“I even went to KFC when it came to my city. Twenty-four people went for the job. Twenty-three were accepted.” – Founder and Former CEO of Alibaba Jack Ma when asked about applying for jobs after university
Mad Hedge Technology Letter
January 28, 2022
Fiat Lux
Featured Trade:
(APPLE PUSHES THE ENVELOPE)
(MSFT), (AAPL), (GOOGL), (FB)
We can flip through the thesaurus to look for superlatives that would describe how Apple (AAPL) is performing versus the rest of the market or tech sector, yet it really doesn’t matter who we compare them to, because no matter what we do, somebody would need to be clinically insane to bet against this well-oiled machine.
To give credit where credit is due, Apple CEO Tim Cook parlayed his friendship with co-founder Steve Jobs into the top job at Apple precisely because he was and still very much is an operational specialist.
In times of pandemic, climate change, supply chain problems, hyperinflation, and geopolitical volatility, this is the man you want at the helm to make those operational decisions that benefit shareholders.
Cook even pulled off China and is the only person in Silicon Valley that can claim that level of tech success in the Middle Kingdom.
Not many US tech companies can outdo the Chinese in China, but that is what Cook has managed to achieve and that sometimes gets overlooked.
I have undeniably been a major skeptic about China, but he has managed to penetrate so deeply into Chinese culture that the Chinese can’t root him and his products out without massive disruption and possible social unrest.
Cook, being the operations guy that he is, told the media that he expects supply bottlenecks to ease, which is a major bullish signal to the rest of tech and the semiconductor industry.
That comment alone will mean that the Nasdaq will finish the year at least 7-10% higher than if he didn’t make that comment and to nobody’s surprise, Apple is trending higher by over 6% today and rightly so.
The market trusts Tim Cook and what he says, and I can’t say the same for Tesla’s Elon Musk who loves to overpromise and underdeliver.
This is also good news for the EV sector such as Lucid (LCID) and Rivian (RIVN) which I highlight as two stocks with massive potential even if they can’t ramp up to Tesla levels right away.
Optimizing the supply chain has never been more important today because of the de-globalized elements that have filtered through to corporate America.
Part of streamlining the operations helps when you are Apple and you are Tim Cook and you can negotiate contracts down to the fractional cent.
Other companies simply don’t have that negotiating leverage.
They have curried together that type of goodwill that Apple has with their brand name and footprint.
Moving forward, the best way to decode the content of Apple’s earnings report is by viewing it as an equivalent to an implicit guarantee that margins and operations will be running smoothly for the rest of the year.
That in itself carries more weight than the Fed supplying capital for zombie companies.
I keep mentioning that this is the era in which the balance sheet matters; and wow, Apple has a crystal clean sheet that almost doesn’t need balancing.
Apple’s optionality is just mind-boggling from unlimited buybacks, to possibly raising their dividend from 22 cents, to hiring and expanding their workforce, adding more data centers, and so on.
They literally have any tool in the tool kit to respond to any possible headwind.
That is a luxury that most tech companies cannot claim to possess aside from a handful.
As Microsoft reported stellar earnings, this is just another feather in the cap for big tech.
Big tech is protected from the carnage that smaller tech companies must face, and who have less options to remediate possible devastating internal or external threats.
Not only is Apple riding high on their horse at the vanguard, but they possess products and software that simply can’t be substituted out, which easily creates an overwhelming strong hand when it comes to pricing power.
Next in the queue with earnings is Alphabet (GOOGL), where I fully expect them to reveal record earnings. Facebook (FB) too should do well, but not as good as GOOGL.
Don’t bet against Goliath.
Mad Hedge Technology Letter
January 26, 2022
Fiat Lux
Featured Trade:
(MSFT DIGS US OUT OF A HOLE)
(MSFT), (AMZN), (GOOGL), (AAPL)
The 14% selloff year to date in tech shares finally met its match when Microsoft (MSFT) soothed us with its most recent quarterly performance.
