Mad Hedge Technology Letter
August 9, 2018
Fiat Lux
Featured Trade:
(WHY SNAPCHAT IS GOING DOWN THE SOCIAL MEDIA DRAIN),
(SNAP), (FB), (NFLX), (AMZN), (GOOGL), (TWTR), (BB)
Tag Archive for: (GOOGL)
Companies this small should be growing.
Growth companies and tech go hand in hand, especially at the incubation stage where there is little resistance hindering growth.
The law of numbers dictate that small companies only need marginal gains to generate high growth in terms of percentages.
Once a company becomes as big as Amazon (AMZN), it becomes harder to move the needle.
Snapchat (SNAP), which is in the same social media game as Facebook, is vastly smaller than the incumbent that hoovers up the digital ad dollars.
Facebook (FB) boasts 1.47 billion daily active users (DAU) and is one of the members of a powerful digital ad duopoly along with Alphabet.
Snapchat added 4 million net (DAU)s in Q1 2018 and blew its chance for sequentially increasing usership by losing 4 million (DAU)s last quarter.
The stock sold off hard in after-hours trading, down 11% at one point but rebounded big time with the earnings commentary with Snapchat revealing guidance for the first time.
Snap opened the next trading day demonstrably lower reflecting the disenchantment of investors.
Evan Spiegel's creation has really had a hard go of it lately. The app redesign was a cataclysmic failure of epic proportions denting the popularity of this app.
The fallout was sacking 100 engineers.
Overall, there were some positive takeaways from the earnings report, mainly, the revenue beat was satisfying, and profitability shone through with average revenue per user (ARPU) shooting up 34% YOY.
Another victory was the boost in ad revenue, up 48% YOY, which is the main driver of revenue in the company.
The hairiest issue with this company is the fundamentals are excruciatingly apathetic.
Stagnating usership growth at this stage is a red flag.
Social media stocks were bashed in recent trading sessions with Twitter (TWTR) dropping from $46 to $31 because of diminishing usership and soft guidance.
The amount of monthly active users dropped from 338.5 million to 335 million, and financial guidance was brought down a few notches.
Twitter has made a poignant attempt to clean up its system from the debris molding around the edges.
To "improve the health" of the Twitter platform, Twitter purged 6% of all accounts rooting out the influences undesirable to its ethos.
Social media companies must take the initiative to protect its platforms, instead of being a silent bystander to a stabbing in a dark alley.
Facebook was the mother of all drops in the social media space collapsing from an all-time high of $218 to $171, a drop in one trading day.
Guidance tore apart this stock after a rapid run-up to the earnings report that saw unbelievable strength rising almost every day.
Poor guidance reflects the ill-effects of the recently enacted General Data Protection Regulation (GDPR), which tainted the European numbers.
The epicenter of data regulation has crimped profitability and popularity of social media in the Eurozone.
If Facebook and Twitter are facing tough short-term headwinds, then imagine how Snap feels.
They are the small fish in the big pond, and they are running out of places to hide.
Every new user Instagram picks up is one less potential user missed for Snapchat.
Let me remind you that Instagram is boosting its monthly average usership (MAU) 5% per year.
Instagram recently surpassed the 1 billion (MAU) mark after eclipsing the 800 million mark in September 2017.
Instagram added 200 million users, more than the entire (DAU) for Snap, in 11 months.
Big trouble for Snap.
Effectively, Snap is the inferior version of Instagram for young kids and that narrative does not bode well for the future.
For every $1 Snapchat spends, it earns -$6 on that $1. Kids aren't the biggest distributors of wealth. It would help if Snap matured its interface to accommodate older millennials who are tech savvy to boost its average revenue per user.
As it stands, Facebook earns $9 per daily active user while Snapchat earns a smidgeon over $1 per daily active user.
I cannot say that Facebook is a quality platform, but it has successfully monetized the platform.
What's more, CEO Evan Spiegel blamed the drop in usership on the redesign.
