Mad Hedge Technology Letter
October 9, 2018
Fiat Lux
Featured Trade:
(LIVING ON THE EDGE),
(AMZN), (MSFT), (HPE), (GOOGL)
Tag Archive for: (GOOGL)
What is Edge Computing?
Edge computing is processing data at the edge of your network.
The data being generated will not only occur in a centralized data-processing storage server anymore, but at different decentralized locations closer to the point of data generation.
This is what everyone is talking about and is an epochal development for tech companies and the businesses they run.
The last generation of IT saw a massive migration to the cloud as centralized servers stored the sudden hoard of data that never existed before.
Edge computing bolsters data performance, boosts reliability, and cuts the costs of operating apps by curtailing the distance data must flow which effectively reduces latency and bandwidth headaches.
Edge computing is revolutionizing IT infrastructure as we know it.
No longer will we be forced to use these monolith-like giant server farms for all our data needs.
Epitomizing the Silicon Valley culture of becoming faster and more agile to disrupt, tech infrastructure is getting the same potent cocktail of performance enhancers underlying the same characteristics.
According to research firm Gartner, around 80% of enterprises will shutter legacy data servers by 2025, compared to 10% in 2018.
Keeping the data near the points of data creation is the logical step to enhance and optimize data processes.
Cloud computing depends on superior bandwidth to handle the data load.
This can create a severe bottleneck if bombarded with a heavy dose of devises all communicating with the centralized servers.
The edge computing industry already in the initial stages of ramping up will be worth $6.72 billion by 2022, up from $1.47 billion in 2017.
Underpinning this crucial IT is the imminent inauguration of 5G networks powering IoT devices.
Simply put, the amount of raw data which will need swift processing is about to explode. Relying on a slower, centralized servers is not the solution, and the edge offers a suitable solution to accommodate the new generation of technology.
And as technology starts to permeate every corner of the globe, data will need to be instantaneously processed locally in cutting-edge technology such as self-driving cars.
Waiting on communicating with a centralized server in another continent is just not plausible.
A self-driving car only has milliseconds to react in hazardous conditions.
Other critical and data heavy operations such as wind turbines, medical robots, airplanes, oil rigs, mining vehicles, and logistics infrastructure only function if operated at peak levels and an interruption to connectivity could be fatal.
Telecom companies and IT firms will experience the biggest sea of changes from edge computing in the next five years.
These two sectors are confronting a significant ramp up in network load and will find it challenging to deliver the results to operate the apps and services they are responsible to run.
This new IT technology is the answer.
The industry adopting edge computing the fastest is retail because of the troves of data collected by IoT sensors and cameras.
Companies will be able to analyze the performance of products and edge computing is the technology that will capture the data.
The adoption of edge computing will perfectly take advantage of the boom in IoT devices and uptick of internet speeds through 5G.
Sales of PC’s, tablets, and smartphones have matured, and aren’t seeing the same pop in growth rates like before.
However, the IoT industry will expand by 30% in the next five years boding well for the broad-based integration of edge computing.
In total, the number of connected devices in the next five years will balloon from 17.5 billion in 2017 to over 31 billion in 2023.
The first iteration of 5G IoT devices will be on the market in 2020 deploying industrial process monitoring and control.
This is not a flash in the plan technology and many firms already or are about to roll-out an edge computing strategy.
In a recent report, 72.7% of tech firms already possess a solid edge computing plan or it is in the works.
If you include all the tech firms who expect to invest in edge computing in the next year, the number catapults to 93.3%.
The same survey continued to delve into the mindset of edge computing for tech management by asking about the importance of the technology.
Over 70% of firms characterized edge computing as important, bifurcated into two categories with the first being “critically important” which 22.2% of respondent agreed with.
Another 49.6% of respondent described edge computing as “very important.”
Firms cited that improved application performance is the largest benefit of edge computing followed by real time data analytics and data streaming.
It is not the death of cloud computing yet.
Even though centralized, slower, and negatively affected by long distance, cloud computing still has a place in the future of IT.
