Mad Hedge Technology Letter
April 21, 2021
Fiat Lux
Featured Trade:
(BUY OR SELL FIRST QUARTER TECH EARNINGS?)
(IBM), (MU), (SAMSUNG), (ZM), (GOOGL)
Posts
We are on the cusp of tech earnings which could either take us on the next leg up or leg down.
Going off of data points that we are getting from around the world, it’s clear that the secular bull market in big technology is as healthy as ever.
A few weeks ago, South Korea’s behemoth Samsung Electronics sounded off when it said first-quarter profit likely rose 44% because of the surge in sales of smartphones and TVs.
The work-from-home economy has made technology stocks the ultimate winner and now we need to assess what will happen to these very stocks in 2021.
Many analysts out there see an ongoing correction in names such as videoconferencing software company Zoom (ZM) which is going through a drawn-out consolidation phase after hyper-growth in their products last year.
That is not a bad thing, but frustrating in the short-term.
Tech stocks are renowned for getting ahead of itself.
Waiting for tech stocks to grow into their valuation is no fun, however, ultimately, there is an avalanche of money piling into this sector because it is fundamentally underpinned by cash cow secular trends.
Part of that thesis also is applied internationally to giants like Samsung, the South Korean technology giant forecast January-March operating profit at $8.32 billion.
Samsung’s flagship Galaxy S21 smartphone series outsold the previous version by a two-to-one margin in the six weeks since its January launch.
Profit in Samsung’s television set and home appliance business also likely more than doubled due to continued stay-at-home demand.
Cross-town TV and home appliance rival LG Electronics announced its largest-ever preliminary quarterly operating profit for January-March.
The secular health is not only confined to Korea, as U.S. memory chip peer Micron Technology last month forecast third-quarter revenue above analyst estimates due to rising demand brought about by a global shift to remote work.
The price of DRAM chips widely used in laptops and other computing devices rose 5.3% in January-March from the previous three months.
Samsung will invest about 10 trillion won in its chip contract manufacturing business this year, compared to about 6 trillion won last year.
In addition to the performance, regulation is now set to offer another helping hand to U.S. tech with two top White House aides hosting a meeting on how to better equip the state of the U.S. supply chain.
Samsung is considering a new $17 billion chip plant in the United States.
On the night before an earnings flurry, we also got word from IBM that they finally reversed 4 years of declining revenue to post 1% revenue growth.
Like many big tech groups, IBM has jumped on the bandwagon of clients digitally transforming their businesses, using hybrid cloud and AI to capture new growth opportunities, increase productivity and create operating flexibility.
Their revenue performance this quarter reflects this. Global business service (GBS) cloud revenue growth accelerated to almost 30%, doubling its growth rate from the prior quarter with strong growth across the portfolio.
The numbers reflect expanding practices with ecosystem partners like Salesforce and Adobe and strong momentum in their acquisition of Red Hat.
IBM has doubled the number of Red Hat client engagements from the prior year to over 150, working with companies such as HBO, Marriott, Vodafone, and Honda.
They’ve now signed $2 billion of business in their Red Hat practice inception to date.
Across these, IBM's cloud revenue was up 18% in the quarter and over the last 12 months and now stands at over $26 billion for the last year.
Like many other tech firms, employment hiring is expanding with IBM hiring thousands of people in the past quarter.
Like other firms as well, M&A is an often-utilized growth strategy with IBM closing on six acquisitions since mid-December.
They are adding go-to-market and delivery capabilities in GBS, and technical skills in Red Hat. And they’re increasing R&D in areas like AI and quantum to drive innovation.
Across cloud and cognitive software, IBM continues to increase subscription and support renewal rates, driving the record deferred income levels.
Red Hat continued solid performance with normalized revenue growth of 15%, led by Red Hat Enterprise Linux and OpenShift, both of which continue to gain share.
Even IBM, the laggard of tech, is improving their balance sheet by whittling down $3 billion from year-end, their debt was down $5 billion. They have now reduced debt by about $17 billion from the peak.
IBM even still delivers shareholders a nice dividend.
The takeaways from IBM and Samsung will largely apply to many of the tech companies that are about to report earnings.
Hiring is up because the business is doing so well.
Even if these legacy operations are only growing minimally in IBM, their cloud operations are far and away the highest growth element in their portfolio, and the performance of Red Hat indicates that.
The secular tailwinds are indeed helped by the business environment undergirded by a work-from-home assumption which is why companies like Samsung are posting record sales in tablets, smartphones, and can’t keep up with the demand for chips.
