Mad Hedge Technology Letter
November 4, 2019
Fiat Lux
Featured Trade:
(THE CHICKENS COME HOME TO ROOST WITH SMALL TECH),
(AAPL), (MSFT), (AMZN), (GOOGL), (WDC), (TXI), (ANET), (PINS)
Mad Hedge Technology Letter
November 4, 2019
Fiat Lux
Featured Trade:
(THE CHICKENS COME HOME TO ROOST WITH SMALL TECH),
(AAPL), (MSFT), (AMZN), (GOOGL), (WDC), (TXI), (ANET), (PINS)
The tech story is still intact, but the edges are losing its shine.
That is the takeaway from the recent slew of earnings reports from many of the prominent yet second-tier tech companies.
On one hand, companies like Apple (AAPL) have been holding the fort as it blasts through to new highs even amid the backdrop of the Chinese trade war that has dragged many of the strong tech names into the mud.
What we did see lately was a magnificent swan dive by chip names like Western Digital (WDC) and Texas Instruments (TXI) which were blindsided by 10-15% haircuts because of lackluster guidance.
The agony didn’t stop there with second rate cloud names like Pinterest (PINS) and Arista Networks, Inc. (ANET) reaching for scapegoats for their weak guidance. These took instant 20% haircuts.
The problem with smaller stocks like these besides having narrower spreads, they are slaves to just a few contracts and when one goes, their guidance and revenue estimates implode in their faces.
Arista slid more than 25% on news that they expect quarterly revenue of $540 million-$560 million, with the midpoint about 20% below the previous Street consensus at $686.2 million.
Arista CEO Jayshree Ullal said in a statement that the company expects “a sudden softening in Q4 with a specific cloud titan customer.”
That is Facebook who comprise about 10% of Arista’s revenue composition because Facebook has pulled back the reigns on cloud spend to cut costs amid a murky global backdrop and regulatory minefield.
Unfortunately, second tier cloud names must accept that they do not offer the best pricing when directly competing with the superior cloud names of Google Cloud, Microsoft Azure, and Amazon Web Services (AWS) because they simply can’t scale as well to the extent these monopolistic FANGs can.
Data storage often comes down to whoever has the cheapest cost of capital to pile into server farms allowing pricing to be ultra-cheap and these three companies win out.
If these firms lose one contract like Walmart’s switch over to Microsoft Azure from Amazon, it’s not a big deal.
It doesn’t put a 10% black hole in the revenue stream like for Arista.
Pinterest was one of the most overhyped IPOs of 2019 promising growth, growth and more growth.
Its digital ad business needs to deliver accelerating growth for its share price to rise and when the latest earnings report showed year-over-year growth slow from 62% to 47%, investors saw the writing on the wall.
The company only grew its users 8% in the lucrative North American market and 38% abroad.
But the foreign markets were tainted by the gruesome underbelly of earning only 13 cents per foreign users.
There is user growth but at the cost of an inferior quality of growth.
Analysts can clearly observe the accelerated erosion of Pinterest, and I can say from a personal point of view that the website isn’t that useful.
Management’s excuse was a tough comparison to the prior year but if a growth firm has a superior model, they should be able to grow past any minor problems if the secular trends stay hemmed in.
Weak excuses now and probably weak excuses next quarter as the global tech landscape gets squeezed even more at the periphery.
What does this all mean?
There has been a flight to tech quality into the Teflon names like Microsoft and Apple.
Names that are showing growth headaches saddled with too much competition and structural softness are getting killed.
Don’t even think about investing in the marginal names like Pinterest and Arista.
Better to be safe on your perch inside the moat than outside isolated from the drawbridge.
Not all tech is created equal and it's rearing its ugly face in a frothy market.
Legal Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
This site uses cookies. By continuing to browse the site, you are agreeing to our use of cookies.
OKLearn moreWe may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.
Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.
These cookies are strictly necessary to provide you with services available through our website and to use some of its features.
Because these cookies are strictly necessary to deliver the website, refuseing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.
We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.
We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.
These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.
If you do not want that we track your visist to our site you can disable tracking in your browser here:
We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.
Google Webfont Settings:
Google Map Settings:
Vimeo and Youtube video embeds: