Mad Hedge Technology Letter
November 14, 2018
Fiat Lux
Featured Trade:
(I NAILED IT)
(AMZN), (GOOGL), (FDX), (UPS), (JCP)
Tag Archive for: (GOOGL)
Mad Hedge Technology Letter
November 12, 2018
Fiat Lux
Featured Trade:
(THE NEXT OVERHYPED TECH PRODUCT TO BOMB)
(SSNGY), (AAPL), (GOOGL)
I’m unimpressed.
The Samsung (SSNGY) Galaxy F foldable smartphone will be a complete failure just like the Google Glass.
Heralding this product as the new disruptor ready to displace the Apple (AAPL) iPhone is a bunch of garbage.
Yes, Korean stalwart Samsung did achieve success with their flagship smartphone device the Samsung Galaxy which took 6 years to produce. But don’t expect anything similar in terms of sales and scale of adoption.
This will be a dud.
I will outline some of the problems creating a foldable smartphone for mass use.
In fact, why not call a laptop a “foldable smartphone”? I routinely wield my Google (GOOGL) Voice and Skype to call my Rolodex of phone numbers around the world from my computer and my laptop definitely folds!
This smells like desperation from Samsung who has grossly miscalculated gimmicky innovation coining it as a true gamechanger.
Illogically, the act of folding creates a second layer that will result in a bulky product. Logically, it makes sense to have one layer and one layer only.
The sleek smartphones of today are trending towards becoming A2 paper thin and lugging around a brick is not what contemporary-minded netizens had in mind.
Naturally, each future iteration will gradually solve this problem just like Moore’s law observes that the number of transistors in a dense integrated circuit doubles about every two years, meaning you can pack more components into a product over time.
But will there be a second version of this foldable phone?
And then manufacturers must keep in mind which addressable market could this foldable device disrupt. Will it replace the smartphone or the tablet?
Smartphone screens have become bigger with each generation eroding the share and application of the tablet once the smartphone eclipsed the 6-inch screen size.
The tablet industry has suffered since with smartphone enhancements only adding to the misery. This is all evident in this year’s tablet sales down 5.4% YOY through September.
If this foldable phone is pigeonholed as a replaceable tablet product, then sales would address a niche market product at best and have a higher chance of being an outsized flop.
No matter how you cut it up, iPhone users won’t gravitate towards this gimmicky device and chuck their iPhones in the bin.
Cost is also a big factor in this type of product because of the capital thrown at it by Samsung.
They no doubt hope to recoup some of the exorbitant R&D that went into building a brand-new product from scratch.
Rumors floating around the Samsung developer conference pin this foldable phone at a retail price of around $2000.
With this high of price point, I would expect the phone to fly out of my pocket by itself and fold out without me physically doing anything or something similarly impressive.
I highly doubt that Samsung can pull off something that innovative.
The nature of Apple producing brilliant smartphones is that to topple the iPhone, something special is needed to clearly surpass the predecessor along with a must have “it” factor.
That is what you got with the hoards of customers camping overnight in a tent outside of Apple stores dotted around the world waiting to be the first to buy the next version of the iPhone.
That type of pandemonium and hoopla surrounding a consumer product hasn’t been replicated since the days of Steve Jobs.
In general, customers want convenience and the arduous nature of folding out a phone will become tedious in actual reality because most phone users have the propensity to check their phone 15 times per hour.
That also means folding out a phone 15 times per hour and that doesn’t dovetail well with most phone users who, as of now, just slip their phone in and out of a coat or trouser pocket ready in half a second to navigate the e-world.
In short, this device isn’t practical and the targeted market who has the cash to pay for this will dislike the inconvenience of the application.
The user experience is demonstrably inferior to the Apple iPhone.
On the surface, the Galaxy F phone looks innovative and the adaptable nature of the foldable screen is a novelty, but Samsung will have to go back to the drawing board on this one.
I incessantly drum up the issue of the lack of visionaries at the helm of tech companies. The number can be counted on one hand, maybe two.
The type of class where you find the Jack Dorsey and Elon Musk level of visionaries is not a dime a dozen.
When you have a lack of vision, consumers get foldable phones.
Forcibly wedging in hyper-charged display technology into a smartphone is a recipe for disaster.
Maybe someday this technology can be more relevantly applied to a consumer product, but this Frankenstein type product is a mix of two sets of technologies not meant to marry each other.
The act of intent is of equal importance.
The bigger takeaway from this fanciful experiment is that the next wave of innovation to replace the smartphone is in full swing and happening as we speak.
Even though Samsung’s Hail Mary pass looking for that elusive last-second touchdown on the last heave of the game will be a bust. It is only a matter of time before another Steve Job’s lookalike hits the jackpot with the perfect consumer device wooing the billions starting another cult-like phenomenon.
In the next 10 years, display technology will be completely revolutionized adorning our megacities and billboards in ways we never imagined.
This is all just the beginning and filtering out the right formula is what we see taking place from all these tech companies determined to become the king of the jungle.
All of this foldable display technology reverts back to one constant desire – the demand for larger screens.
The 6-inch smartphone was the first baby step to something brilliant.
But ultimately, producing a digital device that can easily fit into our pocket, instantaneously ready for action, possessing beautiful optics with the largest screen possible is the eventual chosen one who will win this sweepstake.
And the first company that can figure out how to get the phone out of our pockets, in front of our eyes without the need for human fingers will have the inside track to revolutionize the world.
We are not there yet, but we are inching closer every day because of the hyper-accelerating rate of technology.
Waiting in the queue are Samsung’s biggest rivals looking to enter the foldable phone market such as Huawei, LG, Lenovo, and many other Chinese Android manufacturers.
There have been whispers that Apple has had some patents filed for foldable technology. And with Sir Jonathan Paul Ive, the Chief Design Officer of Apple, a remarkably special talent designing Apple’s revolutionary products, he certainly has something special to offer hidden up his sleeves.
He always does.
Mad Hedge Technology Letter
November 7, 2018
Fiat Lux
Featured Trade:
(THE RELIABILITY OF ADOBE)
(ADBE), (GOOGL), (ZEN), (TWLO), (SQ)
Tech companies have a habit of suddenly coming and going because of the nature of the relentless environment that spits out losers and celebrates winners.
It’s hard-pressed to find software companies that pass the test of time but there is one that is healthily chugging along that most people know quite well.
Adobe (ADBE) was established 35 years ago in co-founder John Warnock's garage.
This legacy software company’s name, Adobe, was named after the Adobe Creek in Los Altos, California, which ran behind Warnock's house.
Adobe cut its teeth in an era when tech CEOs were not larger-than-life cult figures, and all Adobe has done is quietly infiltrating its way into everybody’s devices by way of Adobe Flash Player and its smorgasbord of useful software applications.
Adobe acquired Macromedia in 2005 which was responsible for building Adobe Flash Player.
This Macromedia software has been developed and distributed by Adobe Systems ever since the purchase and its functions involve viewing multimedia contents, executing rich internet applications, and streaming audio and video. Flash Player can run from a web browser as a browser plug-in or on supported mobile devices.
Flash player was its second hit success software program after its Adobe Acrobat and Reader software introduced PDF, the Portable Document Format, which is still ubiquitously used today even after all these years.
Most software companies are relatively new to the scene and like companies I have recently written about such as Zendesk (ZEN) and Twilio (TWLO), they can brag about growing sales of 30% or 40% plus per year.
Adobe isn’t too shabby itself growing sales at over 24% annually – remarkably high for such an ancient tech company.
The company’s strengths are similar to that of Apple (AAPL) – high-quality products and high profitability.
There will be no back-to-back doubling of the stock like some hyper-growth tech stocks because Adobe doesn’t subscribe to the type of growth trail that Square (SQ) has blazed.
What you can expect from Adobe is a slow grind up in share price stoked by its outperforming EPS expansion and acceptable sales growth of mid-20%.
Its annual operating margins have essentially tripled since the beginning of 2015 from around 10% and now boasts an Apple-like 30%.
There are no bones about it – Adobe has high-quality software across its diversified portfolio.
Other Adobe software products universally soaked up are its stable array of graphic design software such as Adobe Photoshop and Adobe Dreamweaver.
Adobe has also ventured into video editing, animation, and visual effects with Adobe Premiere Pro.
Not only that, Adobe has forayed into more conventional types of software such as digital marketing management software and server software.
Simply put, Adobe’s assortment of digital media software products has a religious-like following especially for iOS users.
As you might have guessed correctly, the lion’s share of Adobe’s revenue stream stems from its software as a service (SaaS) segment contributing 80% to the top line.
More narrowly, the digital media segment makes up almost 70% of the subscription-based revenue. This division will expand at least 20% each year boding well for Adobe to maintain its 20% plus sales growth that any legacy software company would sacrifice a right leg to achieve.
It’s digital marketing software products rub up against stifling competition in Alphabet (GOOGL) amongst others and contribute a less robust 30% to overall sales.
I am less bullish on this part of the business because they have it rough competing against one of the Fangs, the path of less resistance clearly sides with its bread and butter of the digital media offerings.
Its subscription-based pricing model was the catalyst for boosting profitability causing the stock to experience massive price gains. The stock has doubled in the past two years which is unheard of for most legacy software companies.
No longer does Adobe need to manufacture the ancient CD of yore physically delivering it to customers, users can briskly download these products directly from the official website, receive constant upgrades over broadband internet, and pay Adobe monthly for their humble services.
In fact, any investors looking for some hot software stocks only need to find companies that recently shifted to a subscription-based pricing model. It’s pretty much a license to print money if the software quality can backup the monthly costs for the user.
I can tell you that Adobe’s software has remained world class, embedded at the heart of most digital devices at home and in the office, and who would have thought that just a little shift to the pricing model would have doubled the stock price?
Well, instead of one-off sales, Adobe can book revenue month after month, and year after year demonstrating the supercharged effect of shifting to a recurring revenue stream model.
Highlighting the pivot to profitability is Adobe’s three-year EPS growth rate of 48% turning this company into a mammoth software company with a $117 billion market cap.
Another positive for Adobe’s future sales are its fertile addressable markets in Europe and Asia.
There is ample room to expand in these geographical regions with Europe already chipping in with almost $2 billion of revenue per year and Asia with another $1 billion.
Future harvests look even more bountiful.
These two regions make up almost 40% of sales and as the Asian middle class is poised to elevate a giant swath of its people to middle class, Adobe will be a handsome beneficiary of this trend as middle-class families tend to pump out more university graduates who migrate to software-based occupations.
Even though Adobe isn’t the sexiest name out there, it certainly is in the category of “safe.”
In no way do I see an eradication of its embedded software spread widely throughout the tech universe.
Its digital media software tools are best-in-show and loyally followed with a long-lasting revenue stream that has room to grow abroad.
Do not expect Adobe to debut any earth-shattering products, but I fully anticipate Adobe to become even more profitable to the point that they might offer a dividend or reallocate capital to shareholders through stock buybacks.
Apple has similar strengths in its business model, albeit on a much grander scale.
I feel that Adobe doesn’t get the credit it deserves because of its steady as it goes drivers that keep motoring higher in an industry that adores groundbreaking products that revolutionize the world.
I would wait for a major sell-off because a double in two years has bid up the stock to expensive levels represented in its premium forward PE multiple of 35.
However, as the conclusion of the mid-term elections offers some certainty to the market, tech stocks could get swept up in a positive rush to round out the year.
Luckily for Mad Hedge Tech readers, this is the golden age for software companies and we are just scratching the surface of the capability software efficiencies can deliver to small and large companies across every bit of the economy.
Another Apple-like similarity is that Adobe is annually voted one of the best places to work according to Fortune, stacked up against companies represented across the full economic spectrum and not just tech.
If you have a kid, tell him to find a job in San Jose, he or she could find worse places to cut a paycheck.
Mad Hedge Technology Letter
October 31, 2018
Fiat Lux
Featured Trade:
(IBM’S PUTS ON A RED HAT)
(RHT), (IBM), (AMZN), (MSFT), (GOOGL), (ORCL)
What took you so long, Ginni?
That was my first reaction when I heard International Business Machines Corporation (IBM) was making a big strategic shift by purchasing open source cloud company Red Hat (RHT) in a landmark $34 billion deal.
Ginni Rometty, IBM’s CEO since 2012, has presided over persistent negative sales growth and has done zilch for investors to conjure up some type of lasting hope for this company.
Not only has Rometty failed to grow the top line, but with an underwhelming 3-year EPS growth rate of -2%, the execution and performance haven’t been there as well.
Somehow and someway, she has maintained an iron-clad grip on her job at the helm of IBM and her legacy at IBM will be wholly determined by the failure or success of this Red Hat acquisition.
IBM shares sold off on the news as shareholders digested this bombshell.
Rometty took a hatchet to share buybacks and suspended them for 2020 and 2021 alienating a segment of their loyal shareholder base.
I can tell you one thing about this move – it smells of desperation and it won’t vault IBM into the conversation of Amazon (AMZN) Web Services or the Microsoft (MSFT) Azure.
The biggest winner of this deal is Red Hat’s CEO Jim Whitehurst who has been dangling the company for sale for a while.
Alphabet (GOOGL) was in the mix and had the opportunity to snag a last-second deal, but it never came to fruition.
The 63% premium IBM must pay for a company who only grew quarterly sales 14% YOY and quarterly EPS by 10% is expensive, but that is where we are with IBM.
Clearly overpaying was better than doing nothing at all.
IBM continues to hemorrhage sales and stopping the blood flow is the first step.
Rometty was responsible for the utter failure of artificial intelligence initiative Watson whose terrible management was a key reason for its implosion.
Analyzing this historic company gave me insight into the pitiful causing me to write a bearish story on IBM last month. To read that story, please click here.
Not only was the agreed price exorbitant, but Red Hat’s stock was trending south even before the interest rate induced sell-off rocked the tech sector of late.
Red Hat missed on sales revenue forecasts and offered weak guidance.
It could be the case that Whitehurst was actively seeking a buyer because he felt that Red Hat would go ex-growth in the next few years.
Red Hat was rumored to be on the market for quite a while looking to fetch a premium price for a company starting to stagnate with its visions of grandeur growth.
Rometty’s career-defining moment is high-risk and high-reward and is born out of being cornered by leading tech companies leaving IBM in their dust.
The deal finally allows IBM to return back to sales growth which will occur two years later, and Rometty will finally have that monkey off her back for now.
But the bigger question is will Rometty still have her job in two years if this experiment becomes toxic.
My guess is that Red Hat CEO Jim Whitehurst is automatically the next in line for the IBM throne if Rometty missteps, and piling on pressure will force IBM to evolve or die out.
And even though they will return back to growth, 2% growth is no reason to do cartwheels over.
The real work starts now and it will take years to turn around this dinosaur.
On the brighter side, the massive deals instantly improve sentiment that was flagging for years and puts IBM back on the map.
The synergies between IBM and Red Hat could be robust.
Red Hat can surely help IBM become a higher-quality hybrid cloud solutions company.
Models like this are the industry standard as luring a company into your cloud is one thing, but being able to cross-sell a plethora of extra add-on software services in the cloud is the necessary path to raising profitability.
IBM also inherits a slew of talented software engineers that it can mobilize for innovative cloud products. Red Hat’s products such as JBoss middleware and the OpenShift software for deploying applications in virtual containers could make IBM’s hybrid cloud more appealing and could help retain customers with the additional offerings.
Doubling down on the software side of the business was a strategy I pinpointed at the Mad Hedge Lake Tahoe conference and deals like this highlight the value of this type of assets.
There is a hoard of legacy tech companies like Oracle (ORCL) that is in dire need of such strategic injections and fresh ideas.
This won’t be the last deal of 2018, other cloud deals could shortly follow.
On the other side of the coin, hardware deals have turned rotten quickly with stark examples such as Hewlett-Packard’s (HPQ) $25 billion acquisition of Compaq, Microsoft’s $7.2 billion disastrous buy of Nokia’s mobile handset business and Google’s unimpressive $12.5 billion deal for Motorola Mobility that they later unloaded to Chinese PC company Lenovo.
Investors must be patient if IBM has any chance of completing this turnaround.
Listening to Rometty talk about this deal clearly reveals that she is hyping it up for something way bigger than it actually is.
Let’s not forget that Rometty’s tenure as CEO began in 2012 when IBM shares were trading north of $200 and she has presided over the company while the stock got pulverized by almost 30%.
It pains me that she is the one given the chance to turn the company around after years of underperformance.
Let’s not forget that at the end of 2017, IBM only had a 1.9% share of the cloud infrastructure, about 25 times smaller than Amazon Web Services.
The costly nature of the deal could also put a dent into IBM’s dividend, alienating another swath of its hardcore shareholder base.
Historically, IBM has had minimal success with transformative M&A and the industry competitors dominating IBM magnify the poor management performance headed by Rometty.
Rometty declaring that this deal means IBM will be “no. 1 in hybrid cloud” is overly optimistic, but this is a move in the right direction and could keep IBM spiralling out of control.
A return to sales growth might help stem the bleeding of its downtrodden share price, but Amazon and Microsoft are too far ahead to catch.
Investors will need to wait and see if the synergies between IBM’s and Red Hat’s products are meaningful or not.
Mad Hedge Technology Letter
October 23, 2018
Fiat Lux
Featured Trade:
(THE CLOUD FOR DUMMIES)
(AMZN), (MSFT), (GOOGL), (AAPL), (CRM), (ZS)
Mad Hedge Technology Letter
October 22, 2018
Fiat Lux
Featured Trade:
(FACEBOOK’S DARPA DALLIANCE),
(FB), (GOOGL), (AAPL)
How far will society and government allow tech companies to adventure before there is some blowback?
Honestly, it’s hard to say when to put the shackles on these companies that are getting too powerful for their own good.
Tech companies have been pedal to the medal pushing the limitations of what the human world can offer.
The hoard of profits showered on the tech giants is one thing, but should they be held accountable for the unintended consequences that there robot-like profit-making operations dump on society?
Each company has chosen different ways to deploy the capital. Apple decided to reward shareholders by executing a $100 billion share buyback program.
The stock has performed great this year.
Apple (AAPL) and CEO Tim Cook have been keen to show a trustful face among a growing phalanx of data misusers.
Facebook (FB) has used the surplus capital to build a secretive research center modeled after the Defense Advanced Research Projects Agency (DARPA) called Building 8.
DARPA is an agency of the United States Department of Defense responsible for the development of emerging technologies for military use.
The division of the government was launched in 1958 by United States President Dwight D. Eisenhower to counteract the Soviet launching of Sputnik 1 in 1957.
DARPA smartly partnered together with America’s business leaders, academia, and other talents dotted around the government and military branches to develop projects that would broaden the frontiers of technology and science far beyond immediate U.S. military current needs.
Building 8 met the real world for the first time when its first product Portal, a vertically-shaped display screen attached to a smart camera, debuted with befuddlement.
How does a company that just announced a breach of 50 million accounts, after a torrid string of mishaps which made a mockery of Facebook’s use of big data, launch a device that gives Facebook unfettered access into the confines of one’s personal home?
