Mad Hedge Technology Letter
June 13, 2018
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The tech industry is infatuated with acronyms.
The two-, three- and four-letter acronyms of yore have been spruced up by a new wave of contemporary terms.
There are a lot more of them now and readers will need to absorb the meaning of each term to avoid our content seeming like a Grecian dialect.
The Mad Hedge Technology Letter will break down the relevant terminology that applies to the current tech sector.
This will aid readers in their pursuit of financial satisfaction.
FANG: Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (now Alphabet) (GOOGL)
Jim Cramer, the host of CNBC's Mad Money, coined this term as this quartet became such a force to reckon with, that they deserved their own grouping. Financial commentators and analysts often refer to the FANGs that ultimately represent the developments and destiny of large cap tech. Apple is sometimes grouped in this bundle with analysts adding a second A inside the acronym.
AWS - Amazon Web Services
The cloud arm of Amazon is its cash cow. Amazon invented this business out of thin air in 2006. It offers the ability for Amazon to operate its e-commerce division close to cost by plowing profits from its thriving cloud arm. AWS is the backbone to the whole Amazon operation. Without it, Jeff Bezos would need to rethink another genius business model because current and future success hinges on this one subsidiary. AWS is the market leader in the cloud industry, carving out 33% of the total market. Microsoft is the runner-up and saw its market share surge from 10% to 13% in the latest quarter.
GDPR - General Data Protection Regulation
Europe has been a stickler concerning individual data protection, and the American companies running riot with Europeans personal data has reached its climax. On May 25, 2018, new European regulations were implemented to give the user more control of handing out their personal data. Penalties for non-compliance are steep. Companies risk being fined up to 20 million Euros or 4% of annual worldwide turnover, whichever is larger. Facebook's Mark Zuckerberg now has a reason to behave like an angel. The least regulated industry in the world is finally experiencing the bitter regulation pill most industries have felt for centuries.
SaaS - Software as a Service
A software distribution model licensing software on a subscription basis. Instead of installing many of these software programs, many of them are available through the Internet on the cloud. Most subscriptions work on an annual basis, and this recurring revenue model has carved out additional income from companies that were used to paying a one-off fee for software. This model has been highly successful. Even former legacy companies have deployed this business model to critical acclaim.
AI - Artificial Intelligence
An area of computer science that strives to deploy human intelligence into machine simulation. The four main tasks it carries out are speech recognition, learning, planning, and problem solving. A.I. has been identified as a cutting-edge tool to fuse with technology products boosting the underlying performance creating massive profits for the participants. This phenomenon is controversial with the prophecy that robots might advance rapidly and turn on their inventors. As each day passes, A.I. is starting to infiltrate deeper into our daily lives, and humans are becoming entirely reliant on their positive functions to carry out daily tasks.
IoT - Internet of Things
Internet connectivity with things. This network will connect billions and billions of devices together. Your bathtub, thermostat, and razor will be armed with sensors and processors that reroute the performance data back to the manufacturer. Deploying the data, engineers will be able to enhance products with even more precision and high quality serving the end customer needs. 5G testing is ongoing in select American cities and new hyper-fast Internet speeds will make mass adoption of IoT products a reality.
5G - 5th generation wireless system
This is the successor to 4G and is poised to increase wireless Internet speeds up to 20 gigabits per second. Some of the traits will be low latency, high mobility, and will be able to accommodate high connection density. This technology is crucial to the development of the next generation of groundbreaking technology such as autonomous cars that need a faster Internet speed to run elaborate software. The war to develop this technology with the Chinese has turned into a heated standoff. China is stubbornly bent on becoming the global leader of technology in the future, and the communist government views 5G as the keys to the Ferrari. U.S. companies Verizon (VZ), AT&T (T) and Sprint (S) plan to roll out 5G in 2019. Other key companies are Huawei, Intel (INTC), Samsung, Nokia, Ericsson and Qualcomm (QCOM).
