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Five Tech Stocks to Lap Up at the Bottom

Tech has led the way to the downside as the macro picture sours in the short term.

Valuations have come down from the nosebleed levels and now is the time to pick and choose where to allocate capital for the next leg up in tech.

Avoiding growth tech is something that should be stapled to your bedpost, loss-making companies won’t be able to compete with more established revenue models.

You don’t want to catch a falling knife, but at the same time, diligently prepare yourself to buy the best discounts of the year.

Here are the names of five of the best stocks to slip into your portfolio in no particular order when we find a bottom.

Remember, tech ALWAYS comes back.

Apple

Steve Job’s creation is weathering the gale-force storm quite well. Apple has been on a tear reconfirming its smooth pivot to a software service tilted tech company. The timing is perfect as China has enhanced its smartphone technology by leaps and bounds.

Even though China cannot produce the top-notch quality phones that Apple can, they have caught up to the point local Chinese are reasonably content with its functionality.

That hasn’t stopped Apple from vigorously growing revenue in greater China 20% YOY during a feverishly testy political climate that has their supply chain in Beijing’s crosshairs.

The pivot is picking up steam and Apple’s revenue will morph into a software company with software and services eventually contributing 25% to total revenue.

They aren’t just an iPhone company anymore. Apple has led the charge with stock buybacks and will gobble up a total of $200 billion in shares by the end of 2021. Get into this stock while you can, as entry points are few and far between.

Oh, and their 5G phone is selling like hotcakes. Some one billion need to be replaced to bring consumers into the new high speed 5G world.

Amazon (AMZN)

This is the best company in America, hands down, and commands 5% of total American retail sales or 49% of American e-commerce sales. The pandemic has vastly accelerated the growth of their business.

It became the second company to eclipse a market capitalization of over $1 trillion. Its Amazon Web Services (AWS) cloud business pioneered the cloud industry and had an almost 10-year head start to craft it into its cash cow. Amazon has branched off into many other businesses since then, oozing innovation, and is a one-stop wrecking ball.

The newest direction is the smart home where they seek to place every single smart product around the Amazon Echo, the smart speaker sitting nicely inside your house. A smart doorbell was the first step along with recently investing in a pre-fab house start-up aimed at building smart homes.

Microsoft (MSFT)

The optics in 2021 look utterly different from when Bill Gates was roaming around the corridors in the Redmond, Washington headquarter -- and that is a good thing.

Current CEO Satya Nadella has turned this former legacy company into the 2^nd largest cloud competitor to Amazon and then some.

Microsoft Azure is rapidly catching up to Amazon in the cloud space because of the Amazon effect working in reverse. Companies don’t want to store proprietary data to Amazon’s server farm when they could possibly destroy them down the road. Microsoft is mainly a software company and gained the trust of many big companies, especially retailers.

Microsoft is also on the vanguard of the gaming industry and deals like the $86 billion purchase of Activision (ATVI) mean that it will be difficult for another company to loosen MSFTs stranglehold at the top of the gaming ladder.

Alphabet (GOOGL)

Alphabet and Facebook boast a strong duopoly of ad technology. Alphabet generated 80% of its revenue from Google's advertising services in 2020. Google's non-advertising businesses (including subscriptions and hardware) accounted for 12%, while another 7% came from Google Cloud.

Alphabet's total revenue rose 13% in 2020, even as the pandemic throttled the growth of Google's advertising business in the first half of the year. The growth of Google Cloud throughout the year also cushioned that blow.

Google's advertising business recovered in the second half of the year, and Alphabet's operating margin expanded from 21% in 2019 to 23% in 2020. Its diluted earnings per share (EPS) also grew 19%.

In the first nine months of 2021, Alphabet's revenue rose 45% year over year as Google's advertising and cloud business grew in tandem.

Its array of different businesses like LinkedIn, YouTube, and Google Maps means this revenue pipeline is as fertile as can be.

Google’s robust balance sheet will protect itself from any downtrend in business that they might ever suffer.

