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Is Netflix Dead?

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.

July 16, 2018

Tech Letter

Mad Hedge Technology Letter
July 16, 2018
Fiat Lux

Featured Trade:
(THE REGULATION EFFECT),
(GOOGL), (AMZN), (FB), (SNAP), (TWTR), (NFLX)

The Regulation Effect

Tech Letter

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.

________________________________________________________________________________________________

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.

July 12, 2018

Tech Letter

Mad Hedge Technology Letter
July 12, 2018
Fiat Lux

Featured Trade:
(NEWSPAPERS REALLY KNOW WHO YOU ARE),
(TRNC), (AMZN), (FB), (GOOGL), (USPS), (SFTBY)

July 5, 2018

Tech Letter

Mad Hedge Technology Letter
July 5, 2018
Fiat Lux

Featured Trade:
(THE HIGH COST OF DRIVING OUT OUR FOREIGN TECHNOLOGISTS),
(EA), (ADBE), (BABA), (BIDU), (FB), (GOOGL), (TWTR)

The High Cost of Driving Out Our Foreign Technologists

Tech Letter

There is only so much juice you can squeeze from a lemon before nothing is left.

Silicon Valley has been focused mainly on squeezing the juice out of the Internet for the past 30 years with intense focus on the American consumer.

In an era of minimal regulation, companies grew at breakneck speeds right into families' living quarters and it was a win-win proposition for both the user and the Internet.

The cream of the crop ideas was found briskly, and the low hanging fruit was pocketed by the venture capitalists (VCs).

That was then, and this is now.

No longer will VCs simply invest in various start-ups and 10 years later a Facebook (FB) or Alphabet (GOOGL) appears out of thin air.

That story is over. Facebook was the last one in the door.

VCs will become more selective because brilliant ideas must withstand the passage of time. Companies want to continue to be relevant in 20 or 30 years and not just disintegrate into obsolescence as did the Eastman Kodak Company, the doomed maker of silver-based film.

The San Francisco Bay Area is the mecca of technology, but recent indicators have presaged the upcoming trends that will reshape the industry.

In general, a healthy and booming local real estate sector is a net positive creating paper wealth for its local people and attracting money slated for expansion.

However, it's crystal clear the net positive has flipped, and housing is now a buzzword for the maladies young people face to sustain themselves in the ultra-expensive coastal Northern California megacities.

The loss of tax deductions in the recent tax bill make conditions even more draconian.

Monthly rental costs are deterring tech's future minions. Without the droves of talent flooding the area, it becomes harder for the industry to incrementally expand.

It also boosts the costs of existing development/operations staffers whose capital feeds back into the local housing market buying whatever they can barely afford for astronomical prices.

Another price spike ensues with first-time home buyers piling into already bare-bones inventory because of the fear of missing out (FOMO).

After surveying HR tech heads, it's clear there aren't enough artificial intelligence (A.I.) programmers and coders to fill internal projects.

Compounding the housing crisis is the change of immigration policy that has frightened off many future Silicon Valley workers.

There is no surprise that millions of aspiring foreign students wish to take advantage of America's treasure of a higher education because there is nothing comparable at home.

The best and brightest foreign minds are trained in America, and a mass exodus would create an even fiercer deficit for global dev-ops talent.

These U.S.-trained foreign tech workers are the main drivers of foreign tech start-ups.

Dangling carrots and sticks for a chance to start an embryonic project in the cozy confines of home is hard to pass up.

Ironically enough, there are more A.I. computer scientists of Chinese origin in America than there are in all of China.

There is a huge movement by the Chinese private sector to bring everyone back home as China vies to become the industry leader in A.I.

Silicon Valley is on the verge of a brain drain of mythical proportions.

If America allows all these brilliant minds to fly home, not only to China but everywhere else, America is just training these workers to compete against American workers.

A premier example is Baidu co-founder Robin Li who received his master's degree in computer science from the State University of New York at Buffalo in 1994.

After graduation, his first job was at Dow Jones & Company, a subsidiary of News Corp., writing code for the online version of the Wall Street Journal.

During this stint, he developed an algorithm for ranking search results that he patented, flew back to China, created the Google search engine equivalent, and named it Baidu (BIDU).

Robin Li is now one of the richest people in China with a fortune of close to $20 billion.

To show it's not just a one-hit-wonder type scenario, three of the top five start-ups are currently headquartered in Beijing and not in California.

