Global Market Comments
May 14, 2019
(FIVE STOCKS TO BUY AT THE BOTTOM),
(AAPL), (AMZN), (SQ), (ROKU), (MSFT)
Global Market Comments
May 14, 2019
(FIVE STOCKS TO BUY AT THE BOTTOM),
(AAPL), (AMZN), (SQ), (ROKU), (MSFT)
Mad Hedge Technology Letter
May 6, 2019
(PAYPAL GOES FROM STRENGTH TO STRENGTH)
(PYPL), (SQ), (GOOGL), (LYFT)
It’s time to revisit one of my favorite tech picks for 2019 that is a constant trade alert candidate.
The attention is warranted with the stock performance delivering a tidal wave of euphoria rising around 30% in the first half of 2019.
I expected PayPal to have a great year, but I didn’t expect them to perform better than Square who are growing from a lower install base.
PayPal’s overperformance signals to the wider business establishment how important a broad install base can be that can tap the network effect to reel in profits.
This is how once legacy dinosaurs can reinvent themselves in months.
The lack of entry points is a concern prodding investors to chase the stock if they want a piece of the action.
This is one of the drastic side effects of PayPal’s meteoric rise that has been buttressed by dovish Fed policy.
Investors are literally praying to the skies for any softness in tech earnings reports because for the best of the bunch, there have been no moderate pullbacks of note since last winter.
PayPal did offer a slight data point that might be construed as disappointing when total payment volume (TPV) of $161 billion was slightly lower than the consensus of $163 million for the quarter.
It’s slim pickings for the bear camp with not much to feast on in an otherwise pretty solid earnings report.
As PayPal expanded by 9.3 million new active accounts, bringing its total up to 277 million, management has super charged this legacy fintech company into an outright renaissance.
Doing even more to shed the tag of a legacy company, PayPal invested half a billion dollars at $47 per share into the upcoming Uber IPO signaling possibilities that their payment software could at some point integrate into Uber’s network down the road.
Alphabet (GOOGL) has shown that if you get in early with these Silicon Valley unicorns, synergistic effects are plenty with Alphabet lapping up revenue charging Lyft (LYFT) for providing digital ad capabilities on top of the appreciating value of their investment stake.
And if you remember that way back, PayPal was tied to eBay before it was spun out.
Better to attach future hopes and dreams to a leading visionary and innovator instead of a legacy e-commerce platform.
Illustrating the tough task of turning around eBay, eBay clocked in negative TPV growth of 4% in the past quarter.
PayPal offered us more detail into active-account numbers for its Venmo peer-to-peer service with more than 40 million people using Venmo for at least one transaction in the last 12 months.
Venmo processed $21 billion in TPV last quarter, mushrooming by 73%, while the core PayPal platform’s TPV grew 41% to $42 billion.
The success paved the way to raise its full-year EPS outlook from $2.94 to $3.01 ensuring that its prior forecast on revenue and TPV will be met.
PayPal previously guided lower with an expected $2.84 to $2.91 in adjusted EPS and $17.75 billion to $18.1 billion in revenue.
When we tally up all the positive points, it’s hard to ignore the 12% YOY increase in revenue to $4.13B and the more impressive 37% YOY rise in EPS growth signaling the company is applying its giant scale to maximum effect.
Customer engagement of 37.9 payment transactions per active account rose 9% YOY while the TPV which came in lower than consensus was still growth of 22% YOY.
I love that PayPal has migrated towards the heart of innovation while being a legacy fintech company.
Venmo and the Venmo card are rapidly infiltrating the center of consumer’s daily financial lives wielded for groceries, gas, and restaurants.
In February, PayPal introduced a limited-edition rainbow card which became the fastest adopted Venmo card.
I want to reiterate how the proof is in the pudding with Venmo volume increasing 73% to approximately $21B in the quarter.
Not only does this legacy fintech have super growth drivers, they have become quasi venture capitalists applying a horde of capital to snap up attractive assets.
An example is a $750 million investment in the e-commerce and payments leader in Latin America called MercadoLibre which creates a network effect to PayPal’s core business in the region.
If the steady drip of news wasn’t good enough, PayPal announced a partnership with Instagram to process payments when customers are shopping on Instagram in the U.S.
Management is convincingly delivering the goods with 110 basis points of operating margin expansion.
