Global Market Comments
October 17, 2019
(UPDATING THE MAD HEDGE LONG TERM MODEL PORTFOLIO),
(USO), (XLV), (CI), (CELG), (BIIB), (AMGN), (CRSP), (IBM), (PYPL), (SQ), (JPM), (BAC), (EEM), (DXJ), (FCX), (GLD)
Global Market Comments
October 17, 2019
(UPDATING THE MAD HEDGE LONG TERM MODEL PORTFOLIO),
(USO), (XLV), (CI), (CELG), (BIIB), (AMGN), (CRSP), (IBM), (PYPL), (SQ), (JPM), (BAC), (EEM), (DXJ), (FCX), (GLD)
Global Market Comments
October 3, 2019
(GOOGLE’S MAJOR BREAKTHROUGH IN QUANTUM COMPUTING),
(AI AND THE NEW HEALTHCARE),
(XLV), (BMY), (AMGN)
I have been following quantum computing since they moved from the theoretical to the practical about five years ago.
The reason is very simple. They promise to bring a 1 trillion-fold increase in computing power at zero cost, promising to solve in seconds some of the world’s most vexing problems.
They also have the potential to ramp the stock market up at least ten times over the next decade and bring on a new golden age. No kidding!
Last week, an academic paper leaked and was quickly withdrawn suggesting that Google has accomplished a major breakthrough in the field.
Google claims to have built the first quantum computer that can carry out calculations beyond the ability of today’s most powerful supercomputers, a landmark moment that has been hotly anticipated by researchers.
A paper by Google’s researchers was briefly posted earlier this week on a NASA website before being removed, claimed that their processor was able to perform a calculation in three minutes and 20 seconds that would take today’s most advanced classical computer, known as Summit, approximately 10,000 years. Yikes!
The researchers said this meant the “quantum supremacy,” when quantum computers carry out calculations that had previously been impossible, had been achieved. This dramatic speed-up relative to all known classical algorithms provides an experimental realization of quantum supremacy on a computational task and heralds the advent of a much-anticipated computing paradigm. This experiment marks the first computation that can only be performed on a quantum processor.
The system can only perform a single, highly technical calculation, according to the researchers, and the use of quantum machines to solve practical problems is still years away. But the Google researchers called it “a milestone towards full- scale quantum computing.”
They also predicted that the power of quantum machines would expand at a “double exponential rate”, compared to the exponential rate of Moore’s Law, which has driven advances in silicon chips in the first era of computing. That means a potential doubling of computing power every nine months with a halving of cost.
While prototypes of so-called quantum computers do exist, developed by companies ranging from IBM (IBM) to start-ups such as Rigetti Computing, they can only perform the same limited tasks classical computers can, albeit quicker. There is also a huge problem accessing stored data. Quantum computers, if they can be built at scale, will harness properties that extend beyond the limits of classical physics to offer exponential gains in computing power.
A November 2018 report by the Boston Consulting Group said they could “change the game in such fields as cryptography and chemistry (and thus material science, agriculture and pharmaceuticals) not to mention artificial intelligence and machine learning . . . logistics, manufacturing, finance and energy”.
Unlike the basic binary elements of classical computers, or bits, which represent either zeros or ones, quantum bits, or “qubits”, can represent both at the same time. By stringing together qubits, the number of states they could represent rises exponentially, making it possible to compute millions of possibilities instantly.
Some researchers have warned against overhyping the quantum supremacy, arguing that it does not suggest that quantum machines will quickly overtake traditional computers and bring a revolution in computing. Led by John Martinis, an experimental physicist from the University of California, Santa Barbara, Google first predicted it would reach quantum supremacy by the end of 2017. But the system it built, linking together 72 qubits proved too difficult to control. It eventually revamped the system to create a 53-qubit design it codenamed Sycamore.
The system was given the task of proving that a random-number generator was truly random. Though that job has little practical application, Google researchers said that “other initial uses for this computational capability” included machine learning, material science, and chemistry.
“It’s a significant milestone, and the first time that somebody has shown that quantum computers could outperform classical computers at all,” said Steve Brierley, founder of quantum software start-up Riverlane, who has worked in the field for 20 years and is an adviser on quantum technologies to the UK government. “It’s an amazing achievement.”
