(AAPL) Archives

The Sky Is the Limit

After Netflix (NFLX) laid an egg, the tech sector badly needed a cure to calm the fierce, open waters.

Netflix missed expectations by about a million subscribers and weak guidance shredded the stock almost 15% in aftermarket trading.

The FANG boat started to rock and large cap tech needed a savior to quell the increasingly downside risk to the best performing sector in the market this year.

You can rock the boat all you want, but when Microsoft (MSFT) shows up, the seas turn tranquil and placid.

Microsoft delivered a dominant quarter.

I expected nothing less from one of the best CEOs in America, Satya Nadella, and his magic touch is the main wisdom behind the loquaciousness when the Mad Hedge Technology Letter delves into the Microsoft business.

I rate Microsoft as a top three technology stock, and it should be a pillar of any sensible equity portfolio, unless you believe throwing away money in the bin is rational.

Born in Hyderabad, India, Nadella has worked wonders inheriting the reins from Steve Ballmer who was more concerned about buying an NBA team than running one of the biggest American companies.

Ballmer had Microsoft barreling unceremoniously toward irrelevancy.

It got so bad for Microsoft, the "L word" started to pop up.

Legacy tech is the lousiest label a tech company can be pinned with, because it takes years and gobs of cash to turn around investor sentiment, the business, and the share price.

Under Nadella's tutelage, Microsoft has burst through to another all-time high, which is becoming a regular occurrence in 2018 for Microsoft's shares that languished in purgatory for years.

If the macro picture holds up and if the administration can keep quiet for a few news cycles, investors can expect a minimum of 15% appreciation per year in this name.

And that is a conservative estimate.

Microsoft is already up over 20% in 2018.

Queue the applause.

Nadella has orchestrated a 300% jump in valuation during his four and half years at the helm.

Microsoft is now valued at more than $800 billion and climbing.

The only other tech members of the prestigious $800 billion club are Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL).

Apple leads the charge to claim the prize as the first trillion-dollar company, and it is within striking distance valued at $951 billion.

Nadella bet the farm on software subscriptions and migration to the cloud.

It was the perfect strategy at the ideal time.

Shares cracked the $108 mark at the market open even as the administration kept up its pugnacious rhetoric threatening to topple the overall market.

Tech has held up through these testy times confirming the fluid migration by the scared investor souls into big cap tech.

How can you blame them?

Amazon prime day saw record numbers visit its platform to the point it crashed from overloading the servers.

Coresight Research predicted users would fork over $3.4 billion on Prime Day in 2018, an increase of 40% YOY.

More than 100 million products were sold in the 36 hours.

The staggering Prime Day sales came on the heels of Alphabet being fined $5 billion for being too dominant in Europe.

The market shrugged it off as the fine does nothing to change Alphabet's dominance in Europe.

Android has harvested 80% of the smartphone market and was slapped on the wrist for bundling Google apps out of the cellophane packaging is a cheap trick by the European regulators.

Imagine frequenting a restaurant that cannot serve its own food.

Alphabet even allows users to download whatever bundle of apps through the Google Play app store. It should be enough.

Alphabet is another solid Mad Hedge Technology Letter pick, albeit it is the weaker tier of the vaunted FANG group and just celebrated all-time highs.

Amazon and Netflix (NFLX) still lead the charge at the top tier of the FANG group, and Facebook's risky business model has it grouped with Alphabet in the lower tier.

At the end of the day, a member of the FANG group is a member of the FANG group.

Microsoft should be part of the FANGs, but the acronyms start becoming too pedantic.

The breadth of the tech sector means many winners.

Microsoft is one of the biggest winners.

Microsoft's total revenue levitated 17% YOY to $30.1 billion.

The number every investor was patiently waiting for were insights into the cloud business.

Microsoft Azure was up 89% YOY and cemented together with strong guidance, ensured Microsoft's shares would continue on its merry way upward.

Gross margins for the commercial cloud offerings, grouped as Azure, Office 365, accelerated to 58% YOY from 52%.

