(AAPL) Archives

Apple Ramps Up Its Game

A steady hand on the tiller – that was the key takeaway from the recent Apple release event that saw updated iPhone models poised to hit stores in October.

There was nothing of substance to steal the show or radical revelations awing the patient neutral, but that is how Apple CEO Tim Cook likes it.

iPhone XS, iPhone XS Max and iPhone XR were conveniently named after their predecessor the iPhone X.

These smartphones are of the same ilk but in a refreshed way.

The iPhone XR is the lower-grade version of the three, but shares many of the same specs as the superior versions.

This version could be the model that lures in Apple lovers that avoided upgrading last cycle, because the inner workings are similar enough and the look is premium enough, but hundreds of dollars cheaper than the XS and XS Max models.

Check, check, and check.

I wouldn’t label it an “entry level” smartphone, but it hits all the right notes for iPhone fans that can’t cough up the big bucks for the higher-priced products.

The phone’s price tag has been a lingering concern especially in the emerging world.

Apple smartly widened the range of premium phone prices to the lower and higher range - the net effect will be a moderate bump in the all-critical average selling price (ASP), which is a huge winner in all of this.

At the top end of the range, the iPhone XS Max with 512 GB of memory will command a hefty $1,449.

This is the priciest iPhone ever made.

Larger screen sizes in the 6.5" XS Max and 6.1" XR will appeal to their fan base driving additional incremental business to the company that Steve Jobs left his indelible mark on as well.

The covert winner in all of this is Apple’s share price.

Apple’s share price is notorious for being slashed and burned before their new iPhone release events and the run up to earnings season.

The lack of apocalyptic behavior in its recent share price surely has the bulls rejoicing.

Basically, these new iPhone models aren’t worrying Apple investors even one scintilla.

Apple going forward is not betting the ranch on hardware anymore and investors have approved in spades.

Last quarter’s earnings report highlighted the Teflon nature of Apple’s iPhone demand by proving to investors that Apple could successfully sell smartphones over $1,000.

The seminal shift breaking psychological price barriers is indicative of Apple’s relentless pursuit to produce the best phone in the world.

This perpetual chase has seen the company almost surpass the $1,500 price tag this time around and will smash this price point next time around.

The strength in recent Apple price action wholeheartedly signifies that Apple is a software and service company now and not a hardware company.

Apple was able to make the transformation with grace and elegance and avoiding any damaging blowups.

Apple is on pace to double services revenue to $15 billion per quarter by 2020 creating a $60 billion per year revenue beast of a division.

The software and services are where all the high margin activity is migrating in Apple’s ecosystem.

I have incessantly urged readers to stay with the highest quality tech companies that continue to unlock value at a breathtaking pace, especially amid a precarious backdrop of global trade spats and brutal competition.

Investors are migrating up the value chain storing their hard-earned capital in the best of tech as the weak hands are flushed out by the regulation and global trade police.

Apple is one of these companies with a dazzling portfolio of products.

Their steady march upward in quality is confirmed by products such as the Apple Watch Series 4.

Wearables have become a strength of Apple’s product line after botching the initial debut.

The new watch is redesigned, sleek, and mesmerizingly beautiful.

The display is more than 30% larger than its old design and offers flawless software functionality.

Apple’s shift into health is partly driven by monetizing its watch and other wearables.

Apple hopes its watch can be a natural part of sportsmen and sportswomen’s lives.

If Apple’s watch can be your lovable sports companion going forward, then an entire new avenue of revenue can break ground and be redistributed to shareholders.

The Cupertino company packed a ton of heat into this sensational device. It is a big reason why industry insiders believe that half of the 43.5 million smartwatches expected to be sold in 2018 will come from Apple.

Google's Wear OS lags distantly behind with a forecasted 12% market share, and it will be tough going to compete with Apple in this space.

Not only is the watch’s screen bigger, the speakers are also 50% louder.

The larger screen will allow users up to eight shortcuts on the screen for apps.

Apple also noted that the watch’s battery life will last 18 hours with an outdoor workout time of six hours.

Another groundbreaking feature is the ability to take electrocardiograms (ECG) reaffirming Apple’s pivot into the health sector through their shimmering new watch.

According to Apple, this revolutionary feature is the first time an (ECG) product has been available to retail consumers.

To admire the full beauty of this scintillating watch, click here to watch a video.

