Mad Hedge Technology Letter
June 8, 2018
Fiat Lux
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Mad Hedge Technology Letter
June 4, 2018
Fiat Lux
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(THE INNOVATOR'S DILEMMA),
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I must confess, innovation can't be taught.
You are innovative, or you aren't. Don't pretend otherwise.
Innovation drives companies to outperform.
The economic environment becomes more cutthroat by the day rendering complacent companies obsolete.
Top-quality innovation leading to outstanding entrepreneurship is a well-traversed theme transcending industries across the American economic landscape.
The reservoir of innovation in 2018 is primarily flowing from one narrow source - the tech sector.
This is the primary motive for many adjacent industries to incorporate tech expertise into existing and commonly ancient legacy systems.
Tech promises laggards a ride atop the gravy chain.
In many instances, these companies are grappling with existential threats from all directions.
The best example is Walmart (WMT), which effectively mutated into the next FANG with its majority stake in Indian e-commerce juggernaut Flipkart. This deal followed its purchase of Jet.com in 2016, which was its first foothold in the e-commerce world.
Traditional companies are becoming tech companies because of the ability to innovate all leads through the fingertips of talented coders.
When all roads lead to Rome, you will have to go through Rome.
The hunger for innovation has had major implications to the financial side of technology.
The story picks up from a recent report disclosing the 2017 remuneration of co-founder and CEO of Instagram competitor Snapchat (SNAP) Evan Spiegel.
The $637.8 million he received in 2017 was the third-highest annual compensation ever to be collected by a CEO.
Snapchat has tanked following its 2017 IPO and the main reason is Facebook is stealing its lunch and leaving Snap the crumbs on which to nibble.
Instagram, using a cunning strategy of cloning Snap's best features, single-handedly bludgeoned Snap's share price cutting it by half after the successfully launched IPO.
Snap has been an unequivocal sell on the rallies stock since the inception of the Mad Hedge Technology Letter and the disastrous redesign did no favors either.
My first risk off recommendation was Snapchat and at the time it was trading at $19. To revisit the story, please click here.
Microsoft (MSFT) is a great stock because it posts accelerated revenue and earnings, while Snapchat is a terrible company because it produces accelerated losses and lousy user growth.
A company almost 100 times smaller than Microsoft should not be struggling to grow.
It's a failure of epic proportions.
Small companies expand briskly because the law of numbers is leveraged in their favor and the tiniest bump of additional business has a larger effect on the bottom line.
As it stands, Snapchat lost $373 million in 2015, and followed that up with a disastrous $514 million loss in 2016, and a gigantic $3.45 billion loss in 2017.
Losses accelerated by 800% but annual revenue only doubled last year.
It was no shocker that the poor relative performance resulted in the sacking of 100 Snapchat developers.
Smart people would assume an annual salary of this magnitude (Spiegel's) would be the result of excellent performance.
Why else would a CEO get a lavish payout?
I'll explain.
The demand for tech knows no bounds.
In this environment, venture capitalists will pay up for brilliant ideas.
The problem is that brilliant ideas don't grow on trees.
The few cutting-edge ideas have stacks of money thrown at them.
In this sellers' market, founders can cherry-pick the best financing deal that will enrich them the quickest and empower them the most.
Multiple offers have become the norm just as with the Silicon Valley housing market.
The consequences are the premium for these brilliant ideas keeps rising and investors keep paying higher prices without a second thought.
Therefore, founders and CEOs are opting for the financial packages that offer them bulletproof voting shares, allowing the innovators to control operations to the very last detail.
The founders are responsible for leading innovation, and investors are offering glorious pay terms for this innovation because it can't be substituted. Low-quality tech has less of a premium because the technology can easily be rebranded and substituted.
Technology from the ground up is slowly being automated away leaving runaway valuations the norm.
Giving the keys to the Ferrari makes sense as tech companies formulate long-term strategies based on scale. And securing job security without the threat of an activist takeover offers peace of mind for CEOs who are focused on the daily grind.
