Posts

May 23, 2019

Mad Hedge Technology Letter
May 23, 2019
Fiat Lux

Featured Trade:

(ANOTHER 5G PLAY TO LOOK AT)
(EQIX), (CSCO), (GOOGL), (MSFT), (ORCL)

Another 5G Play to Look At

One of the seismic outcomes from the upcoming rollout of 5G is the plethora of generated data and data storage that will be needed from it.

If you are a cloud purist and want to bet the ranch on data being the new oil, then look no further than Equinix (EQIX) who connects the world’s leading businesses to their customers, employees, and partners inside the most-interconnected data centers.

On this global platform for digital business, companies come together worldwide on five continents to reach everywhere, interconnect everyone and integrate everything they need to reap a digital windfall.

And whether we like it or not, the future will be more interconnected than ever because of the explosion of data and the 5G that harnesses the data will allow business to reach across the globe and expand their addressable audience.

The stock has reacted like you would have thought with a victorious swing up after a tumultuous last winter.

The cherry on top was the positive earnings report earlier this month.

The highlights were impressive and plentiful with revenues for Q1 coming in at $1.36 billion, up 11% year-over-year meaningfully ahead of management expectations.

Equinix’s market-leading interconnection franchise is performing well, with revenues continuing to outpace colocation, growing 12% year-over-year, as the cloud ecosystem continues to scale.

Penetration in “lighthouse accounts” or early adopters increased nearly 50% from the Fortune 500 and 35% from the Global 2,000 demonstrating the expanding opportunity as Equinix unearths more value from the enterprise industry.

Equinix is now the market leader in 16 out of the 24 countries in which they operate, and they’re expanding its platform with 32 projects announced across 27 markets, with Q1 openings in Frankfurt, Hong Kong, London, Paris, and Shanghai.

Equinix’s network vertical experienced solid bookings led by strength in Access Point (AP), which is a hardware device or a computer’s software that acts as a communication hub for users of a wireless device to connect to a wired LAN.

APs are important for providing heightened wireless security and for extending the physical range of service a wireless user has access to and driven by major telecommunication companies, mobile operators, and NSP resale.

Expansions this quarter include Hutchison, a leading British mobile network operator upgrading their infrastructure to support 5G and cloud services, as well as a leading Asian communication provider, migrating subsea cable notes and connecting to ECX Fabric for low latency.

Equinix’s financial services vertical experienced record bookings led by Europe, the Middle East and Africa (EMEA) and rapid growth in insurance and banking.

New contracts include a fortune 500 Global insurer transforming IT delivery with a cloud-first strategy, a top three auto insurer transforming network topology while securely connecting to multiple clouds, and one of the largest global payment and technology companies optimizing their corporate and commercial networks.

Demand in the social media sub-segment as providers are hellbent on improving user experience and expanding the scope of their business models.

Equinix’s gaming and e-commerce sub-segment grew the fastest year-over-year led by customers, including Tencent, neighbor, and roadblocks.

Cloud and IT verticals also captured strong bookings led by SaaS as the cloud diversifies towards a hybrid multi-cloud architecture.

A robust pipeline can be rejoiced around as cloud service providers continue to push to new frontiers and roll out additional services.

Developments include a leading SaaS provider expanding to support growth in new markets and with the Federal Government as well as an AI-powered commerce platform upgrading to enhance user experience support a rapidly growing customer base.

As digital transformation accelerates, the enterprise vertical continues to be Equinix’s sweet spot led by healthcare, legal and travel sub-segments this quarter and main catalysts to why I keep recommending reader into enterprise software companies.

The chips are being counted with new contracts from Air Canada, a top five North American airline deploying a hybrid multi-cloud strategy, Space X deploying infrastructure to interconnect dense network and partner ecosystems and one of the big four audit firms regenerating networks and interconnecting to multi-cloud to improve the user experience for both employees and clients.

Channel bookings also registered continued strength delivering over 20% of bookings with accelerated growth rates selling to Equinix’s key cloud players and technology alliance partners, including Cisco (CSCO), Google (GOOGL), Microsoft (MSFT), and Oracle (ORCL).

New channel wins this quarter includes a win with Anixter for a leading French transportation and freight logistics company deploying mobility platform, as well as a win with AT&T for a top-five U.S. Bank accessing our network and cloud provider.

Management signaled to investors they are expecting a great year with full-year revenue guidance of $5.6B, a 9-10% year-over-year boost and a $25M revision from the previous guidance.

