Mad Hedge Technology Letter
December 21, 2020
Fiat Lux
Featured Trade:
(THE BEST WAY TO SUPERCHARGE YOUR TECH PORTFOLIO)
(NVDA), (PLTR), (AMD), (APPL), (OTC:SFTBF), (INTC), (QCOM)
Tag Archive for: (NVDA)
Superiority is mainly about taking complicated data and finding perfect solutions for it. Trading in technology stocks is no different.
Investing in software-based cloud stocks has been one of the seminal themes I have promulgated since the launch of the Mad Hedge Technology Letter way back in February 2018.
Well, if you thought every tech letter until now has been useless, this is the one that should whet your appetite.
Instead of racking your brain to find the optimal cloud stock to invest in, I have a quick fix for you and your friends.
Invest in The WisdomTree Cloud Computing Fund (WCLD) which aims to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index (EMCLOUD).
What Is Cloud Computing?
The “cloud” refers to the aggregation of information online that can be accessed from anywhere, on any device remotely.
Yes, something like this does exist and we have been chronicling the development of the cloud since this tech letter’s launch.
The cloud is the concept powering the “shelter-at-home” trade which has been hotter than hot in 2020.
Cloud companies provide on-demand services to a centralized pool of information technology (IT) resources via a network connection.
Even though cloud computing already touches a significant portion of our everyday lives, the adoption is on the verge of overwhelming the rest of the business world due to advancements in artificial intelligence and the Internet of Things (IoT) hyper-improving efficiencies.
The Cloud Software Advantage
Cloud computing has particularly transformed the software industry.
Over the last decade, cloud Software-as-a-Service (SaaS) businesses have dominated traditional software companies as the new industry standard for deploying and updating software. Cloud-based SaaS companies provide software applications and services via a network connection from a remote location, whereas traditional software is delivered and supported on-premise and often manually. I will give you a list of differences to several distinct fundamental advantages for cloud versus traditional software.
Product Advantages
Speed, Ease, and Low Cost of Implementation – cloud software is installed via a network connection; it doesn’t require the higher cost of on-premise infrastructure setup and installation.
Efficient Software Updates – upgrades and support are deployed via a network connection, which shifts the burden of software maintenance from the client to the software provider.
Easily Scalable – deploying via a network connection allows cloud SaaS businesses to grow as their units increase, with the ability to expand services to more users or add product enhancements with ease. Client acquisition can happen 24/7 and cloud SaaS companies can more easily expand into international markets.
Business Model Advantages
High Recurring Revenue – cloud SaaS companies enjoy a subscription-based revenue model with smaller and more frequent transactions, while traditional software businesses rely on a single, large, upfront transaction. This model can result in a more predictable, annuity-like revenue streams making it easy for CFOs to solve long-term financial solutions.
High Client Retention with Longer Revenue Periods – cloud software becomes embedded in client workflow, resulting in higher switching costs and client retention. Importantly, many clients prefer the pay-as-you-go transaction model, which can lead to longer periods of recurring revenue as upselling product enhancements does not require an additional sales cycle.
Lower Expenses – cloud SaaS companies can have lower R&D costs because they don’t need to support various types of networking infrastructure at each client location.
I believe the product and business model advantages of cloud SaaS companies have historically led to better margins, growth, higher free cash flow, and efficiency characteristics as compared to non-cloud software companies.
How does the WCLD ETF select its indexed cloud companies?
Each company must satisfy critical criteria such as they must derive the majority of revenue from business-oriented software products, as determined by the following checklist.
+ Provided to customers through a cloud delivery model – e.g., hosted on remote and multi-tenant server architecture, accessed through a web browser or mobile device, or consumed as an application programming interface (API).
+ Provided to customers through a cloud economic model – e.g., as a subscription-based, volume-based, or transaction-based offering Annual revenue growth, of at least:
+ 15% in each of the last two years for new additions
+ 7% for current securities in at least one of the last two years
Some of the stocks that would epitomize the characteristics of a WCLD stock are Salesforce, Microsoft, Amazon-- I mean, they are all up, you know, well over 100% from the nadir we saw in March and contain the emerging growth traits that make this ETF so robust.
If you peel back the label and you look at the contents of many tech portfolios, they tend to favor some of the large-cap names like Amazon, not because they are “big” but because the numbers behave like emerging growth companies even when the law of large numbers indicate that to push the needle that far in the short-term is a gravity-defying endeavor.
We all know quite well that Amazon isn't necessarily a direct play on cloud computing, but the elements of its cloud business are nothing short of brilliant.
