(NFLX) Archives - Page 31 of 33 - Mad Hedge Fund Trader

What's Up at Facebook?

Capitol Hill unleashed a healthy dose of criticism on Facebook (FB) CEO Mark Zuckerberg and he has mobilized the forces to avoid a repeat shellacking.

Zuckerberg's response has been to reshuffle his cabinet at the Menlo Park, CA, headquarters, and a few tell-tale signs offer a unique glimpse into Facebook's future.

Basically, something needed to change at Facebook.

The company single-handedly took the blame for the entire sector and was not the only company with a liberal stance on personal data.

Zuckerberg would like to eschew public humiliation and avoid being a sitting duck.

The episode in Washington highlights the need for Facebook to decouple itself from ad revenue, which makes up the lion's share of revenue at the firm and find other levers to pull.

Down the road, Facebook's ad business could get crimped by regulators, and a lack of fallback options haunts Facebook investors in their sleep.

Consequently, a whole slew of high-level management rotation is underway at Facebook.

It is the biggest shake-up in the history of Facebook.

The road map starts with one of Zuckerberg's best friends and protege Chris Cox who will manage the new "family of apps" segment.

This collection of projects he will preside over include WhatsApp, Messenger, Instagram, and the Facebook Core App.

The step up in responsibility is warranted for Chris Cox who was credited with creating the Facebook news feed after joining the company in 2005 after ditching his Stanford graduate degree program at the time.

The executive reshuffle coincided with WhatsApp co-founder Jan Koum, one of Silicon Valley's biggest advocates for data privacy, who quit his post as a show of disapproval to Facebook's business model.

Mark Zuckerberg wants to aggressively monetize the WhatsApp messenger service that was acquired for $19 billion in 2014.

Zuckerberg's blueprint involves using the WhatsApp phone numbers as a vehicle to monetize through offering different products.

Facebook would then collect the data from its 1 billion usership and WhatsApp would become Facebook's new advertisement clearing house.

WhatsApp's leadership vehemently refused this U-turn and Koum decided he would rather leave then see his baby ruined.

Facebook consistently refrained in the past from passing WhatsApp to the data mining scientists and was able to prevent full-scale implementations of advertisements onto its platform.

Currently, there are no ads on WhatsApp's interface, and users could be in store for a massive transformation in look and feel.

Facebook investors have been clamoring for Zuckerberg to start the process of making WhatsApp into a material revenue stream.

Time is of the essence as the big data police creep in from the shadows.

Putting Zuckerberg's top guy on the job embarks Facebook down a new path of hyper accelerated profit-making.

Well, that is the goal.

Compounding Facebook's pivot to other businesses is commissioning a new blockchain tech team.

Blockchain technology, the technology that helped unearth bitcoin, has seen a recent slew of endorsements from financial heavy hitters such as Goldman Sachs (GS), which acknowledged the formation of a new business brokering in bitcoin futures.

A year ago, no reputable organization would touch blockchain with a 10-foot pole.

The utilization of blockchain technology would allow trackability and provide more security.

That would help Facebook to understand the provenance of unique problems allowing staff to nip problems in the bud before they snowball.

Blockchain tech fits nicely within the constraints of the model and would enhance the existing Facebook product.

Let's not forget that Facebook has a mountain of cash to fix any problem that crops up.

It is not one of these early stage seed companies burning through heaps of cash waiting for "scalability" down the road.

Facebook is here and now, and it has the money to show for it.

The pillars of blockchain revolve around cryptography. Blockchain would effectively allow individuals to possess more power over their identity decentralizing the stranglehold from Menlo Park.

Thus, Facebook must invest deeply into blockchain to counter the fear that this technology can marginalize the core business.

This epitomizes the tendency for large-cap tech to become preemptive.

None of the powerful FANGs want to miss the next big shift in technology, and the cash hoard allows them to have skin in the game in each revolutionary trend.

The tide has changed at Facebook from the early years where growing the user base was paramount.

Now that user base has matured into a 2.2 billion marketplace.

Facebook's strategy has shifted to extracting more revenue per user and management closely follows this metric.

Mike Schroepfer, the CTO of Facebook, was tabbed as the man leading the charge for Artificial Intelligence (A.I.), Augmented Reality (A.R.), and Virtual Reality (V.R.) technology.