PayPal’s flawless performance is a great model in how to survive the volatile times of rapid tech shifts, and the best way to alter a model to reduce existential threats.
The company has growth drivers, have migrated capital into growth tech, are innovating with the best of them, and management is executing surgically taking advantage of a massive install base.
Buy on any weakness, entry points are few and far between.
Global Market Comments
March 6, 2018
(WILL UNICORNS KILL THE BULL MARKET?),
(TSLA), (NFLX), (DB), (DOCU), (EB), (SVMK), (ZUO), (SQ),
(A NOTE ON OPTIONS CALLED AWAY), (TLT)
Mad Hedge Technology Letter
January 17, 2019
(WHY FINTECH IS EATING THE BANKS’ LUNCH),
(WFC), (JPM), (BAC), (C), (GS), (XLF), (PYPL), (SQ), (SPOT), (FINX), (INTU)
Going into January 2018, the big banks were highlighted as the pocket of the equity market that would most likely benefit from a rising rate environment which in turn boosts net interest margins (NIM).
Fast forward a year and take a look at the charts of Bank of America (BAC), Citibank (C), JP Morgan (JPM), Goldman Sachs (GS), and Morgan Stanley (GS), and each one of these mainstay banking institutions are down between 10%-20% from January 2018.
Take a look at the Financial Select Sector SPDR ETF (XLF) that backs up my point.
And that was after a recent 10% move up at the turn of the calendar year.
As much as it pains me to say it, bloated American banks have been completely caught off-guard by the mesmerizing phenomenon that is FinTech.
Banking is the latest cohort of analog business to get torpedoes by the brash tech start-up culture.
This is another fitting example of what will happen when you fail to evolve and overstep your business capabilities allowing technology to move into the gaps of weakness.
Let me give you one example.
I was most recently in Tokyo, Japan and was out of cash in a country that cash is king.
Japan has gone a long way to promoting a cashless society, but some things like a classic sushi dinner outside the old Tsukiji Fish Market can’t always be paid by credit card.
I found an ATM to pull out a few hundred dollars’ worth of Japanese yen.
It was already bad enough that the December 2018 sell-off meant a huge rush into the safe haven currency of the Japanese Yen.
The Yen moved from 114 per $1 down to 107 in one month.
That was the beginning of the bad news.
I whipped out my Wells Fargo debit card to withdraw enough cash and the fees accrued were nonsensical.
Not only was I charged a $5 fixed fee for using a non-Wells Fargo ATM, but Wells Fargo also charged me 3% of the total amount of the transaction amount.
Then I was hit on the other side with the Japanese ATM slamming another $5 fixed fee on top of that for a non-Japanese ATM withdrawal.
For just a small withdrawal of a few hundred dollars, I was hit with a $20 fee just to receive my money in paper form.
Paper money is on their way to being artifacts.
This type of price gouging of banking fees is the next bastion of tech disruption and that is what the market is telling us with traditional banks getting hammered while a strong economy and record profits can’t entice investors to pour money into these stocks.
FinTech will do what most revolutionary technology does, create an enhanced user experience for cheaper prices to the consumers and wipe the greedy traditional competition that was laughing all the way to the bank.
The best example that most people can relate to on a daily basis is the transportation industry that was turned on its head by ride-sharing mavericks Uber and Lyft.
But don’t ask yellow cab drivers how they think about these tech companies.
Highlighting the strong aversion to traditional banking business is Slack, the workplace chat app, who will follow in the footsteps of online music streaming platform Spotify (SPOT) by going public this year without doing a traditional IPO.
What does this mean for the traditional banks?
Slack will list directly and will set its own market for the sale of shares instead of leaning on an investment bank to stabilize the share price.
Recent tech IPOs such as Apptio, Nutanix and Twilio all paid 7% of the proceeds of their offering to the underwriting banks resulting in hundreds of millions of dollars in revenue.
Directly listings will cut that fee down to $10-20 million, a far cry from what was once status quo and a historical revenue generation machine for Wall Street.
This also layers nicely with my general theme of brokers of all types whether banking, transportation, or in the real estate market gradually be rooted out by technology.
In the world of pervasive technology and free information thanks to Google search, brokers have never before added less value than they do today.
Slowly but surely, this trend will systematically roam throughout the economic landscape culling new victims.
