(NFLX) Archives - Page 32 of 34 - Mad Hedge Fund Trader

Meet the New FANG

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.

_________________________________________________________________________________________________

Quote of the Day

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

April 25, 2018

Tech Letter

Mad Hedge Technology Letter
April 25, 2018
Fiat Lux

Featured Trade:
(FANGS DELIVER ON EARNINGS, BUT FAIL ON PRICE ACTION),
(GOOGL), (AMZN), (MSFT), (AAPL), (FB),
(DBX), (NFLX), (BOX), (WDC)

FANGs Deliver on Earnings, But Fail on Price Action

Tech Letter

Alphabet (GOOGL) did a great job alleviating fears that large-cap tech would be dragged through the mud and fading earnings would dishearten investors.

The major takeaways from the recent deluge of tech earnings are large-cap tech is getting better at what they do best, and the biggest are getting decisively bigger.

Of the 26% rise to $31.1 billion in Alphabet's quarterly revenue, more than $26 billion was concentrated around its mammoth digital ad revenue business.

Alphabet, even though rebranded to express a diverse portfolio of assets, is still very much reliant on its ad revenue to carry the load made possible by Google search.

Its "other bets" category failed to impact the bottom line with loss-making speculative projects such as Nest Labs in charge of mounting a battle against Amazon's (AMZN) Alexa.

The quandary in this battle is the margins Alphabet will surrender to seize a portion of the future smart home market.

What we are seeing is a case of strength fueling further strength.

Alphabet did a lot to smooth over fears that government regulation would put a dent in its business model, asserting that it has been preparing for the new EU privacy rules for "18 months" and its search ad business will not be materially affected by these new standards.

CFO Ruth Porat emphasized the shift to mobile, as mobile growth is leading the charge due to Internet users' migration to mobile platforms.

Google search remains an unrivaled product that transcends culture, language, and society at optimal levels.

Sure, there are other online search engines out there, but the accuracy of results pale in comparison to the preeminent first-class operation at Google search.

Alphabet does not divulge revenue details about its cloud unit. However, the cloud unit is dropped into the "other revenues" category, which also includes hardware sales and posted close to $4.4 billion, up 36% YOY.

Although the cloud segment will never dwarf its premier digital ad segment, if Alphabet can ameliorate its cloud engine into a $10 billion per quarter segment, investors would dance in the streets with delight.

Another problem with the FANGs is that they are one-trick ponies. And if those ponies ever got locked up in the barn, it would spell imminent disaster.

Apple (AAPL) is trying its best to diversify away from the iconic product with which consumers identify.

The iPhone company is ramping up its services and subscription business to combat waning iPhone demand.

Alphabet is charging hard into the autonomous ride-sharing business seizing a leadership position.

Netflix (NFLX) is doubling down on what it already does great - create top-level original content.

This was after it shed its DVD business in the early stages after CEO Reed Hastings identified its imminent implosion.

Tech companies habitually display flexibility and nimbleness of which big corporations dream.

One of the few negatives in an otherwise solid earnings report was the TAC (traffic acquisition costs) reported at $6.28 billion, which make up 24% of total revenue.

An escalation of TAC as a percentage of revenue is certainly a risk factor for the digital ad business. But nibbling away at margins is not the end of the world, and the digital ad business will remain highly profitable moving forward.

TAC comprised 22% of revenue in Q1 2017, and the rise in costs reflects that mobile ads are priced at a premium.

Google noted that TAC will experience further pricing pressure because of the great leap toward mobile devices, but the pace of price increases will recede.

The increased cost of luring new eyeballs will not diminish FANGs' earnings report buttressed by secular trends that pervade Silicon Valley's platforms.

The year of the cloud has positive implications for Alphabet. It ranks No. 3 in the cloud industry behind Microsoft (MSFT) and Amazon.

Amazon and Microsoft announce earnings later this week. The robust cloud segments should easily reaffirm the bullish sentiment in tech stocks.

Amazon's earnings call could provide clarity on the bizarre backbiting emanating from the White House, even though Jeff Bezos rarely frequents the earnings call.

A thinly veiled or bold response would comfort investors because rumors of tech peaking would add immediate downside pressure to equities.

The wider-reaching short-term problem is the macro headwinds that could knock over tech's position on top of the equity pedestal and bring it back down to reality in a war of diplomatic rhetoric and international tariffs.

Google, Facebook, and Netflix are the least affected FANGs because they have been locked out of the Chinese market for years.

