Mad Hedge Technology Letter
June 20, 2018
Fiat Lux
Featured Trade:
(GOOGLE'S GRAND CHINA PLAY),
(BABA), (JD), (GOOGL), (AAPL), (BIDU), (AMZN), (NFLX)
Tag Archive for: (GOOGL)
There is light at the end of the tunnel.
A glimmer of hope is better than nothing.
Stolen IP was yesterday's story.
The administration's attempts to stick China with the bill is a waste of time.
The stock market is forward-looking and that is what I focus on when writing the Mad Hedge Technology Letter.
American tech companies want to turn over this bitter page of history and construct a fruitful future.
Ironically, it could be no other than American large tech companies that solves this trade misunderstanding by embracing Chinese tech instead of dragging them through the embers of political chaos.
That is what this groundbreaking partnership between Alphabet (GOOGL) and China's second largest e-commerce company JD.com (JD) is telling us.
If American and Chinese tech agree to fuse together through different M&A activity, strategic partnerships, and engineering projects, slapping penalties on your own interests would be without basis.
Albeit gone are the yesteryears of complete ownership on the other's turf, a medium ground could be found to satisfy both parties.
Alphabet's $550 million investment will give it 27 million shares of JD.com Class A shares equating to a 1% stake in JD.com.
JD.com products will now be hawked on Google Shopping, a platform giving users a chance to compare different price points from various sellers.
JD.com's fresh links with Silicon Valley's original powerhouse is timely because its business-to-consumer retail sales have slightly dipped in form from 27% last year to an underwhelming 25% in the first quarter of 2018.
Alibaba (BABA), the Amazon of China, is the 800-pound gorilla in the room and has a stranglehold on this market, carving out a robust 60% of sales from business to consumer retail.
Chinese companies have never worried about foreign companies seizing market share in China because they know the rigid operating environment mixed with "cultural" barriers will lead to a rapid demise.
Chinese firms are channeling their distress toward local competitors that understand the market as well as they do and number in the 100s in any one industry.
This is also a huge bet on the Chinese consumer who has put the world economy on its back creating the lions' share of global growth for the past 10 years.
Do not bet against China and the Chinese consumer.
Alphabet is taking this sentiment to the bank by integrating part of a premium Chinese tech firm into its own top line performance.
This investment would not happen if Alphabet believed the trade war could turn draconian cannibalizing each other's profit engines.
Alphabet has obviously been reading the tea leaves from the Mad Hedge Technology Letter as I identified China's huge competitive advantage in Southeast Asia and the huge potential for Chinese companies that migrate there.
The pivot toward Southeast Asia was the deal clincher for Alphabet and rightly so.
Alphabet has also invested in opening an A.I. (artificial intelligence) lab in Beijing showing its determination to extract a piece of the pie from China and ensuring their brand power is maintained in the Middle Kingdom.
Google search has been shut down on mainland China since 2010. Therefore, Alphabet needs to find alternative ways to benefit from the Chinese consumer and increase its presence.
The writing on the wall was when Baidu (BIDU) came to the fore with its own Chinese version of Google search.
Opportunities on the mainland have been scarce ever since the appearance of Baidu.
Apple (AAPL) has been the premier role model in China successfully juggling the complexities of the Chinese market. A big part of its staying power is offering local Chinese jobs.
Not just a few jobs, but millions.
As of April 2017, an Apple press release stated, "Apple has created and supported 4.8 million jobs in China" which is almost three times more than in America.
Apple deploys much of its supply chain around the mainland and taking down Apple in a trade war would strip millions of Chinese jobs in one fell swoop.
Not only that, Apple has deeply invested in data centers located in China and opened research centers in Shanghai and Suzhou.
Foxconn, a company responsible for assembling iPhones in mainland China, employs 1.2 million alone.
Alphabet would be smart to follow in the same footsteps, effectively, morphing into a hybrid Chinese company employing locals in droves and allowing millions of Chinese to earn their crust of bread through local factories.
Let me be clear: This would not hurt its business back at home.
It is also wrong to say that China is saturating because the 6.8% annual growth rate in China is a firm vote of confidence for Chinese discretionary spenders.
However, instead of competing head to head under the scrutiny of Chinese regulators, it is much more sensical to copy SoftBank's Masayoshi Son's lead when he invested $25 million in Jack Ma's Alibaba in 1999.
