Mad Hedge Technology Letter
July 25, 2018
Fiat Lux
Featured Trade:
(PICHAI YOURSELF, EARNINGS ARE REALLY THAT GOOD),
(GOOGL), (MSFT), (AMZN), (AAPL), (TWTR), (DIS), (TGT)
Posts
Google Translate, Alphabet's (GOOGL) free, multilingual machine, foreign language translation service, translates an unimaginable143 billion words per day.
These were one of the pearls divulged in the conference call from Google's CEO Sundar Pichai.
A bump in usage coincided with the 2018 World Cup in Russia, and in the age of low-cost airfare and overpopulation, it could be Alphabet's new cash cow.
Google Translate has the potential to morph into one of the premier foreign language applications used by anyone and everyone.
Forget about the Amazon effect, the Alphabet effect could be just as pungent, albeit away from the trenches of e-commerce.
Thank goodness the application is still ad-free.
No doubt it would be inconvenient to sit through a 15 second ad while interacting with a concierge at a bed and breakfast in the South of France.
Analysts did not sound out Pichai's plans for Google Translate, but he did mention there are some monetization opportunities on the horizon.
The latest earnings report is the most recent indication that the FANGs along with Microsoft are pulling away from the rest.
The equity price action in 2018 vindicates this fact with more than 80% of the gains spread around just a few high caliber tech names.
Is this fair? No. But life isn't fair.
The too slow too late regulation that was supposed to put a cap on the vaunted FANG group has had the opposite effect, squeezing the small guy out of the picture.
The runway is all clear for the FANGs, and the only way they will be stopped is if they stop themselves or an antitrust ruling.
This all adds up to why Alphabet has been a perennial recommendation for the Mad Hedge Technology Letter.
Duopolies are few and far between and monopolies even rarer.
They are great for earnings and as the global digital ad pie grows, it falls down to Google's bottom line.
On the news of stellar earnings, Facebook shares jumped higher in aftermarket trading and powered on to trade around 5% the following day.
Expect a great earnings report from Facebook with robust ad revenue growth.
Nothing less would be a failure of epic proportions.
The migration to mobile is real and investors need to understand analysts cannot keep up with the rising year-end targets in these shares.
Alphabet had a high bar over which to pole vault, and it still managed to beat it handily.
And the $5 billion fine for bundling its in-house apps on Android fell on deaf ears.
Alphabet has $102 billion in the coffers, and $5 billion will do nothing to materially affect the company.
The cash reserves are up from $34 billion in 2010.
The market trampled on any sniff of a risk-adverse sentiment and powered into the green with the Nasdaq reaching another all-time high.
Let's not get too carried away. Alphabet's bread and butter is still its digital ad business with Alphabet CFO Ruth Porat confirming this fact saying, "One of the biggest opportunities for investment continues to be in our ads business."
Alphabet still breaks off 86% of revenue from its distinguished ad business.
"Other" is a category commingling Google Cloud, Google Play, and hardware that only comprised 13 percent of total revenue.
"Other Bets" brings up the rear with 1% of total revenue comprising Waymo, Alphabet's self-driving unit, which is an industry leader putting Tesla and Uber in their place.
Waymo plans to shortly roll out a massive commercial operation. Along with Google Translate, it could carve out a nice position in Alphabet's portfolio going forward.
The most important metric was Alphabet's total ad revenue, which it locked in at $28.1 billion, a 23.9% YOY improvement.
Aggregate paid clicks, a model in which the advertiser pays Google for a user to click an ad, has been steadily rising to 58%, up from 52% from the same time last year.
The masterful efficiency circles back to Google's ad tech team, which is by far the best in the business and has outstanding management.
The Cloud is an area that Alphabet highlights as a place for improvement.
Alphabet's cash war chest allows the company to throw hoards of cash at a problem. When mixed with brilliant management it usually works out kindly.
CFO Porat mentioned that costs were particularly higher in the quarterly head count because of large investments in cloud talent.
Google is tired of playing third fiddle to Amazon (AMZN) and Microsoft (MSFT), and views enhancing the enterprise business as imperative.
This explains Alphabet's head count surge to more than 89,000 employees, sharply higher than the 75,600 employed a year earlier.
Every FANG and high-tier tech company is spending its brains out to compete with each other.
Expanding data centers is not cheap. Neither are the people to deploy it.
Alphabet has the cash to compete with the Amazons and Apples (AAPL) of the world.
They do not have to borrow.
The potential trip wire in Alphabet's earnings report was Google's traffic acquisition cost (TAC).