Yes, the redesign didn't help, but the usership would have dropped anyway because of draconian data laws in Europe and the general malaise stigmatized toward current social media platforms.
Management is not executing effectively at Snap, and it is out of touch with its core base without opening up new sources of growth.
If a company redesigns an app, enhance the app, do not make it unusable such as the Snap redesign.
Snap's eggs are all in one basket. And that basket is shrinking in the high revenue locations of North America and Europe.
It only earned $2 million from non-digital ad revenue.
As FANGs power on to pass a trillion dollars of market cap, the diversity in their segments are nothing short of impressive.
Snap has no other irons in the fire and is overly reliant in an industry in which it will slowly bleed to death.
The only savior is in reinventing itself, but that takes guts and a bold CEO with a revolutionary strategy.
There is precedence for this transformation such as BlackBerry (BB), one of the original smartphone makers, which has morphed into an autonomous driving technology company.
Another good example is Netflix, which started out in the DVD industry and pivoted to online streaming.
What Snap is doing has its limits and it needs to shake up its business model or slowly rot.
The company must wake up to the stark realization that its platform is not engaging.
Many analysts believed Snap could become half as big as Facebook and that seems highly unlikely.
I have been bearish on Snap for the entire existence of the Mad Hedge Technology Letter.
And it has been the perfect sell on the rallies stock because of its poor performance, even poorer management, and awful fundamentals.
A telltale sign was the last earnings call.
It was the second quarter in a row of blaming the redesign on bad performance.
If Spiegel underperforms next quarter again - meaning negative growth usership - it will be interesting if he blames the redesign again.
Third times a charm.
Where does this all lead?
Facebook offered to purchase Snapchat after its IPO because management was worried it would steal market share from Instagram.
Snapchat rebuffed the advances and decided to lock horns directly with Instagram.
Well, the David and Goliath battle is playing as most would assume, boding ill for the fate of Snapchat.
Instagram will keep weakening Snapchat moving forward. And Facebook might end up scooping up Snapchat down the road for a discount.
It doesn't look good for Snapchat, and investors should consider shorting this stock after a dead cat bounce.
________________________________________________________________________________________________
Quote of the Day
"The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model and it might not be successful," - said former Apple cofounder Steve Jobs in a Rolling Stone interview, 2003.
Mad Hedge Technology Letter
August 7, 2018
Fiat Lux
Featured Trade:
(WHAT TO DO ABOUT TECH NOW),
(AAPL), (FB), (NFLX), (AMZN), (GOOGL), (AMD), (MSFT)
Is it time to dump tech?
Short term, yes - long term, no.
Recently, a series of big tech earnings misses throttled the market tearing into the positive investor sentiment, which was holding up nicely after the early year sell-offs.
Every precipitous and steep drop this year has followed with a mammoth dip buying spree lifting stocks to newer highs.
This is the type of robustness investors rejoice in when talking about the price action of technology stocks.
Not only is the dip buying awe-inspiring, but the lack of hesitation in the dip buying is even more impressive.
Investors have scant time to pick up these precious names before the entry points disappear like an invisibility cloak.
Ditch these stocks at your peril, because the buying queue represents the likes of all the tech behemoths waiting to buy back their own stock, namely Warren Buffett, and the flight to quality brigade that view big cap stocks as a de-facto cash sanctuary.
The anxiety was palpable when Netflix's (NFLX) management badly miscalculated new subscription business after a brilliant earnings report from Microsoft.
Investors got another wrench in their stomach when Facebook (FB) followed Netflix with dismal guidance ripping apart the growth narrative and pivoting toward ameliorating its controversial business model giving investors a fresh dose of uncertainty.
All eyes were planted on Alphabet (GOOGL), Amazon (AMZN), and Apple to provide some calm to the markets.
That's exactly what they did.
Part of the problem now is that expectations are so exaggerated, these companies have little wiggle room to overdeliver.
