Mad Hedge Technology Letter
October 25, 2021
Fiat Lux
Featured Trade:
(HOW TO PLAY THE TECH EARNINGS SEASON)
(MSFT), (FB), (GOOGL), (AAPL), (SNAP)
Tag Archive for: (MSFT)
The big guns of tech are coming up to the plate for earnings and they could use a strong showing as big tech’s narrative is on the ropes.
They are still the apex warriors of the stock market, and that position is hardly under threat, but there are whispers of a slowdown.
A recipe of high expectations mixed with cruddy forecasts could give us a dip to buy into.
This is what our portfolio would love to be gifted.
Don’t forget we have already seen some misses from tech companies like Snap (SNAP) which plunged 27% after warning that customers are cutting back on digital advertising spending.
The fallout sent other ad tech companies like Twitter and Google significantly lower.
This never used to happen to these companies and that’s important to point out because we just exited an era where ad tech companies could do no wrong.
Now it almost seems like they can’t do no right.
Readers got spoilt, earnings after earnings, these tech companies used to knock it out of the park and much of that high expectation is still leftover, perhaps a legacy concept from the bull market from 2008 to 2021.
These are the bellwether stocks of the broader market that have single-handedly put the rest of their market on their back and carried it higher.
Everyone wants to know if they can still hack it?
Technology companies in the S&P 500 Index are projected to report revenue growth of roughly 19% for the third quarter such as Alphabet at 38% growth, followed by Facebook at 37% and Apple (AAPL) at 31%.
I do believe that they will achieve these lofty estimates but they won’t overperform to the point where buyers line up in spades.
We aren’t in that type of environment now.
These companies have pricing power, and combined with underlying growth drivers, they generate high returns and reinvest in the business and perpetuate that strength.
The price action backs up my concerns with 85% of tech companies having beaten profit estimates, but the stocks have fallen an average of 2.4% the following day.
The lack of response means we are long in the tooth.
If this does become a “buy the rumor, sell the news” type of event, this will give us plenty of discounts to cherry-pick the next day.
The challenge of justifying their valuations means these companies aren’t getting their “free pass” that they used to pocket and manipulate.
They aren’t the darlings of the business world anymore — that title goes to cryptocurrency and bitcoin.
Facebook will tell us how badly Apple’s privacy changes are affecting its ad revenue model.
Consensus is looking for revenue growth of nearly 40% this quarter in Alphabet which in a normal year wouldn’t be that hard to beat but it’s a new normal now.
Ongoing monetization improvements in search advertising through product/AI-driven updates, along with greater-than-expected contributions from businesses like YouTube and Google Cloud can seem them meet their forecasts.
Microsoft (MSFT) expects revenue to grow around 20% in the quarter and we need to look out for if their cloud-computing business maintains strong demand.
Year-over-year comparisons get progressively tougher throughout the year which is an obstacle for MSFT’s durable growth portfolio of Azure/Security/Teams.
Apple could deliver great iPhone sales, but semiconductor shortages are a limiting factor, and the China risk is another big quagmire.
At what point will the Chinese Communist Party stop giving Apple such an easy go of it in China?
Regulatory uncertainty is an overhang — implications of the App Store ruling remain a wild variable.
Amazon is dealing with supply-chain challenges and labor shortages.
Last quarter, revenue missed expectations for the first time since 2018, and the company warned of the reverse of the pandemic-related tailwind for online retail.
Revenue is expected to grow a little more than 16%, the slowest pace since 2015.
The stock has been dead weight this year, which is unlike Amazon.
I do believe we will get a sprinkling of fairy dust that includes margin expansion, but some of these companies will experience a pullback and I will be waiting to aggressively take advantage of these deals.
Mad Hedge Biotech & Healthcare Letter
September 14, 2021
Fiat Lux
FEATURED TRADE:
(IS THIS THE BIGGEST WINNER IN A WINNER-TAKE-MOST MARKET?)
