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Special Acronym Issue

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 - 5^th 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.

June 13, 2018/by MHFTR

June 4, 2018

Tech Letter

Mad Hedge Technology Letter
June 4, 2018
Fiat Lux

Featured Trade:
(THE INNOVATOR'S DILEMMA),
(UBER), (WMT), (SNAP), (MSFT), (GOOGL), (AAPL), (GM), (IBM)

June 4, 2018/by MHFTR

The Innovator's Dilemma

Tech Letter

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.

June 4, 2018/by MHFTR

May 8, 2018

Tech Letter

Mad Hedge Technology Letter
May 8, 2018
Fiat Lux

Featured Trade:
(BUFFETT GOES ALL IN WITH APPLE),
(SNAP), (WDC), (GOOGL), (AMZN),
(CRM), (RHT), (HPQ), (FB), (AAPL)

May 8, 2018/by MHFTR

Buffett Goes All In With Apple

Tech Letter

Not every stock comes with Warren Buffett's confession that he would like to own 100% of it. But, of course that stock would have to be a tech stock.

As it stands, the Oracle of Omaha owns 5% of Apple (AAPL), and his confession is still a bold statement for someone who seldom forays outside his comfort zone.

Buffett also continues to concede that he "missed" Google (GOOGL) and Amazon (AMZN).

What a revelation!

The outflow of superlatives invading the airwaves is indicative of the strength technology has assumed in the bull market.

The tech sector has been coping with obstacles such as higher interest rates, trade wars, data regulation, IP chaos, and the globalization backlash.

However, the tech companies have come through unscathed and hungry for more.

Their power is not contained to one industry, and techs' capabilities have been spilling over into other sectors digitizing legacy industries.

Every CEO is cognizant that enhancing a product means blending the right amount of tech to suit its needs.

It is not halcyon times in all of tech land either.

There have been some companies that have faltered or were naturally cannibalized by other tech companies that disrupt business.

Times are ruthless and this is just the beginning.

There will be winners and losers as with most other secular paradigm shifts.

Particularly, there are two types of losers that investors need to avoid like the plague.

The first is the prototypical tech company hawking legacy products such as Western Digital Corp. (WDC) that I have been banging on the table telling investors not to buy the stock.

The lion's share of revenue is still in the antiquated hard drive business that has a one-way ticket to obsolescence.

Yes, they are turning around product mixes to factor in its pivot to solid state drives (SSD), but they are late to the game and deservedly punished for it.

Compare WDC to companies that have completed the transition from legacy reliance to the cloud, and it is simple to understand that companies such as Microsoft, which struggled for years to turn around with CEO Satya Nadella, finally can claim victory.

The problem with WDC is the stock's price action performs miserably because the company is tagged as an ongoing turnaround story.

On the other hand, headliner cloud plays experience breathtaking gaps up due to the strength of the cloud such as Amazon (AMZN), Red Hat (RHT), and Salesforce (CRM), just to name a few.

To pour fuel on the fire, speculative reports citing NAND chip price "softening" beat down the stock into submission.

Effectively, legacy companies become sell the rallies type of stocks.

Transforming a legacy company into a high-octane cloud company is perilous to say the least. Jeff Bezos recently gloated that Amazon Web Service's (AWS) seven-year head start is all investors need to know about the cloud. There is some merit to his statement.

Examples are rife with bad executive decisions by legacy companies such as HP Inc. (HPQ), another legacy tech company that makes computers and hardware. It ventured out to buy Palm for $1.2 billion plus debt after a bidding war with legacy competitor Dell in 2010.

In 1996, the Palm PDA (Personal Digital Assistant) was the first smart phone on the market that predated BlackBerry's smart phone with the full keyboard made by RIM (Research in Motion).

The demise of Palm emerged from a hodgepodge of mismanagement, failed spin-offs, misplaced mergers, and resource wastefulness even with the preeminent technology of its time.

(HPQ)'s stab at the smartphone market resulted in purchasing Palm. However, after heavy selling pressure in its shares, HP shut down this division and sold off the remaining technology to Chinese electronics company TCL Corporation.

The sad truth is many transformations fail at step one, and there is no guarantee a newly absorbed business will perform as expected.

RIM, now changed to BlackBerry (BB), soon found out how it felt to be Palm when Steve Jobs dropped the first iPhone on the market, and the world has never been the same.

(BB) gradually morphed into an autonomous vehicle technology company after the writing was on the wall.

The other types of losers are companies with inferior business models such as Snapchat (SNAP), which I have written about extensively from the bearish side.

In an age where disruptors are being disrupted by other disruptors, CEOs must live in fear that their business will get undercut and hijacked at any time.

Instagram, a subsidiary of Facebook (FB), has permanently borrowed numerous features from Snapchat. Its Instagram "stories" feature is now used by more than 300 million daily users.

Snapchat is serving as Instagram's guinea pig while CEO Evan Spiegel finds an alternative way to survive against Facebook's unlimited resources.

Both are in the game of selling ads and nobody does it better than Facebook and Alphabet or has the degree of scale.

The recent redesign was met with a chorus of universal boos. The 60 minutes I spent testing the new design reconfirmed my fears that the new design was an unmitigated washout.

In short, Snap's redesign seemed like a different app and became incredibly difficult to use.

Compounding the deteriorating situation, Snapchat laid off 120 engineers due to sub-par performance and withheld last year's performance bonuses even though co-founder Evan Spiegel received $637 million in 2017.

The latest earnings report was a catastrophe.

Daily active user (DAU) growth, the most sought out metric for Snapchat, failed to deliver the goods. The street expected 194.2 million DAU and Snap reported 191 million. A miss of 3.2 million users and a deceleration of growth QOQ.

Remember that Snapchat is substantially smaller than Instagram and should have no problems surpassing expectations on a smaller scale, thus investors voted with their feet and bailed on the stock after the catatonic performance last quarter.

Instagram is six times larger with more than 800 million users as of the end of 2017.

Top line fell short of expectations and average revenue per user (ARPU) dropped to $1.21, far less than the expected $1.27.

The less than stellar redesign faced a rebellion from long-term Snapchat disciples. More than 1.2 million Snap diehards signed a petition hoping to revert back to the old interface, and its updated ratings in Apple's app store has fallen to 1.6 stars out of 5.

Then the perpetual question of why would advertisers want to pay for Snapchat digital ads when they earn more by buying Instagram ads?

This remains unsolved and appears unsolvable.

Snapchat is befuddled by the pecking order and the company is on a train to nowhere.

To hammer the nail in the coffin, Snapchat announced to investors that it expects revenue to "decelerate substantially" next quarter.

In an era where technology companies will lead the economy and stock market, and has an outsized influence in politics and culture, not all tech companies are one-foot tap-ins.

Investors need to separate the wheat from the chaff or risk losing their shirt.