Mad Hedge Technology Letter
January 22, 2021
(THE ADDITIVE MANUFACTURING BOOM)
(DM), (DDD), (SSYS), (GE)
Mad Hedge Technology Letter
January 22, 2021
(THE ADDITIVE MANUFACTURING BOOM)
(DM), (DDD), (SSYS), (GE)
Mad Hedge Technology Letter
January 15, 2021
(THE CHIP BONANZA)
(MU), (QCOM), (TSM)
What does it mean for companies to apply data to gain an edge?
Let me explain.
Data is best described as the oxygen that is provided to the lungs.
Competition is based on the business intelligence excavated from vast troves of data.
These insights enable companies to target proper growth drivers, migrate to revenue hotspots and add appropriate employee talent.
The data also delves into how to create product stickiness, customer loyalty, promote up-selling, and optimize operations.
It’s not me just saying this to hype up the phenomenon, and I can vouch that data-driven decisions have worked wonders for the Mad Hedge Technology Letter.
Other companies have reported robust performance in productivity and profitability margins up to 10% higher than analog companies.
A recent report showed that margins would expand wider after the first year to 10% and hit a roaring 15% after operations are further refined.
It’s a world of data supremacy; it doubles in size every two years and will reach 70 zettabytes by next year.
Data is connected to every part of the model from marketing campaigns, to website traffic flow and activity engagement, to operational procedures.
Can you believe that only 10% of global data is currently being acted on?
It’s hard to digest that most companies are winging it without any rhyme or reason.
The world is way too complex to bring a knife to a gunfight.
Predictive insights used to be only reserved for Fortune 500 companies who could afford the high expense of applying these high-powered tools.
But after the recent wave of automation and cloud software, even individual proprietors can participate in this once-taboo management exercise because the costs have come down.
Going on gut instinct and best estimates can only get you so far in a rapidly digitizing world and the coronavirus has only made the volume of data explode and required insights into business that are much more important.
I would also say that companies must be vigilant in harnessing the data because the skyrocketing number of nefarious elements out there have corrupted many data forms.
Just recently, the Mad Hedge website was overpowered by a tsunami of bots scouring our website for data.
The bots overloaded our email distributer service with new subscriptions by registering 1000s of emails into our database which muddied our underlying data and our ability to glean salient insights into it.
Bots find the data needed to answer a question or solve a problem and the Mad Hedge Fund Trader website has been a target to find the best financial content in the English-speaking world.
Once the requisite data is in hand, bots identify what toolsets are needed to organize the data and produce predictive and prescriptive business insights.
Many of these bots use content to create trading algorithms based on stand-alone content from the Mad Hedge Fund Trader that acts as a direct input into the database.
This new form of business intelligence deploys machine learning software as a question or problem and generate actionable solutions.
They can categorize base cases, outliers, marginal cases, and errors that require further data cleaning, additional reporting, and queries.
Ultimately, these bots are the vehicles in which a final answer is populated such as whether or not to buy Amazon stock today or tomorrow and so on.
As we push into the 5G era, this same technology will be repurposed for the internet of things (IoT) translating into another wave of products being groomed and fine-tuned by machine learning.
Internet of Things (IoT) is the fastest-growing segment of data and already comprises 15% of total global data.
Physical products will need embedded sensors that will monitor the performance and send terabytes of data back to the data servers for data analysts to pick apart.
One example is a Geared Turbo Fan engine which requires 5,000 sensors that generate up to 10 GB of data per second.
Now you can understand why the volume of data is literally about to mushroom as 5G takes hold and why Amazon has been so hellbent in penetrating the smart home market.
Bots facilitate conversations between systems and data silos and allow your decision-makers to have the keys to the Ferrari.
Bots enable an easy view of displaying key performance indicators (KPIs) and alerts on the run with simple charts and graphs.
As the coronavirus offers us glimpses into the world tomorrow, data analysts embedded all over the world will be harnessing bots to maintain your home thermostat or upgrade software in the rear of your smart microwave.
As we speak, the Mad Hedge Fund Trader website is gearing up for the next wave of data supremacy and I advise everyone else to get with the program.
