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Buy Advanced Micro Devices on the Intel Stumble

It's not an ideal time to own chip stocks because of the trade war jading the chip sector that has inextricable revenue links to mainland China.

But if you feel audacious and want a name to sink your teeth into that is hitting all the right notes, readers must look at Advanced Micro Devices, Inc. (AMD).

After all, what follows a trade war is trade peace, and the chips are the most oversold tech sector out there.

Intel Corporation's (INTC) loss is (AMD)'s gain.

It's a zero-sum game where companies are battling for the same contracts.

Chip companies are under relentless pressure to innovate and enhance bit growth and chip capacity.

They spend billions of dollars to retain and expand their talent pool and on R&D to produce the type of high-end chips for which end product companies clamor.

Sometimes, the development process stifles, delaying chip production and delivery of the chips.

Intel botching the 10nm (nanometer) process technology is a kick in the teeth opening up the pathway for (AMD) to harvest further market share gains.

Intel is experiencing a management crisis as of late with former CEO Brian Krzanich resigning in humiliation after details of an inappropriate relationship with an employee surfaced which breached company rules.

The delay is further proof that Intel fails to execute and develop chips relative to competition, and these announcements hurt investor sentiment and the bottom line.

AMD's comparable 7nm Rome is set to hit the market six to nine months before the Intel chips.

This time frame will allow AMD to make an all-out assault on the CPU market and adoptees will be plenty.

The recent success of AMD has coincided with the heaps of innovation generated by this reinvigorated company.

Namely the Radeon GPUs and Ryzen mobile processors have knocked the cover off the ball.

The Ryzen processors are hot because of their competitive power mixed together with a relatively lower cost.

With Intel on the back burner, these prominent chip models will boost earnings growth for AMD in the short term explaining AMD's meteoric rise from a year-to-date low of $9.50 on April 3, 2018, to an intraday high of more than $20 on July 30, 2018.

Any company that doubles in four months warrants my attention.

How did this all happen?

December 1, 2005 represented the high-water mark for (AMD) when shares surged past $40 only to crumble like a stale cookie down to $2 on September 1, 2008.

The price action was nothing short of horrific, and the three years of sequential decline was an investors nightmare.

The story starts in 1993 when AMD created a 50-50 partnership with Fujitsu called FASL to manufacture flash drives.

This monumental loss-making subsidiary later changed its name to Spansion and tore into AMD's profitability losing more than $250 million in its last nine months being an arm of AMD.

AMD divested from this business with Spansion spinning itself out into its own public company.

Spansion was a disaster operating solo leading the company to file for Chapter 11 bankruptcy on March 1, 2009 and sacking 3,000 employees without severance pay.

AMD's turnaround started in 2014 when it hired Dr. Lisa Su who was once vice president of IBM's semiconductor research and development center.

She replaced Rory Read whose PC background made him highly expendable and unsuitable for the future of AMD as well as lacking the technical pedigree to make the decisions for the long-term vision of AMD.

His background as chief operating officer of Lenovo Group, Ltd. influenced him to heavily bet the ranch of the PC flash drive market, which has been in sequential decline for years.

This masterstroke is paying dividends for AMD.

Out of the gates, Lisa Su presented her vision in May 2015 when she detailed her long-term blueprint focusing on developing high-performance computing and graphics technologies for three growth areas: gaming, datacenter, and "immersive platforms" markets.

The change in direction worked out for AMD increasing top-line growth from $4 billion in 2015 to $5.33 billion in 2017.

The outperformance continues with AMD ringing in $3.41 billion for the first two quarters of 2018.

Because of Lisa Su, AMD chips found their way into Microsoft Xbox consoles among other businesses and the long-term vision is playing out positively to the benefit of shareholders.

AMD goes mano a mano with Nvidia (NVDA) in the highly lucrative GPU segment and data center.