Earlier this year, Apple CFO Luca Maestri told the Financial Times that wearables in the past year have experienced a “60% growth in revenue terms. Adding up the last four quarters, wearables revenue now exceeds $10 billion.”

Apple’s wearables are classified under “other products” and include AirPods, Watch, Beats, and the HomePod.

Watch this division to continue its robust performance going forward.

In a nod to the emerging markets, Apple decided to introduce its first dual sim card inside the new iPhone models.

One of the slots will be an “eSIM” slot – a nascent technology that hasn’t been widely adopted yet.

For all the newbies unsure of what an eSIM card is - “Electronic SIM card” removes the hassle of poking a paperclip through your sim tray to switch out your sim card, which is a little smaller than your pinkie finger nail.

Rather, eSIM cards only need a compatible network requiring support, and it bypassed the need for a physical sim card and sim card tray altogether.

This move could syphon off even more revenue for phone network carriers if the eSIM technology mushrooms.

Apple will be the gatekeeper of the eSIM tech since it will have total control over it, even opening up the possibility to rotate between more than two carriers in the future if a physical sim card is not needed.

This could pave the way for Apple to get rid of the sim card slot entirely for the next iPhone iteration and use the space to develop something even better.

Technological innovation requires bold moves, to which Apple is no stranger.

In fact, only 10 countries currently support eSIM technology - Austria, Canada, Croatia, the Czech Republic, Germany, Hungary, India, Spain, the UK, and the U.S.

Demonstrating that dual sim cards are a way of life in the emerging world is data showing that 98% of Indian smartphones come with embedded dual sim card functionality, 92% in the Philippines, 90% in China, 77% in Indonesia, and just 4% in the U.S. in the third quarter of 2017 to the second quarter of 2018.

The ease of swapping in and out contract less sim cards is useful for any digital nomad. Buy a sim card for a few dollars at the airport, activate it, and you’re on your merry way.

In another nod to the Chinese customer, Apple will forgo the eSIM technology entirely and stick with the physical dual tray, allowing mainland Apple fans to physically implant two sim cards at one time.

Whether enhancing the phone, recreating its beloved watch, or rolling out audacious new technologies – Apple is satisfying all the naysayers.

It’s no wonder this company is a buy on the dip and hold to eternity stock.

Still Doing What They Do Best

Apple’s Health Pivot Via the Watch

________________________________________________________________________________________________

Quote of the Day

“Price is rarely the most important thing. A cheap product might sell some units. Somebody gets it home and they feel great when they pay the money, but then they get it home and use it and the joy is gone,” said Apple CEO Tim Cook.

September 7, 2018

Diary, Newsletter, Summary

Global Market Comments
September 7, 2018
Fiat Lux

Featured Trade:
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA,
GLOBAL STRATEGY LUNCHEON),
(SEPTEMBER 5 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (MU), (MSFT), (LRCX), (GOOGL), (TSLA),
(TBT), (EEM), (PIN), (VXX), (VIX), (JNK), (HYG), (AAPL)

September 5 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 5 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.

As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!

Q: Do you think the collapse of commodity prices in the U.S. will affect the U.S. election?

A: Absolutely, it will if you count agricultural products as commodities, which they are. We have thousands of subscribers in the Midwest and many are farmers up to their eyeballs in corn, wheat, and soybeans. It won’t swing the entire farm vote to the Democratic party because a lot of farmers are simply lifetime Republicans, but it will chip away at the edges. So, instead of winning some of these states by 15 points, they may win by 5 or 3 or 1, or not at all. That’s what all of the by-elections have told us so far.

Q: What will be the first company to go to 2 trillion?

A: Amazon, for sure (AMZN). They have so many major business lines that are now growing gangbusters; I think they will be the first to double again from here. After having doubled twice within the last three years, it would really just be a continuation of the existing trend, except now we can see the business lines that will actually take Amazon to a much bigger company.

Q: Is this a good entry point for Micron Technology (MU)?

A: No, the good entry point was in the middle of August. We are at an absolute double bottom here. Wait for the tech washout to burn out before considering a re-entry. Also, you want to buy Micron the day before the trade war with China ends, since it is far and away its largest customer.

Q: Is Micron Technology a value trap?

A: Absolutely not, this is a high growth stock. A value trap is a term that typically applies to low price, low book to value, low earning or money losing companies in the hope of a turnaround.

