(CRM) Archives

Cloud Security on the March

Take a look at these beauties that I recommended at the beginning of December 2018.

At that time, Okta (OKTA) was trading at $62 and Zscaler (ZS) was at $40 on the button – fast forward to today and Okta is now over $136 and Zscaler victoriously sitting at $82.

Oh, how do times change!

That was my reaction watching their performance for the past 7 months giving belief to my assessment that second-tier cloud companies will have a field day this year.

Cloud companies aren’t going away anytime soon, please tattoo that on your forehead.

There isn’t a hotter topic circulating the gossip winds these days than digital security pressured by geopolitics.

Okta is the best in show for identity management – a snazzy term for managing employees’ passwords.

Okta’s products are built on top of the Amazon Web Services cloud.

Coincidentally, Okta was erected in 2009 by a team of former Salesforce (CRM) executives. Salesforce is one of my favorite cloud-based software companies, offering a blueprint for success to other up-and-coming software companies.

Current Okta CEO and founder Todd McKinnon previously served as the Senior Vice President of Engineering at Salesforce.

Other founders include Okta COO Freddy Kerrest who also meandered through the corridors of Salesforce.

I can tell you that you could do much worse than starting a new software company with a collection of Salesforce upper echelon talent.

This all-star team is behind the insatiable growth of Okta whose revenue has grown over 600% since establishing itself.

Okta’s first-quarter results didn’t disappoint with revenues of $125 million—a rise of 50% year-over-year beating the consensus of $117 million.

Subscription revenues comprised 94% of sales and the company expects sales of $130 million amounting to a rise of 37% year-over-year.

Okta’s subscriber base has risen over 500% in the past 5 years and annual contract value of over $100,000 has expanded 60% annually.

The company still loses money but hopes to make some headway on this issue with projected EPS estimated to grow 25% annually in the next five years.

This year spawned a massive divergence between tech who has legs and tech who will be dragged down to the depths of the ocean floor by the heavy weight of regulation, overwhelming competition, or just flat out poor management or inferior product development.

Zscaler echoed similar positive sentiment of Okta by recording a quarter to remember growing revenue by 61% year-over-year while calculated billings grew 55% year-over-year.

In addition to the top line growth, operating margins improved 14% points year-over-year to 8%.

The quarterly results demonstrate the leverage in cloud security business models and the ability to drive growth and profitability.

String together a third consecutive quarter of profitability is just part of the battle, Zscaler will continue to aggressively invest for significant market opportunity that lie ahead.

Cloud security potential means going after a $20.3 billion Total Addressable Market in calendar 2019.

Let me divulge a tad bit about the competitive landscape and why Zscaler is brilliantly positioned for success.

As organizations increasingly make the shift to the cloud, traditional firewall and VPN vendors are finally acknowledging that the legacy security appliances can secure the new digital enterprise and are attempting to build a security cloud using single tenant software designed for on-premise appliances just like you can't create a Netflix service by stacking thousands of DVD players in the cloud.

You can't offer an inline high-performance security cloud by spinning up a bunch of virtual machines in a public cloud. This is a defensive strategy of cloud imitators which, in our view, serves the self-preservation of the vendor, not the needs of the customers.

Zscaler has a significant competitive advantage as a result of the technology, architecture and maturity of cloud security platform including one, Zscaler was born in the cloud, for the cloud just like Salesforce and Workday.

Two, Zscaler has a purpose built globally distributed multi-tenant cloud for fast user experience, unlike imitation cloud, Zscaler requires no back hauling from front doors to a central computing data center of a public cloud.

Three, Zscaler performs SSL inspection at scale as a purpose-built proxy for better security.

Lastly, Zscaler continues to deliver zero trust network access that provides application access without network access reducing business risk unlike firewalls and VPNs.

The duo of Okta and Zscaler are the bright lights of the cloud generation and leading the digital economy in digital security.

