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The Death of Hardware

Apple’s Chief Design Officer Jony Ive, the British industrial designer who made Apple (AAPL) products beautiful, is on his way out.

What else could the man do?

Jonathan Paul Ive was born in Chingford, London in 2967 to a silversmith who lectured at Middlesex Polytechnic.

He pursed automotive design at Newcastle Polytechnic, now named University of Northumbria at Newcastle, and graduated with a BA in industrial design in 1989.

His student successes harvested him the RSA Student Design Award which gifted him a stipend for an exploratory trip to the United States.

Palo Alto, California was his ultimate destination where he befriended various design experts including Robert Brunner—a designer who ran a small consultancy firm that would later join Apple Computers.

Ive signed onto product design agency Roberts Weaver Group following his studies demonstrating his typical attention to detail that he became renowned for.

London startup design agency called Tangerine came calling and Ive used his talents to design microwave ovens, toilets, drills and toothbrushes.

Ive slammed into confict with management at Tangerine who believed his ideas were too modern and exorbitant.

Apple later decided to partner with Tangerine on the basis of some of Ive’s former Silicon Valley friends like Robert Brunner delivering Ive to the forefront of Apple design products where he started hatching his plan to be the ultimate designer at Apple.

The rest is history as Ive went on to produce memorable consumer product designs such as the iMac, iPod, iPhone, and iPad.

His last burst of creativity was applied to produce the Apple Watch which was an overwhelming success.

He will now take his show independent but still collaborate with Apple as his main client.

The new design firm will be called LoveFrom.

This announcement isn’t a shocker and certainly, he really had one foot out of the door ever since the passing of Former Co-Founder Steve Jobs in 2011 put him on less solid footing.

If you remember, Apple had a secret corridor constructed between Jobs’ and Ive’s office epitomizing how closely they collaborated on product development as well as how good of friends they were.

Current CEO of Apple Tim Cook is the exact opposite of what Steve Jobs represented and part of the reason why Apple has lacked that game-changing new product resulting in a reduced share price.

Steve Jobs was a visionary and the person to transform his ideas into physical form was Jony Ive.

You could argue that part of Jony Ive succumbed with Steve Jobs as well as his parabolic career trajectory.

That’s what all those lines of people camping overnight in front of Apple stores was about.

The cult of Apple was at its peak around 2012 where Apple sold the most iPhones and was miles ahead of competition.

Fast forward 7 years and Tim Cook has allowed the relative competition to catch up and even overtake Apple in numerous metrics.

I would argue that Tim Cook was a dependent stop gap to Steve Jobs but the lack of vision in a position where visionaries are rewarded has been Apple’s Achilles heel.

Surely, Apple could have hired an Elon Musk after Tim Cook steadied the rutter.

The results have been monetary success, milking the famed iPhone business for what it’s worth plus more, but missing the boat on premium content.

They could have bought Netflix (NFLX) while it was less potent with the glut of cash in reserve, or they could have penetrated the enterprise business with acquiring Salesforce (CRM) at an earlier stage.

And during this period, Chinese phone makers caught up big time with Huawei now offering a better and cheaper iPhone alternative.

What Jony Ive was leaving the headquarters of Apple represents is the death of hardware.

Out with the old and in the new, and the new is software and the direction Apple is doubling down on.

Apple’s services of iTunes, the App Store, the Mac App Store, Apple Music, Apple Pay, and AppleCare, has become Apple’s “new” business.

Apple’s services segment did sales of $11.5 billion in revenue, up from the $9.9 billion services earned in the second quarter of 2018.

A new all-time record was set for services revenue this quarter.

Apple Pay is available in 30 markets and expect to go live in 40 markets by the end of 2019.

Apple now boasts 390 million paid subscriptions across all of its services, an increase of 30 million sequentially and by 2020, Apple will pass half a million paid subscriptions.

Apple hopes to penetrate further into the magazine business with Apple News+, a $9.99 per month service that offers unlimited access to more than 200 magazines.

Apple plans to surpass $14 billion in services revenue per quarter by 2020.