To illustrate where we are with Quantum computers today, think of it as 1945 when only five mainframe computers existing in the world, all in the US and England. That’s when IBM founder Thomas Watson famously predicted that “the total market for computers is five.”
Global Market Comments
September 12, 2019
(WILL ANTITRUST DESTROY YOUR TECH PORTFOLIO?),
(FB), (AAPL), (AMZN), (GOOG), (SPOT), (IBM), (MSFT)
In recent days, two antitrust suits have arisen from both the Federal government and 49 states seeking to fine, or break up the big four tech companies, Facebook (FB), Apple (AAPL), Amazon (AMZN), and Google (GOOG). Let’s call them the “FAAGs.”
And here is the problem. These four companies make up the largest share of your retirement funds, whether you are invested with active managers, mutual funds, or simple index funds. The FAAGs dominate the landscape in every sense, accounting 13% of the S&P 500 and 33% of NASDAQ.
They are also the world’s most profitable large publicly listed companies with the best big company earnings growth.
I’ll list the antitrust concern individually for each company.
Facebook has been able to maintain its dominance in social media through buying up any potential competitors it thought might rise up to challenge it through a strategy of serial defense acquisitions
In 2012, it bought the photo-sharing application Instagram for a bargain $1 billion and built it into a wildly successful business. It then overpaid a staggering $19 billion for WhatsApp, the free internet phone and texting service that Mad Hedge Fund Trader uses while I travel. It bought Onovo, a mobile data analytics company, for pennies ($120 million) in 2013.
Facebook has bought over 70 companies in 15 years, and the smaller ones we never heard about. These were done largely to absorb large numbers of talented engineers, their nascent business shut down months after acquisition.
Facebook was fined $5 billion by the Fair Trade Commission (FTC) for data misuse and privacy abuses that were used to help elect Donald Trump in 2016.
Apple only has a 6% market share in the global smart phone business. Samsung sells nearly 50% more at 9%. So, no antitrust problem here.
The bone of contention with Apple is the App Store, which Steve Jobs created in 2008. The company insists that it has to maintain quality standards. No surprise then that Apple finds the products of many of its fiercest competitors inferior or fraudulent. Apple says nothing could be further from the truth and that it has to compete aggressively with third party apps in its own store. Spotify (SPOT) has already filed complaints in the US and Europe over this issue.
However, Apple is on solid ground here because it has nowhere near a dominant market share in the app business and gives away many of its own apps for free. But good luck trying to use these services with anything but Apple’s own browser, Safari.
It’s still a nonissue because services represent less than 15% of total Apple revenues and the App Store is a far smaller share than that.
The big issue is whether Amazon unfairly directs its product searches towards its own products first and competitors second. Do a search for bulk baby diapers and you will reliably get “Mama Bears”, the output of a company that Amazon bought at a fire sale price in 2004. In fact, Amazon now has 170 in-house brands and is currently making a big push into designer apparel.
Here is the weakness in that argument. Keeping customers in-house is currently the business strategy of every large business in America. Go into any Costco and you’ll see an ever-larger portion of products from its own “Kirkland” branch (Kirkland, WA is where the company is headquartered).
Amazon has a market share of no more than 4% in any single product. It has the lowest price, and often the lowest quality offering. But it does deliver for free to its 100 million Prime members. In 2018, some 58% of sales were made from third-party sellers.
In the end, I believe that Amazon will be broken up, not through any government action, but because it has become too large to manage. I think that will happen when the company value doubles again to $2 trillion, or in about 3-5 years, especially if the company can obtain a rich premium by doing so.
Directed search is also the big deal here. And it really is a monopoly too, with some 92% of the global search. Its big breadwinner is advertising, where it has a still hefty 37% market share. Google also controls 75% of the world’s smart phones with its own Android operating software, another monopoly.
However, any antitrust argument falls apart because its search service is given away to the public for free, as is Android. Unless you are an advertiser, it is highly unlikely that you have ever paid Google a penny for a service that is worth thousands of dollars a year. I myself use Google ten hours a day for nothing but would pay at least that much.
The company has already survived one FTC investigation without penalty, while the European Union tagged it for $2.7 billion in 2017 and another $1.7 billion in 2019, a pittance of total revenues.
