Mad Hedge Technology Letter
August 27, 2018
Fiat Lux
Featured Trade:
(WHY ALIBABA IS THE FIRST STOCK TO BUY WITH THE OUTBREAK OF TRADE PEACE),
(BABA), (GOOGL), (AMZN), (YELP), (MSFT), (MU), (ZTE), (HUAWEI)
Mad Hedge Technology Letter
August 27, 2018
Fiat Lux
Featured Trade:
(WHY ALIBABA IS THE FIRST STOCK TO BUY WITH THE OUTBREAK OF TRADE PEACE),
(BABA), (GOOGL), (AMZN), (YELP), (MSFT), (MU), (ZTE), (HUAWEI)
According to the government agency, China Internet Network Information Center, the Chinese Internet community has surpassed 802 million, which only represents a 57.7% penetration rate, miles behind the 89% penetration rate in America.
The gargantuan scale of the Chinese Internet world means China has three times as many Internet users than America, and this is a big deal.
The additional 30 million added to the Chinese Internet ecosphere in the first half of 2018 shows the scale in which local Chinese tech companies are playing with and use to their clear-cut advantage.
Ostensibly, most business strategies in China revolve around scaled tactics as the backbone to operations.
There is even more room to expand in the Middle Kingdom and one clear victor sits atop the parapet looking at the riffraff below and that is Chinese Internet conglomerate Alibaba (BABA).
Alibaba, led by Chinese Internet pioneer Jack Ma, posted its highest-performing growth quarter in the past four years.
Total quarterly revenue ballooned an incredible 61% YOY to $11.8 billion, highlighting the dominant position Alibaba possesses in the Chinese e-commerce landscape.
If you want to know what Amazon (AMZN) is going to do next watch Alibaba.
Profit margins were somewhat sacrificed in the process because of M&A activity that saw Alibaba move into the physical supermarket business snapping up 35 Hema supermarket locations then reinvesting into the business. Echoes of Whole Foods?
Alibaba did not stop there, funneling another $3 billion into food delivery app ele.me, which plans to merge its operations with Yelp (YELP) lookalike app Koubei.
If you thought Silicon Valley moves at a rapid pace, the Chinese Internet space moves faster than lighting.
Alibaba last year dipped into the retail segment as well pocketing a department store chain with 29 stores along with 17 shopping malls.
Alibaba is the closest replica the world has to Amazon and thus is an ideal barometer of the health of the overall Chinese consumer and a peek under the complicated hood that is the Chinese economy.
Alibaba also provides onlookers at how China and its Internet behemoths are coping with the global trading war that has invaded the news headlines from its outset.
The short answer to all this is that China is coping quite well and by no means is ready to back down.
Indeed, there will be peripheral pressures exerted from the fringes, but the core engines remain intact and Chairman Xi can fall asleep in his Beijing abode more than peacefully.
A reason for the stalemate between the two governments is that both are quietly confident they have the levers in place to absorb whatever Molotov cocktails the other has to throw at them.
Investors would be mad to dismiss China’s capabilities after experiencing a mesmerizing economic rise enriching hundreds of millions of Chinese nationals that can be found comfortably living in western megacities in luxury real estate often with a real estate portfolio dotted around the world.
Alibaba’s management made it known on the earnings report that it is not worried much about the trade war because it is largely focused on the domestic Chinese consumer, which has been one of the best economic stories of the past decade.
The overseas expansion unfolding under Alibaba’s tutelage is away from the western world and predominantly focused on Southeast Asia and Eastern Europe where cheap, value-for-money hardware and software allows citizens at these income levels to participate in the e-commerce game.
These individuals can’t afford iPhones on a salary of peanuts. And Alibaba has targeted the undeveloped world as a potential lever of substantial growth.
The regulatory harshness of the west has shut out Huawei and ZTE from its shores. Australia followed suit as well, banning the two telecom companies even though it enjoys a better relationship with Beijing than Europe or North America.
China has already planned a workaround because the engines driving the Chinese tech miracle are semiconductor companies such as Micron (MU), which sells boatloads of DRAM memory chips to Chinese tech companies that flood the world with smartphones and other gadgets.
Beijing has already formulated a plan to circumvent American chips by tapping Korean, European, and Japanese chips to replace the current American supply that could vanish at any time.
Shenzhen-based chip company HiSilicon fully owned by Huawei is responsible for supplying Huawei with chips and is the biggest local designer of integrated circuits in China.
This is what the future of China looks like when China can finally build up the adequate supply necessary to achieve its plans to dominate global technology, America, and the world.
But the plan is still in the process of playing out. The awkwardness was highly visible when the administration’s ban of selling U.S. manufactured components to telecommunications company ZTE resulted in the company almost shutting down until a last-second change of heart by the administration.
