Mad Hedge Technology Letter
August 7, 2019
(CORD-CUTTING IS ACCELERATING)
(DIS), (T), (NFLX), (CMCSA)
Mad Hedge Technology Letter
August 7, 2019
(CORD-CUTTING IS ACCELERATING)
(DIS), (T), (NFLX), (CMCSA)
Cord-cutting is picking up steam – that is the last thing traditional media want to hear.
There are several foundational themes that this newsletter has glued onto readers’ foreheads.
The generational pivot to cloud-based media is one of them.
It’s easy to denominate this phenomenon down to Netflix (NFLX) but in 2019, this trend is so much more than Netflix.
E-marketer published a survey showing that cord-cutters will surpass 20% of all U.S. adults by the end of 2019.
The rapid demise of traditional television has been equally as mind-numbing with the 100.5 million subscribers in 2014 turning into 86.5 million subscribers today.
Comcast (CMCSA) has tried to buck the trend by homing in on fast broadband internet, but that strategy can only go so far.
Disney (DIS), WarnerMedia, and NBCUniversal Disney have really gotten their ducks in a row and are on the verge of launching their own unique streaming services.
Disney’s service entails a 3-segment strategy bringing in Hulu and ESPN Plus to the Disney fold.
The Disney service will revolve around family content at its core so don’t expect Game of Thrones lookalikes.
WarnerMedia’s hopes to cash in on its HBO brand while peppering it with original series and programming from Warner Bros. and DC.
Disney will be able to lean on family brands of Marvel, Star Wars, and Pixar, and newly acquired National Geographic.
Marvel Cinematic Universe is a growth asset pumping out more than $22 billion at the box office across 23 movies.
Disney Plus will also have a solid collection of Disney films to play with, which could make it indispensable to parents and comes with no ads making it even more appealing to kids.
Disney will also deploy some mix of bundles to diversify its offerings and personalize services for viewers who do not want its entire lineup of content.
The soon-to-be HBO Max will implement HBO original content along with WarnerMedia brands like Warner Bros., DC Entertainment, TBS, TNT, and CNN.
HBO Max will have a treasure trove of old Warner Bros. movies and TV shows, like “Friends” and “The Fresh Prince of Bel Air,” that has played extremely well on Netflix.
HBO will get those titles back at the end of 2019.
HBO has also tied up with BBC Studios to stream “Doctor Who.”
“You should assume that HBO Max will have live elements,” said Randall Stephenson, chairman and CEO of AT&T, on the company’s second quarter conference call.
This roughly translates into HBO Max snapping up live sports and music events to complement scripted content.
This is something that Netflix has shied away from and live events are best monetized through live ads.
The last big label service to go into effect is NBC’s yet to be named streaming service.
NBCUniversal will have the luxury of offering their cable subscribers a chance to pivot to an in-house online streaming service making the move seamless.
At first, the 21 million US cable-TV subscribers will receive the streaming content for free.
Some of the assets that will trot out on the NBC platform are “The Office,” because NBC is removing it from Netflix for 2021.
As cord-cutters hasten their move to streaming, this trio of loaded content-creating firms will benefit as long as they maintain a high quality of content and the pipeline to please fidgety consumers.
Global Market Comments
April 3, 2019
(WHO WILL BE THE NEXT FANG?)
(FB), (AMZN), (NFLX), (GOOGL), (AAPL),
(BABA), (TSLA), (WMT), (MSFT),
(IBM), (VZ), (T), (CMCSA), (TWX)
FANGS, FANGS, FANGS! Can’t live with them but can’t live without them either.
I know you’re all dying to get into the next FANG on the ground floor, for to do so means capturing a potential 100-fold return, or more.
I know because I’ve done it four times. The split adjusted average cost of my Apple shares is only 25 cents compared to today’s $174, so you can understand my keen interest. My average on Tesla is $16.50.
Uncover a new FANG and the riches will accrue rapidly. Facebook (FB), Amazon AMZN), Netflix (NFLX), and Alphabet (GOOGL) didn’t exist 25 years ago. Apple (AAPL) is relatively long in the tooth at 40 years. And now all four are in a race to become the world’s first trillion-dollar company.
