Global Market Comments
February 22, 2018
Fiat Lux
Featured Trade:
(HOW WAYMO IS SHOWING THE WAY WITH AUTONOMOUS DRIVING),
(GOOG), (GM), (UBER)
If you think America has a blue collar jobs problem you haven’t seen anything yet. That’s if Alphabet (GOOG) has anything to say about it.
It turns out that the future is coming a lot faster than anyone expected.
Waymo, the top-secret Alphabet autonomous driving subsidiary, has beaten all comers to the punch. The desert state of Arizona has granted a permit for it to commence with their autonomous fleet as a commercial entity in 2018.
This permit means that Waymo’s futuristic robo-taxi can charge passengers for profit. The vehicles started testing in 2017 and were monitored with a human safety engineer inside. This is a big deal from a regulatory point of view.
It took nine years of diligent preparation to arrive at this momentous announcement.
First mover advantage is pivotal in dictating an agenda and setting the rules of the road in the world of innovation.
The desperation of being first to market was epitomized by an email that former top engineer, Chris Urmson, sent Alphabet founders, Larry Page and Sergey Brin, “We have a choice between being the headline or the footnote in history’s book on the next revolution in transportation. Let’s make the right choice.”
In 2018, Waymo has chosen to be the headline after a flurry of lawsuits. The private ride sharing service Uber felt the only way to claw its way back from the abyss was to poach Waymo’s top dogs and steal their trade secrets. It didn’t work.
The war isn’t over, but it will be hard press for other companies to dampen Waymo’s momentum.
Waymo, a subsidiary of Alphabet (GOOG), is the preeminent force in the quest for mass market driver-less vehicles.
Before Waymo was coined, Google's self-driving-car research was an internal program referred to as Project Chauffeur. The project was created in 2009, hidden from the public eye to keep its technology safeguarded from intruders.
Alphabet invested at least $1.1 billion between 2009 and 2015 to grab the undisputed lead position of this newly created industry.
Most observers estimate that commercialization of level 4 self-driving vehicles will occur sometime around 2020. However, Waymo is not most companies.
The time sensitivity is palpable as Waymo has a chance to flood American streets with its technology before GM (GM) or Uber can get off the starting blocks.
Waymo out-muscled its opponents, reaching a Level 3 standard in 2012. Level 4 is the grade that automakers wish to proceed with. Although not fully Level 5 automated, Level 4 technology can operate under controlled factors without a driver.
The Fiat Chrysler minivans tricked out with Waymo technology have been racking up test miles in Phoenix, Arizona to the tune of around 5 million on Level 4 technology.
Arizona has been a fertile breeding ground for driver-less car development since 2015, when Governor Doug Ducey signed an executive order giving authority to state agencies to “undertake any necessary steps to support the testing and operation of self-driving vehicles on public roads within Arizona.”
The success or failure in Arizona will go a long way to test the quality and sustainability of this new phenomenon. It helps a lot that Phoenix streets are laid out in a simple grid that the current level of artificial intelligence find easy to recognize and understand.
The Waymo lawsuit has subdued competitor Uber for the moment in this zero-sum game. In fact, Waymo’s progress represents an existential threat to Uber.
Waymo is essentially Uber with no driver. Drivers cost money. Waymo hopes to remove the highest input in ride sharing transport - the driver itself.
In just the last quarter, Uber shelled out around $8 billion to drivers equating to around 72% of quarterly gross revenue. No wonder Uber is running in the red and and losing sleep over every Waymo headline they read.
Waymo plans to expand its coverage to other locations. During the last earnings call, Google CFO Ruth Porat noted “We do continue to explore a range of options beyond the program we’re piloting in Phoenix, including, ride sharing and personal use vehicles, logistics, deliveries, and working with cities to help them address public transportation objectives.”
The first commercial operation will begin shortly in Arizona and is crucial to harmonize consumer sentiment with reliable driver-less vehicles. The accumulated data will be vital to prove Waymo’s safety record. If all goes smoothly, Waymo’s autonomous vehicles and technology will spread like wildfire to other locations.
NuTonomy is the only other autonomous vehicle maker that hopes to monetize its efforts in 2018. General Motors (GM) is on course to come on line in 2019, contingent on the permit they applied for. The Uber vs Waymo litigation guarantees that Uber will be squarely in the rear-view mirror.
The potential success will fundamentally change the way people live their lives.
Up to 10 million employed drivers are set to be on the chopping block in America. That includes about 3.5 million professional truck drivers who earn between $30,000-$45,000 per year, along with 2 million Uber/Lyft drivers participating in the gig economy at $7.25 an hour.
The mass adoption of autonomous vehicles will eliminate a huge hunk of the American workforce, while redrawing additional income streams to Alphabet (GOOG).
Insurance companies would take a direct hit with the future pipeline of drivers irrevocably thwarted from learning how to drive. If the preliminary data comes up roses, parents will not allow their 16-year-old kid to learn how to drive. Also, the tragic 40,000 annual fatalities caused by motor vehicle crashes will drop off a cliff.
The pick up in productivity would be astounding as workers will no longer need to drive themselves anymore, cutting costs, and allowing additional time to work while in transit.
The unintended consequences will change the world while making the leaders of the space richer. A deeper underlying effect is that it will strengthen (GOOG)’s credentials going forward to apply A.I. in other spheres.
The peer group is comprised of NuTonomy's technology, second only to Waymo in terms of ability and has been undergoing rigorous trials in Singapore since 2016.
Rounding out the top 3 in this trio is (GM) who is patiently waiting for permission to begin operating its fully autonomous fleet in a commercial ride-hailing service in 2019.
