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Who Will Be the Next FANG?

FANGS, FANGS, FANGS! Can’t live with them but can’t live without them either.

I know you’re all dying to get into the next FANG on the ground floor, for to do so means capturing a potential 100-fold return, or more.

I know because I’ve done it four times. The split adjusted average cost of my Apple shares is only 25 cents compared to today’s $174, so you can understand my keen interest. My average on Tesla is $16.50.

Uncover a new FANG and the riches will accrue rapidly. Facebook (FB), Amazon AMZN), Netflix (NFLX), and Alphabet (GOOGL) didn’t exist 25 years ago. Apple (AAPL) is relatively long in the tooth at 40 years. And now all four are in a race to become the world’s first trillion-dollar company.

One thing is certain. The path to FANGdom is shortening. It took Apple four decades to get where it is today, Facebook did it in one. As Steve Jobs used to tell me when he was running both Apple and Pixar, “These overnight successes can take a long time.”

There is also no assurance that once a FANG always a FANG. In my lifetime, I have seen far too many Dow Average components once considered unassailable crash and burn, like Eastman Kodak (KODK), General Electric (GE), General Motors (GM), Sears (SHLD), Bethlehem Steel, and IBM (IBM).

I established in an earlier piece that there are eight essential attributes of a FANG, product differentiation, visionary capital, global reach, likeability, vertical integration, artificial intelligence, accelerant, and geography.

We are really in a “What have you done for me lately” world. That goes for me too. All that said, I shall run through a short list for you of the future FANG candidates we know about today.

Alibaba (BABA)

Alibaba is an amalgamation of the Chinese equivalents of Amazon, PayPal, and Google all sewn together. It accounts for a staggering 63% of all Chinese online commerce and is still growing like crazy. Some 54% of all packages shipped in China originate from Alibaba.

The juggernaut has over half billion active users, and another half billion placing orders through mobile phones. It is a master of AI and B2B commerce. There is nothing else like it in the world.

However, it does have some obvious shortcomings. Its brand is almost unknown in the US. It has a huge problem with fakes sold through their sites.

It also has an ownership structure for foreign investors that is byzantine, to say the least. It is a contractual right to a share of profits funneled through a PO box in the Cayman Island. The SEC is interested, to say the least.

We also don’t know to what extent founder Jack Ma has sold his soul to the Beijing government. It’s probably a lot. That could be a problem if souring trade relations between the US and the Middle Kingdom get worse, a certainty with the current administration.

Tesla (TSLA)

Before you bet on a new startup breaking into the Detroit Big Three, go watch the movie “Tucker” first. Spoiler Alert: It ends in tears.

Still, Tesla (TSLA) has just passed the 270,000 mark in the number of cars manufacturered. Tucker only got to 50.

Having led my readers into the stock after the IPO at $16.50, I am already pretty happy with this company. Owning three of their cars helps too (two totaled). But Tesla still has a long way to go.

It all boils down to the success of the $35,000, 200-mile range Tesla 3 for which it already has 500,000 orders. So far so good.

It’s all about scale. If it can produce these cars in sufficient numbers, it will take over the world and easily become the next FANG. If it can’t, it won’t. It’s that simple.

To say that a lot is already built into the share price would be an understatement. Tesla now trades at ten times revenues compared to 0.5 for Ford (F) and (General Motors (GM). That’s a relative overvaluation of 20:1.

Any of a dozen competing electric car models could scale up with a discount model before they do, such as the similarly priced GM Bolt. But with a ten-year lead in the technology, I doubt it.

It isn’t just cars that will anoint Tesla with FANG sainthood. The firm already has a major presence in rooftop solar cell installation through Solar City, utility sized solar plants, industrial scale battery plants, and is just entering commercial trucks. Consider these all seeds for FANGdom.

One thing is certain. Without Tesla, there wouldn’t be s single mass-market electric car on the road today.

For that, we can already say thanks.

Uber

In the blink of an eye, ride sharing service Uber has become essential for globe-trotting travelers such as myself.

Its 2 million drivers completely disrupted the traditional taxi model for local transportation which remains unchanged since the days of horses and buggies.

That has created the first $75 billion of enterprise value. It’s what’s next that could make the company so interesting.