Many analysts believed there was no way to come out of this unscathed. But as we have found out, this market is not a winner-takes-all market and there is space for other players to take a piece of the pie.

The Data Center market is poised to eclipse $70 billion by 2021.

AMD server chip projects to command 5.5% of market share in 2019, up from the 2.2% market share in 2018.

Two years later should be even healthier for AMD whose market share will rapidly grow to around 9.5%.

Crypto mining-based purchases of AMD GPU's were all the rage in 2017 with their products flying off shelves like hotcakes.

Last year saw crypto mining make up a material 10% of revenue because of Bitcoin's dazzling run up to $20,000.

High demand for Ryzen and Radeon products continues unabated and this segment will take in more than $4 billion in 2018.

This division's performance is the main reason why AMD annual revenues will increase 47% YOY in 2018 after a YOY rise of 50% in 2017.

Not only are GPU chips needed for crypto mining, the main buyers of GPU are companies developing artificial intelligence and machine learning.

The data center business is tied to the cloud industry, which is one of the hottest parts of technology in the world.

These robust secular trends and AMD's migration to these premium businesses solidifies the genius decision to allow Dr. Lisa Su to steer the ship.

Veering away from the legacy business that cratered its share price down to $2 and being part of a high-growth industry with great products will fuel the share price skyward.

The technology sector has been rife with M&A activity in 2018 with successful and failed mergers happening left and right.

AMD has been rumored for takeover numerous times. The share price received short boosts highlighting the attractiveness this name commands to outside investors.

Top-line growth is what is driving AMD in 2018, and it is in the middle of a growth sweet spot.

Nvidia has gone up 1,750% in the past five years while laying claim to 70% gross margins in its vaunted GPU division.

It will be demonstrably bullish if AMD can mildly replicate this growth trajectory, and I believe it will.

The Mad Hedge Technology Letter has advised readers to stay away from chip companies because of the complicated trade war.

If the trade war subsides or even ends, semiconductor chips will be the first group of stocks whose shares explode to the upside.

In any case, it's always great to understand the premium names in each industry, and I am bullish on AMD.

After the spike to more than $19, a pullback is warranted but it won't be long before these shares go back into overdrive.

Directly after the macro headwinds pass by will be the preferred time to enter into AMD unless you are a long-term investor and plan to buy and hold.

________________________________________________________________________________________________

Quote of the Day

"Especially in technology, we need revolutionary change, not incremental change," - said cofounder and CEO of Alphabet Larry Page.

August 13, 2018

Tech Letter

Mad Hedge Technology Letter
August 13, 2018
Fiat Lux

Featured Trade:
(GOOGLE'S NEW CHINESE PLAY),
(GOOGL), (BABA), (AAPL), (JD), (BIDU), (MU), (INTC)

Google's New Chinese Play

Tech Letter

As a bolt from the blue, Google search is headed back to China.

The project coined Dragonfly commenced in early 2017 as Google sought a way back into the lucrative Chinese market to sell its products.

The retracement to China then later sped up after Google CEO Sundar Pichai secretly met with a top Chinese official in December 2017.

The censored Google search application could be launched in the next six months to a year upon approval from the communist party.

Why China?

There are three times more smartphones in China than in the U.S. This market represents celestial scale unfounded in any other country.

The Chinese Internet population has roughly 772 million people with Internet penetration levels at about 55%.

The U.S. has maxed out its penetration level at 89% and there is little room to snatch up a new group of mass users. This is not the case in China, which has ample amounts of room to run.

In addition, Google hopes to roll out a news aggregation app mirrored on Chinese newsfeed app Jinri Toutiao that implements personalized artificial intelligence to cater toward each unique user's needs.

As of December 2017, users spent an average of 73 minutes per day on this app.

Jinri Toutiao has 120 million daily active users and has been given a valuation of around $35 billion.

The unbridled potential for American large cap tech companies in China is unrivaled.