BAT - Baidu, Alibaba, and Tencent
This trio is the Middle Kingdom's answer to America's FANG. The nine-year domestic bull market has been led by large-cap tech, at the same time China's economy has been fueled by Baidu, Alibaba, and Tencent. Baidu and Alibaba are tradable through American depositary receipts (ADR). Tencent is public on Hong Kong's Hang Seng stock exchange, the third largest stock market in Asia. These companies are all a mix and mash of functionality that covers the same broad spectrum of the FANGs. They are the best companies in China and are on the cusp of every single cutting-edge technology from A.I. to autonomous vehicles. The Mad Hedge Technology Letter does not recommend these stocks to our subscribers because the Chinese government is on a nationalistic mission to delist Alibaba and Baidu from America and bring them back home. Initially, Alibaba wanted to list on the Hang Seng Hong Kong stock exchange, but draconian rules applied to dual-listing made the company flee to America.
NIMBY - Not In My Back Yard
Local opposition to proposed development in local areas. Although not a pure tech term, the epicenter of the NIMBY movement is smack dab in the middle of the San Francisco Bay Area where all the premium tech jobs are located. Local opposition has made it grueling for any developers to build.
What's more, the expensive cost of land has made any new building a tough proposition. This explains the 10-year drought where San Francisco experienced not a single new hotel built. The dearth of housing has caused San Francisco housing prices to skyrocket to a medium price of $1.61 million as of March 2018. Exorbitant housing prices have triggered a mass migration of Californians fleeing the Bay Area in droves. The shocking aftereffects have put highly paid Millennial tech workers spending the bulk of their salary on housing or living in dilapidated shacks. The extreme conditions we are now seeing are forcing schools around the Bay Area to close in unison as young families cannot afford to stay. Tech companies have become public enemy No. 1 in the Bay Area as locals are desperate to maintain their current lifestyle but are finding it more difficult by the day.
MAU - Monthly Active Users
Favored by social media companies to measure growth trajectories. This is how Twitter (TWTR) analyzes the health of its user numbers delivering a narrative to potential investors by hyping up user growth. If investors value this metric, this allows companies to focus on driving growth at the expense of burning cash. Thus, emerging social media companies such as Snapchat (SNAP) run huge loss-making operations for the promise of future profits after scaling.
ARPU - Average Revenue Per User
Favored by maturing social media companies, particularly Facebook, which has already grown global usership to 2.2 billion. Once the emerging hypergrowth phase comes to an end, social media companies focus on extracting more income per user through targeted ads. Facebook and Alphabet have the best ad tech divisions in all of Silicon Valley. The business model has made Facebook an inordinate amount of money as advertiser's flock to this de-facto marketplace paying more for effective ads whose price is set at an auction. It's a vicious cycle that attracts more traditional advertisers because it is the only method of selling to Millennials who are addicted to social media platforms. Cord-cutting is accelerating this trend forcing advertisers to co-exist with the Mark Zuckerberg model.
There are many more acronyms in the tech world that need explaining and that is exactly what I will do. The Mad Hedge Technology Letter will be back with another slew of technical terms to help subscribers understand the tech universe.
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Quote of the Day
"You can worry about the competition... or you can focus on what's ahead of you and drive fast," said Square and Twitter CEO Jack Dorsey.
Mad Hedge Technology Letter
May 4, 2018
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Mad Hedge Technology Letter
May 3, 2018
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Talk is cheap.
Do not believe half-truths that go against economic convention.
This was the case when T-Mobile (TMUS) CEO John Legere and Sprint (S) CEO Marcelo Claure popped up on live TV promoting affordability, elevated competition, and massive 5G infrastructure investments if the two companies joined forces in a $26.5 billion deal.
This was a case of smoke and mirrors. The speculative claim of adding 3 million workers and investing $40 billion into 5G development is just a line pandering toward President Trump's nationalistic tendencies.
They want the deal to move forward any way possible.
Jack Ma, founder and executive chairman of Alibaba (BABA), met President Trump at Trump Towers before his term commenced and promised to add 1 million jobs in order to curry favor with the new order.
Where are those jobs?
If this merger came to fruition, market players would shrink from 4 to 3 - a newly reformulated T-Mobile plus Verizon (VZ) and AT&T (T).
Pure economics dictate that shrinking competition by 25% would create pricing leverage for the leftover trio.