July 1, 2019

Tech Letter

Mad Hedge Technology Letter
July 1, 2019
Fiat Lux

Featured Trade:

(THE DEATH OF HARDWARE)
(AAPL), (CRM), (NFLX), (HUAWEI)

The Death of Hardware

Tech Letter

Apple’s Chief Design Officer Jony Ive, the British industrial designer who made Apple (AAPL) products beautiful, is on his way out.

What else could the man do?

Jonathan Paul Ive was born in Chingford, London in 2967 to a silversmith who lectured at Middlesex Polytechnic.

He pursed automotive design at Newcastle Polytechnic, now named University of Northumbria at Newcastle, and graduated with a BA in industrial design in 1989.

His student successes harvested him the RSA Student Design Award which gifted him a stipend for an exploratory trip to the United States.

Palo Alto, California was his ultimate destination where he befriended various design experts including Robert Brunner—a designer who ran a small consultancy firm that would later join Apple Computers.

Ive signed onto product design agency Roberts Weaver Group following his studies demonstrating his typical attention to detail that he became renowned for.

London startup design agency called Tangerine came calling and Ive used his talents to design microwave ovens, toilets, drills and toothbrushes.

Ive slammed into confict with management at Tangerine who believed his ideas were too modern and exorbitant.

Apple later decided to partner with Tangerine on the basis of some of Ive’s former Silicon Valley friends like Robert Brunner delivering Ive to the forefront of Apple design products where he started hatching his plan to be the ultimate designer at Apple.

The rest is history as Ive went on to produce memorable consumer product designs such as the iMac, iPod, iPhone, and iPad.

His last burst of creativity was applied to produce the Apple Watch which was an overwhelming success.

He will now take his show independent but still collaborate with Apple as his main client.

The new design firm will be called LoveFrom.

This announcement isn’t a shocker and certainly, he really had one foot out of the door ever since the passing of Former Co-Founder Steve Jobs in 2011 put him on less solid footing.

If you remember, Apple had a secret corridor constructed between Jobs' and Ive’s office epitomizing how closely they collaborated on product development as well as how good of friends they were.

Current CEO of Apple Tim Cook is the exact opposite of what Steve Jobs represented and part of the reason why Apple has lacked that game-changing new product resulting in a reduced share price.

Steve Jobs was a visionary and the person to transform his ideas into physical form was Jony Ive.

You could argue that part of Jony Ive succumbed with Steve Jobs as well as his parabolic career trajectory.

That’s what all those lines of people camping overnight in front of Apple stores was about.

The cult of Apple was at its peak around 2012 where Apple sold the most iPhones and was miles ahead of competition.

Fast forward 7 years and Tim Cook has allowed the relative competition to catch up and even overtake Apple in numerous metrics.

I would argue that Tim Cook was a dependent stop gap to Steve Jobs but the lack of vision in a position where visionaries are rewarded has been Apple’s Achilles heel.

Surely, Apple could have hired an Elon Musk after Tim Cook steadied the rutter.

The results have been monetary success, milking the famed iPhone business for what it’s worth plus more, but missing the boat on premium content.

They could have bought Netflix (NFLX) while it was less potent with the glut of cash in reserve, or they could have penetrated the enterprise business with acquiring Salesforce (CRM) at an earlier stage.

And during this period, Chinese phone makers caught up big time with Huawei now offering a better and cheaper iPhone alternative.

What Jony Ive was leaving the headquarters of Apple represents is the death of hardware.

Out with the old and in the new, and the new is software and the direction Apple is doubling down on.

Apple's services of iTunes, the App Store, the Mac App Store, Apple Music, Apple Pay, and AppleCare, has become Apple’s “new” business.

Apple's services segment did sales of $11.5 billion in revenue, up from the $9.9 billion services earned in the second quarter of 2018.

A new all-time record was set for services revenue this quarter.

Apple Pay is available in 30 markets and expect to go live in 40 markets by the end of 2019.

Apple now boasts 390 million paid subscriptions across all of its services, an increase of 30 million sequentially and by 2020, Apple will pass half a million paid subscriptions.