Facebook was able to poach Jerome Pesenti from IBM (IBM), where he was a critical cog in the development of IBM's Watson, to run the Facebook A.I. team. A.I. is routinely implemented into Facebook's core products to enhance performance.

Promoting Chris Cox as the next in line and giving him control over all the powerful products effectively pushes ad tech down the pecking order.

Javier Olivan is the new man at Facebook tasked for managing ads, analytics, and integrity, growth and product management.

Moving forward, the ad division will be laced with a certain level of security to avoid a repeat of Cambridge Analytica.

Zuckerberg must know that there are other Cambridge Analytica's hidden somewhere in the system; another incident would knock down the stock 5% to 10%.

Facebook could look vastly different in a few years if some of these profit drivers prove successful. It only needs one to work.

Disrupt or be disrupted.

At this point, the big tech companies are considering anywhere or anyone to capture accelerated growth. The FANGs are spilling over to other companies' turf.

Crossover is everywhere and this is just the beginning.

Expect Amazon's (AMZN) ad division to grow from the already $2 billion per quarter, gradually challenging the duopoly of Facebook and Alphabet in the digital ad revenue industry.

It is yet to be seen if the new revamp of management will produce better results.

This move could backfire as the management carousel excluded any fresh blood from taking part.

Effectively, Zuckerberg rotated his best friends into different parts of the business without demoting anyone.

Solidifying his close-knit circle of trust is no doubt a defensive reaction to being hounded the past few months, leaving his existing circle as the few people on which he can still count.

Facebook's stock remains healthy and the brouhaha stoked by the data leak gave investors a timely entry point.

I pounded on the table calling the bluff, begging readers to get into Facebook.

The long-term Facebook story is intact but the stock is overbought short-term.

Investors should not sleep on Facebook as it is a profit machine printing money like Apple (AAPL) and the executive revamp is a bullish development for Facebook.

My bet is that Chris Cox goes for the low hanging fruit monetizing WhatsApp, inciting the next leg up in Facebook shares later in the year.

_________________________________________________________________________________________________

Quote of the Day

"Simply put: We don't build services to make money; we make money to build better services." - said Facebook CEO Mark Zuckerberg

May 15, 2018

Tech Letter

Mad Hedge Technology Letter
May 15, 2018
Fiat Lux

Featured Trade:
(HARD TIMES AT UBER)
(UBER), (NFLX), (GOOGL), (AMZN), (GRUB)

Hard Times at Uber

Tech Letter

Uber has seen a ferocious challenge to its business model of late. It seems everything it touches turns into fool's gold.

It is easy to assign blame to the current CEO, but Dara Khosrowshahi was shoehorned into a difficult situation after previous CEO Travis Kalanick defiantly departed leaving the company in tatters in his wake.

What could go wrong went wrong.

The company was purged of its license to operate in London, which was one of its highest transactional cities.

Uber boasted a ridership of 3.5 million and sub-contracted 40,000 drivers in London that singlehandedly wiped out the Cockney black cab industry.

The land of fish and chips has not exactly been kind to Uber with the British seaside resort city Brighton the next location to excommunicate Uber from its sandy shores.

Uber's massive data breach of 2016, which took Uber a full year to publicly disclose, of 25.6 million names, 22.1 million mobile phone numbers, and 607,000 driver's license numbers was cited as one of the reasons Uber's license in Brighton was discontinued.

Is there a way back for CEO Dara Khosrowshahi?

The future looks turbulent at best.

Khosrowshahi has left no stone unturned carrying out his search for a new CFO. Uber has not had a CFO since 2015, and a CFO is required to shepherd the company through the IPO process.

Prospective candidates will not touch this position with a 10-foot pole.

Several high-profile hopefuls have already rebuffed offers.

It was painfully obvious to onlookers last week at Uber's Elevate conference in Los Angles that Alphabet (GOOGL) is dominating every potential business that Uber desires to penetrate.

Waymo, Alphabet's autonomous driving technology arm, is miles ahead of Uber after developing in secret for many years.

Waymo's self-driving testing began in 2009 while Uber's first test was carried out in September 2016 in Pittsburgh, conceding a seven-year head start to bitter rivals.