But navigating around China's murky business environment under the comprehensive controls of the Great Firewall has proved cumbersome highlighting the executional prowess of Apple's (AAPL) iPhone business in China.

Why did Google leave in the first place?

The issue of censorship was the catalyst leading Google search to the exits.

Google was stunned by the exploits of the Chinese communist government, which maneuvered around Google's system targeting human rights activists among other things.

Operating abroad, companies do not always have complete control over the systems they build and the business processes that revolve around it.

Beijing continued to press Google to filter its search results in 2010, and anything but compliance spelled doom for Google's future in China.

Restricting speech is commonplace for many undeveloped countries with brutal regimes.

The U.S. has one of the most lenient free press laws in the world underlying the backbreaking hassle of operating in a country that actively and aggressively suppresses free speech deemed negative to the people in powerful positions.

After Google started rerouting mainland Chinese Google search to its filter-less Hong Kong servers, Google search was unceremoniously shut down within months.

A comeback is in the works at a time when China and America are at each other's throats in a tit-for-tat trade war, complicating the move to reinsert itself back in the Middle Kingdom.

Let's make no bones about it, this is a high-risk, high-reward strategy for Alphabet, which seeks to add yet another growth driver to its profit-making machine.

Out of the FANG group, only Apple has emerged to unlock the Chinese market with outstanding success.

All other American tech competition was rooted out. Only chip names such as Micron (MU) and Intel (INTC) latched onto the Chinese market largely because of the Chinese demand for chips.

This unfortunate development opened the path for the BATs to dominate in China, which is comprised of Baidu (BIDU), Alibaba (BABA), and Tencent.

Rewind back to 2010, Google search was directly competing against China's Baidu headed up by founder Robin Li.

Google had just 14% market share in search and was trailing far behind Baidu, which had 79% of market share.

In 2010, the difference in the quality of the search algorithms between the two couldn't have been larger.

When comparing these search engines, 85% of Google searches would populate vastly different results compared to Baidu's search platform.

Upon further inspection, Google search was deemed far more accurate than the market share leader Baidu, and that has not changed.

China's inferior technological abilities are well noted. The shortage of talent has forced them to institute forced technological transfers from western companies working in China, outright theft of technical know-how by state sponsored hackers, and the use of government loans to finance M&A activity in technological advanced countries.

In fact, Google leaving China robbed the Chinese tech sector of legitimate competition crushing the innovation trajectory or any remnants of one.

This led to the BATs running riot making money hand over fist but still trailing American tech by a country mile in terms of technical ability and innovation.

A lack of competition breeds complacency.

The reintegration of Google search into China will bring a whole new level of top-class ad technology into China.

This could be the beginning of a monumental ramp up in digital ad spend in China, which trails far behind North America and Europe in average revenue per person.

Discretionary spending is robust in China and advertisers want a piece of the action.

As much as this could be an opportunity for Alphabet to invigorate its cash-making enterprise, it is also a chance to enhance the overall Chinese tech sector.

Upon hearing Google will return, Baidu's Li laid down the gauntlet retorting that Baidu will "win one more time."

Having the communist party on your side as a tag team partner goes a long way in China and has been the main reason of foreign firms fleeing in droves in the past.

Alphabet won't have the same help.

Yet, it could learn a great deal from heading into this sensitive opportunity that could also lay the groundwork to operate in other countries with repressive governments bent on destroying freedom of speech.

Naturally, Alphabet employees weren't impressed with this new direction.

Silicon Valley is centered on left-wing social mores and adjusting its model to accommodate a totalitarian regime does not sit well with many workers.

Google saw a mini employee revolt because of Project Maven, a national defense program marrying artificial intelligence with combat operations in the United States.

Allowing Google's technology to possibly fall into the hands of Beijing would be unforgivable and a national embarrassment.

This idea is definitely not part of the low hanging fruit initiative.

This fruit is 20 feet high dangling from a distant branch.