Apple hopes to penetrate further into the magazine business with Apple News+, a $9.99 per month service that offers unlimited access to more than 200 magazines.

Apple plans to surpass $14 billion in services revenue per quarter by 2020.

This is what Apple is doing now and the sad fact is that Ive and his special skills do not fit seamlessly into the main growth drivers of the company anymore.

Software engineers are being cherrypicked left, right, and center as Apple avoids making any big capital investments aside from leasing new buildings to install an army of fresh programmers.

Apple reported $11.45 billion in services revenue topped analysts’ expectations of $11.37 billion.

Apple also reported services margins of 63.8% for the quarter.

Services now accounts for about 20% of Apple’s revenue, up from 16% a year earlier and 13% in the first quarter.

I will give Tim Cook credit for recovering from the 20% drop in Apple’s shares, better late than never.

Now Apple is in the process of shifting up to 30% of their supply chain from China to South East Asia to de-risk from the Middle Kingdom.

June 14, 2019

Diary, Newsletter, Summary

Global Market Comments
June 14, 2019
Fiat Lux

Featured Trade:

(WEDNESDAY JUNE 26 BRISBANE, AUSTRALIA STRATEGY LUNCHEON)
(MAY 29 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (BYND), (AMZN), (GOOG), (AAPL), (CRM), (UT), (RTN), (DIS), (TLT), (HAL), (BABA), (BIDU), (SLV), (EEM)

June 12 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader June 12 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Do you think Tesla (TSLA) will survive?

A: Not only do I think it will survive, but it’ll go up 10 times from the current level. That’s why we urged people to buy the stock at $180. Tesla is so far ahead of the competition, it is incredible. They will sell 400,000 cars this year. The number two electric car competitor will sell only 25,000. They have a ten-year head start in the technology and they are increasing that lead every day. Battery costs will drop another 90% over the next decade eventually making these cars incredibly cheap. Increase sales by ten times and double profit margins and eventually, you get to a $1 trillion company.

Q: Beyond Meat (BYND)—the veggie burger stock—just crashed 25% after JP Morgan downgraded the stock. Are you a buyer here?

A: Absolutely not; veggie burgers are not my area of expertise. Although there will be a large long-term market here potentially worth $140 billion, short term, the profits in no way justify the current stock price which exists only for lack of anything else going on in the market. You don’t get rich buying stocks at 37 times company sales.

Q: Are you worried about antitrust fears destroying the Tech stocks?

A: No, it really comes down to a choice: would you rather American or Chinese companies dominate technology? If we break up all our big tech companies, the only large ones left will be Chinese. It’s in the national interest to keep these companies going. If you did break up any of the FANGS, you’d be creating a ton of value. Amazon (AMZN) is probably worth double if it were broken up into four different pieces. Amazon Web Services alone, their cloud business, will probably be worth $1 trillion as a stand-alone company in five years. The same is true with Apple (AAPL) or Google (GOOG). So, that’s not a big threat overhanging the market.

Q: Is it time to buy Salesforce (CRM)?

A: Yes, you want to be picking up any cloud company you can on any kind of sizeable selloff, and although this isn’t a sizeable selloff, Salesforce is the dominant player in cloud plays; you just want to keep buying this all day long. We get back into it every chance we can.

Q: Do you think the proposed merger of United Technologies (UT) and Raytheon (RTN) will lower the business quality of United Tech’s aerospace business?

A: No, these are almost perfectly complementary companies. One is strong in aerospace while the other is weak, and vice versa with defense. You mesh the two together, you get big economies of scale. The resulting layoffs from the merger will show an increase in overall profitability.

Q: I had the Disney (DIS) shares put to me at $114 a share; would you buy these?

A: Disney stock is going to go up ahead of the summer blockbuster season, so the puts are going to expire being worthless. Sell the puts you have and then go short even more to make back your money. Go naked short a small non-leveraged amount Disney $114 puts, and that should bring in a nice return in an otherwise dead market. Make sure you wait for another selloff in the market to do that.

