Mad Hedge Technology Letter
April 3, 2018
Fiat Lux
Featured Trade:
(THE BIG WINNER FROM THE PHOENIX CAR CRASH),
(WAYMO), (TSLA), (GOOGL), (AAPL), (AMZN), (UBER), (GM), (FB)
Posts
In 2014, the juicy sound clips recorded by NFL legend Chris Carter at the annual NFL rookie symposium would be enough for those at league headquarters to have nervous breakdowns.
During a keynote speech, Chris Carter recommended that every rookie about to kick-start a sports career should find a "fall guy" just in case they found themselves on the wrong side of the law.
Carter later rescinded his comments and sincerely apologized for insinuating marginal tactics.
Lo and behold, it seems the most attentive listeners at the symposium weren't the players but the swashbuckling chauffeur-share service that has become the "fall guy" of Big Tech, none other than Uber.
The great thing (read: sarcastic here) for Uber about killing a pedestrian with autonomous vehicle technology is that it does not need to change its Silicon Valley mind-set of "move fast and break things."
Everything Uber touches seems to turn to mush. At least lately.
This revelation is extremely bullish for the other big players in the A.I. (Artificial Intelligence) driverless car space, mainly Waymo and General Motors (GM).
Granted, Uber came late to the party, but that cannot be an excuse for the myriad of shortcuts it promotes to build its business.
Waymo, the autonomous subsidiary of Google (GOOGL), has been honing its software, algorithms, and sensors for the past nine years like a sage samurai swordsmith from Kyoto. This type of detailed nurturing has led Waymo to rack up more than 5 million miles of testing on live roads.
The company recently commenced the first niche ride-hailing service in Phoenix, AZ, and just announced that it will purchase up to 20,000 electric cars from Jaguar Land Rover in a $1 billion deal to outfit with its cutting-edge technology.
Every day is a joyous day for Waymo because the first mover advantage is in full effect.
GM, another laggard, though considered in the top three, won't commence its robotic car fleet until late 2019. However, by that time, Waymo could be on the verge of mass rollouts if there are no setbacks.
The cherry on top for Waymo is Uber's knack of making a dog's breakfast of anything it pursues, magnifying an insurmountable lead for Waymo to possess.
Granted, the autonomous vehicle brain trust expected casualties, and the firm that made news for this mishap would be stuck with this label along with suspended operations.
Waymo missed a direct hit thanks to Uber and Tesla.
Tesla also took a direct hit when it announced that Walter Huang, an Apple engineer, sadly was killed in a Model X accident last weekend while his car was on autopilot.
It capped a horrible week by announcing a comprehensive recall of every Model S made before April 2016 for a faulty part. After fighting tooth and nail to maintain the $300 support level, Tesla swiftly sold off down to $250.
The disruption fetish permeating the ranks of the tech industry has its merits. Often the end result manifests through cheaper prices and better consumer services.
However, Uber's over-aggressiveness has placed it at the forefront of the regulation backlash along with Facebook (FB).
Google has certainly been playing its cards right, and having not run over a pedestrian consolidates its leading position
Luckily, the National Transportation Safety Board does not punish every participant using this technology.
No news is good news.
An extensive review of internal processes will hit team morale, and the burden of blame with fall upon the engineers.
The fallout from the tragic incidents will set back Tesla and Uber at least three to six months.
The suspension of their operations is akin to a white flag because Waymo is currently leaps ahead and plans to ramp up the mass rollout in the next two years with technology that is best of breed.
The running joke in the industry is that Uber's autonomous vehicle engineers are comprised of Waymo rejects.
Waymo already has more than 600 for-profit vehicles in operation in Arizona. And as every day without a fatality is considered a success, the Jaguars are next in line to be tricked-out with sensors and software.
Unceremoniously, Waymo has focused on safety as the pillar of its autonomous driving operation. Its conservative attitude toward danger will serve it well in the future. Waymo even spouted that its technology would have avoided the Uber accident.
Waymo has no desire to physically produce cars, but it aspires to sell licenses to the technology that could be installed in trucks and delivery vehicles, too.
The licenses could act as de-facto SaaS (software as a service) reoccurring revenue that has catapulted cloud companies to untold heights.