It is taking the lead in autonomous driving. It could also replace FeDex, UPS, DHL, and the US post office by offering same day deliveries at a fraction of the overnight cost.

It is already doing this now with Uber Foods which offers immediate delivery of takeouts (click here if you want lunch by the time you finish reading this piece.)

UberCopters anyone? Yes, it’s already being offered in France and Brazil.

Uber has the potential to be so much more if it can just outlive its initial growing pains.

It is a classic case of the founder being a terrible manager, as Travis Kalanick has lurched from one controversy to the next. The board finally decided he should spend much time on his new custom built 350-foot boat.

Its “bro” culture is notorious, even in Silicon Valley.

It is also getting enormous pushback from regulators everywhere protecting entrenched local interests. It has lost its license in London, the only place in the world that offered a decent taxi service pre-Uber. Its drivers are getting beaten up in Paris.

However, if it takes advantage of only a few of the doors open to it, status as a FANG beckons.

Walmart (WMT)

A few years ago, I was heavily criticized for pointing out that half the employees at my local Walmart (WMT) were missing their front teeth. They have since received a $2 an hour’s pay raise, but the teeth are still missing. They don’t earn enough money to get them fixed.

The company is the epitome of bricks and mortar in a digital world with 12,000 stores in 28 countries. It is the largest private employer in the US, with 1.4 million workers, mostly earning minimum wage.

The Walmart customer is the very definition of the term “late adopter.” Many are there only because unlike Amazon, Wal-Mart accepts cash and Food Stamps.

Still, if Walmart can, in any way, crack the online nut, it would be a turbocharger for growth. It moved in this direction with the acquisition of Jet.com for $3 billion, a cutting-edge e-commerce firm based in Hoboken, NJ.

However, this remains a work in progress. Online sales account for only 4% of Walmart’s total. But they could only be a few good hires at the top away from success.

Microsoft (MSFT)

Talk about going from being the 800-pound gorilla to an 80 pound one, and then back to 800 pounds.

I don’t know why Microsoft (MSFT) lost its way for 15 years, but it did. Blame Bill Gates’s retirement from active management and his replacement by his co-founder Steve Ballmer.

Since Ballmer’s departure in 2014, the performance of the share price has been meteoric, rising by some 125% over the past two years.

You can thank the new CEO Satya Nadella who brought new vitality to the job and has done a complete 180, taking Microsoft belatedly into the cloud.

Microsoft was never one to take lightly. Windows still powers 90% of the world’s PCs. No company can function without its Office suite of applications (Word, Excel, and PowerPoint). SQL Server and Visual Studio are everywhere.

That’s all great if you want to be a public utility, which Microsoft shareholders don’t.

LinkedIn, the social media platform for professionals, could be monetized to a far greater degree. However, specialization does come at the cost of scalability.

It seems that the future is for Microsoft to go head to head against next door neighbor Amazon (AMZN) for the cloud services market while simultaneously duking it out with Alphabet (GOOGL).

My bet is that all three win.

Airbnb

This is another new app that has immeasurably changed my life for the better. Instead of cramming myself into a hotel suite with a wildly overpriced minibar for $600 a night, I get a whole house for $300 anywhere in the world, with a new local best friend along with it.

Overnight, Airbnb has become the world’s largest hotel chain without actually owning a single hotel. At its latest funding round in 2017, it was valued at $31 billion.

The really tricky part here is for the firm to balance out supply and demand in every city in the world at the same time. It is also not a model that lends itself to vertical integration. But who knows? Maybe priority deals with established hotels are to come.

This is another firm that is battling local regulation, that great barrier to technological innovation. None other than its home town of San Francisco now has strict licensing requirements for renters, a 30 day annual limitation, and a $1,000 a day fine for offenders.

The downtowns of many tourist meccas like Florence, Italy and Paris, France have been completely taken over by Airbnb customers, driving rents up and locals out.

IBM (IBM)

There was a time in my life when IBM was so omnipresent we thought like the Great Pyramids of Egypt it would be there forever. How times change. Even Oracle of Omaha Warren Buffet became so discouraged that he recently dumped the last of his entire five-decade long position.

A recent 20 consecutive quarters of declining profits certainly hasn’t helped Big Blue’s case. It is one of the only big technology companies whose share price has gone virtually nowhere for the past two years.