This is the world of the future and for companies who don’t adapt, they will be swept into the dustbin of history.
The x-factor for the last tech generation has been none other than – the cloud.
Any portfolio manager that hasn’t aligned performance with this transformational phenomenon is most likely not a portfolio manager anymore.
Now, as we enter into an unknown world, if you thought the cloud was the x-factor of the tech in the last generation, then the 2020s will make the cloud contributions to growth in the last generation appear meek.
About 1/3 of small businesses recently surveyed admitted there is really no path back to reopening. Who would really want to shoulder financial risk in an economic environment that outwardly punishes businesses that operate around anonymous customers in close proximity?
Many of these owners, even with generous government funding, have chosen not to fight against the path of strongest resistance.
When the dust settles, even if a vaccine arrives out of thin air tomorrow, the work at home thing, or should I say the work from anywhere but the office phenomenon will persist like a bad flu, no pun intended.
The Cloud is the winner, and everything associated with it will drive the economy forward.
It has emerged as the cog in the works, that no company can live without.
Not only is the cloud highly effective but it’s also cheaper than traditional systems.
It also provides nimbleness in scaling up or down computing capacity according to business requirements.
Search for growth companies that do not deploy the cloud as a critical pillar of operational execution.
They hardly exist now.
Whether it’s the vanguard of the cloud plays such as Amazon (AMZN), the second in show nipping at Amazon’s heels, Microsoft’s (MSFT), or any other small cloud play, they are all profiting off the monstrous pivot to digital commerce and cord-cutting.
In China, Tencent, Alibaba, and Huawei are cloud companies doing so well that the U.S. government has tried to shut them down to allow a wider moat around U.S. companies.
What’s the simplest way to carve out significant exposure to cloud equities?
A barrage of ETFs (exchange-traded funds) has come online to serve your needs.
They are also durable enough to endure stormy and uncertain times.
Here are three that should whet your appetite.
The First Trust Cloud Computing ETF (SKYY) tracks a modified equal-weighted index of infrastructure, platform, and software cloud companies. Microsoft, Amazon, and Alphabet are its secret sauce.
The Global X Cloud Computing ETF (CLOU) consists of companies that are positioned to benefit from the increased usage of cloud computing. While Amazon, Microsoft, and Alphabet are included in the portfolio, the fund’s top holdings are pure-play cloud companies like Zscaler (ZS) and Shopify (SHOP).
The WisdomTree Cloud Computing ETF (WCLD) tracks an equal-weighted index of emerging companies with DocuSign (DOCU) and RingCentral (RNG) among the largest holdings.
What’s more, let’s remember that every cloud company is about to embark on a massive round of expense cuts by getting rid of the physical office.
Twitter (TWTR) even has allowed workers to work from home on a permanent basis.
Yes, this means San Francisco commercial real estate prices are about to nosedive, but as it relates to the tech industry, operation costs will benefit in one fell swoop boosting earnings.
This also paves the way for many tech companies to re-establish tax headquarters in Nevada, Texas, or Florida which will act as another supercharger to growth.
Elon Musk has called out the Bay Area politicians in Alameda County, California because of a convoluted response and conflicting rules with regards to restarting the Fremont, California factory.
Covid-19 is most likely the straw that breaks the camel’s back as many Bay Area tech workers start to question what on earth they are doing paying $4,000 per month to rent a “cozy” 400 square foot apartment in Cupertino or San Francisco.
The mass exodus from high tax states to low tax states is just another supercharger out of many cloud superchargers on top of growth.
What more can I say?
We received a convincing data point as to why we trade cloud companies and not the semiconductor chips.
The rift between blacklisted telecom equipment giant Huawei Technologies and the U.S. administration has had a dramatic side-effect on the business models of U.S. chip companies.
The U.S. commerce department now will require licenses for sales to Huawei of semiconductors made abroad with U.S. technology signaling more turbulent times ahead.
Huawei is the Chinese smartphone maker and telecom provider who has stolen intellectual property from the West and used mammoth subsidies funded by the Chinese communist party to build itself into one of the premier telecom equipment sellers and number two maker of smartphones in the world.