We are getting indication that much of the transformation into the 2020 digital economy is here to stay, but the issue in April is that although companies are as healthy as could be, firms are now facing Himalayan-like comparisons with last year.
Last year, April was a time when technology took off like a scalded chimp, and fast forward to 2021, many tech firms won’t be able to beat those year-over-year numbers they posted during peak lockdown business.
What I expect is for many tech firms to announce that comparisons were tough to beat because of a once in a 100-year event that locked down most of the world, but many tech firms will reaccelerate growth after a period of earnings consolidation.
Expectations have gotten a little stretched and outperformers like Alphabet (GOOGL) are already up 25% year to date, but I can argue that the guys at Google are making miracles and are surpassing even astronomically high expectations.
That won’t be the case for other tech companies that will need miracle performance to outdo exorbitant forecasts, but just quite aren’t there like Google.
Consolidation through sideways price action could take hold in the second quarter as many tech firms need time to recalibrate so they can reaccelerate in the second half of the year which they indeed will.
Mad Hedge Technology Letter
April 30, 2018
Fiat Lux
Featured Trade:
(RIDING THE CHIP ROLLER COASTER),
(Samsung), (SK Hynix), (AMD), (NVDA), (INTC), (MU)
The supply side of the chip market is spectacularly volatile, rotating between supply constraints and times of overcapacity.
A good place to analyze the heartbeat of the chip market is across the Pacific on South Korean shores.
South Korea takes pride and joy in having given the world two first-rate semiconductor companies - Samsung and SK Hynix.
Samsung is just behind Intel (INTC) in total annual sales.
American consumers are more familiar with Samsung through its consumer electronics division that constructs Samsung smartphones and tablets.
Samsung's silicon business mirrors the elevated earnings results stateside, as muscular demand derived from global data center expansion devours more chips than Samsung can pump out.
Global data centers in the U.S. and Asia will sustain blistering growth levels into the second quarter.
Samsung has displayed resilience to seasonally shift in the consumer electronics segment by staunchly bolstering its relentless chip business.
Samsung is harvesting the benefits of bountiful investments from over the past decade when this overly cyclical industry was exposed to extreme shifts in worldwide appetite for consumer electronics devices.
More than 70 percent of revenue was generated by the chip division boasting quarterly revenue of $19.25 billion.
In the past, memory chip companies endured a ruthless market environment with a diverse set of players ratcheting up supply on a whim then finding demand crumbling before their eyes.
Restructuring has left the burden of supplying the next generation of technology a backbreaking burden.
Tight chip supply and the general shortage of hardware rears its ugly head in earnings reports with a slew of CEOs complaining about input prices rising worse than global warming sea levels.
In Samsung's earnings call, management groaned that "memory supply and demand fundamentals remain tight."
In SK Hynix's earnings call, it echoed that "demand and supply dynamics in the market will remain favorable."
As large cap tech expands data center initiatives and throws piles of money at autonomous cars, A.I. and cloud computing, Samsung's semiconductor division appears nearly immortal.
Chip prices skyrocketed in this sellers' market and the UBS downgrade of Micron (MU) was a headscratcher.
Analyst Timothy Arcuri turned bearish on Micron citing "cyclical memory concerns" and "big estimate cuts."
Sometimes it feels that analysts don't follow the industry they cover.
It is fair to say chip volume might face marginal cuts closer to 2019, but the pendulum hasn't even started to shift back over to that direction.
Suppliers and buyers both agree that capturing the appropriate volume of chips is the first order of the day.
In response to outsized demand, Samsung will double chip capital spending because of failing to match skyrocketing demand.
Fortifying the bull case, SK Hynix guesstimated DRAM demand for the rest of 2018 to be in the "low-20 percent" and even the injection of new funds for facility expansion is not a proper solution.
Samsung also hammered into investors that it is not in the business to drive the chip prices to zero, and the gross profit metric is more important to them than most people expect.
A goldilocks scenario could ensue with Samsung supplying enough to create price hikes and ploughing its cash back into more silicon expansion.
Korean memory chip producers are expected to enjoy a booming business during the remainder of this year as global DRAM chip demand will surpass supply.
SK Hynix also indicated that server products would supersede mobile products as data center related products are all the rage.
Korea's No. 2 said NAND demand would rise by "mid-40 percent" in 2018, which is double the rise in demand than DRAM products.
Instead of the estimate cuts on which UBS is waiting, the more likely scenario is an easing of chip constraints. The easing will last just long enough before the next massive wave of demand hits with a vengeance.
You read my thoughts - the generational paradigm shift due to hyper-accelerating technology has largely made the boom-bust cycle irrelevant.
