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Pichai Yourself, Earnings Are Really that Good

Google Translate, Alphabet's (GOOGL) free, multilingual machine, foreign language translation service, translates an unimaginable143 billion words per day.

These were one of the pearls divulged in the conference call from Google's CEO Sundar Pichai.

A bump in usage coincided with the 2018 World Cup in Russia, and in the age of low-cost airfare and overpopulation, it could be Alphabet's new cash cow.

Google Translate has the potential to morph into one of the premier foreign language applications used by anyone and everyone.

Forget about the Amazon effect, the Alphabet effect could be just as pungent, albeit away from the trenches of e-commerce.

Thank goodness the application is still ad-free.

No doubt it would be inconvenient to sit through a 15 second ad while interacting with a concierge at a bed and breakfast in the South of France.

Analysts did not sound out Pichai's plans for Google Translate, but he did mention there are some monetization opportunities on the horizon.

The latest earnings report is the most recent indication that the FANGs along with Microsoft are pulling away from the rest.

The equity price action in 2018 vindicates this fact with more than 80% of the gains spread around just a few high caliber tech names.

Is this fair? No. But life isn't fair.

The too slow too late regulation that was supposed to put a cap on the vaunted FANG group has had the opposite effect, squeezing the small guy out of the picture.

The runway is all clear for the FANGs, and the only way they will be stopped is if they stop themselves or an antitrust ruling.

This all adds up to why Alphabet has been a perennial recommendation for the Mad Hedge Technology Letter.

Duopolies are few and far between and monopolies even rarer.

They are great for earnings and as the global digital ad pie grows, it falls down to Google's bottom line.

On the news of stellar earnings, Facebook shares jumped higher in aftermarket trading and powered on to trade around 5% the following day.

Expect a great earnings report from Facebook with robust ad revenue growth.

Nothing less would be a failure of epic proportions.

The migration to mobile is real and investors need to understand analysts cannot keep up with the rising year-end targets in these shares.

Alphabet had a high bar over which to pole vault, and it still managed to beat it handily.

And the $5 billion fine for bundling its in-house apps on Android fell on deaf ears.

Alphabet has $102 billion in the coffers, and $5 billion will do nothing to materially affect the company.

The cash reserves are up from $34 billion in 2010.

The market trampled on any sniff of a risk-adverse sentiment and powered into the green with the Nasdaq reaching another all-time high.

Let's not get too carried away. Alphabet's bread and butter is still its digital ad business with Alphabet CFO Ruth Porat confirming this fact saying, "One of the biggest opportunities for investment continues to be in our ads business."

Alphabet still breaks off 86% of revenue from its distinguished ad business.

"Other" is a category commingling Google Cloud, Google Play, and hardware that only comprised 13 percent of total revenue.

"Other Bets" brings up the rear with 1% of total revenue comprising Waymo, Alphabet's self-driving unit, which is an industry leader putting Tesla and Uber in their place.

Waymo plans to shortly roll out a massive commercial operation. Along with Google Translate, it could carve out a nice position in Alphabet's portfolio going forward.

The most important metric was Alphabet's total ad revenue, which it locked in at $28.1 billion, a 23.9% YOY improvement.

Aggregate paid clicks, a model in which the advertiser pays Google for a user to click an ad, has been steadily rising to 58%, up from 52% from the same time last year.

The masterful efficiency circles back to Google's ad tech team, which is by far the best in the business and has outstanding management.

The Cloud is an area that Alphabet highlights as a place for improvement.

Alphabet's cash war chest allows the company to throw hoards of cash at a problem. When mixed with brilliant management it usually works out kindly.

CFO Porat mentioned that costs were particularly higher in the quarterly head count because of large investments in cloud talent.

Google is tired of playing third fiddle to Amazon (AMZN) and Microsoft (MSFT), and views enhancing the enterprise business as imperative.

This explains Alphabet's head count surge to more than 89,000 employees, sharply higher than the 75,600 employed a year earlier.

Every FANG and high-tier tech company is spending its brains out to compete with each other.

Expanding data centers is not cheap. Neither are the people to deploy it.

Alphabet has the cash to compete with the Amazons and Apples (AAPL) of the world.

They do not have to borrow.

The potential trip wire in Alphabet's earnings report was Google's traffic acquisition cost (TAC).

Alphabet's (TAC) is described as money paid to other companies to direct user traffic to its suite of Google products.

(TAC) went up to $6.4 billion, which is 23% of Google's ad revenue but down on a relative percentage basis of 24%.

This was enough to keep investors from sounding the alarm and was welcomed by analysts.

