Global Market Comments
June 10, 2019
Fiat Lux
Featured Trade:
(JUNE 21 AUCKLAND NEW ZEALAND STRATEGY LUNCH)
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE GRAND PLAN)
(MSFT), (GOOGL), (AMZN), (TESLA), (TLT), ($TNX)
Tag Archive for: (GOOGL)
Mad Hedge Technology Letter
June 6, 2019
Fiat Lux
Featured Trade:
(THE SHAKEOUT IN GAME STOCKS)
(GME), (MSFT), (GOOGL), (APPL), (STX), (WDC)
Do not invest in any video game stocks that don’t make video games.
If you want to simplify today’s newsletter down to the nuts and bolts, then there you go.
The company that I have been pounding on the table for readers to sell on rallies has convincingly proven my forecast right yet again with GameStop (GME) capitulating 35%.
It’s difficult to find a tech company with a strategic model that is worse than GameStop’s, and my call to short this stock has been vindicated.
Other competitors that vie for awful tech business models would be in the hard disk drive (HDD) market, and that is why I have been ushering readers to spurn Western Digital (WDC) and Seagate Technology (STX).
This is a time when everybody and their grandmother are ditching hard drives and migrating to the cloud, while GameStop is a video game retailer who is set up in malls that add zero value to the consumer.
This also dovetails nicely with my premise that broker technology or in this case retail brokers of physical video games are a weak business to be in when kids are downloading video game straight from their broadband via the cloud and don’t need to go into the store anymore.
Let’s analyze why GameStop dropped 35%.
The rapid migration of the digital economy does not have room to accompany GameStop’s model of retail video game stores anymore.
It’s a 1990 business in 2019 – only twenty years too late.
This model is being attacked from all fronts - a live sinking ship with no life vests on board.
GameStop was already confronted with a harsh reality and pigeonholed into one of a handful of companies in need of a turnaround.
This isn’t new in the technology sector as many legacy firms have had to reinvent themselves to spruce up a stale business model.
The earnings call was peppered with buzz words such as “transformation” and “strategic vision.”
And when the Chief Operating Officer Rob Lloyd detailed the prior quarter’s results, it was nothing short of a stinker.
Total quarterly revenue dropped 13.3% in Q1 2019 which was down from the prior year of 10.3%.
The headline number did nothing to assuage investors that the ship is turning around, it appears as if the boat is still drifting in reverse.
Diving into the segments, underperformance is an accurate way to capture the current state of GameStop with hardware sales down 35%, software sales down 4.3% and selling pre-owned products declining 20.3%.
Poor software sales were blamed on weaker new title launches this year and comping the strong data war launched last year with increasing digital adoption.
The awful hardware sales were pinned on the late stages of the current generation PS4 and Xbox One cycle with GameStop awaiting an official launch date announcement from Sony and Microsoft for their new console products.
Pre-owned business fell off a cliff reflecting tepid software demand for physical games and the increasing popularity of the various digitally offered products via alternative channels.
The only part of GameStop going in the right direction is the collectibles business that increased 10.5% from last year but makes up only a minor part of the overall business.
Management has elected to remove the dividend completely to freshen up the balance sheet slamming the company as a whole with a black eye and giving investors even less reason to hold the stock.
Indirectly, this is a confession that cash might be a problem in the medium-term.
The move to put the kibosh on rewarding shareholders will save the company over $150 million, but the ugly sell-off means that investors are leaving in droves as this past quarter could be the straw that broke the camel’s back.
They plan to use some of these funds to pay down debt, and GameStop is still confronted by a lack of transformative initiatives that could breathe life back into this legacy gaming company.
It was only in 2016 when the company was profitable earning over $400 million.
Profits have steadily eroded over time with the company now losing around $700 million per year.
Management offered annual guidance which was also hit by the ugly stick projecting annual sales to decline between 5-10%.
GameStop is on a fast track to irrelevancy.
If you were awaiting some blockbuster announcements that could offer a certain degree of respite going forward, well, the tone was disappointing not offering investors much to dig their teeth into.
Remember that GameStop is now on a collision course with the FANGs who have pivoted into the video game diaspora.
GameStop will see zero revenue from this development and a boatload of fresh competition.
