Mad Hedge Technology Alerts!
It was one of those normally mundane seasonal events.
But what I heard blew my mind and will substantially shape my trading and investment strategy for 2018.
By now you already know that I used some of my stock market winnings this year to buy a vintage Steinway concert grand piano (click here for "The Great Inflation Hedge You've Never Heard Of."
Well, you can't own a Steinway without a recital, and ours was held last weekend.
After listening to an assortment of children display their skills with Pachelbel, Ode to Joy, and The Entertainer, we adjourned for a celebratory buffet dinner.
Making small talk with the other parents, I asked one particularly articulate gentleman what he did for a living. He, too, had enjoyed an excellent year, and also used his profits to buy a Steinway, although his was a cheaper upright model.
It turned out that he was the chief technology officer at LAM Research (LRCX).
Had I heard of it?
Not only did I know the company intimately, I had recommended it to my clients and caught the better part of the nearly 400% move since the beginning of 2016. Furthermore, I was expecting another double in the share price in the years ahead.
Was I right to be so bullish?
The man then launched into a detailed review of the company's prospects for the next three years.
The blockbuster development that no one outside the industry sees coming is China's massive expansion of its semiconductor production.
More than a dozen gigantic fabrication plants are planned, the scale of which is unprecedented in history. Some of these fabs are 10 times larger than those built previously.
This is creating exponential growth opportunities for the tiny handful of companies that produce the highly specialized machines essential to the manufacture of cutting-edge semiconductors, including Applied Materials (AMAT), ASML (ASML), Tokyo Electron (TOELY), KLA-Tencor, and LAM Research (LRCX).
Everyone in the industry has boggled minds over the demand they are seeing for their products.
The reality is the artificial intelligence is rapidly working its way into all consumer and industrial products far faster than anyone realizes, creating astronomical demand for the chips needed to implement it.
Bitcoin mining is also creating enormous new demand for chips that no one remotely imagined possible even two years ago.
As a result, the industry has been caught flat-footed with severe capacity shortages. They are all racing to add capacity as fast as they can. Profit margins are exploding.
On October 17, (LRCX) announced Q3 revenues of $2.48 billion, a staggering increase of 51.84% over the previous year, and a gross margin of 46.4%. The operating margin was 28%, generating net income of $591 million.
That gives the shares a very reasonable price earnings multiple of 16.95X, a 10% discount to the 18X multiple for the S&P 500. That is an incredible deal for one of the fastest growing companies in America.
Samsung of South Korea was far and away its largest customer, accounting for 38% of total sales.
On November 14, the company announced an eye-popping $2 billion share repurchase program that is certain to drive the price higher.
If there is one dark cloud on the horizon, it is the loss of the research and development tax credit embedded deep in the proposed Republican tax bill.
This will have a noticeable and negative impact on (LRCX)'s bottom line. Still, my friend thought that the company could offset this loss with faster sales growth and margin expansion.
However, many other technology companies in Silicon Valley won't be able to bridge that gap. It is a hugely anti-technology move for the government to take.
My fellow Steinway owner thought that LAM Research could easily see sales double in three years as long as there is no recession, which I believe is at least two years off. As for the share price, he couldn't comment, but remained hopeful, as he was a large owner himself.
Of course, the trick is how to buy a stock that has just risen by 400% in two years. So, you could start scaling in here, and build a larger position over time.
You only get opportunities like this a couple of times a decade, and it's better to be too aggressive than too cautious.
To learn more about LAM Research, please click here to visit the company website.
A Steinway Model D
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Quote of the Day
"The market always gets it right," said Jim O'Neill, the chairman of Goldman Sachs International, who coined the term "BRIC."
Mad Hedge Technology Letter
June 14, 2018
Fiat Lux
Featured Trade:
(THREE RULES FOR JACK DORSEY),
(TWTR), (SQ), (MSFT), (FB)
I am Jack Dorsey's biggest fan.
If he has an entourage, I would like to be part of it.
Even if he just needs a chauffeur, I would be willing to drive for free just to pick up little pearls of wisdom percolating through his brain.
He is perhaps the biggest name outside the vaunted FANG group that is not Microsoft (MSFT) CEO Satya Nadella.
The special Jack Dorsey issue (click here for the link http://www.madhedgefundtrader.com/a-straight-line-to-profits-with-square/) gloating about his company Square was not a misjudgment.
I am supremely bullish on his other company Twitter (TWTR) too.
Like I said last time about Dorsey, do not bet against Jack Dorsey.
Rule No. 2 don't bet against Jack Dorsey.
If he has a heartbeat, then success will follow him wherever he goes.
Dorsey co-founded Twitter in 2006 and was sacked, later to return in a blaze of glory seven years later ala Steve Jobs.
Evan Williams, the other co-founder of Twitter, got rid of Jack after he found out Jack slipped out of work each day at 6 p.m. for drawing classes, hot yoga sessions, and fashion classes where he learned how to design mini-skirts.