Knowing their baby won't get stolen from the carriage goes a long way in tech land.
Venture capitalists are reticent about following through with proper governance because they do not want to alienate the innovators who could choose to stop innovating.
These investors also know that tech is the least regulated industry in the world, so it's better to turn a blind eye to cunning growth strategies that push the border of regulation.
The competition to fund these emerging tech companies is borderline criminal.
Uber declined a $3 billion investment by no other than the Oracle of Omaha Warren Buffett.
Buffett described himself as a "great admirer" of Uber CEO Dara Khosrowshahi.
Uber is one of the most unlikely Warren Buffett investments because it doesn't create anything and burns cash faster than a Kardashian.
Buffett's faith in Uber underscores the reliance on tech to fuel the stock market to new heights.
Buffett also admitted mistakes on missing out on Alphabet (GOOGL) and Apple (AAPL).
Rightly so.
Then add in the mix of SoftBank's $100 billion vision fund that just announced an upcoming sequel with another $100 billion vision fund.
Where is all this money flowing into?
Of the tech companies that went through an IPO last year backed by venture capitalist money, 67% relinquished superior voting rights to key founders, a rise of 54% since 2010.
Compare that to non-tech companies that only allow 10% to 15% of CEOs to institute a voting structure that will put them in charge indefinitely.
In many instances, the persona of these ultra-famous tech CEOs has taken on a life of its own.
Elon Musk, CEO of Tesla, is the most prominent example of a celebrity tech innovator milking every possible penny from his shareholders and is not shy about flaunting it.
News has it that Musk needs to go back to the well for another stage of financing later this year.
Don't worry, the money will be there in this climate.
Buffett's rejection was due to losing out to SoftBank, which beat out Buffett to invest in Uber.
SoftBank just announced a $3.35 billion investment into GM's (GM) autonomous driving unit called Cruise enhancing the best big data portfolio in the world.
At this pace, CEO of SoftBank Masayoshi Son will have a piece of every major big data company in the world.
This all bodes well for tech equities as the insatiable hunt for emerging, innovative tech spills over into daily equity market driving up the prices for all the top innovating public companies such as Salesforce, Amazon, Microsoft and Netflix.
Buffett, down on his luck after being shafted by Uber, picked up more Apple shares.
He sold all his IBM (IBM) shares after reading the Mad Hedge Technology Letter advising him to stay away from legacy companies.
Smart move, Warren. You can pick up the tab for our next lunch date.
If you have a few billion to throw around, expect multiple offers over the asking price for any high-grade tech innovation.
The going rate is shooting through the roof and you might NEVER be able to sack the founder.
Caveat emptor.
_________________________________________________________________________________________________
Quote of the Day
"We knew that Lyft was going to raise a ton of money. And we went (to their investors): 'Just so you know, we're going to be fund-raising after this, so before you decide whether you want to invest in them, just make sure you know that we are going to be fund-raising immediately after.' " - said former CEO and founder of Uber Travis Kalanick when asked how he copes with competition.
Mad Hedge Technology Letter
May 21, 2018
Fiat Lux
Featured Trade:
(HERE'S THE BIGGEST TECHNOLOGY CONTRACT IN HISTORY)
(AMZN), (MSFT), (ORCL), (IBM), (GOOGL)
The return of the Jedi is coming.
Luke Skywalker and Obi-Wan Kenobi will enter the cloud and use the force.
Not the Jedi of the famous George Lucas films, but JEDI - Joint Enterprise Defense Infrastructure commissioned by the Department of Defense.
This large contract is up for grabs.
Rumor has it that Amazon is in the driver's seat to become the government's right-hand man.
The purpose of this broad-based upgrade is to enhance communication channels among military branches by loading up operations into the cloud.
Artificial Intelligence (A.I.) and machine learning will be integrated as well.
One task slated for modernization includes the heaps of documents waiting to be translated from Arabic, Farsi, Chinese and other foreign languages into English.