Equinix can boast 65 consecutive quarters of increasing revenues, which eclipses every other company in the S&P 500, and it anticipates 8%-10% in annual revenue growth through 2022.

This is an incredibly stable yet growing business and the 2.17% dividend yield, although not the highest, is another sign of a healthy balance sheet for a profitable company.

If you had any concerns about this stock, then just take a look at its 3-year EPS growth rate of 73% which should tell you that the massive operational scale of Equinix is starting to allow efficiencies to take hold dropping revenue straight down to the bottom line.

If you are searching for a company that cuts across every nook and cranny of the tech sector by taking advantage of the unifying demand and storage requirements of big data, then this is the perfect company for you.

This company will only become more vital once 5G goes online and being the global wizards of the data center will mean the stock goes higher in the long-term.

 

 

 

 

May 16, 2019

Mad Hedge Technology Letter
May 16, 2019
Fiat Lux

Featured Trade:

(WHY YOU SHOULD AVOID INTEL)
(INTC), (QCOM), (ORCL), (WDC)

Why You Should Avoid Intel

In the most recent investor day, current CEO of Intel (INTC) Bob Swan dived into the asphalt of failure below confessing that the company would have to guide down $2.5 billion next quarter, 25 cents, and operating margins would shrink by 2 points.

This is exactly the playbook of what you shouldn’t be doing as a company, but I would argue that Intel is a byproduct of larger macro forces combined with poor execution performance.

Nonetheless, failure is failure even if macro forces put a choke hold on a profit model.  

Swan admitted to investors his failure saying “we let you down. We let ourselves down.”

This type of defeatist attitude is the last thing you want to hear from the head honcho who should be brimming with confidence no matter if it rains, shines, or if a once in a lifetime monsoon is about to uproot your existence.

In Swan’s spiffy presentation at Intel’s investors day, the second bullet point on his 2nd slide called for Intel to “lead the AI, 5G, and Autonomous Revolution.”

But when the company just announces that its 5G smartphone products are a no go, investors might have asked him what he actually meant by using this sentence in his presentation.

The vicious cycle of underperformance leads back to Intel seriously losing the battle of hiring top talent, and purging important divisions is indicative of the inability to compete with the likes of Qualcomm (QCOM).

Assuaging smartphone chip revenue isn’t the only slice of revenue cut from the chip industry, but to take a samurai sword and gut the insides of this division as a result of being uncompetitive means losing out on one of the major money makers in the chip industry.

Then if you predicted that the PC chip revenue would save their bacon, you are duly wrong, with global PC sales falling 4.6% in the first quarter, after a similar decline in the fourth quarter of 2018, according to analyst Gartner Inc.

The broad-based weakness means that revenue from Intel’s main PC processor business will decline or be unchanged during the next three years, which leads me to question leadership in why they did not bet the ranch on smartphone chips when the trend of mobile replacing desktop is an entrenched trend that a 2-year old could have identified.

The cocktail of underperformance stems from slipping demand which in turn destroys profitability mixed with intensifying competition and the ineptitude of its execution in manufacturing.

In fact, the guide down at investor day was the second time the company guided down in a month, forcing investors to scratch their heads thinking if the company is fast-tracked to a one-way path to obsoletion.

If Intel is reliant on its data centers and PC chip business to drag them through hard times, they might as well pack up and go home.

Missing the smartphone chip business is painful, but if Intel dare misses the boat for the IoT revolution that promises to install sensors and chips in and around every consumer product, then that would be checkmate.

Adding benzine to the flames, Intel’s enterprise and government revenue saw the steepest slide falling 21% while the communications service provider segment declined 4%.

The super growth asset is the cloud and with Intel’s cloud segment only expanding 5%, Intel has managed to turn a high growth area into an anemic, stale business.

Then if you stepped back a few meters and understood that going forward Intel will have to operate in the face of a hotter than hot trade war between China and America, then investors have scarce meaningful catalysts to hang their hat on.

Swan said the company saw “greater than expected weakness in China during the fourth quarter” boding ill for the future considering Intel derives 24% of total revenue from China.

Investors are fearing that Intel could turn into additional collateral damage to the trade war that has no end in sight, and chips are at the vanguard of contested products that China and America are squabbling over.

Oracle (ORCL), without notice, shuttered their China research and development center laying off 900 Chinese workers in one fell swoop, and Intel could also be forced to cut off limbs to save the body as well.

The narrative coming out of both countries will not offer investors peace of mind, and a primary reason why the Mad Hedge Technology Letter has avoided the chip space in 2019.

It’s hard to trade around the most volatile area in tech whose global revenue is becoming less and less certain because of two governments that have deep-rooted structural problems with each other’s trade policies.

