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September 12, 2018

Global Market Comments
September 12, 2018
Fiat Lux

THE FUTURE OF AI ISSUE

Featured Trade:
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August 22, 2018

Mad Hedge Technology Letter
August 22, 2018
Fiat Lux

 

Featured Trade:
(WHAT’S IN STORE FOR TECH IN THE SECOND HALF OF 2018?),

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What’s in Store for Tech in the Second Half of 2018?

Tech margins could be under pressure the second half of the year as headwinds from a multitude of sides could crimp profitability.

It has truly been a year to remember for the tech sector with companies enjoying all-time high probability and revenue.

The tech industries’ best of breed are surpassing and approaching the trillion-dollar valuation mark highlighting the potency of these unstoppable businesses.

Sadly, it can’t go on forever and periods of rest are needed to consolidate before shares relaunch to higher highs.

This could shift the narrative from the global trade war, which is perceived as the biggest risk to the current tech market to a domestic growth issue.

Healthy revenue beats and margin growth have been essential pillars in an era of easy money, non-existent tech regulation, and insatiable demand for everything tech.

Tech has enjoyed this nine-year bull market dominating other industries and taking over the S&P on a relative basis.

The lion’s share of growth in the overall market, by and large, has been derived from the tech sector, namely the most powerful names in Silicon Valley.

Late-stage bull markets are fraught with canaries in the coal mine offering clues for the short-term future.

Therefore, it is a good time to reassess the market risks going forward as we stampede into the tail end of the financial year.

The shortage of Silicon Valley workers is not a new phenomenon, but the dearth of talent is going from bad to worse.

Proof can be found in the controversial H-1B visa program used to hire foreign tech workers mainly to Silicon Valley.

A few examples are Alphabet (GOOGL), which was granted 1,213 H-1B approvals in 2017, a 31% YOY rise.

Alphabet’s competitor Facebook (FB) based in Menlo Park, Calif., was granted 720 H-1B approvals in 2017, a 53% YOY jump from 2016.

This lottery-based visa for highly skilled foreign workers underscores the difficulty in finding local American talent suitable for a role at one of these tech stalwarts.

Amazon (AMZN) made one of the biggest jumps in H-1B approvals with 2,515 in 2017, a 78% YOY surge.

The vote of non-confidence in hiring Americans shines an ugly light on American youth who are not applying themselves to the domestic higher education system as are foreigners.

For the lucky ones that do make it into the hallways of Silicon Valley, a great salary is waiting for them as they walk through the front door.

Reportedly, the average salary at Facebook is about $250,000 and Alphabet workers take home around $200,000 now.

Pay packages will continue to rise in Silicon Valley as tech companies vie for the same talent pool and have boatloads of capital to wield to hire them.

This is terrible for margins as wages are the costliest input to operate tech companies.

United Technologies Corp. (UTX) chief executive Gregory Hayes chimed in citing a horrid “labor shortage in the U.S. and in Europe.”

He followed that up by saying the company will have to grapple with this additional cost pressure.

Certain commodity prices are spiraling out of control and will dampen profits for some tech companies.

Uber and Lyft, ridesharing app companies, are sensitive to the price of oil, and a spike could hurt the attractiveness to recruit potential drivers.

The perpetually volatile oil market has been trending higher since January, from $47 per barrel and another spike could damage Uber’s path to its IPO next year.

Will Uber be able to lure drivers into its ecosystem if $100 per barrel becomes the new normal?

Probably not unless every potential driver rolls around in a Toyota Prius.

If oil slides because of a global recession instigated by the current administration aim to rein in trade partners, then Uber will be hard hit abroad because it boasts major operations in many foreign megacities.

A recession means less spending on Uber.

Either result will be negative for Uber and ridesharing companies won’t be the only companies to be hit.

Other victims will be tech companies incorporating transport as part of their business model, such as Amazon which will have to pass on more delivery costs to the customer or absorb the blows themselves.

Logistics is a massive expense for them transporting goods to and from fulfillment centers. And they have a freshly integrated Whole Foods business offering two-hour free delivery.

Higher transport costs will bite into the bottom line, which is always a contentious issue for Amazon shareholders.

Another red flag is the deceleration of the global smartphone market evident in the lackluster Samsung earnings reflecting a massive loss of market share to Chinese foes who will tear apart profit margins.

