Mad Hedge Technology Letter
August 28, 2018
Fiat Lux
Featured Trade:
(SPOTIFY STILL HAS SOME UPSIDE),
(SPOT), (AMZN), (AAPL), (P)
Tag Archive for: (AAPL)
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
________________________________________________________________________________________________
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.
Global Market Comments
August 27, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD),
(AAPL), (TLT), (SPY),
(BIDDING MORE FOR THE STARS),
(SPY), (INDU), (AAPL), (AMZN)
Ahhhh…the wonders of global excess liquidity.
Last week saw senior-level felony convictions, the real estate and auto industries rolling over and playing dead, rising inflation, escalating trade wars, sagging exports. It’s as if an entire flock of black swans landed on the markets.
And what did stocks do? Rocket to new all-time highs, Of course! What, are you, some kind of dummy? Didn’t you get the memo? With $50 trillion of global excess liquidity spawned by a decade of quantitative easing, of course stocks will go straight up, forever!
Until they don’t.
Even my favorite, Apple (AAPL) blasted through to new highs at $219 after an analyst raised his target to $245. You may recall me loading the boat with Apple calls during the February meltdown when the shares hit $150.
My target for Apple this year was $200, which I then raised to $220. Am I going to raise my target again? No. As my late mentor, Barton Biggs used to say, “Always leave the last 10% for the next guy.”
It kind of makes my own split adjusted cost of Apple shares of 50 cents, which I picked up in 1998, look pretty good. Yup. That double bottom on the charts at 40 cents said it all.
I used the strength to increase my cash position from 80% to 90%, unloading my long position in Walt Disney options at cost. That leaves me with a single short position in bonds (TLT), which have to see yield on the 10-year U.S. Treasury bond market to fall below 2.67% in three weeks before I lose money.
I am even focusing a sharp eye on the Volatility Index (VIX) for a trade alert this week. If you buy the January 2019 (VXX) $40 calls at $2.90 and the ETF rises 25 points to its April high of $54, these calls would rocket by 382% to $14.00. Sounds like a trade to me! Then I can say thank you very much to Mr. Market, thumb my nose at him, and then take off for the rest of the year. TA-TA!
In the meantime, much of industrial America is getting ready to shut down. Tariffs on 50% of all Chinese imports come into force in September. It turns out that you can’t make anything in the U.S. without the millions of little Chinese parts you’ve never heard of, which also have no U.S. equivalent.
Factories will have to either pass their costs on to consumers in a deflationary economy or shut down. What the administration has done is offset a tax cut with a tax increase in the form of higher import taxes. It was not supposed to work out like that.
The bond rally has pared back my August performance to a dead even at 0.02%. My 2018 year-to-date performance has pulled back to 24.84% and my nine-year return appreciated to 301.31%. The Averaged Annualized Return stands at 34.76%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 32.24%.
This coming week will be real estate dominated on the data front.
On Monday, August 27, at 10:30 AM EST, we obtain the Dallas Fed Manufacturing Survey.
On Tuesday, August 28, at 9:00 AM EST, we get the June S&P CoreLogic Case-Shiller National Home Price Index. Will we start to see the price falls that more current data are already showing?
On Wednesday, August 29, at 10:00 AM EST, we learn July Pending Home Sales, which lately have been weak.
Thursday, August 30, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 2,000 last week to 210,000.
On Friday, August 31, at 10:00 AM EST, we get Chicago Purchasing Managers Index for July. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, I think I’ll pop over to the Pebble Beach Concours d'Elegance vintage car show this weekend and place a bid on Ferris Bueller’s red 1962 Ferrari GT California. It’s actually a Hollywood custom chassis built around a Ford engine. I can’t afford a real vintage Ferrari GTO, one of which is expected to sell for an eye-popping $60 million this weekend.
Good luck and good trading.
The stock market has turned into the real estate market, where everyone is afraid to sell their shares for fear of being unable to find a replacement. Will it next turn into the Bitcoin market?