Tesla (TSLA)

The influential EV leader has really surged ahead of the competition during the pandemic.

Demand for its product is off the charts as they delivered 184,800 Model 3 and Model Y cars in the first quarter, beating expectations and setting a record for Tesla.

However, the company also said it produced none of its higher-end Model S sedans or Model X SUVs for the period ending March. It delivered 2,020 older Model S sedans and Model X SUVs from inventory.

Supply chain issues are likely to remain a challenge for Tesla this year as many EV makers are having a hard time sourcing semiconductor chips.

Tesla is now aiming to produce 2,000 Model S and X vehicles per week later this year.

The company said Monday it expects more than 50% vehicle delivery growth in 2021 overall, which implies minimum deliveries of around 750,000 vehicles this year.

This stock is a must-buy when tech reverses.

January 19, 2022

Tech Letter

Mad Hedge Technology Letter
January 19, 2022
Fiat Lux

Featured Trade:

(MICROSOFT TAKES A GIANT LEAP FORWARD)
(MSFT), (ATVI), (PINS), (GOOGL), (AAPL), (AMZN)

Microsoft Takes a Giant Leap Forward

Tech Letter

CEO of Microsoft (MSFT), Satya Nadella, and his management team have made an aggressive step towards making inroads to the metaverse.

Gaming will be the launching pad to the metaverse that will first start as digital communities and later evolve into interoperable and integrated digital worlds.

The rest of the metaverse will germinate via these gaming communities and Microsoft knows that which is why they purchased Activision (ATVI) in cash for $68 billion and change.

The price was 3X higher than what they paid for LinkedIn but equally as strategic as many tech behemoths look forward to the next “big thing.”

The deal will mean MSFT will be one of the biggest gaming companies in the world just nudging out China’s Tencent and Japan’s Sony.

In the U.S., they will be by far the biggest gaming company and Nadella has made it a point of emphasis to navigate the gaming world by tapping M&A.

Remember, it was Nadella who built the MSFT cloud from scratch and Microsoft possessing its own stand-alone cloud asset dovetails nicely with their deep dive into gaming.

There are intrinsic synergies resulting from owning both.

The lack of native cloud infrastructure was a critical reason why ATVI gave up, as Chief Executive Officer Bobby Kotick said in an interview, “You look at companies like Facebook and Google and Amazon and Apple, and especially companies like Tencent — they're enormous and we realized that we needed a partner in order to be able to realize the dreams and aspirations we have,” he said.

This was the best Kotick could have wished for and I’ve mentioned this overarching trend of the best Silicon Valley companies getting stronger and now it’s even more pronounced as we are on the verge of exiting this pandemic this year.

In a higher interest rate environment, cash hoarders like Microsoft, Apple (AAPL), and Amazon (AMZN) simply have more ammunition than these smaller outfits who get penalized because of a harder route to access cheap capital making future cash flows costlier.

Now many of these smaller companies are realizing that they need to stand on their own two feet and that’s a scary thought for many CEOs who have been accustomed to tapping the capital markets to paper over the cracks.

What’s good about ATVI?

Activision owns mobile-gaming studio King, maker of Candy Crush, one of the most popular mobile games of all time.

Microsoft has almost zero presence in mobile gaming.

Nadella wants his gaming empire to facilitate direct payment like Apple’s App Store.

That’s effectively the holy grail of today’s gaming.

Microsoft has been at war with Apple and Google, over the fees the app stores charge for games.

It’s no surprise that Microsoft wants complete control over its ability to distribute games and content.

The deal also allows Microsoft an access point to secure an influential pool of gamers creating their own gaming content and worlds.

After adding Minecraft, LinkedIn, and GitHub, Nadella has been on the hunt for a game-changing asset that will drive the bottom line of MSFT via a large community of creators.

He failed to land social video service TikTok, while negotiations with Pinterest (PINS) and Discord were rebuffed.