This is what Apple is doing now and the sad fact is that Ive and his special skills do not fit seamlessly into the main growth drivers of the company anymore.

Software engineers are being cherrypicked left, right, and center as Apple avoids making any big capital investments aside from leasing new buildings to install an army of fresh programmers.

Apple reported $11.45 billion in services revenue topped analysts’ expectations of $11.37 billion.

Apple also reported services margins of 63.8% for the quarter.

Services now accounts for about 20% of Apple’s revenue, up from 16% a year earlier and 13% in the first quarter.

I will give Tim Cook credit for recovering from the 20% drop in Apple’s shares, better late than never.

Now Apple is in the process of shifting up to 30% of their supply chain from China to South East Asia to de-risk from the Middle Kingdom.

 

June 11, 2019

Mad Hedge Technology Letter
June 11, 2019
Fiat Lux

Featured Trade:

(BIG TECH’S FEEDING FRENZY)
(CRM), (DATA), (GOOGL), (NFLX)

Big Tech’s Feeding Frenzy

The start of the cloud consolidation is upon us.

The cloud kings, in order to stay ahead of the competition, are resorting to acquiring growth through M&A.

We are still in the sweet part of the growth phase with companies showing they can pull off a mid-20% annual growth rate.

Salesforce (CRM), the leader in client relationships management platforms, took this cue to add to its army of software cloud options by snapping up Tableau (DATA).

What does Tableau do?

Tableau software takes the inputs of raw data and transforms it into easily decipherable dashboards and diagrams.

The company has been expanding its product line to include data cleanup and machine learning tools, enabling it to compete in the wider data-warehousing business.

It has more than 86,000 customers, including Verizon Communications Inc. and Netflix (NFLX).

Let me remind you why big data companies are the golden goose of the technology industry and why they are intrinsic to the fortunes of tech companies.

The idea of big data has been around for years; most organizations now are acutely aware that if they capture all the data that flows into their businesses, they can apply data analytics and generate value creation by making the best strategic decisions suggested from the underlying data.

If upper management hasn’t figured this out yet, they are probably out of business by now.

Let’s roll back to the 1950s, decades before anyone coined the term “big data,” businesses were using rudimentary analytics, basically numbers in a spreadsheet that were manually registered, to unearth paradigm shifts and market opportunities in their industry.

The smorgasbord of goodies that big data analytics offer the world is legendary.

Speed and efficiency are at the top of the list.

Whereas a few years ago, collecting vital information that could be used for future decisions took pace much slower than today.

Identifying insights for immediate actionable business implementation is happening in real time now.

This new mode of execution and organization offers firms an outsized competitive edge they could only dream of.

Harnessing data and utilizing it in the best way in order to monetize its business model is now the norm.

The end result is repeatedly higher trending profits and better customer experience.

Companies and its expenses were also reaping the rewards of this new model with major cost reduction.

Big data technologies can expect significant cost advantages when it comes to storing large amounts of data – plus they can identify more efficient ways of doing business.

Companies now have the pulse of the market and demonstrate the ability to gauge customer needs and satisfaction allowing the company to identify new markets.

This, in turn, has firms often migrating into completely different parts of the economy.

Salesforce’s deal with Tableau isn’t the first and won’t be the last cloud deal.

This is just the beginning.

The decision comes after Google (GOOGL) agreed to buy Looker Data Sciences Inc. for $2.6 billion last week, a move to expand Google’s offerings for managing data in the cloud.

I envision Google wading further into the enterprise software waters as they attempt to relieve their reliance on Search as the primary money maker.

Acquiring the best software then spreading its application through its other assets would be a great initiative too.

For example, creating an enterprise service for YouTube channels and charging YouTube creators a fee to operate a cloud-based product that specializes in optimizing their YouTube channel would be a compelling idea.

There are a million different machinations that Google could elect for, and letting the genie out of the bottle in a good way will do wonders.

After all, global spending on technologies and services that enable digital transformation will surpass $2 trillion in 2022 serving up a long and wide runway for companies that can hunker down and carve out premium enterprise software on the cloud.