Industry consolidation is usually met with accelerated profit drivers because companies can get away with reckless price increases without offering more goods and services.
Being at the vanguard of the 4G movement, America overwhelmingly benefited from lucid synergistic applications that fueled domestic job growth and economic gains.
Japanese and German players were hit hard from missing out in leading the new wave of wireless technology.
T-Mobile and Sprint wish to be insiders of this revolutionary technology and this is their way in.
In the past, T-Mobile jumped onto the scene with aggressively twisting its business model to fight tooth and nail with Verizon and AT&T.
It was moderately successful.
T-Mobile even offered affordable plans without contracts offering customers optionality and advantageous pricing.
It was able to take market share from Sprint, which is the monumental laggard in this group and the butt of jokes in this foursome.
The average cost of wireless has slid 19% in the past five years, and traditional wireless Internet companies are sweating bullets as the future is murky at best.
The bold strategy to merge these two wireless firms derives from an urgent need to combat harsh competition from the two titans Verizon and AT&T.
The merger is in serious threat of being shot down by the Department of Justice (DOJ) on antitrust grounds.
History is littered with companies that became complacent and toppled because of monopolistic positions.
Case in point, the predominant force in the American and global economy was the American automotive industry and Detroit in the 1950s.
Detroit had the highest income and highest rate of home ownership out of any major American city at that time.
Flint, Michigan, oozed prosperity, and the top three car manufacturers boasted magnanimous employee benefits and a tight knit union.
During this era of success, 50% of American cars were made by GM and 80% of cars were American made.
The car industry could do no wrong.
This would mark the peak of American automotive dominance, as local companies failed to innovate, preferring stop-gap measures such as installing add-ons such as power steering, sound systems, and air conditioning instead of properly developing the next generation of models.
American companies declined to revolutionize the expensive system put in place that could produce new models because of the absence of competition and were making too much money to justify alterations.
It's expensive to make cars but neglecting reinvestment yielded future mediocrity to the detriment of the whole city of Detroit.
The tech mentality is the polar opposite with most tech firms reinvesting the lion's share of operational profit, if any, back into product improvement.
Sprint got burned because it skimped on investment. It is in a difficult predicament dependent on T-Mobile to haul it out of a precarious position.
GM, Ford, and Chrysler met their match when Toyota imported a vastly more efficient way of production and the rest is history.
Detroit is a ghastly remnant of what it used to be with half the population escaping to greener pastures.
A carbon copy scenario is playing out in the mobile wireless space and allowing a merger would suppress any real competition.
To add confusion to the mix, fresh competition is growing on the fringes desiring to disrupt this industry sooner than later by cable providers such as Charter (CHTR) and Comcast (CMCSA) entering the fray offering mobile phone plans.
Google also offers a mobile phone plan through the Google Fi division.
The fusion of wireless, broadband, and video is attracting competition from other spheres of the business world.
The paranoia served in doses originates from the Netflix (NFLX) threat that vies for the same entertainment dollars and eyeballs.
Remember that AT&T is in the midst of merging with Time Warner Cable, which is the second largest cable company behind Comcast.
The top two in the bunch - AT&T and Verizon - are under attack from online streaming business models, and the Time Warner merger is a direct response to this threat.
There are a lot of moving parts to this situation.
AT&T hopes to leverage new video content to extract digital ad revenue capturing margin gains.
Legere and Claure put on their fearmongering hats as they argued that this deal has national security implications and losing out to Chinese innovation is not an option.
This argument is ironic considering T-Mobile is a German company and Sprint is owned by the Japanese.
Sprint have been burning cash for years and this move would ensure the businesses survives.
Sprint's crippling debt puts it in an unenviable position and this merger is an all or nothing gamble.
Sprint has not invested in its network and is miles behind the other three.
AT&T has outspent Sprint by more than $90 billion in the past 10 years.
This is the last chance saloon for Sprint whose stock price has halved in the past four years.
However, T-Mobile sits on its perch as a healthier rival that would do fine on a stand-alone basis.
Consolidation of this great magnitude never pans out for the consumer as users' interests get moved down the pecking order.
Wireless stocks were taken out and beaten behind the wood shed on the announcement of this news as the lack of clarity moving forward marked a perfect time to sell.
