Mad Hedge Technology Alerts!
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.