It’s starting to feel like a broken record, but this world belongs to 5 large Silicon Valley tech companies and for the rest of the other few hundred publicly listed companies, we are just living in their world.
And it just so happens that if anybody or anyone is anointed as the savior to save this market from capitulating, it has to be the heavy lifters and we are getting validation from the strongest of cloud/enterprise companies.
Just as resonating, MSFTs positive quarter draws yet one more line in the sand for Mr. Market, offering us support and offering us evidence this could morph into a short-term bottom.
Even more salient, this is even deeper evidence that the software sector is the cream of the crop in tech and their strategic position is only getting stronger.
The thing that these guys have that is critical in today’s economic environment is tinged with inflation headwinds — pricing power.
Starting in March, Microsoft is pushing through an MSFT 365 price hike and consumers and businesses will see their monthly bill go up a few bucks.
According to Microsoft, those increases will apply globally with local market adjustments for certain regions.
And it’s not that 365 is MSFT's cutting edge division, it’s just another example of how MSFT can raise prices and consumers have no other choice but to comply because, at this point, 365 is a utility.
Sure, you can find a substitute, but it wouldn’t be as good of a product.
It was a record quarter, driven by the continued strength of the Microsoft Cloud, which surpassed $22 billion in revenue, up 32% year over year. We are living through a generational shift in our economy and society. Digital technology is the most malleable resource at the world's disposal to overcome constraints and reimagine everyday work and life.
Anyone who bet the ranch on the cloud and enterprise is happy they bet the ranch on it.
MSFT's earnings were just a giant confirmation of how tech won’t be knocked off its perch as the apex warrior, not only in the Nasdaq index but the broader market.
The stock market has been a tech market for quite a few years and that can’t be ignored or discounted.
Fundamentally, the foundations of profitable tech stocks have never been healthier, and they are extracting more of the pie than ever.
Then as we hear nonstop about the upcoming metaverse project and its entryways through gaming, MSFT is so on top of that new development that they will put all other companies to shame.
Granted, there are other heavyweights like Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL) that MSFT must take measures of to see if they are pushing ahead with something they are unaware of, but all is good is Redmond, Washington.
As data volumes and transactions increased over 100% year over year, MSFT has a grip on what’s going on and can quickly pivot to anything that’s worth it with its army of high-quality developers.
MSFT’s ubiquitous fingerprints are everywhere with even over 90% of Fortune 500 companies using Teams Phone this past quarter highlighting the deep penetration into the richest corners of corporate America.
My overarching point is that MSFTs products aren’t just a one-trick pony ala Facebook.
More than half of customers have four or more MSFT workloads, up 75% year over year, underscoring MSFTs end-to-end differentiation.
On a short-term trading basis, traders must adopt tech winners with robust balance sheets, and this must be looked at as a dealbreaker or deal winner of sorts.
In a world that is clamoring for quality tech names, it’s no time to allocate your hard-earned savings into Podunk technology.
Once the macro washout fades, pile into MSFT!
What I am saying is that there is a great deal of the market to plain out avoid, and don’t get caught up in those lemons.
“Culture eats strategy for breakfast.” – Said Microsoft CEO Satya Nadella
Mad Hedge Technology Letter
January 24, 2022
Fiat Lux
Featured Trade:
(BEST OF THE REST GETS SLAUGHTERED)
(MSFT), (SNAP), (GOOGL), (AAPL), (AMZN), (FB), (TIKTOK)
Popular nostrum has it that earnings will save the stock market.
The strength of corporate America time and time again is on display to show investors how high short-term growth follows through.
Anytime the Nasdaq enters a little rut, earnings bail us out and the next move is usually higher for tech shares.
Well, wait a second, things are different this time.
The bad news now is that confirmation of solid fundamentals during the upcoming earnings season, won’t make the Nasdaq index go higher.
