Recently, a series of big tech earnings misses throttled the market tearing into the positive investor sentiment, which was holding up nicely after the early year sell-offs.
Every precipitous and steep drop this year has followed with a mammoth dip buying spree lifting stocks to newer highs.
This is the type of robustness investors rejoice in when talking about the price action of technology stocks.
Not only is the dip buying awe-inspiring, but the lack of hesitation in the dip buying is even more impressive.
Investors have scant time to pick up these precious names before the entry points disappear like an invisibility cloak.
Ditch these stocks at your peril, because the buying queue represents the likes of all the tech behemoths waiting to buy back their own stock, namely Warren Buffett, and the flight to quality brigade that view big cap stocks as a de-facto cash sanctuary.
The anxiety was palpable when Netflix's (NFLX) management badly miscalculated new subscription business after a brilliant earnings report from Microsoft.
Investors got another wrench in their stomach when Facebook (FB) followed Netflix with dismal guidance ripping apart the growth narrative and pivoting toward ameliorating its controversial business model giving investors a fresh dose of uncertainty.
All eyes were planted on Alphabet (GOOGL), Amazon (AMZN), and Apple to provide some calm to the markets.
That's exactly what they did.
Part of the problem now is that expectations are so exaggerated, these companies have little wiggle room to overdeliver.
Industry specialists largely believe tech profits to rise 20.9% YOY this earnings season. The lion's share of the growth has been contained to the headliner names such as Amazon, which has grown like no company has ever grown before.
Estimates show a slide in YOY tech profits for the third-quarter earnings decelerating down to less than 15%. While still good, it's not the 20% growth YOY, and over that it has been fueling tech's rise in increasingly precarious market conditions.
The downshift in profit growth has been anticipated for the past few quarters, as investors thought a trip wire would at some point bring down the entire FANG group.
What we have found out is that not all FANGs are created equal. Some are more equal than others.
The past earnings performance indicated this with Amazon's emphatic top-line growth numbers blowing away the most adamant bear.
Netflix's narrative is still intact, and consolidation is badly needed for a stock that has gone parabolic in 2018.
The short-term capitulation of Facebook and Netflix is proof that large cap tech also has downside risk embedded in its model.
It was starting to seem like down days were never in the cards.
Lowered tech guidance for next quarter will really test the market's resiliency during next earnings season.
If these numbers miss spectacularly, expect the tech sector to give back a good chunk of the year's gains back.
Decelerating profits is never a positive sign. However, after coming from Mt. Everest profit levels, will the markets brush it off and power higher?
There is a lot more juice left in this tech story, and sharp corrections should still be bought.
Tech is becoming quite frothy at these levels and choosing the right tech story will go a long way to sleeping well at night.
It will be excruciatingly difficult for tech companies to impressively beat on the upside next quarter.
However, the secular story and unique earnings growth are treasures compared to other sectors that are getting beaten into submission.
When you delve into the numbers, the success becomes comical.
Apple is the first company to cross the $1 trillion of market cap.
This company prints money to the tune of $11 billion in profits each quarter.
It possesses a devoted userbase, surging software and services segment, and premium grade smartphones allowing Apple to cash in profits to the extent they do.
CEO Tim Cook sent an email to Apple's employees downplaying the milestone, instead saying "financial returns are simply the result of Apple's innovation."
He is completely correct.
The innovation has fed back through spiking profits and boosting sales allowing Apple to make money hand over fist.
This in turn is a big reason why Apple's share price has almost quadrupled with Cook at the helm.
The best and brightest tech companies in 2018 share one unified trait: innovation.
And it is not a surprise that Amazon and Microsoft (MSFT) will be next to join the trillion-dollar club as they boast some of the most innovative staff in the world.
As these two companies pass the trillion-dollar market cap, it will encourage the next tier of flourishing tech companies to make the jump to the trillion-dollar club.
The tech sector is still eating everybody's lunch with every business in the world migrating to their front yard.
Some weakness in the extended tech shares have been a matter of when and not if.
Advanced Micro Devices, Inc. (AMD) is a stock gaining 22.8% just in the month of July underlining the overheated price action of some of these tech names.
I am largely staying away from chip stocks now because trade tensions have bred uncertainty around Chinese chip revenues.
The tech sector has many moving parts and a trade war can hurt one part of tech while others remain unblemished.
Another front of concern is data regulation headlines rearing their ugly heads from time to time.
There are more hurdles for tech stocks going forward, but that does not mean they will get tripped up.
I am in a tech holding pattern until I find an opening to issue my next slew of tech trade alerts.