Even though Samsung has a stranglehold on the chip market, mobile shipments have fell off a cliff.

Damaging market share loss to Chinese smartphone makers Xiaomi and Huawei are undercutting Samsung products. Chinese companies offer better value for money and are scoring big in the emerging world where incomes are lower making Chinese phones more viable.

The same trend is happening to Samsung’s screen business and there could be no way back competing against cheaper, lower quality but good enough Chinese imitations.

Pouring gasoline on the fire is the Chinese investigation charging Micron (MU), SK Hynix, and Samsung for colluding together to prop up chip prices.

These three companies control more than 90% of the global DRAM chip market and China is its biggest customer.

The golden days are over for smartphone growth as customers are not flooding into stores to buy incremental improvements on new models.

Customers are staying away.

The smartphone market is turning into the American used car market with people holding on to their models longer and only upgrading if it makes practical sense.

Chinese smartphone makers will continue to grab global smartphone market share with their cheaper premium versions that western companies rather avoid.

Battling against Chinese companies almost always means slashing margins to the bone and highlights the importance of companies such as Apple (AAPL), which are great innovators and produce the best of the best justifying lofty pricing.

The stagnating smartphone market will hurt chip and component company revenues that have already been hit by the protectionist measures from the trade war.

They could turn into political bargaining chips and short-term pressures will slam these stocks.

This quarter’s earnings season has seen a slew of weak guidance from Facebook, Nvidia (NVDA) mixed in with great numbers from Alphabet and Amazon.

Beating these soaring estimates is not a guarantee anymore as we move into the latter part of the year.

Migrating into the highest quality names such as Amazon and Microsoft (MSFT) with bulletproof revenue drivers would be the sensible strategy if tech’s lofty valuations do not scare you off.

Tech has had its own cake and ate it too for years. But on the near horizon, overdelivering on earnings results will be an arduous chore if outside pressures do not relent.

It’s been fashionable in the past for market insiders to call the top of the tech market, but precisely calling the top is impossible.

The long-term tech story is still intact but be prepared for short-term turbulence.

 

 

 

 

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Quote of the Day

“By giving people the power to share, we're making the world more transparent,” – said cofounder and CEO of Facebook Mark Zuckerberg.

 

August 21, 2018

Mad Hedge Technology Letter
August 21, 2018
Fiat Lux

Featured Trade:
(THE CHIP MINI RECESSION IS ON),
(NVDA), (AMD)

The Chip Mini Recession is On

Now is not a good time to put new money to work in the semiconductor space.

American chip companies are some of the major exporters of domestic technology in a world that has been taken over by a contentious global trade war.

The administration shows no signs of backing down digging into the trenches and not giving up an inch.

Damocles' sword is hanging over chip revenues waiting for the final verdict giving investors a great short-term reason to avoid semiconductor companies.

It’s not the time to be cute in the market, but there is still one must-buy name in the chip space that is best in show and that is Nvidia (NVDA).

"Turing is NVIDIA's most important innovation in computer graphics in more than a decade," said Nvidia CEO and founder Jensen Huang.

Huang made this announcement of the eighth-generation Turing graphics architecture at a conference in Vancouver last week.

There have been recent leaks in the press that Nvidia will roll out two new GPU products shortly, the RTX 2080 and RTX 2080 Ti adding to its already stellar lineup of gaming hardware.

The quality shines through with the real-time ray-tracing offering gamers newly enhanced lighting effects.

Nvidia’s new GeForce RTX 2080 series of graphics cards is derived from the company’s Turing architecture.

To check out a demo that shows off production-quality rendering and cinematic frame rates then click here.

Innovation has been a hallmark of Nvidia’s approach for quite some time and the high quality of products has always attracted a diverse set of customers.

Enhancing its GPU products is a boon because a myriad of gamers, professional and casual, will end up upgrading to these chips that vie to stay ahead of the fierce gaming competition.

Gaming is Nvidia’s core revenue stream comprising more than 58% of sales.

Global exports revenue projects to surge 30% higher in 2018, eclipsing $906 million and could swell to $1.65 billion by 2021.

The new Turing GPU is poised to elevate margins because of its $2,500-$10,000 price point.

The Turing architecture incorporates enhanced Tensor Cores offering six times the performance of the previous generation architecture.