But ETF funds like WCLD, what they look to do is to cue off of pure plays and include pure plays that are growing faster than the broader tech market at large. So you're not going to necessarily see the vanilla tech of the world in that portfolio. You're going to see a portfolio that's going to have a little bit more sort of explosive nature to it, names with a little more mojo, a little bit more risk because you're focusing on smaller names that have the possibility to go parabolic and gift you a 10-bagger.
One stock that has the chance of a 10-bagger is my call on Palantir (PLTR).
Palantir is a tech firm that builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations, and my call was to buy them at $10 after it’s IPO, it's up to $26 and has an easy pathway to $50.
This is one of the no-brainers that procure revenue from Democrat and Republican administrations even though its CEO Alex Karp has been caught on video making fun of the current administration’s leaders.
In a global market where the search for yield couldn’t be tougher right now, right-sizing a tech portfolio to target those extraordinary, extra-salacious tech growth companies is one of the few ways to produce alpha without overleveraging.
No doubt there will be periods of volatility, but if a long-term horizon is something suited for you, this super-growth strategy is a winner and don’t forget about PLTR while you’re at it.
Mad Hedge Technology Letter
December 18, 2020
Fiat Lux
Featured Trade:
(TECH IN 2021)
(ZM), (WORK), (NVDA), (AMD), (QCOM), (SQ), (PYPL), (INTU), (PANW), (OKTA), (CRWD), (SHOP), (MELI), (ETSY), (NOW), (AKAM), (TWLO)
The tech sector has been through a whirlwind in 2020, and if investors didn’t lose their shirt in March and sell at the bottom, many of them should have ended the year in the green.
My prediction at the end of 2019 that cybersecurity and health cloud companies would outperform came true.
What I didn’t get right was that almost every other tech company would double as well.
Saying that video conferencing Zoom (ZM) is the Tech Company of 2020 is not a revelation at this point, but it shows how quickly a hot software tool can come to the forefront of the tech ecosystem.
M&A was as hot as can be as many cash-heavy cloud firms try to keep pace with the Apples and Googles of the tech world like Salesforce’s purchase of workforce collaboration app Slack (WORK).
Not only has the cloud felt the huge tailwinds from the pandemic, but hardware companies like HP and Dell have been helped by the massive demand for devices since the whole world moved online in March.
What can we expect in 2021?
Although I don’t foresee many tech firms making 100% returns like in 2020, they are still the star QB on the team and are carrying the rest of the market on their back.
That won’t change and in fact, tech will need smaller companies to do more heavy lifting come 2021.
The only other sector to get through completely unscathed from the pandemic is housing, and unsurprisingly, it goes hand in hand with converted remote offices that wield the software that I talk about.
The world has essentially become silos of remote offices and we plug into the central system to do business with each other with this thing called the internet.
In 2021, this concept accelerates, and cloud companies could easily check in with 20%-30% return by 2022. The true “growth” cloud firms will see 40% returns if external factors stay favorable.
This year was the beginning of the end for many non-tech businesses and just because vaccines are rolling out across the U.S. doesn’t mean that everyone will ditch the masks and congregate in tight, indoor places.
There is nothing stopping tech from snatching more turf from the other sectors and the coast couldn’t be clearer minus the few dealing with anti-trust issues.
I can tell you with conviction that Facebook, Google, Apple, and Amazon have run out of time and meaningful regulation will rear its ugly head in 2021.
We are already seeing the EU try to ratchet up the tax coffers and lawsuits up the wazoo on Facebook are starting to mount.
Eventually, they will all be broken up which will spawn even more shareholder value.
Even Fed Chair Jerome Powell told us that he thinks stocks aren’t expensive based on how low rates have become.
That is the green light to throw new money at growth stocks unless the Fed signal otherwise.
As we head into the 5G world, I would not bet against the semiconductor trade and the likes of Nvidia (NVDA), AMD (AMD), Qualcomm (QCOM) should overperform in 2021.
Communication is the glue of society and communications-as-a-platform app Twilio (TWLO) will improve on its 2020 form along with cloud apps that make the internet more efficient and robust like Akamai (AKAM).
Workflow cloud app ServiceNow (NOW) is another one that will continue its success.
The uninterrupted shift to the cloud will not stop in 2021 and will be a strong growth driver for numerous tech companies next year.
I will not say this is a digital revolution, but as corporate executives realize they haven’t spent enough on the cloud in the lead-up to the pandemic and must now play catch-up in order to satisfy new demands in the business.
The most recent CIO survey was the thesis that cloud and digital adoption at 10% of enterprise and 15% of consumer spend entering 2020 would continue to accelerate post-pandemic and into 2021-2022.
