Mad Hedge Technology Alerts!
After watching the performance of technology stocks over the past two weeks, you may be on the verge of slitting your wrist, overdosing on drugs, and then jumping off the Golden Gate Bridge.
However, the results reported by tech companies this week say you should be doing otherwise.
As tech companies confront upcoming regulation and an overseas trade war, it has felt like a death by a thousand cuts.
It almost is starting to feel as if being a technology company is akin to drinking from a poisoned chalice.
I beg to differ.
I will tell you why the destiny of tech is quite positive.
The long-term secular growth drivers will prevail of accelerated earnings amid a backdrop of global economic synchronized expansion.
Assiduous capital reallocation programs will attract investors instead of detract from them.
The ironic angle to the precarious diplomatic tumult is that regulation will ultimately benefit the current pacesetters and culprits of technology because the barriers of entry become insurmountable.
The trade war has the same effect as the data regulation because it is ultimately for the betterment and protection of domestic, made-in-USA technology.
Washington knows the FANGs all too well, and the bull market will cease to exist if Beijing buys out our technological expertise.
Short-term pain for long-term gain. That's it in a nutshell.
The White House further understands that it's better to start a trade war now when it holds a stronger hand. No doubt after 20 more years of an ascending China, the Middle Kingdom will leverage its economic clout for diplomatic power dictating the outcome more ruthlessly.
Effectively, Trump's trade fracas is a one step back and two steps forward policy. During the one step back phase simply seems as if the economy is taking a nosedive into the ocean floor.
Love it or hate it, technology is becoming more (and not less) ubiquitous. However, it's gone too far too fast, and society and public officials require time to absorb the new environment or you risk the current backlash.
Simultaneously, America is in the one step back phase of data regulation, trade laws, and society's backlash of encroaching tech.
Bad timing.
The teething problems will gradually subside, the stock market will re-ignite, and tech will advance further into regular life.
The market even has seen some green shoots with the blockbuster Dropbox (DBX) IPO up over 40% intraday on the first day of trading.
In the S-1 filing required for IPOs, (DBX) stated that it may "not be able to achieve or maintain profitability" because of increasing expenses. The disclosure also prefaced its "history of net losses" to justify the business direction.
(DBX) lost $111.7 million in 2017, on revenues of just over $1 billion.
Technology must be doing something right if loss-making firms are treated with a 40% gain on IPO day; and, Spotify, an even bigger money loser, will go public next week.
If investors are smitten with loss-making tech companies, I imagine they feel quite comfortable with the ones earning billions in quarterly profits and growing at a pace where analysts cannot hike their price targets quick enough, making them look foolish.
The outstanding gains by (DBX) was for one reason and one reason only.
It's a pure cloud play, and pure cloud plays have been rewarded in spades.
Red Hat's (RHT) stellar earnings were on the heels of the (DBX) IPO success.
Red Hat is a medium-size unadulterated cloud play that lacks the financial resources of the FANGs but is still turning a profit.
It is the poster boy for enterprise cloud companies flourishing in an unrelenting fierce environment.
If the world is going to hell in a handbasket, then how did Red Hat achieve aggregate billings growth of 25%?
Everyone and their uncle expect tech companies to start floundering, but the opposite is true. They overpromise then over deliver to the upside every quarter.
Red Hat booked the most deals over $1 million in Q4 2017 in its history.
Cross-selling cloud applications was especially strong with 81% of deals over $1 million spending on multiple software services.
The critical subscription revenue comprised 88% of Q4 revenue and is up 15% YOY. Application development-related subscriptions were up 42% YOY, higher than the infrastructure-related subscription revenue growing 17% YOY.
Companies are churning out innovation on top of their existing platforms using various software solutions. And every company in the world is migrating toward cloud software and infrastructure. There has never been a better time to be a pure cloud company.
The most poignant telltale sign was that Red Hat renewed 99 out of 100 of its top deals and disclosed that multiyear deals were healthy.
Ansible, its software for automating data center operations, OpenShift, its software for container-based deployment and management, and OpenStack, an infrastructure-as-a-service (IaaS) for cloud computing are the underpinnings to Red Hat's supreme business.
The reoccurring revenue salted away is legion.
