Mad Hedge Technology Alerts!
If you've been living under a rock the past few years, the cloud phenomenon hasn't passed you by and you still have time to cash in.
You want to hitch your wagon to cloud-based investments in any way, shape or form.
Microsoft's (MSFT) pivot to its Azure enterprise business has sent its stock skyward, and it is poised to rake in more than $100 billion in cloud revenue over the next 10 years.
Microsoft's share of the cloud market rose from 10% to 13% and is catching up to Amazon Web Services (AWS).
Amazon leads the cloud industry it created, and the 49% growth in cloud sales from the 42% in Q3 2017 is a welcome sign that Amazon is not tripping up.
It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.
Amazon (AMZN) relies on AWS to underpin the rest of its businesses and that is why AWS contributes 73% to Amazon's total operating income.
Total revenue for just the AWS division is an annual $5.5 billion business and would operate as a healthy stand-alone tech company if need be.
Cloud revenue is even starting to account for a noticeable share of Apple's (AAPL) earnings, which has previously bet the ranch on hardware products.
The future is about the cloud.
These days, the average investor probably hears about the cloud a dozen times a day. If you work in Silicon Valley you can triple that figure.
So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.
Think of this as a cloud primer.
It's important to understand the cloud, both its strengths and limitations. Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest growing companies in the world.
Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that's where I come in.
Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.
They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy remember that the original Department of Defense packet switching design was intended to make the system atomic bomb proof.
As a user you can access any single server at any one time anywhere in the world. These servers are owned, maintained and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.
The most important features of cloud storage are:
1) It is a service provided by an external provider.
2) All data is stored outside your computer residing inside an in-house network.
3) A simple Internet connection will allow you to access your data at anytime from anywhere.
4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.
Once you start using the cloud to store a company's data, the benefits are many.
- No Maintenance
Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.
However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.
Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.
Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing IT staff of prima donnas.
- Greater Flexibility
Today's employees want to have a better work/life balance and this goal can be best achieved through letting them telecommute. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.
How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?
Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees. According to a recent survey, 79% of respondents already work outside of their office some of the time, while another 60% would switch jobs if offered this flexibility.
With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.
It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.
- Better Collaboration and Communication
In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.
For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.
These products, which all offer free entry-level versions, allow users to access the latest versions of any document, so they can stay on top of real-time changes, which can help businesses to better manage work flow, regardless of geographical location.
- Data Protection
Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.
The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.
It's best to move data to the cloud, to avoid such disruptions because there your data will be stored in multiple locations.
This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.
- Lower Overhead
The cloud can save businesses a lot of money.
By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.
Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.
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Quote of the Day
"Life is not fair; get used to it," said founder of Microsoft Bill Gates.
Mad Hedge Technology Letter
June 29, 2018
Fiat Lux
Featured Trade:
(IS AIRBNB YOUR NEXT TEN BAGGER?)
I was not surprised to hear that the home sharing app, Airbnb, was given a $31 billion valuation in the latest venture capital funding round.
The big question for you and I is: Will the valuation soar tenfold to $300 billion, and how much of a piece of that will you and I be allowed to get?
To answer that question I spent six weeks traveling around Europe as an Airbnb customer. This enabled me to understand its business model, its strengths and weaknesses, and analyze its long-term potential.
As a customer the value you receive is nothing less than amazing.
I have been a five-star hotel client for most of my life, with someone else picking up the tab much of the time, so I have a pretty good idea on the true value of accommodations.
What you get from Airbnb is nothing less than spectacular. You get three or four times the space for one-third the price. That's a disruption factor of 7:1.
The standards are often five-star and at the top end, depending on how much you spend. I found I could often get an entire three-bedroom house for the price of a single hotel room, with a better location.
Or, I could get an excellent abode in rural settings, where none other was to be had, whatsoever.
That's a big deal for someone like me who spends so much of the year on the road.
You also get a new best friend in every city you visit.
On most occasions the host greeted me on the doorsteps with the keys, and then introduced me to the mysteries of European kitchen appliances, heating, and air-conditioning.
Pre-stocking the refrigerator with fresh milk, coffee, tea, and jam seems to be a tradition the hosts pick up in their Airbnb orientation course.
One in Waterford, Ireland, even left me a bottle of wine, plenty of beer, and a frozen pizza. She read my mind. Thanks, Mary!
She then took me on a one-hour tour of their city, divulging secrets about their favorite restaurants, city sights, and nightspots. Every one proved golden.
After you check out, Airbnb asks you to review the accommodation. These can be incredibly valuable in deciding your next pick.
I had one near miss with what I thought was a great deal in London, until I read, "The entire place reeks of Indian cooking."
Similarly, the hosts rate you as a guest.
One hostess shared a story about picking up her clients from town after they got drunk and lost in the middle of the night. Then they threw up in the back of the car on the way home.
Guests forgetting to return keys are another common complaint.
Needless to say, I received top ratings from my hosts, as fixing their Wi-Fi to boost performance became a regular habit of mine.
After my initial fabulous experience in London, I thought it might be a one-off, limited to only the largest cities. So, I started researching accommodations for my upcoming trips.
I couldn't have been more wrong.
