asia and Eastern Europe where cheap, value-for-money hardware and software allows citizens at these income levels to participate in the e-commerce game.
These individuals can’t afford iPhones on a salary of peanuts. And Alibaba has targeted the undeveloped world as a potential lever of substantial growth.
The regulatory harshness of the west has shut out Huawei and ZTE from its shores. Australia followed suit as well, banning the two telecom companies even though it enjoys a better relationship with Beijing than Europe or North America.
China has already planned a workaround because the engines driving the Chinese tech miracle are semiconductor companies such as Micron (MU), which sells boatloads of DRAM memory chips to Chinese tech companies that flood the world with smartphones and other gadgets.
Beijing has already formulated a plan to circumvent American chips by tapping Korean, European, and Japanese chips to replace the current American supply that could vanish at any time.
Shenzhen-based chip company HiSilicon fully owned by Huawei is responsible for supplying Huawei with chips and is the biggest local designer of integrated circuits in China.
This is what the future of China looks like when China can finally build up the adequate supply necessary to achieve its plans to dominate global technology, America, and the world.
But the plan is still in the process of playing out. The awkwardness was highly visible when the administration’s ban of selling U.S. manufactured components to telecommunications company ZTE resulted in the company almost shutting down until a last-second change of heart by the administration.
The near-death experience will invigorate ZTE to muster its own local supply of chips to avoid the unreliable foreign supply and a deja vu feeling.
American chip companies won’t be able to enjoy the Chinese market for long as all these negative experiences for Chinese companies has forced Chinese tech companies to search and secure a guaranteed chip supply.
At the same time, Chinese local smartphone players have gone from 0 to 60 in no time with companies that barely existed a few years ago, such as Oppo, Vivo coming into the fore along with Huawei picking up 43% of the global smartphone market.
This is bad news for Apple as local competitors are learning fast and furious how to build premium smartphones via re-engineering the current technology or through forced technology transfers.
These companies subsequently offer these phones at the lowest possible price point. And at some point in the near future Apple could be expendable if Chinese smartphones start to display the type of quality the best phones show.
Chinese domestic consumption and investment comprise 90% of the GDP growth in China and are propped up by three robust trends including real wage growth boosting the middle-class population, high savings rate that of which Americans would be jealous, and easy access to credit vehicles.
When I was recently in the Middle Kingdom, it was highly evident that as the generations became younger, their quality of life was higher than their parents.
The opposite is happening in America with millennials earning demonstrably less than their parents’ generation while the American middle class is shrinking at an accelerated pace.
Beijing knows this and hopes to wait things out as it feels time is a positive variable for China and not America.
It is true that if this trade war took place in 20 years in the future, China would be in a stronger strategic position to extract whatever concessions it desires because even though Chinese growth is slowing, it is still growing at 6.5%.
And if you don’t believe what I just said then just look at Alibaba’s cloud division, which grew 93% YOY opening artificial intelligence-based data centers around Europe to battle Amazon (AMZN) and Microsoft (MSFT).
Europe was once Elysian Fields for American tech companies, but with European regulators going after American tech and China encroaching on European turf, the future looks a lot less certain for the FANGs there than ever before.
Alibaba’s operating margins dipped 10% YOY but the slide will be returned to shareholders in the future in the form of high-quality revenue and is worth the investment into the most innovative ideas of tomorrow.
I did not even mention the large stake Alibaba has in Ant Financial, which operates the ubiquitous digital payment app Alipay.
It would be analogous to Amazon if it owned Visa.
Alibaba is one of the best tech companies in the world headed by a former Chinese English language teacher in Hangzhou.
If America becomes too difficult or expensive with which to do business, Alibaba and Chinese tech will just recalibrate their strategy to deeper infiltrate the confines of Southeast Asia and the rest of the undeveloped world.
Any price war on undeveloped soil favors the Chinese as they have mastered scale better than anyone on the planet.
The stellar Alibaba numbers also mean the trade war has no end in sight as each player thinks they have the upper hand. But it also means the tech giants from both countries will come out unscathed and will lead their country’s respective equity markets higher for the foreseeable future.
The Jeff Bezos of China – Alibaba’s Jack Ma
________________________________________________________________________________________________
Quote of the Day
“Technology is nothing. What's important is that you have a faith in people, that they're basically good and smart, and if you give them tools, they'll do wonderful things with them,” – said Apple cofounder and former CEO Steve Jobs.
Global Market Comments
August 23, 2018
Fiat Lux
Featured Trade:
(WHY THE DOW IS GOING TO 120,000),
(X), (IBM), (GM), (MSFT), (INTC), (DELL),
($INDU), (NFLX), (AMZN), (AAPL), (GOOGL),
(THE MAD HEDGE CONCIERGE SERVICE HAS AN OPENING),
(TESTIMONIAL)
For years, I have been predicting that a new Golden Age was setting up for America, a repeat of the Roaring Twenties. The response I received was that I was a permabull, a nut job, or a conman simply trying to sell more newsletters.