Industry specialists largely believe tech profits to rise 20.9% YOY this earnings season. The lion's share of the growth has been contained to the headliner names such as Amazon, which has grown like no company has ever grown before.
Estimates show a slide in YOY tech profits for the third-quarter earnings decelerating down to less than 15%. While still good, it's not the 20% growth YOY, and over that it has been fueling tech's rise in increasingly precarious market conditions.
The downshift in profit growth has been anticipated for the past few quarters, as investors thought a trip wire would at some point bring down the entire FANG group.
What we have found out is that not all FANGs are created equal. Some are more equal than others.
The past earnings performance indicated this with Amazon's emphatic top-line growth numbers blowing away the most adamant bear.
Netflix's narrative is still intact, and consolidation is badly needed for a stock that has gone parabolic in 2018.
The short-term capitulation of Facebook and Netflix is proof that large cap tech also has downside risk embedded in its model.
It was starting to seem like down days were never in the cards.
Lowered tech guidance for next quarter will really test the market's resiliency during next earnings season.
If these numbers miss spectacularly, expect the tech sector to give back a good chunk of the year's gains back.
Decelerating profits is never a positive sign. However, after coming from Mt. Everest profit levels, will the markets brush it off and power higher?
There is a lot more juice left in this tech story, and sharp corrections should still be bought.
Tech is becoming quite frothy at these levels and choosing the right tech story will go a long way to sleeping well at night.
It will be excruciatingly difficult for tech companies to impressively beat on the upside next quarter.
However, the secular story and unique earnings growth are treasures compared to other sectors that are getting beaten into submission.
When you delve into the numbers, the success becomes comical.
Apple is the first company to cross the $1 trillion of market cap.
This company prints money to the tune of $11 billion in profits each quarter.
It possesses a devoted userbase, surging software and services segment, and premium grade smartphones allowing Apple to cash in profits to the extent they do.
CEO Tim Cook sent an email to Apple's employees downplaying the milestone, instead saying "financial returns are simply the result of Apple's innovation."
He is completely correct.
The innovation has fed back through spiking profits and boosting sales allowing Apple to make money hand over fist.
This in turn is a big reason why Apple's share price has almost quadrupled with Cook at the helm.
The best and brightest tech companies in 2018 share one unified trait: innovation.
And it is not a surprise that Amazon and Microsoft (MSFT) will be next to join the trillion-dollar club as they boast some of the most innovative staff in the world.
As these two companies pass the trillion-dollar market cap, it will encourage the next tier of flourishing tech companies to make the jump to the trillion-dollar club.
The tech sector is still eating everybody's lunch with every business in the world migrating to their front yard.
Some weakness in the extended tech shares have been a matter of when and not if.
Advanced Micro Devices, Inc. (AMD) is a stock gaining 22.8% just in the month of July underlining the overheated price action of some of these tech names.
I am largely staying away from chip stocks now because trade tensions have bred uncertainty around Chinese chip revenues.
The tech sector has many moving parts and a trade war can hurt one part of tech while others remain unblemished.
Another front of concern is data regulation headlines rearing their ugly heads from time to time.
There are more hurdles for tech stocks going forward, but that does not mean they will get tripped up.
I am in a tech holding pattern until I find an opening to issue my next slew of tech trade alerts.
Year Over Year Profit Growth
________________________________________________________________________________________________
Quote of the Day
"I will always choose a lazy person to do a difficult job because a lazy person will find an easy way to do it." - said founder of Microsoft Corporation Bill Gates.
Mad Hedge Technology Letter
August 6, 2018
Fiat Lux
Featured Trade:
(NEXT STOP IS $2 TRILLION),
(AAPL), (AMZN), (MSFT), (NFLX), (FB), (GOOGL), (TWTR), (CRM)
Another win for big tech.
Apple (AAPL) is the first company in America to have a trillion-dollar market cap and won't be the last as Amazon (AMZN) is close behind.