As for Salesforce, the stock sold off on anxiety that Salesforce is overreaching to add growth.

There is definitely some truth behind this weakness.

Could this be the end for Salesforce’s growth supercycle?

Salesforce is a pure software growth strategy and the stock has gone nowhere trading sideways for the past 6 months.

Make no bones about it, Salesforce absolutely overpaid for Tableau and even announced that its second headquarter will be stationed in Seattle, a stone’s throw from the headquarter of Tableau.

Founder and Co-CEO of Salesforce Marc Benioff is betting the ranch on data analytics and hopes the subsequent synergies will result in cost savings, better cloud products, a resurgence in revenue growth while wielding a first-rate army of software engineers.

As for now, even the tech market is single-handedly propped up by the Fed who have signaled even more dovish monetary policy.

Wait to read the tea leaves on whether these new additions to Salesforce will meaningfully result in growth or not.

For the time being, Salesforce and tech remain in a precarious position whipsawing because of Trump’s high-risk geopolitical strategy and the Fed attempting to cushion any economic blows from an administration hellbent on tariffs.

 

May 7, 2019

Mad Hedge Technology Letter
May 7, 2019
Fiat Lux

Featured Trade:

(THE LURKING DANGERS BEHIND FACEBOOK)
(FB), (WFC), (NFLX)

The Lurking Dangers Behind Facebook

The current business model of social media is dead, and the future model seems in doubt – that was the take away from world’s largest social media platform at F8 that I attended, its annual developer conference.

Co-founder and CEO Facebook (FB) Mark Zuckerberg stated at the event that “in our digital lives, we also need both public and private spaces,” an impromptu call to action to migrate users into a new private digital world with Facebook dictating the terms.

The sushi must really be hitting the fan for Zuckerberg to announce his future vision of social media, and the writing is on the wall for his current social media experiment, that is, if he continues along at the same rate.

The projected $5 billion fine incurred by Facebook from the Federal Trade Commission over its privacy handling of personal data is peanuts for the social media company, but this could be the first of numerous fines doled out by regional and national regulatory bureaus that span from the Bay Area to Vietnam.

Facebook is a company that made over $55 billion in revenue last year and the $5 billion would amount to less than 10% of annual sales.

From that $55 billion, Facebook earned profits of over $22 billion, and this $22 billion is what the regulatory battles are about, along with the co-founder’s tenacious defense of deploying his users as free content.

The firm has continued to post operating margins of over 40% and delivered margins of 46% last quarter, a sequential rise of 4% in Q4 2018.

The Oracle of Omaha better known as Warren Buffet cited necessitating accountability for CEOs that drive a company into a government bailout especially banks.

He advocated that these executives and their spouses should be stripped of their net worth if they damage shareholder value.

The comments were directed at the way Wells Fargo’s (WFC) former CEO Tim Sloan crippled Wells Fargo and has since been sidelined during the long bull market in equities.

At some point, Zuckerberg could confront similar ructions because of his efforts at perverting democracy that has caused innumerable damage to American democracy and global society, and I am certain his legion of lawyers are already hatching a plan to tackle this thorny predicament.

If you ponder about his announcement in a zero-sum environment, it makes no sense for Facebook to pivot to “private” messages.

This leads me to believe his words are smoke and mirrors so that Facebook can perpetuate its duopoly and force digital ad players to continue to drink from the same Kool-Aid.

As before, Zuckerberg still believes this game of cat and mouse is a half-baked marketing fix.

This is why many of his trusted disciples such as former executive Chris Cox left under a shroud of mystery citing “artistic differences” in terminating his tenure at Facebook.

It is clear to many that Facebook is barreling straight into an even more frightening future.

What does the announcement mean from a business perspective?

Zuckerberg will continue to purge anyone that disagrees with him, even trusted lieutenants, and continue to integrate the family of apps into one big platform that includes Facebook, Instagram, and WhatsApp messenger.

These three will become one and thus, Zuckerberg’s ad machine rolls on like the dystopian action film Mad Max.