Risk assets everywhere are now facing a good news glut.
My 2019 market top target of 28,000 for the Dow Average is rushing forward with reckless abandon.
Today's price action really gives you the feeling of an approaching short-term blow-off market top.
A few years ago, I went to a charity fundraiser at San Francisco's priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5.
Amply fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area's premier hotties, whom shall remain nameless. Suffice to say, she is now married to a tech titan and has a sports stadium named after her.
Obviously, I didn't work hard enough.
The bids soared to $23,000, $24,000, $25,000.
After all, it was for a good cause. But when it hit $26,000, I suddenly developed a severe case of lockjaw.
Later, the sheepish winner with a severe case of buyer’s remorse came to me and offered his date back to me for $24,000. I said, “No thanks.” He then implored, “$23,000, $22,000, $21,000?"
I passed.
The altitude of the stock market right now reminds me of that evening.
If you rode the S&P 500 (SPX) from 667 to 2,790 and the Dow Average (INDU) from 7,000 to 25,790, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now?
Here we are eight months into the year, and my top picks for the year have gone ballistic. Amazon (AMZN) has doubled off its February low of $1,000, and Apple (AAPL) shares have soared from $150 to $217. Today, an analyst raised his forecast to $245.
As my late mentor, Morgan Stanley’s Barton Biggs, always used to tell me, “Always leave the last 10% for the next guy.”
I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands.
But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: "There is a time to fish, and a time to hang your nets out to dry.
You don't have to chase every trade.
At least then I'll have plenty of dry powder for when the window of opportunity reopens for business. So, while I'm mending my nets, I'll be building new lists of trades for you to strap on when the sun, moon, and stars align once again.
What Am I Bid?
Global Market Comments
August 23, 2018
Fiat Lux
Featured Trade:
(WHY THE DOW IS GOING TO 120,000),
(X), (IBM), (GM), (MSFT), (INTC), (DELL),
($INDU), (NFLX), (AMZN), (AAPL), (GOOGL),
(THE MAD HEDGE CONCIERGE SERVICE HAS AN OPENING),
(TESTIMONIAL)
For years, I have been predicting that a new Golden Age was setting up for America, a repeat of the Roaring Twenties. The response I received was that I was a permabull, a nut job, or a conman simply trying to sell more newsletters.
Now some strategists are finally starting to agree with me. They too are recognizing that a ganging up of three generations of investment preferences will combine to drive markets higher during the 2020s, much higher.
How high are we talking? How about a Dow Average of 120,000 by 2030, up another 465% from here? That is a 20-fold gain from the March 2009 bottom.
It’s all about demographics, which are creating an epic structural shortage of stocks. I’m talking about the 80 million Baby Boomers, 65 million from Generation X, and now 85 million Millennials. Add the three generations together and you end up with a staggering 230 million investors chasing stocks, the most in history, perhaps by a factor of two.
Oh, and by the way, the number of shares out there to buy is actually shrinking, thanks to a record $1 trillion in corporate stock buybacks.
I’m not talking pie in the sky stuff here. Such ballistic moves have happened many times in history. And I am not talking about the 17th century tulip bubble. They have happened in my lifetime. From August 1982 until April 2000 the Dow Average rose, you guessed it, exactly 20 times, from 600 to 12,000, when the Dotcom bubble popped.
What have the Millennials been buying? I know many, like my kids, their friends, and the many new Millennials who have recently been subscribing to the Diary of a Mad Hedge Fund Trader. Yes, it seems you can learn new tricks from an old dog. But they are a different kind of investor.
Like all of us, they buy companies they know, work for, and are comfortable with. During my Dad’s generation that meant loading your portfolio with U.S. Steel (X), IBM (IBM), and General Motors (GM).
For my generation that meant buying Microsoft (MSFT), Intel (INTC), and Dell Computer (DELL).