(NVTA), (ARKK), (ARKG), (SFTBY), (AMZN), (EXAS), (AAPL), (MSFT)
One of the most underappreciated names in the biotechnology sector might just be the biggest winner in a winner-take-most market today: Invitae (NVTA).
Despite being at the receiving end of a seemingly endless flogging since the year started, Invitae remains an attractive stock for the likes of Cathie Woods.
In fact, this San Francisco-based company is one of the Top 20 holdings of ARK Innovation (ARKK) and ARK Genomic Revolution (ARKG).
Described by Woods as "probably one of the most important companies in the genomic revolution," Invitae is the sixth-largest holding of the ARK Investment portfolio with more than $1 billion worth of exposure.
Aside from ARK, Invitae also recently attracted the attention of Japanese tech conglomerate SoftBank (SFTBY), which came in the form of $1.2 billion worth of convertible bond investment.
Amid all these, why is Invitae still under-appreciated?
First, it’s essential to understand that biotech companies opt to target particular niches where they aim to maintain high prices and maximize profitability for as long as possible.
That way, they can maintain and continue to boost their profits.
This results in highly prohibitive costs in the healthcare innovation section, which in turn cause rationing of cases because only a select group of patients can actually afford the exorbitant fees for the innovative drug or therapy.
While rationing care and maximizing profits are obviously great for investors, this makes the innovations inaccessible to people who could not shell out the cash to take the tests or treatments.
This is where Invitae comes in.
Basically, Invitae is taking a completely different approach compared to its peers in the biotechnology world.
According to the company, its mission is "to bring comprehensive genetic information into mainstream medicine to improve healthcare for billions of people."
How will Invitae achieve this?
Instead of choosing a single genetic variant to test, which costs over $1,000 each, the company is developing a testing platform that can identify thousands of genetic variants.
The clincher? This will only cost less than $250 for the entire test panel.
This nonconforming approach to biotechnological innovations is what has primarily led to Invitae’s under-appreciation.
However, Invitae’s mission holds incredible potential.
What it means in medical terms is that the company can help about 1 in 6 people suffering from a medical condition with an inherent genetic factor.
What it means in financial terms is that the company holds the possibility of generating several hundred dollars per year from over 2 billion people—a jaw-dropping market opportunity worth $4 trillion.
One of Invitae’s key ideas is to grant people access to their genetic information and then interpret it for them.
To me, this indicates the company’s goal of doing for genetics what Amazon (AMZN) has done for book buyers.
The next question is this: Can Invitae truly accomplish this?
Let’s consider the company’s growth trajectory along with the catalysts ahead.
So far, three catalysts can push the company towards its goals.
First is the steady growth in testing volume. As with most medical procedures, the volume of genetic testing went down during the COVID-19 pandemic. However, this is now rebounding gradually.
In the first quarter of 2021, the billable volume went up by 72% year over year, with roughly 259,000 tests in that quarter alone.
Traditionally, genetic testing is generally driven by orders from doctors and the cooperation of health plans to cover the tests.
Moving forward, we expect pharmaceutical firms to play more significant roles in promoting and even paying for these tests.
Approximately 90% of the pharma pipelines these days are based on genetic conditions.
As these new and innovative genetic treatments gain FDA approval, the pharma companies would have additional vested interest in ensuring eligible patients receive testing. That way, they can drive demand for the therapies they developed.
The second catalyst comprises the oncology sector.
Genetic testing has become the trend, particularly for cancer—an undoubtedly massive and financially lucrative market.
To leverage this growth, Invitae acquired ArcherDX in 2020 in an effort to expand its offerings.
With this purchase, the company can help major cancer centers implement their testing systems while also offering support to healthcare providers who opt not to do their own testing.
The availability of these comprehensive services will serve as critical drivers of income and profitability considering the historically proven high reimbursement rates in the oncology testing segment.
Apart from this, Invitae recently announced its decision to acquire Ciitizen, a consumer health tech firm, for $325 million.
