Mad Hedge Technology Alerts!
Even though the tech market isn’t in a renaissance, that doesn’t mean there aren’t any good choices to park capital.
I’d like to bring readers' attention to 3 cloud stocks that still have some upside.
It’s true that tech stocks no longer go up in a straight line, that auto-pilot mindset blew up spectacularly in 2022 when tech stocks finally stopped defying gravity.
The 16% the Nasdaq has gained this year is somewhat due to the expectations of a rebound and better-than-expected earnings.
With that in mind, software still has legs and it would be a shame to not go where the value is in tech.
After the big 7 behemoths, there are some tech plays that readers need to target because workloads will migrate to the cloud over the next decade.
There has been a significant shift to the cloud in recent years from legacy on-premise workloads and infrastructure. Cloud computing allows organizations to rent rather than buy IT and other functions.
Given the cost savings, scalability, flexibility, productivity gains, and improved security features, it’s obvious why this shift is happening.
These advantages mean more workloads will continue moving to the cloud. SaaS growth stocks are expanding despite the current macro uncertainty.
IT service management giant ServiceNow (NOW) is one to slide into your black leather wallet.
The company is a leader in the cloud-based IT service management and digital workflow solutions sphere. Its software helps businesses streamline operations, automate workflows and improve customer experience.
NOW recently grew revenues by 24% year-over-year last quarter.
It reported a healthy 35% free cash flow margin, which ranks in the top quartile among SaaS growth stocks.
Another one to keep an eye on is Snowflake (SNOW).
Data migration to the cloud is a secular trend that will support growth for years. Snowflake is a cloud-based data warehousing, processing, and analytics company.
Their data platform provides businesses with a scalable and flexible service for managing their data. It enables organizations to store, analyze and share large amounts of data in real-time, helping them to make better decisions and improve their operations.
Over the last five years, it has reported a net revenue retention rate above 150%.
Its platform capabilities are critical for any enterprise, and it has been winning customers in various industries.
On March 1, they reported quarterly revenues of $589 million, a 53% year-over-year growth rate.
Just as impressive, the company announced a plan to return cash to shareholders through a $2 billion buyback.
Lastly, Workday (WDAY) is a cloud-based software company that provides businesses with human capital management, financial management, and analytics solutions.
The company’s cloud software helps businesses improve workforce management, financial management, and decision-making processes.
It counts many Fortune 500 companies as customers. The company hit the 10,000 customers milestone lately with revenue increasing 19.6% year-over-year.
The runway is long for WDAY with a total addressable market for this subsector at $73 billion, respectively. Considering that organizations will continue to modernize HR and finance operations, Workday is one of the top SaaS stocks to buy to play this trend.
Mad Hedge Technology Letter
May 5, 2023
Fiat Lux
Featured Trade:
(HIGHER FOR LONGER)
(AAPL), (JOBS)
Non-farm payroll matters.
The job numbers have serious consequences for the tech sector - the biggest being there will be no recession in 2023 because everybody has a job.
Not only does everyone have jobs, they are also getting double the wage gains the Fed forecasted at 0.5% annualized to 6% year over year.
The tech sector has gotten rid of many good-paying jobs, many of those jobs were fake jobs that were absorbed to hoard talent when rates were at 0%.
It’s interesting that many of these tech stocks have exploded to the upside upon announcing job cuts, meaning investors don’t view the cuts through the prism of lost revenue but rather increasing productivity and delivering added efficiency.
Now, the entire bond investing complex is waiting on a Fed cut, which is why as of yesterday, 4 quarter percent rate cuts were priced in.
Fast forward 1 day and Fed future pricing is now pricing in 3-quarter percent rate cuts as investors believe we will stay higher for longer.
Higher for longer is bad for tech shares.
This extinguishes any hope of reducing inflation in the medium term.
It could be that we only get 1-2 quarter-point rate cuts in 2023 if the bond market is correct.
The Nasdaq has performed exquisitely in 2023 gaining 15% so far amid a souring backdrop of shrinking margins, increasing interest rates, federal government mismanagement on an epic level, domestic banking contagion from regional banks, and geopolitical strife.
The not so bad – not so good situation in tech stocks has manifested itself in the best tech stock Apple, which reported earnings yesterday.
Apple’s earnings report validated what I am seeing in the data.
The report was nothing special but good enough to believe that tech will narrowly avoid a recession in 2023.
The balance sheet is so ironclad that Apple even initiated a stock buyback of $90 billion.
Not too shabby.
Granted, there are few that can wield a strong balance sheet in the ways CEO Tim Cook can, but that’s not taking anything away from him.
Apple also told us about the 975 million paying subscribers to their services and that’s 150 million more than one year ago.
The takeaway is that Apple has a highly loyal customer base that continues to drive its dollars into the ecosystem.
Customer retention is incredibly high because they deliver products customers want.
Even their flagship product the iPhone and its revenue was up 2% year over year and beat forecast by $2.5 billion coming in at $51.33 billion when overall revenue decreased year over year.
iPhone revenue is just over half of Apple’s revenue.
A recession data point would be one in which to expect negative growth from iPhone revenue, so low single digits are fine.
The bottom line is that the US economy added 253,000 jobs to the overall job market and the unemployment rate is defying gravity.
US consumers keep spending, spending, and spending more.
Tech has turned into a 7 stock market and generous shareholder returns.
I admit that 2% iPhone revenue growth isn’t eye-popping, but that is where we are at this point in a late economic cycle.
Squeeze the juice out of the iPhone before the next big pivot to the next technology.
Similar can be said about the job market, everyone is trying to make their last buck before this whole thing gets a reset with 0% Fed fund interest rates.
Many even wish that 0% rates were already here.
Tech stocks will grind up as investors will bid up tech stocks, because they believe the Fed will cut sooner than initially thought. We’ll go back to that narrative for better or worse.