SoftBank's 1999 investment is now valued at more than $30 billion as of the current share price today.
Yahoo later joined the party in 2005, investing $1 billion into Alibaba and that stake is worth many times over.
Instead of fighting through cultural norms and fighting against the throes of an exotic business environment, paying for a stake and leaving its nose out of it has shown to be demonstrably effective.
Partnerships complicate the relationship, but if management can lock down each side's commitment to the very T, collaboration could spur even more innovation benefiting both countries and bottom lines.
China has draconian Internet controls put in place. American tech companies aren't up to snuff with cultural maneuverability to navigate through these shark-infested waters.
Better to pay for a stake and pick up the check after the market close.
Another winner in this deal is tech valuations, which has been the Cinderella story of 2018.
Although American tech companies will probably never be able to own 100% of a Chinese BAT. However, allowing these types of investments to go ahead is certainly bullish for equities.
Tech is still the sector lifting the heavy weight stateside and promoting innovation through collaboration will do a great deal to win the hearts and minds of Chinese people, companies and government.
As much as China hates the stain to its image of this nebulous trade war, it still deeply respects and admires large-cap American tech companies.
Chinese Millennials particularly have a deep love affair with Tesla's Elon Musk. They are captivated by his braggadocio, which they find appealingly exotic and captivatingly un-Chinese.
Through this partnership, JD.com will learn heaps about cutting-edge ad-tech and is guaranteed to apply the know-how to its home user base. In return, Alphabet will get deep insights of how JD.com controls the entire logistical experience and how a Chinese tech behemoth operates its supply chain.
The nuggets of information pocketed will help Alphabet compete more with Amazon back at home.
This is a win-win proposition.
Adding even more cream on top, enhanced brand awareness by joining together with Google could catapult JD.com into the shop window of America's consciousness.
Up until today, JD.com is hardly known about in the West except for specialists that avidly follow technology like the Mad Hedge Technology Letter.
I reiterate my stance of not buying into Chinese tech companies, and readers would be better served buying Microsoft (MSFT), Amazon (AMZN), and Netflix. (NFLX)
It makes no sense to trade stocks mired in the heart of a trade war.
As much as I love Alibaba as a company, it has been trading in a range because of the whipsawing headlines released in the press.
However, I can stand from afar and admire how the Chinese BATs have advanced in such a short amount of time.
If American tech and Chinese tech merge to the point of unrecognizability, consolidation could create a super tech power comprising of mixed Chinese and American interests.
Instead of bickering at each other, other solutions look to be more compelling.
The world's economy needs a healthy Chinese economy and vibrant Chinese consumer.
If the Chinese economy ever fell off a cliff, you can kiss this nine-year equity bull market goodbye, and the Mad Hedge Technology Letter would turn extremely bearish in a blink of an eye.
Therefore, America has a large stake in not alienating the Mandarins to the point of disgust.
I am still bullish on equities, but vigilance is the name of the game for short-term traders.
Package Delivery!
_________________________________________________________________________________________________
Quote of the Day
"My belief is that one plus one equals three. The pie gets larger, working together," Apple CEO Tim Cook said about its operations in mainland China and working with the Chinese Communist government.
Mad Hedge Technology Letter
June 18, 2018
Fiat Lux
Featured Trade:
(DON'T WORRY ABOUT THE BATS),
(BIDU), (BABA), (AMZN), (AAPL), (MGI), (NVDA), (AMD), (GOOGL), (FB)
The Chinese BATs (Baidu, Alibaba, and Tencent) are China's response to the American FANG group.
It's one of few sectors outperforming the vigorous American tech sector, and valuations have soared in the past year.
Former English teacher Jack Ma founded the Amazon (AMZN) of China named Alibaba in April 1999, which has grown to become one of the biggest websites on the Internet.
This company even has a massive cloud division that acts in the same way as Amazon Web Services (AWS).
Alibaba also has Alipay on its roster, the fintech and digital payments subsidiary of Alibaba.
Baidu, led by Robin Li, is the de-facto Google search of China and is entirely tailored for the Chinese market without English language support.
Tencent, created by Ma Huateng, has an assortment of businesses from social media, instant messaging, online gaming, and digital payments.
Tencent's WeChat platform is the lynchpin acting as the gateway to the robust Tencent eco-system.
The BATs have heavily invested in autonomous vehicle technology set to roll out in the coming years.
