Mad Hedge Technology Letter
August 16, 2019
(CISCO’S CHINA HIT)
(WEWORK), (CSCO), (FXI)
Mad Hedge Technology Letter
August 16, 2019
(CISCO’S CHINA HIT)
(WEWORK), (CSCO), (FXI)
If you believe that the trade war developments have had a negligible effect on the tech companies that operate in mainland China, then you are dead wrong.
Cisco is a cautionary tale highlighting that things aren’t running smoothly with its decrease of 25% in annualized revenue from operations in mainland China.
Many of the profit models in China have been swallowed up by the friction between the two governments at the highest level.
The Cisco employee count was sacrificed stateside with the San Jose, California branch implementing a second round of layoffs that will sweep aside 500 more Cisco engineers.
The most damming set of words that epitomized the dire situation that Cisco face is when management said, “we’re being uninvited to bid …We’re not being allowed to even participate anymore.”
The Chinese government has disengaged Cisco from competing in China and that means a whole channel of revenue will be effectively offline for the foreseeable future unless there is substantial rapprochement from the two governments.
Perusing the files of venture capitalist heartthrob WeWork that plans to go public proved that relations with China and doing business is a financial high-wire act.
I will explain.
WeWork’s 350-plus-page IPO prospectus offered insight into the treacherous nature of business exposure in the Middle Kingdom.
Any investor who rummaged through the prospectus has to be dreading the worse because the boobytraps are plentiful.
A cynical take of WeWork’s business tells me they are doomed in China.
Property is in control of a huge swath of Chinese wealth vehicles and commercial property is part of that equation.
According to the filing, WeWork is contracted to 115 buildings across 12 cities in Greater China, about 15% of its total number of facilities.
I envision property law skirmishes of the foreign WeWork against local property landlords and by historical standards, the court system has not been kind to non-Chinese who seek justice in the Chinese court system against Chinese national interests.
WeWork’s management references “higher tariffs, capital controls, new adverse trade policies or other barriers to entry” as possible counterpunches to an already delicate working environment.
The pressure cooker could explode at any point with the higher-ups making heads roll at the corporate level to prove a point at a macrolevel.
Foreign companies are easy targets and WeWork is an American company – a double whammy that could make it a convenient target for the Chinese communist party.
Summing it up, this is not an advantageous time to lever up on the Chinese economy.
Risk control is needed and this smells like a ticking time bomb.
It really shows how the tech landscape has disintegrated for American companies in China.
They were once welcomed with grandeur and hospitality plus the forced technology transfers.
CEOs bit their tongue because the revenue growth surpassed the cons of cyberespionage and outright theft.
With the accumulation of generations of free knowhow, China is now locked and loaded with a tech industry that rivals anyone in the world.
The last item left on the menu are high-grade semi chips which the Chinese have not mastered yet and that might be the last stand for the Americans if they hope to salvage a stunning comeback victory.
If WeWork does manage to go public without the equity market raining down on its parade, it’s an outright sell and stay away.
It’s nothing but a glorified property manager and its interests in China could open up pandora box.
Global Market Comments
July 19, 2019
(DON’T MISS THE JULY 24 GLOBAL STRATEGY WEBINAR)
(WHAT’S HAPPENED TO APPLE?), (AAPL)
(MSFT), (IBM), (CSCO), (SWCH)
No, this piece is not about the TV reality show that has a gruff lot of hopeful entrepreneurs blindly bidding for the contents of abandoned storage lockers.
With hyper-accelerating technology creating data at an exponential rate, it is getting far too big to physically store.
In 2018, over $80 billion was spent on data centers across the country, often in the remotest areas imaginable. Bend, OR, rural West Virginia, or dusty sun-baked Sparks, NV, yes, they’re all there.
And you know what the biggest headache for the management of many tech companies is today? A severe shortage of cost-effective data storage and the skyrocketing electric power bills to power them.
During my lifetime, storage has evolved from one-inch magnetic tape on huge reels to highly unreliable 5 ¼ inch floppy disks, then 3-inch discs, and later to compact discs.