IBM’s problem is that it stuck with hardware for too long. An entrenched bureaucracy delayed its entry into services and the cloud, the highest growth areas of technology.

Still, with some $80 billion in annual revenues, IBM is not to be dismissed. Its brand value is still immense. It still maintains a market capitalization of $144 billion.

And it has a new toy, Watson, the supercomputer named after the company’s founder, which has great promise, but until now has remained largely an advertising ploy.

If IBM can reinvent itself and get back into the game, it has FANG potential. But for the time being, investors are unimpressed and sitting on their hands.

The Big Telecom Companies

My final entrant in the FANGstakes would be any combination of the four top telecommunication companies, Verizon (VZ), AT&T (T), Comcast (CMCSA), and Time Warner (TWX), which now control a near monopoly in the US.

There is a reason why the administration is blocking the AT&T/Time Warner merger, and it is not because these companies are consistently cited in polls as the most despised in America. They are trying to stop the creation of another hostile FANG.

Still, if any of the big four can somehow get together, the consequences would be enormous. Ownership of the pipes through which the modern economy courses bestows great power on these firms.

And Then….

There is one more FANG possibility that I haven’t mentioned. Somewhere, someplace, there is a pimple-faced kid in a dorm room thinking up a brand-new technology or business model that will take the world by storm and create the next FANG.

Call me crazy, but I have been watching this happen for my entire life.

I want to thank my friend, Scott Galloway, of New York University’s Stern School of Business, for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.

 

 

 

 

 

Creating the Next FANG?

March 29, 2019

Global Market Comments
March 29, 2019
Fiat Lux

SPECIAL FANG ISSUE

Featured Trade:

(FINDING A NEW FANG),
(FB), (AAPL), (NFLX), (GOOGL),
(TSLA), (BABA)

Finding a New FANG

We all love our FANGS.

Not only have Facebook (FB), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL) been at the core of our investment performance for the past nine years.

We also gobble up their products and services like kids eating their candy stash the day after Halloween.

All four of the FANGs are now in a race to become the first $1 trillion in history. My bet is on Amazon, but then all four will eventually do it.

In fact, the FANGs are so popular that we need more of them, a lot more. So how do we find a new FANG?

Here is where it gets complicated. None of the four have perfect business models. All excel in many things but are deficient at others.

So, there are at least four different answers as to what makes a FANG. A more accurate answer would probably be 4 squared or four to the tenth power.

I will list the eight crucial elements that make a FANG.

1) Product Differentiation

In medieval times, location was the most important determinant of business success. If you owned Ye Olde Shoppe at the foot of London Bridge, you prospered.

Then great distribution was crucial. This occurred during the 19th century when the railroads ran the economy.

Products followed with the automobile boom of the 20th century when those who dreamed up 18-inch tailfins dominated. This strategy was applied to all consumer products.

The Financial age came next when cheap money was used to assemble massive conglomerates that were the primary determinant of success.

The eighties and nineties spawned the era of global brands, be it Coca Cola, MacDonald’s, Lexus, or Gucci.

Today, the global economy is ruled by those who can provide the best services. Facebook offers you personal access to a network of 1.5 billion. Apple will sell you a phone that can perform a magical array of tricks.

Netflix will stream any video content imaginable with lightning speed. Alphabet will deliver you any piece of information you want as fast as you can type, but charges advertisers hundreds of billions of dollars to get in your way.

This has created what I call an “Apple” effect. It stampedes buyers to pay the highest premiums for the best products, assuring global dominance.

While Apple accounts for less than 10% of the smartphone market, it captures a stunning 92% of the net profits. Everyone else is just an “also ran.”

Instead of driving my car into a dingy dealership every few months to get ripped off for a tune-up, Tesla (TSLA) does it remotely, online, while I sleep, for free.

Unlike battling for a smelly New York taxi cab in a snow storm, a smiling Uber driver will show up instantly, know where to go, automatically bill me at a discount price, and even give me restaurant recommendations in Kabul.

And you all know what Amazon can do. It beats the hell out of looking for a parking space at a mall these days, only to be told they don’t have your size (48 XLT).

2. Visionary Capital

If you have a great vision, you can get unlimited financing for free from investors anywhere. That puts those who must pay for expensive external financing for growth at a huge disadvantage.

Have a great vision, and the world is your oyster.