There will be many twists and turns in this saga and any capital put to use now will be dead money while this imbroglio works itself out.
If the deal doesn't die a slow death and finds a way through, the approval process will be drawn out and cumbersome.
The ambitious deadline of early 2019 seems highly unrealistic even with the most optimistic guesses.
The outsized winner from a deal would be AT&T, Verizon, and the newly formed T-Mobile and Sprint operation.
If this new wave of consolidation becomes reality, pricing pressure on the business model would ease for the remaining players, particularly allowing more breathing room for the leaders.
Stay away from this sector until the light can be seen at the end of the tunnel.
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Quote of the Day
"Everything is designed. Few things are designed well." - said radio producer Brian Reed
Rumors hit the market Friday that Sprint (S) will mount a $20 billion takeover bid for T-Mobile (TMUS) in early January. The news caused a late day kerfluffle on what would otherwise have been a slow December pre holiday Friday.
The Shares of both companies immediately jumped 10%, which left many analysts scratching their heads. Normally, the shares of the acquirer falls (they?re spending money), while those of the target rise (they are selling for a premium to the market).
Why do I care about a minor US phone company? Guess who owns Sprint? Softbank, which took over the company for $21.8 billion last July, and carries a hefty 20% weighting in my model-trading portfolio.
The move would make Softbank one of the three largest US carriers. That will automatically trigger an antitrust review by the Justice Department, which blocked a similar takeover attempt for giant AT&T (T) earlier. Look at how Eric Holder stood in the way of the American Airlines-US Air deal, which both firms clearly needed to survive. And this is in a country with 100 airlines. So any decision here could be a long wait.
I think this is just an opening shot in a long campaign that eventually leads up to the Alibaba IPO, expected to be one of the largest in history (the biggest was also from China, the $128 billion deal for the Industrial Bank of China in 2010). Expect to hear a lot about Softbank?s role in all of this in coming months. This should be good for its stock price.
As part of the build up, my old employer, the Financial Times of London, named Alibaba founder and CEO, Jack Ma, as its Person of the Year. The paper chronicles Ma?s rise for abject poverty in Hangzhou, China, where he was the son of impoverished traditional performers, to becoming one of the world?s richest men.
Ma was fascinated by the English language at an early age, and used to listen to my own broadcasts on BBC Radio to learn new words (another one of my former employers). After graduating in 1988, he earned $12 an hour as a teacher in China. While working for the Foreign Trade and International Cooperation, he escorted foreign visitors to the Great Wall. One of them turned out to be Jerry Yang, co founder of Yahoo.
Thus inspired, Ma went on to found Alibaba in 1999. Its initial strategy was to match up Chinese manufacturers with American customers, an approach that proved wildly successful. He then took on Ebay. In the following years the US e-commerce giant saw its Chinese market share plummet from 80% to 8%, most of that going to Alibaba. Today, Alibaba has 600 million registered users, and one day in November it clocked a staggering $6 billion in sales.
The FT estimates its current market value at $100 billion. To read the rest of the FT profile, please click here. Its IPO will be one of the preeminent investment events of 2014. Better to get in early.
Followers of my Trade Alert Service will notice that this is one of the few outright equity trades that I have done this year. This is a way for me to deleverage my exposure after a spectacular stock market run. Equity ownership ducks the time decay that plagues call options, and avoids the leverage inherent in call spreads.
If the stock is unchanged over the holidays, it won?t cost me a dime. One thing is for sure. When the Alibaba IPO is announced, it will be a surprise. The only way to participate is to get in indirectly through a minority owner now.
Don?t expect an allocation from your broker, unless they think it is going o fail.
I have always been a big fan of buying a dollar for 30 cents. That appears to be the opportunity now presented by the Japanese software giant, Softbank (SFTBY).
This gorilla of the Internet space was founded and run by my old friend, Masayoshi Son, who many refer to as a combination of the Jeff Bezos and the Bill Gates of Japan. I have known Mas, as his friends call him, for 30 years, meeting him, of all places, at a University of California Alumni Association meeting. Mas received his BA in economics from Berkeley in 1980.
