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The Best Way to Supercharge Your Tech Portfolio

Superiority is mainly about taking complicated data and finding perfect solutions for it. Trading in technology stocks is no different.

Investing in software-based cloud stocks has been one of the seminal themes I have promulgated since the launch of the Mad Hedge Technology Letter way back in February 2018.

Well, if you thought every tech letter until now has been useless, this is the one that should whet your appetite.

Instead of racking your brain to find the optimal cloud stock to invest in, I have a quick fix for you and your friends.

Invest in The WisdomTree Cloud Computing Fund (WCLD) which aims to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index (EMCLOUD).

What Is Cloud Computing?

The “cloud” refers to the aggregation of information online that can be accessed from anywhere, on any device remotely.

Yes, something like this does exist and we have been chronicling the development of the cloud since this tech letter’s launch.

The cloud is the concept powering the “shelter-at-home” trade which has been hotter than hot in 2020.

Cloud companies provide on-demand services to a centralized pool of information technology (IT) resources via a network connection.

Even though cloud computing already touches a significant portion of our everyday lives, the adoption is on the verge of overwhelming the rest of the business world due to advancements in artificial intelligence and the Internet of Things (IoT) hyper-improving efficiencies.

The Cloud Software Advantage

Cloud computing has particularly transformed the software industry.

Over the last decade, cloud Software-as-a-Service (SaaS) businesses have dominated traditional software companies as the new industry standard for deploying and updating software. Cloud-based SaaS companies provide software applications and services via a network connection from a remote location, whereas traditional software is delivered and supported on-premise and often manually. I will give you a list of differences to several distinct fundamental advantages for cloud versus traditional software.

Product Advantages

Speed, Ease, and Low Cost of Implementation – cloud software is installed via a network connection; it doesn’t require the higher cost of on-premise infrastructure setup and installation.

Efficient Software Updates – upgrades and support are deployed via a network connection, which shifts the burden of software maintenance from the client to the software provider.

Easily Scalable – deploying via a network connection allows cloud SaaS businesses to grow as their units increase, with the ability to expand services to more users or add product enhancements with ease. Client acquisition can happen 24/7 and cloud SaaS companies can more easily expand into international markets.

Business Model Advantages

High Recurring Revenue – cloud SaaS companies enjoy a subscription-based revenue model with smaller and more frequent transactions, while traditional software businesses rely on a single, large, upfront transaction. This model can result in a more predictable, annuity-like revenue streams making it easy for CFOs to solve long-term financial solutions.

High Client Retention with Longer Revenue Periods – cloud software becomes embedded in client workflow, resulting in higher switching costs and client retention. Importantly, many clients prefer the pay-as-you-go transaction model, which can lead to longer periods of recurring revenue as upselling product enhancements does not require an additional sales cycle.

Lower Expenses – cloud SaaS companies can have lower R&D costs because they don’t need to support various types of networking infrastructure at each client location.

I believe the product and business model advantages of cloud SaaS companies have historically led to better margins, growth, higher free cash flow, and efficiency characteristics as compared to non-cloud software companies.

How does the WCLD ETF select its indexed cloud companies?

Each company must satisfy critical criteria such as they must derive the majority of revenue from business-oriented software products, as determined by the following checklist.

+ Provided to customers through a cloud delivery model – e.g., hosted on remote and multi-tenant server architecture, accessed through a web browser or mobile device, or consumed as an application programming interface (API).

+ Provided to customers through a cloud economic model – e.g., as a subscription-based, volume-based, or transaction-based offering Annual revenue growth, of at least:

+ 15% in each of the last two years for new additions

+ 7% for current securities in at least one of the last two years

Some of the stocks that would epitomize the characteristics of a WCLD stock are Salesforce, Microsoft, Amazon– I mean, they are all up, you know, well over 100% from the nadir we saw in March and contain the emerging growth traits that make this ETF so robust.

If you peel back the label and you look at the contents of many tech portfolios, they tend to favor some of the large-cap names like Amazon, not because they are “big” but because the numbers behave like emerging growth companies even when the law of large numbers indicate that to push the needle that far in the short-term is a gravity-defying endeavor.