A Facebook spokesman said that Facebook will “use this information to inform the ads we show you across our platforms. Other general usage data, such as aggregate usage of apps, etc., may also feed into the information that we use to serve ads.”
Executives at Facebook know that this product would be a commercial write-off, but the sunk cost associated with this project forced them to throw it on the market with reckless abandon.
And at the end of the day, some data is better than no data at all and that is what the earth’s existence is boiling down to.
So, if you thought that Facebook might finally decide to stop being your effective cyber-stalker, you are wrong.
And this is all just the beginning, it gets a lot worse than this, let me explain.
In fact, Facebook’s Building 8 was led by the former Director of the Defense Advanced Research Projects Agency Regina Dugan.
The more I sniff around, the more I see her pawprints everywhere she went.
Dugan used her elite role at DARPA to score a job at Google’s (GOOGL) Advanced Technology and Projects (ATAP) group before she jumped ship to Facebook’s secretive research center Building 8.
Dugan’s tenure at DARPA from 1996 to 2012 meant she was privy to the LifeLog project which was developed for just one year and subsequently shut down.
This program was cancelled after heavy criticism from activists advocating privacy and rightly so.
But, was this program really shut down?
Lifelog was a program with the mission to effectively record all of an individual’s physical movements, conversations and everything they listened to, ate, read and bought.
Everything!
The premise of this program was to cultivate a permanent searchable record of one’s life.
The daredevil program was light years ahead of its time predating the iPhone, tablet, and the current wave of populism engulfing the free world.
Back then, the weaponizing of consumer technology was largely absent from the world, and the top brass of DARPA surely wasn’t naïve enough to believe that this technology could only be applied to create an epic cyber-diary of one’s life.
In any case, Dugan conveniently was employed by Google and Facebook and her knowledge of Lifelog was fluid, deep and comprehensive.
Unintended consequences are rife and, if I connect the dots, it appears that DARPA’s Lifelog found new spawning grounds in Silicon Valley’s richest companies, or at least two of them.
There is no way to know for sure, but monetizing Lifelog’s cyber-record technology to harness it as a tool to collect personal information for the use of digital ad targeting has rained profits down on these two companies.
Building 8 is serving up round two of its DARPA-esque mission by announcing that they have built a prototype producing an armband that will facilitate the understanding of oral language “through a person’s skin.”
It was in January 2017 when Dugan took the stage in San Jose at a conference to announce this project.
It was mostly dismissed as fantasy and something out of science fiction.
Well, it’s one more step closer to being rolled out in mass market form.
The way the language process works is that vibrations allow for the roots of words to be transformed into silent speech.
If scientists manage to do this, it would give deaf people a new lifeline giving them the capability to understand what people are saying without the need for lip reading.
However, on the other side of the coin, the technology could be modified to aid spies in eavesdropping if the range of the vibrations allows them to.
The second project announced by Dugan that same night in San Jose was Facebook’s bold attempt of a noninvasive brain sensor designed to turn thoughts into text.
This would require brain surgery to install a sensor, and the plan for this technology is for people to access devices from their brain without the need to physically or orally communicate with it.
I suspect that Facebook would collect the data from this brain sensor and the sensor would be in contact with the Facebook infrastructure sharing the performance and state of operations.
If the sushi hits the fan and a person dies from the sensor, Facebook would need to analyze the specific details in the malfunction.
What a scary thought.
Facebook adopting the DARPA blueprint from its halted project of Lifelog to respawn similar technology that painstakingly retrieves as much data about our lives as possible is the first step to something substantially bigger.
However, the digital ad business has made Facebook and Google insanely rich and they want an encore.
I am surprised that other Silicon Valley cash-rich companies avoid tapping up the offspring of other military-grade technology to join the profit parade.
Apparently, there has been zero backlash from it.
If Facebook somehow manages to roll-out a commercialized brain sensor giving Mark Zuckerberg access to our minds, I wonder what on earth could round three entail for Zuckerberg…
Nothing is impossible.