This move will allow Invitae to expand its patient database through the genomic and clinical information gathered from Ciitizen’s platform.
Thus far, Invitae has announced 13 acquisitions over the past 5 years.
The third catalyst is the continuous global growth of Invitae.
Evidently, the mission of reaching 2 billion people requires worldwide expansion—something that the company has been working on.
In fact, roughly 18% of the total billable volume of Invitae in the first quarter came from international transactions, which have the potential to grow faster than their business in the US.
To date, Invitae has been expanding its operations in Japan, Israel, Europe, and Australia.
Meanwhile, Invitae’s incredible potential has attracted other companies as well. Exact Sciences (EXAS) has been linked to the company for a potential merger among the firms interested.
Admittedly, Invitae’s mission to offer affordable and accessible genetic testing to 2 billion people will require many more years before it comes to fruition.
When that day comes, the company will join Apple (APPL), Amazon, and Microsoft (MSFT) as part of an elite group with $1 trillion and over market cap.
The long wait for Invitae to achieve this ambitious goal would be worth it for patient buy-and-hold investors.
Mad Hedge Technology Letter
September 13, 2021
Fiat Lux
Featured Trade:
(THE DATABASE MOST WANTED BY DEVELOPERS 4 YEARS RUNNING)
(MDB), (MSFT), (IBM), (SAP), (ORCL), (CLDR)
MongoDB’s latest earnings’ results validate the concept open source software as a rival to the opposed closed-source software grid.
A keen rival of MongoDB’s RedHat was also acquired by IBM (IBM) a few years ago showing the vitality of the sub-sector.
Don’t sleep on these companies as another one Cloudera (CLDR) were taken private by private equity firms KKR and Clayton, Dubilier & Rice.
These are highly valuable assets and I’m not the only one shouting from the rooftops.
How did this all first start?
The first open-source projects were not really businesses, they were counter attacks against the unfair profits that closed-source software companies were reaping.
Microsoft (MSFT), Oracle (ORCL), SAP (SAP), to name a few, were enforcing monopoly-like “rents” for software that were substandard in quality.
The latest evolution of open source came when developers evolved the projects with two important elements.
The first is that the open-source software is now developed largely within the confines of businesses.
Often, more than 90% of the lines of code in these projects are written by the employees of the company that commercialized the software.
Second, these businesses offer their own software as a cloud service from inception.
In a sense, these are Open Core / Cloud service hybrid businesses that can obtain multiple pathways to monetize their product and that is exactly what MongoDB did.
By offering the products as SaaS, these businesses can interweave open-source software with commercial software so customers no longer have to worry about which license they should be taking.
MongoDB Atlas is a great example of this evolution and can become the dominant business model for software infrastructure.
This is their hottest product which is a fully-managed cloud database and Atlas handles all the complexity of deploying, managing, and healing deployments on the cloud service provider of your choice like Amazon or Google.
MongoDB changed how open-source software is licensed, and they introduced the new cloud service that required them and partners to compete with the largest cloud providers.
Looking quickly at second-quarter financial results, they generated revenue of $199 million, a 44% year-over-year increase and above the high-end of guidance. They grew subscription revenue 44% year over year.
Mongo Atlas revenue grew 83% year over year and now represents 56% of revenue, and they had another strong quarter of customer growth, ending the quarter with over 29,000 customers.
Businesses that can develop software faster are able to ultimately outgrow their competition.
MongoDB’s results are a clear indication that customers view MongoDB as a critical platform to accelerate their digital innovation agenda.
Customers of all types are choosing MongoDB because they can develop so much faster using this platform to build new applications and replatform legacy applications across a broad range of use cases to drive business forward.
Even though MongoDB open-source software is lower cost per unit, it makes up the total market size by leveraging the elasticity in the market. When something is cheaper, more people buy it. That’s why open-source companies have such massive and rapid adoption when they achieve product-market fit.
