Mad Hedge Technology Letter
July 21, 2023
Fiat Lux
Featured Trade:
(WHAT TO DO ABOUT NETFLIX SHARES?)
(NFLX), (APPL), (MSFT)
It’s quite the irony that Netflix’s earnings report came smack dab in the middle of Hollywood’s meltdown as the contract standoff between writers and studios threaten to implode a Southern Californian industry that has been on life support for quite some time.
One’s famine is another’s fortune.
NFLX had a mixed earnings report so it’s not like it has been gangbusters for streaming platforms either.
They used to be a perennial tech growth company and now they are down to just 3% revenue growth which won’t cut it.
NFLX has been saved by the macro picture as traders scurried into tech stocks from early 2023 while investors bet on a Fed pivot and a reversion to the mean after a horrible 2022.
The business itself isn’t doing anything special like it used to, and they are also way too woke, but when they don’t have to be spectacular, it’s easier for the stock to elevate.
The brightest number of all was the addition of 5.9 million subs.
Netflix, which now boasts 238 million global subscribers, will keep benefiting from this password-sharing clampdown.
Some expected it to backfire, but viewers have flashed their wallets and signed up for the service.
The streamer boasted that “sign-ups are already exceeding cancellations” and that it is implementing the password policy across the world now.
Profitability is starting to become an issue for NFLX as they missed on revenue.
Streaming has become a worse business lately because the world is too saturated with content.
Another positive is that NFLX upped its free cash flow from $1.5 billion to approximately $5 billion for the year.
This is what mature tech companies are supposed to do.
Eventually, they will increase deliverables back to the shareholder in the form of buybacks and dividends like Apple (AAPL) and Microsoft (MSFT).
The company cited “lower cash content spend” amid the writers’ and actors’ strikes that have brought content production to an absolute standstill.
No more $9.99 ad-free plan.
Netflix axed its cheapest ad-free option in the US and the UK. The plan, offered at $9.99, is no longer available to new customers.
The decision to cut the skeleton plan appears aimed at pushing subscribers in that price tier toward the ad-supported model, which is priced at $6.99. The company has previously said the ad-supported model performed better on the “economics” than the $9.99 ad-free model.
NFLX shares have had a great year so far with shares up 44%.
The 44% upswing is also after an 8% drop yesterday on this earnings report.
Clearly, traders used this opportunity to take profits.
NFLX’s performance is part of my wider thesis that earnings won’t be anything special, but good enough to deliver a better entry point into these stocks.
Buy the dip strategy will perpetuate for most brand-name tech companies.
It’s not exactly simple to get into a stock that has gone up 44% in 7 months because most of the time the stock needs to be chased.
Chasing tech stocks is an underlying theme of 2023 with fear of missing out (FOMO) engulfing most fund manager’s plans of attack.
So yes, I do believe many investors will use these tepid earnings reports to take profits and these dips are incredibly healthy for the tech sector.
Thus, traders should reload because tech stocks like NFLX will be on discount before the next leg higher.
“Life is too short for long-term grudges.” – Said Owner of Twitter Elon Musk
Artificial Intelligence (AI) is transforming industries worldwide, and Europe is no exception. As the AI landscape continues to evolve, it presents lucrative investment opportunities across various sectors. European companies are increasingly embracing AI technologies to enhance their operations, improve efficiency, and gain a competitive edge. This article will delve into the thriving European AI investing opportunities and highlight some of the most popular AI investing companies that have captured the attention of investors in the region.
European AI Investing Opportunities:
In Europe, AI is revolutionizing the healthcare and biotechnology sectors, presenting promising investment opportunities. AI-powered technologies are streamlining drug discovery, accelerating medical research, and improving patient care. Companies specializing in AI-driven medical imaging, precision medicine, and drug development are particularly attractive to investors looking to capitalize on the growing demand for advanced healthcare solutions.
The financial services sector in Europe has been quick to adopt AI technologies to enhance risk management, fraud detection, and customer experience. AI-powered robo-advisors are gaining popularity, providing personalized investment advice to clients and automating portfolio management. Investors keen on the financial sector are exploring opportunities in innovative AI-based fintech companies that aim to disrupt traditional banking and financial processes.
The development of autonomous vehicles is gaining momentum in Europe, and AI plays a pivotal role in their realization. Companies specializing in autonomous driving technology, AI-powered fleet management, and smart transportation solutions are poised to benefit from the growth of this transformative sector.