The Bottom Line
The stock market tells the whole story here, with FAAG share prices dropping a desultory 1%-2% for a single day on any antitrust development, and then bouncing back the next day.
Clearly, Google is at greatest risk here as it actually does have a monopoly. Perhaps this is why the stock has lagged the others this year. But you can count on whatever the outcome, the company will just design around it as have others in the past.
For start, there is no current law that makes what the FAAGs do illegal. The Sherman Antitrust Act, first written in 1898 and originally envisioned as a union-busting tool, never anticipated anticompetitive monopolies of free services. To apply this to free online services would be a wild stretch.
The current gridlocked congress is unlikely to pass any law of any kind. The earliest they can do so will be in 18 months. But the problems persist in that most congressmen fundamentally don’t understand what these companies do for a living. And even the companies themselves are uncertain about the future.
Even if they passed a law, it would be to regulate yesterday’s business model, not the next one. The FAAGs are evolving so fast that they are really beyond regulation. Artificial intelligence is hyper-accelerating that trend.
It all reminds me of the IBM antitrust case, which started in 1975, which my own mother worked on. It didn’t end until the early 1990s. The government’s beef then was Big Blue’s near-monopoly in mainframe computers. By the time the case ended, IBM had taken over the personal computer market. Legal experts refer to this case as the Justice Department’s Vietnam.
The same thing happened to Microsoft (MSFT) in the 1990s. After ten years, there was a settlement with no net benefit to the consumer. So, the track record of the government attempting to direct the course of technological development through litigation is not great, especially when the lawyers haven’t a clue about what the technology does.
There is also a big “not invented here” effect going on in these cases. It’s easy to sue companies based in other states. Of the 49 states taking action against big tech, California was absent. But California was in the forefront of litigation again for big tobacco (North Carolina), and the Big Three (Detroit).
And the European Community has been far ahead of the US in pursuing tech with assorted actions. Their sum total contribution to the development of technology was the mouse (Sweden) and the World Wide Web (Tim Berners Lee working for CERN in Geneva).
So, I think your investments in FAAGs are safe. No need to start eyeing the nearest McDonald’s for your retirement job yet. Personally, I think the value of the FAAGs will double in five years, as they have over the last five years, recession or not.
Global Market Comments
July 19, 2019
(DON’T MISS THE JULY 24 GLOBAL STRATEGY WEBINAR)
(WHAT’S HAPPENED TO APPLE?), (AAPL)
(MSFT), (IBM), (CSCO), (SWCH)
No, this piece is not about the TV reality show that has a gruff lot of hopeful entrepreneurs blindly bidding for the contents of abandoned storage lockers.
With hyper-accelerating technology creating data at an exponential rate, it is getting far too big to physically store.
In 2018, over $80 billion was spent on data centers across the country, often in the remotest areas imaginable. Bend, OR, rural West Virginia, or dusty sun-baked Sparks, NV, yes, they’re all there.
And you know what the biggest headache for the management of many tech companies is today? A severe shortage of cost-effective data storage and the skyrocketing electric power bills to power them.
During my lifetime, storage has evolved from one-inch magnetic tape on huge reels to highly unreliable 5 ¼ inch floppy disks, then 3-inch discs, and later to compact discs.
The solid-state storage on silicon chips that hit the market six years ago was a dream, as it was cheap, highly portable, and lightning fast. Boot-up time shrank from minutes to seconds. The only problem was the heat and sitting on it when you forgot those ultra slim designs on the sofa.
Moore’s Law, which has storage doubling every 18 months while the cost halves, has proved faithful to the bitter end. The problem now is, the end is near as the size of an electron becoming too big to pass through a gate is increasingly becoming a limiting factor.
As of 2017, the world needed 44 gigabytes of storage per day. According to the International Data Corporation, that figure will explode to 460 billion gigabytes by 2025, in a mere seven years.
That’s when the global datasphere will reach 160 trillion gigabytes, or 160 zettabytes. It all sounds like something out of an Isaac Asimov science fiction novel.
You can double that figure again when Google’s Project Loon brings the planet’s 5 million residents currently missing from the Internet online.
In the meantime, companies are making fortunes on the build-out. Some $50 billion has to be spent this year just to keep even with burgeoning storage demand.