Even worse, Uber's trials have been sidelined as of late because of a casualty in the Phoenix program. Arizona is on the verge of removing Uber from possible future tests along with California making Pittsburgh the last place left to consolidate operations.

At the Elevate conference, Khosrowshahi elucidated Uber's roadmap to industry professionals, and his synopsis was largely underwhelming.

Khosrowshahi broke down the future into three easy-to-understand stages.

In the next two to three years, stage one consists of focusing on improving existing algorithms, enhancing ride share transactions, and expanding to different locations widening the companies ride-share footprint.

Stage 1.5 detailed refining its Uber Eats segment seizing further market share from Grubhub (GRUB) and Amazon (AMZN), the two biggest rivals.

In two to five years from now, stage two entails ramping up the e-bike segment through recently acquired e-bike firm Jump.

Lastly, stage three was proposed to happen in five to 10 years and encompass growing a newly minted air-taxi division called Elevate.

Up until today, Uber's core business has been an unmitigated failure of massive proportions.

In the fourth quarter of 2016, Uber hemorrhaged $2.8 billion then followed up the fourth quarter in 2017 with a $4.5 billion loss, a stark reminder that profits are hard to come by in the tech world.

If losses are what investors want, Uber gives it to you in spades.

If it cannot successfully monetize the core business using cars, the e-biking future is dead on arrival.

Stage 1.5 is all designer chocolates and fancy roses now because growth and margins remain healthy. However, this industry is fraught with booby traps that I chronicled in the recently published story about Grubhub (GRUB).

Stage three was a division that Khosrowshahi reviewed several times after he took the top job and it made the cut after deep contemplation.

Uber plans to start conducting trials in 2020 in Dallas or Los Angeles with the hope of commercial operations starting in 2023.

This timeline is wishful thinking because regulators would never grant operational authority to Uber in a mere five years when it cannot even succeed on asphalt with its self-driving technology.

Lamentably, Alphabet's co-founder Larry Page has an ace up his sleeve.

Since last October, stealth flight trials have been carried out in New Zealand by firm Kitty Hawk led by Sebastian Thrun one of the creators of Waymo, which is developing autonomous flying taxis.

Kitty Hawk was developed for years in secret and personally backed by Larry Page's personal wealth.

He has already poured more than $100 million of his own money into this venture.

To further develop its business, Kitty Hawk was forced to decamp to New Zealand as the Federal Aviation Administration (FAA) in America lacks a path to certification and commercialization.

New Zealand has embraced the revolutionary start-up, and New Zealand is the first country poised to develop a functional robo air-taxi network.

Kitty Hawk's hopes and dreams rely on the aircraft Cora. Please click here to visit its website for more information.

Cora is an all-electric affair powered by batteries with a 36-foot wingspan.

This meshes perfectly with New Zealand's hope to be carbon free by 2050.

Cora has been manufactured with capabilities of flying at heights up to 2,950 feet and a range of 62 miles.

New Zealand has bet the ranch on aerospace technology allowing even marginal start-ups within its borders such as Martin Jetpack, the first commercially sold jetpack, operating with a flight ceiling of 2,500 feet and sold at a starting price of $150,000.

It is ironic that Uber chose to host an aerial-taxi conference considering it is not the company building the flying taxis.

This is the crux of the problem in which Uber finds itself.

It does not produce anything unique.

The biggest winners that take home the lion's share of the spoils are the firms that create a proprietary product that cannot be replicated easily such as Netflix's original content or Google's advanced search engine.

The heavy lifters gain control and can dictate the path toward monetization.

Page's Kitty Hawk is in the driver's seat with the best technology and Uber's Khosrowshahi recently met with Thrun pitching his idea of partnering up.

Expectedly, Kitty Hawk declined to become buddies because nothing can be gained by collaborating with Uber.

Kitty Hawk stated that it plans to develop an app for its own robo-flights, which could crush Uber's dream of being the end all be all of transportation apps.

At the end of the day, Uber is just an app matching drivers and passengers, and creating this app is highly replicable.

It takes billions upon billions of dollars to build an autonomous aerial taxi from scratch. Uber's inability to produce aircraft gives it little negotiating power down the line.