AI is driving the advancement of Industry 4.0 in Europe, transforming manufacturing processes and increasing productivity. Investors interested in industrial automation, predictive maintenance, and AI-powered supply chain optimization are finding exciting opportunities in this rapidly evolving sector.
With the growing dependence on digital technologies, cybersecurity is a pressing concern for businesses and governments alike. AI is being leveraged to enhance cybersecurity measures, detect threats in real-time, and fortify network defenses. Investors seeking long-term growth are eyeing cybersecurity firms with innovative AI-based solutions to protect critical data and infrastructure.
Popular AI Investing Companies in Europe:
- UiPath: As a global leader in Robotic Process Automation (RPA), UiPath has garnered significant attention from investors. With headquarters in New York and operations across Europe, UiPath offers AI-powered software that enables businesses to automate repetitive tasks, driving efficiency and productivity. The company's successful IPO in 2021 exemplifies its appeal in the investment community.
- DeepMind Technologies: Based in London, DeepMind Technologies is renowned for its groundbreaking work in AI research and applications. Acquired by Google's parent company, Alphabet Inc., in 2014, DeepMind focuses on developing AI algorithms for healthcare, gaming, and other industries. Its collaborations with leading European institutions have attracted investors looking to support cutting-edge AI advancements.
- Graphcore: Headquartered in Bristol, Graphcore is a pioneer in AI chip design and development. The company's specialized AI accelerators, known as Intelligence Processing Units (IPUs), are designed to optimize AI computations, making them faster and more efficient. Graphcore's innovative approach has generated significant interest from investors and technology giants seeking to harness AI's full potential.
- Babylon Health: Babylon Health, headquartered in London, has gained recognition for its AI-powered telemedicine platform. The company's app leverages AI algorithms to provide virtual consultations, health assessments, and personalized medical advice. As telemedicine gains widespread acceptance, Babylon Health's innovative approach has drawn investments from both venture capitalists and major healthcare players.
- BenevolentAI: BenevolentAI, based in London, is an AI-driven drug discovery company that applies machine learning to analyze vast datasets and identify potential drug candidates. The company aims to accelerate the drug discovery process and improve treatment options for various diseases. Its innovative approach to pharmaceutical research has captured the interest of investors seeking to support advancements in healthcare.
- Darktrace: Darktrace, with headquarters in Cambridge, is a cybersecurity company that uses AI to detect and respond to cyber threats in real-time. Its AI-powered platform learns the unique behaviors of networks, devices, and users, enabling it to identify anomalies indicative of potential cyberattacks. Darktrace's impressive growth and track record in cybersecurity have made it a compelling investment opportunity in the European tech sector.
Conclusion:
European AI investing opportunities are flourishing as AI technologies continue to disrupt and innovate various industries. Healthcare, finance, autonomous vehicles, manufacturing, and cybersecurity are some of the sectors presenting lucrative prospects for investors. Prominent European AI investing companies such as UiPath, DeepMind Technologies, Graphcore, Babylon Health, BenevolentAI, and Darktrace have demonstrated groundbreaking approaches to AI applications and research, attracting significant attention from investors.
As AI continues to reshape the business landscape, European companies at the forefront of AI innovation will likely remain attractive to investors seeking growth and long-term potential. To capitalize on these opportunities, investors must keep a keen eye on emerging trends, regulatory developments, and the evolving AI landscape to make informed and strategic investment decisions in the European AI market.
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
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
Global Market Comments
July 21, 2023
Fiat Lux
Featured Trades:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
CLICK HERE to download today's position sheet.
The probability of a recession taking place over the next 12 months is now low ranging as high as 20%. If it reaccelerates, not an impossibility, you can take that up to 100%.
And here’s the scary part. Bear markets front-run recessions by 6-12 months, i.e. now.
We’ll get a better read on the inflation numbers over the coming months. If inflation turns hot again, the Fed will be forced to raise rates to once unimagined levels.
So, it’s time to start asking the question of what the next recession will look like. Are we in for another 2008-2009 meltdown, when friends and relatives lost homes, jobs, and their entire net worth? Or can we look forward to a mild pullback that only economists and data junkies like myself will notice?