Let me remind you, these drastic measures boil down to Facebook doing everything they can to keep content costs down.

If they, for example, have to go the same route as Netflix (NFLX) – overpaying for the best actors and directors to generate premium content, the stock would halve the next day.

And that is what Zuckerberg is desperately hoping to avoid after the 30% dip in shares in 2018 because of regulatory headwinds.

Combining the three apps would be impossible to regulate at a time that regulation is rearing its ugly head.

Zuckerberg is intentionally upping the ante and accruing more risk in the hope that Facebook can outmuscle its way through in one piece.

The ad industry is crying out for something new, but as long as Zuckerberg’s claws are firmly into the meat of the digital ad budgets for most companies, he gets to decide how the industry develops because he knows the ad dollars will stick.

In the future, your private chats won’t be private because Zuckerberg will be mining the data for ad dollar revenue.

No matter what he says, nothing will change unless Facebook goes in an entirely new direction which would inhibit sales.

Until the fines become material, let’s say 70% of annual revenue or something of that nature, a $5 billion hit to the bottom line will not persuade the management to transform their practices.

Expect less privacy, and WhatsApp and Instagram to be heavily monetized through ad promotion and data mining even though Zuckerberg pledging his company won’t hold user data “longer than necessary.”

As for Facebook itself, Zuckerberg can’t throw his baby out with the bathwater and will hope to minimize its deceleration by bundling it with the growth trajectory of WhatsApp and Instagram.

Instead of major structural changes, Zuckerberg continues to beat around the bush saying, “You should expect that we’re not going to store your data in countries where there’s weak data protection.”

This is not the crux of the problem and shows Zuckerberg is still paying lip service and not ponying up to reality.

Attaching Facebook and its dying model is not an attractive strategy leading to a slew of executive resignations.

I believe this could all end in calamity for Zuckerberg as he figures piling on more risk onto the elevated risk levels is the right decision making Warren Buffet’s point for him about CEO’s accountability.

Should Zuckerberg refund shareholders if his flight turns into a suicide mission then claims to be an unwitting victim?

And how does he even refund democracy with his apps causing major unrest to society such as killings that occur because of the distribution of fake news on his platforms?

Making a hot potato hotter might work for the short term and if ad dollars stream into WhatsApp and Instagram, Zuckerberg will claim victory.

But at some point, the potato will scald his hands so bad that it will drop.

Your private chats will be the content at the fulcrum of his data broker empire since his “digital town square” approach isn’t working anymore.

The company is utterly incentivized to figure out how to continue this ad revenue carnival because 93% of total revenue last quarter came from digital ads which is up from the prior year when it constituted 89%.

It all sounds like a big brother apocalyptical novel, which we are in, scarily, in putting out this dialogue before the firestorm starts, Facebook wants to normalize, and front runs the craziness of selling your private chat data before it becomes a national issue.

Will regulators shut this down or will they be naïve and turn a blind eye?

 

 

April 23, 2019

Global Market Comments
April 23, 2019
Fiat Lux

Featured Trade:
(LAS VEGAS MAY 9 GLOBAL STRAGEGY LUNCHEON)
(APRIL 17 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXI), (RWM), (IWM), (VXXB), (VIX), (QCOM), (AAPL), (GM), (TSLA), (FCX), (COPX), (GLD), (NFLX), (AMZN), (DIS)

April 17 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 17 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What will the market do after the Muller report is out?

A: Absolutely nothing—this has been a total nonmarket event from the very beginning. Even if Trump gets impeached, Pence will continue with the same kinds of policies.

Q: If we are so close to the peak, when do we go short?

A: It’s simple: markets can remain irrational longer than you can remain liquid. Those shorts are expensive. As long as global excess liquidity continues pouring into the U.S., you’ll not want to short anything. I think what we’ll see is a market that slowly grinds upward until it’s extremely overbought.

Q: China (FXI) is showing some economic strength. Will this last?

