2018 Archive - Mad Hedge Fund Trader

Is Netflix Dead?

Too far out over their skis.

For the first time in five quarters, Netflix (NFLX) was unable to eclipse the alpine level like expectations prognosticated by its own senior management.

Netflix and Amazon (AMZN) have been given luminary status at the Mad Hedge Technology Letter because the straight-line price action offers such agonizing entry points for investors, along with the best business growth models in the American economy.

Chasing this stock has usually worked out for the better, but leading up to the latest quarterly earnings report, Netflix started to scrunch up.

The firing squad loaded up its bullets and after Friday's close, shots were rained down on Netflix's parade as it failed to beat the only metric significant to Netflix investors - new subscribers.

The numbers were not even close.

Netflix fizzled out on its domestic subscriber's growth metric by 560,000, when 1.23 million new subscribers were expected.

International numbers succumbed to the inevitable, but less in percentage terms, failing to surpass the expected 5.11 million, only successfully adding 4.47 million new subscribers.

The 5.2 million adds out of the expected 6.3 million expected is the best news that has happened to Netflix in a long time if you are underinvested in this name.

Ravenous investors looking to jump on Netflix's bandwagon are licking their chops.

After-hours trading saw the stock tank, falling down the rabbit hole by almost 15%.

The stock had only recently been trading around an all-time high of $419. Fluffing their lines has given investors a much-awaited entry point into one of the creme de la creme growth stories in the vaunted tech sector.

Let's get a little more granular, shall we?

Even for high-flying tech stocks, the velocity of the price surges has put off many investors calling the stock "overbought."

Netflix shares were up 108% in 2018 before profit taking commenced before the earnings call. It was unusual to see Netflix intraday slide of 4%.

Investors smelled a rat.

It was only a matter of time before normal investors were finally given a chance to swiftly pile into this precious gem of a stock.

That time is now.

UBS analyst Eric Sheridan recently declared Netflix's growth story as "all priced in."

I don't buy it.

Yes, the shares got ahead of itself, but the Netflix narrative is still intact.

Over the earnings call, Netflix CEO Reed Hastings gushed about the current state of the company remarking that "fundamentals have never been stronger."

The bad news is that it missed on overzealous estimates; the good news is it added 5.2 million new subscribers.

Don't forget that in Q1 2018, Netflix beat total estimates by a herculean 920,000 subscribers, which is around what it missed by in Q2 2018.

The most recent quarter was overwhelmed by World Cup 2018 fever, with audiences migrating toward probably the most dramatic and exciting World Cup in history and the first to be streamed.

The most popular sporting event in the world gave Netflix a short-term kick in the cojones, delaying many new subscription sign-ups until after France lifted the trophy for the second time in its illustrious history.

The Twitter (TWTR) and Facebook (FB) numbers back up this thesis, experiencing explosive engagement and ad buying over the monthlong tournament boding well for their next earnings results.

Don't worry investors.

These eyeballs are just temporary.

The tournament offering a short-term bump to social media stocks clearly is just a one-off event that happens one summer out of every four.

Any recent profit taking will see the same investors eyeing a lower cost basis after this share dump.

Netflix won't be down for long.

Let's briefly review some of Netflix's cornerstone advantages:

The massive user migration from linear television to over-the-top content (OTT) led by cord-cutting millennials, responsible for a growing slice of domestic purchasing power.

The inherent advantages of a global over-the-top content (OTT) streaming model, applying massive scale with the cheap marginal cost of current technology.

The first-mover advantage that has allowed Netflix to have its own cake and eat it.

And the competition's laggardly response to Netflix eating its own cake.

Netflix CFO David Wells' take on the missed targets was "lumpiness" in the business and brushed it off like a bug crawling up your leg.

Hastings also chimed in about the increased competition shaping up and Disney (DIS), HBO, and other players finally getting their act together.

He mentioned there is room for multiple players in this industry, but they better not show up to the gunfight with a knife.

Netflix has been weaning itself from Disney's, Fox's and other third-party content for years, along with spending 50% more on marketing in 2018.

Ted Sarandos, chief content officer of Netflix, let it be known that 85% of new spending will be on original content in 2018.

