Mad Hedge Technology Alerts!
Spotify (SPOT) is raising prices and the underlying stock is up 4% this morning.
Shareholders are happy and there is more to come from this European giant.
Much of the same pricing behavior has been experienced in products like Netflix whom are incentivized to raise prices to get that extra juice out of its stock.
Why not raise prices when customers are happy to pay for it?
Remember, this only works when a company is part of a duopoly, monopoly, or something of that nature where they have a firm grip on pricing power.
Consumers are willing to shell out that little extra bit for Spotify because the competition is so much worse.
This has been going on for quite a while and tech was famous for the “freemium” model built on free services.
After building a significant audience and hooking the audience for free, a subscription-based model was rolled out to monetize the customer base.
Spotify is looking to extract a little more from the premium customer.
The price of Premium Individual will pay more so that SPOT can continue to invest in and innovate the product offerings and features then levy another major price hike.
That’s the game in tech land and we roll with the punches.
The company offers an advertising-supported free service with limited features and a subscription-based paid service that gives access to all its functionality, with premium subscribers accounting for most of its revenue.
The streaming giant could drive further growth by offering tailored subscription plans based on consumer preferences in verticals such as music, audiobooks, and podcasts.
The company's quarterly gross profit topped $1.08 billion for the first time in April after it reined in marketing spending.
Its premium subscribers rose by 14% to 239 million and it forecast monthly active users at 631 million for the second quarter.
The company offers an advertising-supported free service with limited features and a subscription-based paid service that gives access to all its functionality, with premium subscribers accounting for most of its revenue.
I believe the streaming giant could drive further growth by offering tailored subscription plans based on consumer preferences in verticals such as music, audiobooks, and podcasts.
Since we are in the last stage of the economic cycle, expect tech companies to pull out all the bells and whistles to charge extra for the software, hardware, and other tech.
Being that we are late cycle, there is an incredible push for that last incremental dollar before the economy goes into recession and I do believe that tech companies will behave in a somewhat mercantile way to get what they want.
Tech companies, especially the bigger ones, have a massive incentive to stave off a recession for one extra quarter so that much of the management can cash out at all-time high stock prices with vested shares.
Tech will eventually experience a steep pullback in shares and the longer that is staved off, the better for everyone because who knows what the next iteration of tech will look like.
It could become more corporate which would mean higher prices for the consumers and higher shares prices for stocks like SPOT.
Remember that the only thing in tech that is certain is change and that is what we will see. It’s sooner than you think and right around the corner for many tech companies.
In the meantime, expect higher product prices for streaming and software products like Spotify, Netflix, and other lookalikes that will lift corresponding share prices.
Mad Hedge Technology Letter
May 31, 2024
Fiat Lux
Featured Trade:
(ANOTHER AI SERVER STOCK)
(DELL), (SMCI), (NVDA), (ORCL)
Nvidia CEO Jensen Huang complimented Dell by saying it’s a “great partnership” at its GTC conference and said that “nobody is better at building end-to-end systems of very large scale for the enterprise than Dell.”
Words like this go a long way in this industry let alone partnering with the best tech firm in the industry.
To have the best CEO in tech flatter your products means staying power but in the short-term, the stock has come too far too fast.
That’s what this deep selloff is about as Dell shares.
The stock is down 19% today but that doesn’t diminish the 207% gain in the past 365 days.
Dell has reinvented itself as an AI stock and specifically a company specializing in servers that serve AI chips.
The company has done so well lately that they are gearing themselves up for inclusion into the S&P index.
That would honestly be a game-changer for the stock.
Super Micro Computer (SMCI), another play on AI servers, was added in March, despite having a market cap below $50 billion.
Confirmation of improving growth prospects could continue to support a stock that’s at a record high while trading at a discount to other tech favorites.
Dell recently generated excitement by unveiling a line of PCs optimized for AI, adding to hopes that such features could prompt a long-awaited upgrade cycle from customers and businesses. HP even reported the first increase in PC sales in two years.
The firm has become a critical cog in the AI ecosystem.
Both the PC and the server businesses will drive growth in coming years, and that’s supportive of both the stock price and the multiple.
I believe we can now say the company has turned itself into both a growth and a value play since the growth story is still under-appreciated and the multiple is very low relative to other AI plays.
The S&P 500 is rebalanced quarterly, with the next scheduled to occur in June. Becoming a component would open Dell up to a fresh avalanche of investors who use the S&P 500 as their benchmark, as well as flows into passive funds that track the index.
All things considered, I believe this is one of the best tech stocks to play server momentum, sky-rocketing storage demand, and an improving PC market.
Dell is becoming an increasingly strategic vendor in AI, but there’s a lot more appreciation for this than there was a few months ago.
Demand for AI systems remains healthy, but other parts of the business remain cyclical, and if we see a macro downturn, even a growth story as powerful as AI could slow down.
I like that investors are looking through the bad PC numbers and only focusing on Dell's AI server story.
This means that readers should be dissuaded from reach for this tech play even though they have a saturated computer business.
The most important and hardest endeavor in the tech industry is to reinvent when business is slowing down.
Only so many firms can pull it off and now that the pivot is into AI, companies are scrambling like Google and Apple in order to stay relevant.
Dell is a stock that should be bought on dips now and I feel funny saying that because that wasn’t the case not too long ago.
Another stock that has reinvented itself with the AI craze has been Oracle (ORCL).
