Mad Hedge Technology Letter
August 2, 2024
Fiat Lux
Featured Trade:
(BAD NEWS IS BAD NEWS FOR TECH)
($COMPQ), (FXY)
Tech stocks ($COMPQ) won’t be down for too long. It’s been a while since we were caught by a right hook to the jaw, but it still hurts nonetheless.
The myriad of weakness was triggered by weakening employment numbers suggesting the internals of the US economy are falling apart.
Some of the big names are down, but that doesn’t mean they are down and out.
In fact, big tech didn’t fare that badly during earnings even though lots of little software companies were crushed.
It is true that forecasts have been substantially weak as enterprise spending is reigned in and belts tightened.
Then to really cap it off, the Japanese yen (FXY) strengthening via an unexpected interest rate hike by the Bank of Japan, sparked an unwind that really gutted tech stocks in the short-term.
Much of the liquid capital used to bid up tech stocks originated from Japanese banks who lent in Yen only for private funds to buy tech stocks in dollars.
That trade has gotten clobbered in the past few weeks.
There is a strong chance that the Bank of Japan could be out of bullets for now and this isn’t the death of tech.
We are just resting.
The unemployment rate cooling and tech stocks selling off finally means that bad news is bad news.
That translates into a manifestation of an upcoming recession or at least tech investors firmly believe so.
New signs of a cooling labor market are stoking fears that the Federal Reserve may have waited too long to start lowering interest rates.
We are in full-blown risk-off mode.
The US economy added 114,000 nonfarm payroll jobs in July, fewer than the 175,000 expected by economists. The unemployment rate rose to 4.3% — its highest level since October 2021.
Fed chair Jerome Powell said Wednesday that a cut in September was “on the table.”
Powell also said "the question really is one of are we worried about a sharper downturn in the labor market. The answer is we are watching carefully for that."
I still believe we will experience some sort of bounce back from tech stocks.
There is no way we go from soft landing to hard landing in a matter of three days.
What does this do for tech stocks?
With data points of this magnitude, it’s normal for a sharp rotation to occur.
The thing we have here is that we are at all-time highs so the profit-taking can become very vicious and hasty.
But if you want to ask me if the tech rally is over, no, it isn’t but we will need to go into consolidation mode to absorb poor revenue guidance.
The dip will be bigger than a mini-dip so as investors, we need to allow this underperformance to work itself through the system before we are off to the races again.
In the end, lower rates are the most advantageous for tech stocks, but conditions need to stabilize for tech stocks to reap those benefits.
“Rule No. 1: Never lose money.” – Said American Investor Warren Buffett
Mad Hedge Technology Letter
July 31, 2024
Fiat Lux
Featured Trade:
(CONSOLIDATION TIME)
(MSFT), (PINS), (NVDA)
The Nasdaq experiencing a big dip is in fact healthy for the tech sector long term.
Shaking out the weak hands is necessary a few times per year.
It doesn’t hurt that tech stocks boast the higher growth rates in the entire stock market.
The price action has suggested a winner-take-all mentality with winners like Nvidia and other big tech companies experiencing outsized gains.
Chip stocks have been recent victors while smaller software stocks have been pounded.
Just take a look at social media stock Pinterest (PINS) which is down over 12% on a weak forecast.
At the top end, Microsoft (MSFT) is the perennial flag bearer of cloud growth but this time it was different.
The stock sold off hard after earnings because the company missed cloud revenue expectations.
Cloud has been MSFTs bread and butter for years.
Even the CEO Satya Nadella came from the cloud division to grab the title of CEO.
Microsoft's overall cloud revenue came in at $36.8 billion, in line with expectations of $36.8 billion, but the company's Intelligent Cloud revenue, which includes its Azure services, fell short, coming in at $28.5 billion versus expectations of $28.7 billion.
While Microsoft's cloud business missed expectations, overall revenue still rose 21% year over year. Intelligent Cloud revenue, meanwhile, increased 19% year over year. What's more, Microsoft said AI services contributed 8 percentage points of growth to its Azure and other cloud services revenue, which increased by 29%.