Elon Musk figured this out early with Tesla. By promising a “carbon-free economy” he has been able to raise tens of billions of equity capital even though his firm has never made a real profit.

Alphabet is “organizing the world’s information”, while Facebook is “connecting the world.”

Chinese Internet giant Alibaba (BABA) invented a holiday from scratch, “Singles Day,” November 11, which has quickly become the most feverish shopping day in history. In 2018, they booked an unbelievable $30.8 billion in sales in a single 24 hours period, up 27% from the previous year.

And you know the great thing about visions? Not only do venture capitalists and consumers love them, so do stock investors.

3) Global Reach

You have to go global or be gone. A company with 7 billion customers will beat one with only 330 million all day long.

Go global, and economies of scale kick in enormously. This is only possible if you digitize everything from the point of sale to the senior management. Some two-thirds of Facebook’s users are outside the US, although half its profits are homegrown.

By the way, the Mad Hedge Fund Trader is global, with readers in 135 countries. Our marginal cost of production is zero, and the entire firm is run off my American Express card. It’s a great business model. And boy, do I get a ton of frequent flier points! Whenever I board Virgin Atlantic’s nonstop from San Francisco to London, the entire crew stands up to salute.

4) Likeability

Who doesn’t like Mark Zuckerberg, with his ever-present hoodies, skinny jeans, and self-effacing demeanor? And who did Facebook send to Washington to testify about internet regulation but the attractive, razor-sharp, and witty Sheryl Sandberg? The senators ate out of her hand.

Bill Gates and Steve Ballmer? Not so likable. Their arrogance invited a ten-year antitrust suit against Microsoft (MSFT) from the Justice Department.

And here’s the thing. If people like you, so will consumers, regulators, and yes, even equity investors. It makes a big difference to the bottom line and your investment performance.

5) Vertical Integration

Crucial to the success of the FANGs is their complete control of the customer experience through vertical integration.

When FANGs don’t manufacture their own products, as Apple does, they source them, rebrand them, and sell them as their own, like Amazon.

The return on investment for advertising is plummeting. Just ask the National Football League. So, it has become essential for companies to keep a death grip on the customer the second they enter your site.

Some, like Amazon again, will keep chasing you long after you have left their sites with special offers and alternative products. Even if you change computers, they will hunt you down.

One of my teenage daughters used my computer to buy a swimsuit last summer, and let me tell you, booting up every morning has been a real joy ever since.

This was the genius of the Apple store network. Buy one Apple product and they own you for life, like an indentured servant. They all integrate and talk to each other, a huge advantage for a small business owner. And they are cool.

No pimple-faced geeks wearing horn-rimmed glasses here. Get your iPhone fixed and you don’t talk to a technician, but a genius. It’s all about control.

Expect other strong brands to open their own store chains soon.

6) Artificial Intelligence

There is probably no more commonly known but least understood term in technology today. It’s like counting the number of people who have finished Dr. Stephen Hawking’s “A Brief History of Time” (I have).

A trillion-dollar company absolutely must be able to learn from human data input and then use algorithms to analyze it. Data has become the oxygen of the modern economy.

The company then use other algos to predict what you’re most likely to buy next and then thrust it in front of your face screaming at the top of its lungs.

This has been evolving for decades.

First, there was demographic targeting. White suburban middle-class guys have all got to like Budweiser, right?

This turned into social targeting. If two friends “liked” the same brand, regardless of their demographics, they should be targeted by same advertisers.

Now we live in the age of behavioral targeting. There is no better predictor of future purchases than current activities. So, if I buy a plane ticket to Paris, offerings of Paris guidebooks, tours, French cookbooks, French dating services, and even seller of discount black berets suddenly start coming out of the woodwork.

It would be a vast understatement to say that behavioral targeting is the most successful marketing strategy ever invented. So, guess what? We’re going to get a lot more of it.

As depressing as this may sound, the number one goal of almost all new technological advancements these days is to get you to buy more stuff.

Better to use the public computer at the library to buy your copy of “50 Shades of Gray.”

7) Accelerant

If you want to throw gasoline on the growth of a company, you absolutely have to have the best people to do it. The companies with the smartest staff can suck in free capital, invent faster, develop speedier services, and always be ahead of the curve when compared to the competition.

