Mad Hedge Technology Letter
November 5, 2018
Fiat Lux
Featured Trade:
(GET READY FOR ANOTHER BITE OF THE APPLE)
(AAPL), (ROKU), (MSFT), (PYPL)
The biggest news of Apple’s earnings results was what Apple decided they will not do in the future – stop publishing iPhone unit sales.
I applaud CEO of Apple Tim Cook for putting this to rest because it is starting to get out of hand. The outbreak of criticism and grief targeted at Cook has to stop because analysts do not understand.
On one hand, it’s important to be aware of the metrics tech companies are judged on, but if analysts aren’t in tune to what these numbers mean in the bigger scheme of things, then it is irrelevant.
Apple is doing everything it can to turn into a software company. They are not interested in battling it out at the low-end of the totem pole because that path is a scrap down to zero margins.
Migrating up the value chain is something that management has identified, and this strategic shift should be met with rapturous celebrations.
Unit sales growth, gross payment value, and monthly views are all metrics that growth companies hold dear to their heart and a way to show to investors they are worth investing in regardless of the cash burn and cringeworthy operating margins.
Apple is way past that point if you haven’t noticed and should be focusing on how to monetize the existing base of customers.
Plain and simple, Apple is not a start-up growth company and taking away this reporting metric will help investors refocus on the real story at hand which is its core of software and services.
With software and services, profitability by way of innovative software offerings will be magnified and highlighted as the roadmap ahead.
As for the last batch ever of iPhone data, Apple has done a brilliant job, to say the least. They exceeded all expectations by smashing the average selling price (ASP) of iPhones at $793.
This is a monumental jump from $618 at the same time last year, a 28% YOY increase.
I did not say that Apple is the world’s best tech company at the Mad Hedge Lake Tahoe Conference, but I did say Apple is by far the highest quality company and this earnings report is a great example of that.
EPS routinely is beat and raised on a sequential basis.
Doubling down on the theme of quality is the revenue numbers from Japan which were up 34% YOY for a group of people who have the harshest view of quality control in the world.
Believe me, Japanese consumers have no desire to ever buy a Chinese smartphone.
The spike in ASPs was triggered by a flight to its collection of ultra-premium smartphones that has enthralled consumers. The ballooning ASP prices led iPhone revenue to spike 29% YOY to over $37 billion crushing the almost $30 million in quarterly revenue the prior year.
According to data from Hyla Mobile Inc., American iPhones traded in between July 1 and the end of September were 2.92 years old on average, up from 2.37 years old the same period two years earlier.
The reasons are two-fold.
Companies are producing better performing smartphones negating the need to impatiently upgrade right away.
The second reason is that they are just plain out pricey, and not everybody will have the dough to splurge on a new iPhone every year or two.
Thus, Apple has strategically placed itself in the correct manner by producing the best smartphone that customers will eventually adopt but carving out as much revenue while consumers are using their phones longer.
During this time, data usage has exploded as consumers are addicted to their smartphones and relying on a whole host of apps to complete their daily lives.
Apple would be stupid to not position themselves to capture this tectonic shift to more hourly data usage and breaking itself from the reliance of smart device revenue itself.
This is what other tech companies are doing like Roku, albeit at an earlier stage in their growth cycle.
In the future, smartphones will become obsolete replaced by something smaller, nimbler, and perhaps integrated with our brain or body or both.
Apple is also acutely aware that the bombardment of Chinese smartphones and the upward trend in the overall quality of these phones has siphoned off part of the iPhone market in specific segments of the world.
Thus, Apple has barely even touched the emerging markets of India that has been flooded by Chinese mid-tier phones without the branding power of Apple.
Apple doesn’t create these trends, they are merely stitching together smart decisions based upon them.
The next step is also a two-pronged proposition.
Apple needs a full-blown enterprise service based upon the cloud.
They can either buy one and they certainly have the cash to do so. Or they can develop one internally from scratch.
The second issue is that Apple also needs to widen its product service offerings that not only include an enterprise cloud option but also entertainment, news, sports, and everything else that could hook user’s attention and stick them to the iOS operating system until death.
Cementing users to the iOS operating system is the overall goal of all of this software infusion because if users start migrating over to the Android platform, it’s real game, set, and match for Apple as we know it.
Instead of myopic analysts focusing on “unit sales”, smart analysts should be focusing on whether what Apple is doing will tie future users to iOS or not.
I am happy with what I have seen so far but there can be a great deal of improvement going forward.