About two-thirds of tech firms plan to utilize a hybrid centralized cloud – edge computing strategy.
Even if they did not combine this strategy, companies would most likely separate the operations responsible for two distinct set of tasks filtered by the level of time sensitivity.
The overwhelming and imminent adoption of IoT devices means IT departments are crafting a substantially higher budget for edge computing to satisfy their operational needs.
Large recipients of this technology will turn out to be companies related to manufacturing, smart cities and transportation as well as energy and healthcare.
This technology really cuts across the entire spectrum of global industries.
Data usually does not discriminate, and applications of new tech is fueling a rapid rise of performance optimization that no other sectors can claim.
Let’s do a quick rundown of the edge computing players.
The three cloud behemoths of Amazon Web Services (AWS), Microsoft (MSFT) Azure, and Google (GOOGL) Cloud are constructing edge gateways and edge analytics into their IoT offerings aiding workload distribution across edge and cloud services.
Microsoft has over 300 edge computing patents and launched its Azure IoT Edge service integrating container modules, an edge runtime, and a cloud-based management interface.
Amazon Web Services offers AWS CloudFront content delivery infrastructure and AWS Greengrass IoT service building on the momentum of pioneering centralized cloud technology.
Dell’s IoT division invested $1 billion in R&D to help drive Edge Gateways and VMware's Pulse IoT Center.
Hewlett Packard Enterprise (HPE) devoted $4 billion to its edge network portfolio. HPE operates edge services, mini-data centers, and smart routers.
These are just some of the initiatives from some of the main players in the field.
Expect companies to become a lot more connected while possessing the speed, high performance, and agility to optimally entertain this new-found connectivity.
Mad Hedge Technology Letter
October 1, 2018
Fiat Lux
Featured Trade:
(ZINC AIR BATTERIES WILL REVOLUTIONIZE ELECTRIC CARS),
(TSLA), (NIO), (FB), (GOOGL), (NFLX)
As Panasonic ramps up its battery production at the Tesla Gigafactory 1 in Sparks, Nevada, the demand and business for renewable energy has never been more robust.
And as the world’s population balloons and man-made pollutants roil the natural ecosphere, business needs an answer to these potential apocalyptic bombshells or there will be nowhere clean enough to live.
Energy security and population growth will have a complicated relationship going forward and cannot be ignored for the sake of mankind.
This isn’t me being a tree-hugging, Birkenstock-trotting, save-the-earth, love and peace-type of guy.
This problem is real and whoever discovers the solution could reap untold profits.
The answer has been found - rechargeable zinc air batteries.
Spearheading this massive initiative is South African-born entrepreneur, sports team owner, Los Angeles Times owner, and more importantly the founder, chairman and CEO of NantEnergy Dr. Patrick Soon-Shiong.
This El Segundo, California-based company presented an utter game changer to the future of the world and the world’s economy.
NantEnergy debuted a rechargeable battery powered by oxidizing zinc with oxygen from the air for commercial use at the One Planet Summit in New York.
It also has the capability to store energy.
Not only is this technology and product cutting edge, but it has the cost basis to support broad-based scalability and adoption.
Ramkumar Krishnan, chief technology officer of NantEnergy claimed this revolutionary battery can “deliver energy for $100 per kilowatt-hour (kWh).”
Lithium-ion batteries have been the mainstay choice for clean energy or clean enough energy since 1992, and its usage varies in cost from $300 to $500 kWh.
Tesla, with its phalanx of superior engineers, has been able to suppress that cost all the way down to a level between $100 to $200 kWh level.
NantEnergy has already registered more than100 related patents in its name and envisions a $50 billion addressable market.
I believe the addressable market is substantially bigger.
For all the hoopla about lithium-ion batteries, there are severe drawbacks in its usage and application.
Let’s concisely run down the pitfalls of batteries of this ilk.
Once out the factory door, the performance starts to go downhill.
Lithium-ion batteries react poorly to high temperatures.
These batteries become inoperable if completely discharged.
There is a slight chance a battery could burst into flames and burn off your face.
Simply put, lithium-ion batteries incorporate cobalt, an extremely toxic material hazardous to human health.