The most powerful industry in America's economy is just a transient training hub for foreign nationals before they go home to make the real moola.

More than 70% of tech employees in Silicon Valley and more than 50% in the San Francisco Bay Area are foreign, according to the 2016 census data.

Adding insult to injury, the exorbitant cost of housing is preventing burgeoning American talent from migrating from rural towns across America and moving to the Bay Area.

They make it as far West as Salt Lake City, Reno, or Las Vegas.

Instead of living a homeless life in Golden Gate Park, they decide to set up shop in a second-tier American city after horror stories of Bay Area housing starts populate their friends' Instagram feeds and are shared a million times over.

This trend was reinforced by domestic migration statistics.

Between 2007 and 2016, 5 million people moved to California, and 6 million people moved out of the state.

The biggest takeaways are that many of these new California migrants are from New York, possess graduate degrees, and command an annual salary of more than $110,000.

Conversely, Nevada, Arizona, and Texas have major inflows of migrants that mostly earn less than $50,000 per year and are less educated.

That will change in the near future.

Ultimately, if VCs think it is expensive now to operate a start-up in Silicon Valley, it will be costlier in the future.

Pouring gasoline on the flames, Northern California schools are starting to fold like a house of cards due to minimal household formation wiping out student numbers.

The dire shortage of affordable housing is the region's No. 1 problem.

A 1,066-sq.-ft. property in San Jose's Willow Glen neighborhood went on sale for $800,000.

This would be considered an absolute steal at this price, but the catch is the house was badly burned two years ago. This is the price for a teardown.

When you combine the housing crisis with the price readjustment for big data, it looks as if Silicon Valley has peaked or at the very least it's not cheap.

Yes, the FANGs will continue their gravy train, but the next big thing to hit tech will not originate from California.

VCs will overwhelmingly invest in data over rental bills. The percolation of tech ingenuity will likely pop up in either Nevada, Arizona, Texas, Utah, or yes, even Michigan.

Even though these states attract poorer migrants, the lower cost of housing is beginning to attract tech professionals who can afford more than a burned down shack.

Washington state has become a hotbed for bitcoin activity. Small rural counties set in the Columbia Basin such as Chelan, Douglas, and Grant used to be farmland.

The bitcoin industry moved three hours east of Seattle for one reason and one reason only - cost.

Electricity is five times cheaper there because of fluid access to plentiful hydro-electric power.

Many business decisions come down to cost, and a fractional advantage of pennies.

Globalization has supercharged competition, and technology is the lubricant fueling competition to new heights.

Once millennials desire to form families, the only choices are regions where housing costs are affordable and areas that aren't bereft of tech talent.

Cities such as Las Vegas and Reno in Nevada; Austin, Texas; Phoenix, Arizona; and Salt Lake City, Utah, will turn into hotbeds of West Coast growth engines just as Hangzhou, China-based Alibaba (BABA) turned that city into more than a sleepy backwater town with a big lake at its center.

The overarching theme of decentralizing is taking the world by storm. The built-up power levers in Northern California are overheated, and the decentralization process will take many years to flow into the direction of these smaller but growing cities.

Salt Lake City, known as Silicon Slopes, has been a tech magnet of late with big players such as Adobe (ADBE), Twitter (TWTR), and EA Sports (EA) opening new branches there while Reno has become a massive hotspot for data server farms. Nearby Sparks hosts Tesla's Gigafactory 1 along with massive data centers for Apple, Alphabet, and Switch.

The half a billion-dollars required to build a proper tech company will stretch further in Austin or Las Vegas, and most of the funds will be reserved for tech talent - not slum landlords.

The nail in the coffin will be the millions saved in state taxes.

The rise of the second-tier cities is the key to staying ahead of the race for tech supremacy.

_________________________________________________________________________________________________

Quote of the Day

"Twitter is about moving words. Square is about moving money," - said CEO of Twitter, Jack Dorsey, to The New Yorker, October 2013.

July 2, 2018

Tech Letter

Mad Hedge Technology Letter
July 2, 2018
Fiat Lux

Featured Trade:
(THE CLOUD FOR DUMMIES)
(AMZN), (MSFT), (GOOGL), (AAPL), (CRM), (ZS)

The Cloud for Dummies

Tech Letter

If you've been living under a rock the past few years, the cloud phenomenon hasn't passed you by and you still have time to cash in.