"I will always choose a lazy person to do a difficult job because a lazy person will find an easy way to do it." - said founder of Microsoft Corporation Bill Gates.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-08-07 01:05:352018-08-07 01:05:35What to Do About Tech Now?
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or FINDING A NEW GIG),
(FB), (TWTR), (INTC), (NFLX), (AAPL), (AMZN),
(RIGHTSIZING YOUR TRADING)
I'm back! Yes, I have freshly debarked from the KLM 10-hour nonstop from Amsterdam, with little gin bottles in the shape of old Dutch houses in my pockets.
And what do I do upon landing but rush to pound out another newsletter, digesting what I learned from reading a mountain of research on the way home.
Oops! It looks like I forgot how to type!
My 24-hour layover there enabled me to view the great Rembrandt masterpieces at the Rijksmuseum and explore Anne Frank's house, now part of a large museum complex. When I visited there 50 years ago you could just walk right in the front door, as there was almost no one there.
It was not a bad summer as far as losses go; a charger left behind on the Queen Mary, a hair brush in Paris, and all of my money in Zermatt, Switzerland. That last item was the result of my daughter breaking an ankle while riding a scooter down the Matterhorn.
If you are going to break something make sure you do it in Switzerland. The X-rays, MRI scans, doctors, and cast cost me only $1,000. The same would have cost me $10,000 in the U.S. But the wheelchair set me back $650. A better one could be had at home from Amazon for $115.
Still, there is no better way to breeze through customs and immigration but in a wheelchair. We avoided the long lines and saved so much time that my other daughter promised to break her ankle next year to achieve the same shortcuts.
Arriving at home in San Francisco it immediately became clear that a lot of chart formations are busted as well, especially those for Facebook (FB), Twitter (TWTR), Intel (INTC), and Netflix (NFLX). Apple (AAPL) is bumping up against my 2018 target of $220, while Amazon nearly hit my $2,000 goal.
With tech likely resting until the NEXT round of 25% earnings growth that starts in two months, we are going to have to find a new gig to earn our crust of bread. That will most likely be small caps, value plays, and multiyear laggards. Last year's big August play was in steel, gold, industrials, and commodities, which are all now getting hammered by trade wars.
Even if I had stayed at home in July trading like a one-armed paperhanger I'm not sure I would have made any money. Tech melted up, then melted down, and as we all know from hard-earned experience, the losses always cost more than the gains.
The week went out with a July Nonfarm Payroll Report that was tepid at best at 157,000. But headline unemployment stayed at 3.9%, a 17-year low. With the fifth week of gains and the (SPY) now up 6.2% in 2018 it appears that the markets only want to hear good news...for now.
Professional and Business Services were up 51,000, Manufacturing gained 37,000, while Hospitality and Leisure picked up 40,000 jobs. The bankruptcy of Toys "R" Us seems to have cost the economy 32,000 jobs. The broader U-6 "discouraged worker" unemployment rate fell to 7.5%.
Now is the golden age of the working high school dropout, the criminal background, and the DUI conviction. Many companies would rather hire former junkies that pay up for expensive college grads, which is why wage gains are still going nowhere, and perhaps, never will. Expensive retiring baby boomers replaced by cheap minimum-wage millennials is also a drag on wages.
Deflation isn't just hitting wages. It is destroying the financial industry as well, as high-paid yuppies are replaced by robots. This is the first bull market in history with no net hiring by Wall Street.
Wells Fargo no longer actually manages money, although it will readily accept your money to do so and farm it out to bots. Fidelity launched the world's first zero fee index fund, the Fidelity ZERO Total Market Index Fund (FZROX). As interest rates are now providing new income sources for managers, expect negative fee funds to come soon.
Markets are certainly climbing a wall of worry, a Great Wall. The Chinese are matching our threatened 25% tariffs on an additional $200 billion of trade with $60 billion of their own. After that retaliation will have to take indirect forms, as they have run out of tats to match our tits (oops, doesn't really work, does it?).
They might shut down the massive General Motors (GM) plants in China, where they sell more cars than in the U.S., and a LOT more Buicks. They could also interfere with the Apple assembly line. Remember, trade wars are only easy to win when you run a dictatorship. They could also continue weakening the yuan to offset the tariffs, as they have done so far. We can't retaliate there with a rising interest rate regime.
Speaking of rates, you can bet your bottom dollar that the Fed will raise them another 25 basis points to a 2.0% to 2.25% range at their upcoming September 25-26 meeting, after having passed last week. A market killing inverted yield curve is now only months away. Rising rates don't matter until they do, and then they matter A LOT!