A.I. will organize which documents have priority over others as well as aiding in raw translation. This will save the Department of Defense's overworked linguists thousands of hours in brute translation work.
As it stands, the government is grappling with an overlapping fractious system with legacy software up to 20 years old.
These legacy systems of yore are poor at keeping out the cyber criminals looking for a smash-and-data grab.
One instance where massive inefficiencies rear its ugly head is in the Department of Agriculture.
This department has 22 chief information officers that require seven more personal assistants inflating the IT budget.
The government could become the best turnaround story in the tech industry in years.
This turnaround could eventually become bigger than Microsoft and Cisco, which are the poster children for extreme cosmetic surgery in Silicon Valley.
The government burns $90 billion per year servicing IT operations, and JEDI is slated to offer an attractive sum of $100 billion over 10 years to a private company.
Not only will the Department of Defense modernize, but every part of the government will adopt new technologies.
Security is a priority for this administration after its legitimacy was questioned due to alleged nefarious Russian involvement.
The Committee on Foreign Investment in the United States (CFIUS) has buckled down rejecting a myriad of attempted foreign takeovers of cutting-edge tech companies stressing the need to properly harness local tech companies' ingenuity to the benefit of the country.
These new opportunities do not affect the already $1 billion per quarter that Alphabet (GOOGL) takes in from government servicing.
The $1 billion contract was given to Alphabet to develop the Algorithmic Warfare Cross-Functional Team industrially working on Project Maven.
Project Maven is the Department of Defense's attempt to integrate A.I. and machine learning into motion detector technology applied to surveillance drones using the Google cloud.
Project Maven received an additional boost to its objectives with an additional $100 million cash injection recently underlining the government's efforts to make warfare more efficient and less expensive.
Amazon Web Services (AWS) has also carved out a nice $5 billion per quarter business thanks to the power brokers in Washington.
Another side deal consummated recently has thrust Microsoft into the frame as well.
Microsoft (MSFT) agreed with the Office of the Director of National Intelligence to service 17 intelligence agencies with the Microsoft Azure cloud platform.
The deal was reported to be valued at "hundreds of million" of dollars.
Another separate deal agreed by both parties has Microsoft migrating another 3.4 million users and 4 million devices from the Department of Defense into the cloud.
All told, Microsoft has pulled in more than $1.3 billion of orders from the government in the past five years.
Bill Gates's old company was rewarded certification to supply the government with computers, operating systems, Microsoft Office, and the cloud services bolstering their credentials to potentially extract more government business.
The administration has adopted a winner takes all approach to the JEDI contract preferring one cloud provider to maintain the infrastructure.
Companies are scratching and clawing to get within a shout of winning this valuable revenue stream that could extrapolate down the road.
JEDI accounts for just 20% of the cloud possibilities for the tech companies in the government system.
The further 80% of digitization will happen down the road.
Firms are up in arms about the single platform solution and believe branching out to multiple platforms will come in use if part of the operation goes down.
Hybrid solutions are the norm for 80% of Fortune 500 companies.
As it is, International Business Machines Corp. (IBM), Oracle (ORCL), Alphabet, Amazon (AMZN), and Microsoft have been adamant that they are the best candidates for the job.
Amazon has been on a one-man mission mobilizing its all-star team of lobbyists to gain an edge.
Amazon has been part of the government's purse strings for quite some time.
It was awarded a $600 million contract in 2013.
Secretary of Defense James Mattis spoke about the relationship with Amazon in glowing terms characterizing Amazon's performance as "impressive" in terms of securing data and functionality.
The positive Amazon feedback has given AWS a head start. It hopes to capitalize on the biggest transfer of data to the cloud in modern history.
Once completed, departments will at last be able to access files from different branches on the same platform. This process is currently done manually.
Quickening the pace of modernization is a prerogative for the new administration.
President Donald Trump signed an executive order to spur on the process of getting rid of the decaying system.
