Mad Hedge Technology Letter
March 18, 2019
Fiat Lux
Featured Trade:
(WHY ALPHABET IS THE BEST FANG TO BUY NOW),
(GOOGL), (NFLX), (FB), (TWTR), (DIS)
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Why am I bullish on Alphabet (GOOGL) short-term?
Video has muscled its way to the peak of the digital content value chain.
If you don't have video streaming, then you are significantly depriving yourself of the necessary ammunition capable of battling against legitimate content originators.
The optimal type of content is short form yet engaging.
Interesting enough, the format method integrated into systems of Facebook (FB) and Twitter (TWTR) has experienced unrivaled success.
They have been leaning on this model as growth levers that will take them to the next stage of revenue acceleration and rightly so.
This has seen smartphone apps such as Instagram become game-changing revenue machines destroying all types of competition.
The x-factor that stands out in Instagram's, Facebook’s, YouTube’s model is that it's free and they do not absorb heavy expenses from content creation.
It’s certainly cheap when the user is the product.
Google’s YouTube service has morphed into something of a phenomenon.
Its interface is easy to use, and followers have a simple time navigating around its platform.
Familiar news outlets such as Sky News, Bloomberg News, and even CNBC news have recently installed their live feeds on YouTube's main platform scared of losing aggregate eyeballs.
And even more intriguing is that YouTube has become a legitimate competitor to Netflix's (NFLX) online video streaming platform.
YouTube has sensed the outsized pivot to their free platform and has double down hard by installing 5-second ads at the front end and middle of videos.
Of Alphabet’s total $39.3 billion revenue pocketed in Q4 2018, ads constituted 83% or an astounding $32.6 billion.
I feel that Alphabet shares are currently undervalued, and I believe that we will see outperformance from Alphabet shares for the rest of 2019 based on YouTube's performance relative to expectation.
YouTube’s ever-growing presence showing up in the top line will offer the growth investors desire to pile into these shares as the company wrestles with future projects such as Waymo.
That's not to say that their traditional advertisement business of Google Search is failing.
Investors can expect continuous 20% to 25% growth in this cash cow business, but the reason why Alphabet share has not been able to break out is that investors have baked this into the pie.
Therefore, YouTube is really the X Factor and will take them to this new promised land with shares surging past the $1,250 mark and more importantly, staying at that level.
YouTube brought in about $15 billion in 2018 and that consisted of about 10% of Alphabet’s total annual revenue.
However, the company is just scratching its surface of what it can accomplish with this fast-growing revenue driver and I can extrapolate this growth segment turning into 20% or 25% of the company’s annual revenue in the next few years.
Google does not strip out YouTube revenue in its reporting, therefore, it's difficult to put my finger on exactly how much YouTube is carving out in terms of revenue.
I can also assume that if Netflix continues to raise the cost of monthly subscription, this strategy will directly hurt its revenue acceleration ability as it relates to competing with Google's YouTube because YouTube's free service is demonstrably attractive to viewers hoping to discover high-quality content relative to a $20 per month Netflix subscription.
I do agree that Netflix is a great company and a great stock, but as they slowly raise the price of content, this will gift YouTube a huge chunk of Netflix’s marginal audience freeing itself from the shackles of Netflix’s price rises.
At some point, online video streaming will become as expensive as the cable bundles now, and at that point, we know that saturation is imminent boding negative for Netflix.
What I do envision in the short-term future are consumers in America will pay into several unique bundles such as Netflix, maybe Disney (DIS), ESPN and merely stick with these as their base content generators as more consumers cut their cord and hard pivot from traditional cable packages that are becoming less appealing by the day.
And don't forget that at some point, Netflix will have to demonstrate profitability and the huge cash burn that permeates throughout the business will be exposed when subscription growth starts to fade away.
In every possible variant, YouTube will become an outsized winner in the media wars because the quality of the free content keeps improving, the cost for consumers stays at 0, and their best of breed ad tech migrating from their Google search into YouTube just keeps getting more surgical and efficient.
Not only are the positive synergies from the best of breed ad tech aiding YouTube’s model, but just think about YouTube having access to the Google cloud and saving expenses by accessing this function to store data onto the Google Cloud.
If this was a standalone service, they would have to subcontract cloud storage functions to third-party cloud company causing the content service to spend millions and millions of dollars per year in expenses.
This would have the potential of crushing the bottom line.
That is just one example of the synergies that Google can take advantage of with YouTube under its umbrella of assets.
And think about self-driving vehicles, Google could potentially equip YouTube as a pre-programmed application inside of autonomous vehicle platform tech with YouTube popping up on the multiple screens.
I assume that there will be multiple screens inside of cars with self-phone driving technology because of the lack of driving required.
The worst maneuver that Alphabet could do right now is spinoff YouTube into its own company, and if that happens, YouTube won't be able to take advantage of the various synergies and benefits of being an Alphabet asset.
We are just scratching the surface of what YouTube can accomplish, and I believe this upcoming overperformance isn’t in the price of the stock yet.
If the Fed continues its “patient” strategy towards interest rates at a macro level, Alphabet will easily soar past $1,250 and it can easily gain another 10% in 2019.
If any “regulation” risk as a result of extremist content rears its ugly head, buy shares on the dips because the algorithms are in place to eradicate this material and any fine will be manageable.