Also, of concern is the appreciating levels of the Mad Hedge Market Timing Index, which at a nosebleed 71 is approaching seven-month highs. Buying up here never offers a good risk/reward ratio. As I have been climbing in the Alps and out of the markets my 2018 year-to-date performance remains unchanged at an eye-popping 24.82% and my 8 1/2-year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.
This coming week will be a very boring week on the data front, which is usual after the big jobs reports of the previous week.. On Monday, August 6, there will be nothing of note to report.
On Tuesday, August 7 at 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.
On Wednesday, August 8 at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST the Fed is expected to raise interest rates by 25 basis points. At 2:30 PM Fed governor Jerome Powell holds a press conference.
Thursday, August 9, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.
On Friday, August 10 at 9:15 AM EST, we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, I'll be recovering from jet lag and getting back into my groove. I'll send you a Trade Alert as soon as I find a good entry point. The year-end sprint is now on.
Below look at the gigantic smoke plume rising to 40,000 feet from the massive California fires that I flew past on the way home.
Good luck and good trading.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-08-06 01:07:192018-08-06 01:07:19The Market Outlook for the Week Ahead, or Finding a New Gig
Apple (AAPL) is the first company in America to have a trillion-dollar market cap and won't be the last as Amazon (AMZN) is close behind.
This also opens up the door for one of our favorite companies Microsoft (MSFT), which will shortly cross the $1 trillion threshold as well.
The milestone underscores the reliability and power of the tech sector that has propped up this entire market in 2018 as we continue the late stage cycle of the nine-year bull market.
Apple has entered into a hyper-charged expansion phase, and I will explain how this will boost shares to new heights.
The Mad Hedge Technology Letter has been hammering away on the software and services narrative since its inception.
As legacy companies are pummeled in the financial markets, the cloud has enabled a revolutionary industry catering toward annual subscriptions of all types.
Users no longer have to store gobs of data on computers. The cloud allows the data to be stored on remote data servers giving access to the information from anywhere in the world with an Internet connection.
A plethora of modern hybrid apps boosting productivity integrated with the cloud offers business a new-found way to collaborate with coworkers around this increasingly multicultural, multilingual, and globalized world.
Apple is perfectly placed to take advantage of the current technology climate and will wean itself from the image of being a hardware company.
Investors wholeheartedly approve of the conscious move to bet the farm on service and subscriptions.
After Apple's earnings came out, the stock traded up whereas in past quarters, the total sales unit was the crucial number investors hung their hat on and the stock would dip.
Apple missed iPhone total sale units registering 41.3 million compared to the expected 41.79 million units.
This slight miss in the past was enough for the stock to sell off on and instead the stock rose 3%.
This is the new Apple.
A software services company.
Investors can feel at peace that iPhone sales aren't growing. It's not that important anymore.
Apple's software and services segment pocketed $9.55 billion in revenue, a 31% jump YOY from $7.27 billion.
This has been in the making for a while as software and services has been a five-star performer for the past few quarters.
However, the performance is material now and the pace of improvement will take Apple into the next phase of hyper-growth.
This is all good news for the stock price.
Software and services revenue now comprise 17.9% of Apple's total revenue.
By year-end, this division could topple the 25% mark.
In the earnings call, Apple CEO Tim Cook was smitten with the software and services growth saying this particular revenue will double by 2020.
In the next few years, software and services will eclipse the 40% mark, all made possible inside an incredibly sticky and top-quality ecosystem.
The iPhone continues to be the best smartphone the market has to offer. If you marry the best hardware with top-quality software, this stock will chug along to higher share prices unhindered.
As the technology sector matures, the flight to quality becomes even more glaring.
The inferior platforms will be found out quickly heightening the risk of massive intraday sell-offs and revenue-depleting penalties.
Facebook and Twitter have seen 20% sell-offs hitting investors in the mouth.
These platforms have issues rooting out the nefarious elements that seek to infiltrate its operations and manipulate the platform for self-serving interests.
Apple does not have this problem. Neither does Microsoft, Amazon, Netflix (NFLX) or Salesforce (CRM), and I will explain why.
When you offer services for free such as Facebook (FB) and Twitter (TWTR) do, you get the good, bad, and ugly bombarding the system.
Even though it's free to use these platforms, Facebook and Twitter must spend to make it useable for the good forces that made these companies into tech behemoths.
Instead of rooting out these rogue elements, they turned a blind eye describing their businesses as a distribution system and were not accountable.
Then sooner or later one of the evil elements would get these companies in hot water. It happened.
Big mistake, and the chickens are coming home to roost.
The flight to quality means avoiding public tech companies that only offer free services.
You pay for what you get.
Alphabet also has seen its free model penalized twice in Europe with hefty fines, and it probably won't be the last time.