This also opens up the door for one of our favorite companies Microsoft (MSFT), which will shortly cross the $1 trillion threshold as well.
The milestone underscores the reliability and power of the tech sector that has propped up this entire market in 2018 as we continue the late stage cycle of the nine-year bull market.
Apple has entered into a hyper-charged expansion phase, and I will explain how this will boost shares to new heights.
The Mad Hedge Technology Letter has been hammering away on the software and services narrative since its inception.
As legacy companies are pummeled in the financial markets, the cloud has enabled a revolutionary industry catering toward annual subscriptions of all types.
Users no longer have to store gobs of data on computers. The cloud allows the data to be stored on remote data servers giving access to the information from anywhere in the world with an Internet connection.
A plethora of modern hybrid apps boosting productivity integrated with the cloud offers business a new-found way to collaborate with coworkers around this increasingly multicultural, multilingual, and globalized world.
Apple is perfectly placed to take advantage of the current technology climate and will wean itself from the image of being a hardware company.
Investors wholeheartedly approve of the conscious move to bet the farm on service and subscriptions.
After Apple's earnings came out, the stock traded up whereas in past quarters, the total sales unit was the crucial number investors hung their hat on and the stock would dip.
Apple missed iPhone total sale units registering 41.3 million compared to the expected 41.79 million units.
This slight miss in the past was enough for the stock to sell off on and instead the stock rose 3%.
This is the new Apple.
A software services company.
Investors can feel at peace that iPhone sales aren't growing. It's not that important anymore.
Apple's software and services segment pocketed $9.55 billion in revenue, a 31% jump YOY from $7.27 billion.
This has been in the making for a while as software and services has been a five-star performer for the past few quarters.
However, the performance is material now and the pace of improvement will take Apple into the next phase of hyper-growth.
This is all good news for the stock price.
Software and services revenue now comprise 17.9% of Apple's total revenue.
By year-end, this division could topple the 25% mark.
In the earnings call, Apple CEO Tim Cook was smitten with the software and services growth saying this particular revenue will double by 2020.
In the next few years, software and services will eclipse the 40% mark, all made possible inside an incredibly sticky and top-quality ecosystem.
The iPhone continues to be the best smartphone the market has to offer. If you marry the best hardware with top-quality software, this stock will chug along to higher share prices unhindered.
As the technology sector matures, the flight to quality becomes even more glaring.
The inferior platforms will be found out quickly heightening the risk of massive intraday sell-offs and revenue-depleting penalties.
Facebook and Twitter have seen 20% sell-offs hitting investors in the mouth.
These platforms have issues rooting out the nefarious elements that seek to infiltrate its operations and manipulate the platform for self-serving interests.
Apple does not have this problem. Neither does Microsoft, Amazon, Netflix (NFLX) or Salesforce (CRM), and I will explain why.
When you offer services for free such as Facebook (FB) and Twitter (TWTR) do, you get the good, bad, and ugly bombarding the system.
Even though it's free to use these platforms, Facebook and Twitter must spend to make it useable for the good forces that made these companies into tech behemoths.
Instead of rooting out these rogue elements, they turned a blind eye describing their businesses as a distribution system and were not accountable.
Then sooner or later one of the evil elements would get these companies in hot water. It happened.
Big mistake, and the chickens are coming home to roost.
The flight to quality means avoiding public tech companies that only offer free services.
You pay for what you get.
Alphabet also has seen its free model penalized twice in Europe with hefty fines, and it probably won't be the last time.
Play with fire and you get burned.
It also offers Cook the moral high road, allowing him to non-stop criticize the low-quality platform companies, mainly Facebook, because it makes the whole tech sector look bad.
The bite back against technology in 2018 is largely in part due to these low-quality free platforms manipulating user data to ring in the profits.
Amazon has been public enemy No. 1 for the Washington administration but not to the public because the loathing of Amazon is largely a personal issue.