And guess what? Thanks to rocketing demand from electric cars and AI, memory grade silicon is expected to run out by 2040.
All I can say is “Better pray for DNA.”
Deoxyribonucleic acid has long been the Holy Grail for data storage. There is no reason why it shouldn’t work. After all, you and I are the product of the most dynamic data storage system known to man.
All of the information needed to replicate ourselves is found in 3 trillion base pairs occupying every single cell in the human body.
To give you some idea of the immense scalability of DNA, consider this. One exabyte of data storage using convention silicon would weigh 320 metric tonnes. The same amount of information in DNA would occupy five cubic centimeters weighing five grams, or 0.18 ounce!
And here is the big advantage of DNA. Conventional silicon permits only two programing choices, “0” or “1”. Even with just that, we have been able to achieve incredible gains in computing over the last 50 years.
DNA is made of four difference bases, adenine, cytosine, guanine, and thymine, which allow four squared possible combinations, or 16. The power demands are immeasurably small and it runs cool.
Also known as NAM, or nucleic acid memory, it has already burst out of the realm of science fiction. Microsoft Research (MSFT), the University of Washington, and (IBM) have all gotten it to work on a limited basis.
So far, retrieval is the biggest problem, something we ourselves do trillions of times a day every day without thinking about it.
DNA is organic, requires no silicon, and can replicate itself into infinity at zero cost. The information can last tens of thousands of years. Indeed, scientists were recently able to reconstruct the DNA from Neanderthals who lived in cave in Spain 27,000 years ago.
Yes, you can now clone your own Neanderthal. Gardening work maybe? Low-waged assembly line workers? Soldiers? Traders? I think I already know some. Look for that tell-tale supraorbital brow (click here for details).
But I diverge.
If you want to make money, like tomorrow, instead of in a decade, there are still a few possibilities on the storage front.
If you want to take a flyer on the ongoing data storage buildout, you might look at Las Vegas-based Switch (SWCH). The company IPO’d in October and has since seen its shares drop by 32%, which is normal for these small tech companies.
A much cleaner and safer play is Cisco Systems (CSCO), one of my favorite lagging old technology companies. After all, everyone needs Cisco routers on an industrial scale.
Global Market Comments
April 3, 2019
(WHO WILL BE THE NEXT FANG?)
(FB), (AMZN), (NFLX), (GOOGL), (AAPL),
(BABA), (TSLA), (WMT), (MSFT),
(IBM), (VZ), (T), (CMCSA), (TWX)
FANGS, FANGS, FANGS! Can’t live with them but can’t live without them either.
I know you’re all dying to get into the next FANG on the ground floor, for to do so means capturing a potential 100-fold return, or more.
I know because I’ve done it four times. The split adjusted average cost of my Apple shares is only 25 cents compared to today’s $174, so you can understand my keen interest. My average on Tesla is $16.50.
Uncover a new FANG and the riches will accrue rapidly. Facebook (FB), Amazon AMZN), Netflix (NFLX), and Alphabet (GOOGL) didn’t exist 25 years ago. Apple (AAPL) is relatively long in the tooth at 40 years. And now all four are in a race to become the world’s first trillion-dollar company.
One thing is certain. The path to FANGdom is shortening. It took Apple four decades to get where it is today, Facebook did it in one. As Steve Jobs used to tell me when he was running both Apple and Pixar, “These overnight successes can take a long time.”
There is also no assurance that once a FANG always a FANG. In my lifetime, I have seen far too many Dow Average components once considered unassailable crash and burn, like Eastman Kodak (KODK), General Electric (GE), General Motors (GM), Sears (SHLD), Bethlehem Steel, and IBM (IBM).
I established in an earlier piece that there are eight essential attributes of a FANG, product differentiation, visionary capital, global reach, likeability, vertical integration, artificial intelligence, accelerant, and geography.
We are really in a “What have you done for me lately” world. That goes for me too. All that said, I shall run through a short list for you of the future FANG candidates we know about today.
Alibaba is an amalgamation of the Chinese equivalents of Amazon, PayPal, and Google all sewn together. It accounts for a staggering 63% of all Chinese online commerce and is still growing like crazy. Some 54% of all packages shipped in China originate from Alibaba.