One thing is certain. The path to FANGdom is shortening. It took Apple four decades to get where it is today, Facebook did it in one. As Steve Jobs used to tell me when he was running both Apple and Pixar, “These overnight successes can take a long time.”
There is also no assurance that once a FANG always a FANG. In my lifetime, I have seen far too many Dow Average components once considered unassailable crash and burn, like Eastman Kodak (KODK), General Electric (GE), General Motors (GM), Sears (SHLD), Bethlehem Steel, and IBM (IBM).
I established in an earlier piece that there are eight essential attributes of a FANG, product differentiation, visionary capital, global reach, likeability, vertical integration, artificial intelligence, accelerant, and geography.
We are really in a “What have you done for me lately” world. That goes for me too. All that said, I shall run through a short list for you of the future FANG candidates we know about today.
Alibaba is an amalgamation of the Chinese equivalents of Amazon, PayPal, and Google all sewn together. It accounts for a staggering 63% of all Chinese online commerce and is still growing like crazy. Some 54% of all packages shipped in China originate from Alibaba.
The juggernaut has over half billion active users, and another half billion placing orders through mobile phones. It is a master of AI and B2B commerce. There is nothing else like it in the world.
However, it does have some obvious shortcomings. Its brand is almost unknown in the US. It has a huge problem with fakes sold through their sites.
It also has an ownership structure for foreign investors that is byzantine, to say the least. It is a contractual right to a share of profits funneled through a PO box in the Cayman Island. The SEC is interested, to say the least.
We also don’t know to what extent founder Jack Ma has sold his soul to the Beijing government. It’s probably a lot. That could be a problem if souring trade relations between the US and the Middle Kingdom get worse, a certainty with the current administration.
Before you bet on a new startup breaking into the Detroit Big Three, go watch the movie “Tucker” first. Spoiler Alert: It ends in tears.
Still, Tesla (TSLA) has just passed the 270,000 mark in the number of cars manufacturered. Tucker only got to 50.
Having led my readers into the stock after the IPO at $16.50, I am already pretty happy with this company. Owning three of their cars helps too (two totaled). But Tesla still has a long way to go.
It all boils down to the success of the $35,000, 200-mile range Tesla 3 for which it already has 500,000 orders. So far so good.
It’s all about scale. If it can produce these cars in sufficient numbers, it will take over the world and easily become the next FANG. If it can’t, it won’t. It’s that simple.
To say that a lot is already built into the share price would be an understatement. Tesla now trades at ten times revenues compared to 0.5 for Ford (F) and (General Motors (GM). That’s a relative overvaluation of 20:1.
Any of a dozen competing electric car models could scale up with a discount model before they do, such as the similarly priced GM Bolt. But with a ten-year lead in the technology, I doubt it.
It isn’t just cars that will anoint Tesla with FANG sainthood. The firm already has a major presence in rooftop solar cell installation through Solar City, utility sized solar plants, industrial scale battery plants, and is just entering commercial trucks. Consider these all seeds for FANGdom.
One thing is certain. Without Tesla, there wouldn’t be s single mass-market electric car on the road today.
For that, we can already say thanks.
In the blink of an eye, ride sharing service Uber has become essential for globe-trotting travelers such as myself.
Its 2 million drivers completely disrupted the traditional taxi model for local transportation which remains unchanged since the days of horses and buggies.
That has created the first $75 billion of enterprise value. It’s what’s next that could make the company so interesting.
It is taking the lead in autonomous driving. It could also replace FeDex, UPS, DHL, and the US post office by offering same day deliveries at a fraction of the overnight cost.
It is already doing this now with Uber Foods which offers immediate delivery of takeouts (click here if you want lunch by the time you finish reading this piece.)
UberCopters anyone? Yes, it’s already being offered in France and Brazil.
Uber has the potential to be so much more if it can just outlive its initial growing pains.