I seldom issue trade alerts on semiconductor chip companies because I’d rather not compete with the Chinese communist party and their capital funding capacity.
China is hellbent on subsidizing its own chip capacity as many Western chip companies are blocked from doing deals with them.
A recent example is the Chinese communist party injecting $2.25 billion into a Semiconductor Manufacturing International Corp. wafer plant to ramp up development in the sector.
To read about this, click here.
Exploiting the economic freedom and laws of the West has worked out perfectly for Chinese tech enabling them to develop juggernauts like Tencent and Baidu.
In fact, state-sponsored hacking of Western intellectual property is not considered a malicious activity in China.
There is the Chinese notion that everything is fair game in business and war and protecting company secrets falls on the shoulders of the cybersecurity sector.
To read more about the fallout in the West from China’s aggressive trade strategy, click here.
The concept that you should only blame yourself if you allow your secrets to get stolen prevails in China.
The consequences are impactful with U.S. chip companies suffering large drops in revenue without notice.
Leading up to the coronavirus, chip companies experienced a revenue slide of 12% in 2019 to $412 billion largely due to the trade war.
An example is Xilinx Inc. (XLNX) who will fire 7% of its workforce citing lower revenue from Huawei and delayed adoption of superfast 5G networks.
Along with the West getting smacked by the trade war, the ripple effect of increased uncertainty and guide-downs across the semiconductor supply stems from China’s economy being hit even worse than the U.S. economy.
There are no winners here and it will be a hard slog back from the nadir.
Either way, the sabre-rattling doesn’t stop here and each tweet and counterpunch will cause heightened volatility in chip shares.
Then consider that the existence of supply chains will most likely uproot, and we got indication of that type of activity with Taiwan Semiconductor’s (TSM) announcement to build a new chip factory in Phoenix.
To read more about this impactful deal then click here.
This would have never happened during prior administrations where all manufacturing was offshored to China.
As it stands, China has been circumventing existing U.S. law to clampdown chip sales by buying U.S. chips from 3rd party channels.
Once many of the supply chains come back, it will be almost impossible for Chinese to procure those same chips.
The Taiwan semiconductor manufacturing facility in Arizona will ultimately employ 1,600 high-tech workers.
Building is slated for 2021 with production targeted to begin in 2024.
Moving forward, the U.S. administration will make it implausible for many U.S. chip companies to offshore using the reasons of national security and domestic job demand to ensure that many factories are rerouted back to U.S. shores.
The boom and bust nature of chip companies make for treacherous spikes and drops in share prices.
The insane volatility is why I stay away from them as the Mad Hedge Technology Letter mainly opts for short-term options trades.
Nvidia (NVDA) and AMD (AMD) are great individual chip stocks that I would encourage readers to buy and hold.
Another option is to just park your money in the semi ETF VanEck Vectors Semiconductor ETF (SMH) or iShares PHLX Semiconductor ETF (SOXX).
On the flip side, cloud stock’s backbone of recurring monthly revenue is just too savory.
The constant cash flow with minimal international risk along with pristine balance sheets is what makes U.S. cloud companies top on the list of trade alert candidates.
That won’t stop anytime soon as the pandemic has offered us more conviction into the moat between cloud stocks and the rest of technology.
I apologize if I sound like a broken record, but I love my Akamai’s (AKAM) and DocuSign’s (DOCU), they have the growth portfolio that backs up my thesis.
Buy cloud stocks on the dip.
To understand the unintended consequences of the Fed’s helicopter money to U.S. capitalism, we can put a magnifying glass over Uber’s (UBER) recent takeover attempt of Grubhub (GRUB) as what’s in store for not only the tech sector but the wider public markets.
Zombie companies parade around Europe and Japan because of an era of low interest rates and cozy bank relationships that keep these companies from dying out.
To read more about Allianz Economic Advisor Mohamed El-Erian’s take on zombie companies – click here.