This has led to enormous disparities in income. Companies will pay anything for winners, but virtually nothing for losers.

I’ll never forget the first day I walked on to the trading floor at Morgan Stanley (MS). I am 6’4” and am used to towering over those around me. But at Morgan, almost all the salesmen were my height or a few inches shorter.

The company specifically selected these people because they delivered better sales records. Height is intimidating, especially to short customers.

And that’s what the FANGs have, the programming equivalents of an all 6’4” sales team.

A few years ago, my son got a job as the head of International SEO at Google. He was rare in that he spoke fluent Japanese and carried three passports, US, British, and Japanese (born in London with a Japanese mom and an American dad).

However, when he met his team, they all spoke multiple languages, were binational, and were valedictorians, National Merit Scholars, and Eagle Scouts to boot!

This is why immigration is such a hot-button issue in Silicon Valley these days. If one can’t get a work visa for a graduating Ph.D. in Computer Science from Stanford, he’ll just go back to China or India to start a local competitor that may someday eat your lunch.

By the way, if you get a FANG on your resume, even for a short period, you are set for life. Oh, and by the way, Apple gets 100,000 resumes a month!

8) Geography

It’s all about location, location, location. It’s no accident that Silicon Valley took root near two world-class universities, the University of California at Berkeley (my alma mater), and the heathens at Stanford across the bay.

Cal, in particular, was the recipient of massive government funding for the Manhattan Project that built the first atomic bomb during WWII. The tailwind lingers to this day. The world’s first cyclotron still occupies a local roundabout.

Universities provide the raw materials essential to create hothouse local economies like the San Francisco Bay Area. And as much as every region in the US or country in the world would like to do this, none have been able to.

There is only one place in the world where a company can hire 1,000 engineers from scratch on short notice, and that is the Bay Area.

Also, innovation is city-centered. Some two-thirds of future GDP growth will emanate from cities.

So, if you want to move your career forward, you better count on spending some serious time in Silicon Valley, New York, London, and Tokyo.

I’ve done all four and it paid handsomely.

So, there you have it. Now we know what makes a FANG. I’ll be addressing who the most likely FANG candidates are in a future letter.

I want to thank my friend, Scott Galloway, of New York University’s Stern School of Business, for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.

 

 

 

 

 

March 25, 2019

Mad Hedge Technology Letter
March 25, 2019
Fiat Lux

Featured Trade:

(APPLE’S BIG PUSH INTO SERVICES)
(AAPL), (GS), (NFLX), (GOOGL), (ROKU)

Apple’s Big Push Into Services

The future of Apple (AAPL) has arrived.

Apple has endured a tumultuous last six months, but the company and the stock have turned the page on the back of the anticipation of the new Apple streaming service that Apple plans to introduce next week at an Apple event.

The company also recently announced a partnership with Goldman Sachs (GS) to launch an Apple-branded credit card.

In the deal, Goldman Sachs will pay Apple for each consumer credit card that is issued.

These new initiatives indicate that Apple is doing its utmost to wean itself from hardware sales.

Effectively, Apple’s over-reliance on hardware sales was the reason for its catastrophic winter of 2018 when Apple shares fell off a cliff trending lower by almost 35%.

This new Apple is finally here to save the day and will demonstrate the high-quality of engineering the company possesses to roll out such a momentous service.

Frankly speaking, Apple needs this badly.

They were awkwardly wrong-footed when Chinese consumers in unison stopped buying iPhones destroying sales targets that heaped bad news onto a bad situation.

I never thought that Apple could pivot this quickly.

Apple’s move into online streaming has huge ramifications to competing companies such as Roku (ROKU).

In 2018, I was an unmitigated bull on this streaming platform that aggregates online streaming channels such a Sling TV, Hulu, Netflix and charges digital advertisers to promote their products on the platform through digital ads.

I believe this trade is no more and Roku will be negatively impacted by Apple’s ambitious move into online streaming.

What we do know about the service is that channels such as Starz and HBO will be subscription-based channels that device owners will need to pay a monthly fee and Apple will collect an affiliate commission on these sales.

Apple needs to supplement its original content strategy with periphery deals because Apple just doesn’t have the volume to offer consumers a comprehensive streaming product like Netflix.

Only $1 billion on original content has been spent, and this content will be free for device owners who have Apple IDs.