If Alphabet pulls this off, it could add another surging driver to its portfolio, which prints money because of its digital ad segment.

It could potentially increase revenue by 30%.

Alphabet's successfully bringing in its Google search engine back from the cold, albeit censored search engine, could lay the groundwork for other American tech companies to enter the Chinese market, which would crush Alibaba, JD.com (JD), Tencent, and Baidu's share price.

Baidu dropped more than 6% upon this announcement.

The tech expertise level would naturally rise in China if American tech companies were permitted to set up shop, enhancing the total Chinese tech sector.

It would also apply pressure on China's communist government to open up its industries and do away with the protectionist stance that has been a bedrock policy fueling China's unbelievable rise from rags to riches.

China's top-level politicians must understand inward policies of this ilk do not mesh with the status of a country that is the world's second biggest economy. And it was only a matter of time before unyielding backlash ensued.

From the political side, it could possibly offer additional ammunition to the American administration if China wholeheartedly rejects Google's foray into the mainland, even if it complies with every miniscule, arcane rule Beijing throws at them.

It will prove that China is not willing to compromise or make a deal with the deal-obsessed American administration. And it will signal a dead-end road for any large cap American tech company with China aspirations.

The U.S. administration would use this as an "I told you so" moment, highlighting a history of perpetual unfair trade practices. Hopefully, it never gets to this point.

As it stands, many American large cap tech companies won't touch the Chinese market with a 10-foot pole, but the breathless scale is hard to pass up for others.

If Google is stonewalled, expect an even tougher response from the American administration hell-bent on preventing technological transfers to China.

Currently, the Committee on Foreign Investment in the United States (CFIUS) is attempting to recreate the rules to counteract the China threat.

The trade war is ultimately about global supremacy and being able to harness the biggest tool to achieve world hegemony, which is high caliber technology.

The treatment of Chinese and American tech companies by each other's government will give investors deep insight into how this all plays out.

This is Alphabet's last gasp chance at entering China. If it evolves into a spectacular failure, it always has its digital ad business to fall back on and the upcoming mass rollout of Waymo, its autonomous self-driving taxi business.

So why not take a stab at it?

________________________________________________________________________________________________

Quote of the Day

"If Google re-enters the market, it gives us the opportunity to player kill with real swords and spears and win one more time," - said founder and CEO of Baidu Robin Li.

August 6, 2018

Diary, Newsletter

Global Market Comments
August 6, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or FINDING A NEW GIG),
(FB), (TWTR), (INTC), (NFLX), (AAPL), (AMZN),
(RIGHTSIZING YOUR TRADING)

The Market Outlook for the Week Ahead, or Finding a New Gig

Diary, Newsletter, Research

I'm back! Yes, I have freshly debarked from the KLM 10-hour nonstop from Amsterdam, with little gin bottles in the shape of old Dutch houses in my pockets.

And what do I do upon landing but rush to pound out another newsletter, digesting what I learned from reading a mountain of research on the way home.

Oops! It looks like I forgot how to type!

My 24-hour layover there enabled me to view the great Rembrandt masterpieces at the Rijksmuseum and explore Anne Frank's house, now part of a large museum complex. When I visited there 50 years ago you could just walk right in the front door, as there was almost no one there.

It was not a bad summer as far as losses go; a charger left behind on the Queen Mary, a hair brush in Paris, and all of my money in Zermatt, Switzerland. That last item was the result of my daughter breaking an ankle while riding a scooter down the Matterhorn.

If you are going to break something make sure you do it in Switzerland. The X-rays, MRI scans, doctors, and cast cost me only $1,000. The same would have cost me $10,000 in the U.S. But the wheelchair set me back $650. A better one could be had at home from Amazon for $115.

Still, there is no better way to breeze through customs and immigration but in a wheelchair. We avoided the long lines and saved so much time that my other daughter promised to break her ankle next year to achieve the same shortcuts.