The FY 2018 guidance was even more impressive than the quarterly earnings report. Red Hat expects a revenue range between $800 million and $810 million, up from the $748 million last quarter and expects quarterly EPS at $0.81, up from $0.70 last quarter.
Toward the end of the earnings call, Red Hat CEO Jim Whitehurst described the cloud growth environment as "very, very, very fast growth."
Market conditions and heightened volatility could stay irrational for longer than expected but leadership stocks are always the last to fall.
If (DBX) can catch a bid, and headway is made on political issues, then jump back into the cloud names that perform like Red Hat and about which I have been beating the drum.
And don't forget that these regulatory and political hindrances all point toward giving big cap tech cozier conditions and an elevated runway from which to operate.
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Quote of the Day
"We know where you are. We know where you've been. We can more or less know what you're thinking about." - said Eric Schmidt in 2010, the former executive chairman of Google from 2001-2017
Mad Hedge Technology Letter
March 28, 2018
Fiat Lux
Featured Trade:
(HOW THE COBALT SHORTAGE WILL LEAD TO THE $2,000 IPHONE)
(AAPL), (SSNLF), (CMCLF), (FCX), (VALE), (GLNCY), (VLKAY), (BMWYY)
Hello $2,000 iPhone.
Flabbergasted consumers reacted last holiday season when Apple dared offer a $1,000 smartphone.
How confident this company has become!
Well, this is just the beginning.
Apple (AAPL) will be the first smartphone maker to offer a $2,000 phone, and I will tell you why!
The tech industry is going through a cumbersome wave of repricing after several high-profile debacles that have cast the light on the true value of data.
The upward revision of data has seen more players pour into the game attempting to carve out a slice of the pie for themselves.
The reason why tech companies will start offering their products at higher price points is because the inputs are rising at a rapid clip.
Apple's Development and Operations (DevOps) costs to design and maintain this outstanding product is going through the roof.
Apple's DevOps employees earn around $145,000 per year and compensation is rising. Granted, the technology is developing and batteries smaller, but salaries are rising at a quicker relative pace because of the dire shortage of DevOps talent in Silicon Valley.
It's possible that living in a shoebox at $4,200 per month in Mountain View, Calif., is off-putting for potential staff.
The most expensive part of an iPhone X is the OLED screen.
Apple estimated costs of $120 per screen manufacturing the Apple iPhone X. The cost doubled from LCD panels from $60 per screen.
Samsung (SSNLF) has been best of breed for screens for a while, and it is currently working on the next generation of Micro LED tech, which is the next gap up from the OLED displays of today.
Samsung has an inherent conflict of interest with Apple, creating tension between these tech stalwarts. Apple made the contentious decision to procure in-house screens at a secret manufacturing facility in Santa Clara, Calif., to avoid the constant friction.
It's common knowledge that the average price of technology shrinks over time, but the American smartphone industry has defied gravity with expected prices to shoot up 6% to $324 in 2018.
The Apple iPhone X raw costs were around $400 per phone. There is zero chance that a next gen, enhanced Apple smartphone will cost this low ever again.
Confirming this trend are Chinese smartphones retail prices rising at 15% last year.
The cost of memory, DRAM and NAND chips, rose dramatically this past year. As more memory is designed into these devices, the costs keep trending higher.
Lithium-ion batteries only add up to 1% to 2% of OEM (Original Equipment Manufacturers) cost and probably only bumps up the cost of iPhones incrementally.
The more skittish situation is the EV (Electric Vehicles) snafu.
Volkswagen (VLKAY) announced it will transform its entire fleet of 300 models into electrified versions by 2025.
In order to achieve this lofty objective, Volkswagen has earmarked $25 billion for batteries from Samsung, LG, and Contemporary Amperex. Volkswagen hopes to have 16 up and running (EV) factories by 2022, up from three today.
The goal is unattainable because of a lack of in-house battery production.
CEO Matthias Muller said the reason for not manufacturing in-house batteries was, "Others can do it better than we can."
Muller will rue the decision down the line as a myriad of companies migrate toward in-house solutions, giving firms more control over the process and overhead.
More importantly, Muller will have to rely on the ebb and flow of rising cobalt prices.
