Mad Hedge Technology Letter
August 22, 2018
Fiat Lux
Featured Trade:
(WHAT’S IN STORE FOR TECH IN THE SECOND HALF OF 2018?),
(GOOGL), (AMZN), (FB), (UTX), (UBER), (LYFT), (MSFT), (MU), (NVDA), (AAPL), (SMH)
Posts
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.
________________________________________________________________________________________________
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.
Mad Hedge Technology Letter
August 21, 2018
Fiat Lux
Featured Trade:
(THE CHIP MINI RECESSION IS ON),
(NVDA), (AMD)
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, $225 is the next level of support that would provide a timely entry point into a company that leads its industry.
These types of companies do not grow on trees and if you choose to buy into any chip stock, Nvidia would be the favorite because of its dominant position grabbing 66% of market share in the GPU market leaving runner-up AMD with the scraps.
________________________________________________________________________________________________
Quote of the Day
"It's OK to have your eggs in one basket as long as you control what happens to that basket," – said Tesla founder and CEO Elon Musk.
Global Market Comments
August 16, 2018
Fiat Lux
SPECIAL ARTIFICIAL INTELLIGENCE ISSUE
Featured Trade:
(NEW PLAYS IN ARTIFICIAL INTELLIGENCE),
(NVDA), (AMD), (ADI), (AMAT), (AVGO), (CRUS),
(CY), (INTC), (LRCX), (MU), (TSM)
Global Market Comments
August 15, 2018
Fiat Lux
Featured Trade:
(WHY BONDS CAN'T GO DOWN),
(TLT), (TBT), ($TNX), (TUR), (TSLA),
(HOW TO MAKE MORE MONEY THAN I DO),
(AMZN), (LRCX), (ABX), (AAPL), (TSLA), (NVDA)
Mad Hedge Technology Letter
August 15, 2018
Fiat Lux
Featured Trade:
(HOW TO PLAY THE NEW FORTNITE GAMING FAD),
(ATVI), (EA), (AMD), (NVDA), (MSFT), (AAPL), (GOOGL), (TWTR), (SNAP), (FB), (SPOT), (GAMR)
By now, most of you have figured out that I love calling readers every day and milking them for ideas on how to improve my service.
Often, they think I am an imposter, a telephone salesman, a machine, or an algorithm. It's only after listening for a few seconds that they recognize my voice from the biweekly strategy webinars and realize that it's the real me.
I don't do this to get renewals, because everyone renews anyway. Where else do you get a 62% annual return with no serious drawdowns?
No, I do it because the information I pick up from subscribers is golden. Some of my best Trade Alerts are inspired by reader questions.
One of my favorite Einstein quotes is that "There are no stupid questions, only stupid answers."
In fact, I have discovered that a lot of subscribers are making much more money from my service than I do.
I'll tell you how they do it.
First, let me remind readers that every Trade Alert I send out includes recommendation for a call or put option spread, a single stock, or an ETF.
The trading performance charts that we published are based on the options spread positions only.
WARNING: What worked swimmingly over the past 10 years is no guarantee that it will work next year, but I thought you'd like to know anyway.
1) Raise the Strike Prices
Move the strike prices up by a dollar. So instead of buying the Barrick Gold (ABX) September $15-$16 deep in-the-money vertical bull call spread, you pick up the $16-$17 call spread instead.
Generally, you make a profit that is 50% greater on this higher spread than with the original recommendation. But you are also taking on higher risk.
When 90% or more of our Trade Alerts are successful this has been a pretty good bet to make.
2) Buy the Call Options Only
Instead of buying the call spread, you buy the call option only in half the size.
When it works, your upside is unlimited. When it doesn't, you just write off the total value of your investment.
This is a great approach when the stocks I recommend take off like a rocket and double or more, as have Apple (AAPL), Amazon, (AMZN), Tesla (TSLA), Lam Research (LRCX), and NVIDIA (NVDA).
Option spread buyers leave a lot of money on the table with this scenario, but get lower performance volatility.
I have observed that many of my Australia readers pursue this approach, as they are fighting a 14-hour time zone disadvantage with the New York Stock Exchange. Not many civilians want to trade at 4:00 AM no matter how much it pays.
The payoff is that they earn about double what I do trading the same stocks.
3) Buy a 2X or 3X Leveraged ETF
This is moving out even further off the risk curve.
Almost every one of the 101 S&P 500 sectors have listed for them 2X and 3X bull and bear ETF's. In theory, the best-case scenario for one of these funds is that they will rise three times as fast as the underlying basket.