If a Samsung Galaxy smartphone explodes, cover your mouth to avoid inhaling the cobalt-laced fumes.
Dr. Soon-Shiong characterized this new technology as the “holy grail” of renewable energy.
Wide-scale adoption would bring the need for cobalt to its knees.
No longer would tech companies need to scramble to secure a sufficient amount of cobalt supply from the deepest reaches of the Congo jungle.
It would be the end of cobalt as we know it.
At first, lithium would be required for a stopgap measure while engineers refine the battery on its way to a full-fledged zinc alone battery.
The lithium placeholder would only be temporary.
The clean energy movement must be grinning widely as the potential to finally do away with cobalt from renewable energy has pronounced social and economic consequences.
An estimated 1.4 billion people still live in the dark and do not have access to electricity.
This technology is being tested in villages in Africa and desolate communities in Asia as we speak.
The absence of electricity isolates these undeveloped communities in third-world Africa and Asia without access to health care, education, and technology.
It’s hard to kick-start your life as a sprouting little kid when you’re lost in the dark half the time.
Importing fossil fuel to put these communities online is unfeasible and just plain too expensive for communities that have a dire shortage of capital.
Currently, NantEnergy’s rechargeable zinc air batteries are online in 110 villages located in nine Asian and African countries.
The batteries have been combined to establish a microgrid system powering entire areas.
The company will start delivery this product next year widening its type of use to telecommunications towers.
The next step after that would be the home energy storage market targeting California and New York as the first American cities.
Engineers have pointed out that this development could transform the electric grid into a “round-the-clock carbon-free system.”
In addition, with cooperation with Duke Energy, a major utility, NantEnergy’s batteries have been powering communications towers in America for the past six years.
The design is mind-boggling utilitarian - plastic, a circuit board, and zinc oxide wrapped up in a briefcase-size shell.
One charge can offer 72 hours of battery life.
The charging process is easy - electricity from solar installations is stored by converting zinc oxide to zinc and oxygen.
The discharge process is straightforward, too - the system produces energy by oxidizing the zinc with air.
The pursuit of energy reduction is in full throttle, and this is the next leg up for energy aficionados.
Your lithium-ion-run Tesla could become a legacy company in a matter of years if this technology disrupts Elon Musk’s brainchild.
Lately, Musk has been falling behind the eight ball with fresh innovators hot on his heels.
This is the latest company to enter into its market even though still in the incubation stage.
Competitors have popped out of nowhere and are coming for his bacon.
Shanghai headquartered electric car manufacturer Nio (NIO) went public and raised more than $2 billion.
Even though it is not yet a threat to Tesla, it shows that Tesla isn’t the only game in town anymore.
In any case, NantEnergy has the magic to unlock the “holy grail” of renewable energy. And if it can promise on its cost projections, I see no reason why this won’t be furiously adopted by corporations worldwide.
As it is, America has been losing out in the Congo, as China has cornered the cobalt market there.
And, as the evolution of fracking technology quelled the Middle-East situation, it could also have the same effect in the Congo.
More excitingly, it could put online an additional 1.2 billion new customers to devour iPhones and watch Netflix (NFLX).
Companies such as Facebook (FB) and Alphabet (GOOGL) have been developing a way for these remote and poverty-prone places to use Internet from a satellite.
They would need electricity first to power their devices unless Mark Zuckerberg has found a way to use a smartphone without electricity.
NantEnergy’s renewable batteries have already cut the need of 1 million lithium-ion batteries, and warded off the need to release 50,000 metric tons of carbon dioxide since 2012.
California is the flag-bearer in renewable energy policy by forcing its populace to be at 100% carbon-free electricity by 2045.
Musk is on record by saying he expects to break the 100-kWh level, which would contribute to better power storage and expedited electric vehicle (EV) adoption.
In contrast, energy storage analyst Mitalee Gupta at GTM Research has retorted that he’s “unsure $100/kWh is achievable this year.”
Musk, being a naturally optimistic entrepreneur, sets targets then does everything he can to break them.