We all know quite well that Amazon isn’t necessarily a direct play on cloud computing, but the elements of its cloud business are nothing short of brilliant.

But ETF funds like WCLD, what they look to do is to cue off of pure plays and include pure plays that are growing faster than the broader tech market at large. So you’re not going to necessarily see the vanilla tech of the world in that portfolio. You’re going to see a portfolio that’s going to have a little bit more sort of explosive nature to it, names with a little more mojo, a little bit more risk because you’re focusing on smaller names that have the possibility to go parabolic and gift you a 10-bagger.

One stock that has the chance of a 10-bagger is my call on Palantir (PLTR).

Palantir is a tech firm that builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations, and my call was to buy them at $10 after it’s IPO, it’s up to $26 and has an easy pathway to $50.

This is one of the no-brainers that procure revenue from Democrat and Republican administrations even though its CEO Alex Karp has been caught on video making fun of the current administration’s leaders.

In a global market where the search for yield couldn’t be tougher right now, right-sizing a tech portfolio to target those extraordinary, extra-salacious tech growth companies is one of the few ways to produce alpha without overleveraging.

No doubt there will be periods of volatility, but if a long-term horizon is something suited for you, this super-growth strategy is a winner and don’t forget about PLTR while you’re at it.

December 14, 2020

Tech Letter

Mad Hedge Technology Letter
December 14, 2020
Fiat Lux

Featured Trade:

(NVIDIA’S SHOW OF FORCE)
(NVDA), (AMD), (APPL), (OTC:SFTBF), (INTC), (QCOM)

Nvidia’s Show of Force

Tech Letter

One of the best buy and hold tech stock has to be Nvidia (NVDA).

They are positioned at the vanguard of every major cutting-edge technology in the world such as self-driving technology, data center, and artificial intelligence.

Their cash cow business of manufacturing GPUs (graphics processing unit) which are essential to video gaming has been bolstered by the shelter-at-home movement.

Video games as an activity or something to just pass the time has never been so popular and Nvidia is the best of breed in this department.

The key takeaway from Nvidia’s asset portfolio is the diversity.

They aren’t beholden to any one division and I wouldn’t bet anytime soon that video games are going to go out of fashion because of the generational tailwind occurring.

In fact, the underlying Nvidia stock has risen more than 120% in 2020 and semiconductors have proven to be an astute place to put your money in during the pandemic.

The same goes for competitive rivals such as Advanced Micro Devices (AMD), Intel (INTC), and Qualcomm (QCOM) who explore some of those same markets.

Nvidia counts Amazon (AMZN) Web Services as a customer for data-center chips. It is partnering with VMware (VMW) and Amazon on an AI-driven cloud platform for big businesses.

Be mindful that semiconductor stocks are volatile because of the boom-bust nature of their business cycle.

Global chip sales cratered in late 2018 and fell 12% in 2019.

They rallied early this year on signs of an industry recovery and on a U.S.-China trade deal, then sold off on coronavirus fears.

The trade war has also thrown a spanner in the works of global chip production.

Production was first halted in China and then put global economies under strain.

Despite the pandemic, the semiconductor industry will return to growth in 2020.

Chip sales will rise by 5.1% to $433 billion this year and accelerate to 8.4% in 2021.

The spread of 5G wireless networks is a key catalyst.

Moving forward, it’s highly likely that U.S. lawmakers maintain an anti-China doctrine, and Nvidia and AMD derive only 1% to 2% of revenue from Huawei.

In fact, other companies are more exposed like Cisco and Intel.

How well is Nvidia doing?

They increased revenue by 57% year over year in the third quarter predominately due to its data center business, which grew revenue by 162% over the same period.

In Q3, the data center division accounted for $1.9 billion of the company’s $4.7 billion of revenue.

Nvidia is also growing through acquisitions with its blockbuster pending $40 billion acquisition of chip design licensor ARM Holdings from Softbank (OTC:SFTBF).

ARM’s acquisition will help NVIDIA maintain the best of breed quality through 2021 and beyond.

That is important because the semiconductor industry is becoming more cutthroat with many big players sourcing chips in-house after deeply investing in this technology.