Out of $8 billion earmarked for content in 2018, a colossal $6.8 billion is set to be splashed on in-house productions.

Compare this with the competition of Amazon, which plans to spend $4.5 billion on original content in 2018 and Hulu's plan to spend $2.5 billion in 2018.

Down the road, Netflix will have greater ability to finance its expensive content spend as it has flipped to a profit-making entity.

Amazon uses its AWS (Amazon Web Services) arm to fund its various subsidiaries.

The high level of quality content is reflected in the 40 Emmy nominations garnered by Netflix, in effect crushing stalwart HBO.

Netflix is aggressively courting Hollywood's A-list and poaching them in droves.

Proven content creators such as Ryan Murphy, Shonda Rhimes, Shawn Levy and Jenji Kohan are now on Netflix's payroll, and are a vital reason for the uptick in quality programming.

This successful harvest will result in added brand recognition and elevated prestige for current and future eyeballs.

Netflix will push out around 1,000 original programs in 2018. More than 90% of Netflix's subscribers habitually watch its vast portfolio of original programming.

The only way Netflix can be stopped is if it stops itself.

The pipeline is plush, and it is not all priced into the stock yet.

Next year could be the year India and Japan massage the bottom lines to greater effect, as Netflix double downs on the international arena.

Netflix's first original Indian series "Sacred Games" has been a winner, and its first original movie "Lust Stories" is creating a stir among avid Indian movie followers.

CEO Hastings has gone on record stating the "next 100 million" Netflix subscribers will derive from the land of Taj Mahal and chicken tikka masala.

Netflix has a lot of work to do to catch up with entrenched leaders Hotstar and Alphabet's (GOOGL) YouTube India.

About 800 million Indians have never been online before. The screaming potential India offers cannot be found elsewhere, especially with films historically, deeply embedded inside India's ancient culture.

Next month will see the release of "Ghoul," based on critically acclaimed work by authors Salman Rushdie and Aravind Adiga.

Slated for imminent release is also Mumbai Indians, a documentary about a top team in the locally obsessed Indian Premier League cricket tournament.

GBH Insights' internal research has found that Netflix is watched 10 hours per week in American households.

That number will inevitably grow as the quality of content goes from strength to strength for this first-rate company.

And how did Netflix's shock miss affect the Nasdaq (QQQ) on the next trading day?

It showed the resiliency and intestinal fortitude that has been a hallmark of the tech sector bull market.

The latest earnings result snafu is a surefire chance to finally have a little taste of Netflix. It will be back over $400 in no time.

________________________________________________________________________________________________

Quote of the Day

"If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner," - said retired U.S. Army General Omar Bradley.

July 17, 2018 - MDT Alert (FEYE)

MDT Alert

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

July 17, 2018 - MDT Pro Tips A.M.

MDT Alert

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

July 17, 2018

Diary, Newsletter

Global Market Comments
July 17, 2018
Fiat Lux

(WHERE THE ECONOMIST "BIG MAC" INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (FXA), (FXY), (CYB),
(CATCHING UP WITH DOWNTON ABBEY),
(TESTIMONIAL)

Catching Up with Downton Abbey

Diary, Newsletter

I decided to flee the madness in London for a day and visit some old friends in the countryside, the 8th Earl and Countess of Carnarvon.

The late 7th Earl was an early investor in my first hedge fund, and I have kept in touch with the family ever since.

His grandfather, the 5th Earl gained fame and fortune from his co-discovery of King Tut's tomb in Egypt's Valley of the Kings in 1922.

His early death, shortly thereafter, was the origin of "The Mummy's Curse" of depression-era horror film fame. Many of his discoveries today make up the bulk of the Egyptian collection in New York's Metropolitan Museum of Art, which the family sold to pay estate taxes.

Recently, the family has been renting out its 350-year-old home, a 15-minute taxi ride south of Newbury in England, the spectacular Highclere Castle, for use as a film set.

The period drama series that resulted, "Downtown Abbey," unexpectedly became a blockbuster in the U.S. where viewers, stupefied by endless low-budget reality shows, were starved for quality, thoughtful content and adult writing.