Apple’s original content budget is 1/9 of Netflix annual original content budget.

My guess is that Apple wants to take stock of the streaming product on a smaller scale, run the data analytics and make some tough strategic decisions before launching this service in a full-blown way.

It’s easier to clean up a $1 billion mess than a $9 billion mess, but knowing Apple and its hallmarks of precise execution, I’d be shocked if they make a boondoggle out of this.

Transforming the company from a hardware to a software company will be the long-lasting legacy of Tim Cook.

The first stage of implementation will see Apple seeking for a mainstay show that can ingrain the service into the public’s consciousness.

Netflix was a great example, showing that hit shows such as House of Cards can make or break an ecosystem and keep it extremely sticky ensuring viewers will stay inside a walled pay garden.

Apple hopes to convince traditional media giants such as the Wall Street Journal to place content on Apple’s platform, but there has already been blowback from companies like the New York Times who referenced Netflix’s demolition of traditional video content as a crucial reason to avoid placing original content on big tech platforms.

Netflix understands how they blew up other media companies and don’t expect them to be on Apple’s streaming service.

They wouldn’t be caught dead on it.

Tim Cook will have to run this race without the wind of Netflix’s sails at their back.

Netflix has great content, and that content will never leave the Netflix platform come hell or high water.

Apple is just starting with a $1 billion content budget, but I believe that will mushroom between $4 to $5 billion next year, and double again in 2021 to take advantage of the positive network effect.

Apple has every incentive to manufacture original content if third-party original content is not willing to place content on Apple’s platform due to fear of cannibalization or loss of control.

Ultimately, Apple is up against Netflix in the long run and Apple has a serious shot at competing because of the embedment of 1 billion users already inside of Apple’s iOS ecosystem that can easily be converted into Apple streaming service customers.

If you haven’t noticed lately, Silicon Valley’s big tech companies are all migrating into service-related SaaS products with Alphabet (GOOGL) announcing a new gaming product that will bypass traditional consoles and operate through the Google Chrome browser.

Even Walmart (WMT) announced its own solution to gaming with a new cloud-based gaming service.

I envision Apple traversing into the gaming environment too and using this new streaming service as a fulcrum to launch this gaming product on Apple TV in the future.

The big just keep getting bigger and are nimble enough to go where internet users spend their time and money whether it’s sports, gaming, or shopping.

Apple is no longer the iPhone company.

I have said numerous times that Apple’s pivot to software was about a year too late. 

The announcement next week would have been more conducive to supporting Apple’s stock price if it was announced the same time last year, but better late than never.

Moving forward, Apple shares should be a great buy and hold investment vehicle.

Expect many more cloud-based services under the umbrella of the Apple brand.

This is just the beginning.

 

 

 

March 19, 2019

Mad Hedge Technology Letter
March 19, 2019
Fiat Lux

Featured Trade:

(GOOGLE’S AGGRESSIVE MOVE INTO GAMING),
(GOOGL), (AAPL), (FB), (NFLX), (MSFT) (EA), (TTWO), (ATVI)

Google’s Aggressive Move Into Gaming

The saturation of tech is upon us.

That is the takeaway from Google’s (GOOGL) hard pivot into gaming.

The goal of their new gaming service is to become the Netflix (NFLX) of gaming allowing gamers to skip purchasing third-party consoles and playing games directly from an Android-based Google device.

Middlemen in the broad economy are getting killed and this is the beginning.

What we are really seeing is a last-ditch effort to protect gaming consoles – these devices will become extinct in less than 20 years boding ill for companies such as Sony and Nintendo

The cloud is still all the rage and companies such as Microsoft (MSFT), Alphabet (GOOGL), and Apple (AAPL) have the natural infrastructure in place to offer cloud-based gaming solutions.

Phenomenon such as internet game Fortnite have shown that consoles are outdated and relying on the cloud as a fulcrum to extract gaming revenue by way of add-ons and in-game enhancements will be the way forward

Another key takeaway from this development is that passive investment is dead, even more so in tech, where these big tech companies are starting to bleed over into each other’s territory.

This dispersion will create opportunity and pockets of weakness.

I blame this on a lack of innovation with companies still trying to extract as much as they can from the current smartphone-based status quo which has pretty much run its course.