Either way, two South African born visionaries are doing their part to crater the cost per kWh in the renewable energy market, and Elon Musk might not be the biggest disruptor from South Africa.
Time will tell if this market will become zinc-based or lithium-based – the higher-grade technology eventually wins out spelling doom for Musk.
But it appears that Musk has other things to worry about now.
NantEnergy plans to inaugurate a battery manufacturing facility in California next year.
As for Tesla, buy the car and not the stock.
And for Nio, don’t buy the car or the stock.
Disrupting the Disrupter
Global Market Comments
September 26, 2018
Fiat Lux
SPECIAL CAR ISSUE
Featured Trade:
(SAY GOODBYE TO THAT GAS GUZZLER),
(GM), (F), (TSLA), (GOOGL), (AAPL)
Do you want to get in on the ground floor of another major new trend?
Well, here’s another new trend. Get this one right and your retirement funds should multiple like rabbits.
There have been some pretty amazing announcements by governments lately.
The United Kingdom has banned the use of gasoline-powered engines by 2040.
China is considering doing the same by 2035.
And now the State of California is targeting 100% alternative energy use by 2040. That’s only 22 years away.
The only unknown is what such a planned obsolescence program will look like, and how soon it will be implemented.
With 20% of the U.S. car market, don’t take the Golden State’s ruminations lightly.
California was the first state to require safety glass, seat belts, and catalytic converters, and the other 49 eventually had to follow. Some 20% of the market is just too big to ignore.
The death of the car is now upon us, and it is still early, very early.
This is a very big deal.
Earlier in my lifetime, car production directly and indirectly accounted for about one-third of the U.S. economy.
Much of the growth during our earlier Golden Ages, in the 1920s and the 1950s, were driven by a never-ending cycle of upgrades of our favorite form of transportation, and the countless ancillary products and services needed to support them. Tail fins, radios, and tons of chrome assured you always had to have the next new model.
Today, 253 million automobiles and trucks prowl America’s roads, about half the world’s total, with an average age of 11.4 years.
The demise of this crucial industry started during the 2008 crash, when (GM) and Chrysler (owned by Fiat) went bankrupt. Only more conservatively run, family owned Ford (F) survived on its own.
The government stepped in with massive bailouts. That was the cheaper option for the Feds, as the cost of benefits for an entire unemployed industry was far greater than the cost of the companies absorbed.
If it hadn’t done so, the auto industry would have decamped for a new base near the technology hubs in California, and today would be a decade closer to their futures than they are now.
And remember, the government made billions of dollars of profits from its brief foray into the auto industry as an investor. It was one of the best returns on investment in history in major size.
I’ll breakout the major directions the industry is now taking. Hint: It doesn’t have much to do with traditional metal bashing.
The Car as a Peripheral
The important thing about a car today is not the car, but the various doodads, doohickeys, gizmos, and gadgets they stick in them.
In this category you can include 24/7 4G wireless, full Internet access, mapping software, artificial intelligence, and learning programs.
(GM) is now installing more than 100 microprocessors in its vehicles to control and monitor various functions.
Good luck doing your own tune-ups.
The Car as a Service
When you think about it, automobile ownership is a wildly inefficient use of capital. It is usually a family’s second largest expense, after their home, running $30,000 to $80,000.
It then sits unused in garages or public parking for 96% to 98% of the day. Insurance, maintenance, and liability costs can be off the charts.
What if your car was used 24/7, as is machinery in well-run industrial plants? Your cost drops by 96% to 98% to the point where it is almost free.
The sharing economy is the way to accomplish this.
We are already seeing several start-ups attempting to achieve this in major U.S. cities, such as Zipcar, Car2Go, Getaround, RelayRides, and City CarShare.
What happens to conventional car companies when consumers shift from ownership to sharing? Demand plunges by 96% to 98%.
Perhaps that is why auto shares (GM), (F) have performed so abysmally this year relative to technology and the main market.
Self-Driving Technology
This is the hottest development area in the industry, with Apple (AAPL), Alphabet (GOOG), and the big European carmakers committing thousands of engineers.