The steep price will entice content creators and developers to drop a wad of cash on state-of-the-art GPUs improving their own products.

The step up in price reflects the addition of modern AI and ray-tracing acceleration into the design that previous generations lacked.

Ray tracing is the act of simulating how light bounces in the physical world smoothly transferring it to a virtual image.

The new Turing architecture will produce 25 times the performance of the previous generation.

Content creators are drooling over these new possibilities.

Profit margins will increase starting from the fourth quarter when shipping commences.

Nvidia has chimed in before describing that the GPU addressable market will rake in 50 million potential customers and will be a $250 billion industry.

Innovation is Nvidia’s bread and butter and instead of resting on its laurels, it has gone out and pushed the limits further with these new GPU technologies.

Advanced Micro Devices (AMD) will have a hard time replicating Nvidia’s success after Nvidia’s second generation of products with integrated AI acceleration is lapping up praises by industry specialists.

Nvidia has adopted the playbook that so many tech companies have found useful. It has a mix of businesses that complement its core business.

The gaming division is by far its main driver. However, the rest of the 42% of revenue is made up of a collection of mainly the data center comprising 23.8% of sales, and its automotive segment bringing up the rear with 5.2% of revenue.

The total addressable market for artificial intelligence will be in the ballpark of $50 billion by 2023 offering a huge pipeline of potential deals in its data center and autonomous driving divisions.

Nvidia rings in just 5.2% of revenue from autonomous driving segment and the mass rollout of robot-taxis will ignite this segment into a meaningful part of its portfolio.

The first hurdle is the mass adoption of Waymo vehicles because they are first in line to make this futuristic industry into modern day reality.

Either way, Nvidia is advancing its technology to be in pole position to capitalize on the shift to automotive driving by developing a driverless car supercomputer named Drive PX Pegasus aimed at helping automakers create Level 5 self-driving vehicles.

Even though this industry is still in its incubation stage, a projected 33 million autonomous vehicles will be cruising around streets by 2040 ballooning from the 51,000 cars forecasted by 2021.

Nvidia’s have struggled as of late.

The post-earnings sell-off happened even though it beat the current quarter’s projections, but the all-important guidance was light.

Guidance fell short because of bitcoin’s fall from grace cratering from $20,000 to $6,000.

Low cryptocurrency prices suck the air out of the demand for GPUs required to mine cryptocurrency.

The softness in demand was reflected in last quarter’s crypto-based revenue coming in at a paltry $18 million.

The previous quarter was a different story with crypto-based revenue boosting top-line revenue substantially with quarterly revenue registering $289 million, which was 9% of total quarterly revenue.

Huang has confided that crypto-based revenue is not the main driver for Nvidia going forward. And latching itself to an unstable digital currency with governments out to drown out the fad is not sustainable.

The guidance, even though less than expected, is still healthy representing 23% YOY growth.

The sell-off offers a prime entry point in a stock that is the best publicly traded chip company in America right now.

No doubt the enhanced GPU chips will kick-start another round of increasing revenue. The lighter-than-expected revenue guidance sets the stage for Nvidia to resoundingly beat next quarter’s earnings estimate.

Crypto-based revenue was never an assumed part of Nvidia’s revenue engine and was at best a one-off boost to the bottom line.

Nvidia is still a great company producing hardware with duopoly playmate AMD, which has seen a double in its share price in the past four months.

As Nvidia retraces from its all-time high, $225 is the next level of support that would provide a timely entry point into a company that leads its industry.

These types of companies do not grow on trees and if you choose to buy into any chip stock, Nvidia would be the favorite because of its dominant position grabbing 66% of market share in the GPU market leaving runner-up AMD with the scraps.

 

 

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Quote of the Day

"It's OK to have your eggs in one basket as long as you control what happens to that basket," – said Tesla founder and CEO Elon Musk.

 

August 16, 2018

Global Market Comments
August 16, 2018
Fiat Lux

SPECIAL ARTIFICIAL INTELLIGENCE ISSUE

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August 15, 2018

Global Market Comments
August 15, 2018
Fiat Lux

Featured Trade:
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August 10, 2018

Global Market Comments
August 10, 2018
Fiat Lux

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July 25, 2018

Global Market Comments
July 25, 2018
Fiat Lux

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July 2, 2018

Global Market Comments
July 2, 2018
Fiat Lux

Featured Trade:
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