The model now is that companies are venturing as far as actually open sourcing all their software but applying a commercial license to parts of the software base. The premise being that real enterprise customers would pay whether the software is open or closed, and they are more incentivized to use commercial software if they can actually read the code.
Observing how airline JetBlue deployed MongoDB is how these new approaches and improved products manifest themselves in the topline revenue.
JetBlue came to the decision to overhaul their core e-commerce app, and JetBlue chose the MongoDB application data platform.
MongoDB's flexible data model allowed JetBlue to build a dynamic customer experience with modern ticketing applications, as well as predictive analytics in real-time.
An avalanche of firms is leveraging the tools of MongoDB tools to up their digital game.
Management has steered the narrative to include the ease of use and expanding the capabilities of the MongoDB platform to make it more compelling for customers to standardize on MongoDB.
For example, a serverless, customer can get started with MongoDB without having to pick a specific machine type or size. The application connects to Atlas, and they handle the elastic scaling of compute and storage seamlessly, whether an application scales fast or becomes popular. Customers no longer must do capacity planning or manual intervention to adjust the size of the deployment.
The verdict is in and deploying MongoDB to harness in-house developers to build unique commercial applications has been a winning formula.
Not only are they sheltered from rigid closed-source software, but customers can even integrate the code first, then pay later when it is deployed, and this licensing model has been extremely beneficial for developers who need to test out whether certain code is valuable or not.
Atlas is now the cash cow for MongoDB and forecasts predict acceleration in top-line growth.
Yes, this company is still small procuring revenue of just $166 million in 2018, but 2023 will see annual revenue surpass $1 billion which is why everyone wants to hop on MondoDB’s train.
I would consider any dips to deploy capital in MongoDB, I would call it a rising star of the software world, and a gem in the developers’ world.
Mad Hedge Technology Letter
September 10, 2021
Fiat Lux
Featured Trade:
(YOUR GUIDE TO THE METAVERSE)
(RBLX), (FB), (MSFT), (APPL), (AMZN), (EPIC GAMES)
People have no idea what the Metaverse is, so I will be the one to fill you in.
What is the Metaverse? Simply put, the Metaverse is the next mega-phase of the internet, a merging of the physical world with XR, AR, and VR that is just beginning to revolutionize.
It is an extensive online world transcending individual tech platforms, where people exist in immersive, shared virtual spaces. Through avatars, people would be able to try on items available in stores or attend concerts with friends, just as they would offline.
On a recent earnings call, Facebook (FB) CEO Mark Zuckerberg detailed the Metaverse: “It's a virtual environment where you can be present with people in digital spaces,” he said. “You can kind of think about this as an embodied internet that you're inside of rather than just looking at. We believe that this is going to be the successor to the mobile internet.”
Does the Metaverse exist anywhere yet? The answer is yes, early versions of it. The closest approximations of it right now include the likes of digital game platforms Roblox (RBLX) and Fortnite.
The internet era was defined by the computer being in the living room and the connection to the internet being occasional.
The shift to mobile computing is defined by moving the computer from the living room to the office and into your pocket and changing access to the internet from occasional to continuous and persistent.
Metaverse is the idea of computing everywhere, ubiquitous, ambient. In a simplified sense, think about the Metaverse as a series of interconnected and persistent simulations.
One could almost describe it as the next internet, web 3.0.
And crypto, or some sort of crypto offspring or cousin of it, will be the coin of this new realm which is why crypto in its form now is so important.
Consider the internet and mobile internet. Over time it disrupted nearly every industry in nearly every geography.
It changed how consumers patronized, business models, products, behaviors. This produces an extraordinary economic opportunity overall.
The same will happen via the Metaverse.
In the future, instead of just doing calls over a phone call, you’ll be able to sit as a hologram on a couch, or I’ll be able to sit as a hologram on your couch, and it’ll actually feel like we’re in the same place even though it is remote.
Sharing space is what humans perceive as closer to something real.
There’s spatial audio in which distance can change the meaning of a sentence.