Q: What role does global warming play in your bullish hypothesis for the 2020s?

A: If people start to actually address global warming, it will be hugely positive for the global economy. It would demand the creation of a plethora of industries around the world, such as solar and other alternative energy industries. When I originally made my “Golden Age” forecast years ago, it was based on the demographics, not global warming; but now that you mention it, any kind of increase in government spending is positive for the global economy, even if it’s borrowed. Spending to avert global warming could be the turbocharger.

Q: Why not go long in the United States Treasury Bond Fund (TLT) into the Fed interest rate cuts?

A: I would, but only on a larger pullback. The problem is that at a 2.06% ten-year Treasury yield, three of the next five quarter-point cuts are already priced into the market. Ideally, if you can get down to $126 in the (TLT), that would be a sweet spot. I have a feeling we’re not going to pull back that far—if you can pull back five points from the recent high at $133, that would be a good point at which to be long in the (TLT).

Q: Extreme weather is driving energy demand to its highest peak since 2010...is there a play here in some energy companies that I’m missing?

A: No, if we’re going into recession and there’s a global supply glut of oil, you don’t want to be anywhere near the energy space whatsoever; and the charts we just went through—Halliburton (HAL) and so on—amply demonstrate that fact. The only play here in oil is on the short side. When US production is in the process of ramping up from 5 million (2005) to $12.3 million (now), to 17 million barrels a day (by 2024) you don’t want to have any exposure to the price of oil whatsoever.

Q: What about China’s FANGS—Alibaba (BABA) and Baidu (BIDU). What do you think of them?

A: I wanted to start buying these on extreme selloff days in anticipation of a trade deal that happens sometime next year. You actually did get rallies without a deal in these things showing that they have finally bottomed down. So yes, I want to be a player in the Chinese FANGS in expectation of a trade deal in the future sometime, but not soon.

Q: Silver (SLV) seems weaker than gold. What’s your view on this?

A: Silver is always the high beta play. It usually moves 1.5-2.5 times faster than gold, so not only do you get bigger rallies in silver, you get bigger selloffs also. The industrial case for silver basically disappeared when we went to digital cameras twenty years ago.

Q: Does this extended trade war mean the end for emerging markets (EEM)?

A: Yes, for the time being. Emerging markets are one of the biggest victims of trade wars. They are more dependent on trade than any of the major economies, so as long as we have a trade war that’s getting worse, we want to avoid emerging markets like the plague.

Q: We just got a huge rebound in the market out of dovish Fed comments. Is this delivering the way for a more dovish message for the rest of the year?

A: Yes, the market is discounting five interest rate cuts through next year; so far, the Fed has delivered none of them. If they delayed that cutting strategy at all, even for a month, it could lead to a 10% selloff in the stock market very quickly and that in and of itself will bring more Fed interest rate cuts. So, it is sort of a self-fulfilling prophecy. The bottom line is that we’re looking at an ultra-low interest rate world for the foreseeable future.

Good Luck and Good Trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

June 11, 2019

Tech Letter

Mad Hedge Technology Letter
June 11, 2019
Fiat Lux

Featured Trade:

(BIG TECH’S FEEDING FRENZY)
(CRM), (DATA), (GOOGL), (NFLX)

Big Tech's Feeding Frenzy

Tech Letter

The start of the cloud consolidation is upon us.

The cloud kings, in order to stay ahead of the competition, are resorting to acquiring growth through M&A.

We are still in the sweet part of the growth phase with companies showing they can pull off a mid-20% annual growth rate.

Salesforce (CRM), the leader in client relationships management platforms, took this cue to add to its army of software cloud options by snapping up Tableau (DATA).

What does Tableau do?

Tableau software takes the inputs of raw data and transforms it into easily decipherable dashboards and diagrams.

The company has been expanding its product line to include data cleanup and machine learning tools, enabling it to compete in the wider data-warehousing business.

It has more than 86,000 customers, including Verizon Communications Inc. and Netflix (NFLX).