Alphabet's (TAC) is described as money paid to other companies to direct user traffic to its suite of Google products.
(TAC) went up to $6.4 billion, which is 23% of Google's ad revenue but down on a relative percentage basis of 24%.
This was enough to keep investors from sounding the alarm and was welcomed by analysts.
Alphabet pulled out all the stops this quarter and the momentum is palpable.
Top-line growth from its core ad business shows no sign of slowing.
Acceptable (TAC) was the cherry on the sundae for the quarter at a time when many industry insiders thought it would be around 25% or higher.
Hardware offered less punch than before, which is what all high-quality tech companies desire.
There were no obvious weaknesses and the 34 straight quarters of 23% YOY growth is hard to top.
Google pulls in 10% of all global digital ad dollars in one business.
Other highlights were Waymo eclipsing the 8-million-mile mark of self-driving on public roads as it is the next business to come to the fore.
Google cloud is at an inflection point attempting to win over corporate management.
It has already won contracts with heavy hitters such as Twitter (TWTR) and Disney (DIS).
Pichai mentioned Target (TGT) as a key new cloud client that just signed on with Google last quarter.
More importantly, Alphabet's brilliant quarter bolsters the macroeconomic picture heavily reliant on tech earnings to usher the market through the gauntlet.
Regulation has proved irrelevant. Whatever fine they are slapped with does not change that Google reaps the benefits from its market position as one of the duopolies in the global ad business.
Alphabet has been trading from the bottom left to the upper right via a consistent channel.
Do not chase the new all-time high of $1,270. Use any weakness around the $1,100 level to initiate new positions.
Owning a company this dominant has little downside. The regulatory burden was a myth and Pichai has handled this operation beautifully.
I am bullish on Alphabet and its partner in crime Facebook.
________________________________________________________________________________________________
Quote of the Day
"Man is still the most extraordinary computer of all," said the 35th President of the United States John F. Kennedy.
Mad Hedge Technology Letter
July 23, 2018
Fiat Lux
Featured Trade:
(THE SKY IS THE LIMIT),
(NFLX), (FB), (AAPL), (MSFT), (GOOGL)
After Netflix (NFLX) laid an egg, the tech sector badly needed a cure to calm the fierce, open waters.
Netflix missed expectations by about a million subscribers and weak guidance shredded the stock almost 15% in aftermarket trading.
The FANG boat started to rock and large cap tech needed a savior to quell the increasingly downside risk to the best performing sector in the market this year.
You can rock the boat all you want, but when Microsoft (MSFT) shows up, the seas turn tranquil and placid.
Microsoft delivered a dominant quarter.
I expected nothing less from one of the best CEOs in America, Satya Nadella, and his magic touch is the main wisdom behind the loquaciousness when the Mad Hedge Technology Letter delves into the Microsoft business.
I rate Microsoft as a top three technology stock, and it should be a pillar of any sensible equity portfolio, unless you believe throwing away money in the bin is rational.
Born in Hyderabad, India, Nadella has worked wonders inheriting the reins from Steve Ballmer who was more concerned about buying an NBA team than running one of the biggest American companies.
Ballmer had Microsoft barreling unceremoniously toward irrelevancy.
It got so bad for Microsoft, the "L word" started to pop up.
Legacy tech is the lousiest label a tech company can be pinned with, because it takes years and gobs of cash to turn around investor sentiment, the business, and the share price.
Under Nadella's tutelage, Microsoft has burst through to another all-time high, which is becoming a regular occurrence in 2018 for Microsoft's shares that languished in purgatory for years.
If the macro picture holds up and if the administration can keep quiet for a few news cycles, investors can expect a minimum of 15% appreciation per year in this name.
And that is a conservative estimate.
Microsoft is already up over 20% in 2018.
Queue the applause.
Nadella has orchestrated a 300% jump in valuation during his four and half years at the helm.
Microsoft is now valued at more than $800 billion and climbing.
The only other tech members of the prestigious $800 billion club are Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL).
Apple leads the charge to claim the prize as the first trillion-dollar company, and it is within striking distance valued at $951 billion.
Nadella bet the farm on software subscriptions and migration to the cloud.
It was the perfect strategy at the ideal time.
Shares cracked the $108 mark at the market open even as the administration kept up its pugnacious rhetoric threatening to topple the overall market.
Tech has held up through these testy times confirming the fluid migration by the scared investor souls into big cap tech.
How can you blame them?
Amazon prime day saw record numbers visit its platform to the point it crashed from overloading the servers.