This has been in the works for years, ever since Zuckerberg bought Oculus in 2014 and Oculus is effectively the gateway to the Metaverse that Zuckerberg wants to spawn.
Other power Silicon Valley elite are also moving forward into the Metaverse for their own objectives. Microsoft (MSFT) CEO Satya Nadella commented at his earnings call, “As the digital and physical worlds converge, we are leading in a new layer of the infrastructure stack, the enterprise Metaverse."
Many Metaverse believers say the economy of the Metaverse will be larger than that of the physical world.
Personally, I believe it will be 100X larger than the physical world’s economies and much more dynamic.
One of the biggest winners of this Metaverse race will be Epic Games —owner of Fortnite —founded by CEO Tim Sweeney.
Epic released "Fortnite" just five years ago. The game now has 350 million registered players, with anywhere from six to 12 million people playing at any given time.
The Metaverse is a great example of a technology that will likely bring huge benefits to people but there will be unintended, unanticipated costs and harms.
Right now, the Metaverse operates with zero regulations, while its previous iteration, the internet, operates with the least number of regulations out of any major industry in 2021.
The bottom line is that every power Silicon Valley has skin in the game such as Facebook, Apple, Amazon, Microsoft, and Netflix after Epic Games, and they will receive another supercharger to accelerating revenue growth.
The revenue growth in the Metaverse for these companies will make what they earn in the physical world look like a pittance.
We are driving to that point in tech development through hell or high water, and like how every company became a tech company to survive, when the Metaverse and an operable iteration of it become good enough for people to transact smoothly, every company will have to become a Metaverse company or die.
This is the future and it’s creeping closer by the day.
Global Market Comments
August 5, 2021
Fiat Lux
Featured Trade:
(THE NEW AI BOOK THAT INVESTORS ARE SCRAMBLING FOR),
(GOOG), (FB), (AMZN), MSFT), (BABA), (BIDU),
(TENCENT), (TSLA), (NVDA), (AMD), (MU), (LRCX)
A better headline for this piece would be “The Future of You,” as artificial intelligence is about to become so integral to your work, your investment portfolio, and even your very existence that you won’t be able to live without it, quite literally.
Well, do I have some great news for you. A blockbuster book about the state of play on all things AI will be released on September 25, and I managed to obtain and read an advanced copy. It is entitled: AI Superpowers: China, Silicon Valley, and the New World Order by Dr. Kai-Fu Lee.
The bottom line: The future is even more unbelievable than you remotely imagined. We are at the very early days of this giant megatrend, and the investment opportunities will be nothing less than spectacular.
And here is a barn burner. The price of AI is dropping fast as hundreds of thousands of new programmers pour into the field. Those $10 million signing bonuses are about to become a thing of the past.
Dr. Lee is certainly someone to take seriously. He obtained one of the first Ph.D.’s in AI from Carnegie Mellon University. He was the president of Google (GOOG) China and put in stints at Microsoft (MSFT) and Apple (AAPL). Today, he is the CEO of Sinovation Ventures, the largest AI venture capital firm in China, and is a board director of Alibaba (BABA).
AI is nothing more than deep learning, or super pattern recognition. Dr. Lee dates the onset of artificial intelligence to 1952, when an IBM mainframe computer learned to play checkers and beat human opponents. By 1955, it learned to develop strategies on its own.
Dr. Lee sees the AI field ultimately divided into two spheres of dominance, the U.S. and China. No one else is devoting a fraction of the resources needed to become a serious player. The good news is that Russia and Iran are nowhere in the game.
While the U.S. dominates in the original theory and algorithms that founded AI, China is about to take the lead in applications. It can do this because it has access to mountains of data that dwarf those available in America. China processes three times more mobile phones, five times more Internet customers, 10 times more eat-out orders, and 50 times more mobile transactions. In a future where data is currency, this is huge.
The wake-up call for China in applications took place two years ago when U.S. and Korean AI programs beat grandmasters in the traditional Chinese game of Go. Long a goal of AI programmers, this great leap forward took place 20 years earlier than had been anticipated. This created an AI stampede in the Middle Kingdom that led to the current bubble.