It is a classic case of the founder being a terrible manager, as Travis Kalanick has lurched from one controversy to the next. The board finally decided he should spend much time on his new custom built 350-foot boat.
Its “bro” culture is notorious, even in Silicon Valley.
It is also getting enormous pushback from regulators everywhere protecting entrenched local interests. It has lost its license in London, the only place in the world that offered a decent taxi service pre-Uber. Its drivers are getting beaten up in Paris.
However, if it takes advantage of only a few of the doors open to it, status as a FANG beckons.
A few years ago, I was heavily criticized for pointing out that half the employees at my local Walmart (WMT) were missing their front teeth. They have since received a $2 an hour’s pay raise, but the teeth are still missing. They don’t earn enough money to get them fixed.
The company is the epitome of bricks and mortar in a digital world with 12,000 stores in 28 countries. It is the largest private employer in the US, with 1.4 million workers, mostly earning minimum wage.
The Walmart customer is the very definition of the term “late adopter.” Many are there only because unlike Amazon, Wal-Mart accepts cash and Food Stamps.
Still, if Walmart can, in any way, crack the online nut, it would be a turbocharger for growth. It moved in this direction with the acquisition of Jet.com for $3 billion, a cutting-edge e-commerce firm based in Hoboken, NJ.
However, this remains a work in progress. Online sales account for only 4% of Walmart’s total. But they could only be a few good hires at the top away from success.
Talk about going from being the 800-pound gorilla to an 80 pound one, and then back to 800 pounds.
I don’t know why Microsoft (MSFT) lost its way for 15 years, but it did. Blame Bill Gates’s retirement from active management and his replacement by his co-founder Steve Ballmer.
Since Ballmer’s departure in 2014, the performance of the share price has been meteoric, rising by some 125% over the past two years.
You can thank the new CEO Satya Nadella who brought new vitality to the job and has done a complete 180, taking Microsoft belatedly into the cloud.
Microsoft was never one to take lightly. Windows still powers 90% of the world’s PCs. No company can function without its Office suite of applications (Word, Excel, and PowerPoint). SQL Server and Visual Studio are everywhere.
That’s all great if you want to be a public utility, which Microsoft shareholders don’t.
LinkedIn, the social media platform for professionals, could be monetized to a far greater degree. However, specialization does come at the cost of scalability.
It seems that the future is for Microsoft to go head to head against next door neighbor Amazon (AMZN) for the cloud services market while simultaneously duking it out with Alphabet (GOOGL).
My bet is that all three win.
This is another new app that has immeasurably changed my life for the better. Instead of cramming myself into a hotel suite with a wildly overpriced minibar for $600 a night, I get a whole house for $300 anywhere in the world, with a new local best friend along with it.
Overnight, Airbnb has become the world’s largest hotel chain without actually owning a single hotel. At its latest funding round in 2017, it was valued at $31 billion.
The really tricky part here is for the firm to balance out supply and demand in every city in the world at the same time. It is also not a model that lends itself to vertical integration. But who knows? Maybe priority deals with established hotels are to come.
This is another firm that is battling local regulation, that great barrier to technological innovation. None other than its home town of San Francisco now has strict licensing requirements for renters, a 30 day annual limitation, and a $1,000 a day fine for offenders.
The downtowns of many tourist meccas like Florence, Italy and Paris, France have been completely taken over by Airbnb customers, driving rents up and locals out.
There was a time in my life when IBM was so omnipresent we thought like the Great Pyramids of Egypt it would be there forever. How times change. Even Oracle of Omaha Warren Buffet became so discouraged that he recently dumped the last of his entire five-decade long position.
A recent 20 consecutive quarters of declining profits certainly hasn’t helped Big Blue’s case. It is one of the only big technology companies whose share price has gone virtually nowhere for the past two years.
IBM’s problem is that it stuck with hardware for too long. An entrenched bureaucracy delayed its entry into services and the cloud, the highest growth areas of technology.
Still, with some $80 billion in annual revenues, IBM is not to be dismissed. Its brand value is still immense. It still maintains a market capitalization of $144 billion.