In theory, I said.
By the time you take out management fees, tracking error, and execution costs, and wide spreads, you are more likely to get 2.5 times the basket appreciation, if not 2X.
I normally steer investors away from 3X funds. But 401k traders, who are not allowed to deal in stock options, swear by them.
4) Trade Futures
This is a favorite of foreign exchange, precious metals, and bond traders. A futures contract can deliver up to 100 times the performance of the underlying currency, metal, or Treasury bond.
Get a good entry point, run a tight stop loss, and the potential gains can be astronomical.
Every year we get a couple of followers who earn 1,000% profits using our market timing for entry and exit point, and they always do it through the futures markets. Yes, that is a 10X return.
This is also a much higher risk, but higher return strategy. Your broker will present greater disclosure requirements and need a higher clearance level.
But potentially retiring in a year is ample bait for many professionals to go through with this.
5) Read the Research
I know a lot of you only buy this service only for our industry beating Trade Alert service.
But my decade-long experience in watching readers succeed, or fail, in their executions is that the more research they read, the more money they make.
Don't try to skim though with a minimal effort.
It's really very simple. The more work you put into this, the more profit you take out.
Understanding fully what is happening in the markets, indeed the entire global economy, will give you the confidence you need to take on bigger positions and make A LOT more money.
There is no free lunch. There is no Holy Grail.
Having said all that, good luck and good trading.
Looks Like I Got Another One
Each generation grows up in its own unique environment.
Childhood experiences differ more and more as the world rapidly changes because of hyper-accelerating technology.
Millennials are usually defined as children born between 1981 to 1996.
They were the last generation to grow up outside breathing crisp, fresh air and meandering around the neighborhood with their friends looking for excitement.
Generation Z is the first generation in America generally raised indoors because of their overwhelming preference and broad-based addiction to technology.
Social media stocks have been a huge winner from this new paradigm shift in the behavior of young adults.
Instead of running around the block in packs, children are laser focused on these platforms communicating with the entire world and propping up their social lives.
Children meet a lot less than they used to and convening on a social media platform of choice has become the new normal.
Platforms such as Twitter (TWTR), Instagram and Snapchat (SNAP) have convincingly won over these new eyeballs even so much so that the new "going out" is congregating on Snapchat with a group of friends.
Facebook (FB) is now considered a legacy social media platform full of millennials and the older crowd.
Generation Z do not fancy drugs or drinking like the youth before them, rather, their panacea is video games and a lot of them.
These new societal trends will hugely affect your portfolio going forward.
A battle royal game is a video game category mixing the survival, exploration and scavenging elements together with last-man-standing gameplay.
These types of games predominantly contain 100 players sharing the same experience on a broadband connection.
This genre has been all the rage with PlayerUnknown's Battlegrounds (PUBG) piling up 400 million gamers across the globe selling 50 million copies of the game.
Of the 400 million gamers, 88% access the game via mobile devices highlighting the vigorous shift to mobile for younger generations.
PUBG made more than $700 million in sales in 2017.
The rise of the billion-dollar video games is alive and well.
In fact, Activision Blizzard (ATVI) stakes claim to eight gaming franchises commanding more than $1 billion in annual revenue with titles such as Overwatch, Candy Crush, and Call of Duty.
The popularity of video games will drive GPU manufacturers Nvidia (NVDA) and AMD (AMD) to new heights because gamers require high-quality GPUs to effectively game.
Nvidia CEO Jensen Huang even spouted that "the success of Fortnite and PUBG are just beyond comprehension" boosting GPU sales and capturing the imagination of global youth.
Fortnite, a "Hunger Games" style battle royal video game mirroring PUBG, has taken the world by storm in 2018.
This cultural juggernaut surpassed the 125 million gamer mark in just one year.
In February 2018, Epic Games, the maker of Fortnite, earned $126 million in one month, and it was the first time it passed PUBG in monthly sales.
In April 2018, it followed up monster February numbers by pulling in $296 million.
The growth trajectory is parabolic. Hold onto your hats.
Fortnite sparkles in the sunlight because its free-to-play model does not exclude anyone and is available on all devices.
At first, Fortnite was available for iOS customers and Samsung Android holders because it inked an exclusive deal with Samsung.
This week is the first week Epic Games is rolling out Fortnite to non-Samsung Android users with an interesting caveat.
The Android version of Fortnite bypasses Google Play (Google's app store on Android) preferring to sell the game direct for download from its official website.