A: Probably, yes. China was first to stimulate their economy and to stimulate it the most. The delayed effect is kicking in now. If we do get a resolution of the trade war, you want to buy China, not the U.S.

Q: Are commodities expected to be strong?

A: Yes, China stimulating their economy and they are the world’s largest consumer commodities.

Q: When is the ProShares Short Russell 2000 ETF (RWM) actionable?

A: Probably very soon. You really do see the double top forming in the Russell 2000 (IWM), and if we don’t get any movement in the next day or two, it will also start to roll over. The Russell 2000 is the canary in the coal mine for the main market. Even if the main market continues to grind up on small volume the (IWM) will go nowhere.

Q: Why do you recommend buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXXB) instead of the Volatility Index (VIX)?

A: The VIX doesn’t have an actual ETF behind it, so you have to buy either options on the futures or a derivative ETF. The (VXXB), which has recently been renamed, is an actual ETF which does have a huge amount of time decay built into it, so it’s easier for people to trade. You don’t need an option for futures qualification on your brokerage account to buy the (VXXB) which most people don’t have—it’s just a straight ETF.

Q: So much of the market cap is based on revenues outside the U.S., or GDP making things look more expensive than they actually are. What are your thoughts on this?

A: That is true; the U.S. GDP is somewhat out of date and we as stock traders don’t buy the GDP, we buy individual stocks. Mad Hedge Fund Trader in particular only focuses on the 5% or so—stocks that are absolutely leading the market—and the rest of the 95% is absolutely irrelevant. That 95% is what makes up most of the GDP. A lot of people have actually been caught in the GDP trap this year, expecting a terrible GDP number in Q1 and staying out of the market because of that when, in fact, their individual stocks have been going up 50%. So, that’s something to be careful of.

Q: Is it time to jump into Qualcomm (QCOM)?

A: Probably, yes, on the dip. It’s already had a nice 46% pop so it’s a little late now. The battle with Apple (AAPL) was overhanging that stock for years.

Q: Will Trump next slap tariffs on German autos and what will that do to American shares? Should I buy General Motors (GM)?

A: Absolutely not; if we do slap tariffs on German autos, Europe will retaliate against every U.S. carmaker and that would be disastrous for us. We already know that trade wars are bad news for stocks. Industry-specific trade wars are pure poison. So, you don’t want to buy the U.S. car industry on a European trade war. In fact, you don’t want to buy anything. The European trade war might be the cause of the summer correction. Destroying the economies of your largest customers is always bad for business.

Q: How much debt can the global economy keep taking on before a crash?

A: Apparently, it’s a lot more with interest rates at these ridiculously low levels. We’re in uncharted territory now. We really don’t know how much more it can take, but we know it’s more because interest rates are so low. With every new borrowing, the global economy is making itself increasingly sensitive to any interest rate increases. This is a policy you should enact only at bear market bottoms, not bull market tops. It is borrowing economic growth from futures year which we may not have.

Q: Is the worst over for Tesla (TSLA) or do you think car sales will get worse?

A: I think car sales will get better, but it may take several months to see the actual production numbers. In the meantime, the burden of proof is on Tesla. Any other surprises on that stock could see us break to a new 2 year low—that’s why I don’t want to touch it. They’ve lately been adopting policies that one normally associates with imminent recessions, like closing most of their store and getting rid of customer support staff.

Q: Is 2019 a “sell in May and go away” type year?

A: It’s really looking like a great “Sell in May” is setting up. What’s helping is that we’ve gone up in a straight line practically every day this year. Also, in the first 4 months of the year, your allocations for equities are done. We have about 6 months of dead territory to cover from May onward— narrow trading ranges or severe drops. That, by the way, is also the perfect environment for deep-in-the-money put spreads, which we plan to be setting up soon.

Q: Is it time to buy Freeport McMoRan (FCX) in to play both oil and copper?

A: Yes. They’re both being driven by the same thing: China demand. China is the world’s largest new buyer of both of these resources. But you’re late in the cycle, so use dips and choose your entry points cautiously. (FCX) is not an oil play. It is only a copper (COPX) and gold (GLD) play.