Alphabet pulled out all the stops this quarter and the momentum is palpable.

Top-line growth from its core ad business shows no sign of slowing.

Acceptable (TAC) was the cherry on the sundae for the quarter at a time when many industry insiders thought it would be around 25% or higher.

Hardware offered less punch than before, which is what all high-quality tech companies desire.

There were no obvious weaknesses and the 34 straight quarters of 23% YOY growth is hard to top.

Google pulls in 10% of all global digital ad dollars in one business.

Other highlights were Waymo eclipsing the 8-million-mile mark of self-driving on public roads as it is the next business to come to the fore.

Google cloud is at an inflection point attempting to win over corporate management.

It has already won contracts with heavy hitters such as Twitter (TWTR) and Disney (DIS).

Pichai mentioned Target (TGT) as a key new cloud client that just signed on with Google last quarter.

More importantly, Alphabet's brilliant quarter bolsters the macroeconomic picture heavily reliant on tech earnings to usher the market through the gauntlet.

Regulation has proved irrelevant. Whatever fine they are slapped with does not change that Google reaps the benefits from its market position as one of the duopolies in the global ad business.

Alphabet has been trading from the bottom left to the upper right via a consistent channel.

Do not chase the new all-time high of $1,270. Use any weakness around the $1,100 level to initiate new positions.

Owning a company this dominant has little downside. The regulatory burden was a myth and Pichai has handled this operation beautifully.

I am bullish on Alphabet and its partner in crime Facebook.

________________________________________________________________________________________________

Quote of the Day

"Man is still the most extraordinary computer of all," said the 35th President of the United States John F. Kennedy.

June 21, 2018

Tech Letter

Mad Hedge Technology Letter
June 21, 2018
Fiat Lux

Featured Trade:
(WHY NETFLIX IS UNSTOPPABLE),
(NFLX), (CAT), (AMZN), (CMCSA), (DIS), (FOX), (TWX), (GM), (WMT), (TGT)

Why Netflix is Unstoppable

Tech Letter

Trade war? What trade war?

Apparently, nobody told Netflix (NFLX) that we are smack dab in a tit-for-tat trade war between two of the greatest economic powers to grace mankind.

No matter rain or shine, Netflix keeps powering on to new highs.

The Mad Hedge Technology Letter first recommended this stock on April 23, 2018, when I published the story "How Netflix Can Double Again," (click here for the link) and at that time, shares were hovering at $334.

Since, then it's off to the races, clocking in at more than $413 as of today, a sweet 19% uptick since my recommendation.

It seems the harder I try, the luckier I get.

What separates the fool's gold from the real yellow bullion are challenging market days like yesterday.

The administration announced a new set of tariffs on $200 billion worth of Chinese imports.

The day began early on the Shanghai exchange dropping a cringeworthy 3.8%.

The Hong Kong Hang Seng Market didn't fare much better cratering 2.78%.

Investors were waiting for the sky to drop when the minutes counted down to the open in New York and futures were down big premarket.

Just as expected, the Dow Jones Index plummeted on the open, and in a flash the Dow was down 410 points intraday.

The risk off appetite toyed with traders' nerves and American companies with substantial China exposure being rocked the hardest such as Caterpillar (CAT).

After the Dow hit an intraday low, a funny thing happened.

The truth revealed itself and U.S. equities reacted in a way that epitomizes the nine-year bull market.

Tar and feather a stock as much as you want and if the stock keeps going up, it's a keeper.

Not only a keeper, but an undisputable bullish signal to keep you from developing sleep apnea.

In the eye of the storm, Netflix closed the day up a breathtaking 3.73%. The overspill of momentum continued with Netflix up another 2% and change today.

This company is the stuff of legends and reasons to buy them are legion.

As subscriber surveys flow onto analysts' desks, Netflix is the recipient of a cascade of upgrades from sell side analysts scurrying to raise targets.

Analysts cannot raise their targets fast enough as Netflix's price action goes from strength to hyper-strength.

Chip stocks have the opposite problem when surveys, portraying an inaccurate picture of the 30,000-foot view, prod analysts to downgrade the whole sector.

That is why they are analysts, and most financial analysts these days are sacked in the morning because they don't understand the big picture.

Quality always trumps quantity. Period.

Netflix has stockpiled consecutive premium shows from titles such as Stranger Things, The Crown, Unbreakable Kimmy Schmidt, and Orange is the New Black.

This is in line with Netflix's policy to spend more on non-sports content than any other competitors in the online streaming space.

In 2017, Netflix ponied up $6.3 billion for content and followed that up in 2018, with a budget of $8 billion to produce original in-house shows.