Google would also be able to integrate Google Maps, Google Docs, and all Google services into the robot-cab experience. The robo-taxi would merely serve as an incubation chamber to use the plethora of Google services while being transported from point A to point B.
And with Uber temporarily wiped off the map, Waymo seems like a great bet to monetize this segment at massive scale.
Google is truly on a roll as of late, even finding the perfect fall guy for the big data leak that has roiled the tech world, inducing a wicked tech sell-off - Facebook.
Instead of extracting data from user-posted content, Google's search builds a profile on users' search tendencies, and it is just as culpable in this ordeal.
Ironically, all the heat is coming down on Facebook's plate, and Mark Zuckerberg's lack of tactical PR noise is cause for investor concern.
The mountains of cash vaulted up over the years has made barriers of entry into new fields simple.
For example, Amazon's desire to lead health care came out of left field, and 10 years ago nobody ever thought the iPod company would make smart watches.
The interesting development in broader tech is the disintegration of unity that once supported the backbone of these firms.
Tim Cook, chief executive officer of Apple, railed on Facebook's business model and trashed Mark Zuckerberg's blatant disregard for privacy in order to profit from people's personal lives.
Large cap tech has never had as much overlap as it does now, and the new normal is throwing others under the bus.
If Google is dragged into the Facebook regulatory orbit, the silver lining is that the world's best autonomous driving technology will soon transform its narrative and put its incredibly profitable search business on the back burner.
Markets are forward looking and reward outstanding growth stories.
Tech is growth.
Morgan Stanley issued a report claiming the repercussions of mass-integrating this technology would be to the tune of about half a trillion dollars. That includes the $18 billion saved in annual health costs to automotive injuries. Also, 42% of police work ignites from a simple traffic stop. This would vanish overnight as well as concrete parking garages that blight cities. Car insurance is another industry that will be swept into the dustbin of ancient history.
Yes, tech has evolved that fast when Google can start claiming its revered search business as the daunted L word - legacy business.
The fog of war is starting to burn off and the visible winner is Waymo.
The shaping of its autonomous vehicle business is starting to take concrete form and although this won't affect earnings in the next few years, it will be a game changer of monumental proportions.
Uber is seriously in the throes of having an existential problem because of Waymo's outperformance. Venture capitalists heavily invested in Uber because of the promises of autonomous vehicle technology.
This is its entire growth story of the future.
Without it, it is a simple taxi company run on an app. There is no competitive advantage.
Waymo is on the verge of creating a scintillating growth business that is effectively Uber without a driver while simultaneously destroying Uber.
Ouch!
It speaks volumes to the ascendancy. And if Waymo miraculously capitulates, Google can always call Chris Carter and find another "fall guy."
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Quote of the Day
Asked what he would do if he was Mark Zuckerberg, Apple CEO Tim Cook said, "I wouldn't be in this situation."
Global Market Comments
March 29, 2018
Fiat Lux
Featured Trade:
(IS IT ALL OVER FOR ARTIFICIAL INTELLIGENCE?),
(GOOGL), (TSLA), (NVDA), (LRCX), (AMD), (BOTZ),
(CHINA'S COMING DEMOGRAPHIC NIGHTMARE)
Take a look at the worst performing stocks of the past two weeks and they all have one theme in common: artificial intelligence.
You can trace the beginning of the move back to the Arizona crash by an Uber AI autonomous driven car that killed a pedestrian.
As all those who have studied chaos theory in mathematics, it's like the proverbial butterfly that flapped its wings in a Brazilian rain forest, which then triggered a typhoon in Japan.
Never mind that the pedestrian was jaywalking at night wearing dark clothes. AI is supposed to see this. My guess is that only a sensor failure could have caused the accident, a dud $5 part, which means it has nothing to do with AI.
This is the second autonomous driving death in three years. The last one, involving a Tesla Model S-1 in Florida, didn't see the back of a white truck while driving into the sun, and crashed into it, killing the driver.
And here is the problem if you are a trader or investor.
Autonomous driving has been a major theme in the entire tech sector for the past two years.