Global Market Comments
August 6, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or FINDING A NEW GIG),
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Global Market Comments
July 30, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD,
or POURING GASOLINE ON THE FIRE),
(MSFT), (AMZN), (FB), (NFLX), (TWTR),
(TESTIMONIAL)
Global Market Comments
June 11, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE WEDNESDAY, JUNE 13, 2018, PHILADELPHIA, PA, GLOBAL STRATEGY LUNCHEON),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE NEW WORLD ORDER),
(AAPL), (MU), (TWTR),
(I'M HITTING THE ROAD)
The San Francisco Bay area?s beleaguered renting class moaned again when the social media giant, Twitter (TWTR) finally went public a couple of years ago.
The deal immediately placed $1.82 billion into the pockets of early shareholders, almost all of whom live near the company?s San Francisco headquarters.
This is adding insult to injury to those in the region who are desperately seeking a home. San Francisco already has the most expensive rentals in the country.
The median rent for a modest two-bedroom apartment in a marginal neighborhood with poor access to public transit and no view is $4,500 a month.
Forget about it if you smoke, have a pet, or suffer from a poor credit rating. That compares to $3,150 a month in New York City, $2,300 in Boston, and $2,250 in Los Angeles.
This is just the latest tsunami of cash to hit the city?s torrid real estate market. Since 1998, Apple (AAPL) has created $700 billion in equity for shareholders, while Google (GOOG) has manufactured a further $450 billion.
In 2012 Facebook (FB) joined their ranks with a $100 billion IPO that quickly went sour. What is hoody wearing Mark Zukerberg?s creation worth today? A stunning $339 billion.
The first thing these newly enriched entrepreneurs do is buy a nice big house. This is not just limited to founding technology nerds and geeks wearing hoodies.
During the early start up days of these cash starved companies, shares are handed out to employees in lieu of better pay, all the way down to the secretary level. When they go public, thousands of millionaires are created and not a few billionaires.
Presto! A housing bubble!
Renters are getting creative in dealing with the high prices. Some are doubling up the use of bedrooms. Others rent out their beds during the day to programmers who often prefer working all night, much like hot sheet hotels of old.
Many have moved into the garage and sleep with the business they are trying to develop. Some homeowners with yards are leasing out spaces to pitch tents, while others are taking advantage of new services on the internet that allow them to rent spare rooms by the night.
There is no way of telling how far this will go. The last technology bubble popped when price earnings multiples hit 100. Most established tech firms are now trading in the 11-18 range, so the day of reckoning could be quite a ways off. Rentals could reach the astronomical levels now seen in London and Hong Kong.
In the meantime, I?m thinking of renting out my tool shed in the garden. My agent says that I could get at least $1,000 a month. The alternative is for home seekers to move to Las Vegas, where they can get a larger two bedroom without the need for heating for only $900 a month.
Do you think it is worth the commute?
?The Solar Road Revisited?. Somehow this modernized version of Bob Dylan?s epic folk album doesn?t quite ring true when couched in terms of our hyper accelerating 21st century technology. Perhaps a Millennial bard will improve on this in the future on iTunes, Pandora, and Beats, of course?
Yet, such a futuristic invention has already been created, is raising money through crowdfunding, and even landed a small Federal Highway Administration grant.
We live in an age of exploding technologies. So, when I find some that are especially interesting, offer a potential long term impact on the global economy, or present immediate investment opportunities, I am going to update you in this newsletter.
One common complaint I hear during my road shows is that we are moving into the future so fast, that it is getting increasingly hard to keep up. That is, unless you live within sight of Apple (AAPL), Google (GOOG), Twitter (TWTR), and Facebook (FB) headquarters, which I do. These companies all have venture capital arms, which fund many of these things.
Sandpoint, Idaho based engineers Julie and Scott Brusaw are the founders of Solar Roadways, a tiny engineering company that seeks to convert the American highway system from old fashioned asphalt and concrete to tempered glass and LED?s.
They have raised $2 million through the crowdsourcing website Indiegogo, which saw its amazing videos on the project go viral and attract 15 million views (https://www.indiegogo.com/projects/solar-roadways ).
Caution: conservatives may want to avert their eyes during all of the global warming, anti gasoline, and tree hugging references. But this stuff raises big bucks in California.
What can solar roads do? Obviously, the green hexagonal panels they are made of convert sunlight into electricity, heating roads so they can remain free of ice and snow all year. I could really use that up at Lake Tahoe.
Surplus power can be sold to local utilities to pay for it. Electric cars, like my Tesla Model S-1 (TSLA), can recharge their batteries just by parking on it, as my toothbrush already does in my bathroom.
You can program the LED?s to embed changeable road signs, borders, parking lots, and crosswalks. They can highlight crossing animals (200 deaths a year now in the US), or impending road obstructions.
They can even display layouts for every kind of sport (basketball, tennis, etc). The glass can be cast to give it a better grip than contemporary roads. Highway deaths would plunge, as would insurance costs.
Driving trucks on glass? The material is so strong that it can support the heaviest, or some 62 tons. My question, can handle steel caterpillar tractor treads used in road repair equipment?
Of course, it always comes down to cost with these new technologies, many of which remain pie in the sky forever. Estimates are that these roads cost 50%-300% more than existing ones. Large-scale construction would bring that down through economies of scale via mass production. The design is really quite simple.
The vision is big. It would probably cost over $1 trillion just to pave over the existing 48,000 miles of the interstate highway system. Tens of thousands of blue-collar jobs would be created. It all sounds like a massive public works project would be required, of Rooseveltian, CCC magnitude.
This just gives you a flavor of the incredibly interesting things going on here in the San Francisco Bay area, which I learn about on a daily basis. Check out the site, if only to see the future of start up funding.
You can contribute $5, or just buy a tote bag.
Somehow, It?s Just Not the Same
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