Microsoft's intelligent cloud described by Nadella as "Microsoft's drive to build artificial intelligence into all its apps and services" rose 23% YOY to $9.6 billion.

Management said that it expects Cloud margins to ameliorate through the rest of 2018.

Even the hardware side of the operations caught an updraft with Microsoft Surface, a series of touchscreen Windows personal computers, pole vaulted by 25% YOY.

Simply put, Microsoft is a lean, mean cash-making machine. Last quarter's profit of $8.87 billion coincided with the first time the company eclipsed $100 billion in annual sales.

Microsoft Azure's 16 percent share of the global cloud infrastructure market, according to data by research firm Canalys in April, is rapidly approaching Amazon's Amazon Web Services (AWS) business.

A Morgan Stanley poll of 100 U.S. and European CIOs gleaned insight into the broad-based acceptance of Microsoft's products.

The poll saw 34% planned to upgrade to a higher and more expensive tier of Office 365 software in the next two years, and more than 70% plan to deploy Microsoft Azure and its collection of hybrid cloud solutions.

Microsoft still has its cash cow business injecting healthy profits into its business with Microsoft's productivity and business processes unit, including Office 365, rising 13.1% YOY to $9.67 billion.

The tech sector needs the mega cloud stocks to stand up and be accountable at a precarious time when the macro picture is doing its best to suppress the robust tech sector.

Amazon and Alphabet are in the limelight next week, and Amazon will divulge frighteningly strong cloud numbers along with the braggadocio numbers about its record-breaking Prime Day.

The more I look at Microsoft's last quarter performance, it becomes harder and harder to identify any chink's in Microsoft's armor.

This is not your father's Microsoft.

This is the flashy, innovative Microsoft on top of the most influential trend in the technology sector - the migration to the cloud.

Sticking to this stock could be the rich new uncle of which you've always dreamed. But in this case, it's Satya Nadella providing the free flow of funds.

The spike in the shares is well deserved and any remnant of a retracement should be bought with two hands.

Saying that I am bullish about Microsoft's prospects is an understatement.

________________________________________________________________________________________________

Quote of the Day

"Your margin is my opportunity," said founder and CEO of Amazon Jeff Bezos.

July 17, 2018

Tech Letter

Mad Hedge Technology Letter
July 17, 2018
Fiat Lux

Featured Trade:
(THE PATH AHEAD),
(IBM), (AMZN), (FB), (MSFT), (NFLX), (QQQ), (AAPL), (DBX), (BLK)

The Path Ahead

Tech Letter

The Red Sea has parted, and the path has opened up.

Technology has been a beacon of light providing comfort to the equity market, when a trade war could have purged the living daylights out of bullish investor sentiment.

If an increasingly hostile, tit-for-tat trade skirmish threatening overseas revenue can't bring tech equities to its knees, what can?

It seems the more bellicose the administration becomes, the higher technology stocks balloon.

Does this all add up?

The Nasdaq (QQQ) continues its processional march skyward. If you were a portfolio manager at the beginning of the year without technology exposure, then polish off the resume before it picks up too much dust.

The Nasdaq has set all-time highs even after a brutal 700-point sell-off at the end of January.

Apple (AAPL), Microsoft (MSFT), Netflix (NFLX), and Amazon (AMZN) can take credit for 83% of the S&P 500's gains in 2018.

And that fearsome four does not even include Facebook (FB), which has left the shorts in the dust.

Each momentous sell-off has proved to be a golden buying opportunity, propelling tech stocks to higher highs and retracing to higher lows.

And now the path to tech profits is gaping wide, luring in the marginal investor after two highly bullish events for the tech world boding well for the rest of fiscal year 2018.

Xiaomi, one of China's precious unicorns, which sells upmarket smartphones, went public on the Hong Kong Hang Seng market last week.

The timing couldn't be poorer.

The rhetoric between the two global leaders reached fever pitch with the administration proposing $200 billion worth of tariffs levied on Chinese imports.

China reiterated its entrenched stance of not backing down, triggering a tense war of words between the two global powers.