On that note, Uber announced a partnership with NASA to build an air traffic control system, which would logically be used to construct landing ports similar to a helipad for aircraft to land.

By carving out a sliver of the industry mastering port construction, it gives Uber a narrow entranceway into the future of aero-taxi industry albeit a weaker strategic position than Page's Kitty Hawk.

Another day and another loss to Alphabet. Wave the white flag.

Each loss leads to the need for more funding.

More funding has brought on more losses for Uber in a vicious cycle that has seen Uber's valuation slip at the last round of financing.

In the next five years, onlookers can expect much of the same from Uber - underperformance in the form of accelerated losses from its core ride-sharing business.

Capital is disappearing into a black hole and the monetization of Uber Eats and Jump is nothing about which to boast.

These are side businesses at best.

The road map is wishy-washy at best. Uber's Elevate division could turn out to be lipstick on a pig hyping up the company for its 2019 IPO to attract more dollars - the same reason it needs to recruit a new CFO.

The IPO road show will give Uber a platform to explain how it plans to curtail losses. A miracle is required for Uber to finally turn into a profitable business by the time it goes public.

To visit Uber's Elevate division to watch a video of its version of the future of aerial taxis, please click here.

Kitty Hawk's Cora in New Zealand

_________________________________________________________________________________________________

Quote of the Day

"A computer once beat me at chess, but it was no match for me at kickboxing." - said American comedian Emo Philips.

May 14, 2018

Tech Letter

Mad Hedge Technology Letter
May 14, 2018
Fiat Lux

Featured Trade:
(MEET THE NEW FANG),
(AMZN), (WMT), (FB), (NFLX), (GOOGL), (UBER)

Meet the New FANG

Tech Letter

Yes, it's Wal-Mart (WMT).

No, I'm not making this recommendation because they let you park your RV in their parking lots at night for free.

And no, I'm not smoking California's biggest cash crop either (it's not grapes).

I predicted as much in my recent research piece, "Who Will Be the Next FANG?" by clicking here.

It is the dawn of a new era with the world absorbing yet another FANG to add to the list of Facebook (FB), Alphabet (GOOGL), Amazon (AMZN), and Netflix (NFLX).

As the tech world powers on to new heights, nothing can slow down these juggernauts.

Let's face it - companies are more lucrative when technical expertise is ramped up and infused into the business model.

Ground zero of the tech movement - Silicon Valley - has helped supercharge the economy and prodigious earnings' results support this thesis.

New innovations will fuel the next level up in the tech arm's race but more crucially, so will new geographical locations.

Instead of throwing a dart at a world map, the locations are a no-brainer because tech scavenger hunts orbit around one idiosyncrasy and that is scale.

Scalability is a sacred word in the tech world.

If a start-up cannot scale up, investors can't imagine future profits, entrepreneurs can't imagine growth, and funding dries up.

End of story.

For instance, Amazon's business model does not mesh kindly with pint-sized Iceland.

Not because Amazon discriminates against Iceland's culinary delicacy of sheep testicles but because the population is only around 330,000 people.

Scale equals success.

Indisputably, every country with an Amazon-esque business is being bid up because big tech firms know how to digitally monetize, effectively out-sourcing an incredibly profitable business model that has worked unabated for the developed world for the past decade or two.

The heightened awareness of existential survival is pitting foreign money against each other in far-flung places jostling for the same digital assets after a decade of cheap financing enriching tech companies.

Remember that first mover advantage leads to dominance in the datasphere because the volume of data is directly correlated to the bottom line.

Examples are rife around the world, for instance Amazon's $580 million purchase of Souq.com, described as the Amazon of the Middle East headquartered in Dubai and the biggest e-commerce site in the Arab world.

E-commerce commands a paltry 2% of sales in the region. That number is poised to explode as digital-savvy, tech Millennials reach peak consuming age and the migration to mobile erupts.

A preemptive strike is usually the most compelling strategy for large cap tech as it pushes out the smaller players, which lack the resources to compete.

Even the corporate offices of Walmart (WMT) in Bentonville, Arkansas, would wholeheartedly agree with me after doling out for its new toy.