Netflix hopes to increase the share of original content to 50%, decoupling its reliance on traditional media stalwarts who hate Netflix's guts with a passion.

A good portion of this generous budget will be deployed to make 30 new anime shows and 80 new original films all debuting by the end of 2018.

Amazon's (AMZN) Manchester by the Sea harvested two Oscars for its screenplay and Casey Affleck's performance, foreshadowing the opportunity for Netflix to win awards next time around, potentially boosting its industry profile.

It will only be a matter of time because of the high quality of production.

Netflix's content budget will dwarf traditional media companies by 2019, creating more breathing room against the competitors who have been late to the party and scrambling for scraps.

This is what Disney's futile attempts to take on Netflix, which raised its offer for Fox to $71.3 billion to galvanize its content business.

Disney's (DIS) bid came on the heels of Comcast Corp. (CMCSA) bid for Disney at $65 billion.

The sellers' market has boosted all content assets across the board.

Remember, content is king in this day and age.

In 2017, Time Warner (TWX) and Fox (FOX) spent $8 billion each and Disney slightly lagged with a $7.8 billion spend on non-sports programming.

Netflix will certainly announce a sweetened content outlay of somewhere close to $9.5 billion next year attracting the best and brightest to don the studios of Netflix.

What's the whole point of creating the best content?

It lures in the most eyeballs.

Subscriber growth has been nothing short of spectacular.

Expectations were elevated, and Netflix delivered in spades last quarter adding quarterly total subscribers to the tune of 7.41 million versus the 6.5 million expected by analysts.

Not only a beat, but a blowout of epic proportions.

Inside the numbers, rumors were adrift of Netflix's domestic numbers stagnating.

Consensus was proved wrong again, with domestic subscribers surging to 1.96 million versus the 1.48 million expected.

The cycle replays itself over. Lather, rinse, repeat.

Quality content attracts a wave of new subscribers. Robust subscriber growth fuels more spending, which paves the way for more quality content.

This is Netflix's secret formula to success.

Netflix has executed this strategy systemically to the aghast of traditional media companies that are stuck with legacy businesses dragging them down and making it decisively difficult to compete with the nimble online streaming players.

Turning around a legacy business is tough work because investors expect profits and curse the ends of the earth if companies spend big on new projects removing the prospects of dividend hikes.

Netflix and the tech darlings usually don't make a profit but have a license to spend, spend, and spend some more because investors are on board with a specific narrative prioritizing market share and posting rapid growth.

The cherry on top is the booming secular story happening as we speak in Silicon Valley.

Effectively, all other sectors that are not tech have become legacy sectors thanks in large part to the high degree of innovation and cross-functionality of big cap tech companies.

The future legacy winners are the legacy stocks and sectors reinventing themselves as new tech players such as General Motors (GM), Walmart (WMT), and Target (TGT).

The rest will die a miserably and excruciatingly slow death.

The Game of Thrones M&A battle with the traditional media companies is a cry of desperate search for these dinosaurs.

They were too late to react to the Netflix threat and were punished to full effect.

Halcyon days are upon Netflix, and this company controls its own destiny in the streaming wars and online streaming content industry.

As history shows, nobody executes better than CEO Reed Hastings at Netflix, which is why Netflix maintains its grade as a top 3 stock in the eyes of the Mad Hedge Technology Letter.

_________________________________________________________________________________________________

Quote of the Day

"I got the idea for Netflix after my company was acquired. I had a big late fee for Apollo 13. It was six weeks late and I owed the video store $40. I had misplaced the cassette. It was all my fault," - said cofounder and CEO of Netflix Reed Hastings.

May 1, 2018

Tech Letter

Mad Hedge Technology Letter
May 1, 2018
Fiat Lux

Featured Trade:
(AMAZON KILLS IT AGAIN),
(AMZN), (WMT), (FB), (TGT), (GOOGL)

Amazon Kills It Again

Tech Letter

Jeff Bezos is a god.

Well, not quite but he is turning into one after Amazon delivered a mythical earnings report that left Amazon haters in awe.

The Amazon bears patiently waiting for the day of reckoning will have to wait longer as Amazon smashed earnings expectations by a magnitude of two or three.

Amazon had a lot riding on the most recent earnings report after racing to new highs in mid-March.

The brief macro-correction then gave investors yet another entry point into one of the best companies of our generation that is still up more than 30% this year.

Amazon Web Services (AWS) revenue reaccelerated from its 42% growth last year to a high octane 49% YOY and made up a disproportionate 73% of Amazon's operating income.

