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Here's the Biggest Technology Contract in History

The return of the Jedi is coming.

Luke Skywalker and Obi-Wan Kenobi will enter the cloud and use the force.

Not the Jedi of the famous George Lucas films, but JEDI - Joint Enterprise Defense Infrastructure commissioned by the Department of Defense.

This large contract is up for grabs.

Rumor has it that Amazon is in the driver's seat to become the government's right-hand man.

The purpose of this broad-based upgrade is to enhance communication channels among military branches by loading up operations into the cloud.

Artificial Intelligence (A.I.) and machine learning will be integrated as well.

One task slated for modernization includes the heaps of documents waiting to be translated from Arabic, Farsi, Chinese and other foreign languages into English.

A.I. will organize which documents have priority over others as well as aiding in raw translation. This will save the Department of Defense's overworked linguists thousands of hours in brute translation work.

As it stands, the government is grappling with an overlapping fractious system with legacy software up to 20 years old.

These legacy systems of yore are poor at keeping out the cyber criminals looking for a smash-and-data grab.

One instance where massive inefficiencies rear its ugly head is in the Department of Agriculture.

This department has 22 chief information officers that require seven more personal assistants inflating the IT budget.

The government could become the best turnaround story in the tech industry in years.

This turnaround could eventually become bigger than Microsoft and Cisco, which are the poster children for extreme cosmetic surgery in Silicon Valley.

The government burns $90 billion per year servicing IT operations, and JEDI is slated to offer an attractive sum of $100 billion over 10 years to a private company.

Not only will the Department of Defense modernize, but every part of the government will adopt new technologies.

Security is a priority for this administration after its legitimacy was questioned due to alleged nefarious Russian involvement.

The Committee on Foreign Investment in the United States (CFIUS) has buckled down rejecting a myriad of attempted foreign takeovers of cutting-edge tech companies stressing the need to properly harness local tech companies' ingenuity to the benefit of the country.

These new opportunities do not affect the already $1 billion per quarter that Alphabet (GOOGL) takes in from government servicing.

The $1 billion contract was given to Alphabet to develop the Algorithmic Warfare Cross-Functional Team industrially working on Project Maven.

Project Maven is the Department of Defense's attempt to integrate A.I. and machine learning into motion detector technology applied to surveillance drones using the Google cloud.

Project Maven received an additional boost to its objectives with an additional $100 million cash injection recently underlining the government's efforts to make warfare more efficient and less expensive.

Amazon Web Services (AWS) has also carved out a nice $5 billion per quarter business thanks to the power brokers in Washington.

Another side deal consummated recently has thrust Microsoft into the frame as well.

Microsoft (MSFT) agreed with the Office of the Director of National Intelligence to service 17 intelligence agencies with the Microsoft Azure cloud platform.

The deal was reported to be valued at "hundreds of million" of dollars.

Another separate deal agreed by both parties has Microsoft migrating another 3.4 million users and 4 million devices from the Department of Defense into the cloud.

All told, Microsoft has pulled in more than $1.3 billion of orders from the government in the past five years.

Bill Gates's old company was rewarded certification to supply the government with computers, operating systems, Microsoft Office, and the cloud services bolstering their credentials to potentially extract more government business.

The administration has adopted a winner takes all approach to the JEDI contract preferring one cloud provider to maintain the infrastructure.

Companies are scratching and clawing to get within a shout of winning this valuable revenue stream that could extrapolate down the road.

JEDI accounts for just 20% of the cloud possibilities for the tech companies in the government system.

The further 80% of digitization will happen down the road.

Firms are up in arms about the single platform solution and believe branching out to multiple platforms will come in use if part of the operation goes down.

Hybrid solutions are the norm for 80% of Fortune 500 companies.

As it is, International Business Machines Corp. (IBM), Oracle (ORCL), Alphabet, Amazon (AMZN), and Microsoft have been adamant that they are the best candidates for the job.