You want to hitch your wagon to cloud-based investments in any way, shape or form.

Microsoft's (MSFT) pivot to its Azure enterprise business has sent its stock skyward, and it is poised to rake in more than $100 billion in cloud revenue over the next 10 years.

Microsoft's share of the cloud market rose from 10% to 13% and is catching up to Amazon Web Services (AWS).

Amazon leads the cloud industry it created, and the 49% growth in cloud sales from the 42% in Q3 2017 is a welcome sign that Amazon is not tripping up.

It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.

Amazon (AMZN) relies on AWS to underpin the rest of its businesses and that is why AWS contributes 73% to Amazon's total operating income.

Total revenue for just the AWS division is an annual $5.5 billion business and would operate as a healthy stand-alone tech company if need be.

Cloud revenue is even starting to account for a noticeable share of Apple's (AAPL) earnings, which has previously bet the ranch on hardware products.

The future is about the cloud.

These days, the average investor probably hears about the cloud a dozen times a day. If you work in Silicon Valley you can triple that figure.

So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.

Think of this as a cloud primer.

It's important to understand the cloud, both its strengths and limitations. Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest growing companies in the world.

Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that's where I come in.

Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.

They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy remember that the original Department of Defense packet switching design was intended to make the system atomic bomb proof.

As a user you can access any single server at any one time anywhere in the world. These servers are owned, maintained and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.

The most important features of cloud storage are:

1) It is a service provided by an external provider.

2) All data is stored outside your computer residing inside an in-house network.

3) A simple Internet connection will allow you to access your data at anytime from anywhere.

4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.

Once you start using the cloud to store a company's data, the benefits are many.

No Maintenance

Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.

However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.

Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.

Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing IT staff of prima donnas.

Greater Flexibility

Today's employees want to have a better work/life balance and this goal can be best achieved through letting them telecommute. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.

How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?

Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees. According to a recent survey, 79% of respondents already work outside of their office some of the time, while another 60% would switch jobs if offered this flexibility.

With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.

It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.

Better Collaboration and Communication

In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.

For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.

These products, which all offer free entry-level versions, allow users to access the latest versions of any document, so they can stay on top of real-time changes, which can help businesses to better manage work flow, regardless of geographical location.

Data Protection

Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.

The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.

It's best to move data to the cloud, to avoid such disruptions because there your data will be stored in multiple locations.

This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.

Lower Overhead

The cloud can save businesses a lot of money.

By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.

Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.

_________________________________________________________________________________________________

Quote of the Day

"Life is not fair; get used to it," said founder of Microsoft Bill Gates.

June 25, 2018

Tech Letter

Mad Hedge Technology Letter
June 25, 2018
Fiat Lux

Featured Trade:
(IT'S NOT HEAVEN FOR ALL CLOUD STOCKS)
(ORCL), (MSFT), (AMZN), (CRM), (GOOGL)

It's Not Heaven for All Cloud Stocks

Tech Letter

The year of the Cloud takes no prisoners.

Cloud stocks have been on a tear resiliently combating the leaky macro environment.

Many of my cloud recommendations have been outright winners such as Salesforce (CRM).

However, there are some unfortunate losers I must dredge up for the masses.

Oracle (ORCL) announced quarterly earnings and it was a real head-scratcher.

I have been banging on the table to ditch this legacy tech company since the inception of the Mad Hedge Technology Letter.

It was the April 10, 2018 tech letter where I prodded readers to stay away from this stock like the black plague.

At the time, the stock was trading at $45, click here to revisit the story "Why I'm Passing on Oracle."

The first quarter was disappointing and abysmal guidance of 1% to 3% for annual total revenue topped off a generally underwhelming cloud forecast.

Investors spotlight one part of the business requiring the utmost care and nurturing - its cloud business.

The second quarter was Oracle's chance to revive itself demonstrating to investors it is serious about its cloud direction.

What did management do?

They announced a screeching halt to the reporting of cloud revenue and it would avoid reporting on specific segments going forward.

Undoubtedly, something is wrong behind the scenes.

To withdraw financial transparency is indicative of Oracle's failure to pivot to the cloud and this has been my No. 1 gripe with Oracle.

It is simply getting pummeled by the competition of Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT).

Stuck with an aging legacy business focused on database software, transformation has been elusive.