The juggernaut has over half billion active users, and another half billion placing orders through mobile phones. It is a master of AI and B2B commerce. There is nothing else like it in the world.
However, it does have some obvious shortcomings. Its brand is almost unknown in the US. It has a huge problem with fakes sold through their sites.
It also has an ownership structure for foreign investors that is byzantine, to say the least. It is a contractual right to a share of profits funneled through a PO box in the Cayman Island. The SEC is interested, to say the least.
We also don’t know to what extent founder Jack Ma has sold his soul to the Beijing government. It’s probably a lot. That could be a problem if souring trade relations between the US and the Middle Kingdom get worse, a certainty with the current administration.
Before you bet on a new startup breaking into the Detroit Big Three, go watch the movie “Tucker” first. Spoiler Alert: It ends in tears.
Still, Tesla (TSLA) has just passed the 270,000 mark in the number of cars manufacturered. Tucker only got to 50.
Having led my readers into the stock after the IPO at $16.50, I am already pretty happy with this company. Owning three of their cars helps too (two totaled). But Tesla still has a long way to go.
It all boils down to the success of the $35,000, 200-mile range Tesla 3 for which it already has 500,000 orders. So far so good.
It’s all about scale. If it can produce these cars in sufficient numbers, it will take over the world and easily become the next FANG. If it can’t, it won’t. It’s that simple.
To say that a lot is already built into the share price would be an understatement. Tesla now trades at ten times revenues compared to 0.5 for Ford (F) and (General Motors (GM). That’s a relative overvaluation of 20:1.
Any of a dozen competing electric car models could scale up with a discount model before they do, such as the similarly priced GM Bolt. But with a ten-year lead in the technology, I doubt it.
It isn’t just cars that will anoint Tesla with FANG sainthood. The firm already has a major presence in rooftop solar cell installation through Solar City, utility sized solar plants, industrial scale battery plants, and is just entering commercial trucks. Consider these all seeds for FANGdom.
One thing is certain. Without Tesla, there wouldn’t be s single mass-market electric car on the road today.
For that, we can already say thanks.
In the blink of an eye, ride sharing service Uber has become essential for globe-trotting travelers such as myself.
Its 2 million drivers completely disrupted the traditional taxi model for local transportation which remains unchanged since the days of horses and buggies.
That has created the first $75 billion of enterprise value. It’s what’s next that could make the company so interesting.
It is taking the lead in autonomous driving. It could also replace FeDex, UPS, DHL, and the US post office by offering same day deliveries at a fraction of the overnight cost.
It is already doing this now with Uber Foods which offers immediate delivery of takeouts (click here if you want lunch by the time you finish reading this piece.)
UberCopters anyone? Yes, it’s already being offered in France and Brazil.
Uber has the potential to be so much more if it can just outlive its initial growing pains.
It is a classic case of the founder being a terrible manager, as Travis Kalanick has lurched from one controversy to the next. The board finally decided he should spend much time on his new custom built 350-foot boat.
Its “bro” culture is notorious, even in Silicon Valley.
It is also getting enormous pushback from regulators everywhere protecting entrenched local interests. It has lost its license in London, the only place in the world that offered a decent taxi service pre-Uber. Its drivers are getting beaten up in Paris.
However, if it takes advantage of only a few of the doors open to it, status as a FANG beckons.
A few years ago, I was heavily criticized for pointing out that half the employees at my local Walmart (WMT) were missing their front teeth. They have since received a $2 an hour’s pay raise, but the teeth are still missing. They don’t earn enough money to get them fixed.
The company is the epitome of bricks and mortar in a digital world with 12,000 stores in 28 countries. It is the largest private employer in the US, with 1.4 million workers, mostly earning minimum wage.
The Walmart customer is the very definition of the term “late adopter.” Many are there only because unlike Amazon, Wal-Mart accepts cash and Food Stamps.
Still, if Walmart can, in any way, crack the online nut, it would be a turbocharger for growth. It moved in this direction with the acquisition of Jet.com for $3 billion, a cutting-edge e-commerce firm based in Hoboken, NJ.
However, this remains a work in progress. Online sales account for only 4% of Walmart’s total. But they could only be a few good hires at the top away from success.