The Amazon Web Services (AWS) cloud arm of Amazon blew past cloud revenue estimates of 42% last quarter by registering a 45% jump in revenue.

Microsoft reiterated that immense cloud growth permeating through the industry, expanding 99% QOQ.

I expect repeat performances from the best cloud plays in the industry.

Any cloud firm growing under 20% is not even worth a look since the bull case for cloud revenue revolves around a minimum of 20% growth QOQ.

Amazon still boasts around 30% market share in the cloud space with Microsoft staking 15% but gaining each quarter.

AWS growth has been stunted for the past nine quarters as competition and cybersecurity costs related to patches erode margins.

Above all else, the one company that investors can pinpoint with margin problems is Amazon, which abandoned margin strength for market share years ago and that investors approved in droves.

AWS is the key driver of profits that allows Amazon to fund its e-commerce business.

Cloud adoption is still in the early stages.

Microsoft Azure and Google have a chance to catch up to AWS. There will be ample opportunity for these players to leverage existing infrastructure and expertise to rival AWS's strength.

As the recent IPO performance suggests, there is nothing hotter than this narrow sliver of tech, and this is all happening with numerous companies losing vast amounts of money such as Dropbox (DBX) and Box (BOX).

Microsoft has been inching toward gross profits of $8 billion per quarter and has been profitable for years.

And now it has a hyper-expanding cloud division to boot.

Any macro sell-off that pulls down Microsoft to around the $90 level or if Alphabet dips below $1,000, these would be great entry points into the core pillars of the equity market.

If tech goes, so will everything else.

If it plays its cards right, Microsoft Azure has the tools in place to overtake AWS.

Shorting cloud companies is a difficult proposition because the leg ups are legendary.

If traders are looking for any tech shorts to pile into, then focus on the legacy companies that lack a cloud growth driver.

Another cue would be a company that has not completed the resuscitation process yet, such as Western Digital (WDC) whose shares have traded sideways for the past year.

But for now, as the 10-year interest rate shoots past 3%, investors should bide their time as cheaper entry points will shortly appear.

_________________________________________________________________________________________________

Quote of the Day

"Technology is a word that describes something that doesn't work yet." - said British author Douglas Adams.

April 23, 2018

Tech Letter

Mad Hedge Technology Letter
April 23, 2018
Fiat Lux

Featured Trade:
(HOW NETFLIX CAN DOUBLE AGAIN),
(NFLX), (AMZN), (IQ), (ORCL), (MU), (AMAT), (CRUS), (QRVO), (IFNNY), (NVDA), (JD), (BABA), (MSFT)

How Netflix Can Double Again

Tech Letter

The first batch of earnings numbers are trickling in, and on the whole, so far so good.

A spectacular earnings season will further cement tech's position at the vanguard of the greatest bull market in history.

The bull case for technology revolves around two figures indicating "RISK ON" or "RISK OFF".

The first set of numbers from Netflix (NFLX) emanated sheer perfection.

Netflix has gambled on its international audience to drive its growth and unceasing creation of premium content to reach these lofty targets set forth.

It worked.

Consensus was that domestic subscription growth had peaked, and Netflix would have to lean on overseas expansion to beat earnings estimates.

American subscription growth knocked it out of the ballpark, beating expectations by 480,000 subscriptions. The street expected only 1.48 million new adds. The 1.96 million shows the American online streamer is resilient, and the migration toward cord-cutting is happening faster than initially thought.

International adds were pristine, beating the 5.02 million estimates by 440,000 million new subscribers.

Content is king as Netflix has proved time and time again (we notice that here at Mad Hedge Fund Trader, too). Netflix plans to fork out about 700 original series in 2018.

By 2023, Netflix could grow its subscriber base to close to 400 million. The potential for international advancement is immense considering foreign companies are playing catch-up and cannot compete with the level of Netflix's content.

The earnings report coincided with Netflix announcing a forceful push into Europe, doubling its allocated content-related investments to $1 billion.

All of Netflix's estimates take into consideration that it is shut out of the Chinese market. Ironically, the Netflix of China, named iQIYI (IQ), just recently went public on the Nasdaq.

Amazon Web Services (AWS), the cloud-arm of Amazon (AMZN), revenue numbers are the other numbers that are near and dear to the pulsating heartbeat of the bull market.

Jeff Bezos, Amazon's CEO, penned a letter to shareholders that Amazon prime subscribers blew past the 100 million mark.

The positive foreshadowing augurs nicely for Amazon to surprise to the upside when it reports earnings next week on April 26.

Expect more of the same from cloud companies that are overperforming.