The most consistent theme in this round of checks was the number of customers and partners that cited share gains by Microsoft resulting from its early lead on the AI front.
During Alphabet’s earnings call, CFO Ruth Porat said the company spent $13 billion on capital expenditures, up from $12 billion in the prior quarter, adding that the vast majority of that spending is going toward AI.
There are data points showing that growing the cloud is becoming something more similar to stealing rival clients from Google or Amazon.
That is a worrying sign because total addressable cloud revenue has been going up for a whole generation.
The cloud industry has never seen a scarcity mentality.
In the earnings rhetoric, the management talked as if growth is harder to come by in 2024.
I would be hard-pressed to find anyone who disagrees with that opinion.
The overall consensus starting to form is that these growing expenses related to AI won’t produce the blockbuster revenue projected so quickly.
The more likely case is that revenue from AI comes online in late 2025 or 2026 or maybe not at all.
The delay in the benefits of AI will mean shareholders pulling back temporarily and offer AI stocks a “prove it” period to show if they are legit or not.
Before winter, I do expect a consolidation phase in tech and in AI stocks that will set the stage for a Santa Claus rally.
MSFT stock is up over 200% in the past 5 years, and although this 11% or so dip in the past month is very unlike MSFT, this is a healthy and orderly dip.
I am still bullish MSFT in the long term.
Mad Hedge Technology Letter
July 29, 2024
Fiat Lux
Featured Trade:
(THE EYEWEAR STRATEGY IN TECH)
(META), (ESSILORLUXOTTICA)
Meta planning on getting into the eyewear business is a little bit of a head-scratcher until pealing back the layers.
Meta in talks to buy a $5 billion minority interest in EssilorLuxottica is more about a mega tech company putting out feelers to how they can corner another premium market.
It’s almost a given that Meta would start to branch out into other venues once their core businesses start to stagnate.
The digital ad game and social media platforms only go so far in terms of growth these days and that doesn’t hack it. Shareholders aren’t excited about what prospects Facebook and Instagram have to offer moving forward.
EssilorLuxottica is the largest maker of eyewear in the world and the owner of many eyewear brands and retailers including Ray-Ban, LensCrafters, and Pearle Vision in the U.S. If the deal happens, Meta would own about 5% of EssilorLuxottica.
EssilorLuxottica also announced its acquisition of Heidelberg Engineering, a maker of imaging and healthcare machinery and technology, largely for the ophthalmic and eyecare markets worldwide.
Prescription glasses are not cheap ranging into the thousands of dollars for designer frames and lenses.
If Meta can figure out how to do this all online without going to the optician, imagine the juicy margins they could extract from this sort of venture.
Meta and EssilorLuxottica have a relationship for the production of the Ray-Ban smart glasses. The glasses’ latest version gives consumers video, camera, and Bluetooth headset capability in a stylish eyewear frame with a cool brand on it.
Heidelberg Engineering makes complex, sophisticated, expensive equipment that you may be exposed to if you’re examined in an ophthalmologist’s office. Buying Heidelberg makes EssilorLuxottica more entrenched in the industry where it is the established leader.
The tie-up with EssilorLuxottica is the perfect onboarding situation to understand how to perfect the optimal glasses and lenses and then transfer it into an online experience.
Remember, even if this investment is for VR purposes, the application revolves around virtual eyewear as well.
Meta now understands they need to secure a monopoly on eyewear and it is a conscious decision to make that a launching point for more of their products.
In the future, Meta wants consumers to access Instagram, Whatsapp, and Facebook through EssilorLuxottica eyewear products.
Meta also hopes to secure the first mover advantage while other big tech firms lack the deep knowledge of eyewear. There have already been numerous failed attempts at smart glasses and so Meta founder Mark Zuckerberg is doubling down with a relationship with Europe’s most deeply entrenched premium eyewear firm.
Although the boost to the bottom and top line won’t happen quickly with a possible relationship with EssilorLuxottica, this could anoint Meta as the gatekeeper to the new virtual world through this new eyewear tech.
It’s becoming clear that Meta is running up to certain upper limits in regards to the growth of their 3 platforms and they are looking for another super booster to prop up profits.