Today’s tech letter is another rallying cry for buying software companies with zero exposure to China in order to shelter capital from the draconian stances of two tech sectors that are at odds with each other.

Let me remind you that Intel and Western Digital (WDC) were on my list of five tech stocks to avoid this year, and those calls that I made 6 months before are looking great in hindsight.

 

 

 

FireEye’s Last Line of Defense

A potential cataclysmic threat potentially wreaking havoc to our financial system is no other than cybercrime – that is one of the few gems that Fed Chair Jerome Powell delivered to the American public in a historic interview with 60 Minutes this past weekend.

Powell has even gone on record before claiming that Congress should do “as much as possible (against cybercrime), and then double it.”

The Fed Chair clearly has intelligence that retail investors wish they could get their hands on.

Digital nefarious attacks have been all the rage resulting in public blowups at Equifax (EFX) and North Korea’s state-sponsored hack on International Business Machines Corporation (IBM) just to name a few.

At the bare minimum, this means that cybersecurity solution companies will be the recipients of a gloriously expanding addressable market.

Powell’s testimony to the public was timely as it provides the impetus for investors to look at cybersecurity firms that will actively forge ahead and protect domestic business from these lurking threats.

Considering a long-term investment in FireEye Inc. (FEYE) at these beaten down prices could unearth value.

For all the digital novices, FireEye offers cybersecurity solutions allowing organizations to pre-emptively plan, prevent, respond to, and remediate cyber-attacks.

It offers vector-specific appliance, virtual appliance, and a smorgasbord of cloud-based solutions to detect and thwart indistinguishable cyber-attacks.

The company deploys threat detection and preventative methods including network security products, email security solutions, and endpoint security solutions.

And when you marry this up with my 2019 underlying thesis of the year of the enterprise software subscription, this company is on the verge of a breakout.

Last year was a year full of milestones for the company with the firm achieving non-GAAP profitability for the full year for the first time and generating positive operating and free cash flow for the full year.

The company was able to attract new business by adding over 1,100 new customers.

The cloud is where the company is betting all their chips and crafting the optimal subscription-as-a-service (SaaS) product is the engine that will propel the company’s shares higher.

The heart of their cloud initiative relies on Helix – a comprehensive detection and response platform designed to simplify, integrate and automate security operations.

This intelligence-led approach fuses innovative security technologies, nation-grade FireEye Threat Intelligence and world-renowned expertise from FireEye Mandiant into FireEye Helix.

By enhancing the endpoint products and email protection, sales of both products exploded higher by double digits YOY as FireEye successfully displaced incumbent vendors and legacy technology to the delight of shareholders.

As a result, the firm’s pipeline of opportunities continues to build.

As for network security, FireEye plans to extend the reach of their market-leading advanced threat protection capabilities further into the cloud with protection specifically aimed for cloud heavyweights Microsoft (MSFT) Azure, Amazon Web Services (AWS), Google (GOOGL) and Oracle (ORCL) Cloud.

They are collaborating with these major cloud providers on hybrid solutions that integrate seamlessly with their technologies so FireEye solutions will easily snap into a customer’s cloud deployments.

Cloud subscriptions and managed services were the ultimate breakout performer highlighting the successful outsized pivot to (SaaS) revenue.

This segment increased 31% sequentially and 12% YOY, highlighting underlined strength in the segments of managed defense, standalone threat intelligence, Helix subscriptions, and cloud email solution.

The furious growth was achieved even though Q4 2017 billings included a $10 million plus transaction and if this deal is excluded, cloud subscriptions and managed services would have grown more than 30% YOY in Q4 2017 demonstrating the hard bias to the cloud has been highly instrumental to its success.

Recurring billings expanded 12% YOY, a small bump in acceleration from 11% in Q3, but if you remove that big deal in Q4 ’17, recurring billings grew over 20% YOY in Q4 2018.

The growing chorus of product satisfaction can be found in the customer retention rate of 90%.

Transaction volume was at record levels for both deals greater than $1 million and transactions less than $1 million, signaling not only that customer renewals are expanding, but also explosion of new revenue streams captured by FireEye is aiding the top line.

This story is all about the recurring revenue and I expect that narrative to perpetuate throughout 2019 as an overarching theme to the strength of the firm’s revenue drivers.

The 10% billings growth last quarter paints a more honest trajectory of the true growth proposition for FireEye.

I believe the 6%-to-7% revenue guide for fiscal 2019 is down to the accounting technicals manifesting in the appliance revenue that is fading from the overall story.