Q: I didn’t get the Microsoft (MSFT) call spread when the alert went out — should I add it on here?

A: No, I am generally risk-averse this month; let’s wait for that 4% correction in the main market before we consider putting any kind of longs on, especially in technology stocks which have had great runs.

Q: How do you see Lam Research (LRCX)?

A: Long term it’s another double. The demand from China to build out their own semiconductor industry is exponential. Short term, it’s a victim of the China trade war. So, I would hold back for now, or take short-term profits.

Q: Is this a good entry point for Google (GOOGL)?

A: No, wait for a better sell-off. Again, it’s the main market influencing my risk aversion, not the activity of individual stocks. It also may not be a bad idea to wait for talk of a government investigation over censorship to die down.

Q: Would you buy Tesla (TSLA)?

A: No, buy the car, not the stock. There are just too many black swans out there circling around Tesla. It seems to be a disaster a week, but then every time you sell off it runs right back up again. Eventually, on a 10-year view I would be buying Tesla here as I believe they will eventually become the world’s largest car company. That is the view of the big long-term value players, like T. Rowe Price and Fidelity, who are sticking with it. But regarding short term, it’s almost untradable because of the constant titanic battle between the shorts and the longs. At 26% Tesla has the largest short interest in the market.

Q: I’m long Microsoft; is it time to buy more?

A: No, I would wait for a bit more of a sell-off unless you’re a very short-term trader.

Q: What would you do with the TBT (TBT) calls?

A: I would buy more, actually; preferably at the next revisit by the ProShares Ultra Short 20 Year Plus Treasury ETF (TBT) to $33. If we don’t get there, I would just wait.

Q: What’s your suggestion on our existing (TLT) 9/$123-$126 vertical bear put spread?

A: It expires in 12 days, so I would run it into expiration. That way the spread you bought at $2.60 will expire worth $3.00. We’re 80% cash now, so there is no opportunity cost of missing out with other positions.

Q: Do you like emerging markets (EEM)?

A: Only for the very long term; it’s too early to get in there now. (EEM) really needs a weak dollar and strong commodities to really get going, and right now we have the opposite. However, once they turn there will be a screaming “BUY” because historically emerging nations have double the growth rate of developed ones.

Q: Do you like the Invesco India ETF (PIN)?

A: Yes, I do; India is the leading emerging market ETF right now and I would stick with it. India is the next China. It has the next major infrastructure build-out to do, once they get politics, regulation, and corruption out of the way.

Q: Do you trade junk bonds (JNK), (HYG)?

A: Only at market tops and market bottoms, and we are at neither point. When the markets top out, a great short-selling opportunity will present itself. But I am hiding my research on this for now because I don’t want subscribers to sell short too early.

Q: With the (VXX), I bought the ETF outright instead of the options, what should I do here?

A: Sell for the short term. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) has a huge contango that runs against it, which makes long-term holds a terrible idea. In this respect it is similar to oil and natural gas ETFs. Contango is when long-term futures sell at a big premium to short-term ones.

Q: How much higher for Apple (AAPL)?

A: It’s already unbelievably high, we hit $228 yesterday. Today it’s $228.73, a new all-time high. When it was at $150, my 2018 target was initially $200. Then I raised it to $220. I think it is now overbought territory, and you would be crazy to initiate a new entry here. We could be setting up for another situation where the day they bring out all their new phones in September, the stock peaks for the year and sells off shortly after.

September 5, 2018

Tech Letter

Mad Hedge Technology Letter
September 5, 2018
Fiat Lux

Featured Trade:
(WARREN BUFFETT’S GREAT TECH FIND IN INDIA),
(BRK/B), (AAPL), (GOOGL), (MSFT), (BABA), (NFLX)

Warren Buffett’s Great Tech Find in India

Tech Letter

Warren Buffett preaches searching among your “circle of competence” to find those gems of companies that will offer abundant value in the far future.

His time horizon has always been long – 10, 20, 30 years where a company has sufficient time to execute its business strategy.

The celebrated investor’s track record is unrivaled.

Another critical rule to his playbook of uncanny success is to invest in companies within your area of expertise to avoid erroneous investment decisions.

If an investor is uncertain if a company is within its “circle of competence,” then it is likely outside the circle and best to skip investing in the company for now.