Arriving at home in San Francisco it immediately became clear that a lot of chart formations are busted as well, especially those for Facebook (FB), Twitter (TWTR), Intel (INTC), and Netflix (NFLX). Apple (AAPL) is bumping up against my 2018 target of $220, while Amazon nearly hit my $2,000 goal.

With tech likely resting until the NEXT round of 25% earnings growth that starts in two months, we are going to have to find a new gig to earn our crust of bread. That will most likely be small caps, value plays, and multiyear laggards. Last year's big August play was in steel, gold, industrials, and commodities, which are all now getting hammered by trade wars.

Even if I had stayed at home in July trading like a one-armed paperhanger I'm not sure I would have made any money. Tech melted up, then melted down, and as we all know from hard-earned experience, the losses always cost more than the gains.

The week went out with a July Nonfarm Payroll Report that was tepid at best at 157,000. But headline unemployment stayed at 3.9%, a 17-year low. With the fifth week of gains and the (SPY) now up 6.2% in 2018 it appears that the markets only want to hear good news...for now.

Professional and Business Services were up 51,000, Manufacturing gained 37,000, while Hospitality and Leisure picked up 40,000 jobs. The bankruptcy of Toys "R" Us seems to have cost the economy 32,000 jobs. The broader U-6 "discouraged worker" unemployment rate fell to 7.5%.

Now is the golden age of the working high school dropout, the criminal background, and the DUI conviction. Many companies would rather hire former junkies that pay up for expensive college grads, which is why wage gains are still going nowhere, and perhaps, never will. Expensive retiring baby boomers replaced by cheap minimum-wage millennials is also a drag on wages.

Deflation isn't just hitting wages. It is destroying the financial industry as well, as high-paid yuppies are replaced by robots. This is the first bull market in history with no net hiring by Wall Street.

Wells Fargo no longer actually manages money, although it will readily accept your money to do so and farm it out to bots. Fidelity launched the world's first zero fee index fund, the Fidelity ZERO Total Market Index Fund (FZROX). As interest rates are now providing new income sources for managers, expect negative fee funds to come soon.

Markets are certainly climbing a wall of worry, a Great Wall. The Chinese are matching our threatened 25% tariffs on an additional $200 billion of trade with $60 billion of their own. After that retaliation will have to take indirect forms, as they have run out of tats to match our tits (oops, doesn't really work, does it?).

They might shut down the massive General Motors (GM) plants in China, where they sell more cars than in the U.S., and a LOT more Buicks. They could also interfere with the Apple assembly line. Remember, trade wars are only easy to win when you run a dictatorship. They could also continue weakening the yuan to offset the tariffs, as they have done so far. We can't retaliate there with a rising interest rate regime.

Speaking of rates, you can bet your bottom dollar that the Fed will raise them another 25 basis points to a 2.0% to 2.25% range at their upcoming September 25-26 meeting, after having passed last week. A market killing inverted yield curve is now only months away. Rising rates don't matter until they do, and then they matter A LOT!

Also, of concern is the appreciating levels of the Mad Hedge Market Timing Index, which at a nosebleed 71 is approaching seven-month highs. Buying up here never offers a good risk/reward ratio.

As I have been climbing in the Alps and out of the markets my 2018 year-to-date performance remains unchanged at an eye-popping 24.82% and my 8 1/2-year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.

This coming week will be a very boring week on the data front, which is usual after the big jobs reports of the previous week..

On Monday, August 6, there will be nothing of note to report.

On Tuesday, August 7 at 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.

On Wednesday, August 8 at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST the Fed is expected to raise interest rates by 25 basis points. At 2:30 PM Fed governor Jerome Powell holds a press conference.

Thursday, August 9, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.

On Friday, August 10 at 9:15 AM EST, we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, I'll be recovering from jet lag and getting back into my groove. I'll send you a Trade Alert as soon as I find a good entry point. The year-end sprint is now on.