ATVI is really a feather in the cap for Nadella, who won’t stop there and knows it’s just one battle of a greater war for tech supremacy.

These high-quality assets don’t get cheaper over time either.

Simply put, Microsoft loves subscription businesses, and gaming is among the best of them, and they are the stickiest around with recurring revenue that makes predicting future cash flows that much easier.

The ATVI pickup will raise the price of buying gaming assets across the board as I foresee a rush into these types of assets where not only can a company purchase the content, licenses, and gaming platform, but they can also add top-notch gaming developers which are equally as important as Microsoft tries to outmuscle Apple and Google.

This move is highly bullish for MSFT, so much so, that anti-trust regulators might cast a suspicious eye on this deal.

January 12, 2022

Tech Letter

Mad Hedge Technology Letter
January 12, 2022
Fiat Lux

Featured Trade:

(JUMP OFF THE ROKU BANDWAGON)
(ROKU), (GOOGL), (AMZN)

Jump Off the Roku Bandwagon

Tech Letter

Many “experts” have been advising investors to buy the dip in Roku (ROKU) since it dropped to $370 from the peak of $480 it reached in July 2020.

These experts kept banging the drum to buy the dip on Roku as it slid to $350 then $320.

The calls for dip-buying continue as Roku nosedived to $280 then most recently on a downgrade, Roku fell all the way to $177.

Painful as it feels to be an investor in Roku, this is not the time to double down on high-tech growth stocks.

Growth tends to usually overshoot to the upside as investors give a pass to growth for losing money and selectively put a premium on high growth rates.

But that deal is only valid in a low-interest rate environment and what we are witnessing is the reverse happen as investors are bolting from Roku like stallions out the back of a stable.

At a micro level, there is somewhat distaste at the ever-increasing competition Roku is facing and the lack of growth prospects overseas.

Overseas is usually the growth engine for many of these streaming cohorts, but the dilemma here is that margins are lower because of a poor purchasing power profiles for the median consumer overseas.

That’s not to say it’s easy to succeed in the U.S. — hardly so.

However, Roku’s business in the United States has been highly successful, but the issue here is that the market is getting somewhat saturated and since the stock market is priced based on future cash flow, where does the incremental buying come from to save Roku’s stock?

Roku faces a perilous uphill challenge to convince the incremental platform user to install its Roku stick at a time when Amazon (AMZN) and Google (GOOGL) are using their greater clout and sharper elbows to get rid of the tech peons.

Amazon reported sales of over 150 million Fire TV devices recently. Roku has over 56 million active accounts, although it’s not a direct comparison because Amazon’s figure counts sold devices and includes Fire TV devices that are not being used.

There is no possible way that Roku can secure 50% of the market here and 40% would be a stretch capping its ceiling.

Another leery signal came when smart television maker TCL who have partnered to make the Roku smart TV decided to jump ship to Google.

This could represent a red flag as these bigger companies have the capacity to poach talent, know-how, and convince suppliers to jump ship with a more lucrative contract for a larger install base.

This could be the first point of contact that could eventually lead to Google buying out TCL and cutting off Roku from a source of a hardware supplier.

TCL has now claimed to be one of the biggest sellers of sets featuring Google’s connected TV operating system and the partnership will take precedence over anything Roku is involved with.

In the short term, readers need to stay away from Roku as we need more commentary on how it plans to shake off Google and Amazon and how it plans to navigate a perceived saturation in its domestic business while underperforming overseas.

Granted, it’s intimidating to go up against Google and Amazon because there are less tools available in the tool kit in terms of stacking resources and convincing consumers that they are indeed a higher quality product.

Long term, I don’t see it for Roku.

Short term, it’s dicey at best.

This stock promises to be volatile in the next three months and actively trading this stock will probably mean selling sharp rallies and avoiding dips.

The first-mover advantage was stellar for a while and Roku rode that donkey up the mountain of success, but now as reality sets in and the first-mover advantage dissipates, they need a miracle or should just negotiate to sell itself while the stock price is still near $200.