Amazon improves the lives of customers by giving users the best prices on the planet through its comprehensive e-commerce business.
Apple now constitutes 4% of the S&P 500 index.
Investors have been waiting for Apple's Cook to sweep them off their feet with the "next big thing."
Even though nearly not as sleek and sexy as a smartphone, the software and services unit are it.
Apple doubling down on high quality that I keep mumbling about shows up in average selling price (ASP) of the iPhone, which destroyed estimates of $694, coming in at $724 per unit.
The bump in (ASP) signals the high demand for its higher-end iPhone X model over the lower-tiered premium smartphones.
The iPhone X is the best-selling iPhone model because customers want the best on the market and will pay up.
The success of the iPhone X lays the pathway for Apple to introduce an even more expensive smartphone in the future with better functionality and performance.
If Apple can continue innovating and producing the best smartphone in the world, the price increases are justified, and demand will not suffer.
Perusing through some other parts of the earnings report, cloud revenue was up 50% YOY.
Apple pay has tripled in the volume of transactions YOY surpassing the billion-transaction mark.
China revenue has stayed solid even with the mounting trade tension. I have oftentimes repeated myself in this letter that Apple is untouchable in China because it provides more than 4 million jobs to local Chinese directly and indirectly through Apple's ecosystem.
This prognosis was proved correct when Apple announced revenue in China of $9.55 billion, a spike of 19% YOY.
Even though much of Apple's supply chain remains in China, Beijing isn't going to take a hammer and smash it up risking massive social upheaval and public fallout. In many ways, Apple is an American company masquerading as a Chinese one.
As for the stock price, the explosion to more than $208 means that Apple is overbought in the short term.
If this stock dips back to $200, it would serve as a reasonable entry point into this record-breaking hyper-growth software and services company.
And with the $234 billion in cash planned to be deployed in Apple's capital reallocation plan, the biggest hurdle is the federal daily limit Apple has in buying back its own stock according to Apple CFO Luca Maestri.
Even the problems Apple has right now are great.
Apple's Path to $1 Trillion
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Quote of the Day
Mad Hedge Technology Letter
July 31, 2018
Fiat Lux
Featured Trade:
(THE BEST IN THE BUSINESS),
(AMZN), (FB), (GOOGL), (AAPL), (NVDA), (CRM)
Scale works, and Amazon (AMZN) is proving it.
Jeff Bezos' company is hyper-charging its levers and pumping out growth to the tune of $2.5 billion in net profit as of last quarter.
This is a big deal for a company that has largely been considered using the AWS engine to fund the e-commerce business.
The topline growth is mind-boggling for a company poised to seize 50% of U.S. e-commerce sales by the end of 2018, up from the current 44%.
It's truly an Amazon stock market in 2018.
The razor-thin e-commerce margins are what Amazon is most renowned for, but it's high margin divisions are creating a higher quality company.
Investors are willing to pay a higher multiple for this version of Amazon in the future.
That is a very bullish sign going forward.
Tech shares sold off last Friday because the Amazon fireworks came to an end and no other company will be able to compare with its earnings.
This is another knock off effect from Amazon existing.
Of the vaunted FANG group, only Alphabet and Amazon impressed during this crunch earnings season at a pivotal time in the market that has looked short on ideas.
FANGs are not created equal and Amazon is by far the creme de la creme of this cohort.
The AWS cloud unit and its digital advertising division are the fodder allowing Amazon to take risks elsewhere.
Amazon is the most efficient business in America. In the past quarter it experienced more fluid data centers and warehouse operations.
If you do this for as long as Amazon has, you eventually learn all the tricks to the trade.
Hyper-accelerating technology offers Amazon a new way to implement new efficiencies, non-existent even a quarter ago boosting operational margins.
AWS surged 48.9% YOY to $6.11 billion improving on 48.7% last quarter.
AWS is also comprising a larger stake of the business than before.
This quarter AWS attributed 11.5% to total revenue compared to 10.8% last year.