The beginning of March saw the Shanghai stock market nosedive through any remnants of support levels.

The 50-day moving average, 100-day, and 200-day were smashed to bits and Shanghai kept trending lower.

The trade skirmish has had the reverse effect on Chinese equities compared to the Nasdaq's brilliance, and combined with the strong dollar, has seen emerging markets hammered like the Croatian soccer team in Moscow.

Xiaomi's IPO was priced in the range of HK$17 to $22, and when it opened up on the first day at HK$16.60, investors were holding their breath.

Take the recent IPO triumph of cloud company Dropbox (DBX), whose IPO was priced in the expected range of US$18 to $20. The first day of trading showed how much appetite there is for to- quality cloud companies, with Dropbox starting its trading day at US$29, 40% higher than the expected range.

Dropbox finished its first day at a lofty US$28.48, a nice 35% return in one trading day.

No doubt Xiaomi's shares were not expected to perform like Dropbox, but it held its own.

Astonishingly, this company did not even exist nine years ago and is now the fourth-largest smartphone manufacturer in the world, grossing $18 billion in revenue in 2017.

The unimaginable pace of development highlights the speed at which the Chinese economy and consumer zigs and zags.

Chinese retail sales were up a staggering 9% YOY for the month of June 2018. Its overall economy met its 6.7% target for the second quarter of 2018.

The price range settled for the IPO gave Xiaomi a valuation of $54 billion.

Instead of getting roiled, Xiaomi came through with flying colors posting a 26% gain after the first week of trading.

Poor price action could have given Beijing ammunition to cry foul, laying blame for the underperformance on the U.S. tariffs.

The healthy price action underscores there is still room for Chinese and American companies to flourish in 2018, albeit through a highly politicized environment.

Specifically, Apple comes through unscathed as a disastrous Xiaomi IPO could have resulted in negative local press stoking higher operational risks in greater China.

Apple is in the eye of the storm, but untouchable because it employs more than 4 million local Chinese employees throughout its expansive ecosystem and has been praised by Beijing as the model foreign company.

Apple earned $13 billion in revenue from China in Q2 2018, a 21% YOY increase.

Hounding Apple out of China will be the inflection point when tech investors know there is a serious problem going on and need to hit the eject button.

If this ever happens, The Mad Hedge Technology Letter will be the first to resort to risk off strategies.

BlackRock's (BLK) CEO Larry Fink let everyone know his piece saying, "the lack of breadth in the equity markets is troubling."

Investors cannot blame tech companies for executing their way to the top behind the tailwind of the biggest technological transformation in mankind.

And even in the tech industry, winners can turn into losers in a blink of an eye, such as legacy tech company IBM (IBM).

Someone better tell Fink that this is the beginning.

Amazon recorded 44% of total U.S. e-commerce sales in 2017, equaling 4% of total retail sales in the U.S.

This number is expected to breach 50% by the end of 2018.

The second piece of bullish tech news was lifting the ban on Chinese telecommunications company ZTE.

It is open for business again.

From a national security front, this is an unequivocal loss. However, it saved 75,000 Chinese jobs and gave a small victory to American regulators attempting to patrol the mischievous behemoth.

The U.S. Department of Commerce lifted the seven-year ban even after ZTE sold telecommunication products to North Korea and Iran.

ZTE was fined $1 billion, changed the senior management team, and put into place an American compliance team that will monitor its business for the next 10 years.

Diluting the penalty lowers the operational risk for American tech companies because it shows the administration is willing to reach compromises even if the compromise isn't perfect.

China is a lot less willing to ransack Micron and Intel's China revenues, if America allows China to save face and 75,000 local jobs.

This is a big deal for them and their employees.

America has a strong hand to play with against China because China still requires Uncle Sam's semiconductor components to build its future.

This hand is only effective if Chinese still thirst for American technology. As of today, America is higher on the technological food chain than China.

The move is also a model of what the U.S. Department of Commerce will do if Chinese companies run amok, which Chinese tech companies often do because of the lack of corporate governance and transparency.

