Mad Hedge Technology Alerts!
There is plenty of turmoil in chip land these days.
Investors should not freak out, or worse, dump their Intel (INTC) shares on pain of death.
Take a deep breath ... and I'll explain why Intel is still a great stock into which you should dip your toes.
Apple (AAPL) reportedly plans to replace Intel processors in Mac computers with its own proprietary chips starting around 2020. It is useless for investors to prognosticate the worst-case scenario playing out because this announcement will not put Intel out of business.
This is not the first phase of the death of Intel and represents a fabulous entry point into a beacon of tech stability.
Apple started placing Intel CPUs into its MacBook Pro and iMac in 2006 and have enjoyed a fruitful relationship since then.
As technology mutates at lightning speed, Apple justifiably desires more control over its chip design to create the innovative end product it envisions and provide a smoother experience between mobile and desktop devices.
Intel's engineers cannot match the pace of Apple's chip improvements that use ARM-based processors, which Apple has stuck into devices using the iOS system, including the Apple Watch and the Apple TV.
Apple's latest gadgets are more powerful than its past Macs, and its future is better served by tailor-making its chip architecture for its devices.
Security will be bolstered by procuring more control over design construction.
Intel still boasts the world's most popular CPU chip line for laptops and desktop computers, and hyper-increasing global demand for silicon chips will fail to disrupt Intel's growth trajectory.
Remember that the CPU chip line is Intel's legacy business, and this lump of the operation will slowly fade away into oblivion anyway.
Apple's top-end computers will still use Intel's chips such as the iMac Pro and Mac Pro revision until they can transition to in-house chips.
This trend has staying power with Apple designing its own iPhone chips partially due to removing its heavy reliance on Qualcomm (QCOM). It also has locked horns in court for years adding tension to the relationship.
On a relative basis, iMacs are just a fragment of the overall laptop market at 7.3% during the fourth quarter of 2017.
Apple's announcement could shed $1.8 billion in annual gross profit from Intel's earnings.
Intel accumulated $62.8 billion in sales in 2017, and losing Apple's business is only a small hiccup in the bigger scheme of things.
In late 2017, Intel poached the former head of AMD's (AMD) graphics business to head up a new high-end graphics division.
Raja Koduri, the new chief architect and senior vice president of the newly formed Core and Visual Computing division at Intel, will enable the company to directly compete with AMD and Nvidia (NVDA) in the GPU market.
The competition with AMD is a big deal because AMD has caught up with Intel and could steal CPU market share.
AMD has built its own comprehensive lineup of PC CPU chips while Intel unveiled its eighth generation Core processors on April 3.
Acquiring new segments with its cash hoard is another way to move forward.
Rumors were rife with reports suggesting Intel would acquire Broadcom (AVGO) to create the biggest chip maker in the world.
This was a defensive maneuver to combat the possible combination of a Broadcom-Qualcomm merger that would damage Intel's market share in chips for mobile phones and cars.
By getting into bed with Broadcom, Intel could scrap the construction of the world's third-largest chipmaker, after Intel itself and Korea's Samsung.
Altera and Mobileye are companies Intel added to its lineup using its egregiously large cash hoard.
Mobileye, an Israeli company, provides advanced driver assistance software that prevents collisions. This purchase clearly bolsters its autonomous vehicle technology division.
Altera, a San Jose, Calif.-based company, manufactures integrated circuits.
Intel is likely to remain the dominant force at the very high end of computing.
It would be foolish to only analyze Intel based on its legacy business as it has veered into a different growth mode and is not just a chip company anymore.
Intel has been weaning itself from the secular downtrend of computer chips and strategically established an unmovable position in the massive cloud data center and server business.
The Data Center Group, Intel's second largest segment and most vital, grew 20% YOY, with $5.6 billion in revenue. Investors must keep close tabs on how this area performs because it is the lynchpin to emerging technologies such as artificial intelligence and 5G in terms of overall infrastructure.
Intel's data center performance represents the harbinger of success, and Intel is doubling down on this future growth driver.
Cloud capital expenditures will rise 30 percent in 2018 because chunks of money must be thrown at this segment to stay relevant from cutthroat competition.
Computing is at an inflection point in 2018. Priorities have rotated to the data-centric phase of development. And Intel's CEO Brian Krzanich, who just received a nice pay rise to $21.5 million per year, will fill us in at Intel's next earnings call on April 26.
To visit Intel's website please click here.
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Quote of the Day
"Quality is much better than quantity. One home run is much better than two doubles." - said former Apple CEO, Steve Jobs in 2006.
Mad Hedge Technology Letter
April 5, 2018
Fiat Lux
Featured Trade:
(GOOGLE IS FIRING ON ALL CYLINDERS ... BUY THE DIP),
(GOOGL), (FB), (AMZN), (AAPL), (MSFT)
Google (GOOGL) makes bucket loads of money and even makes Facebook's (FB) business model look dwarfish.
Total revenue in 2017 came in at more than $110 billion, up 23% YOY and almost three times larger than Facebook's annual revenue of $40.65 billion in 2017.