These companies are some of the biggest venture capitalists in the world throwing around capital like Masayoshi Son's SoftBank.
Alibaba has seen its share price rocket from $135 in June 2017 to $206.
Baidu has also seen huge gyrations in its share price elevating from $174 in June 2017 to $270.
Tencent, public on the Hong Kong Hang Seng Index, has gone from $273 HKD (Hong Kong dollars) to $412 HKD.
And this is all just the beginning!
An economy growing a stable 6.5% per year with companies able to scale to a mind-boggling 1.3 billion people is something of which to take notice.
China hopes to wean itself from its industrial heritage betting the ranch on a rapidly expanding tech sector.
Does this put China on a collision course steamrolling toward the American FANGs?
Highly possible but not yet.
Even though the BATs modus operandi has been to follow in the footsteps of the FANG's business model, they do not directly compete.
Ant Financial, the fintech arm of Alibaba, was blocked from purchasing MoneyGram International (MGI), effectively, closing any doors leading to the lucrative American digital payments industry.
This also meant curtains for WeChat, the multi-functional app that half of the Chinese use as a digital wallet, in the digital payments space.
The Committee on Foreign Investment in the United States (CFIUS) has made it crystal clear that BAT's capital will be scrutinized more than ever before because of China's open policy of transferring Western technology expertise to the mainland for the purpose of leading the world in technology.
China cannot have its cake and eat it.
The first stumbling block is that the American market does not suit the BAT's FANG business model with Chinese characteristics.
For example, the only other market Baidu search operates in is Brazil.
It has leveraged itself to the Chinese consumer whose purchasing power has spiked from its burgeoning middle class.
Another headwind is the lack of innovation caused by a rigid education system punishing freedom of thought in favor of rote memorization.
Innovation is American tech's bread and butter and investors pay up for this ingenuity that cannot be found elsewhere in the world.
This is also the reason why the BATs need to buy American technology and not the other way around.
Original concepts such as Uber and Airbnb were made in America first and Didi Chuxing and Tujia are rip-offs of these American companies.
The list is endless.
The BATs understand they cannot go head to head with American talent, but that does not mean they won't win out in the end.
To make matters worse, global tech talents do not want to work in China if they are reliant on America to develop something and copy it.
Why not just go work in Silicon Valley for a higher salary?
This was highlighted when the only tech talent to cross over to the other side quit in a blaze of glory.
Hugo Barra was poached from Alphabet in 2013, where he worked as vice present for the Android mobile operating system.
He was installed as the vice president of international development for smartphone maker Xiaomi, the Apple (AAPL) of China.
Barra suddenly threw in the towel at Xiaomi in 2017, offering a harsh critique stating, "What I've realized is that the last few years of living in such a singular environment have taken a huge toll on my life and started affecting my health."
Not exactly the stamp of approval the Mandarins were looking for.
In turn, China has focused its effort on recruiting Chinese-Americans who understand the working environment better and have roots or even family on the mainland.
The dire tech talent shortage is worse in China than Silicon Valley because Chinese tech companies have zero access to non-Chinese talent.
Even with a reverse in immigration policies by the administration, America continues to be the holy grail of tech jobs.
That is why you see hoards of Chinese, Indians, Russians, and every other country's best and brightest waiting in line to make the move.
Taiwanese American CEOs lead some of Silicon Valley's best companies such as the CEO for Nvidia (NVDA), Jensen Huang, and the CEO of Advanced Micro Devices (AMD), Dr. Lisa Su.
Only 1% of Baidu's revenues is extracted from American soil underscoring the BAT's China-first business model. Tencent isn't much better at 5%, and Alibaba heads the list at 11%.
Compare these statistics with Alphabet (GOOGL) making 53% and Facebook (FB) earning 56% of revenue from international sales.
Amazon is still very much an American business but 32% of revenue comes from international sales.
The bulk of this revenue is mainly from Europe where American large-cap tech companies are staunch mainstays.
China has focused on building out its business in Southeast Asia instead.
Those governments are cozy with Beijing and are willing to relinquish some sovereign influence to develop its poor digital infrastructure.
The nail in the coffin for potential BAT companies doing business in America is the total lack of data protection in China.
If you think what Facebook is doing doesn't make you sleep at night, the BATs are running riot with personal data in China.
Expect multiple attempts of hackers breaking into your email while your phone number is constantly harassed by spam messages and robo-calls galore.