Q: Are you still against Bitcoin?

A: There are simply too many better trading and investment options to focus on than Bitcoin. Bitcoin is like buying a lottery ticket—you’re 10 times more likely to get struck by lightning than you are to win.

Q: Are there any LEAPS put to buy right now?

A: You never buy a Long-Term Equity Appreciation Securities (LEAPS) at market tops. You only buy these long-term bull option plays at really severe market selloffs like we had in November/December. Otherwise, you’ll get your head handed to you.

Q: What is your outlook on U.S. dollar and gold?

A: U.S. dollar should be decreasing on its lower interest rates but everyone else is lowering their rates faster than us, so that’s why it’s staying high. Eventually, I expect it to go down but not yet. Gold will be weak as long as we’re on a global “RISK ON” environment, which could last another month.

Q: Is Netflix (NFLX) a buy here, after the earnings report?

A: Yes, but don’t buy on the pop, buy on the dip. They have a huge head start over rivals Amazon (AMZN) and Walt Disney (DIS) and the overall market is growing fast enough to accommodate everyone.

Q: Will wages keep going up in 2019?

A: Yes, but technology is destroying jobs faster than inflation can raise wages so they won’t increase much—pennies rather than dollars.

Q: How about buying a big pullback?

A: If we get one, it would be in the spring or summer. I would buy a big pullback as long as the U.S. is hyper-stimulating its economy and flooding the world with excess liquidity. You wouldn’t want to bet against that. We may not see the beginning of the true bear market for another year. Any pullbacks before that will just be corrections in a broader bull market.

Good Luck and Good Trading
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader

 

 

 

 

April 18, 2019

Mad Hedge Technology Letter
April 18, 2019
Fiat Lux

Featured Trade:

(NETFLIX’S WORST NIGHTMARE)
(NFLX), (DIS), (FB), (AAPL)

Netflix’s Worst Nightmare

Netflix came out with earnings yesterday and revealed guidance that many industry analysts were dreading.

It appears that Netflix’s relative subscriber growth rate has reached the high-water mark for now.

Competition is rapidly encroaching Netflix’s moat.

In a letter to shareholders, management opined revealing that they do not “anticipate these new entrants will materially affect our growth.”

I am quite bothered by this statement because one would have to be blind, deaf, and dumb to believe that Disney (DIS) or Apple’s (AAPL) new products will not take away meaningful eyeballs from Netflix.

These companies are all competing in the same sphere – digital entertainment.

Papering over the cracks with wishy washy rhetoric was not something I was doing backflips over.

Netflix’s management knew this earnings report had nothing to do with results because everyone wanted to reassess how bad the new entrants would make life for Netflix.

Disney has the content to inflict major damage to Netflix’s business model.

The mere existence of Disney as a rival weakens Netflix’s narrative substantially in two ways.

First, Disney’s entrance into the online streaming game means Netflix will not have a chance to raise subscription prices for the short to medium term.

The last price hike was done in the nick of time and even though management mentioned it followed through “as expected,” losing this financial lever gives Netflix less ammunition going forward and caps EPS growth potential.

Second, another dispiriting factor is the premium for retaining and acquiring original content will skyrocket with more firms jockeying for the same finite amount of actors, producers, directors, and writers.

This particular premium cannot be quantified but firms might try to bid up the cost of certain talent just so the other guy has to foot a bigger bill, this is done in professional sports all the time.

Firms might even take actors off the table with exclusive contracts just to frustrate the supply of content generators.

Uncertainty perpetuates with the future cost of content unable to be baked into the casserole yet, and represents severe downside risk to a stock which trots out an expensive PE ratio of 133.

Growth, growth, and more growth – that is what Netflix has groomed investors to obsess on with the caveat of major strings attached.

This model is highly effective in a vacuum when there are no other players that can erode market share.

Delivering on growth justifies heavy cash burn, and to Netflix’s credit, they have fully delivered in spades.

The strings attached come in the form of steep losses in order to create top of the line content.