A key dynamic playing out in the tech world over the next 12 to 18 months is the secular growth areas around cloud and cybersecurity that are seeing eye-popping demand trends.
Consumers will still be stuck at home, meaning e-commerce will still be big winners in 2021 such as Shopify (SHOP), Etsy (ETSY), and MercadoLibre (MELI).
The reliance on e-commerce will open the door for more tech companies to participate in the digital flow of transactions and the U.S. will finally catch up to the Chinese idea of paying through contactless instruments and not cards.
This highly benefits U.S. fintech companies like Square (SQ) and PayPal (PYPL). Intuit (INTU) and its accounting software is another niche player that will dominate.
Intuit most recently bought Credit Karma for $8.1 billion signaling deeper penetration into fintech.
Since we are all splurging online, we need cybersecurity to protect us and the likes of Palo Alto Networks (PANW), Okta (OKTA), and CrowdStrike Holdings, Inc. (CRWD).
The side effect of the accelerating shift to digital and cloud are troves of data that need to be stored, thus anything related to big data will also outperform.
Most of the information created (97%) has historically been stored, processed, or archived.
As new mountains of digital gold are created, we expect AI will have an increasingly critical role.
I believe that 2021 will finally see the integration of 5G technology ushering in another wave of digital migration and data generation that the world has never seen before and above are some of the tech companies that will make out well.
The average household is using 38x the amount of internet data they were using ten years ago and this is just the beginning.
Mad Hedge Technology Letter
December 14, 2020
Fiat Lux
Featured Trade:
(NVIDIA’S SHOW OF FORCE)
(NVDA), (AMD), (APPL), (OTC:SFTBF), (INTC), (QCOM)
One of the best buy and hold tech stock has to be Nvidia (NVDA).
They are positioned at the vanguard of every major cutting-edge technology in the world such as self-driving technology, data center, and artificial intelligence.
Their cash cow business of manufacturing GPUs (graphics processing unit) which are essential to video gaming has been bolstered by the shelter-at-home movement.
Video games as an activity or something to just pass the time has never been so popular and Nvidia is the best of breed in this department.
The key takeaway from Nvidia’s asset portfolio is the diversity.
They aren’t beholden to any one division and I wouldn’t bet anytime soon that video games are going to go out of fashion because of the generational tailwind occurring.
In fact, the underlying Nvidia stock has risen more than 120% in 2020 and semiconductors have proven to be an astute place to put your money in during the pandemic.
The same goes for competitive rivals such as Advanced Micro Devices (AMD), Intel (INTC), and Qualcomm (QCOM) who explore some of those same markets.
Nvidia counts Amazon (AMZN) Web Services as a customer for data-center chips. It is partnering with VMware (VMW) and Amazon on an AI-driven cloud platform for big businesses.
Be mindful that semiconductor stocks are volatile because of the boom-bust nature of their business cycle.
Global chip sales cratered in late 2018 and fell 12% in 2019.
They rallied early this year on signs of an industry recovery and on a U.S.-China trade deal, then sold off on coronavirus fears.
The trade war has also thrown a spanner in the works of global chip production.
Production was first halted in China and then put global economies under strain.
Despite the pandemic, the semiconductor industry will return to growth in 2020.
Chip sales will rise by 5.1% to $433 billion this year and accelerate to 8.4% in 2021.
The spread of 5G wireless networks is a key catalyst.
Moving forward, it’s highly likely that U.S. lawmakers maintain an anti-China doctrine, and Nvidia and AMD derive only 1% to 2% of revenue from Huawei.
In fact, other companies are more exposed like Cisco and Intel.
How well is Nvidia doing?
They increased revenue by 57% year over year in the third quarter predominately due to its data center business, which grew revenue by 162% over the same period.
In Q3, the data center division accounted for $1.9 billion of the company's $4.7 billion of revenue.
Nvidia is also growing through acquisitions with its blockbuster pending $40 billion acquisition of chip design licensor ARM Holdings from Softbank (OTC:SFTBF).
ARM’s acquisition will help NVIDIA maintain the best of breed quality through 2021 and beyond.
That is important because the semiconductor industry is becoming more cutthroat with many big players sourcing chips in-house after deeply investing in this technology.
Apple (AAPL) recently unveiled its own stable of Mac processors, the M1, making its debut in late 2020. Manufacturing chips is historically a capital-intensive activity, and new chips don’t roll out that fast. In any case, cash-rich companies the size of Google and Apple have the firepower to pull this off.