Son-in-law Jared Kushner has also been an advocate of the agonizing overhaul.
This bold initiative ties in well with enhancing cybersecurity inside Washington at a time when hackers have penetrated legacy systems with ease.
Getting the White House up and running will improve the operation of the government. From an investor's point of view, it will add materially to the bottom line of companies that start to win more contracts.
This underscores the reliance of our government and economy on the large cap tech companies that are single-handedly propping up the current bull market.
The White House will wake up one day and understand that technology innovation is more powerful than ever, and even the mayhem inside the White House can't stop the digitization of politics.
Going forward Amazon and Microsoft should get a healthy boost to their overflowing coffers. Legacy companies such as IBM and Oracle could be punished by the government as well as investors for being legacy companies, which could lead the government to pass over IBM and Oracle.
Yes Mr. President ... An Upgrade Is Needed
_________________________________________________________________________________________________
Quote of the Day
"What would I do? I'd shut it down and give the money back to the shareholders." - said Michael Dell in 1997, the founder of Dell Technologies, when asked what he would do if he was in charge of Apple.
Mad Hedge Technology Letter
May 16, 2018
Fiat Lux
Featured Trade:
(WHAT'S UP AT FACEBOOK?)
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Capitol Hill unleashed a healthy dose of criticism on Facebook (FB) CEO Mark Zuckerberg and he has mobilized the forces to avoid a repeat shellacking.
Zuckerberg's response has been to reshuffle his cabinet at the Menlo Park, CA, headquarters, and a few tell-tale signs offer a unique glimpse into Facebook's future.
Basically, something needed to change at Facebook.
The company single-handedly took the blame for the entire sector and was not the only company with a liberal stance on personal data.
Zuckerberg would like to eschew public humiliation and avoid being a sitting duck.
The episode in Washington highlights the need for Facebook to decouple itself from ad revenue, which makes up the lion's share of revenue at the firm and find other levers to pull.
Down the road, Facebook's ad business could get crimped by regulators, and a lack of fallback options haunts Facebook investors in their sleep.
Consequently, a whole slew of high-level management rotation is underway at Facebook.
It is the biggest shake-up in the history of Facebook.
The road map starts with one of Zuckerberg's best friends and protege Chris Cox who will manage the new "family of apps" segment.
This collection of projects he will preside over include WhatsApp, Messenger, Instagram, and the Facebook Core App.
The step up in responsibility is warranted for Chris Cox who was credited with creating the Facebook news feed after joining the company in 2005 after ditching his Stanford graduate degree program at the time.
The executive reshuffle coincided with WhatsApp co-founder Jan Koum, one of Silicon Valley's biggest advocates for data privacy, who quit his post as a show of disapproval to Facebook's business model.
Mark Zuckerberg wants to aggressively monetize the WhatsApp messenger service that was acquired for $19 billion in 2014.
Zuckerberg's blueprint involves using the WhatsApp phone numbers as a vehicle to monetize through offering different products.
Facebook would then collect the data from its 1 billion usership and WhatsApp would become Facebook's new advertisement clearing house.
WhatsApp's leadership vehemently refused this U-turn and Koum decided he would rather leave then see his baby ruined.
Facebook consistently refrained in the past from passing WhatsApp to the data mining scientists and was able to prevent full-scale implementations of advertisements onto its platform.
Currently, there are no ads on WhatsApp's interface, and users could be in store for a massive transformation in look and feel.
Facebook investors have been clamoring for Zuckerberg to start the process of making WhatsApp into a material revenue stream.
Time is of the essence as the big data police creep in from the shadows.
Putting Zuckerberg's top guy on the job embarks Facebook down a new path of hyper accelerated profit-making.
Well, that is the goal.
Compounding Facebook's pivot to other businesses is commissioning a new blockchain tech team.
Blockchain technology, the technology that helped unearth bitcoin, has seen a recent slew of endorsements from financial heavy hitters such as Goldman Sachs (GS), which acknowledged the formation of a new business brokering in bitcoin futures.