Yes, Walmart acquired a 77% share in the Amazon of India, Flipkart, for $16 billion after the real Amazon failed to cut a deal with the most famous e-commerce unicorn in India.

This new development is a game changer.

India is a country that tech executives pinpoint as the future because of its massive population, economic growth, and economic potential foreign investors hope to tap up.

The International Monetary Fund (IMF) has anointed India as the fastest growing economy in 2018, and the 7.4% growth this year will follow with an even sturdier 7.8% in 2019.

Amazon has been well aware of India's ascent. Its CEO Jeff Bezos pledged to invest more than $5 billion in India and Amazon began its e-commerce operation in 2013.

Amazon's early entrance into the Indian e-commerce industry has paid off grabbing 31% of market share putting it in second place behind Flipkart's 40%, according to big data firms.

The Indian e-commerce space was $20 billion in 2017, and by 2019, expect that number to grow to $35 billion.

Walmart CEO Doug McMillon noted that by 2026, the Indian e-commerce industry will surpass $200 billion. When it comes to clothing and fashion, Flipkart has a 70% share in India.

Even more valuable than the economic growth is the new pipeline of tech talent that will help Walmart compete with Amazon.

The Trump administration's crackdown on H-1B visas that Silicon Valley utilizes to bring developers to American shores has forced American tech companies to implement a work-around.

Essentially, the only difference now will be that the past recipients of H-1B visas will be sitting in an air-conditioned office in Bengaluru, India, until the visa documents come through.

Flipkart has a deep pipeline into the best engineering schools in India and the staff of more than 30,000 employees work on Indian wage levels.

This deal is one of the biggest talent grabs of tech developers the world has ever seen. And this group has the know-how of building an Amazon-style digital marketplace platform from zero.

The Flipkart investment comes after Walmart's purchase of Jet.com, an e-commerce company based in Hoboken, New Jersey.

The $3.3 billion purchase of Jet.com in 2016 was the beginning of Walmart's digital strategy, and it has come a long way in a very short time.

Walmart is now a vaunted member of the FANG group and has a new army of developers to back up this claim.

Glancing at the opportunities to scale, Indonesia is clearly the runner-up behind India.

Indonesia has been tagged as a tech new battleground with a population of 260 million in 2016 and growing.

The country has a medium age of 28, meaning this young population could turn into a reliable source of new tech developers who traditionally are young and digital natives.

Economic prosperity has been welcomed with open arms to this tropical island nation. It is poised to become the seventh largest economy by 2030, up from its rank of No. 16 today, creating a burgeoning middle class with newfangled discretionary spending.

The rural migration to urban environments will add another 90 million people living in Indonesian cities by 2030, while Internet access is growing by 20% each year in Indonesia.

Goldman Sachs recently issued a note to investors citing Indonesia's unbridled potential.

Capital is pouring into Indonesia at a breakneck speed with Alibaba investing $1.1 billion into Tokopedia, the Amazon of Indonesia.

Companies are coming to the stark realization that the domestic low hanging fruits have been picked, and aging developed countries are turning to undeveloped regions of growth to advance business objectives.

This is why South East Asia has been bombarded with an onslaught of Japanese, Korean, and Chinese investments and not only in the tech sector.

The Far East powerhouse countries are battling each other in Southeast Asia for consumer goods, infrastructure, high speed trains, and of course technology.

Uber just sold its Southeast Asian ride-sharing asset Grab to China's DiDi Chuxing and SoftBank for $2 billion.

The Southeast Asian region is one of the hottest places to make a deal because of a lack of FANG occupancy.

Walmart sold off on the Flipkart news because of the potential impairment to margins, but this move is a long-term positive for Walmart shareholders.

Flipkart does not turn a profit and Walmart is still solely judged by earnings. Unfortunately, it does not receive the same license to focus on growth like Tesla, Amazon, and Netflix.

However, I have a hunch that down the road, investors will agree this move by Walmart's McMillon was as shrewd as can be.

Like the colonial powers of yore, India and Southeast Asia are likely to be divvied up.

American companies already own more than 70% of market share in India e-commerce.

India is the biggest democracy in Asia and a staunch ally of the United States.

India's frosty relationship with China due to border spats and communist origins will stunt China's ability to take over and expand in India.