Technology is itching for something revolutionary and we still have no idea what that new idea or device will be.

The rollout of 5G is promising and companies will need some time to adapt to this super-fast connection speed.

In either case, I can tell you the revolution won’t include foldable smartphones.

In 2018, the gaming industry flourished on accelerating momentum by registering over $136 billion in sales, and the revenue growth rate is already about 15% and increasing.

Naturally, companies such as Amazon and Google want a piece of this action and are hellbent on making inroads in the gaming environment such as Amazon’s ownership of Twitch, which is a game streaming service where viewers can watch live tournament-style competitions proving extremely popular with Generation Z.

I applaud this move by Google because they already have proved they can execute on certain mature assets such as YouTube which has become the Netflix replacement of 2019.

Doubling down in the gaming sector would be a bonus as they search a second accelerating revenue driver that will dovetail nicely with the overperformance in YouTube this year.

It’s even possible that YouTube could be modified to support live stream gaming, certainly various synergistic dynamics are at play here.

Even if they fail – it’s worth the risk.

Revenue extraction will be painful for certain companies like Facebook (FB) in this new environment, who has seen a horde of top executives abort after the company drastically changed directions, believing the company is on a suicide mission to fines and more regulatory penalties.

I’ve mentioned in the past that Facebook no longer commands the same type of employee brand recognition they once cultivated.

Facebook will find a tougher time to find the right people they need to execute their private chat plan, by linking the likes of WhatsApp, Instagram, and Facebook Messenger.

This is a high-risk high-reward proposition that could end up with Facebook’s co-founder Mark Zuckerberg in tears if regulators give him the cold shoulder, and that is why many executives who are risk-adverse want to cash in now because they sink with the Titanic.  

Not only are gaming assets becoming saturated, but the general online streaming environment is attracting a tsunami of supply all at one time.

Online content is already veering into the same type of pricing structures that cable offered traditional customers.

Investors will have to ask themselves, how much will the average consumer spend in content-based entertainment per month?

My guess is not more than $100 per month.

The saturation will cause tech companies to become even more draconian.

Be prepared for some more epic in-fighting until a new gateway of internet monetization opens up.

There has never been a better time to be a tactical and active investor in tech.

The Fang trade has splintered off with each company facing unpredictable futures.

Unearthing value will become more difficult because these traditional bellwether tech stocks have decoupled and aren’t going straight up anymore.

Those zigs and zags will still be buttressed by a secular tailwind of the migration to digital, but there are certain winners and losers that will result of this.

Apple announcing a new streaming product is proof that these Silicon Valley tech firms are desperate for new profit drivers as the woodchips that fuel the fire start to run noticeably short on supply.

At the bare minimum, this looks disastrous for the traditional gaming companies of Electronic Arts (EA), Take-Two Interactive (TTWO), and Activision (ATVI) whose shares have been effectively shelved due to the Fortnite revolution.

EA has fought back with their own Fortnite lookalike called Apex Legends which showed a Fortnite-like trajectory sucking in 10 million players in the first 72 hours.

The stock exploded 16%, signaling this is the new way forward for gaming companies.

As a whole, these traditional gaming studios simply don’t have the firepower to compete with the big boys, let alone possess a strong cloud infrastructure.

 

 

March 18, 2019

Mad Hedge Technology Letter
March 18, 2019
Fiat Lux

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Why Alphabet is the best FANG to Buy Now

Why am I bullish on Alphabet (GOOGL) short-term?

Video has muscled its way to the peak of the digital content value chain.

If you don’t have video streaming, then you are significantly depriving yourself of the necessary ammunition capable of battling against legitimate content originators. 

The optimal type of content is short form yet engaging.

Interesting enough, the format method integrated into systems of Facebook (FB) and Twitter (TWTR) has experienced unrivaled success.

They have been leaning on this model as growth levers that will take them to the next stage of revenue acceleration and rightly so.

This has seen smartphone apps such as Instagram become game-changing revenue machines destroying all types of competition.

The x-factor that stands out in Instagram’s, Facebook’s, YouTube’s model is that it’s free and they do not absorb heavy expenses from content creation. 

It’s certainly cheap when the user is the product.

Google’s YouTube service has morphed into something of a phenomenon.

Its interface is easy to use, and followers have a simple time navigating around its platform. 