It also sent 100,000 visitors a year their way, as well as $25 million in ticket fees. This windfall enables them to maintain the house and the magnificent gardens in immaculate condition.

The cash flow also allows them to ramp up the other family business, breeding racehorses for the queen. Portraits of past winners adorn almost every room.

After tea with my hosts and a personal tour of the estate, I picked up some tea towels for friends at home who worship this kind of thing. I also saw a display of some spectacular early Egyptian relics, which the family found bricked up behind a wall 60 years after the Met sale.

Given the huge reception by the viewing public, we can count on this drama to extend to at least five seasons, when it will then be syndicated for the rest of our lives. That works fine for the real life Carnarvons, who can now reinvest in even more thoroughbreds.

Who needs hedge funds?

Testimonial

Diary, Newsletter

A belated thank you for the time you provided to all of us at the Las Vegas Strategy Luncheon back in May. My apologies for not submitting a prompter response.

I am the Air Force C-17 pilot from Seattle; you graciously gave me additional time on your walk back to the room during the SALT Conference. I was honored to be a part of your luncheon.

Your advice regarding the investing world and my progress into it was insightful and helpful. I quickly relayed all of your sage commentary to my wife and have used it in my further studies since.

Fantastic info on the Tesla, flying etc. as well - I relayed all of that to my buddies back in the squadron. I plan on attending more luncheons as the opportunities present themselves.

My offer to take you in the simulator still stands, if you're ever here in the Seattle area again. Yes, the MiG has a better climb rate but we have a stand-up bathroom, kitchen and two bunks.

Again, thank you for your time,

Ben
Seattle, Washington

July 17, 2018

Tech Letter

Mad Hedge Technology Letter
July 17, 2018
Fiat Lux

Featured Trade:
(THE PATH AHEAD),
(IBM), (AMZN), (FB), (MSFT), (NFLX), (QQQ), (AAPL), (DBX), (BLK)

The Path Ahead

Tech Letter

The Red Sea has parted, and the path has opened up.

Technology has been a beacon of light providing comfort to the equity market, when a trade war could have purged the living daylights out of bullish investor sentiment.

If an increasingly hostile, tit-for-tat trade skirmish threatening overseas revenue can't bring tech equities to its knees, what can?

It seems the more bellicose the administration becomes, the higher technology stocks balloon.

Does this all add up?

The Nasdaq (QQQ) continues its processional march skyward. If you were a portfolio manager at the beginning of the year without technology exposure, then polish off the resume before it picks up too much dust.

The Nasdaq has set all-time highs even after a brutal 700-point sell-off at the end of January.

Apple (AAPL), Microsoft (MSFT), Netflix (NFLX), and Amazon (AMZN) can take credit for 83% of the S&P 500's gains in 2018.

And that fearsome four does not even include Facebook (FB), which has left the shorts in the dust.

Each momentous sell-off has proved to be a golden buying opportunity, propelling tech stocks to higher highs and retracing to higher lows.

And now the path to tech profits is gaping wide, luring in the marginal investor after two highly bullish events for the tech world boding well for the rest of fiscal year 2018.

Xiaomi, one of China's precious unicorns, which sells upmarket smartphones, went public on the Hong Kong Hang Seng market last week.

The timing couldn't be poorer.

The rhetoric between the two global leaders reached fever pitch with the administration proposing $200 billion worth of tariffs levied on Chinese imports.

China reiterated its entrenched stance of not backing down, triggering a tense war of words between the two global powers.

The beginning of March saw the Shanghai stock market nosedive through any remnants of support levels.

The 50-day moving average, 100-day, and 200-day were smashed to bits and Shanghai kept trending lower.

The trade skirmish has had the reverse effect on Chinese equities compared to the Nasdaq's brilliance, and combined with the strong dollar, has seen emerging markets hammered like the Croatian soccer team in Moscow.

Xiaomi's IPO was priced in the range of HK$17 to $22, and when it opened up on the first day at HK$16.60, investors were holding their breath.

Take the recent IPO triumph of cloud company Dropbox (DBX), whose IPO was priced in the expected range of US$18 to $20. The first day of trading showed how much appetite there is for to- quality cloud companies, with Dropbox starting its trading day at US$29, 40% higher than the expected range.