I think my 2-year-old nephew even knows that iPhone sales are maturing by now. This has not been a new story and I would call it poor reporting from a group of lazy-minded analysts.
It’s true that Apple rode the coattails of its miracle hardware products to a $1 trillion market cap. It was a magnificent achievement. I pat all who were involved on the back.
However, it’s clear as daylight that hardware is not what is going to propel Apple to a $2 trillion market cap.
Lost in all the smoke and mirrors is that revenue was up 20% YOY which is a staggering feat for a $1 trillion company.
Even more muddied in the rhetoric is that there has been minimal slowdown in China even after all the trade war jostling which is a miracle in its own right growing 16% YOY.
Software and services were up 27% YOY pulling in $10 billion and the Apple ecosystem has now reached 330 million paid subscribers, a growth of 50% YOY.
Paid subscribers are the most important metric to Apple now as it shows how many users are percolating inside their eco-system wielding their credit card around for software and services whether its maintenance spend or Apple pay.
Apple pay transaction volume tripled in the past year with four times the growth rate of FinTech player PayPal (PYPL).
Wearables still maintain broad-based growth climbing 50% YOY which is slightly down from the 60% YOY last quarter.
All of the wearables such as the amazing Apple Watch, AirPods, and Beats products have a nice supplemental effect to the Apple eco-system and is an over $10 billion business per year.
I am interested to see if Apple can make the quick pivot to an enterprise software company, and Apple’s announcement of Apple business manager, a method to deploy iOS devices at scale, had an initial sign up of 40,000 companies. Apple needs to bet the ranch on this direction and do it fast.
I would like to see Apple attack the enterprise market with zeal because there is a long runway for them to scale and the bulk of companies would welcome Apple products and services littered around their mobile offices.
The most important soundbite was by CFO of Apple Luca Maestri saying, “Given the increasing importance of our services business and in order to provide additional transparency to our financial results, we will start reporting revenue and total services beginning this December quarter.”
There you go…Apple explicitly saying they are the newest software company on the block that should go alongside the likes of Microsoft (MSFT).
The software theme will continue with the Mad Hedge Tech Letter because there are some real gems out there in the software landscape tied to the cloud.
As for Apple, the earnings report reaffirms my opinion that they just keep getting better and are magicians at adjusting to the current tech climate.
Wait for the stock to find some footing then it’s a definite buy, and for long-term holders, it’s a screaming buy.
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When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
November 2, 2018
Fiat Lux
Featured Trade:
(OCTOBER 31 BIWEEKLY STRATEGY WEBINAR Q&A),
(EDIT), (TMO), (OVAS), (GE), (GLD), (AMZN), (SQ), (VIX), (VXX), (GS), (MSFT), (PIN), (UUP), (XRT), (AMD), (TLT)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 31 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: I would like to keep CRISPR stocks as a one or two-year-old, or even longer if it is prudent. What do you think?
A: Yes, there is a CRISPR revolution going on in biotech—I’m extremely bullish on all these stocks, like Editas Medicine (EDIT), Thermo Fisher Scientific (TMO), and Ovascience Inc. (OVAS). If any of these individual companies don’t move forward with their own technology, they will get taken over. The principal asset of these companies is not the patents or the products, it’s the staff, and there is an extreme shortage in CRISPR specialists (and anybody who knows anything about monoclonal antibodies).
Q: Could you explain how to manage LEAPs? For example, the Gold (GLD) and the General Electric (GE) LEAPs. Sit and leave them or trade them short term?
A: You make a lot of money trading long-term LEAPs. Just because you own a year and a half LEAP doesn’t mean that you keep it for a year and a half. You sell it on the first big profit, and I happen to know that on both the Gold (GLD) and the (GE) LEAPs we sent out, people made a 50% profit in the first week. So, I told them: sell it, take the profit. The market always gives you another chance to get in and buy them cheap. You make the money on the turnover, on the volume—not hanging out trying to hit a home run.
Q: Why did you only close the Amazon (AMZN) November $1,550-$1,600 vertical bull call spread and not roll the strike prices down and out?
A: Well I actually did do the down and out strike roll out first, which is the super aggressive approach. By adding the November $1,350-$1,400 vertical bull call spread position on Monday at the market lows and doubling the size—we took a huge 30% position in Amazon and that position alone should bring in about $3600 in profits in two weeks, at expiration. And when I put on that second position I told myself that on the next big rally I would get out of the high-risk trouble making position, which was the November $1,550-$1,600 vertical bull call spread. So that’s how you trade your way out of a 30% drop in three weeks in one of the best tech stocks in the market.