Coresight Research predicted users would fork over $3.4 billion on Prime Day in 2018, an increase of 40% YOY.
More than 100 million products were sold in the 36 hours.
The staggering Prime Day sales came on the heels of Alphabet being fined $5 billion for being too dominant in Europe.
The market shrugged it off as the fine does nothing to change Alphabet's dominance in Europe.
Android has harvested 80% of the smartphone market and was slapped on the wrist for bundling Google apps out of the cellophane packaging is a cheap trick by the European regulators.
Imagine frequenting a restaurant that cannot serve its own food.
Alphabet even allows users to download whatever bundle of apps through the Google Play app store. It should be enough.
Alphabet is another solid Mad Hedge Technology Letter pick, albeit it is the weaker tier of the vaunted FANG group and just celebrated all-time highs.
Amazon and Netflix (NFLX) still lead the charge at the top tier of the FANG group, and Facebook's risky business model has it grouped with Alphabet in the lower tier.
At the end of the day, a member of the FANG group is a member of the FANG group.
Microsoft should be part of the FANGs, but the acronyms start becoming too pedantic.
The breadth of the tech sector means many winners.
Microsoft is one of the biggest winners.
Microsoft's total revenue levitated 17% YOY to $30.1 billion.
The number every investor was patiently waiting for were insights into the cloud business.
Microsoft Azure was up 89% YOY and cemented together with strong guidance, ensured Microsoft's shares would continue on its merry way upward.
Gross margins for the commercial cloud offerings, grouped as Azure, Office 365, accelerated to 58% YOY from 52%.
Microsoft's intelligent cloud described by Nadella as "Microsoft's drive to build artificial intelligence into all its apps and services" rose 23% YOY to $9.6 billion.
Management said that it expects Cloud margins to ameliorate through the rest of 2018.
Even the hardware side of the operations caught an updraft with Microsoft Surface, a series of touchscreen Windows personal computers, pole vaulted by 25% YOY.
Simply put, Microsoft is a lean, mean cash-making machine. Last quarter's profit of $8.87 billion coincided with the first time the company eclipsed $100 billion in annual sales.
Microsoft Azure's 16 percent share of the global cloud infrastructure market, according to data by research firm Canalys in April, is rapidly approaching Amazon's Amazon Web Services (AWS) business.
A Morgan Stanley poll of 100 U.S. and European CIOs gleaned insight into the broad-based acceptance of Microsoft's products.
The poll saw 34% planned to upgrade to a higher and more expensive tier of Office 365 software in the next two years, and more than 70% plan to deploy Microsoft Azure and its collection of hybrid cloud solutions.
Microsoft still has its cash cow business injecting healthy profits into its business with Microsoft's productivity and business processes unit, including Office 365, rising 13.1% YOY to $9.67 billion.
The tech sector needs the mega cloud stocks to stand up and be accountable at a precarious time when the macro picture is doing its best to suppress the robust tech sector.
Amazon and Alphabet are in the limelight next week, and Amazon will divulge frighteningly strong cloud numbers along with the braggadocio numbers about its record-breaking Prime Day.
The more I look at Microsoft's last quarter performance, it becomes harder and harder to identify any chink's in Microsoft's armor.
This is not your father's Microsoft.
This is the flashy, innovative Microsoft on top of the most influential trend in the technology sector - the migration to the cloud.
Sticking to this stock could be the rich new uncle of which you've always dreamed. But in this case, it's Satya Nadella providing the free flow of funds.
The spike in the shares is well deserved and any remnant of a retracement should be bought with two hands.
Saying that I am bullish about Microsoft's prospects is an understatement.
________________________________________________________________________________________________
Quote of the Day
"Your margin is my opportunity," said founder and CEO of Amazon Jeff Bezos.
Mad Hedge Technology Letter
July 20, 2018
Fiat Lux
Featured Trade:
(A SELLERS' MARKET)
(CSCO), (MSCC), (GOOGL), (MCHP), (SWKS), (JNPR), (AMAT),
(PANW), (UBER), (AMZN), (AVGO), (QCOM), (CA), (CRM)
I bet you are wondering where all that money from the tax cuts is going.
Believe it or not, the No. 1 destination of this new windfall is technology companies, not just the stocks, but entire companies.
In fact, the takeover boom in Silicon Valley has already started, and it is rapidly accelerating.
The only logical conclusion in 2018 is that tech firms are about to get a lot more expensive. I'll explain exactly why.