However, Southeast Asian countries are more likely to go the way of Cambodia, which is reliant on Chinese money to fund new initiatives, hamstrung by Chinese debt up to its eyeballs, and acquiesced political capital to the Mandarins.

Chinese investment's path of least resistance is Southeast Asia. This progression will be facilitated by the sizable Chinese expat population that resides in Indonesia, Vietnam, Thailand, Philippines, Myanmar, Laos and Cambodia.

Long-term shareholders of Amazon and Walmart will be rewarded. However, expect a few more Indians walking around Bentonville, Seattle, and Hoboken.

_________________________________________________________________________________________________

Quote of the Day

"My life is now a constant assessment of whether what's happening in real life is more entertaining than what's happening on my phone." - said television host Damien Fahey.

May 4, 2018

Tech Letter

Mad Hedge Technology Letter
May 4, 2018
Fiat Lux
SPECIAL SPACE X ISSUE

Featured Trade:
(WILL SPACE X BE YOUR NEXT TEN-BAGGER?)
(EBAY), (TSLA), (SCTY), (BA), (LMT)

May 3, 2018

Tech Letter

Mad Hedge Technology Letter
May 3, 2018
Fiat Lux

Featured Trade:
(THE INCREDIBLE SHRINKING TELEPHONE INDUSTRY)
(TMUS), (S), (NFLX), (T), (VZ), (CHTR), (CMCSA)

The Incredible Shrinking Telephone Industry

Tech Letter

Talk is cheap.

Do not believe half-truths that go against economic convention.

This was the case when T-Mobile (TMUS) CEO John Legere and Sprint (S) CEO Marcelo Claure popped up on live TV promoting affordability, elevated competition, and massive 5G infrastructure investments if the two companies joined forces in a $26.5 billion deal.

This was a case of smoke and mirrors. The speculative claim of adding 3 million workers and investing $40 billion into 5G development is just a line pandering toward President Trump's nationalistic tendencies.

They want the deal to move forward any way possible.

Jack Ma, founder and executive chairman of Alibaba (BABA), met President Trump at Trump Towers before his term commenced and promised to add 1 million jobs in order to curry favor with the new order.

Where are those jobs?

If this merger came to fruition, market players would shrink from 4 to 3 - a newly reformulated T-Mobile plus Verizon (VZ) and AT&T (T).

Pure economics dictate that shrinking competition by 25% would create pricing leverage for the leftover trio.

Industry consolidation is usually met with accelerated profit drivers because companies can get away with reckless price increases without offering more goods and services.

Being at the vanguard of the 4G movement, America overwhelmingly benefited from lucid synergistic applications that fueled domestic job growth and economic gains.

Japanese and German players were hit hard from missing out in leading the new wave of wireless technology.

T-Mobile and Sprint wish to be insiders of this revolutionary technology and this is their way in.

In the past, T-Mobile jumped onto the scene with aggressively twisting its business model to fight tooth and nail with Verizon and AT&T.

It was moderately successful.

T-Mobile even offered affordable plans without contracts offering customers optionality and advantageous pricing.

It was able to take market share from Sprint, which is the monumental laggard in this group and the butt of jokes in this foursome.

The average cost of wireless has slid 19% in the past five years, and traditional wireless Internet companies are sweating bullets as the future is murky at best.

The bold strategy to merge these two wireless firms derives from an urgent need to combat harsh competition from the two titans Verizon and AT&T.

The merger is in serious threat of being shot down by the Department of Justice (DOJ) on antitrust grounds.

History is littered with companies that became complacent and toppled because of monopolistic positions.

Case in point, the predominant force in the American and global economy was the American automotive industry and Detroit in the 1950s.

Detroit had the highest income and highest rate of home ownership out of any major American city at that time.

Flint, Michigan, oozed prosperity, and the top three car manufacturers boasted magnanimous employee benefits and a tight knit union.

During this era of success, 50% of American cars were made by GM and 80% of cars were American made.

The car industry could do no wrong.

This would mark the peak of American automotive dominance, as local companies failed to innovate, preferring stop-gap measures such as installing add-ons such as power steering, sound systems, and air conditioning instead of properly developing the next generation of models.

