The recent Chinese pandemic over the coronavirus is overshadowing a sensational start to tech earnings.
The big have only gotten bigger!
Apple, Microsoft, and now Amazon and Founder Jeff Bezos have clearly tweaked the business into a well-oiled machine.
I won’t lie – expectations were a little shaky going into the earnings’ report because of expense worries on turning the 2-day free shipping for Amazon Prime members into a 1-day affair.
The narrative was whether Amazon could deliver enhancements that could overcome the high cost of making Amazon Prime better.
It’s not cheap to make the logistical improvements in the warehouses and transportation functions.
A lot of money has been poured into air cargo transport efficiency and last-mile developments as well.
Profitability was supposed to bear the brunt of the expense surge, but just take a peek at EPS performance of $6.47 per share vs. expectations of $4.03 per share, and rejoice in relief that expense worries were overblown.
The only conclusion that I can make is that the spoils from investments into logistics have outweighed the costs of the investments.
In total, revenue expanded 21% to $87.44 billion for the quarter which is a robust growth trajectory for a company as gargantuan as Amazon.
Amazon unleashed the head turner metric this time around too sharing that Amazon already has over 150 million Amazon Prime members.
That is almost the equivalent of half of the U.S. population paying Amazon $119 per year.
The higher logistic costs were deemed necessary to stay in front of the rest and expectedly ballooning costs showed up in the earnings report with shipping expenses up 43% year over year to $12.9 billion.
Other segments of the business have been just as prolific as Kansas City Chief’s quarterback Patrick Mahomes.
Streaming and subscriptions pulled in a massive $5.24 billion for the quarter, up 32% from the year-ago period.
Amazon’s cloud business AWS was up 19% to almost $10 billion last quarter.
The 19% represents a significant slowdown from the 35% they grew during the 3rd quarter of last year but still brings in the lion's share of the profits.
Are there any other dark horse growth drivers in Amazon’s arsenal?
Certainly, Amazon’s advertising segment can be pigeonholed as the rising star and generated $4.8 billion in revenue during the quarter, a 41% increase from the year-ago period.
Amazon is also bullish on the Amazon’s “stores,” allowing the company to customize and curate a multipage digital storefront.
Stores are getting a refresh and the company has added features like shoppable images and the ability to schedule updates like new releases or seasonal changes.
Other advertising tools like the ability for brands to create posts, which consumers can view to discover products and brands through a curated feed, will help the company become an advertising juggernaut.
The company launched “Posts” in beta last year which shows that Amazon plans to double down in marketing.
The marketing space serves as a critical area for incremental growth potential and profitability flow-through.
This is because the marketing space is the largest and least penetrated total addressable market, ahead of retail, cloud, and business-to-business segments.
Amazon is a sure-fire buy and hold tech company because it simply is the second-best tech company behind Microsoft.
There will also be opportunities to trade this short-term from the long side, but the volatility might turn off some investors.
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The Davos World Economic Forum is the optimal place to get a snapshot of the state of the American technology sector and apply its underpinnings to an overall trading strategy for 2020.
Stepping back, one clear theme is the lasting effects of the trade war and how that will manifest itself in the broader tech sector.
We got some serious sound bites from CEO of Microsoft Satya Nadella at Davos who is convinced that mutual economic saber-rattling between the US and China will show up in higher costs because of the misallocation of resources.
The most critical point of contention is the development in the semiconductor space as we move into the 5G world and this $470 billion industry which realizes cost savings from scaling by global supply is splintering off as we speak into two separate industries.
This just translates into higher costs to source components for your Microsoft Surface laptop or your Apple Ear Buds.
The follow-through effect is ultimately bludgeoning global growth rates and tech intermediaries will be forced to pick up the extra tab or face the looming decision to pass costs on to the consumer.
As we move forward, the administration is considering more limits to US semiconductor companies’ access to the Chinese consumer market.
The scaremongering fueled by the rise and threat of Huawei has reached fever pitch.
Remember that even with the aggression of the American administration hoping to cap Huawei’s revenue explosion, Huawei still managed to grow sales 18% last year to $122 billion.
I can tell you that if the U.S. administration came after the Mad Hedge Technology Letter guns blazing, we wouldn’t be sitting here growing 18% annually!