The solid-state storage on silicon chips that hit the market six years ago was a dream, as it was cheap, highly portable, and lightning fast. Boot-up time shrank from minutes to seconds. The only problem was the heat and sitting on it when you forgot those ultra slim designs on the sofa.
Moore’s Law, which has storage doubling every 18 months while the cost halves, has proved faithful to the bitter end. The problem now is, the end is near as the size of an electron becoming too big to pass through a gate is increasingly becoming a limiting factor.
As of 2017, the world needed 44 gigabytes of storage per day. According to the International Data Corporation, that figure will explode to 460 billion gigabytes by 2025, in a mere seven years.
That’s when the global datasphere will reach 160 trillion gigabytes, or 160 zettabytes. It all sounds like something out of an Isaac Asimov science fiction novel.
You can double that figure again when Google’s Project Loon brings the planet’s 5 million residents currently missing from the Internet online.
In the meantime, companies are making fortunes on the build-out. Some $50 billion has to be spent this year just to keep even with burgeoning storage demand.
And guess what? Thanks to rocketing demand from electric cars and AI, memory grade silicon is expected to run out by 2040.
All I can say is “Better pray for DNA.”
Deoxyribonucleic acid has long been the Holy Grail for data storage. There is no reason why it shouldn’t work. After all, you and I are the product of the most dynamic data storage system known to man.
All of the information needed to replicate ourselves is found in 3 trillion base pairs occupying every single cell in the human body.
To give you some idea of the immense scalability of DNA, consider this. One exabyte of data storage using convention silicon would weigh 320 metric tonnes. The same amount of information in DNA would occupy five cubic centimeters weighing five grams, or 0.18 ounce!
And here is the big advantage of DNA. Conventional silicon permits only two programing choices, “0” or “1”. Even with just that, we have been able to achieve incredible gains in computing over the last 50 years.
DNA is made of four difference bases, adenine, cytosine, guanine, and thymine, which allow four squared possible combinations, or 16. The power demands are immeasurably small and it runs cool.
Also known as NAM, or nucleic acid memory, it has already burst out of the realm of science fiction. Microsoft Research (MSFT), the University of Washington, and (IBM) have all gotten it to work on a limited basis.
So far, retrieval is the biggest problem, something we ourselves do trillions of times a day every day without thinking about it.
DNA is organic, requires no silicon, and can replicate itself into infinity at zero cost. The information can last tens of thousands of years. Indeed, scientists were recently able to reconstruct the DNA from Neanderthals who lived in cave in Spain 27,000 years ago.
Yes, you can now clone your own Neanderthal. Gardening work maybe? Low-waged assembly line workers? Soldiers? Traders? I think I already know some. Look for that tell-tale supraorbital brow (click here for details).
But I diverge.
If you want to make money, like tomorrow, instead of in a decade, there are still a few possibilities on the storage front.
If you want to take a flyer on the ongoing data storage buildout, you might look at Las Vegas-based Switch (SWCH). The company IPO’d in October and has since seen its shares drop by 32%, which is normal for these small tech companies.
A much cleaner and safer play is Cisco Systems (CSCO), one of my favorite lagging old technology companies. After all, everyone needs Cisco routers on an industrial scale.
Global Market Comments
June 13, 2019
(TUESDAY, JUNE 25 SYDNEY, AUSTRALIA STRATEGY LUNCHEON)
(CYBERSECURITY IS ONLY JUST GETTING STARTED),
(PANW), (HACK), (FEYE), (CSCO), (FTNT), (JNPR), (CIBR)
The cybersecurity sector has been dragged with the rest of technology in recent months creating a rare entry point on the cheap side of the longer term charts.
The near destruction of Sony (SNE) by North Korean hackers years ago has certainly put the fear of God into corporate America. Apparently, they have no sense of humor whatsoever north of the 38th parallel.
As a result, there is a generational upgrade in cybersecurity underway with many potential targets boosting spending by multiples.
It’s not often that I get a stock recommendation from an army general. That is exactly what happened the other day when I was speaking to a three star about the long-term implications of the Iran peace deal.
He argued persuasively that the world will probably never again see large-scale armies fielded by major industrial nations. Wars of the future will be fought online as they have been silently and invisibly over the past 15 years.