A battery for an (EV) ranges between $8,000- to 20,000, comprising the largest input for the (EV) makers such as Tesla (TSLA) and Ford (F).
Making matters worse, companies cut from all cloth are hoarding cobalt reserves based on anticipating the potential demand.
This phenomenon will cause all big tech players to replenish any reserves of base materials immediately.
Apple has had chip shortage problems in the past. This year is even worse than 2017, with NAND and DRAM chip supply trailing the demand by 30%. Tech companies have been hastily locking down contracts in advance to ensure the necessary materials to produce their flashy gadgets.
Lithium battery demand is expected to rise 45% between 2017 and 2020, and there has been no meaningful large-scale investment into this industry.
Battery production made up 51% of cobalt demand in 2016 and will hit around 62% by 2022.
Compounding the complexity is 60% of global cobalt production is found in one country - the Democratic Republic of the Congo (DRC).
DRC is a hotspot for geopolitical fallout and its history is littered with civil war, internal conflict, and poor infrastructure.
The 21st century will be dependent on a chosen group of valuable materials. Cobalt is shaping up to be the leader of this pack and is needed in a plethora of business applications such as EV, lithium-ion batteries, and PCs.
Cobalt is vital in metallurgical applications that include aerospace rotating parts, military and defense, thermal sprays, prosthetics, and much more.
The DRC recently proposed a revised mining law increasing taxes on cobalt and other precious metals. The legislation has yet to be written into stone and would certainly jack up the price of cobalt.
Glencore's (GLNCY) management has noted this mining tax is "challenging" at a time it is just completing its Katanga expansion.
Katanga has the potential to become the largest global copper and cobalt producer.
Copper is equally important to cobalt since cobalt production is a by-product of copper and nickel mining. Only 2% of cobalt results directly from cobalt mining, and 60% via copper mining, and 38% via nickel mining.
Last year, Freeport-McMoRan (FCX) was dangling its cobalt project to outside investors in the DRC but was unable to fetch a premium price.
In a blink of an eye, China Molybdenum Co. (CMCLF) swooped in and (FCX) accepted an offer of $2.65 billion. (FXC) used the sale to pay down debt while the price of cobalt has taken off to the moon.
It gets worse, China owns 80% of refined global cobalt production and 90% of its operations are in the DRC.
China is attempting to corner the cobalt market in the DRC, gaining a stranglehold on future technological devices, (EV)s, and big data.
The keys to future technological hegemony lie in the jungles of the DRC, and China has the first mover advantage and backing of the communist party as (CMCLF) strives to be a global leader in cobalt production.
China has smartly wriggled its way down to the bottom of the supply chain capturing cobalt resources, and if a trade war ensues, China can simply cut off cobalt supply lines to whomever.
There is nothing CFIUS or Donald Trump can do.
America's 14% of global cobalt production will be insufficient to produce the new (EV)s, iPhone 11s, gizmos and gadgets that American consumers demand for daily life.
Analysts expected Apple to acquire some supplementary companies that will aid in expansion following the overseas repatriation.
A thriving software outfit or a company of cloud developers would have sufficed. However, reports streaming in that Apple has entered into negotiations to buy a five-year supply of cobalt directly from miners for the first-time underscore where Apple's priorities lie.
Cobalt demand expects to increase by 30% from 2016 to 2020.
Apple is scared it will be locked out of the cobalt market or forced to pay ludicrous prices for its cobalt needs.
Considering the price of cobalt has quadrupled since June 2016, and smartphones are 25% of the cobalt market, it's a strategically prudent move by Apple's CEO Tim Cook in light of BMW (BMWYY) announcing the need of 10X more cobalt by 2025.
Going forward anything comprised of cobalt-based technology will garner a higher premium resulting in higher prices for consumers including that $2,000 iPhone.
(FCX) is a must buy for those who believe precious metals are the foundation to all future technology. Other intriguing names include Brazilian company Vale S.A. (VALE), and Glencore, the largest Swiss company by revenue.
Or if you have the cash, plunk it down on a cobalt mine in the DRC. But only if you're insane.
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Quote of the Day
"Heavier-than-air flying machines are impossible." - Lord Kelvin, President of the Royal Society, in 1895