Let’s say your car is now comfortably driving you to work, allowing you to read the morning papers and catch up on your email. Or maybe you’re lazy and would rather watch the season finale of Game of Thrones.
What else is possible?
How about if, instead of parking, your car drops you off, saving that exorbitant fee.
Then it joins Uber, picking up local riders and paying for its own way. It then dutifully returns to pick you up at your office when it’s time to go home.
Since the crash rate for computers is vastly lower than for humans, car insurance rates will collapse, gutting that industry.
Ditto for life insurance, as 35,000 people a year will no longer die in car crashes.
Half of all emergency room visits are the result of car accidents, so that business disappears too, dramatically shrinking health care costs in the process.
I have been letting my new Tesla S-1 drive me since last year, and I can assure you that the car can drive better than I can, especially at night.
What better way to get home after I have downed a bottle of Caymus cabernet at a city restaurant?
Driverless electric cars are totally silent, increasing the value of land near freeways.
Nor do they require much maintenance, as they have so few moving parts. Exit the car repair industry.
I could go on and on, but you get the general idea.
For more on the topic, please read “Test Driving Tesla's Self Driving Technology” by clicking here.
Virtual Reality
After 30 years of inadequate infrastructure budgets, trying to get into any America city center is a complete nightmare.
Only last week, a cattle truck turned over on the Golden Gate Bridge, bringing traffic to a halt. Fortunately, a cowboy traveling to a nearby rodeo was able to unload his horse and lasso the errant critters (no, it wasn’t me!).
Even if you get into the city, you will be greeted by a $40 tab for a parking space. Hopefully, no one will smash your windows and steal your laptop (happened to me last year).
Why bother?
Thirty years ago, teleconferencing services pitched themselves as replacing the airplane.
Today, we are taking the next step, using Skype and GoToMeeting to conduct even local meetings, as we do at the Mad Hedge Fund Trader.
Virtual reality is clearly the next step, providing a 3D, 360 degree experience that makes you feel like you and your products are actually there.
Better to leave that car in the garage where it can get a top up on its charge. BART is cheaper anyway, when it runs.
New Materials
We are probably five years away from adopting the carbon fiber technology now used in the aircraft industry for mass-market cars. Carbon has one-tenth the weight of steel, with five times the strength.
The next great leap forward for electric cars won’t be through better batteries. It will come through a 70% reduction of the mass of a car, tripling ranges with existing technology.
San Francisco Becomes the Car Capital of the World
This will definitely NOT happen, as sky-high rents assure that the city by the bay will never attract large, labor-intensive industries.
Instead, the industry will develop much as the one for smartphones. The high value-added aspects, design and programming, will stay in California.
The assembly of the chassis, the body, and the rest of the vehicle will be best done in low-cost, tax-free states with a lot of land, such as Texas and Nevada.
What will happen to Detroit? It has already become a favored destination of new venture capital financial start-ups - the cost of offices and housing is virtually free.
Seems Alive to Me
Global Market Comments
September 25, 2018
Fiat Lux
Featured Trade:
(AI AND THE NEW HEALTH CARE),
(GOOGL), (XLP), (XLV), (MRK), (BMY), (PFE),
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA,
GLOBAL STRATEGY LUNCHEON)
Mad Hedge Technology Letter
September 25, 2018
Fiat Lux
Featured Trade:
(AMAZON’S HOME INVASION),
(AMZN), (GOOGL), (HBB), (PG)
In another resplendent display of corporate expertise, Amazon (AMZN) debuted its stunning new lineup of smart home products aiming to dominate your inside walls.
In total, Amazon gave consumers 15 new devices to dabble with – an unprecedented amount.
Amazon Echo, Amazon’s smart speaker, also received a software update.
Jeff Bezos’ company is traversing where they have never been before, infiltrating the car with the Echo Auto, executing location-based routines such as directing drivers running on a brand-new operating system.
Other products in the shop window were smart devices related to security, a clock, an upgraded Echo Dot, and a microwave.
