Mad Hedge Technology Letter
March 14, 2025
Fiat Lux
Featured Trade:
(TECH SECTOR HEADING TO A NEW SPACE)
(DBX), (MCHP), (META), (MSFT)
Posts
Anyone out there who has children in high school or college, the best piece of advice to give them to prepare for a highly lucrative career in technology is that their path will most likely start outside of the United States.
Why?
In one fell swoop, Big Tech and other smaller tech firms have decided that American salaries are not worth the money and have accelerated a full-on position migration to the rest of the world.
The salary arbitrage is something that gets missed in corporate America but is also a reason why these American tech companies keep beating earnings results.
Everyone knows the biggest expensive line item to a tech firm isn’t the software, but the salaries.
Every executive I talk to has widespread plans to cut jobs, whether it be in Seattle, Washington, or Los Angeles, California, and install them in places like India, Moldova, or even notorious Ukraine.
This is happening quietly, but the trend has picked up pace in 2025.
The early numbers in the United States are portending poorly for US employment and many good tech jobs will be reinstalled in cheaper countries and paid 5X lower than what it once was.
Since 2017, the United States has created 0 jobs for native born Americans, and this is part of the reason why.
Compounding the situation, in a global survey, some 61% of tech companies worldwide said they expected to reduce their workforces over the next five years because of the rise of artificial intelligence.
Tech firms such as Dropbox and IBM have previously announced job cuts related to AI. Tech jobs in big data, fintech, and AI are meanwhile expected to double by 2030.
The digital-financial-services company Ally is firing roughly 500 employees, or 7% of staff.
Ally made a similar level of cuts in October 2023, the Charlotte Observer reported.
Jeff Bezos's rocket company, Blue Origin, is sacking about 10% of its workforce, a move that could affect more than 1,000 employees.
Meta CEO Mark Zuckerberg told staff he "decided to raise the bar on performance management" and will act quickly to "move out low-performers." On just recently, the company had laid off more than 21,000 workers since 2022.
Microchip Technology is cutting its head count across the company by around 2,000 employees, the semiconductor company said a few days ago.
Last year, Microchip announced it was closing its Tempe, Arizona facility because of slower-than-anticipated orders. The closure begins in May 2025 and is expected to affect 500 jobs.
Microsoft cut an unspecified number of jobs in January based on employees' performance.
If anyone thinks this is a blip on the radar, then check your head again.
Once the WFH (work from home) movement started during 2020, there was no going back from there.
Tech companies don’t need warm bodies in offices anymore, so physical location doesn’t matter for lower-level employees.
95% of Silicon Valley will now be outsourced, and all “entry-level” jobs will originate in low-cost-of-living countries.
This is the new American tech sector. Ownership will still be mostly American, but workers will be offshore.
What is the result of this?
Tech stocks will stay higher for longer because of the massive cost savings in wages, which will allow management to beat earnings quarter after quarter.
It gives the balance sheet a reprieve allowing tech to hire more workers elsewhere for less money even if they aren’t an equal replacement.
It also opens the opportunities to deliver more value back to shareholder in the form of dividends or stock splits.
Tech firms won’t die off, but balance sheets will be financially engineered to the max to the benefit of executive management and to the chagrin of the American tech worker.
Once the macroeconomic backdrop calms, it will be time again to jump into tech stocks.
Mad Hedge Technology Letter
March 13, 2019
Fiat Lux
Featured Trade:
(NVIDIA STEPS UP ITS GAME),
(NVDA), (INTC), (MSFT), (ANET), (CSCO), (MCHP), (XLNX)
Nvidia (NVDA) was right to pull the trigger – that was my first reaction when I first learned that they had aggressively acquired Israeli chip company Mellanox for $6.9 billion.
The fight to seize these assets were fierce triggering a bidding war -American heavyweights Intel and Microsoft were also in the mix but lost out.
CEO of Nvidia Jensen Huang touted the importance of the deal by explaining that “the emergence of AI and data science as well as billions of simultaneous computer users, is fueling skyrocketing demand on the world's data centers."