In three decades, Mas has turned an obscure, hard copy Japanese computer hobbyist magazine into today?s massive online empire. You may know him as the organizer of the huge Comdex conferences in Las Vegas every January, the Woodstock of technology gatherings. Today, Mas has an estimated personal net worth $9 billion, not bad for a kid who wore the same pair of ragged Levis to his economics classes every day.
The really interesting thing about Softbank right now is not what Mas is doing, but what he owns. That includes a 37% stake in the Chinese Internet giant, Alibaba, which boasts an overwhelming 80% market share in the Middle Kingdom.
The Hangzhou based Alibaba is actually a group of Internet-based e-commerce businesses including business-to-business online web portals, online retail and payment services, a shopping search engine and data-centric cloud computing services. Think of it as Amazon (AMZN), eBay (EBAY), Google (GOOG), and Oracle (ORCL) all wrapped into one.
In 2012, two of Alibaba?s portals together handled 1.1 trillion Yuan ($170 billion) in sales, more than competitors eBay and Amazon.com combined.
Its sales account for no less than 3% of China?s total GDP. Yikes! To learn more about their website please: http://news.alibaba.com/specials/aboutalibaba/aligroup/index.html.
Online commerce in China is now growing faster than in any other place on the planet, including the US. Some 5% of retail transactions in the People?s Republic take place on the Internet, and that is expected to grow to 25% over the next three years. By comparison, it took online business in America 15 years to reach that market share.
What is happening in China now is truly fascinating. They are leapfrogging traditional brick and mortar stores, going straight from barter to online purchases, completely skipping the Wal-Mart stage of the retail evolution. I saw the same thing happen during the early nineties, when eastern Europeans jumped straight from having no phones to mobile ones, bypassing decades of unreliable and indifferent landline service.
The value of Alibaba is anyone?s guess as the company is still private. However, my former employers at The Economist magazine estimate that it is worth anywhere from $55-$120 billion. What this means is that you can buy Softbank now purely for the value of its Alibaba ownership, and get everything else the company does in the online universe for free.
But wait! It gets better. Softbank also owns major stakes in Yahoo, whose shares are up a gob smacking 157% since last year (Thank you Marissa Meyer!). It owns a major chunk of Sprint (S), which has gained a mind blowing 325% since 2012. Can Mas pick them, or what? Softbank also owns pieces of Japan Cellular and many other companies.
Add it all up together, and you get a Softbank that is worth at least $250 billion, almost triple its current $97 billion market capitalization. In other words, it?s a steal at this price.
Yes, you may say, this all sounds great. But how do I buy shares in Japan in yen? Easy. Softbank trades on the pink sheets in the US (hence the five letter ticker symbol) and is denominated in US dollars. Normally this means nothing, as liquidity in the pink sheets is notoriously poor.
Not so for (SFTBY), which saw 1.6 million shares worth $67 million trade around $42 a share on a slow Friday with a reasonably narrow spread. You may not be able to margin these, but at least you can get them. You also have some yen exposure here, as these shares are tied to the domestic shares in Japan. As for the big hedge funds, they have to go to Tokyo to get the size they want, and then hedge out their yen risk.
OK, OK, you say. Great story. But the road to perdition is paved with fabulous value plays that were never realized in the marketplace. This thing could stay cheap forever, like Apple (AAPL).
Aha! I got you! Alibaba is about to go public in the US, with Goldman Sachs now polling major institutional investors about potential interest. Given the chance to buy an Amazon clone at ten year ago prices, this IPO will be a blockbuster, making the recent Twitter (TWTR) float pale by comparison.
Did I mention that my buddy, Dan Loeb of hedge fund giant Third Point Partners, totally agrees with me, and has bought $1 billion worth of Softbank shares already? In fact, many believe that Alibaba could be the Apple of this decade, about to deliver a tenfold increase in its share price.
That seems to be the right thing to do this year.
Hitch Your Wagon to Mas
I have always been a big fan of buying a dollar for 30 cents. That appears to be the opportunity now presented by the Japanese software giant, Softbank (SFTBY).