The near-death experience will invigorate ZTE to muster its own local supply of chips to avoid the unreliable foreign supply and a deja vu feeling.
American chip companies won’t be able to enjoy the Chinese market for long as all these negative experiences for Chinese companies has forced Chinese tech companies to search and secure a guaranteed chip supply.
At the same time, Chinese local smartphone players have gone from 0 to 60 in no time with companies that barely existed a few years ago, such as Oppo, Vivo coming into the fore along with Huawei picking up 43% of the global smartphone market.
This is bad news for Apple as local competitors are learning fast and furious how to build premium smartphones via re-engineering the current technology or through forced technology transfers.
These companies subsequently offer these phones at the lowest possible price point. And at some point in the near future Apple could be expendable if Chinese smartphones start to display the type of quality the best phones show.
Chinese domestic consumption and investment comprise 90% of the GDP growth in China and are propped up by three robust trends including real wage growth boosting the middle-class population, high savings rate that of which Americans would be jealous, and easy access to credit vehicles.
When I was recently in the Middle Kingdom, it was highly evident that as the generations became younger, their quality of life was higher than their parents.
The opposite is happening in America with millennials earning demonstrably less than their parents’ generation while the American middle class is shrinking at an accelerated pace.
Beijing knows this and hopes to wait things out as it feels time is a positive variable for China and not America.
It is true that if this trade war took place in 20 years in the future, China would be in a stronger strategic position to extract whatever concessions it desires because even though Chinese growth is slowing, it is still growing at 6.5%.
And if you don’t believe what I just said then just look at Alibaba’s cloud division, which grew 93% YOY opening artificial intelligence-based data centers around Europe to battle Amazon (AMZN) and Microsoft (MSFT).
Europe was once Elysian Fields for American tech companies, but with European regulators going after American tech and China encroaching on European turf, the future looks a lot less certain for the FANGs there than ever before.
Alibaba’s operating margins dipped 10% YOY but the slide will be returned to shareholders in the future in the form of high-quality revenue and is worth the investment into the most innovative ideas of tomorrow.
I did not even mention the large stake Alibaba has in Ant Financial, which operates the ubiquitous digital payment app Alipay.
It would be analogous to Amazon if it owned Visa.
Alibaba is one of the best tech companies in the world headed by a former Chinese English language teacher in Hangzhou.
If America becomes too difficult or expensive with which to do business, Alibaba and Chinese tech will just recalibrate their strategy to deeper infiltrate the confines of Southeast Asia and the rest of the undeveloped world.
Any price war on undeveloped soil favors the Chinese as they have mastered scale better than anyone on the planet.
The stellar Alibaba numbers also mean the trade war has no end in sight as each player thinks they have the upper hand. But it also means the tech giants from both countries will come out unscathed and will lead their country’s respective equity markets higher for the foreseeable future.
________________________________________________________________________________________________
Quote of the Day
“Technology is nothing. What's important is that you have a faith in people, that they're basically good and smart, and if you give them tools, they'll do wonderful things with them,” – said Apple cofounder and former CEO Steve Jobs.
Mad Hedge Technology Letter
May 17, 2018
Fiat Lux
Featured Trade:
(NVIDIA NAILS IT AGAIN)
(NVDA), (ZTE), (GOOGL), (AMD)
No one does it better than Nvidia (NVDA).
Fetch a measuring stick from the cupboard, gauge the levels of innovation around Silicon Valley, and Nvidia's name floats straight to the top of the list.
Nvidia has it all and more.
Not many firms can brandish one of the best CEOs in all of tech.
Nvidia CEO Jensen Huang is a true visionary.
When he hops on earnings calls, investors and analysts rejoice about the breadth of innovation percolating through the corridors in Santa Clara, CA.
Nvidia was able to increase quarterly revenue by an eye-popping 61% YOY. And this company is one of the quintessential growth companies in tech.
Huang is one of the few CEOs confident enough to talk all the way through the earnings call like he is talking about the back of his hand.
Most CEOs delegate to the CFO after a carefully choreographed introductory statement.
He knows everything about the company and is not afraid to go into detail.
The past few weeks have been hell for chip companies.
The cascade of downgrades undercut momentum with chip shares prices falling across the board.
Every nonsensical downgrade has proved unjustified with chip earnings displaying the robust potency that only FANGs can replicate.
Delve into Nvidia's latest performance and two parts of the business have gone into overdrive.
Gaming has burst to the forefront providing a sturdy pillar to Nvidia's income stream.
Fortunately, crypto mining and e-gamers are dual drivers fueling a rapidly expanding market.
In Q1, crypto miners and e-gamers faced a hysterical "scarcity" of high grade GPU hardware.