Amazon has been on a one-man mission mobilizing its all-star team of lobbyists to gain an edge.

Amazon has been part of the government's purse strings for quite some time.

It was awarded a $600 million contract in 2013.

Secretary of Defense James Mattis spoke about the relationship with Amazon in glowing terms characterizing Amazon's performance as "impressive" in terms of securing data and functionality.

The positive Amazon feedback has given AWS a head start. It hopes to capitalize on the biggest transfer of data to the cloud in modern history.

Once completed, departments will at last be able to access files from different branches on the same platform. This process is currently done manually.

Quickening the pace of modernization is a prerogative for the new administration.

President Donald Trump signed an executive order to spur on the process of getting rid of the decaying system.

Son-in-law Jared Kushner has also been an advocate of the agonizing overhaul.

This bold initiative ties in well with enhancing cybersecurity inside Washington at a time when hackers have penetrated legacy systems with ease.

Getting the White House up and running will improve the operation of the government. From an investor's point of view, it will add materially to the bottom line of companies that start to win more contracts.

This underscores the reliance of our government and economy on the large cap tech companies that are single-handedly propping up the current bull market.

The White House will wake up one day and understand that technology innovation is more powerful than ever, and even the mayhem inside the White House can't stop the digitization of politics.

Going forward Amazon and Microsoft should get a healthy boost to their overflowing coffers. Legacy companies such as IBM and Oracle could be punished by the government as well as investors for being legacy companies, which could lead the government to pass over IBM and Oracle.

Yes Mr. President ... An Upgrade Is Needed

_________________________________________________________________________________________________

Quote of the Day

"What would I do? I'd shut it down and give the money back to the shareholders." - said Michael Dell in 1997, the founder of Dell Technologies, when asked what he would do if he was in charge of Apple.

May 11, 2018

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May 11, 2018
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May 9 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers' Q&A for the Mad Hedge Fund Trader May 9 Global Strategy Webinar with my guest co-host Bill Davis of the Mad Day Trader.

As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!

Q: Would you still short Facebook (FB)?

A: Right now, no. I thought the dynamics changed off the last earnings report, so the answer is no. We have made a ton of money trading Facebook this year, and all of it has been from the long side.

Q: How will the election affect the market?

A: It will go down into the election, but you'll then get a strong rally as the uncertainty fades away. It really makes no difference who wins. It is the elimination of uncertainty that is the big issue.

Q: Do you have a price to buy Micron Technology (MU) or NVIDIA (NVDA), or do you want to wait for a crash day?

A: I want to wait for a crash day, because even though these are great companies, on the down days, they fall twice as fast as any other stock. Your entry point is very important in that situation.

Q: Do you see opportunities to sell short the U.S. Treasury bond market (TLT) again?

A: Yes. But wait for the four-point rally not the two-point rally.

Q: Rising interest rates should benefit banks - why are they such horrible performers?

A: The double in bank stocks in 2017 fully discounted this year's interest rate move. For banks to really perform interest rates have to move higher still, which they will eventually.

Q: When will the yield curve invert and what will be the implications?

A: You can take the Fed's current rate of interest rate rises (which is 25 basis points every three months) and essentially calculate that the yield curve inverts at the end of 2018 or the beginning of 2019. Recessions and bear markets always follow six months after that inversion takes place. That's when interest rates start to rise very sharply as bond investors panic and unwind all their leveraged long positions.

Q: Why are you not involved with Amazon (AMZN) and Google (GOOGL)?

A: I've already taken big profits in both of these and I'm just waiting for another serious dip before I get back in again.

Q: What happens to stock buybacks?

A: While other investors are pulling out of the market, stock buybacks are doubling. But, that is only happening, essentially, in the tech stocks - they're the buyback kings. If you don't have a serious buyback program this year, your stock is falling. Companies are the sole net buyers of the market this year, and they are only buying their own stocks.