It’s sink-or-swim at this point.

roku

January 7, 2022

Tech Letter

Mad Hedge Technology Letter
January 7, 2022
Fiat Lux

Featured Trade:

(THE DEATH OF VISA AND MASTERCARD)
(MA), (V), (SQ), (PYPL), (AFTPY), (AFRM), (AMZN)

The Death of Visa and Mastercard

Tech Letter

Visa and Mastercard’s card networks are a relic of the past, not in terms of reach or footprint, but the technology of it.

This will cost their stock price and we are already seeing it play out in the market.

The canary in the coal mine was fintech players Square (SQ) and PayPal (PYPL) whose share prices were pummeled at the back end of last year.

PYPL is down 40% from its 2021 peak and SQ experienced a similar 42% drop.

This fierce competition and the crowded marketplace have investors paying less of a premium than ever before.

In a tightening rate environment, it’s clear the wolves are out for more flesh and the contagion will spread to those further up the food chain.

Fintech business models aren’t as robust or foundational as the bulwarks of MA and V, but questions must be asked if small businesses aren’t willing to pay an extra 2% on sales for outdated technology.

The fintech space has moved a long way in a short amount of time causing investors to be concerned about secular growth sustainability.

Among them are concerns that consumers are shifting to debit, away from higher-margin credit cards.

Consumers are also using more alternative payment methods that may bypass the card networks, including “buy now pay later” services offered by companies like Klarna, Afterpay (AFTPY), and Affirm (AFRM).

Visa has also come under pressure from a recent announcement by Amazon.com (AMZN) that next year it will stop accepting Visa-branded credit cards issued in the United Kingdom and this could be the beginning of a narrowing of Visas’ moat that could trigger a domino effect in other rich western countries.

The bulls would say that the stocks could undergo a reversal if the Omicron variant is not as bad as initially thought creating a tsunami of consumer spending massaging the bottom line for Visa and Mastercard.

But it’s looking more like V and MA are the victims of tightening travel restrictions around the globe and elevated positive cases that are immobilizing consumers.

The big card networks rely heavily on revenues related to cross-border travel as consumers and businesses use their cards for airfare, Airbnb’s, and Ubers, as well as duty-free gifts in foreign countries.

Multiples may need to come down if the Omicron variant puts the shackles on travel as countries reimpose bans or quarantine rules.

Investors had been counting on a recovery in cross-border travel to boost revenues for the card networks. This is definitely a kick in the nuts after initially seeing momentum as countries in general trended to loosening restrictions.

International transactions brought in $1.9 billion, or 21%, of Visa’s $8.9 billion in revenues for the 2021 fourth quarter.

The segment is highly profitable due to steep transaction and foreign-exchange fees. Cross-border margins come in around 69%, contributing significantly to Visa’s overall earnings per share.

The Christmas season has been confronted by a bevy of new restrictions as many places consider other measures to curb the spread of the Omicron variant.

Ultimately, even if MA and V can get positive reinforcement from increased short-term travel which seems unlikely, alternative business models are breathing down their neck as the technology of money has advanced.

The “buy now, pay later” phenomenon, although risky, is a rapid gut punch to the incumbents.

Then consider there is speculative technology like Bitcoin out there that bypasses these dinosaur networks altogether.

I believe 2022 is the year that MA and V get exposed as a luxury in a frugal world where small businesses can’t afford to give away 2% of revenue.

There’s too much money being invested into the technology of money for small businesses to reach for MA and V’s network.

Even open banking and digital networks can really dent the traditional payment networks.

Basically, I believe these companies have hit the high-water mark, and the likes of Zelle and Venmo will start to put pressure on these high fees.

Places like China don’t even use them by bypassing them through digital wallets like Wechat pay and Alipay.

Pie shrinkage and revenue decelerate — I believe this is one of the seminal trends we will see in fintech in 2022.

visa

Automation and Banking

Tech Letter

Automation is taking place at warp speed displacing employees from all walks of life.