To make matters worse, Apple and Samsung are using the same memory as graphic cards.
These two global giants front ran other companies agreeing pricier per unit contracts to guarantee sufficient supply for their product lineup.
This led to a huge famine or feast environment to secure the necessary components.
Huang has ensured investors that Nvidia is moving mountains to meet demand and he hopes prices will "normalize" in the upcoming quarter.
Advanced Micro Devices (AMD) is the other player producing GPU chips that is experiencing a demand overload.
On the last sell-off, AMD dropped as low as 9.50 and was the perfect entry point into a great company led by Lisa Su, PhD.
AMD continued to bounce off the $9 handle and is trading at $13 after an outstanding earnings report.
Huang also caveated his hopes of chip prices normalizing by saying the "pent-up demand" could get worse because of the unbelievable gaming options in the market, such as blowout title Fortnite and popular online game Player Unknown's Battlegrounds that have sold more than 40 million copies throughout various platforms.
Nvidia has caught the innovation bug with new products coming off the conveyer belt sooner than expected.
Nvidia has announced NVIDIA RTX, the "holy grail" of graphic performance that will offer gamers Hollywood cinematic production quality lighting, reflections, and shadows.
This product has been in the works for the past 10 years and has gamers and miners drooling over this new technology called ray tracing.
Revenue from crypto miners is not a part of Nvidia's core mission, and the stronger than expected numbers are just the beginning.
If bitcoin takes another stab at $20,000, GPU demand will go through the roof.
As the price of cryptocurrencies rise, the profit-making opportunities to mine are greatly enhanced.
Another division running on all cylinders showing no sign of slowing down is the data center segment.
Initially, this industry was tabbed by Nvidia as a $30 billion opportunity by 2020.
They were completely wrong.
Nvidia moved the goal posts and announced at a recent investors day that it believes data center revenue will be a $50 billion market by 2023.
Data center revenue spiked 71% YOY to $701 million highlighting the innovation leadership Nvidia enjoys.
The data center incorporates Nvidia's Volta architecture and adoption has been broad-based.
Volta offers 500% more deep learning power than its previous edition Pascal.
The stamp of approval is evident with every major cloud player embracing the Volta technology.
At some points during the earnings call, it appeared to be a commercial for data center, gaming and crypto because of the strength of these two segments.
Huang did talk about other businesses such as autonomous driving buttering up its place in Nvidia's lineup.
Autonomous driving will be a $60 billion opportunity by 2035, according to conservative estimates.
Nvidia's DRIVE Constellation continues to be the bread-and-butter platform for automotive companies.
The platform allows car companies to use virtual reality (V.R.) to carry out driving trials.
Two servers have been built to aid in development.
The first server allows simulation in the form of a pseudo video game, and the other server is used to process the simulated data.
In whole, autonomous driving lagged gaming and data center with 4% growth YOY.
This should not alarm investors because Nvidia is in it for the long run.
The software system and infotainment in the first generation of commercial autonomous vehicles will have plenty of Nvidia chips hovering around under the hood.
At some point, every vehicle in the world will require autonomous technology. As Nvidia stays ahead of the innovation curve, buyers will gravitate toward its products.
The architecture of Nvidia chips allows car companies to advance their autonomous vehicle technology.
Nvidia is partnering with other industry leaders such as Tesla and Mercedes Benz, just to name a few.
Going forward developers will harness the power of artificial intelligence (A.I.) to build new software programs for the car.
The new car software will be part and parcel with voice recognition that has quickly come to the forefront of tech development.
Creating a whole autonomous vehicle system to just drag and drop into its business could lead to Nvidia's products becoming the industry standard.
Technical superiority eventually wins out.
Nvidia has diversified into every cutting-edge trend in technology.
Huang understands that to keep buyers salivating over its products, they must be the highest quality.
The reason Alphabet (GOOGL) or Apple partner and synergize with Nvidia so well is because it makes the best of the best and they cannot copy their products.
This is why ZTE, one of the biggest tech companies in China, practically went out of business after Donald Trump cut of its pipeline of critical American components.
Chinese companies have been attempting to buy American chip companies for years because the quality of chips is significantly superior.
Amid a backdrop of a trade war, Nvidia shares have been trading choppily from a strong support level of $200.
It is only a matter of time before Nvidia explodes through the $250 resistance level and climbs higher.
To watch a video demonstration on Nvidia's new RTX ray tracing technology click here.
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Quote of the Day
"The United States must possess unquestioned capacity to launch crippling counter-cyberattacks. This is the warfare of the future ... America's dominance in this arena must be unquestioned and today, it's totally questioned." - said President of the United States Donald J. Trump.
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