American companies declined to revolutionize the expensive system put in place that could produce new models because of the absence of competition and were making too much money to justify alterations.

It's expensive to make cars but neglecting reinvestment yielded future mediocrity to the detriment of the whole city of Detroit.

The tech mentality is the polar opposite with most tech firms reinvesting the lion's share of operational profit, if any, back into product improvement.

Sprint got burned because it skimped on investment. It is in a difficult predicament dependent on T-Mobile to haul it out of a precarious position.

GM, Ford, and Chrysler met their match when Toyota imported a vastly more efficient way of production and the rest is history.

Detroit is a ghastly remnant of what it used to be with half the population escaping to greener pastures.

A carbon copy scenario is playing out in the mobile wireless space and allowing a merger would suppress any real competition.

To add confusion to the mix, fresh competition is growing on the fringes desiring to disrupt this industry sooner than later by cable providers such as Charter (CHTR) and Comcast (CMCSA) entering the fray offering mobile phone plans.

Google also offers a mobile phone plan through the Google Fi division.

The fusion of wireless, broadband, and video is attracting competition from other spheres of the business world.

The paranoia served in doses originates from the Netflix (NFLX) threat that vies for the same entertainment dollars and eyeballs.

Remember that AT&T is in the midst of merging with Time Warner Cable, which is the second largest cable company behind Comcast.

The top two in the bunch - AT&T and Verizon - are under attack from online streaming business models, and the Time Warner merger is a direct response to this threat.

There are a lot of moving parts to this situation.

AT&T hopes to leverage new video content to extract digital ad revenue capturing margin gains.

Legere and Claure put on their fearmongering hats as they argued that this deal has national security implications and losing out to Chinese innovation is not an option.

This argument is ironic considering T-Mobile is a German company and Sprint is owned by the Japanese.

Sprint have been burning cash for years and this move would ensure the businesses survives.

Sprint's crippling debt puts it in an unenviable position and this merger is an all or nothing gamble.

Sprint has not invested in its network and is miles behind the other three.

AT&T has outspent Sprint by more than $90 billion in the past 10 years.

This is the last chance saloon for Sprint whose stock price has halved in the past four years.

However, T-Mobile sits on its perch as a healthier rival that would do fine on a stand-alone basis.

Consolidation of this great magnitude never pans out for the consumer as users' interests get moved down the pecking order.

Wireless stocks were taken out and beaten behind the wood shed on the announcement of this news as the lack of clarity moving forward marked a perfect time to sell.

There will be many twists and turns in this saga and any capital put to use now will be dead money while this imbroglio works itself out.

If the deal doesn't die a slow death and finds a way through, the approval process will be drawn out and cumbersome.

The ambitious deadline of early 2019 seems highly unrealistic even with the most optimistic guesses.

The outsized winner from a deal would be AT&T, Verizon, and the newly formed T-Mobile and Sprint operation.

If this new wave of consolidation becomes reality, pricing pressure on the business model would ease for the remaining players, particularly allowing more breathing room for the leaders.

Stay away from this sector until the light can be seen at the end of the tunnel.

_________________________________________________________________________________________________

Quote of the Day

"Everything is designed. Few things are designed well." - said radio producer Brian Reed

May 2, 2018

Tech Letter

Mad Hedge Technology Letter
May 2, 2018
Fiat Lux

Featured Trade:
(FACEBOOK GOES FROM STRENGTH TO STRENGTH),
(FB), (AMZN), (GOOGL), (NFLX)

Facebook Goes from Strength to Strength

Tech Letter

Everyone and their mother was waiting for Facebook (FB) to fluff their lines, but they defied the odds by posting solid performance.

The data police can go back to eating doughnuts because it is obvious that regulation won't fizzle out the precious growth drivers that Mark Zuckerberg relies on to please investors.

I even begged readers to buy the regulatory dip, and I was proved correct with Facebook shares rebounding from $155 to $173.

The dip buying was proof that investors have faith in Facebook's business model.

The Cambridge Analytica scandal threatened to tear apart the quarterly numbers and place Facebook in the tech doghouse, but stabilization in Monthly Active Users (MAU) and bumper digital ad revenue growth was the perfect elixir to an eagerly anticipated earnings report.