Apple (AAPL) recently unveiled its own stable of Mac processors, the M1, making its debut in late 2020. Manufacturing chips is historically a capital-intensive activity, and new chips don’t roll out that fast. In any case, cash-rich companies the size of Google and Apple have the firepower to pull this off.

ARM holds many unique patents forcing many companies to license from them, Apple can customize those designs, and the actual fabrication is outsourced to Taiwan Semiconductor (TSM), the largest and most technologically advanced semiconductor fabricator in the world.

In this specific case, Intel is the direct loser from the production of Apple M1 chips and at this point, this is becoming an existential crisis for Intel.

The acquisition of ARM is a gamechanger, and not just because NVIDIA would gain access to new markets like CPUs for mobile as early as 2021.

Integrating with ARM signals NVIDIA’s future shift toward licensing of technology – a far more stable business model than the traditionally cyclical nature of semiconductor industry sales driven by upgrade cycles.

It all comes down to the quality of NVIDIA’s chips which remain highly competitive in secular growth areas of tech, such as data centers and artificial intelligence. This alone should keep NVIDIA high up investors’ list for years to come.

Demand for the new Nvidia GeForce RTX GPU has been “overwhelming” and the company completed its Mellanox acquisition, a tech firm that sells adapters, switches, software, cables, and silicon for markets including high-performance computing, data centers, cloud computing, computer data storage, and financial services, in April, helping it to double down on their revenue drivers.

Sales for Nvidia’s chips remain robust across some of the most desirable end markets and there is nothing meaningful out there to suggest that Nvidia won’t continue its overperformance next year even if the shelter-at-home economy stops.

I am highly bullish on Nvidia stock into 2021 and beyond.

September 25, 2020

Diary, Newsletter, Summary

Global Market Comments
September 25, 2020
Fiat Lux

Featured Trade:

(HERE’S MY NEXT CHIP TEN BAGGER),
(AMD), (INTC), (NVDA), (MU)

Here is My Next Chip Ten-Bagger

Diary, Newsletter, Summary

I am often asked which semiconductor company to buy. After all, this is not just the high beta play for the stock market as a whole, but the entire economy as well.

When times are good, consumers can’t get enough chips to stockpile. When they are bad, they are used as landfill. Semiconductors are the economy on a bungee cord.

For the past five years, the answer was always the same: top-end graphics card maker Nvidia (NVDA).

It was a great call. Since my initial recommendation in 2015, the stock has soared by tenfold, one of several ten-baggers I have been able to rake in during recent years.

Now it’s time to call the next ten-bagger.

That’s easy enough: Advanced Micro Devices (AMD).

(AMD) is an American multinational semiconductor company based in Santa Clara, California that develops computer processors and related technologies for business and consumer markets.

While it initially manufactured its own processors, the company later outsourced all its manufacturing, a practice known as going fabless, after GlobalFoundries was spun off in 2009. Chip foundry Taiwan Semiconductor Manufacturing (TSM) currently produces (AMD)’s chips.

AMD’s main products include microprocessors, motherboard chipsets, embedded processors, and graphics processors for servers, workstations, personal computers, and embedded system applications.

In 2019, (AMD) brought in $6.48 billion in revenues, $631 million in operating revenue, and $341 million in net profits. It pays no dividend. For the current quarter, (AMD) expects revenue to rise an eye-popping 42% year over year to $2.55 billion.

The company was considered a lagging “also ran” for years, the poor cousin of Intel (INTC), Micron Technology (MU), and powerhouse Nvidia (NVDA).

Then Lisa Hsu took over in 2014. It has been straight up ever since. She immediately launched into a new generation of faster and more efficient chips, such as the Ryzen PC processors and Epyc server chips in 2017.

(AMD) now expects to ship its first revolutionary 7-nanometer processors in late 2022 or early 2023. Next to follow will be once unimaginable 3-nanometer processors. Now we are trying to get single electrons to go through gates.

AMD is also working with Hewlett Packard Enterprise (HPE) and nearby Lawrence Livermore National Laboratory on the El Capitan supercomputer for the U.S. Department of Energy. That gives the company another big advantage in developing new chip technologies.