The U.S. administration hasn’t stopped at Huawei and is putting in shifts attempting to convince other nations to avoid using Chinese infrastructure equipment for the 5G revolution.
The “Phase One” of the trade agreement is largely seen as a moot point in the technology community and in some cases can be argued as a net negative to component makers whose access to the local Chinese market has narrowed.
The agreement signed also delivered no meaningful protection to intellectual property for US technology companies working with China which was largely viewed as the main catalyst provoking a geopolitical fight.
The trade war has sped up the bifurcation of internets, better known as “splinternet,” and I believe that sometime in the near future, you will need to download Chinese software and platforms to function inside of China.
Much of these misunderstandings stem from the lack of trust that has accumulated between the two parties.
The American tech sector and Wall Street have indirectly subsidized China’s technological rise to this point and now they must go head-to-head in every future technology such as artificial intelligence, 5G, fintech, augmented reality, and virtual reality.
This appears to be the new normal - a frosty and adversarial tech relationship.
There is now zero good will between each other.
The trust of tech on American shores could almost be ironically argued that it is worse than the trust level with China.
Edelman’s 20th annual trust barometer surveyed more than 34,000 adult respondents in 38 markets around the world.
It found that 61% of participants said the pace of change in technology is too fast and government does not fully understand emerging technologies enough to regulate them efficiently.
Trust in tech from 2019 to 2020 declined the most significantly in France, Canada, Italy, Russia, Singapore, the U.S. and Australia.
Much of the narrative has been about the domination of American tech by a handful of actors that has seen American companies go up against foreign governments.
France and America recently announced a temporary truce after the French President Emmanuel Macron reached out by phone to President Trump hoping to end the threat of tariffs while they work out a broader accord on digital taxation.
The French leader agreed to postpone until the end of 2020 a tax that France levied on big tech companies last year and in turn, the U.S. will delay the counter-tariffs that were in the works set to be levied on the French.
And it’s not just the French.
India has taken heed from the brooding trouble between the encroachment on sovereignty and American tech giants by adopting an aggressive stance towards Amazon.
Amazon CEO Jeff Bezos' lowlight of a recent India work trip came in the form of being snubbed by the Indian government.
India’s commerce minister Piyush Goyal said, “It’s not as if they (Amazon) are doing a great favor to India when they invest a billion dollars.”
He called Amazon a capital guzzler equating its mounting losses up to “predatory pricing or some unfair trade practices.”
India is on the verge of turning protectionist on foreign tech and this flies in the face of the tech atmosphere even just a few years ago.
Governments have come to realize that America’s FANGs are too dominant and entrenched often resulting in a net negative to the local populace.
More often than not, American tech found ways of rerouting local revenue to coffers of a few billionaires while paying zero local tax.
The easy money has been made and now the Tim Cooks and Sundar Pichais of the world will have to fight tooth and nail with not only the U.S. antitrust regulators, but foreign governments.
This is why a handful of tech companies this dominant has been the outsized winners over the past generation as their share prices have gone from the lower left to the upper right but now command minimal consumer trust.
The ultimate Davos message is that big tech continues to grind higher, but alarm bells have started to ring.
There’s only so much friction they can handle before investors pull the rug.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-22 04:02:102020-05-11 13:08:46The Hollow Victory for Tech in the China Trade Deal
Why has there been a dearth of Mad Hedge Tech trade alerts to start the year?
Let me explain.
Love it or hate it – earnings' season is about to kick off.
And now, this is the part where it starts to get ugly with consensus of a 2% year-over-year decline in fourth-quarter S&P 500 earnings.
Banks are expected to be a rare bright spot and JPMorgan (JPM) delivered us stable results as one of the first to report.
The unfortunate part of the equation is that a lot has to go right for tech shares to go unimpeded for the rest of the year.
What we have seen in the first 2 weeks of the year is a FOMO (fear-of-missing-out) environment in which valuations have lurched forward to 20 times forward earnings.
Tech is overwhelmingly carrying the load and I have banged on the drums about this thread advising readers to be acutely aware of a heavy positive bias towards the FANGs in 2020.
Well, that is already panning out in the first two weeks.
Examples are widespread with Facebook (FB) up over 8% and Apple (AAPL) already topping 6% to start the year.