The Oracle of Omaha has taken his investment playbook to the chicken tikka masala-loving country of India, dropping a few Benjamín’s on One97 Communications Ltd., the parent company of Paytm, an Indian fin-tech firm.

This disrupting digital payments company based in Noida, India, is the nation’s largest mobile-payments firm and quite an achievement in a country that loves paper cash.

It boasts a popular smartphone app used in daily lives, and mirrors digital payment businesses of the likes of China’s Alipay or Tencent’s WeChat payment platform.

When the Indian government laid down the heavy hand of fiscal regulation on the paper currency market with an eye toward the digital currency market, an outsized winner was Paytm.

The cost of printing paper money in India per year is more than $90 million by itself.

I am not saying that the Indian government is going into overdrive adopting bitcoin tomorrow, but its pivot toward fin-tech mobile payments and Buffett’s vote of approval show where all the deep lying tech value is marinating in the world.

It is not Silicon Valley that gets more expensive by the day.

Silicon Valley is largely saturated with venture capitalist firms cherry-picking the best firms before they go public and making many times their investment once they hit the New York public markets.

Well, we are still in the early stages of India’s rapidly developing tech scene. And 2018 has seen some blockbuster cash injections such as Walmart’s investment in e-commerce juggernaut Flipkart.

Buffett has championed investing into companies with a “margin of safety,” allowing him to buy stakes at levels he believes that are well below market value.

This allows him to sleep at night because even if the company tanks short-term, he knows that eventually it will pull it together.

India can now lay claim to more than 390 Internet users, and 300 million of those use Paytm.

When 77% of a country’s population is using an app, you know there is some staying power, as the first mover advantage in the tech world has a powerful and long-term network effect such as the AWS’s foray into the cloud business.

Paytm does have a crowded lineup of heavyweights breathing capital into its company in the form of investments from Masayoshi Son’s SoftBank Vision Fund and Jack Ma’s Alibaba (BABA).

China’s presence in the Indian tech scene is strong, but it has not doubled down there as it has in Southeast Asia, where it enjoys a healthier political connection that is largely void of border skirmishes.

India is the largest democracy in Asia and a strong ally of the United States. Although American tech companies won’t be welcomed with a pristine red carpet, they do have ample opportunity to invest in the burgeoning Indian tech scene.

Buffett’s stake amounts to a 3% to 4% stake in Paytm, and the valuation has spiked to more than $10 billion.

This comes on the heels of Buffett’s adding to his position in Apple (AAPL) that sees him now own 5%.

Apple’s services division is its new cash cow and is on track to eclipse $50 billion in annual revenue next year.

Apple’s services division surpassed $30 billion in the first three quarters of 2018. Its evolution comes at a timely period where smartphone growth has peaked while invaded by low-quality Chinese substitutes.

After sliding to annual low’s in April 2018 of $160, Apple has literally gone ballistic, powering past the $1 trillion valuation mark and is trading at all-time highs around $230.

Apple is another example of why this bull market is predominantly propped up by tech companies that continue to grow earnings at an insane pace.

Only a few companies have fallen into booby traps set forth by the regulatory hurdles first set by the Europeans and General Data Protection Regulation (GDPR).

Apple is losing its smartphone battle in India, but Indians can’t afford iPhones yet and even Netflix (NFLX) is seen as an expensive streaming service.

The average Indian does not possess the purchasing power that North America and Europe have.

Apple has only extracted 1% of smartphone sales in India compared to leader Xiaomi, which leads the market with a 28% share. Further down-market Chinese phone maker Oppo lags with 10% and Vivo with 12%.

It doesn’t matter for Apple.

Apple continues to milk the North American and European markets to great effect padding profits with its high-quality services business.

China was the undeveloped market that launched Apple’s profits sky high. And American tech companies are ostensibly using this same strategy in India and hoping to cement the best strategy for revenue down the road.

Buffett’s investment is finally a green light for India if there ever was one, and every Silicon venture capitalist has to be licking their chops to squeeze value out of India.

The value is deep lying, but it will pay dividends within five to 10 years as India’s economy rises with its citizen’s discretionary income.

With every Tom, Dick, and Harry lusting after the India market, it will drive valuations firmly higher for the foreseeable future.

The fear of missing out (FOMO) will expedite the pivot toward India where many of the most conservative investors could ironically end up.