And it has a new toy, Watson, the supercomputer named after the company’s founder, which has great promise, but until now has remained largely an advertising ploy.
If IBM can reinvent itself and get back into the game, it has FANG potential. But for the time being, investors are unimpressed and sitting on their hands.
The Big Telecom Companies
My final entrant in the FANGstakes would be any combination of the four top telecommunication companies, Verizon (VZ), AT&T (T), Comcast (CMCSA), and Time Warner (TWX), which now control a near monopoly in the US.
There is a reason why the administration is blocking the AT&T/Time Warner merger, and it is not because these companies are consistently cited in polls as the most despised in America. They are trying to stop the creation of another hostile FANG.
Still, if any of the big four can somehow get together, the consequences would be enormous. Ownership of the pipes through which the modern economy courses bestows great power on these firms.
There is one more FANG possibility that I haven’t mentioned. Somewhere, someplace, there is a pimple-faced kid in a dorm room thinking up a brand-new technology or business model that will take the world by storm and create the next FANG.
Call me crazy, but I have been watching this happen for my entire life.
I want to thank my friend, Scott Galloway, of New York University’s Stern School of Business, for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.
Creating the Next FANG?
Global Market Comments
October 17, 2018
(WHO WAS THE GREATEST WEALTH CREATOR IN HISTORY?)
(FB), (AAPL), (GOOG), (AMZN),
(XOM), (BRKY), (T), (GM), (VZ), (CCA),
(WHY DOCTORS MAKE TERRIBLE TRADERS?)
Apple holders (AAPL) were ecstatic and even apoplectic when they heard that their beloved company would be joining the Dow Average last year.
The move required thousands of portfolio managers to add Apple to their portfolios, like the $32 billion worth of Dow index managers, whether they wanted to or not. From then on it would be illegal for them not to own Apple.
At the very least it put the fear of Jobs into moneymen everywhere, especially if the Dow is the benchmark they are measured against.
The world?s now second largest listed company replaced tired and flagging AT&T (T), one of my perennial favorite short positions.
The symbolism couldn?t be more evident. A former monopoly with a literally rusting infrastructure is getting booted for iPhones, iPads, iTunes, Apps and the Cloud. Oh, how the mighty have fallen.
AT&T was one of the oldest Dow stocks, joining the closely followed index in 1916. The new listing then had a symbolic move of its own, taking place the year after the first-ever transcontinental telephone call was placed.
Who made that call? Alexander Graham Bell in New York telephoned his former assistant, Thomas Watson, in San Francisco in a replay of the first phone call in history 50 years earlier in 1876, from room to room at their lab. ?Mr. Watson, come here, I want to see you,? the first words ever uttered on a phone line, were repeated once more.
AT&T, or ?Ma Bell? as it was known, lost its listing in 2004 after it merged with SBC Communications. It was reinstated a year later when the new firm?s name was changed back to AT&T.
However, Apple shareholders should be careful what they wish for.
There is not exactly a great track record for share price performance after a company joins the Dow, especially a technology stock.
In 1999, Microsoft (MSFT) fell 43% after becoming a Dow 30 stock, while Intel (INTC) shed 52%. Cisco Systems (CSCO) lost 16% after joining the club in 2009.
The problem is that Apple entered the index after a meteoric 18 month, 130% run up. So the Dow, having missed the rise in Apple on the upside, fully participated on the downside in the stock meltdown that followed.
Apple is the second largest component in the Dow, with a hefty $575 billion market capitalization. This means that future Dow corrections will be bigger and more ferocious than they would have been without Apple and with boring AT&T.
The volatility of the lead index has just gone up, a lot.
I remember too well that the Japanese made a similar blunder in 2000. The government wanted to have a national stock index that reflected the economy of the future, not of the past.
They had watched with great envy America?s NASDAQ hog the global spotlight, soaring from 1,000 to 5,000 in just a couple of years.
So what did these geniuses do? They reconstituted the Nikkei Average from a 90% boring industrial, 10% technology index to a 50/50 weighting. And they did this mere weeks after NASDAQ peaked!