Therefore, satisfying this demand will require holistic architectures that connect massive numbers of fast computing nodes over intelligent networking fabrics to form a giant datacenter-scale compute engine.
Mellanox and its capabilities cover all the bases for Nvidia and will nicely slot into its portfolio offering, an added bonus of cross-selling and upselling opportunities to existing clients.
The strategic motives behind the deal are plentiful with increased importance of connectivity and bandwidth enhancing Nvidia's ability to provide datacenter-scale computing across the full stack for next-generation high-performance computing and AI workloads.
The agreement is the result of the company's shift toward next-gen technology as adoption of cloud, AI, and robotics ramps up and Nvidia will be at the forefront of this massive migration.
As the fourth industrial revolution advances, Nvidia is best of breed of semiconductor companies and the imminent adoption of 5G will aid the likes of Microchip Technology (MCHP) and Xilinx (XLNX).
Technology is rapidly changing, and the data center is the segment that is accelerating at a faster clip than in previous years translating into de-emphasizing current revenues of gaming and autonomous on a relative growth basis.
These segments will be secondary to the addressable opportunity in data center and signing up Mellanox is a key strategic initiative to exploit this growth opportunity.
Missing the boat on this compelling opportunity could have dragged Nvidia into an existential crisis down the road as the missed opportunity costs of lucrative data center revenues would begin to bite, and with no quick fix on the horizon, Nvidia’s growth drivers would be potentially disarmed.
Investors need to remember that Nvidia derives half of its revenue from China and up until this point, gaming had been a huge tailwind to its total revenue, however, the Chinese communist party has identified gaming addiction in young adults as a national crisis and have been refusing to deliver new gaming licenses to gaming creators.
As the data center via the cloud begins its next ramp-up of insatiable demand, Nvidia was acutely aware they could not miss the boat and to grab a foot hole against larger player Intel.
Almost overpaying to have more skin in the game does not do justice to what the ramifications would have been if Intel or even Microsoft were able to hijack this deal.
The two-fold victory will in turn boost sales of Nvidia's data center products long term while depriving Intel of extending the lead in data center.
And after the lack of recent underperformance in the prior quarter, Nvidia needed a gamechanger to cauterize the blood flow.
Nvidia's total revenue plunged more than 24% YOY in Q4 of 2018, and shareholders have been looking for remedies, especially after the once mythical cryptocurrency business blew up and the company was stuck with a glut of inventory.
The purchase of Mellanox will help Nvidia start competing with other dominant players like Cisco Systems (CSCO) and Arista Networks (ANET).
Mellanox is one of a handful of firms selling hardware that connects devices in the data center through network cards, switches, and cables.
The deal still needs regulatory approval and could be a stumbling block if Chinese authorities drag this into the orbit of the trade war and make it a bullet point in negotiations.
The net result is positive to the overall business model, and this move will breathe oxygen into Nvidia’s long-term narrative with a flow of revenue set to come online once the 5,000 Mellanox employees are integrated into Nvidia’s levers of operation.
Shares should be the recipient of short-term strength and after getting smushed by a poor last quarter, there is substantial room to the upside.
A dip back to $150 would serve as a good entry point to strap on a short-term bullish trade in Nvidia shares.
Mad Hedge Technology Letter
July 20, 2018
Fiat Lux
Featured Trade:
(A SELLERS' MARKET)
(CSCO), (MSCC), (GOOGL), (MCHP), (SWKS), (JNPR), (AMAT),
(PANW), (UBER), (AMZN), (AVGO), (QCOM), (CA), (CRM)
I bet you are wondering where all that money from the tax cuts is going.
Believe it or not, the No. 1 destination of this new windfall is technology companies, not just the stocks, but entire companies.
In fact, the takeover boom in Silicon Valley has already started, and it is rapidly accelerating.
The only logical conclusion in 2018 is that tech firms are about to get a lot more expensive. I'll explain exactly why.