This is a normal day in the life of a Chinese national and they are used to it.
China understands they are not ready to eclipse the juggernaut that is Silicon Valley.
The BATs are biding their time organically growing by investing into American tech firms helping their overall products and services.
The past five years have seen a gorge of American investment amounting to 95 deals totaling $27.6 billion.
However, this smash-and-grab investment party is effectively over because CFIUS has clamped down on exporting local technology.
Consequently, the BATs will continue to focus on what they know best - the Chinese market.
Southeast Asia is also ripe to become the next stomping ground for the BATs. Expect them to dominate in this region for years to come.
The runway is long in domestic China. The 6.5% annual growth is entirely biased toward these three companies to prolong their hearty growth trajectories.
The communist party even has a seat on the board at each of these companies highlighting another area of conflict if these companies dive head into the American market.
Let's just say corporate governance in China is a shell of what it is in America.
One day there could be an all-out battle for tech supremacy, but these Chinese companies would need some assurances they would likely come out on top.
That is hardly the case yet and they make way too much money by copying Silicon Valley.
_________________________________________________________________________________________________
Quote of the Day
"The leader of the market today may not necessarily be the leader tomorrow," - said Tencent founder and CEO Ma Huateng.
Mad Hedge Technology Letter
June 13, 2018
Fiat Lux
SPECIAL ACRONYM ISSUE
Featured Trade:
(FB), (AMZN), (GOOGL), (NFLX), (BABA), (BIDU), (TWTR), (SNAP), (INTC), (QCOM), (VZ), (T), (S)
The tech industry is infatuated with acronyms.
The two-, three- and four-letter acronyms of yore have been spruced up by a new wave of contemporary terms.
There are a lot more of them now and readers will need to absorb the meaning of each term to avoid our content seeming like a Grecian dialect.
The Mad Hedge Technology Letter will break down the relevant terminology that applies to the current tech sector.
This will aid readers in their pursuit of financial satisfaction.
FANG: Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (now Alphabet) (GOOGL)
Jim Cramer, the host of CNBC's Mad Money, coined this term as this quartet became such a force to reckon with, that they deserved their own grouping. Financial commentators and analysts often refer to the FANGs that ultimately represent the developments and destiny of large cap tech. Apple is sometimes grouped in this bundle with analysts adding a second A inside the acronym.
AWS - Amazon Web Services
The cloud arm of Amazon is its cash cow. Amazon invented this business out of thin air in 2006. It offers the ability for Amazon to operate its e-commerce division close to cost by plowing profits from its thriving cloud arm. AWS is the backbone to the whole Amazon operation. Without it, Jeff Bezos would need to rethink another genius business model because current and future success hinges on this one subsidiary. AWS is the market leader in the cloud industry, carving out 33% of the total market. Microsoft is the runner-up and saw its market share surge from 10% to 13% in the latest quarter.
GDPR - General Data Protection Regulation
Europe has been a stickler concerning individual data protection, and the American companies running riot with Europeans personal data has reached its climax. On May 25, 2018, new European regulations were implemented to give the user more control of handing out their personal data. Penalties for non-compliance are steep. Companies risk being fined up to 20 million Euros or 4% of annual worldwide turnover, whichever is larger. Facebook's Mark Zuckerberg now has a reason to behave like an angel. The least regulated industry in the world is finally experiencing the bitter regulation pill most industries have felt for centuries.
SaaS - Software as a Service
A software distribution model licensing software on a subscription basis. Instead of installing many of these software programs, many of them are available through the Internet on the cloud. Most subscriptions work on an annual basis, and this recurring revenue model has carved out additional income from companies that were used to paying a one-off fee for software. This model has been highly successful. Even former legacy companies have deployed this business model to critical acclaim.
AI - Artificial Intelligence
An area of computer science that strives to deploy human intelligence into machine simulation. The four main tasks it carries out are speech recognition, learning, planning, and problem solving. A.I. has been identified as a cutting-edge tool to fuse with technology products boosting the underlying performance creating massive profits for the participants. This phenomenon is controversial with the prophecy that robots might advance rapidly and turn on their inventors. As each day passes, A.I. is starting to infiltrate deeper into our daily lives, and humans are becoming entirely reliant on their positive functions to carry out daily tasks.