The corporate cash glut is pushing up prices for unrealized M&A activity in 2018. U.S. firms accumulated an overseas treasure trove of around $2.6 trillion and the capital is spilling back into the States with a herd-type mentality.
I have chewed the fat with many CEOs about their cash pile road map. All mirrored each other to a T: strategic acquisition and share buybacks, period. The acquisition effect will be felt through all channels of the tech arterial system in 2018.
As the global race to acquire the best next generation technology heats up, domestic mergers could pierce the 400-deal threshold after a lukewarm 2017.
Spend or die.
Apple alone boomeranged back more than $250 billion with hopes of selective mergers and share buybacks. Cisco (CSCO), Microsoft (MSFT), and Google (GOOGL) were also in the running for most cash repatriated.
The tech behemoths are eager to make transformative injections into security, big data, semiconductor chips, and SaaS (service as a software) among others.
Hint: You want to own stocks in all of these areas.
Even non-traditional tech companies are getting in on the act with Walmart concentrating the heart of its strategic future on the pivot to technology.
Walk into your nearest Walmart every few months.
You'll notice major changes and not for decorative measures.
U-turns from legacy technology firms hawking desktop computers and HDD's (Hard Disk Drive) suddenly realize they are behind the eight ball.
M&A activity will naturally tilt toward firms dabbling in earlier-stage software and 5G supported technology. This flourishing trend will reshape autonomous vehicles and IoT (Internet of Things) products.
The dilemma in waiting to splash on a potential new expansion initiative is that the premium grows with the passage of time. Time is money.
It's a sellers' market and the sellers know this wholeheartedly.
Unleashing the M&A beast comes amid a seismic shift of rapid consolidation in the semiconductor sector. Cut costs to compete now or get crushed under the weight of other rivals that do. Ruthless rules of the game cause ruthless executive decisions.
The best way to cut costs is with immense scale to offer nice shortcuts in the cost structure. Buying another company and using each other's dynamism to find a cheaper way to operate is what Microchip Technology's (MCHP) culling of Microsemi Corporation (MSCC) in a deal worth $10bn was about.
Microsemi, based in Aliso Viejo, California, focuses on manufacturing chips for aerospace, military, and communications equipment.
Microchip's focal point is industrial, automobile and IoT products.
Included in the party bag is a built-in $1.8 billion annual revenue stream and more than $300 million of dynamic synergies set to take effect within three years. The bonus from this package is the ability to cross-sell chips into unique end markets opposed to selling from scratch.
Each business hyper-targets different segments of the chip industry and is highly complementary.
Benefits of a relatively robust credit market create an environment ripe for mergers. Some 57% of tech management questioned intend to go on the prowl for marquee pieces to add to their arsenal.
Then we have chip company Broadcom (AVGO) led by CEO Hock Tan, whose entire strategy is based on M&A and minimal capital spending.
His low-quality strategy of buying market share will ultimately fritter out. His lack of capital spending was also a salient reason for blocking Broadcom's purchase of Qualcomm (QCOM), which if stripped of its capital spending budget would have fallen behind China's Huawei to develop critical 5G infrastructure.
Tan's strategy flies in the face of the most powerful tech companies that are using M&A to enhance their products expanding their halo effect around the world.
Gutting innovation and skimming profits off the top is an entirely self-serving, myopic strategy to the detriment of long-term shareholders.
Investors punished Broadcom for it's latest investment of CA Technologies (CA) for $18.9 billion, even though this pickup signals a different tack.
CA Technologies is a leading provider of information technology (IT) management software, which suggests a belated move into the enterprise software market dominated by incumbents such as Salesforce (CRM).
Better late than never.
No need to mince words here as 2018 won't see any discounts of any sort. Nimble buyers should prepare for price wars as the new normal.
Not only are the plain vanilla big cap tech firms dicing up ways to enter new markets, alternative funds are looking to splash the cash, too.
Sovereign wealth funds and private equity firms are ambitiously circling around like vultures above waiting for the prey to show itself.
Private equity firms dove head first into the M&A circus already tripling output for tech firms.
Highlighting the synchronized show of force is none other than Travis Kalanick, the infamous founder of Uber. He christened his own venture capital fund that hopes to invest in e-commerce, real estate, and companies located in China and India.
The new fund is called 10100 and is backed by his own money. All this is possible because of SoftBank CEO Masayoshi Son's investment in Uber, which netted Kalanick a cool $1.4 billion representing Kalanick's 30% stake in Uber.
It is undeniable that valuations are exorbitant, but all data and chip related companies are selling for huge premiums. The premium will only increase as the applications of 5G, A.I., autonomous cars start to pervade deeper into the mainstream economy.