The solid billings growth underpinning the overall business meshing with diligent expense control is conjuring up a massive amount of operating leverage.

Shares are undervalued and offer an attractive risk versus reward proposition.

If the company delivers on its core growth outlook, which I fully expect them to do plus more, shares should climb over $20 barring any broad-based market meltdowns.

I am bullish FireEye and urge readers to wait for shares to settle before putting new money to work.

 

The Bipolar Economy

Corporate earnings are up big! Great!

Buy!

No, wait!

The economy is going down the toilet!

Sell!

Buy! Sell! Buy! Sell!

Help!

Anyone would be forgiven for thinking that the stock market has become bipolar.

According to the Commerce Department’s Bureau of Economic Analysis, the answer is that corporate profits account for only a small part of the economy.

Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly or are too small to have much of an impact.

Wages and salaries are in a three-decade-long decline. Interest and investment income are falling because of the ultra-low level of interest rates. Farm incomes are at a decade low, thanks to the China trade war, but are a tiny proportion of the total, and agricultural prices have been in a seven-year bear market.

Income from non-farm unincorporated business, mostly small business, is unimpressive.

It gets more complicated than that.

A disproportionate share of corporate profits is being earned overseas.

So, multinationals with a big foreign presence, like Apple (AAPL), Intel (INTC), Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes.

They really get to have their cake and eat it too. Many of their business activities are contributing to foreign GDPs, like China’s, far more than they are here.

Those with large domestic businesses, like retailers, earn less but pay more in tax as they lack the offshore entities in which to park them.

The message here is to not put all your faith in the headlines but to look at the numbers behind the numbers.

Caveat emptor. Buyer beware.

 

What’s In the S&P 500?

 

 

S&P Top 10 Holdings 3-4-2019

Has the Market Become Bipolar?

The Bipolar Economy

Corporate earnings are up big! Great!

Buy!

No wait!

The economy is going down the toilet!

Sell! Buy! Sell! Buy! Sell!

Help!

Anyone would be forgiven for thinking that the stock market has become bipolar.

According to the Commerce Department?s Bureau of Economic Analysis, the answer is that corporate profits accounts for only a small part of the economy.

Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly, or are too small to have much of an impact.

Wages and salaries are in a three decade long decline. Interest and investment income is falling, because of the ultra low level of interest rates. Farm incomes are up, but are a tiny proportion of the total. Income from non-farm unincorporated business, mostly small business, is unimpressive.

It gets more complicated than that.

A disproportionate share of corporate profits is being earned overseas. So multinationals with a big foreign presence, like Apple (AAPL), Intel (INTC), Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes.

They really get to have their cake, and eat it too. Many of their business activities are contributing to foreign GDP?s, like China?s, more than they are here. Those with large domestic businesses, like retailers, earn less, but pay more in tax, as they lack the offshore entities in which to park them.

The message here is to not put all your faith in the headlines, but to look at the numbers behind the numbers. Those who bought in anticipation of good corporate profits last month, got those earnings, and then got slaughtered in the marketplace.

Caveat emptor. Buyer beware.

SPY

What?s In the S&P 500?

Index Sector Allocation

markets

index topbipolar masksHas the Market Become Bipolar?

The Bipolar Economy

Corporate earnings are up big! Great! Buy! No wait! The economy is going down the toilet! Sell! Buy! Sell! Buy! Sell! Help! Anyone would be forgiven for thinking that the stock market has become bipolar. According to the Commerce Department?s Bureau of Economic Analysis, the answer is that corporate profits account for only a small part of the economy. Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly, or are too small to have much of an impact. Wages and salaries are in a three decade long decline. Interest and investment income is falling, because of the low level of interest rates and the collapse of the housing market. Farm incomes are up, but are a small proportion of the total. Income from non-farm unincorporated business, mostly small business, is unimpressive. It gets more complicated than that. A disproportionate share of corporate profits are being earned overseas. So multinationals with a big foreign presence, like Intel, Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes. They really get to have their cake, and eat it too. Many of their business activities are contributing to foreign GDP?s, like China?s, more than they are here. Those with large domestic businesses, like retailers, earn less, but pay more in tax, as they lack the offshore entities in which to park them. The message here is to not put all your faith in the headlines, but to look at the numbers behind the numbers. Those who bought in anticipation of good corporate profits last month, got those earnings, and then got slaughtered in the marketplace. Caveat emptor. Buyer beware.

What?s In the S&P 500?

Whats in the S&P Chart

Girl-Sad Has the Market Become Bipolar?