Now some strategists are finally starting to agree with me. They too are recognizing that a ganging up of three generations of investment preferences will combine to drive markets higher during the 2020s, much higher.
How high are we talking? How about a Dow Average of 120,000 by 2030, up another 465% from here? That is a 20-fold gain from the March 2009 bottom.
It’s all about demographics, which are creating an epic structural shortage of stocks. I’m talking about the 80 million Baby Boomers, 65 million from Generation X, and now 85 million Millennials. Add the three generations together and you end up with a staggering 230 million investors chasing stocks, the most in history, perhaps by a factor of two.
Oh, and by the way, the number of shares out there to buy is actually shrinking, thanks to a record $1 trillion in corporate stock buybacks.
I’m not talking pie in the sky stuff here. Such ballistic moves have happened many times in history. And I am not talking about the 17th century tulip bubble. They have happened in my lifetime. From August 1982 until April 2000 the Dow Average rose, you guessed it, exactly 20 times, from 600 to 12,000, when the Dotcom bubble popped.
What have the Millennials been buying? I know many, like my kids, their friends, and the many new Millennials who have recently been subscribing to the Diary of a Mad Hedge Fund Trader. Yes, it seems you can learn new tricks from an old dog. But they are a different kind of investor.
Like all of us, they buy companies they know, work for, and are comfortable with. During my Dad’s generation that meant loading your portfolio with U.S. Steel (X), IBM (IBM), and General Motors (GM).
For my generation that meant buying Microsoft (MSFT), Intel (INTC), and Dell Computer (DELL).
For Millennials that means focusing on Netflix (NFLX), Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL).
That’s why these four stocks account for some 40% of this year’s 7% gain. Oh yes, and they bought a few Bitcoin along the way too, to their eternal grief.
There is one catch to this hyper-bullish scenario. Somewhere on the way to the next market apex at Dow 120,000 in 2030 we need to squeeze in a recession. That is increasingly becoming a topic of market discussion.
The consensus now is that an impending inverted yield curve will force a recession sometime between August 2019 to August 2020. Throwing fat on the fire will be a one-time only tax break and deficit spending that burns out sometime in 2019. These will be a major factor in U.S. corporate earnings growth dramatically slowing down from 26% today to 5% next year.
Bear markets in stocks historically precede recessions by an average of seven months so that puts the next peak in top prices taking place between February 2019 to February 2020.
When I get a better read on precise dates and market levels, you’ll be the first to know.
To read my full research piece on the topic please click here to read “Get Ready for the Coming Golden Age.”
Dow 1982-2000 Up 20 Times in 18 Years
Dow 2009-Today Up 4.3 Times in 9 Years So Far
Mad Hedge Technology Letter
August 22, 2018
Fiat Lux
Featured Trade:
(WHAT’S IN STORE FOR TECH IN THE SECOND HALF OF 2018?),
(GOOGL), (AMZN), (FB), (UTX), (UBER), (LYFT), (MSFT), (MU), (NVDA), (AAPL), (SMH)
Tech margins could be under pressure the second half of the year as headwinds from a multitude of sides could crimp profitability.
It has truly been a year to remember for the tech sector with companies enjoying all-time high probability and revenue.
The tech industries’ best of breed are surpassing and approaching the trillion-dollar valuation mark highlighting the potency of these unstoppable businesses.
Sadly, it can’t go on forever and periods of rest are needed to consolidate before shares relaunch to higher highs.
This could shift the narrative from the global trade war, which is perceived as the biggest risk to the current tech market to a domestic growth issue.
Healthy revenue beats and margin growth have been essential pillars in an era of easy money, non-existent tech regulation, and insatiable demand for everything tech.
Tech has enjoyed this nine-year bull market dominating other industries and taking over the S&P on a relative basis.
The lion’s share of growth in the overall market, by and large, has been derived from the tech sector, namely the most powerful names in Silicon Valley.
Late-stage bull markets are fraught with canaries in the coal mine offering clues for the short-term future.
Therefore, it is a good time to reassess the market risks going forward as we stampede into the tail end of the financial year.
The shortage of Silicon Valley workers is not a new phenomenon, but the dearth of talent is going from bad to worse.
Proof can be found in the controversial H-1B visa program used to hire foreign tech workers mainly to Silicon Valley.
A few examples are Alphabet (GOOGL), which was granted 1,213 H-1B approvals in 2017, a 31% YOY rise.