Adding fuel to the fire is the corporate tax cut. The lower tax rate will rotate more cash into M&A instead of Washington's tax coffers enhancing the ability for companies to stump up for a higher bill. Sellers know firms are bloated with cash and position themselves accordingly.
Highlighting the challenges buyers face in a sellers' market is Microsemi Corp.'s (MSCC) purchase of PMC-Sierra Inc. Even though PMC-Sierra had been looking to get in bed with Skyworks Solutions Inc. (SWKS) just before the MSCC merger, PMC-Sierra reneged on the acquisition after (SWKS) refused to bump up its original offer.
(SWKS) manufactures radio frequency semiconductors facilitating communication among smartphones, tablets and wireless networks found in iPhones and iPads.
(SWKS) is a prime takeover target for Apple. (SWKS) estimates to have the highest EPS growth over the next three to five years for companies not already participating in M&A. Apple (AAPL) could briskly mold this piece into its supply chain. Directly manufacturing chips would be a huge boon for Apple in a chip market in short supply.
In 2013, Japan's Tokyo Electron and Applied Materials (AMAT) angled to become one company called Eteris. This maneuver would have created the world's largest supplier of semiconductor processing equipment.
After two years of regulatory review, the merger was in violation of anti-trust concerns according to the United States. (AMAT), headquartered in Santa Clara, California, is a premium target as equipment is critical to manufacturing semiconductor chips. (AMAT) competes directly with Lam Research (LRCX), which is an absolute gem of a company.
Juniper Networks (JNPR) sells the third-most routers and switches used by ISP's (Internet Service Providers). It is also No. 2 in core routers with a 25% market share. Additionally, (JNPR) has a 24.8% market share of the firewall market.
In 2014, Palo Alto Networks (PANW), another takeover target focusing on cybersecurity, paid a $175 million settlement fee for allegedly infringing (JNPR)'s application firewall patents.
In data center security applications, (JNPR) routinely plays second fiddle to Cisco Systems (CSCO). Cisco, the best of breed in this space would benefit by snapping up (JNPR) and integrating its expertise into an expanding network.
Unsurprisingly, health care is the other sector experiencing a tidal wave of M&A, and it's not shocking that health care firms accumulated cash hoards abroad too. The dots are all starting to connect.
Firms want to partner with innovative companies. Companies hope to focus on customer demands and build a great user experience that will lead the economy. Health care costs are outrageous in America, and Jeff Bezos could flip this industry on its head.
Amazon (AMZN) pursuing lower health costs ultimately will bind these two industries together at the hip and is net positive for the American consumer.
Ride-sharing company Uber embarked on a new digital application called Uber Health that book patients who are medically unfit for regular Uber and shuttle them around to hospital facilities.
Health care providers can hail a ride for sick people immediately and are able to make an appointment 30 days in advance. It is a little difficult to move around in a wheel chair, and tech solves problems that stir up zero appetite for most business ventures. Apple is another large cap tech titan keeping close tabs on the health care space.
It's a two-way street with health care companies looking to snap up exceptional tech and vice versa.
It's practically a game of musical chairs.
Ultimately, Tech M&A is the catch of the day, and boosting earnings requires cutting-edge technology no matter how expensive it is. Investors will be kicking themselves for waiting too long. Buy now while you can.
Yes, It's All Going Into Tech Stocks
________________________________________________________________________________________________
Quote of the Day
"Companies in every industry need to assume that a software revolution is coming," - said American venture capitalist Marc Andreessen.
Mad Hedge Technology Letter
July 18, 2018
Fiat Lux
Featured Trade:
(IS NETFLIX DEAD?),
(NFLX), (AMZN), (FB), (TWTR), (DIS), (GOOGL), (QQQ)
Too far out over their skis.
For the first time in five quarters, Netflix (NFLX) was unable to eclipse the alpine level like expectations prognosticated by its own senior management.
Netflix and Amazon (AMZN) have been given luminary status at the Mad Hedge Technology Letter because the straight-line price action offers such agonizing entry points for investors, along with the best business growth models in the American economy.
Chasing this stock has usually worked out for the better, but leading up to the latest quarterly earnings report, Netflix started to scrunch up.
The firing squad loaded up its bullets and after Friday's close, shots were rained down on Netflix's parade as it failed to beat the only metric significant to Netflix investors - new subscribers.
The numbers were not even close.
Netflix fizzled out on its domestic subscriber's growth metric by 560,000, when 1.23 million new subscribers were expected.