It’s not a surprise that Japan and Europe are highly unproductive, and innovation ceases to exist when capital is being tied up in marginal companies with management happy to let capital slosh about without adding extra added value.
I get it that the Fed is trying to “save” the wider U.S. economy by bringing out the bazookas and even by buying junk-graded debt which was once seen as heresy.
But what we have now are inferior companies that will never turn a profit masquerading as real companies that would be on life support if not for cheap capital.
In almost every instance, the only winners are the executive management who pillage the system and cash out when they are allowed to sell their stock.
U.S. Representative for Rhode Island David Cicilline hit the nail on the head when he described the fluid situation by focusing on two of the bad apples, saying “Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub — which has a history of exploiting local restaurants through deceptive tactics and extortionate fees — marks a new low in pandemic profiteering.”
Uber is a taxi service that undercompensates its highest expense – the driver, and Grubhub delivers restaurant food but rips off the restaurants in doing it.
I defined exorbitant delivery fees as up to 40% which Grubhub is infamous for charging.
Yes, even with predatory practices, they cannot turn a profit.
Now, in this new normal of coronavirus, it would be a miracle to make any operational headway.
Uber’s attempted market grab is a giant red flag.
My guess is that they are doing this in order to jazz up the balance sheet and concoct some ridiculous new metric showing a pathway to growth.
By adding growth to revenue, Uber would be able to preach “growth” even if it’s of bad quality.
I thought the tech market was done looking through to grow by essentially killing off the “WeWork model.”
However, Uber is going for a model that is one notch above that model and repurposing it as something actually meaningful, which of course, it’s not.
They are already in litigious hell regarding driver’s remuneration, and that will not die down and could even destroy Uber.
Uber has in fact ignored California state orders to reclassify its drivers as employees and have appealed the court’s decision.
The New York state government has validated my theory of these fly-by-night delivery outfits being a net negative for business and society.
The New York City Council compared food ordering apps Grubhub and UberEats to blood-sucking parasites this week before passing emergency legislation aimed at helping struggling restaurants lower delivery costs during a precarious time.
During the state of emergency, a new vote passed capping food ordering and delivery app fees at 15% in delivery fees and 5% “other” takeout order fees.
To read more about this decision by the New York City Council – click here.
This was done to give some power back to the restaurants that have been getting fleeced.
The balance sheet shows the whole story with Uber’s net loss totaling more than $8.5 billion in 2019 and in February, they reported a net loss of $1.1 billion in the fourth quarter.
Let me remind readers that Grubhub posted a net income loss of $27.7 million for the last reported quarter as well.
As it turned out, Grubhub rejected Uber’s offer believing it didn’t meet their valuation of the company.
It would appear natural that a predatory company with no competitive advantage would set a market premium that would align with their borderline extortionate ways.
Do not own either one of these companies – there are far better ones out there in tech and no need to scrounge at the bottom of the barrel.
Monthly Grubhub bill for Chicago Pizza Boss During the Epidemic
There certainly will be crippling longer-term implications for the airline industry, hotel chains, and of course hospitality – but I can’t say the same for online learning platform Chegg (CHGG), which is now a great option if you’re looking for tech stocks to invest in.
Chegg, is a U.S. education technology company based in Santa Clara, California who has hit pay dirt with this coronavirus epidemic.
Chegg provides digital textbook rentals, online tutoring, and other digital student services.
Schools around the U.S. and the world closed in an effort to slow the spread of the coronavirus as well as protecting our future leaders.
Despite the domestic economy on the verge of reopening, it is unclear when schools will.
Naturally, parents are also afraid to allow their children in a school environment where bacteria and germs act as a giant petri dish.
To read more about how schools are having a heck of a time reopening, click here.
Digital learning was already becoming part of the playbook, as college costs continued to soar unabated.
A rule of thumb in every industry is that a crisis often accelerates the inevitable and that is what I see happening in higher education.
Chegg is a portmanteau of the words chicken and egg and references the founders’ unenviable experience of being unable to obtain a job without experience while being unable to acquire experience without a job like many young graduates complain about.
With that in mind, the founders of Chegg, Aayush Phumbhra, Osman Rashid, and Josh Carlson, aspired to disrupt the textbook industry.
