Mad Hedge Technology Letter
November 15, 2019
Fiat Lux
Featured Trade:
(HERE’S THE INFRASTRUCTURE COMPANY FOR EVERYTHING),
(CSCO), (MSFT)
Posts
Cisco (CSCO) is an accurate proxy for global enterprise spending around the world.
This foundational company offers the base for software-reliant companies to flourish and tuning into their quarterly earnings report is a front-row affair.
Even though the firm beat on the bottom line, 2020 prospects dimmed substantially, enough to question whether the underpinnings of global growth remain in-tact.
Topline revenue beat as well with the company earning $13.16 billion in revenue eclipsing the estimated $13.09 billion.
But analysts and investors were mainly there to scrutinize the commentary on future earnings considering that 2020 is unfolding into the most uncertain year in recent history coincides with a potentially fractious U.S. presidential election.
The onus was on CEO Chuck Robbins to provide some comfort and that comfort was visibly lacking in his call.
The disappointment started with the commentary regarding annualized revenue growth.
Cisco expects annual revenue to slide between 3-5% next year.
Earlier this year, Robbins had revealed that the slowdown had been confined to smaller parts of the market but now it is suddenly expanding into almost all corners of the world.
The delay in IT spend has hit conversion rates which were lower than normal and large deals got done but in a smaller way.
Businesses have consciously chosen to elongate their refresh cycle and are defiantly sticking with the current IT technology to subdue costs.
Usually, new IT infrastructure begets more spending on newer software but that is all grinding down to a halt for the foreseeable future.
Cisco has a massive install base of users to grab data points from, and this should put some cold water on a narrowing tech rally.
Safe haven names have received the lion’s share of the tech rally momentum as of late.
The most suitable adjective to describe the current IT slowdown is “broad-based” and countries such as China are showing weak IT spend too.
China isn’t a huge customer for Cisco, and emerging markets have been exhibiting more weakness than the larger economies.
Cisco’s poor guidance dovetails nicely with my recent theme of a prolonged tech earnings recession laced with bad guidance.
The lamentable commentary about 2020 will persist in tech.
I do view the more than 7% dive in Cisco’s shares today as a solid entry point into one of the premier tech infrastructure stocks in the world, but will let the market digest the results first.
Even though corporate America is heading toward a new valley in an earnings recession that could last the entire calendar year, Cisco will muscle its way through as higher-tech spend will at some point reshape the earnings outlook.
But don’t expect that for the next quarter or two.
Investors should expect more softness in tech shares and rerouting of capital into top-grade tech shares like Microsoft (MSFT).
Mad Hedge Technology Letter
October 11, 2019
Fiat Lux
Featured Trade:
(CISCO’S DOWNWARD SPIRAL)
(CSCO)
The technology infrastructure company Cisco sold off over 2% after Goldman Sachs analyst Rod Hall downgraded the stock to neutral from buy.
His downgrade was based on a guess that enterprise spending will weaken further, and that telecom spending will continue to remain unimpressive.
This shows you how far the bank of the elite has fallen and the quality of their research considering Cisco’s earnings report was in August and this call should have gone out far earlier.
Goldman Sachs (GS) has trimmed headcount fiercely as their traditional businesses from IPOs to trading have been squeezed to suffocating levels forcing the bank to go into the subprime segment with the Apple (AAPL) credit card.
In Silicon Valley, Cisco’s shares will be subdued for the foreseeable future because the telecom segment is softening up as we motor into 2020 nicely, noted by Goldman.
The headwinds stem from the slow adoption of 5G and requisite carrier network automation implementation.
If you thought 5G would happen with a mere snap of the fingers, you are wrong. It will be implemented in agonizingly slow stages with lots of trial and error along the way.
Enterprise spending has also tapered off boding ill for the company that supplies the foundational technology to the software startups.
Adding fuel to the fire, waning business confidence at large enterprise driven by trade volatility as opposed to a broader macro slowdown is somewhat disconcerting and Cisco will most likely trade sideways in a stupor until external catalysts either pick up the stock or the bizarre world of geopolitics slams it down.
The floor of the stock is solid and deeply rooted in the profitability of the stock.
This is a great company and is one of the premier brands that slide in nicely in most offices in Silicon Valley.
The company isn’t a growth company, yet not written off into the legacy dustbin, and the sudden paradigm shift to value has made this stock even more attractive.
The 7% revenue YOY growth last quarter is not a problem as risk appetites are reigned back as the economic cycle ends.
EPS grew to $3.10 highlighting the ultra-profitable nature of the company.
Many of the recent tech selloffs in individual names have been induced by sour forward-looking outlooks and Cisco followed suit calling for 0-2% revenue growth, and GAAP EPS growth of -14% year-over-year.
The company has turned to the exciting revenue stream of subscriptions accounting for around 70% of the company's software sales.
This has created inflated net margins with Cisco improving from 16.7% five years ago to 25.8% today.
Cisco is a cash cow generating $15.8 billion of cash flows from operations, up 16% year-over-year.
The bump up in cash flow has made it easier to justify M&A which Cisco has routinely turned to in an effort to shore up different areas of the business.
A dividend was initiated in 2011 providing shareholders with strong annual double-digit percentage increases.
Financial engineering doesn’t stop there with Cisco's buyback approach resulting in reducing its outstanding share count by roughly 16.3% over the past 5 years adding to the profitability narrative.
Macro-risks have gone up the wazoo in the external market and Cisco is a legitimate candidate for a short-term trade to safety at these levels and a long-term investment.
Considering that their Chinese business is only in the single digits and revenue growth is in the high single digits, value-added management should make this company even more compelling.
And as the next wave of 5G adoption hits, this stock will experience a tidal wave of asset appreciation.
I can guarantee that the best is yet to come, and the status quo isn’t all that bad too.
Mad Hedge Technology Letter
August 16, 2019
Fiat Lux
Featured Trade:
(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
Fiat Lux
Featured Trade:
(DON’T MISS THE JULY 24 GLOBAL STRATEGY WEBINAR)
(WHAT’S HAPPENED TO APPLE?), (AAPL)
(STORAGE WARS)
(MSFT), (IBM), (CSCO), (SWCH)
Global Market Comments
June 13, 2019
Fiat Lux
Featured Trade:
(TUESDAY, JUNE 25 SYDNEY, AUSTRALIA STRATEGY LUNCHEON)
(CYBERSECURITY IS ONLY JUST GETTING STARTED),
(PANW), (HACK), (FEYE), (CSCO), (FTNT), (JNPR), (CIBR)
Global Market Comments
June 6, 2019
Fiat Lux
Featured Trade:
(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
Fiat Lux
Featured Trade:
(ANOTHER 5G PLAY TO LOOK AT)
(EQIX), (CSCO), (GOOGL), (MSFT), (ORCL)