The tech relationship between America and India is demonstrably synergistic with Indian born CEOs heading Google (GOOGL) and Microsoft (MSFT) among other influential tech companies.

Berkshire’s (BRK/B) funds join the Chinese, Japanese, and Silicon Valley venture capitalist’s capital queuing at India’s front door awaiting to unlock value.

Buffett even opted out of investing in ride-sharing behemoth Uber, because apparently the “margin of safety” was not sufficient enough in the proposal.

Buffett was even quoted on a local Indian television station gushing about the country saying, “If you’ll tell me a wonderful company in India that might be available for sale, I’ll be there tomorrow.” That day has surfaced in the form of his investment in Paytm.

Apparently, Buffett’s expertise lies in India now and Indian-born Ajit Jain is one of four Berkshire executives running the company on a day-to-day basis.

This will pave the way for more tech investments in the swiftly evolving Indian tech scene, and Berkshire will ring in the profits of these Indian assets down the road.

________________________________________________________________________________________________

Quote of the Day

“Our favorite holding period is forever,” – said legendary American investor Warren Buffett.

September 4, 2018

Diary, Newsletter, Summary

Global Market Comments
September 4, 2018
Fiat Lux

Featured Trade:
(WEDNESDAY, OCTOBER 17, 2018, HOUSTON GLOBAL STRATEGY LUNCHEON),
(DON’T MISS THE SEPTEMBER 5 GLOBAL STRATEGY WEBINAR),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
THE WAR WITH CANADA STARTS ON TUESDAY),
(MSFT), (VXX), (TLT), (AAPL), (KO), (GM), (F)

The Market Outlook for the Week Ahead, or The War with Canada Starts on Tuesday

Diary, Newsletter, Research

I have spent all weekend sitting by the phone, waiting for the call from Washington D.C. to re-activate my status as a Marine combat pilot.

Failure of the administration to reach a new NAFTA trade agreement by the Friday deadline makes such a conflict with Canada inevitable.

And while you may laugh at the prospect of an invasion from the North, the last time this happened Washington burned. You can still see the black scorch marks inside the White House today.

This is all a replay for me, when in 1991, I enjoyed an all-expenses paid vacation courtesy of Uncle Sam. That’s when I spent a year shuttling American fighter pilots from RAF Lakenheath to forward bases at Ramstein, Aviano, Cyprus, and Dharan, Saudi Arabia.

It may seem unlikely that our nation’s military would require the services of a decrepit 66-year-old. However, in my last conflict I ran into another draftee who was then 66. It seems that the Air Force then had a lot of F-111 fighter bombers left over from Vietnam that no one knew how to fly.

That’s the great thing about the military. It never throws anything away. Not even me. The life of our remaining B-52 Stratofortress bombers at their final retirement in 2050 will be 100 years.

Perhaps Canada will decide that discretion is the better part of valor, and simply wait for the World Trade Organization to declare the Trump tariffs illegal, which they obviously all are.

That would then force the administration to withdraw from the organization the U.S. created at the end of WWII to regulate fair trade and go rogue. But then what else is new?

And while there was immense media time devoted to the NAFTA talks, which only oversees trade with partners with around $2 trillion each, China, the 800-pound gorilla, is still lurking out there. It has a $12.2 trillion GDP and Trump is imposing tariffs on another $200 billion of their imports there today.

The corner that Trump has painted himself into is that he has made himself SO unpopular abroad, insulting virtually everyone but Russia, that no leader is willing to risk doing a deal with him lest they get kicked out of office.

I certainly felt this in Europe this summer where the discussion was all about Trump all of the time. When you insult a nation’s leader you insult everyone in that country. I haven’t received that kind of treatment since the Vietnam War was running hot and heavy in 1968.

I’ll tell you, I’d much rather be flying combat missions over enemy territory without a parachute than trading a market like we had last week. For months now, it has been utterly devoid of low risk/high return entry points for all asset classes.

It’s been a slow-motion melt-up virtually every day against the most horrific news backdrop imaginable. Such is the wonder of massive global excess liquidity. It Trumps everything.

NASDAQ topped 8,000, proving that if you aren’t loaded to the gills with technology stocks, as I have been pleading all year, you are out of your freaking mind. If you don’t own Apple, you are doubly screwed.

I doubt that such data is available, but I bet the illiterate and the uneducated have been beating more literate types in performance by a huge margin.