ARM holds many unique patents forcing many companies to license from them, Apple can customize those designs, and the actual fabrication is outsourced to Taiwan Semiconductor (TSM), the largest and most technologically advanced semiconductor fabricator in the world.
In this specific case, Intel is the direct loser from the production of Apple M1 chips and at this point, this is becoming an existential crisis for Intel.
The acquisition of ARM is a gamechanger, and not just because NVIDIA would gain access to new markets like CPUs for mobile as early as 2021.
Integrating with ARM signals NVIDIA's future shift toward licensing of technology - a far more stable business model than the traditionally cyclical nature of semiconductor industry sales driven by upgrade cycles.
It all comes down to the quality of NVIDIA's chips which remain highly competitive in secular growth areas of tech, such as data centers and artificial intelligence. This alone should keep NVIDIA high up investors' list for years to come.
Demand for the new Nvidia GeForce RTX GPU has been “overwhelming” and the company completed its Mellanox acquisition, a tech firm that sells adapters, switches, software, cables, and silicon for markets including high-performance computing, data centers, cloud computing, computer data storage, and financial services, in April, helping it to double down on their revenue drivers.
Sales for Nvidia's chips remain robust across some of the most desirable end markets and there is nothing meaningful out there to suggest that Nvidia won’t continue its overperformance next year even if the shelter-at-home economy stops.
I am highly bullish on Nvidia stock into 2021 and beyond.
Mad Hedge Technology Letter
November 16, 2020
Fiat Lux
Featured Trade:
(THE GOLD STANDARD OF U.S. SEMICONDUCTOR COMPANIES)
(NVDA)
Tech investors who want a sure-fire way to sleep well at night while holding tech stocks should consider one semiconductor stock that is a generational gamechanger.
Short-duration trades in chip companies are susceptible to major selloffs because of the inherent boom-bust nature of the chip market.
Combine that with geopolitical headwinds that make consistent contract negotiations a possible one-off activity making it difficult to decode the short-term movements of the underlying shares.
Even with all the difficulties, Nvidia (NVDA) is a must-own stock for anyone that has any ambition to overperform deploying a basket of tech stocks.
This is the gold standard of technology buttressed by a plethora of secular growth drivers.
There are not many companies out there recreating a significant smorgasbord of multiple long-term growth segments.
Nvidia’s cash cow is its secular growth in gaming and graphics chips plus the data center business.
But it also has skin in the game in AI and machine learning, autonomous driving, and professional graphics.
Not only do they participate in these segments, but they are downright beasts in every segment they take part in which validates the firm as a high-quality operational outfit.
Basically, the company’s GPU (graphics processing unit) offerings are the best in the business.
I tell my high school nephews to find a job at Nvidia in the future.
Even though competition has increased—how could it not?—we know Nvidia’s products are top-notch because its margins are better, and they are able to command a higher premium with no push back.
Accelerating growth is really the common denominator found across the myriad of segments.
I expect 44.6% total revenue growth this year to $15.8 billion.
This estimate stood at just $10.8 billion at the beginning of the year and thus, I have moved up my revenue forecasts by about 50%.
Revenue estimates increasing by $5 billion for this year confirm that Nvidia is one of the tech titans of the world.
Constant revenue upgrades are the hallmark of a healthy tech company and its parabolic rise is in the early innings.
And can you believe that this was a supposed down year because of the macroeconomic weakness?
Imagine what they could do during a “good” year?
Earnings are forecast to grow an even more stellar 57% to $9.11 per share this year.
This year, 2020, isn’t just a demand-driven event due to the novel coronavirus.
The runway is long on the supply side and the elevated demand for its products is just one piece of the puzzle.
Soon enough Nvidia (NVDA) will report quarterly results on Wednesday, November 18, and they will most likely confirm my hunch that the overperformance in 2020 will spill over into 2021 and beyond.
The company has been a prime beneficiary of the “shelter-at-home” driven secular trends such as gaming and data center.
The underlying stock has doubled to over $530 this year and I forecast Nvidia to deliver a solid beat and model above any extreme estimate, driven by an expectation of an extra week of revenue that may not be fully accounted for.
The unparalleled growth due to the renaissance in video games cannot be understated and now that a third wave in the U.S. and second wave in Europe is inevitable, gaming will be thrust into the limelight again.
Some of the segments that I see expanding rapidly are 153% year-over-year growth for Datacenter and a 27% year-over-year increase for Gaming, with the two segments making up 41% and 47% of sales, respectively.
Even though they continue to hit on all cylinders in an otherwise challenging macro environment, I feel the overall premium is reflected in its share price.