Amazon is heavily reliant on the AWS segment to carry it through feast or famine.

According to Jeff Bezos, its critically acclaimed cloud segments' outstanding results originate from the "seven-year head start before like-minded competition."

This reaffirms the benefit of first-mover advantage with which large cap tech is obsessed.

There is room for other companies in the cloud space, with the cloud industry expanding 20% in 2018 to $186 billion.

Therefore, expanding by 20% is the bare bones minimum to be considered relevant.

Amazon has positioned itself to funnel in the most dollars that migrate toward the cloud as the industries pioneer and best of breed.

After the latest earnings report, Amazon is in pole position to become the first publicly traded $1 trillion company.

This latest quarter wrapped up its 62nd consecutive quarter of 20% plus growth.

And the commentary coming out of the earnings reports makes it almost certain that Amazon will capture more market share.

There were a few bombshells dropped that were unequivocal positives for investors.

First, Amazon has become the third player in digital ad industry with the duopoly of Google search and Facebook.

Amazon revved up its digital ad revenue by 139% QOQ to a substantial $2.03 billion per quarter business.

This business is particularly appetizing because of its high margins and will help alleviate tight margins on the e-commerce side.

Amazon's digital ad business is by far the fastest growth lever in its portfolio. It will ramp up this side of the business whose main function is to match consumers with suitable products that consumers otherwise would miss out on in a standard Amazon search.

The extraordinary numbers support the notion that the hoopla of Washington regulation is all bark and no bite.

Facebook also delivered a prodigious quarter for the ages amid testimony and public backlash that resulted in immaterial damage to top- and bottom-line numbers.

The second bombshell announced was the change in pricing to prime members. Amazon upped its annual prime membership to $119 from $99.

This additional $20 price hike, or 20% on 100 million prime members, will swell revenue by an extra $2 billion of incremental revenue.

In total, Amazon will accrue a bonus of 4% of revenue by this price change.

Amazon has a high fixed-cost business, and slightly tweaking prices will create a huge windfall with the revenue almost entirely flowing down to the bottom line in the form of pure profit.

Many industry analysts claim that Amazon has the best management team in the industry and explicate this company as an "Internet staple."

More than 100 million products are delivered with free shipping for Amazon prime customers. This is starkly higher than the 20 million products shipped for free in 2014.

Amazon does everything in its power to offer a unique and efficient experience for customers.

The customer satisfaction reveals itself by the rock-bottom churn rate.

Amazon prime at an annual cost of $119 is such a value that no analysts even dared to ask Amazon CFO Brian Olsavsky if consumers would take issue with the rise in price.

Investors and strangers alike assume that broad-based reoccurring revenue from annual prime membership is a given.

In an era of mass-scrutinization, Amazon's earnings call seemed like a celebration of the mythical achievements that are changing consumer behavior by the day.

The lack of inquiry was justifiable this time because the one major shortcoming suddenly remedied itself.

Amazon's doubters frequently attack the lack of margin growth because its business model is first and foremost a land grab for market share ignoring any remnants of margin stability.

Now that Amazon's digital ad business has sprouted up, the margin story, starting from a miniscule base, will go from weakness to an unrelenting success.

Amazon started with its ultra-thin margin e-commerce business that made an operating loss of $160 billion in 2017.

Cranking up a shiny, high margin business will be hard for the other FANGs to compete with as they gyrate toward other businesses that have lower margins than Amazon's digital ad segment.

This is a horrible time to start fighting Amazon in price wars as the paradigm shift to quantitative tightening has made the cost of capital demonstrably pricier.

Operating margins almost doubled from 2% to 3.8% on $51 billion of quarterly sales.

This is a huge deal.

Amazon has been continuously harangued for "not making money." Well, that era is over.

Profits, and not only revenue, will start accelerating and Amazon will become the closest thing to a perfect company.

The years and years of plowing cheap capital back into fulfillment center and e-commerce activity gave Amazon a stained reputation for years.

However, as Amazon turns the screws and uses its foundational leverage to capture additional profits, the other FANGs will be forced down the same path ruining operating margins for the other big players.

Amazon telegraphed its quest for market share strategy to investors years ago, and investors understand they are paying for growth and growth only.

That will change now that profits have become a real part of its arsenal.

There is no doubt that Amazon will deploy its profits back into expanding its company because Jeff Bezos knows that if he can grow Amazon's top-line number, investors will follow suit.

Also, spending means improving the products, and Amazon has never hesitated to spend big.

The move into digital ad growth is a warning shot to Facebook and Google. Amazon will mobilize its workforce to take on other business, and anything that is high margin is fair game.