Below look at the gigantic smoke plume rising to 40,000 feet from the massive California fires that I flew past on the way home.

Good luck and good trading.

June 13, 2018

Tech Letter

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)

Special Acronym Issue

Tech Letter

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 - 5^th 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.

May 31, 2018

Tech Letter

Mad Hedge Technology Letter
May 31, 2018
Fiat Lux

Featured Trade:
(HOW SALESFORCE RAN OVER ORACLE),
(CRM), (ORCL), (MU), (RHT), (MSFT), (INTC), (AMZN), (GOOGL)

How Salesforce Ran Over Oracle

Tech Letter

Modern tech has an unseen dark side to it.

Coders relish the opaqueness surrounding the industry infatuated with developing the next big thing to take Silicon Valley by storm.

There is nothing opaque about the Mad Hedge Technology Letter.

I grind out recommendations and you follow them. Period. End of story.

To put it mildly, the letter has gotten off to a flying start since its inception in February 2018, and there is no looking back, only looking forward.

Micron (MU), Red Hat (RHT), Microsoft (MSFT), and Intel (INTC), just to name a few, have been solid recommendations standing up to all the nonsense and mayhem permeating throughout the periodically irrational markets.

Have you noticed lately when you open up the morning paper while sipping on a steaming mug of Blue Bottle Coffee, that almost every story is about technology?

It's not a mistake. I swear.

Technology is permeating into the nooks and crannies of our society and the leaders of this movement are laughing all the way to the bank.

One of those aforementioned pioneers is no other than local lad, Salesforce CEO and perennial Facebook basher Marc Benioff.

I recommended Salesforce at $110 and it was one of the first positions in the Mad Hedge Technology portfolio.

You can't blame me.

I saw this stock pick from a million miles away and I will explain why.

Salesforce set ambitious targets that nobody thought were realistic at the time.

How high in the sky does Benioff want to build his castles?

By 2022, Marc Benioff set out sales targets of a colossal $20 billion per year.

Then Benioff gushed that Salesforce would pass the $40 billion mark, done and dusted by 2028 and $60 billion by 2034.

Remember that tech CEOs are incentivized to forecast ludicrous sales targets because it lures in the unknowledgeable investor.

Unknowledgeable or pure genius, it does not matter, Salesforce is an emphatic buy.

Salesforce is the ultimate growth stock.

In 2016, annual revenue came in at $6.67 billion, which is about the same size as a middle level semiconductor company.

They followed that up with $8.38 billion in 2017, demonstrating the parabolic shaped trajectory of the company.

At the end of fiscal year 2017, Salesforce announced that it expects revenue of around $12.60 billion in 2019.

The latest earnings report, Benioff disclosed full year guidance of $13.13 billion.

This puts Salesforce in the running to achieve its lofty aspirations.

Apparently, the castles Benioff is building aren't in the sky after all.

Theoretically, if Benioff expands the business into a $16 billion to $16.5 billion business by 2019, Salesforce will have a more than likely chance to pass the $20 billion mark by the end of 2020, a full two years than initially thought.

Salesforce will have ample wiggle room on the way to $20 billion if it is 2022 for which it aims.

Why am I rambling on about revenue?

It's the only metric that Salesforce investors value.

The company registered two straight years of less than $200 million in profits then followed it up with a less than stellar 2016 where it lost almost $50 million.

Don't expect any dividends from this neck of the woods anytime soon especially after acquiring MuleSoft, an integration software company, for $6.5 billion last quarter.

This purchase will add another $315 million of annual revenue to Salesforce's quest of eclipsing its future sales targets. This was after MuleSoft made $296.5 million in 2017 before it became a part of Marc Benioff's stable.

Benioff has proved a shrewd dealmaker, taking advantage of cheap capital to add suitable parts to his business.

Since 2016, Benioff has snapped more than 50 niche software companies that he rebrands as Salesforce products and sells them as add-on products.