Planning to revise down annual cash flow from $3 billion to $3.5 billion in 2019 will serve as a litmus test to whether investors are ready to shoulder the extra losses in the near term.

I found it compelling that Disney Plus will debut at $6.99 per month – add that to the price of Netflix’s standard package of $12.99 and you get a shade under $20.

Disney hopes to dictate spending habits by psychologically grouping Disney and Netflix for both at under $20.

The result of breaching the $20 threshold might push customers into ditching Netflix and sticking with the $6.99 Disney subscription.

Then there is the thorny issue of Netflix’s growth – the quality and trajectory of it.

The firm issued poor guidance for next quarter projecting total paid net adds of 5.0m, representing -8% YOY with only 300,000 adds in the US and 4.7m for the international segment.

Alarm bells should be sounding in the halls when the most lucrative segment is estimated to decelerate by 8% YOY.

Domestic subscriptions deliver higher margins bumping up the average revenue per user (ARPU).

Contrast this with Netflix’s basic Indian package costing $7.27 or 500 rupees and a mobile package of $3.63 or 250 rupees.

In my opinion, domestically decelerating in the high single digits does not justify the additional annual cash burn of half a billion dollars even if you accumulate millions of more Indian adds at lower price points.

This leads me to surmise that the quality of growth is beginning to slip, and Netflix appears to be running into the same type of quagmire Facebook (FB) is facing.

These models are grappling with stagnating or slowing North American growth and an emerging market solution isn’t the panacea.

The Netflix Indian packages are actually considered expensive by local standards meaning that Netflix’s won’t be able to crowbar in price hikes like they did in America.

On the positive side, Netflix did beat Q1 estimates with paid net adds up 9.6 million with 1.74m in the US and 7.86m internationally, up 16% YOY.

Netflix was able to reach revenue of $4.5B, a company record mostly due to the $2 price hike during the quarter in America.

The letter to shareholders simplifies Netflix’s tactics to investors explaining, “For 20 years, we’ve had the same strategy: when we please our members, they watch more and we grow more.”

What this letter doesn’t tell you is that Disney and the looming battle with Netflix will reshape the online streaming landscape.

In simple economics, an increase of supply caps demand, and don’t get sidetracked by the smoke and mirrors, Disney and Netflix are absolutely fighting for the same eyeballs no matter how much Netflix plays this down.

To highlight an example of how these two are directly competing against each other – let’s take the cast of Monica, Chandler, Rachel, Ross, Joey, and Phoebe – in the hit series Friends.

Netflix acquired the broadcasting rights from Warner Bros, who owns Disney, and it was the most popular show on Netflix.

Warner Bros, knowing that Disney were on the verge of rolling out an online streaming product, renewed Netflix for 2019 at $80 million.

Not only were they hand feeding the enemy in broad daylight, but they handicapped their new products as it is about to debut.

Whoever made that decision must go into the hall of shame of boneheaded online content decisions.

Once 2020 rolls around, Disney will finally be able to slap Friends on Disney Plus where it belongs, and the streaming wars will heat up to a fever pitch.

Ultimately, when Netflix brushes off reality proclaiming that if they please viewers with the same strategy, then everything will be hunky-dory, then I would say they are being disingenuous.

The online streaming industry has started to become more complex by the minute and the “same strategy” that worked wonders in a vacuum before must evolve with the times.

At $360, I would short Netflix in the short to medium term until they prove the headwinds are a blip.

If it goes up to $400, it’s a screaming short because accelerating cash burn, poor guidance, decelerating domestic net adds, and a jolt of new competition aren’t the catalysts that will take shares above the heavenly lands of $400, let alone $450.

Netflix is still a fantastic company though – I’m an avid viewer.

 

 

 

 

 

April 3, 2019

Global Market Comments
April 3, 2019
Fiat Lux

Featured Trade:

(WHO WILL BE THE NEXT FANG?)
(FB), (AMZN), (NFLX), (GOOGL), (AAPL),
(BABA), (TSLA), (WMT), (MSFT),
(IBM), (VZ), (T), (CMCSA), (TWX)