The biggest nugget delivered in this release event was the advent of the Amazon Echo-on-a-chip – Amazon Connect Kit.
Essentially, it would allow any third-party manufacturer that vies for smart home supremacy to embed an Amazon produced chip into its product and design the architecture around it.
This foray has already turned heads with appliance companies already raving about this new development.
Consumer product companies such as Hamilton Beach (HBB) and Procter & Gamble (PG) are in the midst of engineering its own products centered around the Amazon connect kit.
North America sales and marketing senior vice president at Hamilton Beach Scott Tidey said his company has been “surprised at how easy it is to use the Alexa Connect Kit to prototype devices and create Alexa commands with just a few lines of code.”
In the near future, consumers could be maneuvering around their homes with products possessing a legion of these new Amazon proprietary chips.
Amazon is bent on penetrating your home and turning it into the smart home you always dreamed of, and this is one of the in-roads that will take them to the holy grail.
This hard-charging approach has been effective.
Wait to see which products go viral, then go after market share like crazy.
This approach made the Amazon Kindle a favorite of many tablet goers.
It helps that Amazon products are crafted with intense precision and great attention to detail.
As more consumers devour new Amazon devices, the synergistic effects benefit its comprehensive eco-system.
Once a customer becomes entirely drenched in Amazon products, it becomes the backbone to a customer’s existence.
Ask the millennial generation, and a good portion of them entirely depend on Amazon to fuel their daily routine.
Any replacement services would waste them hours and be a whole lot pricier.
As the voice assistants become widely adopted, it could blow a hole in Google (GOOGL) search.
Google search is still reliant on its desktop search, even though more and more people are migrating to its mobile search platform.
But if Amazon can stay ahead of Google in the voice assistant race, it could supplant Google as the premier search engine.
It might be an existential crisis for Google search and the minions of Google ad tech engineers.
Google is still wholeheartedly reliant on advertisement revenue, which is its profit engine.
Although, the cash cow digital advertisement business has made the company famously rich, regulation is a ticking time bomb, as the government has a bull’s-eye marked at this Silicon Valley mainstay.
Amazon has smartly moved up the value chain of search, and believes voice-activated search will be the revolutionary search function in the next few years.
It’s hard to argue with its prognosis.
Providing enough high-caliber accoutrements that mesh with its voice supported portfolio will expedite adoption and put strenuous pressure on Google to evolve faster.
Even worse, the golden years for digital advertisement have passed and the pressure on margins could exacerbate.
Fighting Amazon would provoke the margin bears and in one fell swoop, Alphabet, which is waiting on Waymo to take off, could get hip-checked by the Seattle-based company.
As the FANGs start to bleed over into each other’s business, these new product events take on a more important meaning.
The Amazon-effect has the tendency to destroy smaller company’s stocks, but going forward, large companies will be just as badly affected as Amazon branches off into new spheres spearheading revolutionary initiatives.
This speaks volumes to the innovation of Amazon, and why the best innovators will always stay one step ahead.
Amazon is rated the No. 1 company by the Mad Hedge Technology Letter and after this stellar debut of various IoT products, it’s hard not to like them even more.
And if Amazon’s connect kit catches fire and Google is forced to concede this hardware to Amazon, it would be a kick in the midsection to Google whose IoT strategy is not sticking as strongly as it would like.
Amazon does not want to co-exist with other companies. However, it smartly concedes certain segments until it is confident in taking that segment over.
This is why Amazon’s in-house brands are starting to wreak havoc on the third-party sellers on its e-commerce platform.
Amazon ingenuously chose to make a microwave because the technology hadn’t changed much in a generation, yet it was in dire need of simplification.
Seize the low-hanging fruit before you tackle the more difficult challenges.
Once Amazon masters the simpler devices in the home, watch out!
The rest of the home will be up for grabs too because of the same reason many companies heed way to Amazon – it does it way better than any other company for a fraction of the cost.
The multiplier effect will be in full force when Amazon finally constructs its shiny new headquarter somewhere outside of Seattle giving Amazon more manpower to fulfill Bezos’ vision.