The corporate cash glut is pushing up prices for unrealized M&A activity in 2018. U.S. firms accumulated an overseas treasure trove of around $2.6 trillion and the capital is spilling back into the States with a herd-type mentality.
I have chewed the fat with many CEOs about their cash pile road map. All mirrored each other to a T: strategic acquisition and share buybacks, period. The acquisition effect will be felt through all channels of the tech arterial system in 2018.
As the global race to acquire the best next generation technology heats up, domestic mergers could pierce the 400-deal threshold after a lukewarm 2017.
Spend or die.
Apple alone boomeranged back more than $250 billion with hopes of selective mergers and share buybacks. Cisco (CSCO), Microsoft (MSFT), and Google (GOOGL) were also in the running for most cash repatriated.
The tech behemoths are eager to make transformative injections into security, big data, semiconductor chips, and SaaS (service as a software) among others.
Hint: You want to own stocks in all of these areas.
Even non-traditional tech companies are getting in on the act with Walmart concentrating the heart of its strategic future on the pivot to technology.
Walk into your nearest Walmart every few months.
You'll notice major changes and not for decorative measures.
U-turns from legacy technology firms hawking desktop computers and HDD's (Hard Disk Drive) suddenly realize they are behind the eight ball.
M&A activity will naturally tilt toward firms dabbling in earlier-stage software and 5G supported technology. This flourishing trend will reshape autonomous vehicles and IoT (Internet of Things) products.
The dilemma in waiting to splash on a potential new expansion initiative is that the premium grows with the passage of time. Time is money.
It's a sellers' market and the sellers know this wholeheartedly.
Unleashing the M&A beast comes amid a seismic shift of rapid consolidation in the semiconductor sector. Cut costs to compete now or get crushed under the weight of other rivals that do. Ruthless rules of the game cause ruthless executive decisions.
The best way to cut costs is with immense scale to offer nice shortcuts in the cost structure. Buying another company and using each other's dynamism to find a cheaper way to operate is what Microchip Technology's (MCHP) culling of Microsemi Corporation (MSCC) in a deal worth $10bn was about.
Microsemi, based in Aliso Viejo, California, focuses on manufacturing chips for aerospace, military, and communications equipment.
Microchip's focal point is industrial, automobile and IoT products.
Included in the party bag is a built-in $1.8 billion annual revenue stream and more than $300 million of dynamic synergies set to take effect within three years. The bonus from this package is the ability to cross-sell chips into unique end markets opposed to selling from scratch.
Each business hyper-targets different segments of the chip industry and is highly complementary.
Benefits of a relatively robust credit market create an environment ripe for mergers. Some 57% of tech management questioned intend to go on the prowl for marquee pieces to add to their arsenal.
Then we have chip company Broadcom (AVGO) led by CEO Hock Tan, whose entire strategy is based on M&A and minimal capital spending.
His low-quality strategy of buying market share will ultimately fritter out. His lack of capital spending was also a salient reason for blocking Broadcom's purchase of Qualcomm (QCOM), which if stripped of its capital spending budget would have fallen behind China's Huawei to develop critical 5G infrastructure.
Tan's strategy flies in the face of the most powerful tech companies that are using M&A to enhance their products expanding their halo effect around the world.
Gutting innovation and skimming profits off the top is an entirely self-serving, myopic strategy to the detriment of long-term shareholders.
Investors punished Broadcom for it's latest investment of CA Technologies (CA) for $18.9 billion, even though this pickup signals a different tack.
CA Technologies is a leading provider of information technology (IT) management software, which suggests a belated move into the enterprise software market dominated by incumbents such as Salesforce (CRM).
Better late than never.
No need to mince words here as 2018 won't see any discounts of any sort. Nimble buyers should prepare for price wars as the new normal.
Not only are the plain vanilla big cap tech firms dicing up ways to enter new markets, alternative funds are looking to splash the cash, too.
Sovereign wealth funds and private equity firms are ambitiously circling around like vultures above waiting for the prey to show itself.
Private equity firms dove head first into the M&A circus already tripling output for tech firms.
