Mad Hedge Technology Alerts!
Global IT spending is forecasted to surpass $3.7 trillion in 2018, a boost of 6.2% YOY, according to a report released by leading technology research firm Gartner, Inc. (IT).
This year is the best growth rate forecasted since 2007, and is a precursor to a period of flourishing IT growth.
IT budgetary resilience is oddly occurring in the face of a tech backlash engulfing Mark Zuckerberg as collateral damage during higher than normal volatility due to an unstable geo-political environment and nonstop chaos in the White House.
Zuckerberg's reputation has been torn to shreds by the media and politicians alike.
Tech has had better weeks and months, for instance as this past January when tech stocks went up every day. Facebook (FB) still had a great business model in January as well.
The biggest takeaway from the report was the outsized capital investments going into enterprise software, which spurs on exponential business formation.
Enterprise software will successfully record its highest spend rate increasing by 11.1% YOY to $391 billion. This is far and away an abnormally fast pace of increase, but is completely justified based on every brick and mortar migrating toward data harnessing.
The software industry will benefit immensely by the universal digitization of all facets of life as software acts as the tool that businessmen use to propel companies to stardom.
Application software spending will healthily rise into 2019, and infrastructure software also will continue to grow, boosted by the revamping of laggard architecture.
Data center systems are predicted to grow 3.7% in 2018, down from 6.3 percent growth in 2017. The longer-term outlook continues to have challenges, particularly for the storage segment.
The lower relative rate of spend is exacerbated by the chip shortage for memory components, and prices have shot up faster than previously expected.
The new Samsung Galaxy 9 cost an additional $45 in semiconductor chip costs because of the importunate costs that sabotage cost structures.
Exorbitant pricing was set to subside in the early part of 2018, but the dire shortage of chips is here to stay until the end of 2018.
Even though the supply side has ramped up 30%, demand is far outpacing supply, spoiling any chance for tech devices to be made on the cheap.
Global spend for digital devices will grow in 2018, reaching $706 billion, an increase of 6.6 percent from 2017. Not only will we see the standard characters such as phones and tablets, but new creative ways to produce devices in the micro-variety will soon populate our shores.
Amazon Alexa and Apple's HomePod are just the beginning and will spawn micro-devices that would fit nicely into a flashy James Bond film.
The demand for ultra-mobile premium smartphones will slow in 2018 as more consumers delay their upgrade and feel comfortable using older devices -- kind of like a smashed-up Volvo station wagon handed down from sibling to sibling.
In times of uncertainty, corporations hold back spending until the near-term variables can be flushed out, and unforeseen costs causing operational turbulence can be anticipated.
However, the industry has brushed aside the turmoil that has attempted to infiltrate the core growth story.
Investors cannot overlook that total tech spending growth for 2018 is the highest in the past 15 years.
Next quarter's earnings are now on tap, and investors will turn to fundamentals as a cheat sheet for what's in store.
It's undeniable that currently tech stocks aren't cheap anymore. They are also more expensive than they were at the beginning of the year barring Facebook and a few other stragglers.
The momentum has intensified with the five biggest tech firms accounting for more than 14% of the S&P 500 index's weighting.
Tech's relative performance has fended off the bears with PE multiples down a paltry 4.9% this year compared to the cratering of 11.4% in the general market.
And tech is still trading at a tiny fraction of the crisis of the dot-com era.
The outsized reinvestments back into business models don't tell the tale of an industry brought down to its knees begging for salvation.
Look no further than across the Pacific Ocean. Samsung Electronics Co. represents almost 25% in South Korea's Kospi index. At the same time, Asia's most valuable company, Tencent Holdings, makes up almost a 10% weighting in Hong Kong's Hang Seng Index.
Back stateside, about 90% of US tech firms beat revenue estimates in the last quarter of 2017, marking the best success rate for any industry.
The positive sentiment has continued into this year with wildly bullish expectations led by the FANG stocks.
The broader volatility is a gift to investors who hesitated and missed the monster rally that has graced tech the past few years.
Tech is vital to emerging markets. And this is the first year since 2004 that tech constitutes the biggest sector in the MSCI Emerging Markets Index blowing past financials.
Tech had a 28% weighting at the end of 2017, the weighting more than doubling from six years ago.
As it stands today, tech enjoys light regulation and by a long mile. Tech is actually the least regulated industry in America and has used this period of light regulation to stack up profits to the sky.
Banks are nine times more regulated than tech companies, and manufacturing companies are five times more regulated.
Legislation such as Dodd-Frank has done a lot to taper the excesses of the sub-prime frenzy that almost took down Wall Street.
The lean regulation has helped tech companies such as Facebook and Google build a gilt-edged competitive advantage that has been exploited to full effect.
After the Fed closed the curtains on its QE program, tech and its earnings are the sturdiest pillar of the nine-year bull market.
The Street is reliant on the big players to earn its crust of bread and show investors that tech isn't just a flash in the pan.
The two numbers acting as the de-facto indicators of the health of the overall economy are Netflix's subscriber growth numbers and Amazon's AWS Cloud revenue.
These two companies do not focus on profits and are the prototypical tech growth companies.
If they beat on these metrics, the rest of tech should follow suit.
The market is entirely dependent on big tech to drag investors through the time of transition. My bet is that tech will over-deliver booking stellar earnings.
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Quote of the Day
"By giving the people the power to share, we're making the world more transparent." - said Facebook CEO Mark Zuckerberg
Mad Hedge Technology Letter
April 10, 2018
Fiat Lux
Featured Trade:
(WHY I'M PASSING ON ORACLE),
(ORCL), (MSFT), (AMZN), (CRM)
To say 2018 is the Year of the Cloud is an understatement.