Talk about going from being the 800-pound gorilla to an 80 pound one, and then back to 800 pounds.
I don’t know why Microsoft (MSFT) lost its way for 15 years, but it did. Blame Bill Gates’s retirement from active management and his replacement by his co-founder Steve Ballmer.
Since Ballmer’s departure in 2014, the performance of the share price has been meteoric, rising by some 125% over the past two years.
You can thank the new CEO Satya Nadella who brought new vitality to the job and has done a complete 180, taking Microsoft belatedly into the cloud.
Microsoft was never one to take lightly. Windows still powers 90% of the world’s PCs. No company can function without its Office suite of applications (Word, Excel, and PowerPoint). SQL Server and Visual Studio are everywhere.
That’s all great if you want to be a public utility, which Microsoft shareholders don’t.
LinkedIn, the social media platform for professionals, could be monetized to a far greater degree. However, specialization does come at the cost of scalability.
It seems that the future is for Microsoft to go head to head against next door neighbor Amazon (AMZN) for the cloud services market while simultaneously duking it out with Alphabet (GOOGL).
My bet is that all three win.
This is another new app that has immeasurably changed my life for the better. Instead of cramming myself into a hotel suite with a wildly overpriced minibar for $600 a night, I get a whole house for $300 anywhere in the world, with a new local best friend along with it.
Overnight, Airbnb has become the world’s largest hotel chain without actually owning a single hotel. At its latest funding round in 2017, it was valued at $31 billion.
The really tricky part here is for the firm to balance out supply and demand in every city in the world at the same time. It is also not a model that lends itself to vertical integration. But who knows? Maybe priority deals with established hotels are to come.
This is another firm that is battling local regulation, that great barrier to technological innovation. None other than its home town of San Francisco now has strict licensing requirements for renters, a 30 day annual limitation, and a $1,000 a day fine for offenders.
The downtowns of many tourist meccas like Florence, Italy and Paris, France have been completely taken over by Airbnb customers, driving rents up and locals out.
There was a time in my life when IBM was so omnipresent we thought like the Great Pyramids of Egypt it would be there forever. How times change. Even Oracle of Omaha Warren Buffet became so discouraged that he recently dumped the last of his entire five-decade long position.
A recent 20 consecutive quarters of declining profits certainly hasn’t helped Big Blue’s case. It is one of the only big technology companies whose share price has gone virtually nowhere for the past two years.
IBM’s problem is that it stuck with hardware for too long. An entrenched bureaucracy delayed its entry into services and the cloud, the highest growth areas of technology.
Still, with some $80 billion in annual revenues, IBM is not to be dismissed. Its brand value is still immense. It still maintains a market capitalization of $144 billion.
And it has a new toy, Watson, the supercomputer named after the company’s founder, which has great promise, but until now has remained largely an advertising ploy.
If IBM can reinvent itself and get back into the game, it has FANG potential. But for the time being, investors are unimpressed and sitting on their hands.
The Big Telecom Companies
My final entrant in the FANGstakes would be any combination of the four top telecommunication companies, Verizon (VZ), AT&T (T), Comcast (CMCSA), and Time Warner (TWX), which now control a near monopoly in the US.
There is a reason why the administration is blocking the AT&T/Time Warner merger, and it is not because these companies are consistently cited in polls as the most despised in America. They are trying to stop the creation of another hostile FANG.
Still, if any of the big four can somehow get together, the consequences would be enormous. Ownership of the pipes through which the modern economy courses bestows great power on these firms.
There is one more FANG possibility that I haven’t mentioned. Somewhere, someplace, there is a pimple-faced kid in a dorm room thinking up a brand-new technology or business model that will take the world by storm and create the next FANG.
Call me crazy, but I have been watching this happen for my entire life.
I want to thank my friend, Scott Galloway, of New York University’s Stern School of Business, for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.
Creating the Next FANG?
A potential cataclysmic threat potentially wreaking havoc to our financial system is no other than cybercrime – that is one of the few gems that Fed Chair Jerome Powell delivered to the American public in a historic interview with 60 Minutes this past weekend.
Powell has even gone on record before claiming that Congress should do “as much as possible (against cybercrime), and then double it.”