According to a recent report, the U.S. financial industry will depose of 200,000 workers in the next decade because of automating efficiencies.

Yes, humans are going the way of the dodo bird and banking will effectively become algorithms working for a handful of executives and engineers.

The x-factor in this equation is the direct capital of $150 billion annually that banks spend on technological development in-house which is higher than any other industry.

Welcome to the world of lower cost, shedding wage bills, and boosting performance rates.

We forget to realize that employee compensation eats up 50% of bank expenses.

The 200,000 job trimmings would result in 10% of the U.S. bank jobs getting axed.

The hyped-up “golden age of banking” should deliver extraordinary savings and premium services to the customer at no extra cost.

This iteration of mobile and online banking has delivered functionality that no generation of customers has ever seen.

The most gutted part of banking jobs will naturally occur in the call centers because they are the low-hanging fruit for the automated chatbots.

A few years ago, chatbots were suboptimal, even spewing out arbitrary profanity, but they have slowly crawled up in performance metrics to the point where some customers are unaware they are communicating with an artificially engineered algorithm.

The wholesale integration of automating the back-office staff isn’t the end of it, the front office will experience a 30% drop in numbers sullying the predated ideology that front office staff are irreplaceable heavy hitters.

Front-office staff has already felt the brunt of downsizing with purges carried out from 2018 representing an eighth year of continuous decline.

Front-office traders and brokers are being replaced by software engineers as banks follow the wider trend of every company transitioning into a tech company.

The infusion of artificial intelligence will lower mortgage processing costs by 30% and the accumulation of hordes of data will advance the marketing effort into a smart, multi-pronged, hybrid cloud-based and hyper-targeted strategy.

The last two human bank hiring waves are a distant memory.

The most recent spike came in the 7 years after the dot com crash of 2001 until the sub-prime crisis of 2008 adding around half a million jobs on top of the 1.5 million that existed then.

After the subsidies wear off from the pandemic, I do believe that the banking sector will quietly put in the call to trim even more.

The longest and most dramatic rise in human bankers was from 1935 to 1985, a 50-year boom that delivered over 1.2 million bankers to the U.S. workforce.

This type of human hiring will likely never be seen again in the U.S. financial industry.

Recomposing banks through automation is crucial to surviving as fintech companies like PayPal and Square are chomping at the bit and even tech companies like Amazon and Apple have started tinkering with new financial products.

And if you thought that this phenomenon was limited to the U.S., think again, Europe is by far the biggest culprit by already laying off 63,036 employees in 2019, more than 10x higher the number of U.S. financial job losses and that has continued in 2020 and 2021.

In a sign of the times, the European outlook has turned demonstrably negative with Deutsche Bank announcing layoffs of 40,000 employees through 2023 as it scales down its investment banking business.

Germany banks are also passing on the burden of negative interest rates to their clients.

A recent survey by Deutsche Bundesbank shows that 58% of banks are charging all savers negative interest rates while others only target wealthy and corporate clients.

If the U.S. dips into negatives rates in the future, expect the same nasty effect on job force cuts that Europe has experienced.

Either way, don’t tell your kid to get into banking, because they will most likely be feeding on scraps at that point.

THE LAST STAGE OF HUMAN-FACING BANK SERVICES IS NOW!

December 27, 2021

Tech Letter

Mad Hedge Technology Letter
December 27, 2021
Fiat Lux

Featured Trade:

(SWITCHING CAMPUSES FOR FULFILLMENT CENTERS)
(AMZN), (TGT), (WMT)

Converting Campuses For Fulfillment Centers

Tech Letter

Moving on to tomorrow’s tech and the decisive trends that will power your tech portfolio, you can’t help but think about what will happen to the American university system if we are slammed with another delta dropkick.

A bachelor’s degree has already been massively devalued with each subsequent “wave” knocking off an extra 20% from a 4-year achievement.

Another unstoppable trend that shows no signs of abating is the “winner take all” mentality of the tech industry.