This highlights that content is truly king.
Epic Games is betting the surge in popularity for its juggernaut game will sell itself.
This decision will cost Alphabet (GOOGL) $70 million per year in commission.
Apple makes it mandatory that any app downloaded to its devices must be downloaded from Apple's app store.
However, Android doesn't have the same requirements as its system is more functional, open, and a developer's dream.
Simply put, there are ways to download the game on Android without ever touching Google Play.
Going forward this could have a similar effect Spotify (SPOT) had on Wall Street on its IPO.
The middlemen or broker app could get bypassed in favor of direct sales.
Apple pockets commission on 30% of all in-app spending raking in around $60 million from Fortnite.
In-game add-on revenue is how Fortnite makes money from this free-to-play game.
The bulk of spending comes in the form of costumes better known as skins, where players pay to dress up their character in various garments selected for purchase.
The other revenue stream is a season subscription on sale for $10.
The tech sector has been migrating to subscription-based offerings and video games are no different.
This could play havoc with Alphabet's Google Play and Apple's app store down the line if prominent content producers choose to bypass their stores to sell directly.
The lack of video game exposure to the FANG group is mind-boggling. It seems they have their finger on the pulse of every other major trend in technology but have missed out on this one.
Microsoft (MSFT) is the closest FANG-like stock deep inside the video game ecosphere by way of its famous console Xbox.
In fact, Microsoft earns more than $10 billion per year from its gaming segment surpassing Nintendo at $9.7 billion per year.
This doesn't eclipse Sony's gaming revenue, which is $17 billion per year, but the 36% YOY growth in Xbox-related revenue signals its intent in the gaming industry that plays second fiddle to its cloud and software businesses.
Gaming is just a side business for Microsoft right now.
Ironically, Tencent has a 40% stake in Epic Games and is patiently waiting for government approval to sell Fortnite in China, which could be painstakingly arduous.
If Tencent gets the green light, Fortnite could develop into a monster business in 2018, and this is just the beginning.
Regrettably, Tencent has been mired in regulatory issues with the communist government reluctant to approve selling in-game products, which usually make up the bulk of revenue.
Recent blockbuster hit "Monster Hunter: World" was blocked by censors after debuting to great fanfare on August 8, 2018.
This title was expected to be one of the most popular video games of 2018.
Chinese state censors are on a short-term crusade to block the video game industry from receiving critical licenses and is the main reason for Tencent shares' headwinds.
Tencent shares peaked in January and are down almost 15% in 2018 because of uncertain gaming revenues.
Investors need to wake up and understand the gaming industry is about to mushroom because of demographics and the migration away from outdoor activity.
Following generations will have an even stronger bias toward technology-based indoor entertainment.
We are entering into the unknown of $4 billion per year video game businesses based on just one title and not one company.
Fortnite made PUBG's $700 million in revenue last year look paltry.
Gamers will soon see the rise of a $5 billion game franchise in 2019 and the sky is the limit.
This industry has growth, growth, and more growth and these single titles could surpass revenue of large semiconductor or hardware companies.
Don't underestimate the power of your child gaming away in your basement, he or she is part and parcel of a wicked tech growth driver about which not many people know.
Unfortunately, Epic Games is not a public company and shares cannot be purchased, but the success of Fortnite means that investors must pay heed to these new developments.
I am highly bullish on the video game sector and a big proponent of Activision (ATVI). A secondary name would be EA Sports (EA), which curates the Madden and FIFA franchises.
ATVI has felt the Fortnite effect in its share price selling off 11% because of investors' nervousness of Fortnite siphoning off ATVI gamers.
This short-term drop is a nice entry point into a solid video gaming company with various successful franchises that have withstood the test of time.
The 200-day moving average has provided ironclad support on the way up, and the Fortnite phenomenon won't last forever.
I would avoid the video game ETF ticker symbol GAMR because it includes one of my bona fide shorts - GameStop (GME).
It's mainly comprised of American, Japanese, and a Korean name but it would be sensible to focus on the companies with the highest quality comprehensive content.
The ETFs recent drop is also due to the strength of Fortnite.
________________________________________________________________________________________________
Quote of the Day
"Companies in every industry need to assume that a software revolution is coming." - said Silicon Valley venture capitalist Marc Andreessen.
Mad Hedge Technology Letter
August 14, 2018
Fiat Lux
Featured Trade:
(BUY ADVANCED MICRO DEVICES ON THE INTEL STUMBLE),
(AMD), (NVDA), (INTC)