Play with fire and you get burned.
It also offers Cook the moral high road, allowing him to non-stop criticize the low-quality platform companies, mainly Facebook, because it makes the whole tech sector look bad.
The bite back against technology in 2018 is largely in part due to these low-quality free platforms manipulating user data to ring in the profits.
Amazon has been public enemy No. 1 for the Washington administration but not to the public because the loathing of Amazon is largely a personal issue.
Amazon improves the lives of customers by giving users the best prices on the planet through its comprehensive e-commerce business.
Apple now constitutes 4% of the S&P 500 index.
Investors have been waiting for Apple's Cook to sweep them off their feet with the "next big thing."
Even though nearly not as sleek and sexy as a smartphone, the software and services unit are it.
Apple doubling down on high quality that I keep mumbling about shows up in average selling price (ASP) of the iPhone, which destroyed estimates of $694, coming in at $724 per unit.
The bump in (ASP) signals the high demand for its higher-end iPhone X model over the lower-tiered premium smartphones.
The iPhone X is the best-selling iPhone model because customers want the best on the market and will pay up.
The success of the iPhone X lays the pathway for Apple to introduce an even more expensive smartphone in the future with better functionality and performance.
If Apple can continue innovating and producing the best smartphone in the world, the price increases are justified, and demand will not suffer.
Perusing through some other parts of the earnings report, cloud revenue was up 50% YOY.
Apple pay has tripled in the volume of transactions YOY surpassing the billion-transaction mark.
China revenue has stayed solid even with the mounting trade tension. I have oftentimes repeated myself in this letter that Apple is untouchable in China because it provides more than 4 million jobs to local Chinese directly and indirectly through Apple's ecosystem.
This prognosis was proved correct when Apple announced revenue in China of $9.55 billion, a spike of 19% YOY.
Even though much of Apple's supply chain remains in China, Beijing isn't going to take a hammer and smash it up risking massive social upheaval and public fallout. In many ways, Apple is an American company masquerading as a Chinese one.
As for the stock price, the explosion to more than $208 means that Apple is overbought in the short term.
If this stock dips back to $200, it would serve as a reasonable entry point into this record-breaking hyper-growth software and services company.
And with the $234 billion in cash planned to be deployed in Apple's capital reallocation plan, the biggest hurdle is the federal daily limit Apple has in buying back its own stock according to Apple CFO Luca Maestri.
In its latest earnings report for Q2 2018 Netflix definitely disappointed. Revenues came in at $3.91 billion compared to an expected $3.94 billion. New subscribers came up short 1 million of those expected.
It also provided weaker guidance, expecting to ad only 5 million new subscribers versus an earlier expected 6 million, with most coming from international.
The stock market noticed, taking the shares from $420 down to $330, a loss of 21.42%. Is it time to bail on Reed Hasting's miracle firm? Or is it time to load the boat once again?
If you have any doubts just ask any former employee of Blockbuster. In 1997, Blockbuster was the 800-pound gorilla in the VHS video rental business, with 9,000 worldwide, a 31% market share, and a $5 million market capitalization.
Today, Blockbuster has only one store left somewhere in rural Alaska. There is but one company to blame for this turn of events, and that would be Netflix.
Not only did Blockbuster bite the dust, so did the entire $8 billion-a-year movie rental industry, including Movie Gallery, Hollywood Video, and the rental operations of Walmart (WMT) and Amazon (AMZN).
That year, Reed Hastings returned his rental of the video Apollo 11 a month late and was hit with a huge $40 late charge. He was struck with a bolt of lightning. "There must be a business opportunity here," he thought.
The next day, he and friend Marc Randolph bought an oversized greeting card, tossed the card, and mailed a CD in the remaining envelope to Hastings' house. It arrived the next day in perfect condition. It was a simple matter of geometry. While the CD sat in the middle of the envelope, the Post Office only stamped the corners. This simple experiment became the basis of a business that eventually grew to $186 billion.
Yes, and now you're all thinking, "Why didn't I think of that?"
Hastings was the scion of an East Coast patrician family, a member of the social register and a regular in the New York Times society pages. His great-grandfather, Alfred Lee Loomis, was an early quant who made a fortune.
He received his undergrad degree from Bowdoin College and then joined the Peace Corps. Following a two-year stint in Swaziland to teach math, Hastings then obtained a master's degree in Computer Science from Stanford University in 1988.
Hastings founded his first firm at the age of 30, Pure Software, which went public in 1995. It then merged with Atria Software in 1996 and as Pure Atria was acquired in 1997. That left him flush with cash and looking for new challenges.