These two recent China events empower the overall American tech sector, and the market will need a berserk shock to the tech ecosphere foundations to make it crumble.

As it stands, the tech sector is handling the trade war fine, and with expected blowout tech earnings right around the corner, short tech stocks at your own peril.

________________________________________________________________________________________________

Quote of the Day

"All of the biggest technological inventions created by man - the airplane, the automobile, the computer - says little about his intelligence, but speaks volumes about his laziness," - said author Mark Kennedy.

July 6, 2018

Tech Letter

Mad Hedge Technology Letter
July 6, 2018
Fiat Lux

Featured Trade:
(HOW THE COBALT SHORTAGE WILL LEAD TO THE $2,000 IPHONE),
(AAPL), (SSNLF), (CMCLF), (FCX), (VALE), (GLNCY), (VLKAY), (BMWYY)

How the Cobalt Shortage Will Lead to the $2,000 iPhone

Tech Letter

Hello $2,000 iPhone.

Flabbergasted consumers reacted last holiday season when Apple dared offer a $1,000 smartphone.

How confident this company has become!

Well, this is just the beginning.

Apple (AAPL) will be the first smartphone maker to offer a $2,000 phone, and I will tell you why!

The tech industry is going through a cumbersome wave of repricing after several high-profile debacles underscoring the true value of data.

The upward revision of data has seen more players pour into the game attempting to carve out a slice of the pie for themselves.

The reason why tech companies will start offering products at higher price points is because the inputs are rising at a rapid clip.

Apple's Development and Operations (DevOps) costs to design and maintain this outstanding product is going through the roof.

Apple's DevOps employees earn around $145,000 (before tax) per year and compensation is rising. Granted, the technology is developing and batteries are smaller, but salaries are rising at a quicker relative pace because of the dire shortage of DevOps talent in Silicon Valley.

It's possible that living in a shoebox at $4,200 per month in Mountain View, Calif., is off-putting for potential staff.

The most expensive part of an iPhone X is the OLED screen.

Apple estimated costs of $120 per screen manufacturing the Apple iPhone X. The cost doubled from LCD panels from $60 per screen.

Samsung (SSNLF) has been best of breed for screens for a while, and it is currently working on the next generation of Micro LED tech, which is the next gap up from the OLED displays of today.

Samsung has an inherent conflict of interest with Apple, creating tension between these tech stalwarts. Apple made the contentious decision to procure in-house screens at a secret manufacturing facility in Santa Clara, Calif., to avoid the constant friction.

It's common knowledge that the average price of technology shrinks over time, but the American smartphone industry has defied gravity with expected prices rising 6% to $324 in 2018.

The Apple iPhone X raw costs were around $400 per phone. There is zero chance that a next gen, enhanced Apple smartphone will cost this low ever again.

Confirming this trend are Chinese smartphones retail prices rising at 15% last year.

The cost of memory, DRAM and NAND chips, rose dramatically this past year too. As more memory is crowbarred into the design process, the costs keep trending higher.

Lithium-ion batteries only add up to 1% to 2% of OEM (Original Equipment Manufacturers) cost and probably only bumps up the cost of iPhones incrementally.

The more skittish situation is the EV (Electric Vehicles) snafu spiking total demand.

Volkswagen (VLKAY) announced its most wide-ranging electrification plans ever.

In order to achieve this lofty objective, Volkswagen has earmarked $25 billion for batteries from Samsung, LG, and Contemporary Amperex.

All told, the final investment in batteries will amount to $70 billion and another $25 billion in capital investment.

Volkswagen hopes to have 16 up and running (EV) factories by 2022, up from three today.

All told, this company will bring 80 new EV models to market by 2025.

The goal is unattainable because of a lack of in-house battery production.

CEO Matthias Muller said the reason for not manufacturing in-house batteries was, "Others can do it better than we can."

Muller will rue the decision down the line as a myriad of companies migrate toward in-house solutions, giving firms more control over the process and overhead.