The result has been applications that are still in the realm of science fiction in the U.S. The Chinese equivalent of eBay (EBAY), Taobao, doesn’t charge fees because its customer base is so big it can remain profitable on ad revenues only. Want to be more beautiful in your selfies sent to friends? A Chinese app will do that for you, Beauty Plus.
The Chinese equivalent of Yelp, Dianping, has 600,000 deliverymen on mopeds. The number of takeout meals is so vast that it has been able to drop delivery costs from $6 a meal to 60 cents. As a result, traditional restaurants are dying out in China.
Teachers in Chinese schools no longer take attendance. Students are checked off when they enter the classroom by facial recognition software. And heaven help you if you jaywalk in a Chinese city. Similar software will automatically issue you a citation with a fine and send it to your home.
Credit card fraud is actually on the decline in China as dubious transactions are blocked by facial matching software. The bank simply calls you, asks you to look into your phone, takes your picture, and then matches it with the image they have on file.
Dr. Lee sees AI unfolding in four waves, and there are currently companies operating in every one of these (see graph below):
1) Internet AI
The creation of black boxes and specialized algorithms opened the door to monetizing code. This was the path for today’s giants that dominate online commerce today, Google (GOOG), Amazon (AMZN), JD.com (JD), and Facebook (FB). Alibaba (BABA), Baidu (BIDU), and Tencent followed.
2) Business AI
Think big data. This is the era we just entered, where massive data from online customers, financial transactions, and health care led to the writing of new algorithms that maximize profitability. Suddenly, companies can turn magic knobs to achieve desired goals, such as stepping up penetration or monetization.
3) Perception AI
Using trillions of sensors worldwide, analog data on any movement, facial expression, sound, and image are converted into digital data, and then mined for conclusions by more advanced algorithms. Cameras are suddenly everywhere. Amazon’s Alexa is the first step in this process, where your conversations are recorded and then mined for keywords about your every want and desire.
Think of autonomous fast food where you walk in your local joint and it immediately recognizes you, offers you your preferred dishes, and then auto bills your online account for your purchase. Amazon has already done this with a Whole Foods store in Seattle.
4) Autonomous AI
Think every kind of motion. AI will get applied to autonomous driving, local shuttles, factory forklifts, assembly lines, and inspections of every kind. Again, data and processing demand take an enormous leap upward. Tesla (TSLA), Waymo (GOOG), and Uber are already very active in this field.
The book focuses a lot on the future of work. Dr. Lee creates a four-part scatter chart predicting the viability of several types of skills based on optimization, compassion, creativity, and strategy (see below).
If you are a truck driver, in customer support, or a dishwasher, or engage in any other repetitive and redundant profession your outlook is grim. If you can supplement AI, such as a CEO, economist, or marketing head you’ll do fine. People who can do what AI can’t, such as teachers and artists, will prosper.
The Investment Angle
There have been only two ways to invest in AI until now. You can buy shares in any of the seven giants above, whose shares have already risen for 100- or 1,000-fold.
You can invest in the nets and bolts parts providers, such as NVIDIA (NVDA), Advanced Micro Devices (AMD), Micron Technology (MU), and Lam Research (LRCX), which provide the basic building blocks for the Internet infrastructure.
Fortunately for our paid subscribers, the Mad Hedge Trade Alert Service caught all of these very early.
What’s missing is the “in-between companies,” which are out of your reach because they are locked up in university labs or venture capital funds. Many of these never see the light of day as public companies because they get taken over by the tech giants above. It’s effectively a closed club that won’t let outsiders in. It’s a dilemma that vexes any serious technology investor.
When quantum computing arrives in a decade, you can take all the functionality above and multiply it by a trillion-fold, while costs drop a similar amount. That’s when things really get interesting. But then, I’ve seen trillion-fold increases in technology before.
I hope I live to see another.