For Millennials that means focusing on Netflix (NFLX), Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL).
That’s why these four stocks account for some 40% of this year’s 7% gain. Oh yes, and they bought a few Bitcoin along the way too, to their eternal grief.
There is one catch to this hyper-bullish scenario. Somewhere on the way to the next market apex at Dow 120,000 in 2030 we need to squeeze in a recession. That is increasingly becoming a topic of market discussion.
The consensus now is that an impending inverted yield curve will force a recession sometime between August 2019 to August 2020. Throwing fat on the fire will be a one-time only tax break and deficit spending that burns out sometime in 2019. These will be a major factor in U.S. corporate earnings growth dramatically slowing down from 26% today to 5% next year.
Bear markets in stocks historically precede recessions by an average of seven months so that puts the next peak in top prices taking place between February 2019 to February 2020.
When I get a better read on precise dates and market levels, you’ll be the first to know.
To read my full research piece on the topic please click here to read “Get Ready for the Coming Golden Age.”
Dow 1982-2000 Up 20 Times in 18 Years
Dow 2009-Today Up 4.3 Times in 9 Years So Far
Mad Hedge Technology Letter
August 22, 2018
Fiat Lux
Featured Trade:
(WHAT’S IN STORE FOR TECH IN THE SECOND HALF OF 2018?),
(GOOGL), (AMZN), (FB), (UTX), (UBER), (LYFT), (MSFT), (MU), (NVDA), (AAPL), (SMH)
Tech margins could be under pressure the second half of the year as headwinds from a multitude of sides could crimp profitability.
It has truly been a year to remember for the tech sector with companies enjoying all-time high probability and revenue.
The tech industries’ best of breed are surpassing and approaching the trillion-dollar valuation mark highlighting the potency of these unstoppable businesses.
Sadly, it can’t go on forever and periods of rest are needed to consolidate before shares relaunch to higher highs.
This could shift the narrative from the global trade war, which is perceived as the biggest risk to the current tech market to a domestic growth issue.
Healthy revenue beats and margin growth have been essential pillars in an era of easy money, non-existent tech regulation, and insatiable demand for everything tech.
Tech has enjoyed this nine-year bull market dominating other industries and taking over the S&P on a relative basis.
The lion’s share of growth in the overall market, by and large, has been derived from the tech sector, namely the most powerful names in Silicon Valley.
Late-stage bull markets are fraught with canaries in the coal mine offering clues for the short-term future.
Therefore, it is a good time to reassess the market risks going forward as we stampede into the tail end of the financial year.
The shortage of Silicon Valley workers is not a new phenomenon, but the dearth of talent is going from bad to worse.
Proof can be found in the controversial H-1B visa program used to hire foreign tech workers mainly to Silicon Valley.
A few examples are Alphabet (GOOGL), which was granted 1,213 H-1B approvals in 2017, a 31% YOY rise.
Alphabet’s competitor Facebook (FB) based in Menlo Park, Calif., was granted 720 H-1B approvals in 2017, a 53% YOY jump from 2016.
This lottery-based visa for highly skilled foreign workers underscores the difficulty in finding local American talent suitable for a role at one of these tech stalwarts.
Amazon (AMZN) made one of the biggest jumps in H-1B approvals with 2,515 in 2017, a 78% YOY surge.
The vote of non-confidence in hiring Americans shines an ugly light on American youth who are not applying themselves to the domestic higher education system as are foreigners.
For the lucky ones that do make it into the hallways of Silicon Valley, a great salary is waiting for them as they walk through the front door.
Reportedly, the average salary at Facebook is about $250,000 and Alphabet workers take home around $200,000 now.
Pay packages will continue to rise in Silicon Valley as tech companies vie for the same talent pool and have boatloads of capital to wield to hire them.
This is terrible for margins as wages are the costliest input to operate tech companies.
United Technologies Corp. (UTX) chief executive Gregory Hayes chimed in citing a horrid “labor shortage in the U.S. and in Europe.”