The Fed Chair clearly has intelligence that retail investors wish they could get their hands on.
Digital nefarious attacks have been all the rage resulting in public blowups at Equifax (EFX) and North Korea’s state-sponsored hack on International Business Machines Corporation (IBM) just to name a few.
At the bare minimum, this means that cybersecurity solution companies will be the recipients of a gloriously expanding addressable market.
Powell’s testimony to the public was timely as it provides the impetus for investors to look at cybersecurity firms that will actively forge ahead and protect domestic business from these lurking threats.
Considering a long-term investment in FireEye Inc. (FEYE) at these beaten down prices could unearth value.
For all the digital novices, FireEye offers cybersecurity solutions allowing organizations to pre-emptively plan, prevent, respond to, and remediate cyber-attacks.
It offers vector-specific appliance, virtual appliance, and a smorgasbord of cloud-based solutions to detect and thwart indistinguishable cyber-attacks.
The company deploys threat detection and preventative methods including network security products, email security solutions, and endpoint security solutions.
And when you marry this up with my 2019 underlying thesis of the year of the enterprise software subscription, this company is on the verge of a breakout.
Last year was a year full of milestones for the company with the firm achieving non-GAAP profitability for the full year for the first time and generating positive operating and free cash flow for the full year.
The company was able to attract new business by adding over 1,100 new customers.
The cloud is where the company is betting all their chips and crafting the optimal subscription-as-a-service (SaaS) product is the engine that will propel the company’s shares higher.
The heart of their cloud initiative relies on Helix – a comprehensive detection and response platform designed to simplify, integrate and automate security operations.
This intelligence-led approach fuses innovative security technologies, nation-grade FireEye Threat Intelligence and world-renowned expertise from FireEye Mandiant into FireEye Helix.
By enhancing the endpoint products and email protection, sales of both products exploded higher by double digits YOY as FireEye successfully displaced incumbent vendors and legacy technology to the delight of shareholders.
As a result, the firm’s pipeline of opportunities continues to build.
As for network security, FireEye plans to extend the reach of their market-leading advanced threat protection capabilities further into the cloud with protection specifically aimed for cloud heavyweights Microsoft (MSFT) Azure, Amazon Web Services (AWS), Google (GOOGL) and Oracle (ORCL) Cloud.
They are collaborating with these major cloud providers on hybrid solutions that integrate seamlessly with their technologies so FireEye solutions will easily snap into a customer’s cloud deployments.
Cloud subscriptions and managed services were the ultimate breakout performer highlighting the successful outsized pivot to (SaaS) revenue.
This segment increased 31% sequentially and 12% YOY, highlighting underlined strength in the segments of managed defense, standalone threat intelligence, Helix subscriptions, and cloud email solution.
The furious growth was achieved even though Q4 2017 billings included a $10 million plus transaction and if this deal is excluded, cloud subscriptions and managed services would have grown more than 30% YOY in Q4 2017 demonstrating the hard bias to the cloud has been highly instrumental to its success.
Recurring billings expanded 12% YOY, a small bump in acceleration from 11% in Q3, but if you remove that big deal in Q4 ’17, recurring billings grew over 20% YOY in Q4 2018.
The growing chorus of product satisfaction can be found in the customer retention rate of 90%.
Transaction volume was at record levels for both deals greater than $1 million and transactions less than $1 million, signaling not only that customer renewals are expanding, but also explosion of new revenue streams captured by FireEye is aiding the top line.
This story is all about the recurring revenue and I expect that narrative to perpetuate throughout 2019 as an overarching theme to the strength of the firm’s revenue drivers.
The 10% billings growth last quarter paints a more honest trajectory of the true growth proposition for FireEye.
I believe the 6%-to-7% revenue guide for fiscal 2019 is down to the accounting technicals manifesting in the appliance revenue that is fading from the overall story.
The solid billings growth underpinning the overall business meshing with diligent expense control is conjuring up a massive amount of operating leverage.
Shares are undervalued and offer an attractive risk versus reward proposition.
If the company delivers on its core growth outlook, which I fully expect them to do plus more, shares should climb over $20 barring any broad-based market meltdowns.
I am bullish FireEye and urge readers to wait for shares to settle before putting new money to work.