It would be farfetched to believe that the tech sector can keep pilfering itself higher in the face of negative earnings growth.
However, behind the scenes, relations between China and America are improving, the threat of war with Iran is subsiding, and the Fed continues strong support tempering down risk to tech shares.
The situation we find ourselves in is that of an expensive tech sector that will again guide down on upcoming earnings’ reports telegraphing softness moving into the middle part of the year.
The ensuing post-earnings sell-off in specific software stocks will offer optimal short-term entry points.
The current risk-reward of chasing FANGs at these levels is unfavorable.
Another glaring example of the FANG outperformance is Alphabet who rose 26% last year.
They are on the brink of joining the $1 trillion club that Apple and Microsoft (MSFT) have joined.
Its market value currently sits idling at $985 billion and its surge towards the vaunted trillion-dollar mark is more of a case of when than if.
Alphabet (GOOGL), more or less, still expands at the same rate of low-20% annually that it did 10 years ago.
Sales have ballooned to $160 billion annually and they sit at the forefront of every cutting-edge sub-sector in technology from artificial intelligence, autonomous driving, and augmented reality.
The engine that drives Google is still its core advertising business and strategic premium acquisitions like YouTube and penetration into other fast-growing areas such as cloud computing.
It has rounded out into a broad-based revenue accumulator.
Apple was the first public company to surpass a $1 trillion market cap and ended the year up 86% in 2019, and it has only gone up since then currently checking in at a $1.36 trillion market cap.
Microsoft followed Apple, hitting the $1 trillion mark during the first half of 2019, and it is now worth $1.23 trillion.
Amazon fell back after surging past the $1 trillion mark but inevitably will achieve it on the next heave up.
Amazon shares have been quickly heating up since its capitulation from $2,000 in July 2019 and round out the group of overperforming tech behemoths.
Although the rush into big-cap tech stocks in the first two weeks has been a bullish signal, it still doesn’t marry up with the lack of earnings growth in the overall tech sector.
Companies beating meager expectations will experience strong share appreciation although not at the pace of last year and will still serve investors pockets of overperformance.
We will find our spots to trade shortly, but better to keep our gunpowder dry at the moment.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/01/earnings-vs-growth.png522972Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-15 11:02:512020-05-11 13:08:08The Trade Alert Drought Explained
The year is almost in the rear-view mirror – I’ll make a few meaningful predictions for technology in 2020.
Although iPhones won’t go obsolete in 2020, next year is shaping up as another force multiplier in the world of technology.
Or is it?
A trope that I would like to tap on is the severe shortage of innovation going on in most corners of Silicon Valley.
Many of the incumbents are busy milking the current status quo for what it’s worth instead of targeting the next big development.
Your home screen will still look the same and you will still use the 25 most popular apps
This almost definitely means the interface that we access as a point of contact will most likely be unchanged from 2019.
It will be almost impossible for outside apps to break into the top 25 app rankings and this is why the notorious “first-mover advantage” has legs.
The likes of Google search, Gmail, Instagram, Uber, Amazon, Netflix and the original list of tech disruptors will become even more entrenched, barring the single inclusion of Chinese short-form video app TikTok.
The FANGs are just too good at acquiring, cloning or bludgeoning upstart competitors.
It’s the worst time to be a consumer software company that hasn’t made it yet.
Advertising will find itself migrating to smart speakers
Amazon and Google have blazed a trail in the smart speaker market but ultimately, what’s the point of these devices in homes?
Exaggerated discounting means hardware profits have been sacrificed, and the lack of paid services means that they aren’t pocketing a juicy 30% cut of revenue either.
These companies might come to the conclusion that the only way to move the needle on smart speaker revenue is to infuse a major dose of audio ads to the user.
So if you are sick to your stomach of digital ads like I am, you might consider dumping your smart speaker before you are forced to sit through boring ads.
Amazon’s Alexa will lose momentum
In a way to triple down on Alexa, Amazon has installed it into everything, and this is alienating a broad swath of customers.
Not everyone is on the Amazon Alexa bandwagon, and some would like Amazon’s best in class products and services without involving a voice assistant.
Privacy suspicion has gone through the roof and smart speakers like Alexa could get caught up in the personal data malaise dampening demand to buy one.
Your voice is yours and 2020 could be the first stage of a full onslaught of cyber-attacks on audio data.