Microsoft (MSFT) has been a mainstay with its Xbox business, but Apple (AAPL) and Google are close to entering the market.
Google (GOOGL) plans to leverage YouTube and install gaming directly on Google Chrome with this platform acting as a new gaming channel.
The new gaming models have transformed the industry into freemium games with in-game upselling of in-game items, the main method of capturing revenue.
The liveliest example of this new phenomenon is the battle royale game Fortnite.
Nowhere in this business model includes revenue for GameStop highlighting the ease at which game studios and console makers are bypassing this retailer.
In this new gaming world, I cannot comprehend how GameStop will be able to stay afloat.
Unfortunately, the move down has been priced in and at $5, the risk-reward to the downside is not worth shorting the company now.
The company is the poster boy for technological disruption cast in a negative light and the risks of not evolving with the current times.
BYPASSING THE RETAILER THANKS TO THE CLOUD
Mad Hedge Technology Letter
June 4, 2019
Fiat Lux
Featured Trade:
(THE GOVERNMENT’S WAR ON GOOGLE)
(GOOGL), (FB), (AMZN)
I told you so.
It’s finally happening.
The Department of Justice (DOJ) preparing an antitrust probe on Google (GOOGL) was never about if but when.
The Federal Trade Commission is in the fold as well, as they have secured the authority to investigate Facebook (FB).
The probe will peel back the corrosive layers of Facebook and Google’s businesses such as search, ad marketplace and its other assets in order to excavate the truth.
Investors will get color on whether these businesses are gaining an unfair advantage and perverting the premise of fair competition that every tech company should abide by.
Tech companies skirting the law and living on the margins are in for a stifling reckoning if these probes pick up steam.
Facebook is about to get dragged through the mud kicking and screaming facing an unprecedented existential crisis that have repercussions to not only the broad economy for the next 50 years, but far beyond American shores with America mired in a trade war pitted against the upstart Chinese most powerful tech companies.
Even though I have consistently propped up Alphabet on a pedestal as possessing a few of the most robust assets in tech, I have numerous times flogged their dirty laundry in public view, referencing the regulatory risks that could rear its ugly head at any time.
These companies have been playing with fire and everyone knows it, but in the world of short-term results via stock market earnings report, this trade kept working until governments decided to get their act together because of the accelerating erosion of government trust partly facilitated by technology apps.
As much as a handful of Americans have monetized Silicon Valley to great effect, I can tell you that I spend a great deal of my time abroad, and American soft power is at a generational low ebb.
Blame technology - our dirty secrets are not only exposed in frontal view but it’s pretty much a 3D view of the good, bad, and the ugly and there is a lot of ugly.
I am not saying that punishment is a given for these ultra-rich firms swimming in money.
Historically, Alphabet has stymied regulators before beating out an antitrust investigation in 2013 after a two-year inquiry ended with the FTC unanimously voting to halt the investigation.
Remember that this time around, the probe follows the fine in Europe when The European Union slapped Google with a $1.69 billion for actively disrupting competition in the online advertisement sector.
The European Commission claimed that Google installed exclusivity contracts on website owners, preventing them from populating on non-Google search engines.
It was quite a dirty trick, but do you expect much of anything else from one of the most crooked industries in the economy?
And this wasn’t the first time that Google has run amok.
EU regulators levied a $5 billion penalty on Google for egregious violations regarding its dominance of its Android mobile operating system.
Google was accused by the EU of favoring its in-house apps and services on Android-based smartphones giving manufacturers no alternative but to bundle Google products like Search, Maps and Chrome with its app store Play ensuring that Alphabet would benefit from a lopsided arrangement.
Anti-trust legislation has a myriad of supporters including the current administration who have stepped up its onslaught on Silicon Valley.
President of the United States Donald Trump has even hurled insults at Amazon (AMZN) creator Jeff Bezos and even claimed that Alphabet’s artificial intelligence has aided China’s technological rise.
To say FANG companies are in the good graces of Washington would be laughable.
I would point to Facebook to accelerating the regulatory headwinds as investors have seen Co-Founder and CEO Mark Zuckerberg fire every major executive that has opposed his vision of merging Facebook, Instagram, and WhatsApp into a cesspool of apps that pump out precious big data.