IoT - Internet of Things
Internet connectivity with things. This network will connect billions and billions of devices together. Your bathtub, thermostat, and razor will be armed with sensors and processors that reroute the performance data back to the manufacturer. Deploying the data, engineers will be able to enhance products with even more precision and high quality serving the end customer needs. 5G testing is ongoing in select American cities and new hyper-fast Internet speeds will make mass adoption of IoT products a reality.
5G - 5th generation wireless system
This is the successor to 4G and is poised to increase wireless Internet speeds up to 20 gigabits per second. Some of the traits will be low latency, high mobility, and will be able to accommodate high connection density. This technology is crucial to the development of the next generation of groundbreaking technology such as autonomous cars that need a faster Internet speed to run elaborate software. The war to develop this technology with the Chinese has turned into a heated standoff. China is stubbornly bent on becoming the global leader of technology in the future, and the communist government views 5G as the keys to the Ferrari. U.S. companies Verizon (VZ), AT&T (T) and Sprint (S) plan to roll out 5G in 2019. Other key companies are Huawei, Intel (INTC), Samsung, Nokia, Ericsson and Qualcomm (QCOM).
BAT - Baidu, Alibaba, and Tencent
This trio is the Middle Kingdom's answer to America's FANG. The nine-year domestic bull market has been led by large-cap tech, at the same time China's economy has been fueled by Baidu, Alibaba, and Tencent. Baidu and Alibaba are tradable through American depositary receipts (ADR). Tencent is public on Hong Kong's Hang Seng stock exchange, the third largest stock market in Asia. These companies are all a mix and mash of functionality that covers the same broad spectrum of the FANGs. They are the best companies in China and are on the cusp of every single cutting-edge technology from A.I. to autonomous vehicles. The Mad Hedge Technology Letter does not recommend these stocks to our subscribers because the Chinese government is on a nationalistic mission to delist Alibaba and Baidu from America and bring them back home. Initially, Alibaba wanted to list on the Hang Seng Hong Kong stock exchange, but draconian rules applied to dual-listing made the company flee to America.
NIMBY - Not In My Back Yard
Local opposition to proposed development in local areas. Although not a pure tech term, the epicenter of the NIMBY movement is smack dab in the middle of the San Francisco Bay Area where all the premium tech jobs are located. Local opposition has made it grueling for any developers to build.
What's more, the expensive cost of land has made any new building a tough proposition. This explains the 10-year drought where San Francisco experienced not a single new hotel built. The dearth of housing has caused San Francisco housing prices to skyrocket to a medium price of $1.61 million as of March 2018. Exorbitant housing prices have triggered a mass migration of Californians fleeing the Bay Area in droves. The shocking aftereffects have put highly paid Millennial tech workers spending the bulk of their salary on housing or living in dilapidated shacks. The extreme conditions we are now seeing are forcing schools around the Bay Area to close in unison as young families cannot afford to stay. Tech companies have become public enemy No. 1 in the Bay Area as locals are desperate to maintain their current lifestyle but are finding it more difficult by the day.
MAU - Monthly Active Users
Favored by social media companies to measure growth trajectories. This is how Twitter (TWTR) analyzes the health of its user numbers delivering a narrative to potential investors by hyping up user growth. If investors value this metric, this allows companies to focus on driving growth at the expense of burning cash. Thus, emerging social media companies such as Snapchat (SNAP) run huge loss-making operations for the promise of future profits after scaling.
ARPU - Average Revenue Per User
Favored by maturing social media companies, particularly Facebook, which has already grown global usership to 2.2 billion. Once the emerging hypergrowth phase comes to an end, social media companies focus on extracting more income per user through targeted ads. Facebook and Alphabet have the best ad tech divisions in all of Silicon Valley. The business model has made Facebook an inordinate amount of money as advertiser's flock to this de-facto marketplace paying more for effective ads whose price is set at an auction. It's a vicious cycle that attracts more traditional advertisers because it is the only method of selling to Millennials who are addicted to social media platforms. Cord-cutting is accelerating this trend forcing advertisers to co-exist with the Mark Zuckerberg model.
There are many more acronyms in the tech world that need explaining and that is exactly what I will do. The Mad Hedge Technology Letter will be back with another slew of technical terms to help subscribers understand the tech universe.
_________________________________________________________________________________________________
Quote of the Day
"You can worry about the competition... or you can focus on what's ahead of you and drive fast," said Square and Twitter CEO Jack Dorsey.