This gorilla of the Internet space was founded and run by my old friend, Masayoshi Son, who many refer to as a combination of the Jeff Bezos and the Bill Gates of Japan. I have known Mas, as his friends call him, for 30 years, meeting him, of all places, at a University of California Alumni Association meeting. Mas received his BA in economics from Berkeley in 1980.
In three decades, Mas has turned an obscure, hard copy Japanese computer hobbyist magazine into today?s massive online empire. You may know him as the organizer of the huge Comdex conferences in Las Vegas every January, the Woodstock of technology gatherings. Today, Mas has an estimated personal net worth $9 billion, not bad for a kid who wore the same pair of ragged Levis to his economics classes every day.
The really interesting thing about Softbank right now is not what Mas doing, but what he owns. That includes a 37% stake in the Chinese Internet giant, Alibaba, which boasts an overwhelming 80% market share in the Middle Kingdom.
The Hangzhou based Alibaba is actually a group of Internet-based e-commerce businesses including business-to-business online web portals, online retail and payment services, a shopping search engine and data-centric cloud computing services. Think of it as Amazon (AMZN), eBay (EBAY), Google (GOOG), and Oracle (ORCL) all wrapped into one.
In 2012, two of Alibaba?s portals together handled 1.1 trillion Yuan ($170 billion) in sales, more than competitors eBay and Amazon.com combined.
Its sales account for no less than 3% of China?s total GDP. Yikes! To learn more about their website please visit http://news.alibaba.com/specials/aboutalibaba/aligroup/index.html.
Online commerce in China is now growing faster than in any other place on the planet, including the US. Some 5% of retail transactions in the People?s Republic take place on the Internet, and that is expected to grow to 25% over the next three years. By comparison, it took online business in America 15 years to reach that market share.
What is happening in China now is truly fascinating. They are leapfrogging traditional brick and mortar stores, going straight from barter to online purchases, completely skipping the Wal-Mart stage of the retail evolution. I saw the same thing happen during the early nineties, when eastern Europeans jumped straight from having no phones to mobile ones, bypassing decades of unreliable and indifferent landline service.
The value of Alibaba is anyone?s guess as the company is still private. However, my former employers at The Economist magazine estimate that it is worth anywhere from $55-$120 billion. What this means is that you can buy Softbank now purely for the value of its Alibaba ownership, and get everything else the company does in the online universe for free.
But wait! It gets better. Softbank also owns major stakes in Yahoo, whose shares are up a gob smacking 157% since last year (Thank you Marissa Meyer!). It owns a major chunk of Sprint (S), which has gained a mind blowing 325% since 2012. Can Mas pick them, or what? Softbank also owns pieces of Japan Cellular and many other companies.
Add it all up together, and you get a Softbank that is worth at least $250 billion, almost triple its current $97 billion market capitalization. In other words, it?s a steal at this price.
Yes, you may say, this all sounds great. But how do I buy shares in Japan in yen? Easy. Softbank trades on the pink sheets in the US (hence the five letter ticker symbol) and is denominated in US dollars. Normally this means nothing, as liquidity in the pink sheets is notoriously poor.
Not so for (SFTBY), which saw 1.6 million shares worth $67 million trade around $42 a share on a slow Friday with a reasonably narrow spread. You may not be able to margin these, but at least you can get them. You also have some yen exposure here, as these shares are tied to the domestic shares in Japan. As for the big hedge funds, they have to go to Tokyo to get the size they want, and then hedge out their yen risk.
OK, OK, you say. Great story. But the road to perdition is paved with fabulous value plays that were never realized in the marketplace. This thing could stay cheap forever, like Apple (AAPL).
Aha! I got you! Alibaba is about to go public in the US, with Goldman Sachs now polling major institutional investors about potential interest. Given the chance to buy an Amazon clone at ten year ago prices, this IPO will be a blockbuster, making the recent Twitter (TWTR) float pale by comparison.
Did I mention that my buddy, Dan Loeb of hedge fund giant Third Point Partners, totally agrees with me, and has bought $1 billion worth of Softbank shares already?
I?ll wait for a dip before I send out the Trade Alert. If I don?t get one, I may just throw in the towel and buy it at market.
That seems to be the right thing to do this year.