Chip demand will go up in a straight line, and this is just the beginning.
Legend has it that demand weakness shows up every 15 years. The last one was the global financial crisis in 2008, and the one before that was the dot-com crash of 2001.
In both instances, the disappearance of demand contributed to massive oversupply. The declining prices set off a price war eradicating margins and revenue.
SK Hynix net profit was $2.89 billion last quarter, an increase of 64.4 percent YOY.
SK Hynix capital allocation layout includes a spanking new factory in Cheongju, a city in South Korea.
The insatiable demand brought on by China's quest for technological supremacy is the market the new Cheongju factory will serve.
International chip directors fret that a sudden breakthrough in local Chinese technology could ignite a supply bonanza of cut-rate semiconductors, forcing a recapitulation of the entire industry that encountered egregious oversupply issues about 10 years ago.
But China can't dump low-cost chips into the market due to technological frailties.
Notice that Chinese capital has been flirting with American chip companies for years without success.
The Chinese government even initiated an investigation at the tail end of last year because DRAM price spikes were indigestible for local Chinese companies.
The dearth of supply is not just restricted to one extraneous niche of the hardware industry, as the tightness is broad-based.
Don't look further than AMD (AMD), which specializes in GPU (graphics processing unit) products and has received glowing reviews for its Ryzen and EPYC CPU processors that boast higher-level performance than previous products.
The RX Vega series is the new line of GPUs from AMD that launched last August. Tech-enthusiast website techspot.com described finding these GPUs on sale in stores as "next to impossible."
AMD is well informed of the market outlook and NVIDIA (NVDA) notes that hardware-intensive cryptocurrency mining is stoking excess marginal demand for its products.
AMD is boosting production, but manufacturing is set back by a component shortage in GDDR5 memory, which is needed in the RX 400 card.
The RX 500 card, part of the RX Vega line, is also having delays with a lack of HBM2 memory.
Crypto-fanatics aren't the only consumers clamoring for extra GPUs; gamers require GPUs to perform at top levels.
AMD has even urged retailers to advise gamers of any outlets where they can buy GPUs because of the dearth of supply.
Gamers are being outmaneuvered for GPUs as crypto-miners usually buy up every last unit to transport to mining farms in far-flung places with cheap energy.
Hardware products cannot be produced fast enough to meet demand.
Other industries vying for a portion of chips are military, aerospace, IoT (Internet of Things) products, and autonomous cars.
Incremental supply is accruing but often the supply is added slower than initially thought. Suppliers are hesitant to double down on new factories because of past, bitter experiences at the end of a cycle.
Management monitors inventory channels like a hawk eyeing its prey, and it's clear that organic demand is following through.
After running away with 22.2% growth in 2017, the semiconductor industry is due to take a quick breather expanding in the upper teens in 2018.
A year is an eternity in technology and calling for production "cuts" in a period of massive undersupply is premature.
The claim of "cyclical" headwinds comes at a time of a new-found immunity to cyclical demand and is dubious at best.
This secular story has legs. Don't believe every analyst that pushes out reports. They often have alternative motives.
Nvidia (NVDA) reports earnings on May 10, and CEO Jensen Huang does a great job explaining the development at the front-end of the tech revolution.
Earnings should be extraordinary. Imagine if the price of bitcoin stabilizes, GPU manufacturers will wrestle with continuous quarters of strained supply.
I am bullish on chips.
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Quote of the Day
"Focus on the 20 percent that makes 80 percent of the difference." - said Salesforce CEO Marc Benioff when asked to explain the story of his cloud business.
Mad Hedge Technology Letter
April 11, 2018
Fiat Lux
Featured Trade:
(WHY YOU SHOULD BE BETTING THE RANCH ON TECHNOLOGY),
(AMZN), (NFLX), (FB), (Samsung), (Tencent)
Global IT spending is forecasted to surpass $3.7 trillion in 2018, a boost of 6.2% YOY, according to a report released by leading technology research firm Gartner, Inc. (IT).
This year is the best growth rate forecasted since 2007, and is a precursor to a period of flourishing IT growth.
IT budgetary resilience is oddly occurring in the face of a tech backlash engulfing Mark Zuckerberg as collateral damage during higher than normal volatility due to an unstable geo-political environment and nonstop chaos in the White House.
Zuckerberg's reputation has been torn to shreds by the media and politicians alike.
Tech has had better weeks and months, for instance as this past January when tech stocks went up every day. Facebook (FB) still had a great business model in January as well.
The biggest takeaway from the report was the outsized capital investments going into enterprise software, which spurs on exponential business formation.