Q: What do you see the upper and lower end of the S&P 500 (SPY) range to November?

A: I think we've already got it: 2,550 on the low side, 2,800 on the high side - that a 10% range and you can expect it to get narrower and narrower going into November. After that, we get an upside breakout to new all-time highs.

Q: When will rates be negative next?

A: In the next recession, the bottom of which will be in 2 to 2.5 years; that's when interest rates in the U.S. could go negative, as they did in Japan and Europe for several years.

Q: What is your No. 1 pick in the market today?

A: We love Microsoft (MSFT) long term. However, right now the background macro picture is more important than stock selection than any single name, so we're keeping a position in Microsoft in the Mad Hedge Technology Letter, but not in Global Trading Dispatch. We're sort of hanging back, waiting for another sell-off before we touch anything on the long side in GTD. Remember, the money is made on a buy in the new position, not on the sell going out.

Q: Was the semiconductor chip sell-off overdone?

A: Absolutely - the negative report was put out by a new analyst to the industry who doesn't know what he's talking about. If you ask all the end users of the chips, all they talk about is A.I., and that means exponential growth of chip demand.

Q: Is it a good time to buy airline stocks (DAL)?

A: No, until we get a definitive peak in oil, and a speed up again in the economy, you don't want to touch economically sensitive sectors like the airlines.

May 9, 2018

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May 9, 2018
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Here's the Top Stock in the Market to Buy Today

Tech Letter

When the CEO of Microsoft, Satya Nadella, sits down for a candid interview, I move mountains then cross heaven and hell to listen to him, and you should, too.

Microsoft is at the top of my list as a conviction buy.

Nadella is one of the great CEOs of our time and was able to complete Microsoft's makeover after Steve Ballmer's insipid tenure at the helm.

Microsoft's Build conference is the perfect platform for Nadella to share his wisdom about the company, industry, and changes going forward.

In an age where tech CEOs thrive off of smoke and mirrors, Nadella was succinct conveying the concept of trust as the secret sauce that will help tech's digital footprint expand into new territories.

Trust infused products through the cloud and A.I. will be the perfect archetype of future tech that will encourage accelerated adoption rates.

A.I. was the message of the day at the Build conference. Nadella used the term A.I. 14 times and the word cloud four times when interviewed.

It was fitting that Microsoft wowed the audience with a sparkly, new-fangled demo.

The demo put on by Microsoft in conjunction with Amazon's (AMZN) Alexa showed smart-assistants working in collaboration.

Microsoft showed how it is possible to use a PC Windows desktop to order an Uber car through Amazon's Alexa.

This technology is very powerful and is a work-around for the "walled garden" problem where big companies are closing off their systems only to proprietary software and products limiting upside potential.

The ability to collaborate with multiple A.I. smart systems will generate a whole new layer of business catering toward the communication and business developments among A.I. systems.

Nadella also offered extended examples of A.I. applications, for instance, the capability of detecting cracks in an oil pipeline and running recognition software through a drone using a Qualcomm (QCOM) manufactured camera to monitor the state of containers.

Trusting A.I. will expedite the usage of A.I. business applications, and the companies diverting capital into A.I. enhancement will reap from what they sow.

The knock-on effect is that university A.I. staff members are being poached faster than a breakfast egg. There is a bidding war going on as we speak from both sides of the Pacific.

Facebook is opening new A.I. research centers in Seattle and Pittsburgh.

Previously, A.I. was a buzzword and companies would trot out a visually stimulating display with pizzazz. But that is all changing with A.I. swiftly moving into the backbone of all business operations.

Ottomatika, a company that develops software for autonomous cars acquired by Aptiv (APTV), was entirely a Carnegie Mellon University (CMU) in-house project that was picked up by Aptiv for commercial applications.

In one fell swoop, (CMU) lost a whole team of leading A.I. researchers.

Microsoft is a premium stock because it straddles both sides of the fence.