All of those trillions of dollars spent on big ticket, heavy metal weapons systems are pure pork designed by politicians to buy voters in marginal swing states.
The money would be far better spent where it is most needed, on the cyber warfare front. Needless to say, my friend shall remain anonymous.
The problem is that when wars become cheaper, you fight more of them, as is the case with online combat.
You probably don’t know this, but during the Bush administration, the Chinese military downloaded the entire contents of the Pentagon’s mainframe computers at least seven times.
This was a neat trick because these computers were in stand-alone, siloed, electromagnetically shielded facilities not connected to the Internet in any way.
In the process, they obtained the designs of all of our most advanced weapons systems, including our best nukes. What have they done with this top-secret information?
Like many in senior levels of the US military, the Chinese have concluded that these weapons are a useless waste of valuable resources. Far better value for money is more hackers, coders, and servers, which the Chinese have pursued with a vengeance.
You have seen this in the substantial tightening up of the Chinese Internet through the deployment of the Great Firewall, which blocks local access to most foreign websites.
Try sending an email to someone in the middle Kingdom with a gmail address. It is almost impossible. This is why Google (GOOG) closed its offices there years ago.
I know of these because several Chinese readers are complaining that they are unable to open my Trade Alerts, or access their foreign online brokerage accounts.
As a member of the Joint Chiefs of Staff recently told me, “The greatest threat to national defense is wasting money on national defense.”
Although my brass-hatted friend didn’t mention the company by name, the implication is that I need to go out and buy Palo Alto Networks (PANW) right now.
Palo Alto Networks, Inc. is an American network security company based in Santa Clara, California just across the water from my Bay area office.
The company’s core products are advanced firewalls designed to provide network security, visibility and granular control of network activity based on application, user, and content identification.
Palo Alto Networks competes in the unified threat management and network security industry against Cisco (CSCO), FireEye (FEYE), Fortinet (FTNT), Check Point (CHKP), Juniper Networks (JNPR), and Cyberoam, among others.
The really interesting thing about this industry is that there really are no losers. That’s because companies are taking a layered approach to cyber security, parceling out contracts to many of the leading firms at once, looking to hedge their bets.
To say that top management has no idea what these products really do would be a huge understatement. Therefore, they buy all of them.
This makes a basket approach to the industry more feasible than usual. You can do this by buying the $435 million capitalized Pure Funds ISE Cyber Security ETF (HACK) which boasts CyberArk Software (CYBR and FireEye (FEYE) as its largest positions.
(HACK) has been a hedge fund favorite since the Sony attack.
For more information about (HACK), please click here.
And don’t forget to change your password.
Global Market Comments
June 6, 2019
(WEDNESDAY, JUNE 28 PERTH, AUSTRALIA STRATEGY LUNCHEON)
(THE IRS LETTER YOU SHOULD DREAD),
(PANW), (CSCO), (FEYE),
(CYBR), (CHKP), (HACK), (SNE)
(CHINA’S COMING DEMOGRAPHIC NIGHTMARE)
Mad Hedge Technology Letter
May 23, 2019
(ANOTHER 5G PLAY TO LOOK AT)
(EQIX), (CSCO), (GOOGL), (MSFT), (ORCL)
One of the seismic outcomes from the upcoming rollout of 5G is the plethora of generated data and data storage that will be needed from it.
If you are a cloud purist and want to bet the ranch on data being the new oil, then look no further than Equinix (EQIX) who connects the world’s leading businesses to their customers, employees, and partners inside the most-interconnected data centers.
On this global platform for digital business, companies come together worldwide on five continents to reach everywhere, interconnect everyone and integrate everything they need to reap a digital windfall.
And whether we like it or not, the future will be more interconnected than ever because of the explosion of data and the 5G that harnesses the data will allow business to reach across the globe and expand their addressable audience.
The stock has reacted like you would have thought with a victorious swing up after a tumultuous last winter.
The cherry on top was the positive earnings report earlier this month.
The highlights were impressive and plentiful with revenues for Q1 coming in at $1.36 billion, up 11% year-over-year meaningfully ahead of management expectations.
Equinix’s market-leading interconnection franchise is performing well, with revenues continuing to outpace colocation, growing 12% year-over-year, as the cloud ecosystem continues to scale.