And then there are the actual FinTech companies who are vying to replace the traditional banks with leaner tech models saving money by avoiding costly brick and mortar branches that dot American suburbs.
PayPal (PYPL) has been around forever, but it is in the early stages of ramping up growth.
That doesn’t mean they have a weak balance sheet and their large embedded customer base approaching 250 million users has the network effect most smaller FinTech players lack.
PayPal is directly absorbing market share from the big banks as they have rolled out debit cards and other products that work well for millennials.
They are the owners of Venmo, the super-charged peer-to-peer payment app wildly popular amongst the youth.
Shares of PayPal’s have risen over 200% in the past 2 years and as you guessed, they don’t charge those ridiculous fees that banks do.
Wells Fargo and Bank of America charge a $12 monthly fee for balances that dip below $1,500 at the end of any business day.
Your account at PayPal can have a balance of 0 and there will never be any charge whatsoever.
Then there is the most innovative FinTech company Square who recently locked in a new lease at the Uptown Station in Downtown Oakland expanding their office space by 365,000 square feet for over 2,000 employees.
Square is led by one of the best tech CEOs in Silicon Valley Jack Dorsey.
Not only is the company madly innovative looking to pounce on any pocket of opportunity they observe, but they are extremely diversified in their offerings by selling point of sale (POS) systems and offering an online catering service called Caviar.
They also offer software for Square register for payroll services, large restaurants, analytics, location management, employee management, invoices, and Square capital that provides small loans to businesses and many more.
On average, each customer pays for 3.4 Square software services that are an incredible boon for their software-as-a-service (SaaS) portfolio.
An accelerating recurring revenue stream is the holy grail of software business models and companies who execute this model like Microsoft (MSFT) and Salesforce (CRM) are at the apex of their industry.
The problem with trading this stock is that it is mind-numbingly volatile. Shares sold off 40% in the December 2018 meltdown, but before that, the shares doubled twice in the past two years.
Therefore, I do not promote trading Square short-term unless you have a highly resistant stomach for elevated volatility.
This is a buy and hold stock for the long-term.
And that was only just two companies that are busy redrawing the demarcation lines.
There are others that are following in the same direction as PayPal and Square based in Europe.
French startup Shine is a company building an alternative to traditional bank accounts for freelancers working in France.
First, download the app.
The company will guide you through the simple process — you need to take a photo of your ID and fill out a form.
It almost feels like signing up to a social network and not an app that will store your money.
You can send and receive money from your Shine account just like in any banking app.
After registering, you receive a debit card.
You can temporarily lock the card or disable some features in the app, such as ATM withdrawals and online payments.
Since all these companies are software thoroughbreds, improvement to the platform is swift making the products more efficient and attractive.
There are other European mobile banks that are at the head of the innovation curve namely Revolut and N26.
Revolut, in just 6 months, raised its valuation from $350 million to $1.7 billion in a dazzling display of growth.
Revolut’s core product is a payment card that celebrates low fees when spending abroad—but even more, the company has swiftly added more and more additional financial services, from insurance to cryptocurrency trading and current accounts.
Remember my little anecdote of being price-gouged in Tokyo by Wells Fargo, here would be the solution.
Order a Revolut debit card, the card will come in the mail for a small fee.
Customers then can link a simple checking account to the Revolut debit card ala PayPal.
Why do this?
Because a customer armed with a Revolut debit card linked to a bank account can use the card globally and not be charged any fees.
It would be the same as going down to your local Albertson’s and buying a six-pack, there are no international or hidden fees.
There are no foreign transaction fees and the exchange rate is always the mid-market rate and not some manipulated rate that rips you off.
Ironically enough, the premise behind founding this online bank was exactly that, the originators were tired of meandering around Europe and getting hammered in every which way by inflexible banks who could care less about the user experience.
Revolut’s founder, Nikolay Storonsky, has doubled down on the firm’s growth prospects by claiming to reach the goal of 100 million customers by 2023 and a succession of new features.
To say this business has been wildly popular in Europe is an understatement and the American version just came out and is ready to go.
Since December 2018, Revolut won a specialized banking license from the European Central Bank, facilitated by the Bank of Lithuania which allows them to accept deposits and offer consumer credit products.
N26, a German like-minded online bank, echo the same principles as Revolut and eclipsed them as the most valuable FinTech startup with a $2.7 Billion Valuation.