Business grew fast in the early stages – the company adjusted its business model to reflect that of Netflix’s then rental-based model, concentrating on renting textbooks to students in 2007.
Eventually, the growth led into a textbook rental partnership with education mainstay Pearson Education.
Fast forward to today and Chegg’s stock chart looks like a hockey stick with shares going from $30 to $64 in 2 months.
Chegg’s first quarter revenue jumped 35%, with its services sales up 33% to account for 76% of its total revenue.
The firm also saw the number of Chegg Services subscribers surge 35% to over 3 million for the first time.
And the company forecasted that the momentum it experienced at the end of the first quarter will carry over into Q2, with it calling for its “Q2 subscriber growth to be greater than 45%.”
The substantial increase in engagement from existing subscribers is following through into a meaningful increase in the take rate of the new Chegg Study Pack, much earlier than expected.
Chegg Study Pack is a three-in-one package that bundles together Chegg Study, Chegg Math Solver, and EasyBib Plus. To understand more about the Chegg Study Pack and Chegg’s other online learning products, click here.
Chegg did not provide guidance for the second half of 2020 due to many unknowns such as school start dates, enrollment trends, and whether schools will be taught on-campus, online, or both.
The pain doesn’t stop with the toddler, what about the young adults?
The Graduating Class of 2020 is confronted with the worst hiring climate in history that has seen rescinded internships and evaporating job offers.
These students might back out of the job market completely before they get a sniff and elect to attend graduate school, meaning more online learning in the short-term.
To read about the hardships for fresh graduates, click here.
I am encouraged by Chegg’s strong trends 1Q into 2Q and the broader shift of higher education in Chegg’s wheelhouse, whether done on or off-campus.
Investors are focused on firms that can grow during semi-apocalyptic conditions, especially ones that seem poised for longer-term expansion within a future-looking industry like Chegg.
Meanwhile, Chegg’s adjusted second quarter earnings are expected to explode to 48% and EPS at $0.34 a share. Overall, the company’s adjusted fiscal year EPS figures are projected to surge to 33% and 22%, respectively.
Shares are overheated for the time being and readers should wait for a significant dip in shares as we approach the summer.
Buy that dip because remote learning is here to stay and first movers like Chegg will have staying power with their sticky products.
With the gains concentrated in biggest names in the Nasdaq, there is a sprinkling of uber growth names of the likes of Chegg, Docusign, Datadog, and Teladoc that are outperforming by an order of magnitude.
The issue I have with smaller cap tech stocks right now is that large cap tech stocks have durability because of balance sheet strength.
If there is a sell-off, investors will migrate further up the food chain, meaning FANGs.
As the FANGs make new highs, they continue to reward long-term investors paying a high premium of a future increase in cash flow.
Lastly, FANGs are the biggest beneficiary of the rerating of the tech market after the unprecedented surge of Fed helicopter money.
Sadly, the smaller caps do not get the lions’ share of the Fed funding funneled into its shares.
The bottom line is that the dreaded coronavirus is mutating from its original version, and this iteration has been reported to affect children.
To read about the virus mutation, please click here.
The reopening of schools is going to be staggered, expensive, unfair, and controversial in the best-case scenario.
It’s impossible to envision that students won’t be given a huge dose of Chegg’s digital learning products and even though not a FANG, the secular tailwinds in Chegg are too powerful to ignore, making it again, one of the good tech stocks to invest in.
I am bullish Chegg (CHGG).
Let me explain how China has created a sudden U.S. tech ($COMPQ) renaissance that will most likely change the face of business and society in the U.S. to a degree we cannot even fathom yet.
To decompress the catalysts and the mechanisms at play in this confusing time in history, it is important to understand how the Middle Kingdom has supercharged American tech being one of the main protagonists.
Part of it is healthcare’s role in the events, and part of it is tech’s strategic position waiting for a broad-based pivot in how humans internalize and execute business.
The supercharger has been the algorithms.