Williams reportedly told Dorsey, "You can either be a dressmaker or the CEO of Twitter, but you can't be both."
Williams replaced Dorsey as the CEO of Twitter in 2007.
Dorsey's dismissal led him to Mark Zuckerberg's doorstep where he was practically hired at the Menlo Park offices but could not find a suitable role at the company.
What a legendary exclusion if there ever was one!
Out of options at the time, Dorsey summoned his inner genius and created a new company named Square (SQ) in 2009. Ironically, he was rehired at Twitter as CEO in 2015 and currently runs both companies at the same time.
Apparently, his dressmaking career died before it could take off.
Dorsey is such a stud, he does not even have an office or a desk at his corporate offices.
He simply roams around the office wielding an iPad solving problems that need solving.
He starts his day at Twitter and walks across the street to Square after lunch.
How convenient!
In 2015, Twitter was having growing pains. User growth stagnated in Q4 2015 at 305 million users, down from the 307 million users in Q3.
Management wrote an investment letter promising it will "fix the broken windows and confusing parts" and boy, did they.
Fast forward to today and Twitter just nailed down its second profitable quarter in a row. Monthly active users (MAU) topped 336 million in Q1 2018, up from 330 million in Q4 2017.
Management projects (MAU) to increase at a nice 6% per year clip.
The lion's share of the growth derives from the mass migration of advertisement dollars to social media platforms, the same reason why Facebook (FB) harvests spectacular profits.
Video content has transformed into a robust growth engine carving out more than half of Twitter's revenue.
This is something that never could have been envisaged in 2015. As the quality of broadband develops, more video will be splashed across its platform.
Twitter considers video as a vital part of the road map moving forward.
Video is a better way for advertisers to engage users. Plain and simple.
Summer projects to be an exciting one with the biggest entertainment every four years, the 2018 FIFA World Cup in Russia, set to invigorate Twitter feeds throughout the world.
America missed out on World Cup qualification on the last day of qualifiers because it could not salvage a draw against a second-string Trinidad and Tobago team.
It doesn't matter.
Eyeballs will be glued to the matches in Russia and the audience will vent, cry for joy, and express their emotions on Twitter feeds.
Live events energize Twitter feeds, and advertisers will be throwing money at Twitter to put themselves in the store window for targeted Twitter followers.
Twitter will stream every goal from the World Cup, which is a nice coup.
In total, Twitter has 30 live partnerships and hopes to expand.
MLB, Major League Soccer, and People TV are other live programming that will integrate with Twitter's live feed.
Twitter's total ad revenue is expected to grow by 6% in 2018, which is a nice feather in its cap compared to 2017 when revenue dipped by 6%.
As the pie for ad revenue grows, it will not be one winner takes all.
Facebook, Google, Amazon, and Twitter are strategically positioned to benefit from this mass migration to digital ad spend.
Twitter is a unique product that cannot be undermined. The platform is the mouthpiece for every notable person in their world to speak their piece.
No other platform gains this type of trust from the elite in the world.
That won't change anytime soon.
What's more, Twitter has morphed into a reliable news feed. Its nimbleness is reflected with breaking news flowing into the Twitter channels first, even before the traditional news media can get a sniff.
The agility of tech companies continues to be a huge competitive advantage versus the stalwarts of antiquity that move at sloth-like speeds.
Dorsey epitomizes this ethos by his systematic efficiency, making him view a corner office as a physical and psychological barrier to preventing him from success.
Financials back up my diagnosis. Total revenue increased last quarter 21% YOY.
Twitter has little exposure to data regulations as the data is posted in the public. It does not sell any individual personal information.
A year and a half of continuous double-digit daily active user (DAU) growth resonates with advertisers.
Twitter continues to enhance the core products and executes in fine fashion. This outperformance feeds back into the quality of products basking in advertisers' satisfaction.
Moving forward, expect video to extract a higher percentage of revenue because of the attractiveness to advertisers.
In addition, expect moderate growth from daily active users and more live events integrated into the Twitter platform.
Video has been a salient reason for the great success in the past year and a half. The Twitter management, led by Dorsey, has a great handle on the steps it must take going forward.
Jack Dorsey is the preeminent CEO of his day. A bigger problem is finding an entry point into Twitter or Square.
Granted, Twitter climbed from a low base after Dorsey was reinstalled in 2015 as the CEO. It took him a few years to figure out how to briskly execute and to harness the potential of Twitter.
Both companies have shot to the moon in 2018. Waiting for macro sell-offs to get into these stocks makes more sense than chasing the fumes.
Dorsey is on record saying Square will be bigger than Twitter because it speaks the language everyone understands - money.
Twitter, Square, and Jack Dorsey are the real deal.
Rule No. 3: Don't bet against Jack.
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Quote of the Day
"You are the product on Facebook, Facebook is a data company by its very nature of mass surveillance, collective manipulation and hacking the attention economy for profit," - said cofounder of Apple Steve Wozniak when talking about Facebook's business model.