On one side, it's an uber growth company with Microsoft Azure growing 93% YOY satisfying investors requirement for insatiable growth.

On the other hand, Microsoft is robustly lucrative profiting $21.20 billion in 2017, and would be a Warren Buffett-type of cash flow reliant stock even though he has smothered any inkling of buying Microsoft shares because of his close relationship with co-founder Bill Gates.

Even Microsoft's legacy product Microsoft Office 365 is a gangbuster segment swelling 42% YOY.

This contrasts with other legacy companies that are attempting to wean themselves from their own outdated products.

Office 365 products are still embedded in daily life, and I am using it now to type this story.

On the technical side of it, Microsoft is beefing up its developer tools.

Microsoft will integrate Kubernetes, an open-source system for automating deployment, into the Azure as well as upping its Azure Bot Service adding 100 new features.

There are more than 300,000 developers who operate the Azure Bot Service alone.

The slew of upgrades for developers will enhance the power of Microsoft's software and ecosystem.

The overarching theme to the Build conference is the integration of A.I. into real life business applications and the importance of the cloud.

Now the Cloud.

Nadella reaffirmed Microsoft's position in the cloud wars characterizing the current environment as a duo of Amazon and Microsoft with Google trailing behind.

Microsoft has the potential to nick Amazon's position as the industry's cloud leader because of the unique set of products it can combine with the cloud.

Most of the world utilizes a mix of PC-based hardware, using Microsoft's software and operating system, supplemented by an Android-based smartphone.

As expected, Microsoft, Alphabet (GOOGL), and Amazon are spending a pretty penny advancing their cloud business.

Microsoft spends more than $1 billion per month on Azure cloud data centers.

This number now surpasses the entire annual Microsoft R&D budget.

In the interview, Nadella cited that Microsoft now has 50 domestic data centers.

Amazon habitually holds between 50,000 to 80,000 servers at each data center. Extrapolate the lower range of the number with 50 data centers and Microsoft could have at least 2.5 million servers working for its data needs.

The barriers of entry have never been higher in the cloud industry because the costs are spiraling out of control.

Few people have billions upon billions to make this business work at the appropriate scale.

Tom Keane, head of Global Infrastructure at Microsoft Azure, recently said that Azure meets 58 compliance requirements set forth by the federal government, industry, and local players.

Azure is the first cloud that satisfies the Defense Federal Acquisition Regulation Supplement criteria for contractors to handle Department of Defense work.

Regulation has emerged as one of the controversial issues of 2018, and this did not get lost in the shuffle.

The trust comment was clearly a thinly veiled swipe against Facebook's (FB) much frowned upon business model, making it commonplace these days for prominent CEOs to distance themselves from Mark Zuckerberg's creation.

Protecting a company's image and reputation is paramount in the new rigid era of big data.

Nadella's anti-Facebook rhetoric continued by noting the auction-based pricing standards are "funky," explaining the model is counterintuitive. His reason was that as demand increases, the price should drop and not rise.

Apple (AAPL) CEO Tim Cook has largely been negative about Facebook's tactics. The fury is justified when you consider Apple and Microsoft hustle industriously to develop software and hardware products while Facebook manipulates user data to profit from collected data. A nice shortcut if there ever was one.

It's clear that Apple and Microsoft have no interest in giving third parties access to personal data because the leadership understands it is a slippery slope to go down and unsustainable.

Nadella's emphasis on tech ethics is a breath of fresh air and the data Microsoft accumulates is used to improve the cloud and software products rather than pedal to mercenaries.

The companies that have staying power create proprietary products that cannot be replicated.

Microsoft's assortment of software products acts as the perfect gateway into the cloud and is a moat widening tool.

A.I. and the cloud are all you need to know, and Microsoft is at the heart of this revolutionary movement.

Any weakness of Microsoft's shares into the low-90s is a screaming buy.