To explain in the best way I can, I will reference the Founder and CEO of Tesla (TSLA) and Space X Elon Musk who had a wide-ranging and insightful interview with popular podcast personality Joe Rogan.
The much-viewed interview preceded Musk’s threats to leave Fremont, California for greener pastures and transfer operations to the Gigafactory near Reno, Nevada and Texas.
To check out an article about Musk’s dare this weekend to migrate Tesla’s operations to the “Battle Born State” of Nevada, please click here.
In the interview, he delves into the U.S. healthcare system’s conflicting incentive to label anything remotely close to Covid-19 as symptoms associated with Covid-19 (which there is a long list of) that doesn’t differentiate between deaths attributed to Covid-19.
This line of thought is to widen the Covid-19 healthcare footprint to the point where each hospital can request more government funding based on the high volume of Covid-19 activity and required help to fight it.
We all love extra funding, right?
Musk also disagreed on every procedure not related to Covid-19 labeled as “elective” because it equates a pulled hamstring to a triple bypass heart surgery which can truly be life-threatening.
The point that I would like to expand on is that the attempts at widening the net of Covid-19 cases in order to curry favor for more government aid are effectively widening the digital footprint of Covid-19 internet content that is feeding back into the algorithms that are responsible for the majority of stock trades.
What we have here are vicious feedback loops that can’t be broken out of because of the misallocated tagging of Covid-19 that filters into algorithmic trading.
That is why we open up the newspaper, social media platforms, and any content provider and we are swamped by Covid-19 content and everything “associated” with Covid-19 content meaning all content has become Covid-19 content!
The net has been cast wide with homelessness caused by Covid-19, tax revenue shortfalls associated to Covid-19, professional sports seasons cancelled by Covid-19, and even a story about the King of Thailand King Maha Vajiralongkorn holed up in Switzerland with his wife and a harem of 20 other women to “quarantine” because of, yes – Covid-19. To read this story, click here.
Basically, all content is Covid-19 content until it isn’t.
This indelible influence on global governance has been deep with every politician feeling the pressure of continuing the lockdown because of a massive dislocation between the real footprint of Covid-19 and the digital footprint of Covid-19.
Healthcare pros as well have been duped by the wrong data and supporting lockdown policies because of the risk of looking bad due to perceived optics not meshing well with the current digital content being published.
The truth is that the real data is probably 1.5 standard deviations from what is believed to be consensus – a far cry from the gross data politicians and healthcare experts are using to make important decisions with.
Naturally, protecting a tenure as a politician is human nature and the unintended consequences to guarding one’s political career are causing longer lockdown periods.
Nobody wants to put their neck out and appear out of line.
Musk argued the case that the virus’s fatality rate is in fact “5-10X” lower than it actually is because of the concept of too many deaths being falsely attributed to Covid-19 symptoms and the lack of tests meaning many people are living with it but have not been accounted for in the data.
The tech market has taken wind of the discrepancy and the fierce rally calling the data’s bluff working with another set of data.
Then add to the casserole that tech companies successfully missed the “big one.”
The “big one” is defined by a virus that actually kills healthy bodies between 20 and 30 years old with no pre-existing conditions at a high rate.
And in economic terms, the “big one” means not being a hospitality, retail, or transport business.
The strength of the tech V-shaped recovery stems from the notion that this pandemic is not nearly as bad as we think it is.
There is definitely a level of truth in this.
Another unavoidable unintended consequence is the hastening of decoupling between the Chinese and U.S. economy as the blame game accelerates.
As a result, corporate manufacturing will be shipped back to the U.S. and this isn’t your father’s manufacturing either.
We are talking about manufacturing in the vein of Tesla, that will sprout up across the U.S. as artificial intelligence is finally good enough to make manufacturing profitable stateside as more automation takes hold.
Many of these new industrial A.I. manufacturing headquarters, factories, and complexes will be set up in tax-friendly states like Nevada and Texas taking a cue from Tesla.
There have been many analysts in the China camp prophesizing that the Chinese Communist Party (CCP) will apply the virus as a vehicle to push their narrow agenda.