A year ago, no reputable organization would touch blockchain with a 10-foot pole.
The utilization of blockchain technology would allow trackability and provide more security.
That would help Facebook to understand the provenance of unique problems allowing staff to nip problems in the bud before they snowball.
Blockchain tech fits nicely within the constraints of the model and would enhance the existing Facebook product.
Let's not forget that Facebook has a mountain of cash to fix any problem that crops up.
It is not one of these early stage seed companies burning through heaps of cash waiting for "scalability" down the road.
Facebook is here and now, and it has the money to show for it.
The pillars of blockchain revolve around cryptography. Blockchain would effectively allow individuals to possess more power over their identity decentralizing the stranglehold from Menlo Park.
Thus, Facebook must invest deeply into blockchain to counter the fear that this technology can marginalize the core business.
This epitomizes the tendency for large-cap tech to become preemptive.
None of the powerful FANGs want to miss the next big shift in technology, and the cash hoard allows them to have skin in the game in each revolutionary trend.
The tide has changed at Facebook from the early years where growing the user base was paramount.
Now that user base has matured into a 2.2 billion marketplace.
Facebook's strategy has shifted to extracting more revenue per user and management closely follows this metric.
Mike Schroepfer, the CTO of Facebook, was tabbed as the man leading the charge for Artificial Intelligence (A.I.), Augmented Reality (A.R.), and Virtual Reality (V.R.) technology.
Facebook was able to poach Jerome Pesenti from IBM (IBM), where he was a critical cog in the development of IBM's Watson, to run the Facebook A.I. team. A.I. is routinely implemented into Facebook's core products to enhance performance.
Promoting Chris Cox as the next in line and giving him control over all the powerful products effectively pushes ad tech down the pecking order.
Javier Olivan is the new man at Facebook tasked for managing ads, analytics, and integrity, growth and product management.
Moving forward, the ad division will be laced with a certain level of security to avoid a repeat of Cambridge Analytica.
Zuckerberg must know that there are other Cambridge Analytica's hidden somewhere in the system; another incident would knock down the stock 5% to 10%.
Facebook could look vastly different in a few years if some of these profit drivers prove successful. It only needs one to work.
Disrupt or be disrupted.
At this point, the big tech companies are considering anywhere or anyone to capture accelerated growth. The FANGs are spilling over to other companies' turf.
Crossover is everywhere and this is just the beginning.
Expect Amazon's (AMZN) ad division to grow from the already $2 billion per quarter, gradually challenging the duopoly of Facebook and Alphabet in the digital ad revenue industry.
It is yet to be seen if the new revamp of management will produce better results.
This move could backfire as the management carousel excluded any fresh blood from taking part.
Effectively, Zuckerberg rotated his best friends into different parts of the business without demoting anyone.
Solidifying his close-knit circle of trust is no doubt a defensive reaction to being hounded the past few months, leaving his existing circle as the few people on which he can still count.
Facebook's stock remains healthy and the brouhaha stoked by the data leak gave investors a timely entry point.
I pounded on the table calling the bluff, begging readers to get into Facebook.
The long-term Facebook story is intact but the stock is overbought short-term.
Investors should not sleep on Facebook as it is a profit machine printing money like Apple (AAPL) and the executive revamp is a bullish development for Facebook.
My bet is that Chris Cox goes for the low hanging fruit monetizing WhatsApp, inciting the next leg up in Facebook shares later in the year.
_________________________________________________________________________________________________
Quote of the Day
"Simply put: We don't build services to make money; we make money to build better services." - said Facebook CEO Mark Zuckerberg
Global Market Comments
May 4, 2018
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(DON'T MISS THE MAY 9 GLOBAL STRATEGY WEBINAR),
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Global Market Comments
May 3, 2018
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Mad Hedge Technology Letter
April 26, 2018
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(THE SMALL AI PLAY YOU'VE NEVER HEARD OF),
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