Based on the successful mail experiment Hastings invested $2 million into the Netflix idea, which Marc Randolph ran for the first two years.
Netflix then become the lucky beneficiary of a number of sea changes in technology then underway, none of which it anticipated. Sales of DVD players were taking off. The Internet and online commerce were gaining respectability, and massive overinvestment in broadband led to exponential improvements in streaming speeds.
There was also a crucial Supreme Court decision regarding the Copyright Act of 1909 that protected the right to rent a video that you owned. Hollywood had been fighting rentals tooth and nail to protect their substantial profits from DVD sales.
Hastings assembled a team of former colleagues who managed to build a website and a primitive distribution system. The Netflix website went live on April 14, 1998. The site crashed within 90 minutes, overwhelmed by demand. A rushed trip to the nearest Fry's Electronics brought 10 more PCs, which were quickly wired in as servers. By the end of the first day, Netflix had rented 500 videos.
The DVD optical format first launched in March 1997, creating the DVD player industry. Sales reached 400,000 units by the first half of 1998 and prices collapsed, from $1,100 to $580 in the first year. Netflix was swept up in the tide and monthly revenues reached $100,000 within four months.
Since newly released titles were so expensive at $15, Netflix focused on older, niche films in anime, Chinese martial arts, Bollywood movies, and, yes, soft-core porn. Netflix later exited this market when Hastings accepted an appointment to the California State Board of Education.
The company thrived. The headcount rose from an initial three to more than 100. But it was losing money - some $11 million in 1998.
Then the company caught a major break. The French luxury goods tycoon, Bernard Arnault, CEO of LVMH, was desperate to get into the Dotcom Boom and invested $30 million in Netflix. This attracted another $100 million from other venture capitalists and angel investors.
This allowed the company to experiment with its business model. It launched next-day delivery in San Francisco, which proved wildly popular, new sign-ups, renewals, and customer loyalty soared. Then in a stroke of genius Netflix initiated its Marquee Program, which allowed customers to rent four DVDs a month for only $15.95 a month, with no late fees. DVD player sales in 1999 reached 6 million, but Netflix lost $29.8 million that year.
In 2000, the Marquee Program evolved into the Unlimited Movie Rental service and the price rose to $19.95. It included a free rental, which customers could obtain by entering their credit card data, which then renewed indefinitely. This is common now but was considered wildly aggressive in 2000. Netflix was also an early artificial intelligence user, using algorithms to find movies that both members of a couple would like based on past rental data.
Netflix is a company that did 100 things wrong, any one of which could have wiped out the firm. It was the few things it did right that led it to stardom.
Hastings worked out deals with manufacturers to include a free Netflix rental coupon with every DVD player sold. The move earned it valuable market share, but almost bled the company dry since most didn't return. But a labeling error caused hard-core Chinese porn discs to get sent out instead.
A programing glitch caused members' video queues to be sent out all at once, landing some happy subscribers with 300 videos all at once. Coupon counterfeiting was rife until the company began individually coding each one.
Netflix planned to go public in 2000. Existing shareholders rushed to top up their holdings in expectation of cashing in on a first-day pop in the share price. But the Dotcom Crash intervened, and all new tech IPOs were canceled for years. This episode of greed and attempt at insider trading left Netflix well-funded through the following recession. Netflix lost $57.4 million in 2000.
In the meantime, the installed base on DVD players reached 8.6 million by 2002. Then disaster struck. Hastings learned that Amazon was entering the DVD sales market, the only source of Netflix profits. Hastings flew up to Seattle to sell Netflix to Amazon. But Jeff Bezos only offered $12 million and Hastings walked. It was a rare miss for Bezos. DVD players dropped to $200, and demand for content soared.
An important part of the Netflix story was the self-destruction of industry leader Blockbuster. Hastings offered to sell Netflix to Blockbuster at the bargain price of $50 million. By then, Netflix had 300,000 paid subscribers compared to Blockbuster's 50 million. But Blockbuster charged late fees while Netflix didn't. That difference would change the world. However, CEO John Antioco passed believing that online commerce was nothing more than a passing fad. It was a disastrous decision.
To dress up the company's financials for an IPO in 2002, Hastings fired about 40% of the company's workforce to cut costs. On May 23, 2002, Reed Hastings stood on the floor of wealth manager Merrill Lynch as the stock started trading on NASDAQ under the ticker symbol of (NFLX) at $15 a share. The company raised another $82.5 million in the deal. A year later Netflix announced it had 1 million paid subscribers, and the stock soared to $75 and the stock later split 2 for 1.