Highlighting the synchronized show of force is none other than Travis Kalanick, the infamous founder of Uber. He christened his own venture capital fund that hopes to invest in e-commerce, real estate, and companies located in China and India.
The new fund is called 10100 and is backed by his own money. All this is possible because of SoftBank CEO Masayoshi Son's investment in Uber, which netted Kalanick a cool $1.4 billion representing Kalanick's 30% stake in Uber.
It is undeniable that valuations are exorbitant, but all data and chip related companies are selling for huge premiums. The premium will only increase as the applications of 5G, A.I., autonomous cars start to pervade deeper into the mainstream economy.
Adding fuel to the fire is the corporate tax cut. The lower tax rate will rotate more cash into M&A instead of Washington's tax coffers enhancing the ability for companies to stump up for a higher bill. Sellers know firms are bloated with cash and position themselves accordingly.
Highlighting the challenges buyers face in a sellers' market is Microsemi Corp.'s (MSCC) purchase of PMC-Sierra Inc. Even though PMC-Sierra had been looking to get in bed with Skyworks Solutions Inc. (SWKS) just before the MSCC merger, PMC-Sierra reneged on the acquisition after (SWKS) refused to bump up its original offer.
(SWKS) manufactures radio frequency semiconductors facilitating communication among smartphones, tablets and wireless networks found in iPhones and iPads.
(SWKS) is a prime takeover target for Apple. (SWKS) estimates to have the highest EPS growth over the next three to five years for companies not already participating in M&A. Apple (AAPL) could briskly mold this piece into its supply chain. Directly manufacturing chips would be a huge boon for Apple in a chip market in short supply.
In 2013, Japan's Tokyo Electron and Applied Materials (AMAT) angled to become one company called Eteris. This maneuver would have created the world's largest supplier of semiconductor processing equipment.
After two years of regulatory review, the merger was in violation of anti-trust concerns according to the United States. (AMAT), headquartered in Santa Clara, California, is a premium target as equipment is critical to manufacturing semiconductor chips. (AMAT) competes directly with Lam Research (LRCX), which is an absolute gem of a company.
Juniper Networks (JNPR) sells the third-most routers and switches used by ISP's (Internet Service Providers). It is also No. 2 in core routers with a 25% market share. Additionally, (JNPR) has a 24.8% market share of the firewall market.
In 2014, Palo Alto Networks (PANW), another takeover target focusing on cybersecurity, paid a $175 million settlement fee for allegedly infringing (JNPR)'s application firewall patents.
In data center security applications, (JNPR) routinely plays second fiddle to Cisco Systems (CSCO). Cisco, the best of breed in this space would benefit by snapping up (JNPR) and integrating its expertise into an expanding network.
Unsurprisingly, health care is the other sector experiencing a tidal wave of M&A, and it's not shocking that health care firms accumulated cash hoards abroad too. The dots are all starting to connect.
Firms want to partner with innovative companies. Companies hope to focus on customer demands and build a great user experience that will lead the economy. Health care costs are outrageous in America, and Jeff Bezos could flip this industry on its head.
Amazon (AMZN) pursuing lower health costs ultimately will bind these two industries together at the hip and is net positive for the American consumer.
Ride-sharing company Uber embarked on a new digital application called Uber Health that book patients who are medically unfit for regular Uber and shuttle them around to hospital facilities.
Health care providers can hail a ride for sick people immediately and are able to make an appointment 30 days in advance. It is a little difficult to move around in a wheel chair, and tech solves problems that stir up zero appetite for most business ventures. Apple is another large cap tech titan keeping close tabs on the health care space.
It's a two-way street with health care companies looking to snap up exceptional tech and vice versa.
It's practically a game of musical chairs.
Ultimately, Tech M&A is the catch of the day, and boosting earnings requires cutting-edge technology no matter how expensive it is. Investors will be kicking themselves for waiting too long. Buy now while you can.
Yes, It's All Going Into Tech Stocks
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Quote of the Day
"Companies in every industry need to assume that a software revolution is coming," - said American venture capitalist Marc Andreessen.