Let me remind you why big data companies are the golden goose of the technology industry and why they are intrinsic to the fortunes of tech companies.

The idea of big data has been around for years; most organizations now are acutely aware that if they capture all the data that flows into their businesses, they can apply data analytics and generate value creation by making the best strategic decisions suggested from the underlying data.

If upper management hasn’t figured this out yet, they are probably out of business by now.

Let’s roll back to the 1950s, decades before anyone coined the term “big data,” businesses were using rudimentary analytics, basically numbers in a spreadsheet that were manually registered, to unearth paradigm shifts and market opportunities in their industry.

The smorgasbord of goodies that big data analytics offer the world is legendary.

Speed and efficiency are at the top of the list.

Whereas a few years ago, collecting vital information that could be used for future decisions took pace much slower than today.

Identifying insights for immediate actionable business implementation is happening in real time now.

This new mode of execution and organization offers firms an outsized competitive edge they could only dream of.

Harnessing data and utilizing it in the best way in order to monetize its business model is now the norm.

The end result is repeatedly higher trending profits and better customer experience.

Companies and its expenses were also reaping the rewards of this new model with major cost reduction.

Big data technologies can expect significant cost advantages when it comes to storing large amounts of data – plus they can identify more efficient ways of doing business.

Companies now have the pulse of the market and demonstrate the ability to gauge customer needs and satisfaction allowing the company to identify new markets.

This, in turn, has firms often migrating into completely different parts of the economy.

Salesforce’s deal with Tableau isn’t the first and won’t be the last cloud deal.

This is just the beginning.

The decision comes after Google (GOOGL) agreed to buy Looker Data Sciences Inc. for $2.6 billion last week, a move to expand Google’s offerings for managing data in the cloud.

I envision Google wading further into the enterprise software waters as they attempt to relieve their reliance on Search as the primary money maker.

Acquiring the best software then spreading its application through its other assets would be a great initiative too.

For example, creating an enterprise service for YouTube channels and charging YouTube creators a fee to operate a cloud-based product that specializes in optimizing their YouTube channel would be a compelling idea.

There are a million different machinations that Google could elect for, and letting the genie out of the bottle in a good way will do wonders.

After all, global spending on technologies and services that enable digital transformation will surpass $2 trillion in 2022 serving up a long and wide runway for companies that can hunker down and carve out premium enterprise software on the cloud.

As for Salesforce, the stock sold off on anxiety that Salesforce is overreaching to add growth.

There is definitely some truth behind this weakness.

Could this be the end for Salesforce’s growth supercycle?

Salesforce is a pure software growth strategy and the stock has gone nowhere trading sideways for the past 6 months.

Make no bones about it, Salesforce absolutely overpaid for Tableau and even announced that its second headquarter will be stationed in Seattle, a stone’s throw from the headquarter of Tableau.

Founder and Co-CEO of Salesforce Marc Benioff is betting the ranch on data analytics and hopes the subsequent synergies will result in cost savings, better cloud products, a resurgence in revenue growth while wielding a first-rate army of software engineers.

As for now, even the tech market is single-handedly propped up by the Fed who have signaled even more dovish monetary policy.

Wait to read the tea leaves on whether these new additions to Salesforce will meaningfully result in growth or not.

For the time being, Salesforce and tech remain in a precarious position whipsawing because of Trump’s high-risk geopolitical strategy and the Fed attempting to cushion any economic blows from an administration hellbent on tariffs.

May 2, 2019

Tech Letter

Mad Hedge Technology Letter
May 2, 2019
Fiat Lux

Featured Trade:

(APPLE’S HOME RUN)
(AAPL), (CRM), (GOOGL)

Apple's Home Run

Tech Letter

The company that Steve Jobs built is an earnings thoroughbred with money growing out of their ears.

Apple’s earnings report was real confirmation that Apple’s pivot into a services company is overshadowing its drop in iPhone revenue.

They even elevated forward guidance for next quarter.