The future looks bleak for retail competitors Walmart and Target, as the contents of the earnings report reaffirms Amazon's unrelenting assault on the retail sector, which is systematically being dissected by Amazon for fun.

Google search and Facebook are in Amazon's crosshairs. Staving off this monster will be hard to do in the long run.

Amazon has a clear path to further market gains, and operating margins are almost at a tipping point.

Revenue is poised to re-accelerate because of the reignition of AWS to a higher growth trajectory.

Shoring up operating margins through a burgeoning digital ad division will only be a boon to earnings in the future.

Amazon is one of the best companies in the world, and any weakness in the stock should be bought and held forever.

_________________________________________________________________________________________________

Quote of the Day

"I do not fear computers. I fear a lack of them," - said writer Isaac Asimov.

The Unintended Consequences of the Euro Crash

Diary, Free Research, Newsletter

For those of you who heeded my expert advice to buy the ProShares Ultra Short Euro ETF (EUO) last July, well done!

You are up a massive 48%! This is on a move in the underlying European currency of only 18.5%.

My browsing of the Galleria in Milan, the strolls through Spanish shopping malls, and my dickering with an assortment of dubious Greek merchants, all paid off big time. It turns out that everything I predicted for this beleaguered currency came true.

The European economy did collapse. Cantankerous governments made the problem worse by squabbling, delaying and obfuscating, as usual.

The European Central Bank finally threw in the towel and did everything they could to collapse the value of the Euro and reinvigorate their comatose economies. This they did by imitating America?s wildly successful quantitative easing, which they announced with local variations last Thursday.

And now for the good news: The best is yet to come!

Europe is now six days into a strategy of aggressive monetary easing which may take as long as five years until it delivers tangible, sustainable results. That?s how long it took for the Federal Reserve?s QE to restore satisfactory levels of confidence in the US economy.

The net net is that we have almost certainly only seen the first act of a weakening of the Euro which may last for years. A short Euro could be the trade that keeps on giving.

The ECB?s own target now is obviously parity against the greenback, which you will find predicted in my own 2015 Annual Asset Class Review released at the beginning of January (click here).

Once they hit that target, 87 cents to the Euro will become the new goal, and that could be achieved sooner than later.

However, you will not find me short the Euro up the wazoo this minute. I think we have just stumbled into a classic ?Buy the Rumor, Sell the News? situation with the Euro.

The next act will involve the ECB sitting on its hands for a year, realizing that their first pass at QE was inadequate, superficial, and flaccid, and that it is time to pull the bazooka out of their pockets once again.

This is a problem when the entire investment world is short the Euro. That paves the way for countless, rip your face off short covering rallies in the months ahead. Any smidgeon or blip of positive European economic data could spark one of these.

Trading the Euro for the past eight months has been like falling off a log. It is about to get dull, mean and brutish. So for the moment, my currency play has morphed into selling short the Japanese yen, which has its own unique set of problems.

As for the unintended consequences of the Euro crash, the Q4 earnings reports announced so far by corporate America tells the whole story.

Companies with a heavy dependence on foreign (read Euro and yen) denominated earnings are almost universally coming up short. On this list you can include Caterpillar (CAT), Procter and Gamble (PG), and Microsoft (MSFT).

Who are the winners in the strong dollar, weak Euro contest? US companies that see a high proportion of their costs denominated in flagging foreign currencies, but see their incomes arrive totally in the form of robust, virile dollars.

You may not realize it, but you are playing the global currency arbitrage game every time you go shopping. The standout names here are US retailers, which manufacture abroad virtually all of the junk they sell you here, especially in low waged China.

The stars here are Macy?s (M), Family Dollar Stores (FDO), Costco (COST), Target (TGT), and Wal-Mart (WMT).

You can see this divergence crystal clear in examining the behavior of the major stock indexes. The chart for the Guggenheim S&P 500 Equal Weight ETF (RSP), which has the greatest share of currency sensitive multinationals, looks positively dire, and may be about to put in a fatal ?Head and Shoulders? top (see the following story).

The chart for the NASDAQ (QQQ), where constituent companies have less, but still a substantial foreign currency exposure, appears to be putting in a sideways pennant formation before eventually breaking out to new highs once again.

The small cap Russell 2000, which is composed of almost entirely domestic, dollar based, ?Made in America? type companies, is by far the strongest index of the trio, and looks like it is just biding time before it blasts through to new highs.

If you are a follower of my Trade Alert Service, then you already know that I have a long position in the (IWM), which has already chipped in 2.12% to my 2015 performance.

You see, there is a method to my Madness.