The tone-deaf boss has doubled down to reinvigorate the growth after Facebook sold off from $210.
Board members want Zuckerberg out and he is defiant against any attack on his leadership spinning it around as a vendetta on his reign.
Facebook is walking straight into a minefield and the rest of Silicon Valley is guilty by association, the contagion is that bad.
Facebook is the one to blame because of the daily nature of social interaction on its platform and the pursuance of revenue through hyper-targeting data that 3rd party companies pay access for.
They have no product.
Amazon sells consumer goods which is not as bad.
Facebook facilitates the social dialogue that has unwittingly boosted extremism of almost every type of form possible.
It has given the marginal and nefarious characters in society a platform in which to engineer devastating results and Facebook have an incentive to turn a blind eye to this because of the lust for user engagement.
This has resulted in heinous activities such as terror attacks being broadcasted live on Facebook like the 2019 New Zealand massacre at a mosque.
The former security chief at Facebook Alex Stamos hinted that Mark Zuckerberg’s tenure should wind down and the company needs to shape up and hire a replacement.
The security implications are grave, and many Americans have uploaded all their private information onto the platform.
What is the end game?
Facebook is in hotter water than Google, not by much, but their business model engineers more mayhem than Google currently.
Facebook could get neutered to the point that their ad model is dead and buried.
If Facebook goes down, this would unlock a treasure chest full of ad dollars looking for new avenues.
Facebook’s most precious asset is their data which might be blocked from being monetized moving forward.
Without data, they are worth zero.
The existential risk is far higher for Facebook than Alphabet.
No matter what, Alphabet will still be around, but in what form?
Assets such as YouTube, Google Search, and Waymo, which are all legitimate services, could get spun out to fend for themselves creating many offspring left to sink or swim.
In this case, YouTube, Google Maps, Chrome, Google Play, and Google Search would still possess potent value and offer shareholders future value creation.
Waymo would become a speculative investment based on the future and would be hard to predict the valuation.
Then there is the issue of whether Chinese companies would dominate the collection of FANGs after the split or not.
As I see it, Chinese tech companies will not be allowed to operate in the U.S. at all, and anti-trust repercussions will have many of these homegrown tech companies carved out of their parents to reset a level playing field in a way to re-democratize the tech economy.
This would spur domestic innovation allowing smaller companies to finally compete on a national stage.
The government finally clamping down epitomizes the current volatile tech climate and how Alphabet who has some of the best assets in the industry can go from barnstormer to pariah in a matter of seconds.
As for Facebook, they have always had a bad stench.
The cookie could still crumble in many ways, each case looks high risk for Facebook and Google for the next 365 days.
Stay away from these shares until we get any meaningful indication of how things will play out, but I have a feeling this is just the beginning of a tortuous process.
Mad Hedge Technology Letter
May 23, 2019
Fiat Lux
Featured Trade:
(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 21, 2019
Fiat Lux
Featured Trade:
(HUAWEI HITS THE FAN)
(HUAWEI), (MU), (NVDA), (GOOGL), (FB), (TWTR), (APPL)
If you ever needed a signal to stay away from chip stocks short-term, then the Huawei ban by the American administration was right on cue.
Huawei, the largest telecommunications company in China, is heavily dependent on U.S. semiconductor parts and would be seriously damaged without an ample supply of key U.S. components
The surgical U.S. ban may cause China and Huawei to push back its 5G network build until the ban is lifted while having an impact on many global component suppliers.
The Chinese communist party has exhibited a habit for retaliation and could target Apple (AAPL) who is squarely in their crosshairs after this provocative move.
At a national security level, depriving Huawei of U.S. semiconductor components now is still effective as China’s chip industry is still 5 years behind the Americans.
China has a national mandate to develop and surpass the U.S. chip industry and denying them the inner guts to build out their 5G network will have long-lasting ramifications around the world.
Starting with American chip companies, they will send chip companies such as Micron (MU) and Nvidia (NVDA) into the bargain basement where investors will be able to discount shop at generational lows because of a monumental drop in annual revenue.
Even worse for these firms, Huawei anticipated this move and stocked itself full of chips for an extra 3 months, meaning they were not going to increase shipments in a meaningful way in the short-term anyway.