I’ll paraphrase one of my favorite Russian authors, Fyodor Dostoevsky, who in Anna Karenina might have said, “All economic expansions are all alike, while recessions are all miserable in their own way.”
Let’s look at some major pillars of the economy. A hallmark of the 2008 recession was the near collapse of the financial system, where the ATMs were probably within a week of shutting down nationally. The government had to step in with the TARP, and mandatory 5% equity ownership in the country’s 20 largest banks.
Back then, banks were leveraged 40:1 in the case of Morgan Stanley (MS) and Goldman Sachs (GS), while Lehman Brothers and Bear Stearns were leveraged 100:1. In that case the most heavily borrowed companies only needed markets to move 1% against them to wipe out their entire capital. That is exactly what happened. (MS) and (GS) came within a hair’s breadth of going the same way.
Thanks to the Dodd Frank financial regulation bill, banks cannot leverage themselves more than 10:1. They have spent a decade rebuilding balance sheets and reserves. They are now among the healthiest in the world, having become low-margin, very low-risk utilities. It is now European and Chinese banks that are going down the tubes.
How about real estate, another major cause of angst in the last recession? The market couldn’t be any more different today. There is a structural shortage of housing, especially at entry level affordable prices. While liar loans and house flipping are starting to make a comeback, they are nowhere near as prevalent as a decade ago. And the mis-rating of mortgage-backed securities from single “C” to triple “A” is now a distant memory. (I still can’t believe no one ever went to jail for that!).
And interest rates? We went into the last recession with a 6% overnight rate and a 7% 30-year fixed rate mortgage. Here we are once again.
The auto industry has been in a mild recession for the past two years, with annual production stalling at 15 million units, versus a 2009 low of 9 million units. In any, case the challenges to the industry are now more structural than cyclical, with new buyers decamping en masse to electric vehicles made on the west coast.
Of far greater concern are industries that are already in recession now. Energy has been flagging since oil prices peaked 18 months ago, despite massive tax subsidies. It is suffering from a structural oversupply and falling demand.
Retailers have been in a Great Depression for five years, squeezed on one side by Amazon and the other by China. A decade into store closings and the US is STILL over-stored. However, many of these shares are already so close to zero that the marginal impact on the major indexes will be small.
Financials and legacy banks are also facing a double squeeze from Fintech innovation and collapsing interest rates. All of those expensive national networks with branches on every street corner will be gone later in the 2020s.
And no matter how bad the coming recession gets technology, now 30% of the S&P 500, will keep powering on. Combined revenues of the “Magnificent Seven” in Q1 are at records. That leaves a mighty big cushion for any slowdown. That’s a lot more than the “eyeballs” and market shares they possessed a decade ago.
So, netting all this out, how bad will the next recession be? Not bad at all. I’m looking at a couple of quarters' small negative numbers, like two back-to-back -0.1%’s. Then we’ll see a recovery and probably another decade of decent US growth.
The stock market, however, is another kettle of fish. While the economy may slow from a 2.2% annual rate to -0.1% or -0.2%, the major indexes could fall much more than that, say 30% to 40%.
Earnings multiples are still at a 19X high compared to a 9X low in 2009. Shares would have to drop 53% just to match the last low. Equity weightings in portfolios are low. Money is pouring out of stock funds into bond ones.
Corporations buying back their own shares have been the principal prop from the market for the past three years. Some large companies, like Kohls (KSS), have retired as much as 50% of their outstanding equity in ten years.
The Next Bear Market is Not Far Off
Meeting you in person at the Paris Strategy Luncheon was a true honor after following your newsletter for over 5 years.
And, yes, I will admit it, I am addicted to it and signing up for your Mad Hedge Technology Letter the day it started was my best decision of the year.
I am still buzzing with all the information I received from you so I can put this to work.
My sincere apologies for all the questions that I kept firing at you, while the foie gras and a great glass of Sancerre were standing in front of you...
Of course, I accept your offer to stay with you for the next 10 years, so we can retire at the same time!
Because of you, I am making money each year after losing out for years before I found you.
Enjoy the rest of your European trip with your family. You deserve some rest!
Rolf
The Netherlands
Mad Hedge Biotech and Healthcare Letter
July 20, 2023
Fiat Lux
Featured Trade:
(INNOVATION GENIUS OR INVESTORS’ QUAGMIRE?)
(TDOC), (MSFT)