Penetration in “lighthouse accounts” or early adopters increased nearly 50% from the Fortune 500 and 35% from the Global 2,000 demonstrating the expanding opportunity as Equinix unearths more value from the enterprise industry.
Equinix is now the market leader in 16 out of the 24 countries in which they operate, and they’re expanding its platform with 32 projects announced across 27 markets, with Q1 openings in Frankfurt, Hong Kong, London, Paris, and Shanghai.
Equinix’s network vertical experienced solid bookings led by strength in Access Point (AP), which is a hardware device or a computer’s software that acts as a communication hub for users of a wireless device to connect to a wired LAN.
APs are important for providing heightened wireless security and for extending the physical range of service a wireless user has access to and driven by major telecommunication companies, mobile operators, and NSP resale.
Expansions this quarter include Hutchison, a leading British mobile network operator upgrading their infrastructure to support 5G and cloud services, as well as a leading Asian communication provider, migrating subsea cable notes and connecting to ECX Fabric for low latency.
Equinix’s financial services vertical experienced record bookings led by Europe, the Middle East and Africa (EMEA) and rapid growth in insurance and banking.
New contracts include a fortune 500 Global insurer transforming IT delivery with a cloud-first strategy, a top three auto insurer transforming network topology while securely connecting to multiple clouds, and one of the largest global payment and technology companies optimizing their corporate and commercial networks.
Demand in the social media sub-segment as providers are hellbent on improving user experience and expanding the scope of their business models.
Equinix’s gaming and e-commerce sub-segment grew the fastest year-over-year led by customers, including Tencent, neighbor, and roadblocks.
Cloud and IT verticals also captured strong bookings led by SaaS as the cloud diversifies towards a hybrid multi-cloud architecture.
A robust pipeline can be rejoiced around as cloud service providers continue to push to new frontiers and roll out additional services.
Developments include a leading SaaS provider expanding to support growth in new markets and with the Federal Government as well as an AI-powered commerce platform upgrading to enhance user experience support a rapidly growing customer base.
As digital transformation accelerates, the enterprise vertical continues to be Equinix’s sweet spot led by healthcare, legal and travel sub-segments this quarter and main catalysts to why I keep recommending reader into enterprise software companies.
The chips are being counted with new contracts from Air Canada, a top five North American airline deploying a hybrid multi-cloud strategy, Space X deploying infrastructure to interconnect dense network and partner ecosystems and one of the big four audit firms regenerating networks and interconnecting to multi-cloud to improve the user experience for both employees and clients.
Channel bookings also registered continued strength delivering over 20% of bookings with accelerated growth rates selling to Equinix’s key cloud players and technology alliance partners, including Cisco (CSCO), Google (GOOGL), Microsoft (MSFT), and Oracle (ORCL).
New channel wins this quarter includes a win with Anixter for a leading French transportation and freight logistics company deploying mobility platform, as well as a win with AT&T for a top-five U.S. Bank accessing our network and cloud provider.
Management signaled to investors they are expecting a great year with full-year revenue guidance of $5.6B, a 9-10% year-over-year boost and a $25M revision from the previous guidance.
Equinix can boast 65 consecutive quarters of increasing revenues, which eclipses every other company in the S&P 500, and it anticipates 8%-10% in annual revenue growth through 2022.
This is an incredibly stable yet growing business and the 2.17% dividend yield, although not the highest, is another sign of a healthy balance sheet for a profitable company.
If you had any concerns about this stock, then just take a look at its 3-year EPS growth rate of 73% which should tell you that the massive operational scale of Equinix is starting to allow efficiencies to take hold dropping revenue straight down to the bottom line.
If you are searching for a company that cuts across every nook and cranny of the tech sector by taking advantage of the unifying demand and storage requirements of big data, then this is the perfect company for you.
This company will only become more vital once 5G goes online and being the global wizards of the data center will mean the stock goes higher in the long-term.
Mad Hedge Technology Letter
May 20, 2019
(THE BIG PLAY IN CISCO)
(CSCO), (JNPR), (ANET), (INTC), (GOOGL), (AMZN)