_________________________________________________________________________________________________

Quote of the Day

"Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It's not about money. It's about the people you have, how you're led, and how much you get it." - said Apple cofounder Steve Jobs.

May 4, 2018

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May 4, 2018
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May 3, 2018

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April 26, 2018

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April 26, 2018
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The Small AI Play You've Never Heard of

Tech Letter

The cloud segment of technology is hotter than hot, and as this sector starts to trade at a big premium, investors will have to look further down the chain of command to find a reasonable deal.

An up-and-coming cloud service Box (BOX) has gone undiscovered and is in position to seize a larger share of the cloud market moving forward.

The firm is led by CEO Aaron Levie who dropped out of my old alma mater USC in 2005 to start a cloud company with acting CFO and childhood friend Dylan Smith.

Last quarter was record-setting for Box, and it had a number of significant six- and seven-digit deals. Keep in mind Box's revenues are paltry compared to the behemoths that run this industry.

The platform has seen gradual success from all corners of the business world with various businesses from insurance claims processors to wealth advisors who use Box as a back-end platform.

Health care is another industry deploying the Box platform to aid and develop cloud services for patients.

In a general sense, the beauty of the cloud is the propensity to adapt to any company that is willing to go digital.

Even though many legacy companies are not natively digital, the cloud can twist and contort to fit the customers' needs.

Levie raised some compelling arguments for the continued tech momentum stating that imminent regulation in Europe through General Data Protection Regulation (GDPR) will act as a "broader tailwind in compliance and security efforts."

Box also announced a "readiness (GDPR) package" revealing that tech companies have been planning for the regulation overhaul up to 18 months in advance.

Even though mass media sensationalism would lead investors to believe the threat of regulation is about to blindside this whole sector, the unrest has been bubbling up for quite some time allowing tech companies ample time to get their houses in order.

Box actually sees the genesis of GDPR as a critical part of the cloud adoption process.

As dinosaur systems become outdated, a sense of safety reinforced by strong cybersecurity protection, strong privacy rules, and content compliance will nudge companies to head for the cloud like a drunk sailor to a pub.

Legacy platforms are the most susceptible to cyber-criminals and rogue hackers.

The analog defense is no match for sophisticated cyber-espionage, and GDPR will be another "driving force" behind the macro-migration shift to the cloud, just based on the security aspect alone.

Another pearl of wisdom offered by Box is that the bulk of clients requiring cloud products are integrating Microsoft Office 365.

This software acts as a lynchpin to any cloud service.

I must confess that I am writing this story on Microsoft Office 365 now, and most businesses cannot function without the dizzying array of Excel, PowerPoint, and Word.

Box has a strong relationship with Microsoft and has incisive insight into the synergies the cloud industry spins off.

The integration of Office 365 has complemented the Azure cloud with tighter cohesiveness.

The school of thought is the collective cloud industry is a $50 billion per year market and growing, offering smaller firms healthy growth levers to advance at the same time that the Microsofts (MSFT) and Amazons (AMZN) overperform.

At the Sohn Investment Conference in New York, Chamath Palihapitiya, a venture capitalist and former Facebook executive, extolled Box as a great way to play Artificial Intelligence (AI).

The shares spiked almost 13% upon his adulation.

A recent completed survey showed 66% of business leaders feel the pace of digitization must pick up in their own offices.

The speed of innovation is something that keeps most CEOs up at night. Wake up tomorrow and it is possible their core products could be outdated or disrupted by a new Amazon threat.

That is the world we live in now.

Only 42% of CIOs admitted they have a digital strategy. And of those digital strategies, they are mostly digital second or third, not digital first, blueprints.

In the same PricewaterhouseCoopers (PwC) survey, companies conceded that only 40% of IT teams are able to pursue the newest innovations with adopting specific operational needs in mind.

The micro-environment harbors the same bullishness as the macro-factors.

Box is hitting all the right notes.

Revenue is advancing at a 24% per year clip, and annual revenue surpassed the half a billion mark.