You can start with the car companies, Tesla (TSLA), Uber, and Google's (GOOGL) Waymo, and extend all the way out through the entire ecosystem.
That would include the chip makers, NVIDIA (NVDA), which is suspending its autonomous program, Intel (INTC), Advanced Micro Devices (AMD), and the chip equipment maker Lam Research (LRCX).
So, is it game over for these companies? Is it time to pick up our marbles and play elsewhere (there is nowhere else)?
I don't think so.
Let's look at the hard numbers involving automobile accidents. During the same three-year period that AI cars killed two people, human drivers killed a staggering 100,000, and left millions with injuries.
So there is absolutely no doubt that AI is the superior technology. AI-driven cars don't text while driving, drink, take drugs, drive while tired, overdo it with an afternoon of wine tasting in Napa Valley, or look down at their cell phones, as did the safety driver in the ill-fated Uber car in Phoenix.
AI is not just a self-driving car theme. It is permeating every aspect of the modern economy and will continue to do so at an accelerating pace. It is no one-hit wonder.
All that is happening now is that AI and tech stocks in general are backing off from grievously overbought conditions.
As we approach the next round of earnings reports in a month, the market focus rapidly will shift back from tedious and distressful technicals. That's when they will rocket again.
There is an old market term for the current state of technology stocks. It is known as a "Buying Opportunity."
I haven't been able to touch stocks I love for months because they were completing upward moves of 50% to 300% over the past two years.
They have just become touchable once again.
To watch the video of the Phoenix crash and the expression of the clueless safety driver, please click here.
There is no doubt that old tech is back with a vengeance.
Look at the trifecta of blockbuster earnings reports from Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) recently, and you can reach no other conclusion.
The Microsoft turnaround in particular has been amazing.
PCs, and the software to run them were so 1990s.
After the Dotcom bust in 2000, Microsoft was dead money for years.
Founder Bill Gates retired in 2008. CEO Steve Ballmer finally got the message in 2013, and retired to pay through the nose, some $2 billion, for the basketball team, the LA Clippers.
Succeeding operating systems offered little that was new, and they fell woefully behind the technology curve.
Even I gave away my own machines years ago to switch to Apple devices. These virus immune machines are perfect for a small business like mine, as they seamlessly integrate and all talk to each other.
When the company brought out the Windows Phone in 2010, three years after Apple, people in Silicon Valley laughed.
Long given up for dead as a trading and investment vehicle, the shares have been on a tear in 2015.
The stock is hitting a new all time high FOR THE FIRST TIME IN 15 YEARS!
Satya Nadella, who took over management of the company in 2014, clearly had other ideas. The challenge for Nadella from day one was to move boldly into new technologies, while preserving its legacy Windows business lines.
So far, so good.
The key to the company?s new found success was it?s dumping of its old ?Wintel? strategy of yore that focused entirely on the growth of the PC market.
The problem was that the PC market stopped growing, as the world moved onto the Cloud and mobile.
The company is now rivaling Apple with $100 billion in cash, almost all held tax-free overseas.
EPS growth will reach 10% next year, beating other big competitors.
Windows and servers, the (MSFT)?s core products, still account for 80% of the firm?s business.
But its cloud presence is being ramped up at a frenetic pace, where the future for the company lies, nearly doubling YOY. Mobile technologies, where it has lagged until now, are also on fire.
Rave reviews from its latest operating system upgrade, Windows 10, also helped.
On top of all of this, Microsoft is paying a generous 3% dividend. It?s earnings multiple at 15X makes it a bargain compared to other big tech companies and the rest of the market.
As I explained in my recent research piece ?Switching From Growth to Value? (click here?), Microsoft makes a perfect investment for a mature bull market.
It is not only at a multiple discount to the rest of the market, now at 18X, it is cheap when compared to the rest of its own sector as well.
This is when investors and traders bail from their high priced stocks to safer, lower multiple companies.
Obviously, I don?t want to pile into Microsoft, or any other of the big tech stocks on top of a furious 10% spike. But it is now safely in the ?buy on the dip? camp, along with the rest of big tech.
The party has only just stated.
To read my interview with Bill Gates? father, click here for ?An Evening With Bill Gates, Sr.?.