N26 will come to America sometime in the spring and already boast 2.3 million users.
They execute in five languages across 24 countries with 700 staff, most recently launching in the U.K. last October with a high-profile marketing blitz across the capital.
Most of their revenue is subscription-based paying homage to the time-tested recurring revenue theme that I have harped on since the inception of the Mad Hedge Technology Letter.
And possibly the best part of their growth is that the average age of their customer is 31 which could be the beginning of a beautiful financial relationship that lasts a lifetime.
N26’s basic current account is free, while “Black” and “Metal” cards include higher ATM withdrawal limits overseas and benefits such as travel insurance and WeWork membership for a monthly fee.
Sad to say but Bank of America, Wells Fargo, and the others just can’t compete with the velocity of the new offerings let alone the software-backed talent.
We are at an inflection point in the banking system and there will be carnage to the hills, may I even say another Lehman moment for one of these stale business models.
Online banking is here to stay, and the momentum is only picking up steam.
If you want to take the easy way out, then buy the Global X FinTech ETF (FINX) with an assortment of companies exposed to FinTech such as PayPal, Square, and Intuit (INTU).
The death of cash is sooner than you think.
This year is the year of FinTech and I’m not afraid to say it.
Mad Hedge Technology Letter
January 9, 2019
(TOP 8 TECH TRENDS OF 2018),
(GOOGL), (FB), (WMT), (SQ), (AMZN), (ROKU), (KR), (FDX), (UPS), (CRM), (TWLO), (ADBE), (PYPL)
As 2019 christens us with new technological trends, building our portfolio and lives around these themes will give us a leg up in battling the algorithms that have upped the ante in our drive to get ahead.
Now it’s time to chronicle some of these trends that will permeate through the tech universe.
Some are obvious, and some might as well be hidden treasures.
American consumers will start to notice that locations they frequent and the proximities around them will integrate more smart-tech.
The hoards of data that big tech possesses and the profiles they subsequently create on the American consumer will advance allowing the possibilities of more precise and useful products.
These products won’t just accumulate in a person’s home but in public areas, and business will jump at the chance to improve services if it means more revenue.
Amazon and Google have piled money into the smart home through the voice assistant initiatives and adoption has been breathtaking.
The next generation will provide even more variety to integrate into daily lives.
The gains in technology have given the consumer broader control over their lives.
The ability to practically manage one’s life from a remote location has remarkably improved leaps and bounds.
The deflation of mobile phone data costs, the advancement of high-speed broadband internet services in developing countries, more cloud-based software accessible from any internet entry point, and the development of affordable professional grade hardware have made life easy for the small business owners.
What a difference a few years make!
This has truly given a headache for traditional companies who have failed to evolve with the times such as television staples who rely on analog advertising revenue.
Millennials are more interested in flicking on their favorite YouTuber channel who broadcast from anywhere and aren’t locally based.
Another example is the quality of cameras and audio equipment that have risen to the point that anybody can become the next Justin Bieber.
Music executives are even using Spotify to target new talent to invest in.
Blockchain technology has the makings of transforming the world we live in.
And the currency based on the blockchain technology had a field day in the press and backyard summer barbecues all over the country.
Well, 2019 will finally put this topic on the backburner even though Bitcoin won’t disappear into irrelevancy, the pendulum will swing the other direction and this digital currency will become underhyped.
The rise to $20,000 and the catastrophic selloff down to $4,000 was a bubble popping in front of us.
It made a lot of people rich like the Winklevoss brothers Cameron and Tyler who took the $65 million from Facebook CEO Mark Zuckerberg and spun it into bitcoin before the euphoria mesmerized the American public.
On the way down from $20,000, retail investors were tearing their hair out but that is the type of volatility investors must subscribe to with assets that are far out on the risk curve.
The volatility that FinTech leader Square (SQ) and OTT Box streamer Roku (ROKU) have are nothing compared to the extreme volatility that digital currency investors must endure.
Video games classified as a spectator sport will expand up to 40% in 2019.
This phenomenon has already captivated the Asian continent and is coming stateside.
This is a bit out of my realm as standard spectator sports don’t appeal to me much at all, and watching others play video games for fun is something I am even further removed from.
But that’s what the youth like and how they grew up, and this trend shows no signs of stopping.