The unresponsiveness to news isn’t the only thing afflicting this market. As the summer coughs and sputters its way to a close, we enter September, notorious as the most horrific trading month of the year. And we are launching into it with the Mad Hedge Market Timing Index stuck in the 70s, overbought territory, for weeks now.

Blockbuster earnings, the principal impetus for rising share prices in 2018, are now firmly in the rearview mirror, and won’t make a reappearance for another month. Then they die completely in 2019.

Perhaps this is why my long volatility position in the (VXX) is doing moderately well, even though the indexes have been hitting new all-time highs, with the S&P 500 briefing kissing $292. I rather practice my golf swing rather than try to outtrade this market, even though I don’t play golf.

Other than NAFTA, there was little to trade off of last week. Apple (AAPL) shares continue to break new records, hitting an incredible $228, in front of their big iPhone launch this month. Trump announced he was freezing wages on 1 million-plus federal employees next year. That will solve their tax problems for sure.

Coca-Cola (KO) bought British owned Costa for $5 billion, where I regularly breakfast while traveling abroad, in the hopes that perhaps its 501st new drink launch this year will be successful.

Amazon (AMZN) is within sofa change of becoming the next $1 trillion market cap company, making the parents of founder Jeff Bezos the most successful angel investors in history, worth $30 billion.

U.S. auto sales are in free fall. Car company shares (GM), (F) continued their slide as they are pummeled on every side by administration economic policies. One has to ask the question of how long the American economy can survive after losing a major leg like this one. Home sales, another vital component, are also suddenly awful.

Trump attacked big tech. The market yawned.

With the Mad Hedge Market Timing Index at 71 and bounces around in the 70s all week, I am not inclined to reach for trades here. All three of my current positions are making money, my longs in Microsoft (MSFT) and volatility (VXX) and my short in the U.S. Treasury bond market (TLT).

August finally brought in a performance burst in the final days, leaving us with a respectable return of 2.13%. My 2018 year-to-date performance has clawed its way back up to 25.30% and my nine-year return appreciated to 303.48%. The Averaged Annualized Return stands at 34.35%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 28.59%.

This coming week housing statistics will give the most important insights on the state of the economy.

On Monday, September 3, there was a national holiday, Labor Day.

On Tuesday, September 4, at 9:45 AM the PMI Manufacturers Index is out. August Construction Spending is out at 10:00 AM.

On Wednesday, September 5 at 7:00 AM, we learn MBA Mortgage Applications for the previous week.

Thursday, September 6 leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 3,000 last week to 213,000. Also announced at 9:45 AM are the August PMI Services Index.

On Friday, September 7 the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, the high point of my weekend was the funeral services for Senator John McCain. Boy, the Squids really know how to put on a ceremony. I suspect it may market a turning point for our broken American politics.

In the meantime, King Canute sits in his throne at the seashore ordering the tide not to rise.

Good luck and good trading.

August 28, 2018

Tech Letter

Mad Hedge Technology Letter
August 28, 2018
Fiat Lux

Featured Trade:
(SPOTIFY STILL HAS SOME UPSIDE),
(SPOT), (AMZN), (AAPL), (P)

Spotify Still Has Some Upside

Tech Letter

Investors sulking about Spotify’s (SPOT) inability to make money do not get the point.

Yes, the job of every company to be in the black, but the No. 1 responsibility for a modern tech company is to grow, and grow fast.

Tech investors pay for growth, period.

As investors have seen from Netflix, companies can always raise prices after seizing market share because of the stranglehold on eyeballs inside a walled garden.

That potent formula has been the bread and butter of powerful tech companies of late.

Spotify is a captive of the music industry, of which it is entirely dependent for its source of goods, in this case songs.

At the same time, the music industry has fought tooth and nail to destroy the likes of Spotify, which benefits immensely from distributing the content it creates.

History is littered with failed music streaming services outgunned in the courtroom. Pandora (P) is the biggest public name out there whose share price has tanked over the long haul.

The music industry will battle relentlessly to exterminate Spotify and force up the royalties these Internet giants must pay as their main input.

But that does not mean Spotify is a bad company or even a bad stock.

Every company has its share of pitfalls. Throw in the mix that Amazon (AMZN) and Apple (AAPL) have music streaming services that do not even need to make a profit, and you will understand why some might be wary about putting new money to work in music streaming business stocks.