As a result, the Nikkei Average got the stuffing knocked out of it in the dotcom collapse. It fell a stunning 15% in the week just after the reconstitution announcement. It cratered from 21,000 to eventually bottom at 7,200. Without the reconstitution, it would have sold out at 10,000.
Having missed the dotcom boom on the upside, the Nikkei fully participated on the downside. Apple shareholders please take note.
Apple?s rise was amply chronicled by a steady series of Trade Alerts in this newsletter.
You can go back to my 2012 prediction that Apple would soar from $485 to $1,000 (click here). On a split adjusted basis we? already reached $931.
I followed that up with ?Apple is Ready to Explode? in October, 2013 (click here), when the post split share price was back at $70.
Indeed, I have issued more Trade Alerts to buy Apple over the seven-year life of this newsletter than any other single name.
It looks like I will be issuing a lot more Apple Trade Alerts in the near future as well.
At yesterday morning?s opening bell, we were greeted with the unmistakable evidence the stock market is technically breaking down.
The Dow Average has broken its three-year upward sloping trend line. Market leading sectors, like Consumer Discretionary and Financials have all put in eminently convincing ?Head and Shoulders? tops (click here). More distressingly, the head and shoulders for lead sector Technology has already broken down. Check out all the charts below.
I quickly ran my expiration P&L this morning. I figured out that if I sold all my longs for small profits (SPY), (IWM), and kept all my short positions (FXY), (T), (AA), I would be up 4.43% year to date by mid February, which in this environment is nothing less than heroic. The exception to the analysis is my sale of Linn Energy (LINE), which will be the subject of my next piece.
For more detail on why this is happening, read today?s letter, ?The Great American Rot is Ending? by clicking here).
AT&T (T), or Telephone as we used to call it on the floor on the New York Stock Exchange when we hand traded its shares, enjoyed a nice little 50-cent pop yesterday, to $34, only the second day it managed to rise this year.
The move comes after a federal appeals court in Washington DC ruled that the FCC exceeded its authority when it told Verizon Communication (VZ) that it could not charge different prices to different content providers based on their bandwidth and numbers of users.
This is a reversal of the FCC’s “net neutrality” rule and should allow both Verizon and AT&T to increase revenues and help protect their profits from customers who are costing them more money to service. ?Big users of broadband, like Netflix (NFLX) and Amazon (AMZN), saw their shares suffer accordingly.
You would think it would be off to the races for (T). But it won?t, as not all is well with Ma Bell. One of my first jobs at Morgan Stanley some 32 years ago was to break this company up into the seven ?baby bells? at the direction of the Antitrust Division of the Justice Department (I carried the shareholder ballots from one floor of our building to another). The company traded off its local telephone exchanges for the right to go into the computer business. I have been following it ever since.
For a start, (T) is suffering from some major internal cash flow problems. Revenues have been stagnant for years. Its hard-wired infrastructure has been corroding away for years. The capital spending needed to fix this will be a drag on any future earnings, and is unlikely to generate any real payoff. Do you know anyone under the age of 30 who owns a landline? It?s a wireless world, baby. Did I mention that their service sucks beyond belief?
Every pension fund manager in the country already owns this stock for its generous 5.30% dividend yield. One has to ask how long the company can maintain this in the face of a stagnant business in a highly competitive industry. Now that we are in a world of rising long-term interest rates, this yield will provide much less support than it has in the past.
The hedge fund community has been aware of these difficulties for a while, and has been pounding every rally. This is why (T) completely missed out on last year?s ferocious, record setting bull market, posting a zero return for 2013, versus a 26% increase in the main indexes.
AT&T is the oldest stock to inhabit the Dow 30, being a successor to a company founded by Alexander Graham Bell, the inventor of the telephone. It has long been a pillar of the investment establishment (it took a brief vacation from the index after the breakup). Its history mirrors that of American capitalism.
With 100 million customers and a market capitalization of $179 billion, it certainly occupies a big footprint. Time to put this beast out of its misery and retire it to the dustbin of history.