The topline growth is staggering for a company duking it out with Apple (AAPL) to be the first trillion-dollar company.
The narrow breadth of the nine-year bull market is becoming even narrower, raising risk levels in the short term.
AWS is expected to grow into a $42 billion business by 2020, a nice double of what it is today.
Jeff Bezos does not need to respond to the administration's digital criticism of him because he doesn't need to. Taking the high road is the solution. If he wants to say something, he can publish it through a proxy via the Washington Post, which he owns.
Amazon's digital ad business has been a revelation.
The bad news is that Alphabet (GOOGL) and Facebook (FB) have cornered the global digital ad market taking in 73%, a nice bump from the 63% in 2015.
And of the global digital ad growth, they are collecting 83% of that growth.
That hasn't stopped Amazon from taking a stab at the digital ad market itself which is the logical move with the number of eyeballs attracted to its platform.
The ad business did $2.2 billion in sales last quarter, a nice increase of 132% YOY.
Even though in its infancy, this super-charged digital ad division could eventually give Alphabet and Facebook a run for its money - another reason Facebook is trading in bear market territory.
Facebook's platform quality is far inferior than Amazon, which uses it for e-commerce rather than posting free user content.
Facebook is still pocketing tons of cash but it's growth narrative has been exhausted shown by the dismal guidance for the second half of the year.
Amazon is incrementally raising the quality of the company in all facets, evident in the topline growth and jump in profitability.
Amazon absolutely does care about the bottom line. Watch for the net profits to surge past $3 billion in the third quarter in its resurgent digital ad business.
And with the ad tech quality floating out there, Amazon will be able to invest in poaching top dogs from Facebook and Google to build this division swiftly into tens of billions of dollars in revenue per year.
It could crescendo into another AWS-esque monster.
In Q2 2017, Amazon posted total revenue of $37.96 billion. Fast forward to 2018 and revenue raced ahead to $52.9, a robust $14.94 billion improvement.
The $14.94 billion in one quarter year-over-year improvement in Amazon total revenue is more than many tech companies earn in one year including outstanding companies such as Salesforce (CRM) and Nvidia (NVDA).
It is important for tech companies to have many irons in the fire and Amazon proves this theory correct.
The competition is cutthroat to the point that large tech companies are morphing into each other then abruptly diverging.
The brilliant ideas are copied, then the next set of ideas filter in to be copied again.
Luckily, these ideas are coming from Amazon, which is one of the most innovative companies in the world with top-level management.
This all adds up to why Amazon posted its third straight profitable quarter of more than $1 billion in profits.
Prime members didn't flinch with the price increase of an annual Amazon prime subscription showing management understands the true pulse of its customers.
Under-promise and overdeliver time and time again and a customer will be stuck with you for life.
In the past, investors only bought this company for topline growth. Now, we have a different animal on our hands turning into a model company with bottom line growth flourishing.
Management has proved that strategically investing in the right businesses bear fruit.
It takes time for these businesses to develop but when they do they turn into cash cows.
Investors will take delight in seeing Amazon's brand as just a topline growth company slowly fading away.
Increasing profits offers more opportunities and funds to create new drivers as well.
Increasing profits also adds more opportunities to reallocate capital to shareholders opening up a new investor base.
The network effect is truly alive and well, and the Mad Hedge Technology Letter has routinely identified this company as the best in the tech industry.
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Quote of the Day
"Technological progress has merely provided us with more efficient means for going backwards," said British writer Aldous Huxley.
Global Market Comments
July 25, 2018
Fiat Lux
Featured Trade:
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA
CONFERENCE, OCTOBER 26-27, 2018),
(WHY YOU MISSED THE TECHNOLOGY BOOM
AND WHAT TO DO ABOUT IT NOW),
($INDU), (TLT), (GLD), (GOOGL), (FB),
(AAPL), (NVDA), (MSFT), (AMZN)
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)