International numbers succumbed to the inevitable, but less in percentage terms, failing to surpass the expected 5.11 million, only successfully adding 4.47 million new subscribers.
The 5.2 million adds out of the expected 6.3 million expected is the best news that has happened to Netflix in a long time if you are underinvested in this name.
Ravenous investors looking to jump on Netflix's bandwagon are licking their chops.
After-hours trading saw the stock tank, falling down the rabbit hole by almost 15%.
The stock had only recently been trading around an all-time high of $419. Fluffing their lines has given investors a much-awaited entry point into one of the creme de la creme growth stories in the vaunted tech sector.
Let's get a little more granular, shall we?
Even for high-flying tech stocks, the velocity of the price surges has put off many investors calling the stock "overbought."
Netflix shares were up 108% in 2018 before profit taking commenced before the earnings call. It was unusual to see Netflix intraday slide of 4%.
Investors smelled a rat.
It was only a matter of time before normal investors were finally given a chance to swiftly pile into this precious gem of a stock.
That time is now.
UBS analyst Eric Sheridan recently declared Netflix's growth story as "all priced in."
I don't buy it.
Yes, the shares got ahead of itself, but the Netflix narrative is still intact.
Over the earnings call, Netflix CEO Reed Hastings gushed about the current state of the company remarking that "fundamentals have never been stronger."
The bad news is that it missed on overzealous estimates; the good news is it added 5.2 million new subscribers.
Don't forget that in Q1 2018, Netflix beat total estimates by a herculean 920,000 subscribers, which is around what it missed by in Q2 2018.
The most recent quarter was overwhelmed by World Cup 2018 fever, with audiences migrating toward probably the most dramatic and exciting World Cup in history and the first to be streamed.
The most popular sporting event in the world gave Netflix a short-term kick in the cojones, delaying many new subscription sign-ups until after France lifted the trophy for the second time in its illustrious history.
The Twitter (TWTR) and Facebook (FB) numbers back up this thesis, experiencing explosive engagement and ad buying over the monthlong tournament boding well for their next earnings results.
Don't worry investors.
These eyeballs are just temporary.
The tournament offering a short-term bump to social media stocks clearly is just a one-off event that happens one summer out of every four.
Any recent profit taking will see the same investors eyeing a lower cost basis after this share dump.
Netflix won't be down for long.
Let's briefly review some of Netflix's cornerstone advantages:
The massive user migration from linear television to over-the-top content (OTT) led by cord-cutting millennials, responsible for a growing slice of domestic purchasing power.
The inherent advantages of a global over-the-top content (OTT) streaming model, applying massive scale with the cheap marginal cost of current technology.
The first-mover advantage that has allowed Netflix to have its own cake and eat it.
And the competition's laggardly response to Netflix eating its own cake.
Netflix CFO David Wells' take on the missed targets was "lumpiness" in the business and brushed it off like a bug crawling up your leg.
Hastings also chimed in about the increased competition shaping up and Disney (DIS), HBO, and other players finally getting their act together.
He mentioned there is room for multiple players in this industry, but they better not show up to the gunfight with a knife.
Netflix has been weaning itself from Disney's, Fox's and other third-party content for years, along with spending 50% more on marketing in 2018.
Ted Sarandos, chief content officer of Netflix, let it be known that 85% of new spending will be on original content in 2018.
Out of $8 billion earmarked for content in 2018, a colossal $6.8 billion is set to be splashed on in-house productions.
Compare this with the competition of Amazon, which plans to spend $4.5 billion on original content in 2018 and Hulu's plan to spend $2.5 billion in 2018.
Down the road, Netflix will have greater ability to finance its expensive content spend as it has flipped to a profit-making entity.
Amazon uses its AWS (Amazon Web Services) arm to fund its various subsidiaries.
The high level of quality content is reflected in the 40 Emmy nominations garnered by Netflix, in effect crushing stalwart HBO.
Netflix is aggressively courting Hollywood's A-list and poaching them in droves.
Proven content creators such as Ryan Murphy, Shonda Rhimes, Shawn Levy and Jenji Kohan are now on Netflix's payroll, and are a vital reason for the uptick in quality programming.
This successful harvest will result in added brand recognition and elevated prestige for current and future eyeballs.
Netflix will push out around 1,000 original programs in 2018. More than 90% of Netflix's subscribers habitually watch its vast portfolio of original programming.
The only way Netflix can be stopped is if it stops itself.
The pipeline is plush, and it is not all priced into the stock yet.