Alphabet’s competitor Facebook (FB) based in Menlo Park, Calif., was granted 720 H-1B approvals in 2017, a 53% YOY jump from 2016.
This lottery-based visa for highly skilled foreign workers underscores the difficulty in finding local American talent suitable for a role at one of these tech stalwarts.
Amazon (AMZN) made one of the biggest jumps in H-1B approvals with 2,515 in 2017, a 78% YOY surge.
The vote of non-confidence in hiring Americans shines an ugly light on American youth who are not applying themselves to the domestic higher education system as are foreigners.
For the lucky ones that do make it into the hallways of Silicon Valley, a great salary is waiting for them as they walk through the front door.
Reportedly, the average salary at Facebook is about $250,000 and Alphabet workers take home around $200,000 now.
Pay packages will continue to rise in Silicon Valley as tech companies vie for the same talent pool and have boatloads of capital to wield to hire them.
This is terrible for margins as wages are the costliest input to operate tech companies.
United Technologies Corp. (UTX) chief executive Gregory Hayes chimed in citing a horrid “labor shortage in the U.S. and in Europe.”
He followed that up by saying the company will have to grapple with this additional cost pressure.
Certain commodity prices are spiraling out of control and will dampen profits for some tech companies.
Uber and Lyft, ridesharing app companies, are sensitive to the price of oil, and a spike could hurt the attractiveness to recruit potential drivers.
The perpetually volatile oil market has been trending higher since January, from $47 per barrel and another spike could damage Uber’s path to its IPO next year.
Will Uber be able to lure drivers into its ecosystem if $100 per barrel becomes the new normal?
Probably not unless every potential driver rolls around in a Toyota Prius.
If oil slides because of a global recession instigated by the current administration aim to rein in trade partners, then Uber will be hard hit abroad because it boasts major operations in many foreign megacities.
A recession means less spending on Uber.
Either result will be negative for Uber and ridesharing companies won’t be the only companies to be hit.
Other victims will be tech companies incorporating transport as part of their business model, such as Amazon which will have to pass on more delivery costs to the customer or absorb the blows themselves.
Logistics is a massive expense for them transporting goods to and from fulfillment centers. And they have a freshly integrated Whole Foods business offering two-hour free delivery.
Higher transport costs will bite into the bottom line, which is always a contentious issue for Amazon shareholders.
Another red flag is the deceleration of the global smartphone market evident in the lackluster Samsung earnings reflecting a massive loss of market share to Chinese foes who will tear apart profit margins.
Even though Samsung has a stranglehold on the chip market, mobile shipments have fell off a cliff.
Damaging market share loss to Chinese smartphone makers Xiaomi and Huawei are undercutting Samsung products. Chinese companies offer better value for money and are scoring big in the emerging world where incomes are lower making Chinese phones more viable.
The same trend is happening to Samsung’s screen business and there could be no way back competing against cheaper, lower quality but good enough Chinese imitations.
Pouring gasoline on the fire is the Chinese investigation charging Micron (MU), SK Hynix, and Samsung for colluding together to prop up chip prices.
These three companies control more than 90% of the global DRAM chip market and China is its biggest customer.
The golden days are over for smartphone growth as customers are not flooding into stores to buy incremental improvements on new models.
Customers are staying away.
The smartphone market is turning into the American used car market with people holding on to their models longer and only upgrading if it makes practical sense.
Chinese smartphone makers will continue to grab global smartphone market share with their cheaper premium versions that western companies rather avoid.
Battling against Chinese companies almost always means slashing margins to the bone and highlights the importance of companies such as Apple (AAPL), which are great innovators and produce the best of the best justifying lofty pricing.
The stagnating smartphone market will hurt chip and component company revenues that have already been hit by the protectionist measures from the trade war.
They could turn into political bargaining chips and short-term pressures will slam these stocks.
This quarter’s earnings season has seen a slew of weak guidance from Facebook, Nvidia (NVDA) mixed in with great numbers from Alphabet and Amazon.
Beating these soaring estimates is not a guarantee anymore as we move into the latter part of the year.
Migrating into the highest quality names such as Amazon and Microsoft (MSFT) with bulletproof revenue drivers would be the sensible strategy if tech’s lofty valuations do not scare you off.
Tech has had its own cake and ate it too for years. But on the near horizon, overdelivering on earnings results will be an arduous chore if outside pressures do not relent.
It’s been fashionable in the past for market insiders to call the top of the tech market, but precisely calling the top is impossible.
The long-term tech story is still intact but be prepared for short-term turbulence.
________________________________________________________________________________________________
Quote of the Day
“By giving people the power to share, we're making the world more transparent,” – said cofounder and CEO of Facebook Mark Zuckerberg.