This is further evidence that any funds available will be allocated toward reinvestment into products and services deeming any future dividend inconceivable, especially with the elevated revenue targets to surpass.

As for the business. Do we still need to talk about it?

Rip-roaring growth was seen across the board with total revenue increasing 25%.

Investors should stay away from any cloud company that is growing less than 20%.

Market intelligence firm International Data Corporation (IDC) voted Salesforce as the No. 1 client relationship management (CRM) platform for the fifth consecutive year.

It is the industry leader in sales, marketing, service, and increased market share in 2017, more than its closest competitors.

Larry Ellison must be tearing his hair out as Oracle's (ORCL) share price has been excommunicated to purgatory indefinitely.

Oracle is a company that I have been pounding on the tables to stay away from.

The Mad Hedge Technology Letter seldom recommends legacy companies that are still legacy companies.

Driving past his former estate, emanating from a sparkling perch in Incline Village overlooking Lake Tahoe, my neighbor gives me the goose bumps.

The property was later sold for $20.35 million. All told, Larry has around $100 million invested in real estate dotted around Incline Village. I sarcastically mentioned to him last time we bumped into each other to call me immediately when his $90 million estate in Kyoto, Japan, hits the market.

Oracle's position in the pecking order is a telltale sign of the inability to land the creme de la creme government contracts that ostensibly fall into Amazon (AMZN), Alphabet (GOOGL), and Microsoft's lap.

And it's not surprising that Larry is spending more time tending to his vast array of glittering luxury properties around the world rather than running Oracle.

Oracle is like a deer caught in the headlights and Marc Benioff is at the wheel.

On the Forbes 500 rankings, Salesforce has moved up almost 200 spots.

This position will rise as Salesforce is under contract booking a further $20.4 billion of commitments driven by its subscription services offering cloud products.

On the domestic contract front, it was much of the same for Salesforce, which inked premium deals with the U.S. Department of Agriculture, Kering, and sports apparel giant Adidas.

International companies such as Philips and Santander UK are expanding their relationships with Salesforce. A firm nod of approval.

Salesforce has been voted in the top three of most innovative companies for the past eight years by reputable Forbes magazine. The list was started in 2011, and it has never dropped out of the top three.

The gobs of innovation are the main logic behind the top five financial institutions expanding their relationship with Salesforce by an extra 70%.

Once companies start using the CRM platform, they become mesmerized with the premium add-ons that help companies run more efficiently.

Benioff has been a huge proponent of artificial intelligence (A.I.) and is an outsized catalyst to product enhancement gains.

Salesforce has taken Einstein, it's A.I. platform, and allowed all the applications to run through it.

The integration of Einstein has resulted in more than 2 billion correct predictions per day paying homage to the quality of A.I. engineering on display.

Instead of hiring a whole team of in-house data scientists, Salesforce is A.I. functionality by the bucket full and it is easy to use on its platform.

In some cases, incorporating Salesforce's A.I. into the business has bolstered other companies' top line by 15%.

Often, Salesforce's A.I. tools are declarative meaning the technology can identify solutions without a fixed formula.

Benioff has choreographed his strategy perfectly.

He is betting the ranch on unlocking data from legacy companies that migrate to his platform.

MuleSoft will help in this process of extracting value, then A.I. will supercharge the data, which is being unlocked.

What does this mean for Salesforce?

Higher revenue and more clients leading to accelerated growth. The share price has powered on north of $130, and after I recommended it at $110, I am convinced this stock will surge higher.

Salesforce is an absolute no-brainer buy on the dip.

Growth Means Shiny New Office Buildings

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Quote of the Day

"If we become leaders in Artificial Intelligence, we will share this know-how with the entire world, the same way we share our nuclear technologies today." - said current President of Russia, Vladimir Vladimirovich Putin.

May 29, 2018

Tech Letter

Mad Hedge Technology Letter
May 29, 2018
Fiat Lux

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