The few glitches in tech are minor. It is mindful to stay on the right side of the tracks and not venture into marginal names that haven't proved themselves.

For instance, Oracle (ORCL) had a good, not great, earnings report but shares still cratered after CEO Safra Catz dissatisfied analysts with weak cloud forecasts of just 19%-23% growth.

The street was looking for cloud guidance over 24%. Oracle is still being punished for its legacy tech segments.

The chip sector got pummeled after several chip manufacturers announced weak supply order from Apple.

This is hardly a surprise with Apple slightly missing iPhone estimates last quarter by 1%.

Chip stocks such as Lam Research (LRCX), Micron (MU), and Applied Materials (AMAT) look like affordable bargains. They should be seriously considered after share prices stabilize buttressed by support levels.

The outsized problem is that hardware suppliers have headline risks because of large cap tech's preference toward vertically integrating.

Along with price efficiencies, vertically integration aids design aspects and streamline product production time horizons.

This is not the end of chips.

Consumers need the silicon to generate and extract all the data coming to market.

Particularly, Apple (AAPL) went over its skis trying to push expensive smartphones to a saturated market when all the rip-roaring growth is at the low end of the market.

Apple still managed to sell more than 77 million iPhones, but the trade war rhetoric will deter Chinese consumers from purchasing American tech products. Until now, Apple has counted on China as its best growth prospect. The administration had other ideas.

Any noteworthy Apple supplier has gotten punched in the nose, but crucially, investors must stay out of the SMALLER chip players that rely on narrow revenue sources to keep them afloat.

Bigger chip companies can withstand the shedding of a few revenue sources but not Cirrus Logic (CRUS).

(CRUS) shares have been beaten mercilessly the past year sliding from $68 to a horrifying $37.74 today.

(CRUS) produces audio amplifier chips used in iPhone devices, and weak iPhone X guidance is the cue to bail out of this name.

The company extracts more than 75% of its revenues by selling audio chips used in iPhone devices. Ouch!

Last quarter saw horrific performance, stomaching a 7.7% decline in revenues due to tepid demand for smartphones in Q4 2017.

Cirrus Logic provided an underwhelming outlook, and it is not the only one to be beaten into submission behind the woodshed.

Apple has signaled to its suppliers that it will view production in a different way.

Imagination Technologies, a U.K. company, was informed that its graphic chips are not needed after 2018.

Dialog Semiconductor, another U.K.- based operation, shared the same destiny, as its power management chip was cut out of the production process, sacrificing 74% of revenue.

To top it all off, Apple just announced it plans to manufacture its own MicroLED screens in Silicon Valley, expunging its alliance with Samsung, Sharp, and LG, which traditionally yield smartphone screens for Apple. And Apple plans to make its own chips, phasing out Intel's chips in Apple's MacBook by 2020.

Qorvo (QRVO), Apple's radio frequency chips manufacturer, also can be painted with the same brush.

Apple was responsible for 34% of the company's total revenues in 2017.

Weak iPhone guidance set off a chain reaction, and the trembles were most felt at the bottom feeder group.

Put Infineon Technologies (IFNNY) in the same egg basket as Qorvo and Cirrus Logic. This company installs its cellular basebands in iPhones.

FANG has split into two.

Netflix and Amazon continue producing sublime earnings reports, and Apple and Facebook have hit a relative wall.

It will be interesting if the government's harsh rhetoric toward Amazon amounts to anything.

One domino that could fall is Amazon's lukewarm relationship with the US Postal Service.

Logistics is something the Chinese Amazon's JD.com (JD) and Alibaba (BABA) have successfully adopted. Look for Amazon to do the same.

However, I will say it is unfair that most tech companies are measured against Netflix and Amazon, even for Apple, which earned almost $50 billion in profits in 2017.

It is insane that companies tied to a company that prints money are reprimanded by the market.

But that highlights investors' pedantic fascination with pandemic growth, cloud, and big data.

Making money is irrelevant today. Investors should be laser-like focused on the best growth in tech such as Amazon, Netflix, Lam Research, Nvidia (NVDA), and Microsoft (MSFT), which know how to deliver the perfect cocktail of results that delight investors.

__________________________________________________________________________________________________

Quote of the Day

"$500? Fully subsidized? With a plan? That is the most expensive phone in the world. And it doesn't appeal to business customers because it doesn't have a keyboard. Which makes it not a very good email machine." - said former CEO of Microsoft Steve Ballmer on the introduction of the first iPhone.

Tag Archive for: (NFLX)