Mad Hedge Technology Letter
June 7, 2018
Fiat Lux
Featured Trade:
(THE NEW TECHNOLOGY PLAY YOU'VE NEVER HEARD OF),
(GM), (UBER), (WMT), (GOOGL)
Welcome to the new cutting-edge high-tech play - General Motors (GM).
The tectonic shifts permeating through the tech landscape seem like there is no end.
Another blockbuster announcement hit the airwaves melding together a brand-new partnership between SoftBank and GM's self-driving unit Cruise.
SoftBank invested an eye-popping $2.25 billion into Cruise for a 19.6% stake, adding to its scintillating arsenal of big data assets focusing on transportation including Uber, India's Ola, China's DiDi, and Southeast Asia's Grab.
GM disclosed it will divvy up a further $1.1 billion into the deal.
The Mad Hedge Technology Letter has been an astute follower of the autonomous driving technology race because the technology will be the next proprietary technology to change the world, creating enormous windfalls for the few involved.
The timeline commences later this year, when Waymo, a subsidiary of Alphabet (GOOGL), rolls out a robo-taxi commercial service.
General Motors is right on Waymo's heels rolling out its own commercial service "sometime in 2019."
This momentous investment by SoftBank solidifies (GM) as the No. 2 industry player going forward.
This is a huge victory.
The historic shift symbolizes the next gap up in the technology movement.
Tech stocks have been on a tear of late leaving other equities in the dust.
Waymo was the first mover and confidently never relinquished the top-dog position while avoiding any big disasters along the way.
The unparalleled success of Waymo's self-driving unit has led analysts to put a valuation figure ranging anywhere from $75 billion to $125 billion.
GM paid a measly $1 billion for Cruise in 2016, which is peanuts in today's thriving tech landscape.
Analysts estimated the valuation of Cruise at $4 billion just before the SoftBank investment. The almost 20% stake for $2.25 billion puts the new valuation number over $11 billion, three times more than analysts initially speculated.
Tech acquisitions have exploded in 2018 and show no signs of slowing down.
The hallmarks of Waymo's operation hinge on safety-first initiatives, which went a long way to upholding its industry leader position.
The safety-second attitude led Uber to attempt to short circuit its way to the top from a position of weakness to ill effect.
Uber's technology failed, and the result of the Phoenix, Arizona, casualty was a suspended operation.
Game over.
To stick the blade cleanly through the back, Uber CEO Dara Khosrowshahi revealed that talks are ongoing between Waymo and Uber to add Waymo's technology to Uber's broker app service.
This revelation is interesting considering Uber infuriated Waymo. It means Uber will effectively recede itself from competing with Waymo in self-driving technology.
The company doesn't need to anymore and it burns too much cash.
The protracted court ruling revealed Uber had stolen trade secrets using poached Waymo engineers.
This time, it really is the nail in the coffin for Uber's self-driving technology.
It will change strategy and refine its core app that made them famous in the first place.
The SoftBank investment into Cruise has clear synergies with Uber.
If Waymo refuses to go into bed with Uber, the natural logical step would be for the GM Cruise technology to be integrated with the Uber platform since they are both SoftBank investments.
SoftBank's management will clearly push for this arrangement. It makes no sense to use the Lyft platform with the GM Cruise division.
The tie up with GM Cruise was the catalyst for Uber seeking "talks" with Waymo, knowing very well if talks failed, a backup plan was hatched and would be able to partner up with Cruise's technology.
This is the luxury Uber has now since it is part of the SoftBank umbrella along with the GM Cruise division.
This nullifies the existential threat Uber was anxious about as it is guaranteed a certain slice of the pie leading to material future revenue stream post IPO.
The SoftBank investment is a stamp of approval for the quality of GM self-driving technology.
SoftBank only invests in the most innovative firms.
The conundrum with legacy car companies is that the bulk of revenue is reliant on selling combustion-engine cars that will soon become obsolete.
Any large commitment to R&D, unfocused on its main profits levers, hurt margins. Investors do not buy American car manufacturers that operate at a loss.
Therefore, legacy companies are penalized for spending on new businesses that could be hit or miss.
They stick with their bread and butter through thick and thin because that is what investors expect them to do. This was why Walmart (WMT) sold off when it acquired a stake in Flipkart.
A certain type of Walmart investor would be aghast at this unexpected new direction and amount of dollars drained.