The primary reason that Spotify shares will outperform for the foreseeable future is because it is the preeminent music streaming platform.

Also, there is favorable latitude to make way toward the goal of monetization, and ample space to improve gross margins.

Global streaming revenue growth has gone ballistic as the migration to mobile and cord cutting has exacerbated the monetization prospects of the music industry.

Streaming revenue was a shade under $2 billion in 2013, and continued to post a growth trajectory of more than 40% each year since.

As it stands now, total global streaming revenue registered just a tick under $7 billion per year in 2017, and that was an improvement of 41.1% from 2016.

There are no signs of yielding as more avid music fans push into the music streaming space.

Social media platforms have helped publicize popular artists’ content.

Music is effectively a strong part of youth culture, which will eventually see the youth integrate a music streaming app into their daily lives for the rest of their adult lives.

The choice among choices is Spotify in 2018.

The company was dogged by many years of famous artists removing their proprietary content from the platform citing unfavorable terms.

A prime example was in 2009 when Lady Gaga’s hit song “Poker Face” only received $167 in royalty payments from Spotify for the first million streams. This highlighted the rock-solid position Spotify has curated inside the music industry.

Individual artists’ fight against Spotify has been dead on arrival from the outset, but the benefits and exposure from cooperating with the company far outweigh the drawbacks.

Eventually, almost all artists have relented and reinstalled their music on Spotify. They depend on alternative moneymaking avenues to compensate for lack of royalties, which is mainly live music.

That is why it costs an arm and a leg to go see Taylor Swift in living flesh now, and why those summer festivals dotted around America such as Coachella command premium ticket prices.

How does Spotify make money?

It earns its crust of bread through paid subscriptions but lures in eyeballs using an ad-supported free version of its platform.

Naturally, the paid version is ad-less, and this subscription is around $5 to $15 per month.

In the second quarter, Spotify’s paid subscription volume surpassed 83 million, a sharp uptick of 40% YOY.

Ad-supported users came in at more than 101 million, even under the damage that General Data Protection Regulation (GDPR) did to western tech companies.

The ad-supported subscribers rose 23% YOY, and the paid version expects between 85 million to 88 million paid subscribers in the third quarter.

Many of the new paid subscribers are converts from its free model.

Spotify is poised to increase revenue between 20%-30% for the rest of the year.

The rise of Spotify's developing data division could extract an additional $580 million of revenue in 2023, making up 2% of total revenue.

Remember that Spotify’s reference price set by the New York Stock Exchange (NYSE) was $132 in April 2018. The parabolic move in the stock on the verge of eclipsing $200 undergirds the demand for high-quality tech companies.

When Spotify did go public, the robust price action was with conviction, making major investors - such as China’s Tencent, which possess a 9.1% stake and Tiger Global Management, which owns 7.2% - happy stakeholders.

In the last quarter’s earnings report, Spotify CFO Barry McCarthy reiterated the company’s goal to push gross margins from the mid-20% range to “gross margins in the 30% to 35% range.”

A jump in gross margins would go a long way in making Spotify appear more profitable, and that is the imminent goal right now.

The path to real profitability is still a long way down the road and small victories will offer short-term strength to the share price.

If Spotify can retrace to around the $185, that would serve as a perfect entry point into a stock that has given investors few chances in which to participate.

July and August have only offered meager entry points into this stock, one around the $180 level in August, and another around $170 in July.

Spotify enjoyed a great first day of being public after its unorthodox IPO ending the day at $149. The momentum has continued unabated while Spotify has posted all the growth targets investors come to expect from companies of this ilk.

Bask in the glow of the growth sweet spot Spotify finds itself in right now.

The long-term narrative of this stock is intact for a joyous ride upward, and only whispers of Amazon and Apple meaningfully attempting to monetize this segment could derail it.

For the time being, the music part of Amazon and Apple are just a side business. They have other priorities, such as Apple’s battle to avoid being exterminated from communist China, and Amazon’s integration of Whole Foods and new-fangled digital ad business.

The Dominant Music Streaming Platform of 2018

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Quote of the Day

“Ever since Napster, I’ve dreamt of building a product similar to Spotify,” – said cofounder and CEO of Spotify Daniel Ek.

August 27, 2018

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August 27, 2018
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The Dominant Music Streaming Platform of 2018