Industry experts believe that the U.S. is at an inflection point and adoption will accelerate.
Remember that kids don’t play physical sports anymore because of the risk to head trauma, blown ligaments, and the sheer distances involved traveling to and from venues turn participants away.
Franchise rights, advertising, and streaming contracts will energize revenue as a ballooning audience gravitates towards popular leagues, tapping into the fanbase for successful video game series such as Overwatch.
The rise of eSports can be attributed to not only kids not playing physical sports but also younger people watching less television and spending more time online.
Soon, there will be no difference in terms of pay and stature of pro athletes and video gaming athletes.
The amount of money being thrown at the world’s best gamers makes your spine tingle.
The era of digital data regulation is upon us and whacked a few companies like Google and Facebook in 2018.
Well, this is just the beginning.
The vacuum that once allowed tech companies to run riot is no more, and the government has big tech in their cross-hairs.
The A word will start to reverberate in social circles around the tech ecosphere – Antitrust.
At some point towards the end of 2019, some of these mammoth technology companies could face the mother of all regulation in dismantling their business model through an antitrust suit.
Companies such as Amazon and Facebook are praying to the heavens that this never comes to fruition, but the rhetoric about it will slowly increase in 2019 because of the mischievous ways these tech companies have behaved.
The unintended consequences in 2018 were too widespread and damaging to ignore anymore.
Antitrust lawsuits will creep closer in 2019 and this has spawned an all-out grab for the best lobbyists tech money can buy.
Tech lobbyists now amount to the most in volume historically and they certainly will be wielded in the best interest of Silicon Valley.
Watch this space.
The demand for smart consumer devices will fall off a cliff because most of the people who can afford a device already are reading my newsletter from it.
The stunting of smart device innovation has made the upgrade cycle duration longer and consumers feel no need to incrementally upgrade when they aren’t getting more bang for their buck.
The late-cycle nature of the economy that is losing momentum because of a trade war and higher interest rates will see companies look to add to efficiencies by upgrading software systems and processes.
This bodes well for companies such as Microsoft (MSFT), Salesforce (CRM), Twilio (TWLO), PayPal (PYPL), and Adobe (ADBE) in 2019.
This is where Amazon has gotten so good at efficiently moving goods from point A to point B that it is threatening to blow a hole in the logistic stalwarts of UPS and FedEx.
Robots that help deploy packages in the Amazon warehouses won’t just be an Amazon phenomenon forever.
Smaller businesses will be able to take advantage of more robotics as robotics will benefit from the tailwind of deflation making them affordable to smaller business owners.
Amazon’s ramp-up in logistics was a focal point in their purchase of overpriced grocer Whole Foods.
This was more of a bet on their ability to physically deliver well relative to competition than it was its ability to stock above average quality groceries.
If Whole Foods ever did fail, Amazon would be able to spin the prime real estate into a warehouse located in wealthy areas serving the same wealthy clientele.
Therefore, there is no downside short or long-term by buying Whole Foods. Amazon will be able to fine-tune their logistics strategy which they are piling a ton of innovation into.
Possible new logistical innovations include Amazon attempting to deliver to garages to avoid rampant theft.
This is all happening while Amazon pushes onto FedEx’s (FDX) and UPS’s (UPS) turf by building out their own fleet.
Innovative logistics is forcing other grocers to improve fast giving customers better grocery service and prices.
Kroger (KR) has heavily invested in a new British-based logistics warehouse system and Walmart (WMT) is fast changing into a tech play.
Current Chair of the Federal Reserve Jerome Powell unleashed a dragon when he boxed himself into a corner last year and had to announce a rate hike to preserve the integrity of the institution.
Markets whipsawed like a bull at a rodeo and investors lost their pants.
Tech companies who have been leading the economy and trot out robust EPS growth out of a whole swath of industries will experience further volatility as geopolitics and interest rate rhetoric grips the world.
Apple’s revenue warning did not help either and just wait until semiconductors start announcing disastrous earnings.
The short volatility industry crashed last February, and the unwinding of the Fed’s balance sheet mixed with the Chinese avoiding treasury purchases due to the trade war will insert even more volatility into the mix.
Powell attempted to readjust his message by claiming that the Fed “will be patient” and tech shares have had a monstrous rally capped off with Roku exploding over 30% after news of positive subscriber numbers and news of streaming content platform Hulu blowing past the 25 million subscriber mark.