It's easy to comprehend why the big keep getting bigger if you understand the basic trajectory of technology companies.
A new report from the search consulting firm Adthena chronicled the flow of ad dollars into digital e-commerce and found that retailers are spending 76.4% of total ad budget on Google shopping ads.
Last year was a record-breaking year for total digital ad revenue, and this year the industry is slated to grow another 20%.
Young people aren't watching television as they used to and are more comfortable using computers, tablets, and smartphones to gorge on their entertainment and work.
By 2020, digital ads will comprise 44.6% of total ad revenue as cord-cutting by consumers accelerates and broadband streaming becomes the norm across all of America and the world.
Mobile is the triumphant victor here as the majority of dollars will migrate to smartphone platforms.
China and America will overwhelmingly make up the bulk of digital ad spend, and Europe will remain a distant third.
Last quarter, Alphabet missed Wall Street expectations on the bottom line failing to reach earnings per share (EPS) targets of $9.98. The $9.70 miss wasn't a total failure but disappointing enough for Alphabet shares to nosedive.
Alphabet has positioned itself perfectly for the future and has many irons in the fire.
Google's ad business remains its go-to segment totaling $27.27 billion in revenue in Q4, a main driver of outperformance.
Cost per click (CPC) decreased slightly less than what analysts expected, but that was the trigger for a quick dip in share prices even though Alphabet beat on the top line.
In total, it is immaterial if Alphabet misses slightly on this metric. And, coincidentally, Alphabet is changing the way it calculates ad fees by switching over to cost per impression (CPI), which charges advertisers for raw viewing of an ad.
This pricing mechanism will create higher margins that slightly suffered last quarter because advertisers now are charged for users not clicking an ad as well.
(CPC) has been eroding for years. Alphabet attributes the slight dip to the widespread migration to mobile and the importance of YouTube ads, which yield lower rates than desktop ads.
Alphabet's "other revenues" segment, including its burgeoning enterprise business, hardware sales, and app store Google Play, posted $4.69 billion in revenue, bringing total Google revenue to $31.91 billion in Q4 2017.
Google search, the premier legacy business in tech, still comprises 85% of total revenue. Crucially, the cash mountain procured aids in capital allocation. Alphabet heavily reinvests back into different parts of the business or M&A.
Certainly, it has laid some eggs such as the Google glasses and its attempt at social media through Google+, which flamed out, too.
Many of these new projects originate from the 20% of work time that is allocated to free-spirited entrepreneurship. This initiative has harvested benefits spawning from Google news and other supplementary projects.
Alphabet's innovative qualities feedback into their core product as well, but management understands it needs to evolve to meet the capricious needs of users.
Google founders Sergey Brin and Larry Page thirst for a fresh injection of vivacity into their business and added several outside valuable pieces that include YouTube, Motorola, and Nest Labs for around $17 billion.
These growth engines will fit nicely under the umbrella of firms that Google has collated.
The cloud segment has become a "billion dollar per quarter business." It is dwarfed by the ad revenue but is still the glue that holds the firm together because of the heavy reliance of big data storage to power its firm.
The cloud is still a small sliver of the business and trails Amazon (AMZN), and Microsoft's (MSFT) cloud businesses, but Google drive cloud platform was "the fastest growing major public cloud provider" in 2017.
Apple (AAPL) has even subcontracted Google to store iPhone data on its Google cloud. I bet you didn't know that.
The cloud will continue to gain momentum for Google. Developing the best search engine in the world makes the company specialists in harvesting data because refining a search engine takes an extraordinary amount of data to fine-tune the user searches to perfection.
There are a few headwinds Alphabet is coping with, predominantly traffic-acquisition costs (TAC) as a percentage of revenue will continue to rise, but the increase in velocity will taper off by mid-2018.
Google's total (TAC), which includes funds it pays to phone manufacturers such as Apple that integrates its services, such as search, hit $6.45 billion, or 24% of Google's advertising revenues.
The rising cost of finding eyeballs will squeeze margins.
Another bogey on the horizon is Amazon's foray into the digital ad sphere. It possesses the quality of data to claw away market share and could damage the comprehensive duopoly that Alphabet enjoys with Facebook.
Large cap tech is competing with each other in almost every critical industry guided by the invisible hand of a massive treasure trove of big data. This is unavoidable.
Alphabet's other gambles such as smart-home hardware maker Nest Labs and health-care company Verily are bets on the future as all big tech firms position themselves to compete in a myriad of emerging industries.
These products aren't expected to harvest profits for years and lost Alphabet a combined $500 million last year.
There are a few companies that are perfectly aligned with the direction of future business and technological development, and Alphabet is one of them.
Whether the autonomous vehicle subsidiary Waymo or its smart-home investment in Nest Labs, Alphabet is diversified into most of the cutting-edge trends moving forward.
If the sushi hits the fan with its up-and-coming segments, Alphabet can always fall back on what it knows best - selling ads.
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Quote of the Day
"We want Google to be the third half of your brain." - said co-founder of Google and president of Alphabet, Sergey Brin.