I don’t believe that Meta will be allowed to acquire this eyewear company because of anti-competitive laws, but adopting its best products and hiring their best talent seems a lot more on brand from Meta.
Meta has never been shy at poaching outside talent and rewarding them handsomely.
On the flip side, EssilorLuxottica would be smart to adopt some tech now by hiring the right people and trying to digitize the experience further otherwise Meta will get what they are coming for.
Meta pushing the envelope is one of the big reasons why they have stayed ahead of other big tech companies and why the stock has done so well the past few years.
Buy Meta stock once the tech market consolidates.
Mad Hedge Technology Letter
July 26, 2024
Fiat Lux
Featured Trade:
(THE UNBEATABLE PARTNERSHIP)
(EMR), (GRMN), (AMBA), (NVDA), (DXCM), (CSCO), (INTC), (QCOM)
Let me introduce to you one of the hottest trends in tech.
It has been on the tip of everyone's tongue for years, and that might be an understatement, but the interaction of the Internet of Things (IoT) and Artificial Intelligence (AI) offers companies a wide range of advantages.
In order to get the most out of IoT systems and to be able to interpret data, the symbiosis with AI is almost a must.
If the Internet of Things is merged with data analysis based on artificial intelligence, this is referred to as AIoT.
Moving forward, expect this to be the hot new phrase in an industry backdrop where investors love these hot catchphrases and monikers.
What is this used for?
Lower operating costs, shorter response times through automated processes, and helpful insights for business development are just a few of the notable advantages of the Internet of Things.
AI also offers a variety of business benefits: it reduces errors, automates tasks, and supports relevant business decisions. Machine learning as a sub-area of AI also ensures that models – such as neural networks – are adapted to data. Based on the models, predictions and decisions can be made. For example, if sensors deliver new data, they can be integrated into the existing modules.
The Statista Research Institute assumes that there will be 75 billion networked devices by 2025.
This is exactly where AI comes into play, which generates predictions based on the sensor values received.
However, many companies are still unable to properly benefit from the potential of connecting IoT and AI, or AIoT for short.
They are often skeptical about outsourcing their data - especially in terms of security and communication.
In part because the increased number of networked devices, which requires the connection of IoT and AI, increases the security requirements for infrastructure and communication structure enormously.
It is not surprising that companies are unsettled: Industrial infrastructures have grown historically due to constantly increasing requirements and present companies with completely new challenges, which manifest themselves, for example, in an increasing number of networked devices. With the combination of IoT and AI, many companies are venturing into relatively new territory.
By connecting IoT and AI, a continuous cycle of data collection and analysis is developing.
But companies can no longer deny the advantages of AIoT because this technical combination makes networked devices and objects even more useful.
Based on the insights generated by the models, those responsible can make decisions more easily and reliably predict future events. In this way, a continuous cycle of data collection and analysis develops. With predictive maintenance, for example, production companies can forecast device failures and thus prevent them.
The combination of the two technologies also makes sense from the safety point of view: continuous monitoring and pattern recognition help to identify failure probabilities and possible malfunctions at an early stage – potential gateways can thus be better identified and closed in good time.
The result: companies optimize their processes, avoid costly machine failures, and at the same time reduce maintenance costs and thus increase their operational efficiency.
In this way, IoT and AI represent a profitable fusion: While AI increases the benefit of existing IoT solutions, AI needs IoT data in order to be able to draw any conclusions at all.
AIoT is therefore a real gain for companies of all sizes. They thus optimize processes, are less prone to errors, improve their products and thus ensure their competitiveness in the long term.
Some hardware, software, and semiconductor stocks that will offer exposure into AIoT are Emerson Electric Co. (EMR), Garmin (GRMN), Ambarella (AMBA), Nvidia (NVDA), DexCom (DXCM), Cisco (CSCO), Intel (INTC), and Qualcomm (QCOM).
Mad Hedge Technology Letter
July 24, 2024
Fiat Lux
Featured Trade:
(THE FUTURE IS HERE)
(NO CODE)