Volatility is good for traders as it offers prime entry points and call spreads can be executed deeper in the money because of the heightened implied volatility.
Mad Hedge Technology Letter
January 8, 2019
(WHY I SOLD SHORT APPLE),
(AAPL), (FB), (SNAP), (SQ), (AMZN), (BB), (NOK)
Apple (AAPL) needs Jack Dorsey to save them.
That is what the steep sell-off is telling us.
Lately, Apple’s tumultuous short-term weakness is indicative of the broader mare’s nest that large-cap tech is confronting, and the unintended consequences this monstrous profit-making industry causes.
These powerful tech companies have sucked out the marrow of the innovative bones that the American economy represents, applying this know-how to pile up ceaseless profits to the detriment of the incubational start-ups that used to be part and parcel of the DNA of Silicon Valley.
In the last few years, the number of unicorns has been drying up rapidly on a relative basis to decades of the ’90s and the early 2000s – this is not a startling coincidence.
The mighty FANGs were once fledging start-ups themselves but have become entrenched enough to the point they transcend every swath of culture, society, and digital wallet now.
Becoming too big to boss around has its competitive advantages, namely harnessing the hoards of data to destroy any competition that has any iota of chance of uprooting their current business model.
And if these large tech companies can “borrow” the innovation that these smaller firms cultivate, they wield the necessary resources to undercut or just decapitate the burgeoning competition.
The net effect is that innovation has been crushed and the big tech companies are milking their profits for what its worth.
Not at all.
But tech has never been a fair game and going to a gun fight with a knife is why militaries incessantly focus on technology to accrue a level of firepower head and shoulders above their peers.
The career of Co-Founder of Jet.com, an e-commerce platform bought by Walmart for $3.3 billion in 2016, perfectly illustrates my point.
Marc Lore was born from the mold of leaders such as Amazon (AMZN) founder Jeff Bezos, leveraging the wonders and functionality of the e-commerce platform to construct a thriving business empire.
Quidsi, an e-commerce company, was founded by Marc Lore on the back of Lore maxing out personal credit cards to rent trucks to head to wholesale stores up and down the East coast to buy diapers, wipes, and formula in large quantities.
Under the umbrella of Quidsi, diapers.com and soap.com were successful e-commerce businesses and a segment that Amazon hadn’t cracked yet.
CEO of Amazon Jeff Bezos identified Lore as a mild threat to his low-end pricing, high-volume business empire.
Yes, this was a market grab, but to avoid a looming and an escalating price war, Amazon bought Quidsi for $500 million and $45 million of debt leaving Lore with millions after repaying earlier investors but effectively neutering Lore and putting him out to pasture.
The best way to ensure there is not another Jeff Bezos is for Jeff Bezos to buy out the upcoming Jeff Bezos before he can get close enough to go for the kill.
While both Bezos and Lore extolled the acquisition with pleasantries, Lore later described it as a glass half empty scenario akin to a mourning.
Getting a golden parachute-like payment for innovation is the best-case scenario for these up and coming stars of tech.
Others aren’t as lucky.
The castle that Bezos built and this type of reaction to stunting competition cannot be quantified and has a net negative effect on the overall level of innovation in the tech sector.
Then there is the worst-case scenario for tech companies such as Snapchat (SNAP). They have been courted numerous times by Facebook (FB) and offered sweetened deals that most people would salivate over.
Each rebuff followed a further Facebook retrenchment onto Snapchat’s territory hoping that they would gradually tap out from this vicious headlock.
In return, Snapchat has had the Turkish carpet pulled out from underneath them and most of their in-house innovation has been borrowed by Facebook’s subsidiary social media platform Instagram.
During this time span, Snapchat’s share price has nosedived and the defiant Snapchat management has lost the momentum and bravado that was emblematic to their business model.
Innovation has also been strangled in Venice, California as declining usership has been partly due to a lack of fresh features and an emphasis on profit creation instead of innovation that led to a botched redesign and sacking of 100 engineers.
Then there is that one's company, two's a crowd and three's a party and Snapchat’s growth model trailed Facebook and Twitter who took advantage of the era of zero regulation to build usership and brand awareness.
Snapchat was late to the feast and has suffered because of it.