Being an economic bellwether that it is, the earnings success could point to more bullish momentum for not only the tech sector but the broader market.

The tech strength showing up in the squiggly figures of the sector’s earnings report indicates that the expected earnings recession will be more of a pause rather than a dip that was first expected.

The next bout of bullish strength that permeates through the market will take many tech stocks to higher highs.

The numbers backed up this premise with Q2 2018 revenue from the services category comprising 20% of total revenue in Q2 2019—a rubber stamp of confidence that this isn’t a false dawn after service sales only comprised of 16% of total revenue the prior year.

The death of the smartphone is upon us with most people who can afford a premium one already using one as we speak with no intentions for a quick refresh.

Apple’s strategy of selling expensive iPhones to Chinese nationals is over with iPhone sales getting slaughtered by 17% to about $31 billion—an accelerated decline for a product that has been hamstrung by smartphone rivals in China offering better phones for lower prices.

The $11.5 billion from its services division and the end result of registering revenue in the high end of its $55-59 billion projection for the quarter is a stark shift from the underperformance of 2018 when Chinese iPhones sales were so bad that they stopped reporting the segment altogether.

The $58 billion of quarterly revenue was still a drop of 5% YOY which included $31 billion in iPhone sales, a shell of its former self when they generated $37.5 billion in iPhone sales the same quarter in 2018.

The disruption in handing off the baton to the services brigade caused outsized ructions inside the company causing the stock to plummet 20% last winter.

Wearables put the cherry on top of the sundae expanding at a rate close to 50% during the quarter with AirPods and Apple Watch leading the charge as best sellers.

Apple plans to inject $75 billion on share repurchases and it also approved a 75-cent dividend per share, a 5% increase.

These repurchases could boost Apple’s stock by up to 7% per year offering investors another compelling reason to hold this stock long-term.

The upgraded dimensions of Apple’s business model could finally give investors peace of mind as they wean themselves from Chinese iPhone sales.

Moving forward, the relationship between American tech and the Chinese consumer will be contentious at best, and battling with Huawei on its turf is not a sensible strategy.

Highlighting this weakness were the Greater Chinese revenue registering only $10.2 billion in sales, down from the Q2 2018 tally of $13 billion.

On the positive side, the Chinese weakness is already baked into the pastry ceding way for the services narrative to move to the forefront.

Generating more incremental revenue from its existing base of 1.4 billion Apple accounts is the order of the day.

I initially believed Apple would make major headway in the services segment and foresaw services composing about 25% of total revenue.

However, I didn’t believe they would be able to achieve this for a few years, and the surprise to investors is the velocity of change to the upside in its services business.

Adding the new magazine subscription for $9.99 to its platform is another feather in their cap even though it doesn’t transform the industry.

Respondents to emarketer.com made it widely known that Apple as a platform was the second most important platform for news publishers behind Google offering a great opportunity to carve out more income from their new news app.

Apple is still in dire need of attractive video options for its content basket and assets on the market are plenty from live sports, shows, movies, and video games.

My money would be on Cook to prefer video games as a viable growth driver because it resonates deeply with younger audiences from abroad and avoids the polarity of controversial content which societies are increasingly sensitive to.

Another option would be to dive headfirst into the enterprise software business moving towards a Salesforce (CRM) model selecting cloud companies à la carte to integrate into a business cloud.

Many Apple device holders already wield their devices for their own online businesses, and this would represent a solid growth driver if they could make their services more business-friendly.

What can we expect moving forward?

In short, less iPhone sales and more service revenue as a proportion of total revenue.

If Apple can carefully choreograph its downshift of iPhones sales that doesn’t destroy overall revenue and profitability, they will successfully manage in transforming the company into a hybrid service company.

I believe that Apple’s services will contribute around 30% of total revenue by 2020 and this is a big deal that will buoy the stock.

Ultimately, these are happier times for Apple as their bet on services isn’t getting bogged down, eclipsing expectations, and will cement their status as a sure-fire $1 trillion market cap company.

Bravo!