My bet is that it will be placed smack dab in the middle of Washington D.C. – a stone’s throw away from the White House where Bezos has been increasingly active adding to his army of lobbyists.
With regulation on the verge of breaking social media’s back, Bezos is acutely aware of protecting his assets as if his life depended on it.
Bezos also has a house in Washington and owns the Washington Post.
Amazon doesn’t rest on its laurels because it doesn’t dominate 80% of the Android market, and it must be the aggressor and the disruptor at the same time.
Rolling out 15 smart products blew away the drooling audience and left them befuddled and craving for more.
Amazon must do it another way than Google and its way; the Amazon way, is the winning strategy.
It’s hard to imagine that Google is still reliant on a legacy business to print them money. And as the digital ad industry sinks, Google will sink, too.
Google still hasn’t found the next answer that can marshal it to safe waters.
Its eggs are still in one basket – unlike Amazon.
As Amazon steamrolls the little companies that never had a chance, the threat of them taking out a Google- or a Facebook-size company grows exponentially.
Ironically, Amazon’s digital ad business is set to surpass $4 billion by the end of the year, and it’s not even the main aim for Bezos.
The digital ad business is a side business for Bezos.
His visions are grander and awe-inspiring, and this product rollout affirms this vision.
This is the beginning of something much more powerful. Any investor who thinks Amazon shares are expensive is crazy.
The report of bribery in Amazon’s system and the subsequent short-term weakness in the shares is a great chance to buy Amazon on the dip because this stock is going higher.
Anybody would be a fool to short Amazon.
This company exudes quality, and many would agree with me.
Just The Beginning And More Smart Products On The Way
Last quarter’s earnings report sent Netflix shares nosediving to the depths of the ocean floor, and the wreckage saw Netflix’s stock down 24% in 5 weeks.
The short-term weakness in shares was justified after Netflix miscalculated on their quarterly subscriber numbers.
Netflix is still a buy because the wreckage can be salvaged.
In fact, it was never a wreckage to begin with because Netflix boasts the highest grade online streaming product in the industry.
An industry that is benefitting from massive secular tailwinds at its back, from cord cutters and the widespread pivot to mobile platforms.
Netflix has the best product on the market because they have the best strategy – throw $8 billion on content alone and hire the best production team money can buy to churn out content.
The method to their madness has worked and the haul of 23 Emmy’s was a result of this winning formula.
The 23 Emmy’s tied HBO, whose premier series Game of Thrones is still captivating audiences with its mix of graphic sexual exploits and violent tropes.
Several of Netflix’s award winners saluted Netflix’s hands-off approach, who allow these highly paid production specialists the creative freedom to inspire audiences.
For all of Hollywood’s razzmatazz, director’s and actor’s number one major gripe has been that the leash is tight with minimal wiggle room.
It’s not straightforward to change a culture that has developed over a century.
Cross-pollinating Silicon Valley’s lean business model with Hollywood top-grade content was the trick that removed the shackles from the director’s ankles.
The end-product has been the main beneficiary.
Scoping out Netflix’s end of year lineup has viewers drooling.
The tail end of the year sees Netflix reintroduce some hard-hitting content from Orange Is The New Black, Ozark, Daredevil, Narcos, and Making a Murderer, side by side with fresh content involving Simpsons creator Matt Groening and blockbuster names like Jonah Hill and Emma Stone.
As well as shelling out $8 billion for original content, Netflix upped its marketing budget from $1.28 billion to $2 billion in 2018.
The $2 billion budget is a classy touch but at this point, this product more or less sells itself.
The brand awareness is that far-reaching.
The platform is optimized by tweaking Netflix’s proprietary recommendation algorithm herding the audience into viewing more content that the algorithm deems likely viewable.
The man who is in charge of this is Greg Peters - Netflix chief product officer.
Kelly Bennett, Netflix chief marketing officer, will work with Peters to wield the massive $2 billion marketing budget in the most effective way possible.
To insulate the company from any potential Facebook-like data slipups, Netflix poached Rachel Whetstone from Facebook to head up the public relations division.