Enterprise software will successfully record its highest spend rate increasing by 11.1% YOY to $391 billion. This is far and away an abnormally fast pace of increase, but is completely justified based on every brick and mortar migrating toward data harnessing.
The software industry will benefit immensely by the universal digitization of all facets of life as software acts as the tool that businessmen use to propel companies to stardom.
Application software spending will healthily rise into 2019, and infrastructure software also will continue to grow, boosted by the revamping of laggard architecture.
Data center systems are predicted to grow 3.7% in 2018, down from 6.3 percent growth in 2017. The longer-term outlook continues to have challenges, particularly for the storage segment.
The lower relative rate of spend is exacerbated by the chip shortage for memory components, and prices have shot up faster than previously expected.
The new Samsung Galaxy 9 cost an additional $45 in semiconductor chip costs because of the importunate costs that sabotage cost structures.
Exorbitant pricing was set to subside in the early part of 2018, but the dire shortage of chips is here to stay until the end of 2018.
Even though the supply side has ramped up 30%, demand is far outpacing supply, spoiling any chance for tech devices to be made on the cheap.
Global spend for digital devices will grow in 2018, reaching $706 billion, an increase of 6.6 percent from 2017. Not only will we see the standard characters such as phones and tablets, but new creative ways to produce devices in the micro-variety will soon populate our shores.
Amazon Alexa and Apple's HomePod are just the beginning and will spawn micro-devices that would fit nicely into a flashy James Bond film.
The demand for ultra-mobile premium smartphones will slow in 2018 as more consumers delay their upgrade and feel comfortable using older devices -- kind of like a smashed-up Volvo station wagon handed down from sibling to sibling.
In times of uncertainty, corporations hold back spending until the near-term variables can be flushed out, and unforeseen costs causing operational turbulence can be anticipated.
However, the industry has brushed aside the turmoil that has attempted to infiltrate the core growth story.
Investors cannot overlook that total tech spending growth for 2018 is the highest in the past 15 years.
Next quarter's earnings are now on tap, and investors will turn to fundamentals as a cheat sheet for what's in store.
It's undeniable that currently tech stocks aren't cheap anymore. They are also more expensive than they were at the beginning of the year barring Facebook and a few other stragglers.
The momentum has intensified with the five biggest tech firms accounting for more than 14% of the S&P 500 index's weighting.
Tech's relative performance has fended off the bears with PE multiples down a paltry 4.9% this year compared to the cratering of 11.4% in the general market.
And tech is still trading at a tiny fraction of the crisis of the dot-com era.
The outsized reinvestments back into business models don't tell the tale of an industry brought down to its knees begging for salvation.
Look no further than across the Pacific Ocean. Samsung Electronics Co. represents almost 25% in South Korea's Kospi index. At the same time, Asia's most valuable company, Tencent Holdings, makes up almost a 10% weighting in Hong Kong's Hang Seng Index.
Back stateside, about 90% of US tech firms beat revenue estimates in the last quarter of 2017, marking the best success rate for any industry.
The positive sentiment has continued into this year with wildly bullish expectations led by the FANG stocks.
The broader volatility is a gift to investors who hesitated and missed the monster rally that has graced tech the past few years.
Tech is vital to emerging markets. And this is the first year since 2004 that tech constitutes the biggest sector in the MSCI Emerging Markets Index blowing past financials.
Tech had a 28% weighting at the end of 2017, the weighting more than doubling from six years ago.
As it stands today, tech enjoys light regulation and by a long mile. Tech is actually the least regulated industry in America and has used this period of light regulation to stack up profits to the sky.
Banks are nine times more regulated than tech companies, and manufacturing companies are five times more regulated.
Legislation such as Dodd-Frank has done a lot to taper the excesses of the sub-prime frenzy that almost took down Wall Street.
The lean regulation has helped tech companies such as Facebook and Google build a gilt-edged competitive advantage that has been exploited to full effect.
After the Fed closed the curtains on its QE program, tech and its earnings are the sturdiest pillar of the nine-year bull market.
The Street is reliant on the big players to earn its crust of bread and show investors that tech isn't just a flash in the pan.
The two numbers acting as the de-facto indicators of the health of the overall economy are Netflix's subscriber growth numbers and Amazon's AWS Cloud revenue.
These two companies do not focus on profits and are the prototypical tech growth companies.
If they beat on these metrics, the rest of tech should follow suit.
The market is entirely dependent on big tech to drag investors through the time of transition. My bet is that tech will over-deliver booking stellar earnings.
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Quote of the Day
"By giving the people the power to share, we're making the world more transparent." - said Facebook CEO Mark Zuckerberg