Dropbox finished its first day at a lofty US$28.48, a nice 35% return in one trading day.

No doubt Xiaomi's shares were not expected to perform like Dropbox, but it held its own.

Astonishingly, this company did not even exist nine years ago and is now the fourth-largest smartphone manufacturer in the world, grossing $18 billion in revenue in 2017.

The unimaginable pace of development highlights the speed at which the Chinese economy and consumer zigs and zags.

Chinese retail sales were up a staggering 9% YOY for the month of June 2018. Its overall economy met its 6.7% target for the second quarter of 2018.

The price range settled for the IPO gave Xiaomi a valuation of $54 billion.

Instead of getting roiled, Xiaomi came through with flying colors posting a 26% gain after the first week of trading.

Poor price action could have given Beijing ammunition to cry foul, laying blame for the underperformance on the U.S. tariffs.

The healthy price action underscores there is still room for Chinese and American companies to flourish in 2018, albeit through a highly politicized environment.

Specifically, Apple comes through unscathed as a disastrous Xiaomi IPO could have resulted in negative local press stoking higher operational risks in greater China.

Apple is in the eye of the storm, but untouchable because it employs more than 4 million local Chinese employees throughout its expansive ecosystem and has been praised by Beijing as the model foreign company.

Apple earned $13 billion in revenue from China in Q2 2018, a 21% YOY increase.

Hounding Apple out of China will be the inflection point when tech investors know there is a serious problem going on and need to hit the eject button.

If this ever happens, The Mad Hedge Technology Letter will be the first to resort to risk off strategies.

BlackRock's (BLK) CEO Larry Fink let everyone know his piece saying, "the lack of breadth in the equity markets is troubling."

Investors cannot blame tech companies for executing their way to the top behind the tailwind of the biggest technological transformation in mankind.

And even in the tech industry, winners can turn into losers in a blink of an eye, such as legacy tech company IBM (IBM).

Someone better tell Fink that this is the beginning.

Amazon recorded 44% of total U.S. e-commerce sales in 2017, equaling 4% of total retail sales in the U.S.

This number is expected to breach 50% by the end of 2018.

The second piece of bullish tech news was lifting the ban on Chinese telecommunications company ZTE.

It is open for business again.

From a national security front, this is an unequivocal loss. However, it saved 75,000 Chinese jobs and gave a small victory to American regulators attempting to patrol the mischievous behemoth.

The U.S. Department of Commerce lifted the seven-year ban even after ZTE sold telecommunication products to North Korea and Iran.

ZTE was fined $1 billion, changed the senior management team, and put into place an American compliance team that will monitor its business for the next 10 years.

Diluting the penalty lowers the operational risk for American tech companies because it shows the administration is willing to reach compromises even if the compromise isn't perfect.

China is a lot less willing to ransack Micron and Intel's China revenues, if America allows China to save face and 75,000 local jobs.

This is a big deal for them and their employees.

America has a strong hand to play with against China because China still requires Uncle Sam's semiconductor components to build its future.

This hand is only effective if Chinese still thirst for American technology. As of today, America is higher on the technological food chain than China.

The move is also a model of what the U.S. Department of Commerce will do if Chinese companies run amok, which Chinese tech companies often do because of the lack of corporate governance and transparency.

These two recent China events empower the overall American tech sector, and the market will need a berserk shock to the tech ecosphere foundations to make it crumble.

As it stands, the tech sector is handling the trade war fine, and with expected blowout tech earnings right around the corner, short tech stocks at your own peril.

________________________________________________________________________________________________

Quote of the Day

"All of the biggest technological inventions created by man - the airplane, the automobile, the computer - says little about his intelligence, but speaks volumes about his laziness," - said author Mark Kennedy.

July 16, 2018 - MDT Pro Tips A.M.

MDT Alert

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

July 16, 2018

Diary, Newsletter

Global Market Comments
July 16, 2018
Fiat Lux

Featured Trade:
(THE BEST FINANCIAL BOOK EVER),
(A DAY WITH TOM FRIEDMAN OF THE NEW YORK TIMES),
(THOUGHTS AT SEA ABOARD THE QUEEN MARY 2, PART I)