In support of Walmart, CEO Doug McMillon has been positively vocal about the pivot to tech and e-commerce.
It should not be a surprise.
Old technology gets swept into the dustbin of history. Examples are legion.
Let me explain why.
The shift from horse-drawn carriages to the automobile was an equally jaw-dropping development at the time.
Not all horse-drawn carriage manufacturers were able to make the massive leap from creating simple horse-carriage passenger vehicles to automotive vehicles with combustion engines.
When Abraham Lincoln was transported to the Ford Theatre the night of his assassination, he was rolling in a Studebaker horse-drawn carriage.
Studebaker, which was established in 1852 with $68 of capital and a tool belt, was the only top-notch horse-drawn carriage manufacturer to make the gigantic shift from horse-drawn carriage builder to automotive producer.
The other players shriveled up and waved the white flag.
Studebaker actually manufactured both horse-drawn carriages and cars from 1902-1920.
The company mutated again during World War II making military vehicles, M29, M29C, and engines for B-17 bombers.
Financial mismanagement ruined the company. In 1963 it shuttered its South Bend, Indiana, factory and then went out of business by 1967, missing out on a chance to take on Uber and Waymo by about 55 years.
Such are the annals of history.
(GM) is the first American legacy car company to make the complicated transition from traditional American car producer to self-driving technology player.
And it could be the only one.
The deal will raise the price range for the Uber IPO planned for 2019. The (GM) cruise division will report financials separately from the rest of the (GM) balance sheet, which could be the precursor to spinning it out as its own company creating more shareholder value.
No matter how you dice this up, (GM) is the real deal. Investors voted with their feet causing the stock to explode skyward closing 13% higher on the news of the investment.
Buy (GM) on the next sell-off instead of chasing the bolted stallion out of the starting gate.
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Quote of the Day
"Indian software engineers are the best in the world; even in Silicon Valley, the best software engineers are Indians," - said CEO of Softbank Masayoshi Son
Mad Hedge Technology Letter
June 6, 2018
Fiat Lux
Featured Trade:
(SHOULD MICROSOFT BE A FANG?),
(MSFT), (AAPL), (AMZN), (MU), (GOOGL)
Microsoft's (MSFT) code grab of GitHub was another virtuoso bit of business by Microsoft CEO Satya Nadella.
Bill Gates' old stomping ground has been identified as a top 3 tech stock by the Mad Hedge Technology Letter since the early days of the letter.
A company with Amazon-esque growth and Apple-like profits is hard to beat.
There is little doubt that Microsoft will be leading the economy for the foreseeable future and its purchase of GitHub for $7.5 billion, a source code library and platform for developers to collaborate together, is testimony that Microsoft is developer friendly and raises its attractiveness level to the best developers on the market.
Universally, this underlines the strength of large-cap tech that keeps strengthening in an attempt to eclipse the competition.
Large-cap tech outperformance is one of the main overarching narratives in equity markets this year.
Investors have been handed more and more bullish evidence that has made Morgan Stanley's downgrade of Micron (MU) absurd.
The ultra-competitive environment tech industry is fighting tooth and nail to find the best technology talent around the world.
GitHub is the largest host of source code the world has ever seen and earns revenue by charging corporate customers who run projects on its platform.
This is definitely not a revenue grab as GitHub's marginal revenue is beside the point.
Upon the announcement, Microsoft shares traded higher confirming the stance of investors treating Microsoft as a super growth stock and not a legacy company of yore that focuses on extracting profits while keeping overhead low.
Growth is about spending and spending some more.
This San Francisco-based company plays host to 24 million developers and has become a critical platform for developers working on collaborative projects for Apple (AAPL), Alphabet (GOOGL), and Amazon developers around the world.
Microsoft is its biggest contributor and the purchase makes sense long term and short term.
GitHub has a de-facto monopoly of open source coding repositories. There is only one game in town for developers to collaborate on, boding well for Microsoft.
Not only will Microsoft have the biggest library of code in the world, but the monetization pathway of GitHub squarely falls on the shoulders of Microsoft Azure - Microsoft's sensational cloud business.
GitHub is just another tool that will be incorporated into its cloud and is part of the strategy to surpass Amazon as the No. 1 cloud provider.
Microsoft envisages developers and businessmen working in concert on Microsoft's cloud using its proprietary software and services that will happily feed through to the bottom line in a material way.