More importantly, Muller will have to rely on the ebb and flow of rising cobalt prices.

A battery for an (EV) ranges between $8,000 to $20,000, comprising the largest input for the (EV) makers such as Tesla (TSLA) and Ford (F).

Making matters worse, companies cut from all cloth are hoarding cobalt reserves based on anticipating the potential demand.

This phenomenon will cause all big tech players to replenish any reserves of base materials immediately.

Apple has had chip shortage problems in the past. This year is even worse than 2017, with NAND and DRAM chip supply trailing demand by 30%.

Tech companies have been hastily locking down contracts in advance to ensure the necessary materials to produce their flashy gadgets on a highly pressurized deadline.

Lithium battery demand is expected to rise 45% between 2017 and 2020, and there has been no meaningful large-scale investment into this industry.

Battery production made up 51% of cobalt demand in 2016 and will hit around 62% by 2022.

Compounding the complexity is 60% of global cobalt production is found in one country - the Democratic Republic of the Congo (DRC).

DRC is a hotspot for geopolitical fallout and its history is littered with civil war, internal conflict, and poor infrastructure.

The 21st century will be dependent on a chosen group of valuable materials. Cobalt is shaping up to be the leader of this pack and is needed in a plethora of business applications such as EVs, lithium-ion batteries, and PCs.

Cobalt is vital in metallurgical applications that include aerospace rotating parts, military and defense, thermal sprays, prosthetics, and much more.

The DRC recently proposed a revised mining law increasing taxes on cobalt and other precious metals. The legislation has yet to be written into stone and would certainly jack up the price of cobalt.

Everybody wants a cut of the cobalt game.

Glencore's (GLNCY) management has noted this mining tax is "challenging" at a time it is just completing its Katanga expansion.

Katanga has the potential to become the largest global copper and cobalt producer.

Copper is equally important to cobalt since cobalt production is a by-product of copper and nickel mining. Only 2% of cobalt results directly from cobalt mining, and 60% via copper mining, and 38% via nickel mining.

Last year, Freeport-McMoRan (FCX) was dangling its cobalt project to outside investors in the DRC but was unable to fetch a premium price.

In a blink of an eye, China Molybdenum Co. (CMCLF) swooped in and (FCX) accepted an offer of $2.65 billion. (FXC) used the sale to pay down debt while the price of cobalt has taken off to the moon.

It gets worse. China owns 80% of refined global cobalt production and 90% of its operations are in the DRC.

China is attempting to corner the cobalt market in the DRC, gaining a stranglehold on future technological devices, (EV)s, and big data.

The keys to future technological hegemony lie in the sparsely inhabited jungles of the DRC. China has the first mover advantage and backing of the communist party as (CMCLF) strives to be a global dominator in cobalt production.

China has smartly wriggled its way down to the bottom of the supply chain capturing cobalt resources. If a trade war ensues, China can simply cut off cobalt supply lines to whomever.

There is nothing CFIUS or Donald Trump can do about it.

America's 14% of global cobalt production will be insufficient to produce the new (EV)s, iPhone 11s, gizmos and gadgets that American consumers have grown to embrace.

Analysts expected Apple to acquire some supplementary companies aiding in expansion following the overseas repatriation.

A thriving software outfit or a company of cloud developers would have sufficed. However, reports streaming in that Apple has entered into negotiations to buy a five-year supply of cobalt directly from miners for the first-time underscores where Apple's priorities lie.

Cobalt demand expects to increase by 30% from 2016 to 2020.

Apple is scared it will be locked out of the cobalt market or forced to pay ludicrous prices for its cobalt needs.

Considering the price of cobalt has quadrupled since June 2016, and smartphones are 25% of the cobalt market, it's a strategically prudent move by Apple's CEO Tim Cook in light of BMW (BMWYY) announcing the need of 10X more cobalt by 2025.

Going forward anything comprised of cobalt-based technology will garner a higher premium resulting in higher prices for consumers including that $2,000 iPhone.