Even though operational execution is likely to be perfect, I don’t see much upside in the stock in the short-term and investors will need to use any 10% dip to buy and hold Nvidia long-term.
I don’t recommend short-duration trades in Nvidia because of the volatile nature of the price action.
This is a transformational tech institution and is absolutely worth owning.
Mad Hedge Technology Letter
October 30, 2020
Fiat Lux
Featured Trade:
(THE TWO CAN'T-MISS CHIP COMPANIES)
(NVDA), (AMD), (XLNX), (ARM)
I want to talk about two companies that are the “no-brainers” of the semiconductor space that would give you a call option on the data center space.
Let’s take a quick look back at some of their latest moves and what it would mean for your tech portfolio.
A few months ago, Nvidia said it would buy British chip company Arm from SoftBank for $40 billion in a stock and cash deal.
CEO Jensen Huang admitted that while the company's acquisition of the rival British chipmaker was a little on the expensive side, it would make sense in the long-term.
“I had to pay you an arm and a leg for it,” the Nvidia CEO said, and “I told you I was going to be the last and highest bidder.”
Overpaying for high quality companies is something that is only possible from a position of strength.
Huang justified Arm’s price tag saying that the chipmaker’s network of customers made it worthwhile and that he wants to expose those customers to Nvidia’s artificial intelligence technology.
Cross-selling the products and services is where the synergies between the companies can be exploited.
AMD is the other player that is really crushing it along with Nvidia and they recently made a deal to acquire Xilinx.
The deal is a direct response to Nvidia’s attempts to become the leader in high performance computing.
Obviously, the acquisitions are made possible because of years of refining their balance sheets and buying into more growth is a time-honored strategy that tech companies focus on.
AMD will give Nvidia a run for their company with a combined additional 13,000 talented engineers and over $2.7 billion in annual R&D investments.
This is very much a talent grab as well as a revenue grab.
Xilinx offers AMD access to adaptive platforms in critical areas such as 5G and automotive.
The tie-up is a transformational opportunity to tap into a total addressable market of $110 billion, up from previous AMD standalone estimates of $79 billion for 2022.
Xilinx adds about $31 billion to the total addressable market and on the operational side, AMD will see gross margins spike from 45% to 51%.
Even more impressive, operating income margins will surge to 21%, up from 16%.
It’s not like AMD needed much help, as they smashed expectations by growing 55.6% and beating estimates by $240 million in the latest earnings report.
EPS beat analyst estimates by $0.06 providing the highest level of earnings in years at $0.41 per share.
The Computing and Graphics division beats estimates with revenues of $1.67 billion.
The ramp-up of new consoles and data center sales led to a mindboggling 101% sequential revenue increase.
The company’s server processor revenue almost doubled compared with the year earlier, and AMD is on track to begin shipping its next-generation server processors later this year.
The current and future status of gaming is very much tied to the fortunes of Nvidia and AMD and the pandemic has fueled massive migration to time spent playing video games.
Who would have thought if people can’t go outside, more video games would be played?
The new generation of consoles is set to launch in November from Microsoft (MSFT) and Sony (SNE) which has helped boost AMD’s gaming chip business.
Typically, this gaming chip segment drops in the fourth quarter, but this year it will mushroom because of the new console launches and ramp-up in production and sales.
Ultimately, in terms of the Xilinx (XNLX) deal, it is complimentary to AMD’s business – an appetizer to the main dish.
It will help improve the company’s ability to support data center customers and adds exposure to sectors such as automotive, aerospace, defense, and industrials.
Through Xilinx’s field-programmable gate array (FPGA) chips—or semiconductors that can be reprogrammed after production, unlike most semiconductors—AMD could benefit from the tail end of the 5G upgrade cycle, too.
That’s because with many emerging technologies, it’s too expensive to experiment with chips with instructions that are set in stone, and build emerging infrastructure such as 5G.
Xilinx’s businesses also tend to retain customers for longer because its strong designs can lead to longer product cycles.
Together, Xilinx and AMD will also operate at a significantly larger scale, which should improve margins and cash flow.
These deals will create a leading supplier of chips for edge-network base stations.
Unlike in the data center market where general-purpose chips win, edge networks require chips that are good at specific things: low-latency, custom-built, specific units.
Those are all things AMD and Xilinx are good at making. Edge computing is a concept that refers to moving processing power and data storage closer to where it’s needed, thus improving performance on local machines.
In short, Nvidia and AMD are the leading lights of the semi-chip industry involved in all the growth industries from artificial intelligence, data centers, video gaming, and self-driving technologies.
I am highly bullish both.