Realizing his error, Blockbuster's Antioco launched an all-out effort to catch up with Netflix in online rentals. When that news hit the market, (NFLX) shares fell back to its IPO price of $15. Late in 2004, Blockbuster launched a clunky copy of the Netflix website, but without the magical algorithms in the backend that made it work so well. Blockbuster undercut Netflix on price by $2, offering memberships for $17.95. It immediately captured 50% of all new online sign-ups but continued with its notorious late fees.
Blockbuster Online was plagued with software glitches from the start and every day presented a new crisis. Netflix also fought back with its own price cut, to $17.99. Both companies bled money. Short sellers started accumulating big positions in Netflix stock. Hastings vowed to run Blockbuster out of the online market with a $90 a quarter ad spend.
This Netflix received some manna from heaven. Corporate raider Carl Icahn secretly accumulated a chunk of Blockbuster stock in the market and then demanded that the company pursue an asset stripping strategy. Icahn eventually obtained three board seats and became de facto CEO. So, to say that management time was distracted was a gross understatement.
Netflix received another gift when Walmart finally threw in the towel for online movie rentals. Hastings jumped in and did a deal whereby (WMT) would refer all future movie rental customers to Netflix.
Blockbuster finally decided to dump its despised late fees, costing it $400 million in annual revenues. Hundreds of stores were closed to cut costs. The downward spiral began. The value of Blockbuster fell to $684 million. With 4.2 million subscribers Netflix was now worth about $1.5 billion. Blockbuster lost an eye-popping $500 million in 2005.
DVD sales and rentals reached their all-time peak of $27 billion in 2006. Slightly more than 50% of Americans then had broadband access.
Blockbuster, growing weary of the competition from Netflix, finally decided to deliver a knockout blow. It launched its Total Access program in another attempt to bleed Netflix to death by undercutting Netflix's membership price by $2. It worked, and Netflix was facing another near-death experience. Blockbuster Online's share of new subscriptions soared to 70%, and total subscribers soared from 1.5 million to 3.5 million in months. The Netflix share fell to only 17%, and the company was now losing money for the first time in years.
In a last desperate act, Netflix offered to buy Blockbuster Online for $600 billion, and would have gone up to $1 billion just to eliminate the competition. An overconfident Blockbuster, smelling blood, refused. Movie Gallery and Hollywood Video were already on the bankruptcy trail, so why shouldn't Netflix go the same way?
And then the inexplicable happened. Icahn refused to pay Antioco a promised $7 million performance bonus based on the Blockbuster Online success. Instead, he offered only $2 million and Antioco resigned, collecting an $8 million severance bonus in the process. Icahn replaced him with Jim Keyes, the former CEO of 7-Eleven.
Keyes immediately pulled the plug on the Total Access discount, thus dooming Blockbuster Online. Instead, he ordered that the company's 6,000 remaining stores sell Slurpees and pizzas to return to profitability, in effect turning them into 7-Elevens that rented videos. It was one of the worst decisions in business history. Many of the senior staff resigned and sold their stock on hearing this news. Keyes in effect seized defeat from the jaws of victory.
Reinvigorated and with subscriptions soaring once again, Netflix launched headlong in online streaming. It introduced its set top box, Roku, in 2008. It then got Microsoft to offer Netflix streaming through its Xbox 360 game console that Christmas, instantly adding potentially10 million new subscribers.
And this is what makes Netflix Netflix. Although the company had the best recommendation engine in the industry, CineMatch, Hastings thought he could do better. So, in 2006, he offered a $1 million prize to anyone who could improve Cinematch's performance by 10%. To facilitate the competition, he made public the data on 100 million searches carried out by the firm's customers.
It was the largest data set put in the public domain. Some 40,000 teams in 186 countries entered the contest, including the best artificial intelligence and machine language and mathematical minds. It became the most famous scientific challenge of its day.
After a heated three-year struggle, a team named BellKor's Pragmatic Chaos won, a combination of three teams from Bell Labs, Hungary, and Canada. The copyright for the algorithm is owned by AT&T and licensed to Netflix for a fixed annual fee. AT&T also uses the winning algorithm for its own U-verse TV programming.
When the 2008 financial crisis hit, Netflix subscribers just kept on rising at the rate of 10,000 a day as consumers stayed at home and obtained cheaper forms of entertainment. Total subscriptions topped 10 million in 2009. Those at Blockbuster cratered. A new competitor appeared on the scene, Redbox, with 20,000 supermarket kiosks offering DVDs for 99 cents a day. But Netflix was hardly affected.
By 2012, Netflix subscriptions reached 20 million. Streaming was a blowout success, with half of its customers using streaming only to watch TV shows and movies. Hollywood beat a path to Hastings' door, with Paramount Pictures, Lionsgate, and MGM earning a collective $800 million in Netflix fees. Netflix now accounted for 60% of movies streamed and 20% of total broadband usage.