(FCX) is a must buy for those who believe precious metals are the foundation to all future technology. Other intriguing names include Brazilian company Vale S.A. (VALE), and Glencore, the largest Swiss company by revenue.

Or if you have the cash, plunk it down on a cobalt mine in the DRC. But only if you're insane.

_________________________________________________________________________________________________

Quote of the Day

"Heavier-than-air flying machines are impossible," - said Lord Kelvin, President of the Royal Society, in 1895.

July 2, 2018

Diary, Newsletter

Global Market Comments
July 2, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE FUTURE IS HAPPENING FAST),
(HOG), (TLT), (ROM), (MU), (NVDA), (LRCX),
(SPY), (AMZN), (NFLX), (EEM), (UUP), (WBA),
(THE WORST TRADE IN HISTORY), (AAPL)

July 2, 2018

Tech Letter

Mad Hedge Technology Letter
July 2, 2018
Fiat Lux

Featured Trade:
(THE CLOUD FOR DUMMIES)
(AMZN), (MSFT), (GOOGL), (AAPL), (CRM), (ZS)

The Cloud for Dummies

Tech Letter

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.

_________________________________________________________________________________________________

Quote of the Day

"Life is not fair; get used to it," said founder of Microsoft Bill Gates.

June 27, 2018

Tech Letter

Mad Hedge Technology Letter
June 27, 2018
Fiat Lux

Featured Trade:
(DON'T NAP ON ROKU)
(MSFT), (ROKU), (AMZN), (AAPL), (CBS), (DIS), (NFLX), (TWTR), (SQ), (FB)

Don't Nap on Roku

Tech Letter

Unique assets stand the test of time.

In an era of unprecedented disruption, unique assets' strength begets strength.

This is one of the big reasons the vaunted FANG group has carved out power gains in the business landscape bestowed with a largesse dwarfing any other sector.

As the FANGs trot out to imminent profitability by supercharging massive scale, the emerging tech environment gives food for thought.

These up-and-coming companies fight tooth and nail to elevate themselves to FANG status because of the ease of operating in a duopoly or an outright monopoly.

Microsoft (MSFT) is the closest substitute to an outright FANG. In many ways CEO Satya Nadella has positioned himself better than Facebook (FB) and Apple.

The Mad Hedge Technology Letter has pounced on the newest kids on the block offering subscribers buy, sell or hold recommendations zoning in on the best first and second tier companies in tech land.

The top echelon of the second tier is led by no other than Jack Dorsey and both of his companies, Square (SQ) and Twitter (TWTR), offer idiosyncratic services that cannot be found elsewhere.

I have devoted stories to Dorsey gushing about his ability to build a company and rightly so.

Another solid second tier tech company bringing uniqueness to the table is Roku (ROKU), which I have talked about in glowing terms before when I wrote, "How Roku is Winning the Streaming Wars."

To read the archived story, please click here.

Roku is a cluster of in-house, manufactured, online streaming devices offering OTT (over-the-top) content in the form of channels on its proprietary platform.

The word Roku means six in Japanese and it was chosen because Roku was the sixth company established by founder and CEO Anthony Wood commencing in 2002.

Cord-cutting has been a much-covered topic in my newsletters and this generational shift in consumer behavior benefits Roku the most.

In 2017, 25% of televisions purchased were Roku TVs. According to several reports, more than half of all streaming players purchased last year were Roku players.

This would explain how Roku has shifted its income streams from the physical box itself to selling ads and licensing agreements.

Yes, Roku earns the lion's share of its profits similar to the rogue ad seller Facebook.

Roku does not actually sell anything physical except the box you need to operate Roku, which earned Roku a fixed $30 per unit.

The box serves as the gateway to its platform where it sells ads. Migrating to higher caliber digital businesses like selling ads will stunt the hardware revenue part of its business.

That is all part of the plan.

A new survey conducted regarding fresh cord-cutters demonstrated that out of 2,000 cord-cutters questioned, 70% already had a Roku player and felt no need to pay for cable TV anymore.