Familiar news outlets such as Sky News, Bloomberg News, and even CNBC news have recently installed their live feeds on YouTube’s main platform scared of losing aggregate eyeballs.

And even more intriguing is that YouTube has become a legitimate competitor to Netflix’s (NFLX) online video streaming platform.

YouTube has sensed the outsized pivot to their free platform and has double down hard by installing 5-second ads at the front end and middle of videos.

Of Alphabet’s total $39.3 billion revenue pocketed in Q4 2018, ads constituted 83% or an astounding $32.6 billion.

I feel that Alphabet shares are currently undervalued, and I believe that we will see outperformance from Alphabet shares for the rest of 2019 based on YouTube’s performance relative to expectation.

YouTube’s ever-growing presence showing up in the top line will offer the growth investors desire to pile into these shares as the company wrestles with future projects such as Waymo.

That’s not to say that their traditional advertisement business of Google Search is failing.

Investors can expect continuous 20% to 25% growth in this cash cow business, but the reason why Alphabet share has not been able to break out is that investors have baked this into the pie.

Therefore, YouTube is really the X Factor and will take them to this new promised land with shares surging past the $1,250 mark and more importantly, staying at that level.

YouTube brought in about $15 billion in 2018 and that consisted of about 10% of Alphabet’s total annual revenue.

However, the company is just scratching its surface of what it can accomplish with this fast-growing revenue driver and I can extrapolate this growth segment turning into 20% or 25% of the company’s annual revenue in the next few years.

Google does not strip out YouTube revenue in its reporting, therefore, it’s difficult to put my finger on exactly how much YouTube is carving out in terms of revenue.

I can also assume that if Netflix continues to raise the cost of monthly subscription, this strategy will directly hurt its revenue acceleration ability as it relates to competing with Google’s YouTube because YouTube’s free service is demonstrably attractive to viewers hoping to discover high-quality content relative to a $20 per month Netflix subscription.

I do agree that Netflix is a great company and a great stock, but as they slowly raise the price of content, this will gift YouTube a huge chunk of Netflix’s marginal audience freeing itself from the shackles of Netflix’s price rises.

At some point, online video streaming will become as expensive as the cable bundles now, and at that point, we know that saturation is imminent boding negative for Netflix.

What I do envision in the short-term future are consumers in America will pay into several unique bundles such as Netflix, maybe Disney (DIS), ESPN and merely stick with these as their base content generators as more consumers cut their cord and hard pivot from traditional cable packages that are becoming less appealing by the day.

And don’t forget that at some point, Netflix will have to demonstrate profitability and the huge cash burn that permeates throughout the business will be exposed when subscription growth starts to fade away.

In every possible variant, YouTube will become an outsized winner in the media wars because the quality of the free content keeps improving, the cost for consumers stays at 0, and their best of breed ad tech migrating from their Google search into YouTube just keeps getting more surgical and efficient.

Not only are the positive synergies from the best of breed ad tech aiding YouTube’s model, but just think about YouTube having access to the Google cloud and saving expenses by accessing this function to store data onto the Google Cloud.

If this was a standalone service, they would have to subcontract cloud storage functions to third-party cloud company causing the content service to spend millions and millions of dollars per year in expenses.

This would have the potential of crushing the bottom line.

That is just one example of the synergies that Google can take advantage of with YouTube under its umbrella of assets.

And think about self-driving vehicles, Google could potentially equip YouTube as a pre-programmed application inside of autonomous vehicle platform tech with YouTube popping up on the multiple screens.

I assume that there will be multiple screens inside of cars with self-phone driving technology because of the lack of driving required.

The worst maneuver that Alphabet could do right now is spinoff YouTube into its own company, and if that happens, YouTube won’t be able to take advantage of the various synergies and benefits of being an Alphabet asset.

We are just scratching the surface of what YouTube can accomplish, and I believe this upcoming overperformance isn’t in the price of the stock yet.

If the Fed continues its “patient” strategy towards interest rates at a macro level, Alphabet will easily soar past $1,250 and it can easily gain another 10% in 2019.

If any “regulation” risk as a result of extremist content rears its ugly head, buy shares on the dips because the algorithms are in place to eradicate this material and any fine will be manageable.

 

 

 

March 6, 2019

Global Market Comments
March 6, 2018
Fiat Lux

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