Who said there were no winners from Facebook’s PR disaster?
Whetstone’s professional year of hell offers valuable insight into how not to pull another Facebook (FB) stinker.
She previously worked for Google and Uber and is a veteran PR spinner.
Earlier this year CEO Reed Hastings detailed the possibility of using ads in Netflix’s ad-less platform by saying this about why Netflix has no ads:
“It is a core differentiator and again we're having great success on the commercial-free path. That's what our brand is about. So we're going to continue to expand the relevance of a commercial free service around the world and make that so popular that consumers are very used to it and appreciate Netflix.”
The relevancy of his statement is more meaningful now after a recently released report confirming that Netflix is testing the usage of ads to promote its content.
This would be a huge shift in the company’s ethos, and if the algorithms give Hastings the green light, this could alienate a big chunk of their subscriber base.
In a survey conducted about the implementation of ads, 23% said they would quit the service if ads are rolled out onto Netflix’s platform.
Only 41% said they would “definitely” or “probably” keep Netflix if ads are introduced.
In the same survey, if Netflix lowers the monthly cost by $3 while integrating ads, the cancellation rate falls from 23% to 16%, and half said they would keep Netflix.
The most important number of the survey was that only 8% would cancel if they increased monthly prices by $2, but if it went up by $5, 23% would say goodbye to the streaming service.
All signs point to an incremental price increase in the near future, partly helping to offset the mind-boggling amount of content spend this year.
Netflix subscribers are still willing to absorb price increases which is a great sign for future profitability.
But it is also worth mentioning that Netflix is a profitable company now, and margins have been slowly creeping up for the past few years.
The tests demonstrate that Hastings is serious about profitability at a time when the premier profit machines in tech are Apple (AAPL) and Alphabet (GOOGL).
These two behemoths blaze the trail for the tech sector and offer important lessons on the potential future profitability of Netflix.
It will take time for Netflix to reach that level of profitability, but the pillars are in place to ramp up the monetization drive.
The treasure trove of data will surely help decision making for the management, but to make their platform more like Facebook (FB) would be a huge error of epic proportions.
It’s proven that digital ads are annoying like a swath of mosquitoes trapped in your bedroom at 2am.
To dilute the quality of their product would fly in the face of what the company represents.
So how on earth will Netflix’s shares go from the mid-$300’s and reach the glorious heights of $400-plus and stay there?
One word – India.
It’s no secret that Netflix has been charging hard to rev up international business.
India is the trump card.
India boasts around 78 million middle class dwellers who can afford Netflix’s service.
In the next two years, it’s feasible that 10% of this socioeconomic class could be tuning into Netflix.
That foothold into India could mushroom, and potentially expand with an audience whose DNA is comprised of a strong film culture.
As broad-brand broadband expansion and smartphone penetration heating up in India, Netflix’s timely arrival could make Netflix look genius.
Their arrival coincides with a slew of American tech companies looking to tap revenue out of the largest democracy in Asia.
The unrealized potential cannot be ignored.
Netflix has primed their strategy by focusing on locally-produced content that will resonate with the Indian viewer.
Netflix’s India strategy started red hot with crime thriller Sacred Games imbued with a level of unfiltered, real filmmaking unseen in India.
The dark crime drama is already facing a legal battle concerning its lusty, foul-mouthed content that presses on the outer limits of what modern Indian society can handle.
The stereotype breaking series directed by Vikramaditya Motwane and Anurag Kashyap is Netflix’s first Indian feather in their cap as Netflix looks to accelerate the momentum.
Netflix has not produced back to back quarters where they failed to meet subscriber growth forecasts since 2012.
I firmly believe Netflix will continue this successful streak and beat subscriber estimates in the third quarter.
Initial indications show that Indians have gravitated towards Netflix’s original content, and with the 2018 Russian World Cup in the history books, the path has opened up for some nice surprises to the upside.
NETFLIX’S FUTURE - INDIA
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Quote of the Day
"Health care and education, in my view, are next up for fundamental software-based transformation." – Said Silicon Valley Venture Capitalist Marc Andreessen