The virus was a great catalyst for U.S. tech companies and U.S. asset holders in stocks and real estate to cash in with a smash and grab of the century effectively leaving the rest of the uncompetitive global economy in its wake.

Remember this is all while China is destroying their own tech companies with zeal because they perceive them as too powerful at this point and a legitimate threat to the interest of the communist party.

Now, tech giants will apply their huge relative gains to gut different industries and have set their sights on academics and the buildings they operate from as their next exercise in destroy and conquer.

Recently, we got clarity on big-box malls becoming the new tech fulfillment centers with the largest mall operator in the United States, Simon Property Group (SPG), signaling they are willing to convert space leftover in malls from Sears and J.C. Penny.

The next bombshell would hit sooner rather than later.

College campuses will become the newest of the new Amazon (AMZN), Walmart (WMT), or Target (TGT) eCommerce fulfillment centers, and let me explain to you why.

When the California state college system shut down its campuses and moved classes online due to the coronavirus in March, rising sophomore Jose Antonio returned home to Vallejo, California where he expected to finish his classes and “chill” with friends and family.

Then Amazon announced plans to fill 100,000 positions across the U.S at fulfillment and distribution centers to handle the surge of online orders. A month later, the company said it needed another 75,000 positions just to keep up with demand. More than 1,000 of those jobs were added at the five local fulfillment centers. Amazon also announced it would raise the minimum wage from $15 to $17 per hour through the end of April.

Antonio, a marketing and communications major, jumped at the chance and was hired right away to work in the fulfillment center near Vacaville that mostly services the greater Bay Area. He was thrilled to earn extra spending money while he was home and doing his schoolwork online.

This was just the first wave of hiring for these fulfillment center jobs, and there will be a second, third, and fourth wave as eCommerce volumes spike.

Even college students desperate for the cash might quit academics all together to focus on starting from the bottom at Amazon or launching an e-store.

Even though many of these jobs at Amazon fulfillment centers aren’t the plush office job that Ivy League graduates covet, any job will do for the bottom 40% of hardworking Americans.

The rise of ecommerce has happened at a time when the cost of a college education has risen by 250% and more often than not, the price rises don’t live up to the value accretion.

Many fresh graduates are mired in $100,000 or even $200,000 plus debt burdens that prevent them from getting a foothold on the property ladder and delay household formation and there’s been no indication President Biden is about to cancel this colossal debt.

Then consider that many of the 1000s of colleges that dot America have borrowed capital to the hills building glitzy business schools, $200 million football locker rooms, and rewarding the entrenched bureaucrats at the school management level outrageous compensation packages.

America will be saddled with scores of colleges and universities shuttering because they can’t meet their debt obligations.

The financial profiles of prospective students have dipped by 50% or more in the short-term with their parents unable to find the money to send their kids back to college, not to mention the health risks.

Then there is the international element here with the lucrative Chinese student that added up to 500,000 total students attending American universities in the past.

They won’t come back as well.

The college campuses will be carcasses with juicy meat on the bones allowing Jeff Bezos to choose the prime cuts.

The coronavirus has exposed the American college system for what it is, and not every college has a $40 billion endowment fund like Harvard to withstand today’s financial apocalypse.

The only two industries now big enough to quench big tech’s insatiable appetite for devouring revenue are healthcare and education.

We are seeing this play out quickly, and once tech gets a foothold literally and physically on campus, the rest of the colleges will be thrust into an existential crisis of epic proportions with the only survivors being the ones with large endowment funds and a global brand name.

It’s scary, isn’t it?

This is how tech has evolved and certain parts of society are now diminished while others supercharged.

This is also part of how the world is changing so rapidly now because of a combustible mix of geopolitics, health scares, and accelerating technology that average people can’t recognize the world we live in anymore.

When this happens, close your eyes and buy tech stocks since most of us don’t run pharma companies or can’t extract largesse from dollar or euro-denominated governments.

college

YOUR NEW DELIVERY CENTER

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