When Blockbuster finally declared Chapter 11 bankruptcy on September 23, 2010, so did its Canadian operations. That opened the way for Netflix to enter the international market, picking up 1 million new subscribers practically overnight. Next it launched into Latin America, introducing Spanish and Portuguese streaming in 43 countries.
As streaming replaced DVD rental by mail, Hastings attempted to spin off the rump of the business into a firm called Quickster. Customers would now have to open two accounts, one for streaming and one for mail and pay high prices. Customers and shareholders rebelled, taking the stock from $305 down to a heartbreaking $60. This was the last chance you could buy the stock at a decent price.
Hastings recanted on Quickster and let go the 200 staff applied to the unit. Icahn made a reappearance in this story, this time accumulating a 10% share in Netflix. After demanding management changes nothing happened, and Icahn eventually sold his shares for a large profit. Finally, Icahn made money in the video business.
Going forward, Netflix's strategy is finally straightforward. Create a virtuous circle whereby superior content attracts new subscribers, who then deliver the money for better content.
CineMatch knows more about what you want to watch than you do. The immense data it is generating gives Netflix not only the insight on how to sell you the next movie, it also proves unmatched insight into trends in the industry as a whole. It also makes Netflix unassailable in the movie industry.
That has given the firm the confidence to double its original content budget from $4 billion to $8 billion this year to produce Emmy-winning series such as House of Cards and Orange is the New Black.
So, the future for Netflix looks bright. As for me, I think I'll spend the rest of the evening watching the 1931 version of Frankenstein on Netflix.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-08-02 01:06:312018-08-29 13:33:44What's Next for Netflix?
Please be advised there will be no Technology Letter
Thursday, August 2, or Friday August 3,
as Editor Arthur Henry will be traveling.
Publication will resume Monday, August 6.
Thank you for your understanding.
Mad Hedge Technology Letter August 1, 2018 Fiat Lux
Featured Trade: (THE RACE DOWN TO ZERO), (SCHW), (FB), (WMT), (AMZN), (FFIDX), (BOX)
It seems time after time, entire industries get flipped on their heads without notice.
The modern-day hyper-acceleration of technology is creating tectonic shifts in the economy that only some can truly understand.
There is the good, the bad, and the ugly.
The functionality of technology has helped enhanced our daily lives infinitely, yet there is a dark side of technology that has reared its ugly head threatening the future existence of mankind.
One industry next in line to be smashed to bits will have the effect of unimaginably reshaping Wall Street as we know it.
Gone are the days of brokers shouting from the trading pits, a bygone era where pimple-faced traders cut their teeth rubbing shoulders with the journeymen of yore.
The stock brokerage industry is at an inflection point with the revolutionary online stock brokerage Robinhood on the verge of shaking up an industry that has needed shaking up for years.
A common thread revisited by this newsletter is the phenomenon of broker apps being low-quality tech.
These apps can be built by a pimple-faced freshman college student in his dorm.
A broker ultimately serves little or no value to the real players among the deal, usually extracting huge commissions.
Technology and now blockchain technology vie to completely remove this exorbitant layer from the business process.
Well, for the stock brokerage industry, that time is now.
Robinhood is an online stock brokerage company based in Menlo Park, Calif., trading an assortment of asset classes including equities, options, and cryptocurrencies.
So, what's the catch?
Robinhood does not charge commission.
That's right, you can invest up until the $500,000 threshold protected by the Securities Investor Protection Corporation (SIPC) and you can go along with your merry day trading for free.
The online brokerage industry has been getting away with murder for years.
How did the online brokers get away with this in a technological climate where industries such as the transportation sector are being flipped on their head?
They got comfortable and stopped innovating - the death knell of any company.
Effectively, high execution costs reaping massive profits were the norm for brokers, and nobody questioned this philosophy until Robinhood exposed the ugly truth - unreasonably high rates.
Peeking at a monthly chart of brokerage costs will make your stomach churn.
For instance, a trader frequently executing trades with an account of $100,000 would hand over $1836 in commission in 2017 if their account was with Fidelity.
On the cheaper side, Interactive Brokers would charge $854 for its brokerage services to habitual traders per month.
The outlier was Tradier, a start-up brokerage founded in 2014 using the powerful tool of an API (Application Programming Interface), which charged $213 per month to trade frequently.
An API is described as a software intermediary allowing two applications to communicate with each other.
This model helped cut costs for the online brokerage because Tradier did not have to focus its funds on the trading platform that was delegated to various third-party platforms.