The market is pricing in business as usually for the largest 5 tech stocks which are really the only ones that matter.
Internally, the rest of tech has been deeply damaged by this January sell-off and we are talking about 8-9% one-day sell-offs for the small cap tech growth and I haven’t even mentioned the peak to trough underperformance which is much worse.
Larger cap Enterprise and Cyber Security stocks still boast solid foundations and are going down less than the meme stocks, shelter-at-home stocks, and the best of the rest tech stocks.
Basically, we need to get through earnings because there is minimal upside for tech stocks as investors peruse through a lack of short-term catalysts.
We are stuck in a ditch where monetary and fiscal policy has been set dead straight against an environment of potentially appreciating tech stocks.
Until that changes, I don’t envision a snappy reversal apart from a dead cat bounce to sell into.
Chasing growth in a low-interest rate environment gave us an overshoot to the upside and now that is all working in reverse.
And for the big FANG stocks outperforming small cap, it just means shares are performing better than tech growth because they command lower volatility due to stronger balance sheets.
Resilience to indiscriminate selling is currency in today’s trading world.
Nothing wrong with growth, but they are what they are, so much so that if you cannot generate profitability now, sell-offs are indicative of their poor strategic position among bigger tech.
The carnage under the hood is stark today with Snap stock cratering after the social media company’s shares were downgraded amid risks to revenue growth and tough competition from rival TikTok.
Snap’s headwinds result from a weakening business profile stemming from IDFA headwinds, difficult [year-over-year comparisons] from stellar growth in 2020-21, and increasing competition from TikTok.
IDFA is a serious thorn in the side for the android-based systems of Google as well as for Facebook.
IDFA is Apple minimizing the reach of data harvesting platforms by turning off their data reach and these modifications by Apple (AAPL) to rules for advertising on mobile apps have forced companies like Snap to lower guidance.
When it reported quarterly earnings last October, Snap revealed that the impact on its advertising business could be long lasting and now we are experiencing that.
The IDFA issues could cut growth rates by half as these social media firms have been unable to remedy its loss of reach in digital advertising.
Snap has the unenviable position to not only be behind Google and Facebook, but they are also the next company to be upended by TikTok that has really come on the last few years.
TikTok has supplanted Snap as the go-to social media platform for teens and young adults.
In a rising interest rate environment, the best of the rest like Snap gets punished for not being the best of class.
Snap shares are down over 200% from its peak and threatening to close in on 300% in the red.
Snap represents the fortunes for the marginal tech stocks that rely on growth and that is not working in 2022.
Although not as loss-making as other tech growth, SNAP has been fairly pigeonholed as the tech you don’t want to own now.
It’s a dangerous position to fill in times of the VIX spiking to 30.
The problems don’t stop there with TikTok really threatening Snap’s position and the momentum signaling that Snap is prepared for a deeper slowdown than initially expected.
Snap’s foothold is strongest in the 13-34-year-old range in the U.S., Canada, the U.K., France, Australia, and the Netherlands, but TikTok’s audience is the most similar to Snap’s which means it puts both Snap’s user face time spent and ad dollars at risk.
From a monetary standpoint, digital advertisers will start to play off ad competition between TikTok and Snap, resulting in discounted ad revenue per unit which will narrow margins moving forward.
Not being able to command the prior ad premium is a stinging blow to Snap who thought they were in the driving seat to the third position behind Google and Facebook, but it shows that being a tech minnow is a harrowing experience and fending off toxicity is part of the playbook just to survive.
Head to higher waters in this volatile environment.
“Strip malls are history.” – Said CEO and Founder of Amazon Jeff Bezos
Mad Hedge Technology Letter
January 21, 2022
Fiat Lux
Featured Trade:
(FIVE TECH STOCKS TO LAP UP AT THE BOTTOM)
(MSFT), (TSLA), (GOOGL), (AAPL), (AMZN)