As a result of (AMD)’s Herculean efforts, Intel was left behind in the dust, as its share price amply demonstrates.

Despite its recent ballistic growth (AMD) is still the smaller of the major chip companies. Its market capitalization stands at only $90 billion, compared to $209 billion for fading (INTC) and a monster $308 billion for (NVDA). Yet (AMD) boasts a higher growth rate.

If a global economic recovery ensues in 2021, (AMD) will be your play. As the move online vastly accelerates thanks to the pandemic, a global chip shortage is in the cards. Earnings, multiples, and share prices should all go up. The recent economic data from China shows that we are certainly headed in that direction.

Use this major selloff to stick your toe into (AMD).

To learn more about Advanced Micro Devices, please visit their website by clicking here.

September 23, 2020

Diary, Newsletter, Summary

Global Market Comments
September 23, 2020
Fiat Lux

Featured Trade:

(AN INSIDER’S GUIDE TO THE NEXT DECADE OF TECH INVESTMENT),
(AMZN), (AAPL), (NFLX), (AMD), (INTC), (TSLA), (GOOG), (FB)

An Insider’s Guide to the Next Decade of Tech Investment

Diary, Newsletter, Summary

Last weekend, I had dinner with one of the oldest and best performing technology managers in Silicon Valley. We met at a small out of the way restaurant in Oakland near Jack London Square so no one would recognize us. It was blessed with a very wide sidewalk out front and plenty of patio tables to meet current COVID-19 requirements.

The service was poor and the food indifferent as are most dining experiences these days. I ordered via a QR code menu and paid with a touchless Square swipe.

I wanted to glean from my friend the names of the best tech stocks to own for the long term right now, the kind you can pick up and forget about for a decade or more, a “lose behind the radiator” portfolio.

To get this information I had to promise the utmost confidentiality. If I mentioned his name, you would say “oh my gosh!”

Amazon (AMZN) is now his largest holding, the current leader in cloud computing. Only 5% of the world’s workload is on the cloud presently so we are still in the early innings of a hyper-growth phase there.

By the time you price in all the transportation, labor, and warehousing costs, Amazon breaks even with its online retail business at best. The mistake people make is only focusing on this lowest of margin businesses.

It’s everything else that’s so interesting. While its profitability is quite low compared to the other FANG stocks, Amazon has the best growth outlook. For a start, third party products hosted on the Amazon site, most of what Amazon sells, offer hefty 30% margins.

Amazon Web Services (AWS) has grown from a money loser to a huge earner in just four years. It’s a productivity improvement machine for the world’s cloud infrastructure where they pass all cost increases on to the customer who, once in, buys more services.

Apple (AAPL) is his second holding. The company is in transition now justifying a massive increase in earnings multiples, from 9X to 40X. It now trades at 30X. The iPhone has become an indispensable device for people around the world, and it is the services sold through the phone that are key.

The iPhone is really not a communications device but a selling device, be it for apps, storage, music, or third party services. The cream on top is that Apple is at the very beginning of an enormous replacement cycle for its installed base of over one billion phones. Moving from up-front sales to a lifetime subscription model will also give it the boost.

Half of these are more than four years old, positively geriatric in the tech world. More than half of these are outside the US. 5G will add a turbocharger.

Netflix (NFLX) is another favorite. The world is moving to “over the top” content delivery and Netflix is already spending twice as much on content as any other company in this area. This is why the company won an amazing 21 Emmys this year. This will become a much more profitable company as it grows its subscriber base and amortizes its content costs. Their cash flow is growing by leaps and bounds, which they can use to buy back stock or pay a dividend.

Generally speaking, there is no doubt that the pandemic has pulled forward some future technology demand with the stay-at-home trend. But these companies have delivered normal growth in a hard world. Tech growth will accelerate in 2021 and 2022.

5G will enable better Internet coverage for everyone and will increase the competitiveness of the telecom companies. Factory automation will be another big area for 5G, as it is reliable and secure and can be integrated with artificial intelligence.

Transportation will benefit greatly. Connected self-driving cars will be a big deal, improving safety and the quality of life.