Just the Kona Coast alone on the big island of Hawaii had an incredible 50 offerings, including several bargain beachfront properties.
The center of Tokyo had more than 300 listings. The historic district in Florence, Italy, had a mind-blowing 351 properties.
Fancy a retreat on the island of Bali in Indonesia and tune up your surfing? There are more than 197 places to stay!
While we weren't looking, Airbnb has truly gone global.
Airbnb's business model is almost too simple to be true, involving no more than a couple of popular applications. Call it an artful melding of Google Earth, email, text, and PayPal.
While no one was looking, it became the world's largest hotel at a tiny fraction of the capital cost.
The company has 2 million hosts worldwide, and 100 million customers. That supply/demand imbalance shifts burden of the cost to the renters, who usually have to fork out a 12% fee, plus the cost of the cleaning service.
Hosts only pay 3% to process the credit card fees for the payment.
The tidal wave of revenues this has created has enabled Airbnb to become San Francisco's second largest privately owned "unicorn," right after the $70 billion behemoth ridesharing app, Uber.
To say that Airbnb has created controversy would be a huge understatement.
For a start, it has emerged as a major challenge to the hotel industry, which is still stuck with a 20th century business model. There's no way hotels can compete on price.
One Airbnb "super host" in Manhattan is managing 200 apartments, essentially, creating out of scratch, a medium-sized virtual "hotel."
Taxes are another matter.
Some municipalities require hosts to pay levies of up to 20%, while others demand quarterly tax filings and withholding taxes. That is, if tax collectors can find them.
Airbnb may be the largest new source of tax evasion today.
In cities where housing is in short supply Airbnb is seen as crowding out local residents. After all, an owner can make far more money subletting their residence nightly than with a long-term lease.
Several owners told me that Airbnb covered their entire housing cost for the year, while paying off the mortgage at the same time.
Owners in the primest of areas, such as in midtown Manhattan off of Central Park or the old city center in Dubrovnik, Croatia, rent their homes out as much as 180 days a year.
It is doing nothing less than changing lives.
That has forced local governments to clamp down.
San Francisco has severe, ironclad planning and zoning restrictions that only allow 2,000 new residences a year to come on the market.
It is cracking down on Airbnb, as well as other home-sharing apps such as FlipKey, VRBO, and HomeAway by forcing hosts to register with the city or face brutal $1,000-a-day fines.
So far, only 1,675 out of 9,000 hosts have done so.
Ratting out your neighbor as an off-the-grid Airbnb member has become a new cottage industry in The City by the Bay.
Airbnb is fighting back with multiple lawsuits, citing the federal Communications Decency Act, the Stored Communications Act, and the First Amendment covering the freedom of speech.
It is a safe bet that a $31 billion company can spend more on legal fees than a city the size of San Francisco.
The company also has become the largest contributor in San Francisco's local elections. In 2015, it fought a successful campaign against Proposition "F," meant to place severe restrictions on its services.
An Airbnb stay over is not without its problems.
The burden of truth in advertising is on the host, not the company, and inaccurate listings are withdrawn only after complaints.
A 20-something-year-old guy's idea of cleanliness may be a little lower than your own.
Longtime users learn the unspoken "code."
"Cozy" can mean tiny, "as is" can be a dump, and "lively" can bring the drunken screaming of four-letter words all night long, especially if you are staying upstairs from a pub.
And that spectacular seaside view might come with relentlessly whining Vespa's on the highway out front. Always brings earplugs and blindfolds as backups.
Researching complaints, it seems that the worst of the abuses occur in shared accommodation. Learning new foreign cultures can be fascinating. But your new roommate may want to get to know you better than you want.
In one notorious incident a Madrid guest was raped. The best way to guard against such unpleasantries is to rent the entire residence for your use only, as I do.
Another problem arises when properties are rented out for illegal purposes, such as prostitution or drug dealing.
More than once, an unsuspecting resident woke up one morning to discover they were living next door to a new bordello.
Wild parties that trash the dwelling, annoy the neighbors, and bring in the police is another worry.
Of course, the million-dollar question is, "When will the company go public?"
The current "unicorn" philosophy is to milk the company for all it's worth, and take it public when it is about to go ex-growth.
That's what happened to Twitter (TWTR), which grew exponentially, and then saw shares dive a gut-churning 72% after its initial public offering. It has since recovered.
On seeing the massive crowds of new tourists packing Europe this summer, my conclusion is that the travel industry is entering a hypergrowth phase. Blame the emerging middle-class Chinese who seem to be everywhere.
That means that at whatever price Airbnb goes public, there may not be a ten-bagger left for you. But a two or three bagger may be possible.
The real shock came when I left Airbnb and stayed in a regular hotel. Include the fees and the cleaning charges, and the service is no longer competitive for a single night stay.
In any case, most hosts have two- or three-night minimums to minimize hassle.
When I checked in at a Basel, Switzerland, five-star hotel, all I got was a set of keys and a blank stare. No great restaurant tips, no local secrets, no new best friend.
I spent that night surfing Airbnb, planning my next adventure.
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Quote of the Day
"There are just not enough human buyers in the market," lamented Edward Perkin, chief equity investment officer at Eaton Vance.