The climate and mood for social media have significantly soured in the past six months and have tainted this whole niche sector with one toxic stroke with a brushstroke that has encapsulated any company within two degrees of this sector.
So where do the innovative problems start with Apple?
Right at the top with CEO Tim Cook.
Apple is known for brilliantly rewriting history and not fine-tuning it.
This is why I have preached the emphatic value of erratic but visionary leaders such as Steve Jobs and Elon Musk.
They take big risks and do not apologize for their smoking weed on podcasts and laugh about it.
Investors put up with these shenanigans because these leaders understand the scarcity value of themselves.
They don’t play it safe even if profits are the easiest option.
To save Apple, Apple would need to hire Square and Twitter CEO Jack Dorsey to innovate out of this mess.
The stock would double from here because Dorsey would bring back the innovative juices that once permeated through the corridors in Cupertino through Job’s genius ideas.
Under Cook’s tutelage, Apple has made boatloads of cash, but they were going to do that anyway because of Steve Job’s creations.
However, Cook has presided over China rapidly encroaching on its revenue source and is over-reliant on iPhone revenue.
They had years to develop something new but now China is beating Apple at its own game.
Not only has the smartphone market sullied, but so has the relative innovation that once saw every iPhone iteration vastly different from the prior generation.
The petering out of innovative smartphone features has gifted time to the Chinese to figure out how to snatch iPhone loyalists in China with vastly improved devices but at a way lower price point.
The erosion of Samsung’s market share in China should have been a canary in the coal mine and China is in the midst of replicating this same phenomenon in India too.
And I would argue that this would have never happened if Steve Jobs was still alive.
Jobs would have reinvented the world two times over by now with a product that doesn’t exist yet because that is what Jobs does.
As it is, Cook, a great operation officer, is a liability and probably should still be an operations manager.
Cook blared the sirens in early January with a public interview saying that revenue would drop by $9 billion.
This was the first profit warning in 16 years and won’t be the last if Cook retains his position.
Cook has steered the mystical Apple brand careening into the complex dungeon of communist China and was late to react.
Jobs would act first and others would have to react to his decisions, a staple of innovation.
Sailing Apple’s ship into the eye of the China storm stuck out like a sore thumb once Trump took over.
Adding insult to injury, consumers are opting for cheaper Android-based phones that function the same as iPhones.
The 10% of quality that Apple adds to smartphones isn’t enough to persuade the millions of potential customers to pay $1000 for an iPhone when they can get the same job done with a $300 Android version.
Cook badly miscalculated that Apple would be able to leverage its luxury brand to convince prospective buyers that iPhones would be a daily fixture and can’t-miss product.
Even though it was in 2010, it isn’t now.
The type of price points Apple is offering for new iPhone iterations means that this version of the iPhone should be at least 35% or 40% better than the previous version giving the impetus to customers to trade-up.
Sadly, it’s not and Cook was badly caught out.
Therefore, it is confusing that Apple didn’t apply more of its mountain of capital and luxurious brand status to cobble together a game-changing product.
Cook could have put his stamp on the Apple brand and might not have the chance now.
Cook being an “operations guy” has gone to the well too many times and the narrative and direction of Apple is a big question mark going forward.
This is the exact time needed for some long-term vision.
What does this all mean?
The shares’ horrific sell-off means that it is in line for some breathing room from the relentless downward price action.
However, unless the geopolitical tornados can subside, Apple debuts a Steve Jobs-esque bombshell of a product, or Square (SQ) CEO Jack Dorsey takes over the reins in Cupertino, the share price has limited upside in the short-term.
Apple will not have the momentous and breathtaking gap ups until something is fundamentally changed in the house that Steve Jobs built and that is what the tea leaves are telling us.
This has led me to execute a deep-in-the money put spread to take advantage of this limited upside.
Apple is a great long-term hold, but even Cook is threatening this premise.
As Cook is stewing in his office pondering his uncertain future, he forgets what it was that got Apple to the top of the tech ladder – innovation and lots of it.
The Mad Hedge Technology Letter ranks innovation as the most important input and x-factor a tech company can possess.
Steve Jobs understood that, yet, failed to pass on this hard-learned but important lesson to his protégé.
If Apple stays on the same track, they risk being the next Nokia (NOK) or Blackberry (BB).