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Mad Hedge Technology Letter
February 21, 2018
Fiat Lux
Featured Trade:
(HOW CISCO SYSTEMS GOT ITS MOJO BACK)
(CSCO), (JNPR), (NOK), (MSFT)
??
Global Market Comments
February 21, 2018
Fiat Lux
SPECIAL FANG ISSUE
Featured Trade:
(FINDING A NEW FANG),
(FB), (AAPL), (NFLX), (GOOGL),
(TSLA), (BABA)
Studying the history of the 1849 California Gold Rush, there is not a single miner who is known today.
But the merchants who sold them shovels, food, and blue jeans have banks, hotels, and universities everywhere with names like Huntington, Stanford, Crocker, and Hopkins.
The modern-day Levi and shovel slingers come in the form of the internet infrastructure equipment manufacturer Cisco Systems (CSCO).
Not only does 85% of Internet traffic navigate across Cisco's Systems' powerful routers, Cisco is also run online, from product orders to intra staff circulation of information.
A myriad of tech companies will largely use Cisco's network infrastructure to keep their operations at the cutting edge.
Cisco (CSCO) is an American technology conglomerate headquartered in the heart of Silicon Valley, that builds, manufactures, and peddles networking hardware and telecommunications equipment.
Cisco (CSCO) has finally come in from the cold after a long, hard 2-year slog that finally saw them return to revenue growth.
Quarter after quarter, Cisco (CSCO) was prisoned in the penalty box for sticking with their fading legacy business of network hardware solutions.
Even accumulating a massive $67 billion in profits from abroad, the company failed to impress investor sentiment as revenue sequentially dipped.
How did Cisco (CSCO) get their mojo back?
Cisco finally adopted the SaaS (Service as a subscription) model that has been put to great use by all the high flyers. The one-time fee has been replaced by annual recurring charge generating a perpetual income stream.
The shift means 33% of income is now recurring subscription revenue, comprising 52% of the company's software sales. Cisco (CSCO) made US$5.5 billion from recurring software and subscription in the recent quarter.
Re-calibrating the business model has caused the deferred revenue segment to explode from a pedestrian 6%, just 10 quarters ago, to an impressive 33% now.
The progress has evoked broad based, positive investor sentiment and Cisco is just in the first phase of this secular trend.
Cisco hopes to transition as much business as it can to cloud-based subscriptions to enhance the customer experience.
One of the solutions offered is Cisco UCS Services for data centers. The data center aids business and has a spectacular future ahead of it. Services are aligned with business needs by unique network-based optimization. Cisco Data Center Services cuts operating costs while offering customers a high standard of service.
The plan for their subscription model is to offer pricing that is less than the one-time fee model, but offer premium add-ons to the base model. This incremental quality improvement will justify the recurring model also increase revenue per customer.
The advanced subscriptions will offer the newest cloud-based solutions that Cisco develops and gives impetus towards the SaaS model which has been a boon for the entire tech sector.
Data center was up double digits in the recent quarter, driven by server products as well as the HyperFlex offerings that drew in 2,400 new customers. Security tools have seen a rise in momentum, up 6% QOQ.
Total revenue was up 3% to $11.9 billion, and guidance growth for the next quarter was set at 3% to 5% on the back of the SaaS model, while maintaining vibrant operating margins of 31.7%, and a guided gross margin rate expected in the range of 63% to 64%. These are fantastic numbers.
The second part of the revitalization plan is the $66 billion of repatriated cash. $31 billion will go directly into share buybacks "over the next 18 to 24 months."
Cisco continues to prop up the dividend and remains committed to returning cash, thus exciting institutional investors. Cisco announced a $0.04 boost to the quarterly dividend to $0.33 per share, up 14% YOY.
Acquisitions are also a critical part of the overall strategy, as it always has been. Cloud-based Broadsoft was one of the latest companies scooped up by Cisco.
The company provides the building blocks for service providers to build cloud-based communications services such as voice, video, and web. BroadSoft was founded in 1998 and is headquartered in Maryland.
These little purchases may seem insignificant, but synergistic acquisitions added 80 basis points to the bottom line, and overall inorganic impact bumps up another 0.5 point to about 130 basis points.
Cisco (CSCO) will still be net cash positive of $10 billion to $12 billion and will scour the field for more acquisitions that will levitate growth and improve the product.
When you consider that Cisco's growth is occurring amid a backdrop of a robust domestic and global economy, and amid a trend for all companies to adopt a comprehensive digital blueprint then Cisco is perfectly placed to sell its services to cloud converts.
The digital bias is in the nascent phase, and once brick and mortar grapple with digitization and scalability or extinction, the trend will swiftly compound.
The modernization of the business model explains the surge in Cisco's share price from 2016. The shares have rocketed by an amazing 158% since then. Before that, they were stigmatized as a dying, archaic business that languished for years.
If investors cannot identify new growth drivers on the short-term horizon, they bail out. The two-pronged approach of their subscription model and reallocation capital plan will solidify the accelerating growth rhetoric. In other words, they now have a new "story" to sell.
Their peer group consists of Hewlett Packard (HPE), China's Huawei, Juniper Networks (JNPR), and Finland's Nokia (NOK). Microsoft (MSFT) and Cisco have demonstrated that tech dinosaurs can reinvent, reload, and revitalize a business model on the brink.
Such is the beauty of the digital economy where tinkering with a business model is just a few clicks away.
To learn more about Cisco Systems please click here.
While the Global Trading Dispatch focuses on investment over a one week to six-month time frame, Mad Options Trader, provided by Matt Buckley, will focus primarily on the weekly US equity options expirations, with the goal of making profits at all times. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more