Tradier is largely responsible for the aggregation of data and charts thus employing an army of developers to meet their end of the business.
This model is truly the democratization of the online brokerage industry, which has been coming for years.
Cost are cut to a minimum with equity trades at Tradier costing investors $3.49 per order and option contracts costing $0.35 per contract with a $9 options assignment and exercise fee.
Technology has defeated the traditionalist again.
Day traders will tell you their largest worry is keeping a lid on execution costs.
Volume traders plan their strategies according to bare bones commission.
Marrying technology with online brokerages has the deflation effect that Amazon (AMZN) deftly took advantage to perfection.
Brokerages do not pay higher costs for an incremental bump in trading volume. Costs are mainly fixed.
If you hold an account in one of these legacy brokers charging an arm and a leg to trade with them, jump ship and join the revolution.
So how does Robinhood generate revenue if the broker trades for free?
Hawk ads? No.
They are not rogue ad sellers as is Facebook (FB).
The plethora of accounts opened with Robinhood earn interest, and Robinhood collects the earned interest as revenue.
Also, Robinhood has one paid service for sale.
Robinhood Gold is a subscription allowing traders to use margin. The margin accounts will set traders back $10 per month adding up to $120 per year, and they won't be charged interest on the funds.
This is peanuts compared to what other traditional brokerages are charging clients for margin account interest.
This is also a data grab with the proprietary data building up profusely turning into a potential Masayoshi Son SoftBank Vision fund acquisition.
Robinhood has already registered more than 5 million accounts for a company that started its operations in 2013.
The rise of these 5 million accounts coincided with the explosion of the price of bitcoin breaching the $20,000 level.
This price surge inspired a whole generation of millennials to get off the sofa and start trading cryptocurrencies.
More than 80% of Robinhood's accounts are owned by millennials.
Trading cryptocurrencies acts as a gateway asset to springboard into other asset classes such as equities and derivative contracts.
Vlad Tenev, co-CEO of Robinhood, indicated that Robinhood will have to modify its radical business model to monetize more of the business in the future, but he is comfortable with the current business model.
But Tenev has already seen fruit borne with the likes of Robinhood applying fierce pressure to the legacy brokerages' pricing models.
The traditionalists are locked in a vicious pricing war with each other slashing their commission rates to stay competitive.
The longer the likes of Charles Schwab (SCHW) feel it necessary to charge $4.95, down from the January 2017 cost of $8.95, the better the chances are that Robinhood can build its account base rapidly.
Charles Schwab has more than 10 million accounts, only double the number of Robinhood, after being founded in 1971.
The 42-year head start over Robinhood has not produced the desired effect, and it is ill-prepared to battle these tech companies that enter the fray.
Robinhood has been able to add a million new accounts per year. If Charles Schwab relatively performed at the same rate, it would have 47 million accounts open today.
It doesn't and that is a problem, because the company can be caught up to.
The lack of urgency to combat the tech threat is astounding. Companies such as Walmart (WMT) have taken the initiative to transform the narrative with great success.
The race to zero is a grim reality for the Fidelities (FFIDX) of the world, and adopting a Robinhood approach will be the playbook going forward.
Brokerages and a slew of other industries are turning into a legion of top-level developers fighting tooth and nail to stay relevant.
The transportation industry has grappled with this harsh reality lately, but the economy is on the cusp of many other industries digitizing to the extreme.
My guess is that Robinhood starts rolling out a slew of subscription services catering toward specific investors.
The age of specialization is upon us with full force, and customer demand requires care and diligence that never existed before.
Robinhood continues to enhance its offerings of various products adding Litecoin and Bitcoin Cash to the crypto lineup.
Only Bitcoin and Ethereum were offered before.
The company is not without headline investors boasting the likes of Andreessen Horowitz, the venture capitalist firm based in Menlo Park, Calif., Box (BOX) CEO Aaron Levie, and hip-hop mogul Snoop Dogg.
Expect Robinhood to pile the funds into improving the technology, data accuracy while offering a new mix of hybrid products.
The enhancements will attract another wave of adopters spawning another wave of panic from the legacy brokers.
To visit the pricing information at Robinhood, please click here.
"When something is important enough, you do it even if the odds are not in your favor," - said Tesla founder and CEO Elon Musk.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-08-01 01:05:352018-08-01 01:05:35The Race Down to Zero
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, AUGUST 3
AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(THE INSIDER'S VIEW ON THE FUTURE OF TECHNOLOGY),
(AMZN), (GOOG), (DELL), (MSFT), (EBAY), (MY DATE WITH HITLER'S GIRLFRIEND)
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