Don’t let hackers steal your oral secrets!
Cyber Warfare and AI
Hackers have long been experimenting with automatic tools for breaking into and exploiting corporate and government networks, and AI is about to supercharge this trend.
If you don’t know about deep fakes, then that is another thorny issue that could turn into an existential threat to the internet.
Not only could 2020 be the year of the cloud, but it could turn into the year of cloud security.
That is how bad things could get.
A survey conducted by Cyber Security Hub showed 85% of executives view the weaponization of AI as the largest cybersecurity threat.
On the other side of the coin, these same companies will need to use AI to defend themselves as fears of data breaches grow.
AI tools can be used to detect fraud such as business email compromise, in which companies are sent multiple invoices for the same work or workers duped into releasing financial information.
As AI defenses protect themselves, the sophistication of AI attacks grows.
It really is an arms race at this point with governments and private business having skin in the game.
Facebook gets out of the hardware game because consumers don’t trust them
Remember Facebook Portal – it’s a copy of the Amazon Echo Show.
The only motive to build this was to bring it to market and expect Facebook users to adopt it which backfired.
Facebook will find it difficult convincing users to use more than Facebook and Instagram software apps.
Don’t wait on Facebook to roll out some other ridiculous contraption aimed at stealing more of your data because there probably won’t be another one.
This again goes back to the lack of innovation permeating around Silicon Valley, Facebook’s only new ideas is to copy other products or try to financially destroy them.
China continues to out-innovate Silicon Valley.
The rise of short-form video app TikTok is cementing a perception of China as the home of modern tech innovation, partly because Silicon Valley has become stale and stagnated.
China has also bolted ahead in 5G technology, fintech payment technology, unmanned aerial vehicle (UAV) and is giving America a run for their money in AI.
China’s semiconductor industry is rapidly catching up to the US after billions of government subsidies pouring into the sector.
Silicon Valley needs to decide whether they want to live in a tech world dominated by Chinese rules or not.
Augmented Reality: Is this finally the real deal?
Augmented reality (AR) is still mainly used for games but could develop some meaningful applications in 2020.
Virtual Reality (VR) and AR will play a big role in sectors such as education, navigation systems, advertising and communication, but the hype hasn’t caught up with reality.
One use case is training programs that companies use to prepare new workers.
However, AR applications aren't universally easy or cheap to deploy and lack sophistication.
AR adoption will see a slight uptick, but I doubt it will captivate the public in 2020 and it will most likely be another year on the backburner.
Apple’s New Projects
Apple has two audacious experimental projects: a pair of augmented-reality glasses and a self-driving car.
The car, for now, has no existence outside of a few offices in California and some hires from companies like Tesla.
And, at the earliest, the glasses won’t hit shelves until 2021,
The car is likely to fizzle out and Apple will be forced to double down on digital content and services to keep shareholders happy which is typical Tim Cook.
The 5G Puzzle
Semiconductor stocks have been on fire as investors front-run the revenue windfall of 5G and the applications that will result in profits.
Select American cities will onboard 5G throughout 2020, but we won’t see widespread adoption until later in the year.
5G promises speeds that are five times faster than peak-performance 4G capabilities, allowing users to download movies in five seconds.
With pitiful penetration rates at the start, the technology will need to grow into what it could become.
The force multiplier that is 5G and the high speeds it will grace us with probably won’t materialize in full effect until 2021.
Each of the nine tech developments in 2020 I listed above negatively affects US tech margins and that will follow through to management’s commentary in next year’s earnings and guidance.
Tech shares are closer to the peak and the bull market in tech is closer to the end.
Innovation has ground to a halt or is at best incremental; companies need to stop cloning each other to death to grab the extra penny in front of the steamroller.
Profit margins will be crushed because of heightened regulation, transparency issues, monitoring costs, and the unfortunate weaponizing of tech has been a brutal social cost to society.
Tech is saturated and waiting for a fresh catalyst to take it to the next level, but that being said, tech earnings will still be in better shape than most other industries and have revenue growth that many companies would cherish.
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Mad Hedge Technology Letter
December 16, 2019 Fiat Lux
Featured Trade:
(THE PELETON BUBBLE IS ON)
(PTON), (PLNT), (NFLX), (AMZN)
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