Second on the list was Amazon Fire TV at 34%, and Apple TV (AAPL) came in third at 10%.

The dominant position has forced content creators to pander toward Roku TV's platform because third-party content creators do not want to miss out on a huge swath of cord-cutter millennials who are entering into their peak spending years and spend most of their time parked on Roku's platform.

Surveys have shown that millennials do not need a million different streaming services.

They only choose one or two for main functionality, and in most cases, these are Netflix (NFLX) and Amazon (AMZN).

Roku allows both these services to be integrated onto its platform. Cord-cutters can supplement their Netflix and Amazon Prime Video binge with a few more a la carte channels to their preference depending on points of interest.

In general, this is how millennials are setting up their entertainment routine, and all roads don't lead through Rome, but Roku.

If the massive scale continues at this pace, 2020 could be the year profitability explodes through the roof.

The next 18 months should give way to parabolic spikes, followed by consolidation to higher lows in the share price.

When I recommended this stock, its shares were trading at a tad above $32 on April 18, 2018, and immediately spiked to $47 on June 20, 2018.

The tariff sell-off hit most second tier tech companies flush in the mouth. The 5% and occasional 7% intraday sell-offs churn the stomach like Mumbai street food during the height of the Indian summer.

That is part and parcel of dipping your toe into these rising stars.

The move ups are parabolic, but the sell-offs make your hair fall out.

Well, glue your locks back onto your scalp, because we have reached another entry point.

Roku is now trading back down in the low $40 range, and I would bet my retirement fund that Roku will end the year above $50.

This unique company is expected to grow its subscriber base by at least 20% annually, and in five years total subscribers will eclipse 45 million users.

Reinforcing its industry leadership, traditional media companies such as Disney and CBS do not have built-in streaming viewership that comes close to touching Roku.

This has forced these traditional media giants to push their content through Roku or lose a huge amount of the 18 to 34 age bracket for which advertisers yearn.

These traditional players are armed with robust ad budgets, and a good bulk of it is allocated to Roku among others.

For each additional a la carte channel users sign up for on Roku, the company earns a sales commission.

As a tidal wave of niche streaming channels plan to hit the market, the first place they will look to is Roku's platform and this trend will only become stronger with time.

A prominent example was Sling TV, which showed up at Roku's front door first before circling around the rest of the neighborhood.

The runway for Roku's three main businesses of video ads, display ads, and licensing with streaming partners, is long and robust.

The one caveat is the fierce competition from Amazon Fire TV, which puts its in-house content on Amazon front and center when you start the experience.

Roku has head and shoulders above the biggest library of content, and the Amazon effect could scare traditional media for licensing content to Amazon.

We have seen the trend of major players removing their content from streamers because of the inherent conflict of interests licensing content to them while they are developing an in-house business.

It makes no sense to voluntarily offer an advantage to competition.

Roku has no plans to initiate its own in-house original content, and this is the main reason that Amazon and Netflix will lose out on Disney (DIS), CBS (CBS), NBC, and Fox content going forward.

These traditional players categorize Roku as a partner and not a foe.

To get into bed with the traditional media giants means digital ads and lots of them. In terms of a user experience, the absence of ads on Netflix and Amazon is a huge positive for the consumer experience.

But traditional players have the option of bundling ads and content together on Roku making Roku even more of a diamond in the rough.

In short, nobody offers the type of supreme aggregator experience, deep penetration of cord-cutting viewership, and the best streaming content on one graphic interface like Roku.

It is truly an innovative company, and it is in the driver's seat to this magnificent growth story.

It's hard to argue with CEO Anthony Wood when he says that Roku is the future of TV.

He might be right.

If Roku keeps pushing the envelope enhancing its product, it will be front and center as a potential takeover target by a bigger tech company.

Either way, the scarcity value of these types of assets will drive its share prices to the moon, just avoid the nasty sell-offs.

_________________________________________________________________________________________________

Quote of the Day

"Google's not a real company. It's a house of cards," - said former CEO of Microsoft Steve Ballmer.

Tag Archive for: (AAPL)