My friend is not as worried about government threatened breakups as regulation. There will be more restraints on what these companies can do going forward. Europe, which has no big tech companies if its own, views big American tech companies simply as a source of revenues through fines. Driving companies out of business through cutthroat competition is simply not something Europeans believe in.

Google (GOOG) is probably more subject to antitrust proceedings both in Europe and the US. The founders have both retired to pursue philanthropic activities, so you no longer have the old passion (“don’t be evil”).

Both Google and Facebook (FB) control 70% of the advertising market between them, which is inherently a slow-growing market, expanding at 5% a year at best. (FB)’s growth has slowed dramatically, while it has reversed at (GOOG).

He is a big fan of (AMD), one of his biggest positions, which is undervalued relative to the other chip companies. They out-executed Intel (INTC) over the last five years and should pass it over the next five years.

He has raised value tech stocks from 15% to 30% of his portfolio. Apple used to be one of these. Semiconductor companies today also fall into this category. Samsung with 40% margins in its memory business is a good example. Selling for 10X earnings, it is ridiculously cheap. It is just a matter of time before semiconductors get rerated too.

He was an early owner of Tesla (TSLA) back in the nail-biting days when it was constantly running out of cash. Now they have the opposite problem, using their easy access to cash through new share issues as a weapon to fight off the other EV startups. Tesla is doing to Detroit what Apple did to the cell phone companies, redefining the car.

Its stock is overvalued now but will become much more profitable than people realize. They also are starting to extract services revenues from their cars, like Apple has. Tesla will grow revenues 30%-50% a year for the next two or three years. They should sell several million of the new small SUV Model Y. Most other companies bringing EVs will fall on their faces.

EVs are a big factor in climate change, even in China, the world’s biggest polluter. In Europe, they are legislating gasoline cars out of existence. If you can make money building cars in Fremont, CA, you can make a fortune building them in China.

Tech valuations are high, there is no doubt about it. But interest rates are much lower by comparison. The Fed is forcing people to buy stocks, enabling these companies to evolve even faster.

When rates rise in a year or so, tech stocks may have to come down. They have a lot more things going for them than against them. The customers keep coming back for more.

Needless to say, the above stocks should make up your shortlist for LEAPS to buy at the coming market bottom.

December 27, 2019

Diary, Newsletter, Summary

Global Market Comments
December 27, 2019
Fiat Lux

SPECIAL ISSUE ABOUT THE FAR FUTURE

Featured Trade:
(PEAKING INTO THE FUTURE WITH RAY KURZWEIL),
(GOOG), (INTC), (AAPL), (TXN),

October 18, 2019

Diary, Newsletter, Summary

Global Market Comments
October 18, 2019
Fiat Lux

Featured Trade:

(OCTOBER 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (C), (GM), (IWM), ($RUT), (FB),
(INTC), (AA), (BBY), (M), (RTN), (FCX), GLD)

October 16 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 16 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: How do you think the S&P 500 (SPX) will behave with the China trade negotiations going on?

A: Nobody really knows; no one has any advantage here and logic or rationality doesn’t seem to apply anymore. It suffices to say it will continue to be up and down, depending on the trade headline of the day. It’s what I call a “close your eyes and trade” market. If it’s down, buy it; if it’s, upsell it.

Q: How long can Trump keep kicking the can down the road?

A: Indefinitely, unless he wants to fold completely. It looks like he was bested in the latest round of negotiations because the Chinese agreed to buy $50 billion worth of food they were going to buy anyway in exchange for a tariff freeze. Of course, you really don’t get a trade deal unless you get a tariff roll back to where they were two years ago.

Q: Did I miss the update on the Citigroup (C) trade?

A: Yes, we came out of Citigroup a week ago for a small profit or a break-even. You should always check our website where we post our trading position sheet every day as a backstop to any trade alerts you’re getting by email. Occasionally emails just go completely missing, swallowed up by the ether. To find it go to www.madhedgefundtrader.com , log in, go to My Account, Global Trading Dispatch, then Current Positions. You can also find my newly updated long-term portfolio here.