Facebook showed resilience by growing (MAU) to 2.2 billion, up 13% at a time when attrition could have reared its ugly head.

The market breathed a huge sigh of relief as the Facebook beat came to light.

The battering that Facebook received in the press effectively lowered the bar and Facebook delivered in spades.

The unfaltering migration to mobile continues throughout the industry with mobile digital ad revenue making up 91% of ad revenue, which is a nice bump from the 85% last quarter.

Overall, Facebook grew revenues 49% YOY to $11.97 billion.

There is no getting around that Facebook is a highly profitable business due to the lack of costs. I should be so lucky.

Remember at Facebook, the user is the product.

Instead of paying for rising TAC (Traffic Acquisition Costs) as does Google (GOOGL) or the $8 billion outlay for Netflix's (NFLX) annual content budget, Facebook pours its money into improving its digital platform and advancing its ad tech capabilities.

However, moving forward, Facebook will have to cope with extra regulatory costs.

Facebook recently hired a legion of content supervisors at minimum wage to root out the toxic content roaming around on its platform.

Site operators have doubled to 14,000. This number gives you a taste why the large cap tech names are best positioned to combat the new era of regulation.

Doubling the staff of any business would be a tough cost pill to swallow.

Many companies would go under, but Facebook has the cash to mitigate the additional cost of doing business.

This defensive initiative casts Facebook in a better light than before like a superhero rooting out the evil villain.

Facebook and its co-founder Mark Zuckerberg need to hire a better public relations team to ensure that Mark Zuckerberg isn't pigeonholed in mainstream media as the monster of tech.

The Amazon-effect is infiltrating every possible industry, and even the bigger tech names are coping with the Amazon (AMZN) spillage onto competitors' turf.

A risk down the line is Amazon's booming digital ad business nibbling away at Facebook's own digital ad model.

ARPU (Average Revenue Per User) remains robust with Facebook earning $23.59 per North American user, which is the most lucrative geographic location.

Artificial Intelligence (A.I.) is a tool that Facebook has implemented into its platform and monitoring apparatus.

Removing damaging content preemptively is the order of the day instead of being blamed for harboring nefarious content.

One example of this use case has been targeting ISIS- and Al Qaeda-related terror content with 99% of inappropriate content removed before being flagged by a human.

Heavy investments in A.I. will make Facebook a safer place to share content.

Big events exemplify the strength of Facebook.

During the Super Bowl in February, around 95% of national TV advertisers were simultaneously posting ads on Facebook because of the viral effect commercials and posts have during massive events.

Tourism Australia is another firm that bought ads on Instagram and Facebook platforms during the Super Bowl.

The campaign was hugely successful with half the leads for Tourism Australia coming directly from Facebook.

Facebook acts as the go-to provider for quality digital marketing and this will not change for the foreseeable future.

Investors can feel comfortable that there was no advertiser revolt after the big data chaos.

Facebook is improving its ad tech, and new ad products will be introduced to the 2.2 billion MAUs.

For instance, Facebook developed a carousel of rotating ads on Instagram Stories, and advertisers will be able to share up to three video or photos now instead of one. If the user swipes up, the swipe will take them directly to the advertisers' websites.

The shopping experience is more personalized now with an updated news feed that will show a full-screen catalog to help the user find whatever is in their search.

Facebook will only get better at placing suitable ads that mesh with the users' interests or hobbies.

Investors must be cautious to not let macro-headwinds sabotage existing positions.

Facebook's underlying growth drivers remain intact, but the stock is vulnerable to regulation headline risk that caps its short-term upside.

There is also the possibility that another Cambridge Analytica is just around the corner, which would result in a swift 10% correction.

Next earnings report should be interesting because it will reflect the first quarter that Facebook has operated with higher security expenses and will go a long way to validating its business model in a new era of rigid regulation.

If Facebook does not fill in the moat around the business, then Facebook is braced to grow top and bottom line with minimal resistance.

The cherry on top was the additional $9 billion of buybacks giving the stock price further support.

Facebook is a long-term hold but a risky short-term trade.

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Quote of the Day

"Never trust a computer you can't throw out a window." - said Apple cofounder Steve Wozniak.

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