However, Liu Chenjie, chief economist at fund manager Upright Asset has estimated job losses in China resulting from the pandemic of up to 205 million workers.
Click here to read about the devastating job losses in China.
The CCP is more worried about cleaning up the mess at home.
I would argue that the post-virus tech economy is setting up for a quicker than expected recovery.
As fast as the virus hit, the algorithms pushing this pandemic into the arteries of all digital channels will disappear in days, almost as if Covid-19 never happened.
Covid-19 has been the direct catalyst to a myriad of firings at digital newspapers all over the U.S., for example, Vice Media cut 10% of company’s employees — resulting in the elimination of 250 jobs.
As one door shuts – another one opens.
As tech companies have withstood semi-apocalyptical conditions, imagine how well they will do on the other side when consumers finally get their incomes flowing again.
U.S. tech is a shining example of the future being limitless, and complicit or not – China, algorithms, and healthcare experts gave a great assist.
Today, we got a convincing signal that trillions of stimulus dollars are being diverted into one asset class – tech shares.
That’s right, even though main street has not participated in the V-shaped recovery that tech shares have basked in, tech’s profit engines have gotten through largely unscathed.
The earnings that have streamed out this week validate the big buying into tech shares and today’s price action was mouthwatering.
We had names like cloud communications platform Twilio (TWLO) rise 40% in one day, ride-sharing platform Lyft (LYFT) was up 21%, and Uber (UBER) another 11%.
Outperformance of 5% seemed pitiful today in an asset class that has gone truly parabolic.
Another sub-sector that can’t be held down is video games.
The rampant usage of video games dovetails nicely with the theme of tech companies who have triumphed the coronavirus.
There is nothing more like a stay-at-home stock than video game maker Electronic Arts (EA) who beat expectations during its March quarter.
The company reported adjusted earnings of $1.31 per share during its fiscal fourth quarter, topping consensus estimates at 97 cents a share.
Revenue also beat totaling $1.21 billion surpassing estimates by $.03 billion.
EA Sports has identified Apex Legends as their new growth asset and this free game is having a Fortnite-like growth effect.
Apex Legends was the most downloaded free-to-play game in 2019 on the PlayStation 4 system.
The full ramifications of Covid-19’s impact on EA’s business, operations, and financial results is hard to quantify for the long term and this has been a broad trend with many tech companies pulling annual guidance.
I can definitely say that the year 2020 is experiencing a video games renaissance.
On the downside, EA is heavy into sports video games, and cancellations of sports seasons and sporting events could impact results, given its popular sport simulation titles like FIFA and Madden NFL.
EA Sport’s competitor Activision Blizzard (ATVI) is positioned to reap the benefits by reimagining mainstay title Call of Duty Warzone and users have already hit 60 million players in just 2 months.
The result is accelerating momentum entering the second quarter from the dual tailwinds of strong execution and premium franchises following last year’s increased investment.
With physical entertainment venues like movie theaters, live sports, and music venues closed, home entertainment services have pocketed the increased engagement.
Nintendo is another gaming company whose fourth-quarter profit soared 200% due to surging demand for its Switch game console, and that title Animal Crossing: New Horizons shifted a record 13.4 million units in its first six weeks.
Activision is riding other hit game franchises like World of Warcraft, Overwatch, and Candy Crush – to visit their roster of blockbuster games, please click here.
These blockbuster titles are carrying this subsector at a time when the magnifying glass is on them to provide the entertainment people crave at home.
Shares of EA and Activision Blizzard are overextended after huge run-ups and another gap up from better than expected earnings reports.
If there is a dip, then that would serve as an optimal entry point.
The lack of vaccine means that gaming will see elevated attention until there is a real health solution.
If there is a second wave that hits this fall, then pull the trigger on these video game stocks.
To visit Electronic Art’s website, please click here.
The tech market is telling us that the effects of coronavirus on the U.S. economy have accelerated the Golden Age of Big Tech pulling it forward to 2021.
You know, Big Tech is having their time in the sun when unscrupulous personal data seller Facebook is experiencing 10 times growth with its live camera product Portal video during the health crisis.