Next year could be the year India and Japan massage the bottom lines to greater effect, as Netflix double downs on the international arena.
Netflix's first original Indian series "Sacred Games" has been a winner, and its first original movie "Lust Stories" is creating a stir among avid Indian movie followers.
CEO Hastings has gone on record stating the "next 100 million" Netflix subscribers will derive from the land of Taj Mahal and chicken tikka masala.
Netflix has a lot of work to do to catch up with entrenched leaders Hotstar and Alphabet's (GOOGL) YouTube India.
About 800 million Indians have never been online before. The screaming potential India offers cannot be found elsewhere, especially with films historically, deeply embedded inside India's ancient culture.
Next month will see the release of "Ghoul," based on critically acclaimed work by authors Salman Rushdie and Aravind Adiga.
Slated for imminent release is also Mumbai Indians, a documentary about a top team in the locally obsessed Indian Premier League cricket tournament.
GBH Insights' internal research has found that Netflix is watched 10 hours per week in American households.
That number will inevitably grow as the quality of content goes from strength to strength for this first-rate company.
And how did Netflix's shock miss affect the Nasdaq (QQQ) on the next trading day?
It showed the resiliency and intestinal fortitude that has been a hallmark of the tech sector bull market.
The latest earnings result snafu is a surefire chance to finally have a little taste of Netflix. It will be back over $400 in no time.
________________________________________________________________________________________________
Quote of the Day
"If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner," - said retired U.S. Army General Omar Bradley.
Mad Hedge Technology Letter
July 16, 2018
Fiat Lux
Featured Trade:
(THE REGULATION EFFECT),
(GOOGL), (AMZN), (FB), (SNAP), (TWTR), (NFLX)
Locking horns with large cap technology companies in court is inconceivable for regulators in Washington.
Yes, it is their job to put out fires left, right, and center, but when the scorching inferno reaches full intensity, regulators hit the pass button.
Taking on an industry that employs an army of lawyers and data analysts up the wazoo is frightful.
Tech wants to make the skirmish into a resource fight and no cohort has more ammunition than these four companies.
They are already on the way to create more unregulated industries simply because they do not exist yet.
This is why regulators cannot keep up with the nimbleness on display by the tech industry.
They are always one, maybe two steps ahead.
Investors have been able to digest consequences of the data fiasco fueling an even more bullish narrative for the likes of Facebook (FB) and Alphabet (GOOGL).
Facebook and Alphabet are the two laggards in the vaunted FANG group, only because they are up against Netflix (NFLX) and Amazon (AMZN), two of the most transformational companies of the gig economy generation.
Facebook and Alphabet give traders entry points; Amazon and Netflix hardly ever.
Investors are hard pressed to find days when Amazon and Netflix drop more than 1%, and a brief respite is met with a torrent of new buying.
Even more of a head-scratcher is the American law etched into the books, calculating harm by connecting it with price increases, underscoring the FANG's dominant position.
It is almost impossible to prove caused "harm" because Alphabet and Facebook services are free. However, the free service is a misnomer, because of the extreme manipulation of data allowing tech titans to profit from data opportunities instead of charging customers a service fee.
The Mad Hedge Technology Letter has been rolling out a steady dose of Facebook recommendations since its inception to scintillating effect.
The Cambridge Analytica scandal stoked mayhem on the global news waves ravaging Facebook shares from $192 down to $153.
Investors were panicking and rightly so. A precipitous drop is nothing investors with skin in the game like to see.
The Mad Hedge Technology Letter saw it as a gift from the celestial stars and ushered subscribers into this suave stock at $168, to reread this memorable story please click here.
Facebook has gone from strength to strength blowing past expectations celebrating all-time highs of a recent intraday price of $207 earlier this week.
I am still highly bullish on Facebook, even more so after the first fines were doled out for the recent scandals.
Under the old data laws in Britain, Facebook was fined a grand total of $660,000 along with a detailed report from the Information Commissioner's Office castigating Facebook's business practices.
This amount is peanuts for Facebook, practically equaling the cost of providing a16-person security detail for CEO Mark Zuckerberg around his Palo Alto, California, estate for maybe two weeks.
If Facebook can hold down these fines to inconsequential amounts, regulation will be a decisive tailwind going forward.
How does a headwind turn into a tailwind in the blink of an eye?
General Data Protection Regulation (GDPR) rolled out in Europe lately has helped Alphabet and Facebook solidify their digital ad business.
Alphabet has adopted a stringent version of the rules to its new model because the behemoth does not need to take on the added risk of noncompliance.