Q: Is AT&T (T) no longer a good buy at these prices?
A: All of the telephone companies have legacy technology, meaning they are all dying. Basically, AT&T is about owning a bunch of rusting copper wire spread around the country. They haven’t been able to innovate new technologies fast enough to keep up with others who have. The only reason to own this is for the very high 6.56% dividend. That said, dividends can be cut. Look at General Electric which cut its dividend earlier this year. Whatever you make of the dividend can get lost in the principal.
Q: Do you think Square (SQ) is a good buy at this level?
A: Absolutely, it’s a screaming buy. It’s one of the favorite companies of the Mad Hedge Technology Letter and one of the preeminent disruptors of the banks. We think there’s another 400% gain in Square from here. It’s dominating FinTech now.
Q: When do you expect to close the short position in the iPath S&P 500 VIX Short-Term Futures ETN (VXX)?
A: If we can get the Volatility Index (VIX) down to $15, the (VXX) should crater. We’ll take a hit on the time decay and that’s why I say we may be able to sell it for 20 cents in the future when this happens. We’ll still take a 50% hit on the position, but half is better than none.
Q: What happened to Microsoft (MSFT) last week?
A: People sold their winners. They had a great earnings report and great long-term earnings prospects, but everyone in the world owned it. Buy the long-term LEAP on this one.
Q: If we want to double up on the iPath S&P 500 VIX Short-Term Futures ETN (VXX), how do you plan to do it?
A: Go out to further with your expiration date. When you go long the (VXX) you only buy the most distant expiration date. I would buy the February 15 expiration as soon as it becomes available.
Q: How do you see Goldman Sachs (GS) from here to the end of the year?
A: It may go up a little bit as we get some index money coming into play for year-end, but not much; I expect banks to continue to underperform. They are no longer a rising interest rate play. They are a destruction by FinTech play.
Q: Is it too soon for emerging markets in India (PIN)?
A: As long as the dollar (UUP) is strong, which is going to be at least another year, you want to avoid emerging markets like the plague. As long as the Federal Reserve keeps raising interest rates, increasing the yield differential with other currencies, the buck keeps going up.
Q: What are your thoughts on retail ETFs like the SPDR S&P Retail ETF (XRT)?
A: You may get lucky and catch a rally on that but the medium term move for retail anything is down. They are all getting Amazoned.
Q: Is it better to increase long exposure the day before the election?
A: No, what we saw starting on Tuesday was the pre-election move. That said, I expect it to continue after the election and into yearend.
Q: Any opinions on Advanced Micro Devices (AMD)?
A: Yes, this is a great level. It was extremely overbought two months ago but has now dropped 50%. It is a great long-term LEAP candidate.
Q: What about the W bottom in the stock market that everyone thinks will happen?
A: I’m one of those people. So far, the bottom for the move in the S&P 500 is looking pretty convincing, but we will test the faith sometime in the next week I’m sure. We got close enough to the February $252 low to make this a very convincing move. It sets up range trading for the market for the next year.
Q: How do you figure the inflation rate is 3.1%?
A: The year-on-year Consumer Price Index for September printed at 2.3%, and the most recent months have been running at an annualized 2.9% rate. Given that this data is months old we are probably seeing 3.1% on a monthly annualized basis now given all the anecdotal evidence of rising prices and wages that are out there. That is certainly what the bond market believes with its recent sharp selloff and why I will continue to be a fantastic short. Sell every United States US Treasury Bond Fund ETF (TLT) rally. Like hockey great Wayne Gretzky said, you have to aim not where the hockey puck is, but where it's going to be.
Q: Will rising interest rates kill the housing market?
A: It already has. A 5% 30-year mortgage rate shuts a lot of first time Millennial buyers out of the market. We are seeing real estate slowing all over the country. Los Angeles is getting the worst hit.
Q: How do you see the Christmas selling season going?
A: It’s going to be great, but this may be the last good one for a while. And Amazon is getting half the business.
Q: October was terrible. How do you see November playing out?
A: It could well be a mirror image of October to the upside. We are already $1,000 Dow points off the bottom. So far, so good. Throw fundamentals out the window and buy whatever has fallen the most….like Amazon.
Did I mention you should buy Amazon?
Good luck and good trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Ten Years of Consumer Price Index
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more