Oracle (ORCL) felt the tremors of investors' fickle preference for quality cloud growth when the stock sold off hard after earnings that were relatively solid but unspectacular.
Oracle is a Silicon Valley legacy firm established in 1977 under the name of Software Development Laboratories. The company was co-founded by Larry Ellison, Bob Miner, and Ed Oates and the name later was changed to Oracle.
The company made its name through database software and still relies on it for the bulk of its $37 billion in annual revenue.
Legacy companies are put through the meat grinder by investors, and analysts are micro-sensitive to just a few narrow-defined metrics.
Not all cloud companies are treated equally.
It has become consensus that the only way to move forward is through advancing the cloud model, and neglecting this segment is a death knell for any quasi-cloud stock.
Oracle skirted any sort of calamitous earnings performance but left a lot to be desired.
Cloud SaaS (software-as-a-service) revenue for the quarter was $1.2 billion, up 21% YOY, and growth rates were in line with many that are part of the winners' bracket.
Oracle's overall cloud business is still a diminutive piece of its overall business constituting just 16%, which is incredibly worrisome.
This number accentuates the lack of brisk execution and its late entrance into this industry.
Gross cloud margin only increased 2% to 67%, up from 65% QOQ, providing minimum incremental growth.
Total cloud revenue guidance was substantially weak, which includes SaaS, PaaS (platform-as-a-service) and IaaS (infrastructure-as-a-service) expected to grow 19% to 23% in 2018, much less than the forecasted guidance of 27%.
Oracle should be growing its cloud segment faster, especially since its cloud business is many times smaller than competition, and growing pains habitually occur later in the growth cycle.
The outsized challenge is attempting to leverage its foundational database business to convince existing corporate clients to adopt Oracle's in-house cloud services instead of diverting capital toward cloud offerings from Microsoft (MSFT), Salesforce (CRM), or Amazon (AMZN).
It could be doing a better job.
Weak guidance of 1%-3% for annual total revenue topped off a generally underwhelming cloud forecast.
The lack of over-performance is highly disappointing for a company that has been touting its pivot to cloud.
The message from Oracle is the transformation is nowhere close to finished. That was investors' queue to stampede for the exits.
Investors only need to look a few miles up the coast at the competition.
Salesforce is putting up solid numbers, and many cloud companies are judged solely on a relative basis to the industry leaders.
The turnaround companies are getting crushed by these growth magnates. Salesforce is sequentially increasing total revenue over 20% each quarter and expects total revenue to rise more than 20% in 2019. It has set ambitious revenue targets for 2020, 2030, and 2040.
Microsoft Azure grew cloud revenue 98% QOQ, and Microsoft Windows, its legacy business, only makes up 42% of Microsoft's total revenue and is shrinking by the day.
Microsoft has earned its positon as the King of the Legacy Businesses offering proof by way of its position as the industry's second-best cloud company, engineering cloud quarterly revenue of $7.8 billion and gaining on Amazon Web Services (AWS).
Microsoft was in the same situation as Oracle a few years ago, stuck with a powerful business in a declining industry. It then turned to the cloud and never looked back.
Instead of leveraging databases, Microsoft leveraged its operating system and proprietary software to persuade new clients to adopt its cloud platform - and the numbers speak for themselves.
Oracle still has the chance to pivot toward the cloud because its database product is a brilliant entrance point for potential cloud converts.
In the meantime, Amazon has its sights set on Oracle's database product and plans to go after market share.
Oracle believes its database product is the best in the business - more affordable, quicker, and dependable. However, technology is evolving at such a rapid pace that these nimble companies can flip the script on their opponents in no time.
It's a dangerous proposition to compete with Amazon because of the nature of competing means dumping products, and unlimited cash burn battering opponents into submission by crushing profitability.
Oracle's margins would get hammered in this circumstance at a time when Oracle's gross margins have been a larger sore spot than first diagnosed.
Legacy companies are unwilling to enter price wars with Amazon because they still have dividends to defend and profit margins to nurture skyward.
Concurrently, Salesforce and Microsoft Dynamics CRM are attacking Oracle's CRM products (Customer Relationship Management), which could further impair margins.
The breadth of competition showed up to the detriment of margins with PaaS and IaaS gross margins eroding from 46% YOY, down to 35% YOY.
Microsoft's cloud revenue eked out a better than 60% gross margin even with its gargantuan size.
Investors punished Oracle for whispers of its cloud business plateauing with a size that is just a fraction of Microsoft Azure.
The leveling out is hard to take after Larry Ellison claimed cloud margins would soon breach 80% in upcoming quarters.
Conversely, Microsoft has claimed margins could start to erode as the company reallocates capital into expanding its cloud infrastructure, but it is understandable for maturing companies that must battle with the law of large numbers.
At the end of the day, Oracle's cloud business is failing to grow enough.
Oracle's competitors are speeding down the autobahn while Oracle has been dismissed to the frontage road.
Growth impediments with the small size of Oracle's cloud business is a red flag.
Avoid this legacy turnaround story that hasn't turned around yet.
Oracle looks like a value play at this point and could rise if it gets its cloud act together or the mere anticipation of a resurgence.
But with margins and competition pressuring its attempts at transformation, I would take a wait-and-see approach.
It's clear that Oracle is in the third inning of its turnaround, and teething problems are expected.
If you get the urge to suddenly buy cloud stocks, better look at any dip from Microsoft, Salesforce, and Amazon, which all directly compete with Oracle but are performing at a much higher level.
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Quote of the Day
"A company is like a shark, it either has to move forward or it dies." - said Oracle co-founder Larry Ellison.