That is the type of clout big tech has accumulated in the era of Covid-19 and investors will need to focus on these companies first when putting together a high-quality tech portfolio.
Every investor needs upside exposure to a group of assets that is locked into the smartphone ecosphere.
There are no excuses.
Smartphones, although not a new technology, is now a utility, and the further away from the smartphone revenue stream you get, business is nothing short of catastrophic minus healthcare.
The health scare has ultimately justified the mammoth valuations of over $1 trillion that Apple, Microsoft, and Amazon command.
The next stop is easily $2 trillion and then some.
Consumers are so much more digitized in this day and age weaving in a tapestry of assets such as the iPhone at Apple, advertising at Facebook, and search ads at Google.
Can the coronavirus keep the digital economy down?
Green shoots are certainly popping up with regular consistency.
Facebook and Google have said that digital advertising has “stabilized.”
Apple, Amazon, Netflix, Facebook, and Google each reported financial results in the past week with profits and revenue that, while hit by the closure of the economy, still outperformed relative to the broader market.
Investors already priced in that Apple’s iPhone sales temporarily disappeared, that Google’s and Facebook’s advertising revenue dropped and that Amazon is spending big to keep warehouse workers safe.
Forward expectations can only go north at this point reflecting a giant bull wave of buying that has benefited tech stocks.
Other top tier companies not in the FANG bracket have also gone gangbusters.
Zoom has turned into an overnight sensation now replacing all face-to-face meetings, sparking competition with Microsoft’s Teams video chat and Google Meet.
The market grab that big tech has partaken in will position them as the major revenue accumulators for the next 25 years.
Unsurprisingly, Apple was the canary in the coal mine by calling out a dip in iPhone sales and manufacturing in China earlier in the year.
While iPhone’s sales did fall, down nearly 7%, to $28.9 billion, its revenues from services and wearables, two categories that have been rising steadily for years, jumped 16.5% and 22.5% respectively.
Chip giant Qualcomm said phone shipments will likely drop about 30% around the globe in the June quarter while Apple rival Samsung, said phone and TV sales will “decline significantly” because of the coronavirus.
Google’s YouTube has grown 33% while the video giant keeps us entertained and Microsoft’s Xbox Game Pass subscription service notched more than 10 million subscribers.
Facebook said nearly 3 billion people use its collection of chat apps representing an 11% jump from a year ago.
Everywhere we turn, relative outperformance is evident which in turn minimizes the absolute underperformance in year to year growth.
The market is looking through and putting a premium on the relative outperformance.
Many are coming to the realization that the economy and population will live with the virus until there is a proper vaccine, meaning an elongated period of time where consumers are overloading big tech with higher than average usage.
President Trump’s chief economic adviser Larry Kudlow is projecting that the U.S. economy next year could see “one of the greatest economic growth rates.”
I would adjust that comment to say that big tech is tipped to be the largest winner of this monster rebound in 2021 putting the rest of the broader market on its back.
This is quickly turning into two economies – tech and everybody else.
The eyeballs won’t necessarily translate into a waterfall of revenue right away because of the nature of all the free services that they provide.
But at the beginning of 2021, a higher incremental portion of consumer’s salaries will be directed towards big tech and the fabulous paid services they offer.
Actions speak louder than words and Berkshire Hathaway’s Warren Buffett unloading billions in airline stocks is an ominous sign indicating that parts of the U.S. economy won’t come back to pre-virus levels.
The biggest takeaway in Buffet’s commentary is that he elected to not sell tech stocks like his big position in Apple validating my thesis that any investor not already in big tech will flood big tech with even more capital after being burnt in retail, energy, hotels, and airlines.
Then, when you consider the ironclad nature of tech’s balance sheets, even in the apocalyptical conditions, they will profit and rip away even market share from the weak.
It’s to the point where any financial advisor who doesn’t recommend big tech as the nucleus of their portfolios is most likely underperforming the wider market.
As the U.S. economy triggers the reopening mechanisms and we enter into the real meat and bones of the reopening, data will recover significantly signaling yet another leg up in tech shares.
Hold onto your hat!
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