To erect a giant cloak around its cloud business means that growth is far worse than initially thought to the point where it is better to sweep it under the carpet.

Instead of taking a direct hit on the chin, management decided to wriggle itself out of the accountability of bad cloud numbers.

A glaringly bad cloud business should be the cue for management to kitchen sink the whole quarter and start afresh from a lower base.

The preference to shroud itself with opaqueness is bad management. Period.

Instead of turning over a new leaf, Oracle could be penalized on future earnings reports for the way it reports financials for the simple reason it confuses analysts.

Wars were fought for less.

Bad management runs bad companies. The stock has floundered while other cloud stocks have propelled to new heights - another canary in the coal mine.

Amazon and Netflix are two examples of tech growth stocks that have celebrated all-time highs.

Even rogue ad seller Facebook broke to all-time highs lately.

The champagne is flowing for the top-level tech companies.

As expected, Oracle was punished heavily upon this news with the stock down almost 8% intraday to $42.70, and it sits throttled at $43.60 as I write this.

Diverting attention from the cloud will mire this stock in the malaise it deserves. Shielding its investors from the only numbers that really matter will give analysts a great reason to label this dinosaur stock with sell ratings.

Analysts are usually horrific stock predictors, but they will be able to wash their hands of this beleaguered stock.

Even if the stock goes up, analysts will still be geared toward sell ratings.

Oracle reported a $1.7 billion in total cloud revenue last quarter, a disappointing 9% increase QOQ.

Oracle's cloud revenue is only up 25% YOY.

For an up and coming cloud business, the minimum threshold to please investors is 20% QOQ, and the 9% QOQ expansion will do nothing to get investors excited.

The deceleration of growth is frightening for investors to stomach and Oracle's admission the cloud business is uncompetitive will detract many potential buyers from dipping in at these levels.

In short, Oracle is not growing much. There is no reason to buy this stock.

I always divert subscribers into the most innovative tech stocks because they are most in demand from investors.

Innovative inertia has reverberated through the corridors at its massive complex in Redwood City, California.

A major shake out in product development and business strategy is vital for Oracle clawing back to relevance.

This is the fourth sequential quarter with unhealthy guidance.

Much of the weakness comes from Amazon siphoning business out of Oracle.

Completed surveys suggest the conversion to AWS has one clear loser and that is Oracle.

Cloud vendors are now ramping up their smorgasbord of cloud offerings attracting more business.

The second and third cloud players, Alphabet and Microsoft, have been particularly active in M&A, attempting to make a run at AWS for pole position.

It is most likely that Oracle's capital spending will dip from $2 billion in 2017 to $1.8 billion in 2018.

Considering Salesforce spent $6.5 billion on MuleSoft, a software company integrating applications, an annual $1.8 billion capital expenditure outlay is a pittance and shows that Oracle is functioning at a pitiful scale.

Oracle won't be able to make any noteworthy transactions with such a miniscule budget.

Without enhancing its cloud offerings, Oracle will fall further behind the vanguard exacerbating cloud deceleration.

Oracle pinpointed data center expansion as the targeted cloud segment after which they would chase. Oracle will quadruple two data centers in the next two years.

One of the data centers will be placed in China collaborating with Tencent Holdings Limited to satisfy government rules requiring outsiders partnering with local companies.

Saudi Arabia is locked in for a data center, desperate to attract more tech ingenuity to the kingdom.

Saudi Arabia's iconic state-owned oil giant will form an "Aramco-Google partnership focused on national cloud services and other technology opportunities."

It will be interesting going forward to analyze the stoutness of the data center commentary considering foes such as Alphabet are boosting spending.

Alphabet quarterly spend tripled to $7.56 billion QOQ including the $2.4 billion snag of New York's Chelsea Market skyscraper Google will spin into new offices.

Alphabet has splurged on $30 billion on digital infrastructure alone in the past three years.

That bump up in infrastructure spending is to support the spike in computer power needed for the surging growth across Alphabet's ecosystem.

Apparently, Oracle is not experiencing the same surge.

If investors start to question global growth, investors will migrate into the top-grade names and the marginal names such as Oracle will be taken behind the woodshed and beaten into submission.

Oracle is much more of a sell the rally than buy the dip stock fueled by its growth deceleration challenges.

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Quote of the Day

"If you don't have a mobile strategy, you're in deep turd," - said Nvidia CEO Jensen Huang.

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