Q: How much pain will General Motors (GM) incur from this standoff, and will they ever reach a compromise?

A: Yes, the union somewhat blew it in striking GM when they had incredibly high inventories which the company is desperate to get rid of ahead of a recession. If you wonder where all those great car deals are coming from, that’s the reason. All of the car companies want to go into a recession with as little inventory as possible. It’s not just GM, it’s everybody with the same problem.

Q: When does the New Daily Position Sheet get posted?

A: About every hour after the close each day. We need time to process our trades, update all the position sheets before getting it posted.

Q: What do you think about Bitcoin?

A: We hate it and don’t want to touch it. It’s unanalyzable, and only the insiders are making money.

Q: Are you predicting a repeat of Fall 2018 going into the end of this year to close at the lows?

A: No, I’m not. A year ago, we were looking at four interest rate increases to come. This year we’re looking at 1 or 2 more interest rate cuts. It’s nowhere near the situation we saw a year ago. The most we’re going to get is a 7% selloff rather than a 20% selloff and if anything, stocks will rise into the yearend then fall.

Q: Why are we trading the Russell 200 (IWM) instead of the ($RUT) Small Cap Index? We pay less commissions to brokers.

A: There’s more liquidity in the (IWM). You have to remember that the combined buying power of the trade alert service is about $1 billion. And that’s harder to do with smaller illiquid ETFs like the ($RUT), especially the options.

Q: If this is a “Don’t fight the Fed” rally for investors, where else is there to go but stocks?

A: Nowhere. But it’s happening in the face of an oncoming recession, so it’s not exactly a great investment opportunity, just a trading one. 2009 was a great time not to fight the Fed.

Q: Do you want to buy Facebook (FB) even though there are so many threats of government scrutiny and antitrust breakups?

A: The anti-trust breakups are never going to happen; the government can’t even define what Facebook does. There may be more requirements on disclosures, which means nothing because nobody really cares about disclosures—they just click the box and agree to anything. I was actually looking at this as a buy when we had the big selloff at the end of September and instead, I bought four other Tech stocks and (FB) had moved too far when we got around to it. I think there’s upside potential for Facebook, especially if we can move out of this current range.

Q: Would you sell short European banks? It seems like they’re cutting jobs right and left.

A: I always get this question after big market meltdowns. European banks have been underpricing risks for decades and now the chickens are coming home to roost. Some of these things are down 80-90% so it’s too late to sell short. The next financial crisis is going to be in Europe, not here.

Q: Is it time to short Best Buy (BBY) due to the China deal?

A: No, like Macys (M), Best Buy is heavily dependent on imports from China, and the stock has gotten so low it’s hard to short. And the problem for the whole market in general is all the best sectors to short are already destroyed, down 80-90%. There really is nothing left to short, now that all the bad sectors have been going down for nearly two years. There has been a massive bear market in large chunks of the market which no one has really noticed. So, that might be another reason the market is going up—that we’ve run out of things to short.

Q: Do you like Intel (INTC)?

A: Yes, for the long term. Short term it still could face some headwinds from the China negotiations, where they have a huge business.

Q: Would you buy American Airlines (AA) on the return of Boeing 737 MAX to the fleet?

A: Absolutely, yes. The big American buyers of those planes are really suffering from a shortage of planes. A return of the 737 MAX to the assembly line is great news for the entire industry.

Q: Do you like Raytheon (RTN)?

A: No, Trump has been the defense industry’s best friend. If he exits in the picture, defense will get slaughtered—it will be the first on the chopping block under a future democratic administration. And, if you’re doing nothing but retreating from your allies, you don’t need weapons anyway.

Q: Will Freeport McMoRan (FCX) benefit from a trade war resolution?

A: Yes, the fact that it isn’t moving now is an indication that a trade war resolution has not been reached. (FCX) has huge exposure to traditional metal bashing industries like they still have in China.

Q: Would you go long or short gold (GLD) here?

A: No, I’m waiting for a bigger dip. If you can get in close to the 200-day moving average at $129.50, that would be the sweet spot. Longer term I still like gold and it is a great recession hedge.

Good Luck and Good Trading!

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

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