Box has indicated it expects to cross the $1 billion annual revenue threshold sometime in mid- to late 2021, giving the company more than three years to double revenue.

Recent reports support Box's growth trajectory.

About 60% of revenue derives from firms that employ more than 2,000 workers, highlighting Box's propensity to emphasize enterprise cloud development instead of small individual users.

Working with larger companies gives Box the opportunity to cross-sell more powerful add-ons, delivering a net expansion rate of 14%.

Migrating to a new cloud platform is incredibly sticky boosting retention rates. Box's churn rate is flourishing with a best of breed 4% per year. The key to expediting cloud success is quickening its pace of new product rollout.

Box attempts to give exactly what customers need with a spate of new concoctions.

Box GxP is a new product calibrated around life science companies. The Box GxP compliance is up to date with FDA regulations. And, Box has the ability to retire legacy ECM (Enterprise Content Management) systems.

This new service has experienced solid traction around the world as we head toward a world where legacy software becomes obsolete.

The second new offering is Box Skills, still in beta mode, which is a part of Box's artificial intelligence strategy.

Box is platform neutral allowing in-house architecture to support partnerships with Google, Microsoft, Amazon, and IBM to nail down third-party cloud tools that Box customers need.

Box Skills is a framework that brings the best machine learning innovation to content securely stored in Box.

This is managed through artificial intelligence, which automatically contextualizes images through detection protocols. Text recognition is automated for the benefit of the user, too.

Audio intelligence renders text transcripts and detects topics that can be searched in Box to locate an audio file by words or topic.

Video intelligence offers transcription, topic detection, and facial recognition allowing users to jump around video files in a non-linear fashion.

Palihapitiya effectively gave Box a free commercial to the tech investing world. His bull thesis for Box squarely centers around its AI innovations, specifically Box Skills.

The last new service to market is Box Transform, which is the advanced consulting arm of Box.

The goal of Transform is to arrange a concierge-like Box advisor that can help companies accelerate digital transformation throughout an organization while unlocking efficiencies and productivity for employees.

This service originated from Box's consulting advanced professional services team and will give Box another growth lever. Companies such as Red Hat and Intel have made the consultant- and support-side of the business a robust part of their organizations.

Impeding growth is the cutthroat competition in this space with Amazon, Microsoft, and Google (GOOGL).

However, margins remain strong at 75.5% last quarter, and Box expects margins to slightly dip around 74% this year.

Box has found a warm welcome for its newer products, deriving almost 70% of its new deals from fresh cloud offerings.

Partners are also a big source of new deals comprising more than half the deals over $100,000.

Specifically, IBM (IBM) made up a swath of its larger deals. In a sense, competitors are not really competitors.

They are frenemies. They compete against each other yet innovate and do deals together.

The core growth is supplemented by existing customers that are the best source of extra marginal revenue.

In short, once firms are firmly lodged on a platform, they buy everything on that platform.

Enter a supermarket, and odds are if goods are purchased, the receipt will be from the entered supermarket.

Box is entirely leveraged toward mid-sized and large enterprise business. That is where it makes its money.

The emphasis on large players boosts the ACV (Average Contract Value), which is regarded as a sacrosanct metric for Box.

The amount of data created in 2017 was more data created in the past 5,000 years. In the next five years, data volume with grow by 800%.

Box has continually positioned itself as the firm that can extract a staggering amount of unrealized value locked away in the nooks and crannies of legacy models.

Box is a great long-term hold as these diminutive cloud assets become more valuable by the day.

_________________________________________________________________________________________________

Quote of the Day

"Television won't be able to hold onto any market it captures after the first six months. People will soon get tired of staring at a plywood box every night." - said Darryl F. Zanuck, co-founder of Twentieth Century-Fox Film Corp.

April 25, 2018

Tech Letter

Mad Hedge Technology Letter
April 25, 2018
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