Look for Microsoft to keep adding premium selective parts to its software and services lineup.
As for individual developers, GitHub has been the platform to display their talents.
It is commonplace during interviews for developers to point out contributions to projects through GitHub, giving them an edge in the hiring process.
Any reputable developer should have repositories on GitHub chronicling their every move.
Every major tech company deeply respects the functionality of GitHub and what it brings to the industry.
This is not just a flash in the pan.
Crucially, the plethora of new data access about coders streaming into the Redmond, Washington, offices is a dream come true.
This will also allow Microsoft to identify and recruit the best of the best in an algorithmic method to the dismay of other tech companies.
Theoretically, the company could create an in-house ranking system of developers using the data and automate its HR department while topping it off with some artificial intelligence sauce.
There is certain to be untold, untapped talent hidden away in the layers of GitHub repositories. Once Microsoft combs through the nitty-gritty, surely a slew of contract offers will head the way for the dark horses roaming around GitHub.
In a sellers' market, the buyers find you and pay you more than the market price and not the other way around.
GitHub flirted with the possibility of going public before meeting with Nadella.
The meeting blew away GitHub leaving management impressed.
That smoothed the way for the decision to accept Nadella's offer of $7.5 billion paid in Microsoft stock.
The inflated price was a head turner.
Just three years ago, the last private round of valuation estimated GitHub at $2 billion in 2015.
Microsoft even floated the idea of buying GitHub for $5 billion in informal talks at one point.
Therefore, the $7.5 billion in stock paid to GitHub is considered a healthy premium to the market price.
Even with the inflated price, this move was a no-brainer.
The deal will see Microsoft's Vice President Nat Friedman take the reins at GitHub as CEO. He will be instructed by Nadella how to exactly realize the perfect fusion between Microsoft Azure and GitHub's code treasure trove.
Naturally, there is no guarantee all 28 million GitHub users will be coding on the Azure platform. However, if just a few million convert and adopt the Azure platform, then a GitHub purchase will seem like a massive bargain.
It's entirely possible that in the near-term future, Microsoft will be crowned as the best place in the world to work as a developer.
If this does not come to fruition, Microsoft will be in the ballpark of the top echelon.
The ability to recruit the best developers in the world is reinforced by its other big-name purchase of LinkedIn, a job networking site purchased for $26.2 billion in 2016.
LinkedIn and the data that came with it, is another salient tool helping Microsoft identify inefficiencies in the job market.
The historical progression of employees' careers is digitized, and trends can be manipulated from the data.
Microsoft will be able to understand more about the state of the job market than any other company in the world.
Ownership of the biggest coding platform, largest job networking site, and massive amounts of prized data resulting from these platforms are precious gems inside of Microsoft's portfolio.
All of these new functions will derive synergies from each other helping evolve Microsoft into a stronger company.
No doubt there will be GitHub links showing up in LinkedIn profiles.
The applications are unlimited.
In the future it might be difficult to entirely avoid the Microsoft ecosystem. The conscious decision to become even more developer friendly is poised to pay dividends in the quality of its tech staff.
Microsoft will have to extend an olive branch to the portion of developers who disagree with this purchase.
A small minority is skeptical.
The integrity of the platform will have the potential to be compromised favoring Microsoft's narrow interests.
Nadella will need to do some smoothing over with the maverick developers to get them on board with everybody else.
Even though some developers are worried the platform will be undermined, certainly the existing developers at Microsoft are jumping with joy about this development.
The GitHub buy will aid Microsoft developers to build more unique cloud products to sell as add-ons.
Venture capital company Andreessen Horowitz will be rewarded with a $1 billion pay packet from its $100 million investment into GitHub.
A cool 10-fold return.
These were the precise deals that Microsoft used to lose out to the vaunted FANGs.
It shows how far Microsoft has come in such a short amount of time.
Smartly, Nadella has used the cash pile to draw in businesses that have synergies with the existing Microsoft ecosystem.
GitHub is another example of round pegs fitting into round holes.
Microsoft is a darling of the Mad Hedge Technology Letter, and now that it has crossed the $100 threshold, this price level will act as ironclad support.
If the stock somehow gets caught up in macro-headwinds and drops to $95, consider it a gift from God.
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Quote of the Day
"School districts in the U.S. don't adopt technology very quickly," - said co-founder and CEO of Netflix Reed Hastings.