He followed that up by saying the company will have to grapple with this additional cost pressure.
Certain commodity prices are spiraling out of control and will dampen profits for some tech companies.
Uber and Lyft, ridesharing app companies, are sensitive to the price of oil, and a spike could hurt the attractiveness to recruit potential drivers.
The perpetually volatile oil market has been trending higher since January, from $47 per barrel and another spike could damage Uber’s path to its IPO next year.
Will Uber be able to lure drivers into its ecosystem if $100 per barrel becomes the new normal?
Probably not unless every potential driver rolls around in a Toyota Prius.
If oil slides because of a global recession instigated by the current administration aim to rein in trade partners, then Uber will be hard hit abroad because it boasts major operations in many foreign megacities.
A recession means less spending on Uber.
Either result will be negative for Uber and ridesharing companies won’t be the only companies to be hit.
Other victims will be tech companies incorporating transport as part of their business model, such as Amazon which will have to pass on more delivery costs to the customer or absorb the blows themselves.
Logistics is a massive expense for them transporting goods to and from fulfillment centers. And they have a freshly integrated Whole Foods business offering two-hour free delivery.
Higher transport costs will bite into the bottom line, which is always a contentious issue for Amazon shareholders.
Another red flag is the deceleration of the global smartphone market evident in the lackluster Samsung earnings reflecting a massive loss of market share to Chinese foes who will tear apart profit margins.
Even though Samsung has a stranglehold on the chip market, mobile shipments have fell off a cliff.
Damaging market share loss to Chinese smartphone makers Xiaomi and Huawei are undercutting Samsung products. Chinese companies offer better value for money and are scoring big in the emerging world where incomes are lower making Chinese phones more viable.
The same trend is happening to Samsung’s screen business and there could be no way back competing against cheaper, lower quality but good enough Chinese imitations.
Pouring gasoline on the fire is the Chinese investigation charging Micron (MU), SK Hynix, and Samsung for colluding together to prop up chip prices.
These three companies control more than 90% of the global DRAM chip market and China is its biggest customer.
The golden days are over for smartphone growth as customers are not flooding into stores to buy incremental improvements on new models.
Customers are staying away.
The smartphone market is turning into the American used car market with people holding on to their models longer and only upgrading if it makes practical sense.
Chinese smartphone makers will continue to grab global smartphone market share with their cheaper premium versions that western companies rather avoid.
Battling against Chinese companies almost always means slashing margins to the bone and highlights the importance of companies such as Apple (AAPL), which are great innovators and produce the best of the best justifying lofty pricing.
The stagnating smartphone market will hurt chip and component company revenues that have already been hit by the protectionist measures from the trade war.
They could turn into political bargaining chips and short-term pressures will slam these stocks.
This quarter’s earnings season has seen a slew of weak guidance from Facebook, Nvidia (NVDA) mixed in with great numbers from Alphabet and Amazon.
Beating these soaring estimates is not a guarantee anymore as we move into the latter part of the year.
Migrating into the highest quality names such as Amazon and Microsoft (MSFT) with bulletproof revenue drivers would be the sensible strategy if tech’s lofty valuations do not scare you off.
Tech has had its own cake and ate it too for years. But on the near horizon, overdelivering on earnings results will be an arduous chore if outside pressures do not relent.
It’s been fashionable in the past for market insiders to call the top of the tech market, but precisely calling the top is impossible.
The long-term tech story is still intact but be prepared for short-term turbulence.
________________________________________________________________________________________________
Quote of the Day
“By giving people the power to share, we're making the world more transparent,” – said cofounder and CEO of Facebook Mark Zuckerberg.
Global Market Comments
August 22, 2018
Fiat Lux
Featured Trade:
(WHY DOCTOR COPPER IS WAVING A RED FLAG),
($COPPER), (FCX), (USO),
(HANGING OUT WITH THE WOZ),
(AAPL)