Marginal companies do.
The possibility of exorbitant fines clearly grabbed the attention of Silicon Valley CEOs, and they have put the ball in motion to insulate themselves from such downside risk.
Unsurprisingly, Alphabet has a higher opt-in consent rate than its smaller tech brethren.
Users are more comfortably entrusting data to an Alphabet instead of a smaller unknown that could potentially be 10 times worse than Alphabet.
Uncertainty breeds risk aversion.
Recent data shows other companies have a galling time keeping up with the same percentage of consent as Alphabet.
You cannot expect a college basketball player to perform miracles like Steph Curry.
This puts Alphabet in a healthier strategic position as the users who consent are five times more valuable to digital ad exchanges and easier to monetize.
Other ad exchanges face an uphill battle against Alphabet if they cannot increase the rate of consent.
The extra premium is derived from the ability to personalize the advertisements boosting the conversion rate for sellers.
Alphabet has in effect increased its quality of data just by being Alphabet.
It is certainly not fair, but life is not fair.
And then there is the conundrum of where do you go if you do not want to sell on Alphabet or Facebook?
Well, Twitter (TWTR), Snapchat (SNAP), and Instagram (owned by Facebook) are the other alternatives fighting for the scraps.
The battle to get users to consent is really the be-all and end-all for many of these ad sellers.
Facebook and Alphabet have seen the best results and will likely extend their hegemony.
Recently, Alphabet has been offering 15% less ads on its exchange. But, it all involves consented users demonstrating the unenviable position for other exchanges to match Alphabet's quality.
The EU antirust watchdog is expected to levy a multi-billion dollar fine for abusing its dominant position of its Android operating system.
This comes on the heals of fining Alphabet $2.82 billion last year for abusing the dominance of a search again.
The stock barely budged on this news.
Alphabet's punishment for being too dominant in Europe is laughable.
When a company is punished for being too good then you sit back and admire from afar.
There is no other company that can undermine its position and even hit with billions in fines - its leadership status is unquestioned.
American readers sometimes forget the popularity of the Android ecosystem outside of America because of the ubiquitous nature of iPhones stateside. The network effect has made it impossible to do business in Europe without collaborating with the Android platform.
Facebook took more than eight years to reach a billion users but only half that time to reach the next billion.
The stock has held up relatively well. The 73% market share of digital ad dollars Facebook and Alphabet extracted in 2017 is up from 63% in 2015.
This two-headed monster shows no sign of abating, demonstrated by taking in 83% of all digital ad growth, leaving the crumbs for the rest.
They are specialists at exploiting their business environments, much like mining companies exploit the earth.
Their platforms are so influential, they turn elections on its head.
Governments are scared of taking them down, empowering these companies to new heights creating a massive halo effect worldwide.
The Chinese communist government has even used Chinese social media platforms to establish an Orwellian surveillance system monitoring its people at all times. Such is the power of technology these days.
Users are forced to accept any conditional terms they offer, because many jobs are reliant on these platforms such as the millions of app developers hustling to create the new hot app.
They all have families to feed.
On an individual level, people would not sacrifice a cushy income because they do not wish to consent to tracking services.
The next step is for the Amazons and Alphabets to ramp up their private label businesses using their high-quality treasure trove of data.
Amazon has been the leader in selling its own products from tech behemoths, and that percentage in terms of overall sales will increase over time.
It does not need others to sell products they can make themselves for cheaper, better quality retaining every cent.
Amazon's private label is geared toward decent quality and low prices capturing the volume of transactions desired.
Bundling services, exploiting the data, and applying discriminatory pricing will become the new normal for these powerful platforms and nobody does that better than Amazon.
It has no incentive to allow eyeballs, data and dollars to escape these proprietary walled gardens hence the term walled gardens.
Even more genius, Facebook and Alphabet can track users outside their walled gardens if they are signed into their Facebook or Google accounts.
Granted, Facebook has had better price action of late as traders understand there has been no lasting effect from the misuse of leaked data.
However, Alphabet has the crown jewel of the next leg up in A.I. (Artificial Intelligence) - Waymo. Waymo is a company I have chronicled in the past leading the race in autonomous driving inching closer to full-scale deployment sometime in the next year.
If you think Alphabet and Facebook shares are lofty now and "overbought," then I cannot imagine what you'll think when these companies dominate further because the runway is as far as the eye can see.
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Quote of the Day
"One machine can do the work of 50 ordinary men. No machine can do the work of one extraordinary man," - said American author Elbert Hubbard.