This kills the chip trade for the rest of the first half of 2019, and once again backs up my thesis in avoiding hardware firms with Chinese exposure.
Alphabet (GOOGL) has cut ties with cooperating with Huawei and that means software and the apps that are built around the software too.
Gmail, YouTube, Google Maps and Chrome will be removed from future Huawei smartphones, and even though this doesn’t amount to much in mainland China, this is devastating for markets in Eastern Europe and Huawei smartphone owners in the European Union who absolutely rely on many of these Google-based apps and view Chinese smartphones as a viable alternative to high-end Apple phones.
Users who own an existing Huawei device with access to the Google Play Store will be able to download app updates from Google now, but these same users will not consider Huawei phones in the future when the Google Play Store is banned forcing them to go somewhere else for the new upgrade cycle.
The fallout further bifurcates the China and American tech ecosystems.
I would argue that China had already banned Google, Facebook (FB), Twitter (TWTR), and marginalized Amazon (AMZN) before the trade war even started.
The American government is merely putting in place the same measures the Chinese communist party has had in place for years against foreign competition.
The recent ban on Huawei was a proactive response to China backing away from negotiations that they already had verbally agreed upon after hawks inside the Chinese communist party gained the upper hand in the tireless fight against the reformist.
These hawks want to preserve the status quo because they benefit directly from the current system and economic structure in place.
The American administration appears to have taken on an even more aggressive tone with the Chinese, as the resulting tariffs are putting even more stress on the Chinese hawks.
However, there is only so much bending they can do until a full-scale fissure occurs and debt rated “A” which is its third-highest classification has recently been slashed to a negative outlook as the tariff headwinds pile up.
The U.S. administration could further delve into its party bag by rebanning Chinese tech firm ZTE who almost folded after the first ban of U.S. semiconductor components.
The U.S. administration is emboldened to play the hand they have now because as long as Chinese tech need U.S. chips, the ball is in the American’s court and going on the offensive now would be more effective than if they carried out the same strategy in the future.
China is clearly attempting to delay the process enough to get to the point where they can install their own in-house chips and can say adios to America and the chips they currently rely on.
It’s doubtful at the current pace of escalation if China can survive until that point in time.
How will China react?
Massive easing and dovishness by the Chinese central bank will be needed to maintain stability and remedy the economy.
The manufacturing sector will face another wave of mass layoffs and debt pressures will inch up.
Chinese exports will get slashed with international corporations looking to move elsewhere to stop the hemorrhaging and rid itself of uncertainty.
Many Chinese tech companies will have entire divisions disrupted and even shut down because of the lack of hardware needed to operate their businesses.
Imagine attempting to construct a smartphone without chips, almost like building a plane to fly without wings.
This is also an easy to decode message to corporate America letting them know that if they haven’t moved their supply chains out of China yet, then time is almost up.
Going forward, I do not envision any meaningful foreign tech supply chain that could survive operating in mainland China because nationalistic forces will aim for revenge sooner or later.
There are many positives to this story as the provocative decision has been carried out during a time when the American economy is fiercely strong and firing on all cylinders.
Unemployment is spectacularly low at 3.6%, the lowest rate since 1969, while wage growth has accelerated to 3.8% annually up from 3.4%.
The robust nature of the economy has led to stock market performance being incredibly resilient in the face of continuous global headline risk.
The positive reactions are in part based on the notion that investors expect the Fed Governor Jerome Powell to adopt an even more dovish stance towards rates.
It’s almost as if we are back to the bad news is good news narrative.
Each dip is met with a furious bout of buying and even though we are trudging along sideways, for the time being, this sets up a great second half of the year as China will be forced to fold or face mass employment or worse offering at least a short-term respite for investors to go risk on.
As for the chip sector, high inventories on semiconductor balance sheets and in the channel will continue, as well as weak end demand in nearly every semiconductor end market meaning a once-in-a-generation magnitude of memory oversupply.
The trade war will most likely turn for the worse giving investors even more beaten down prices that will turn into great entry points when the time is ripe.
Global Market Comments
May 20, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR I’LL TAKE SOME OF THAT!)
(FXI), (CYB), (TSLA), (AAPL), (BA), (WMT), (TLT), (INTU), (GOOGL)
