Mad Hedge Technology Letter
November 1, 2021
Fiat Lux
Featured Trade:
(A FINE-TUNED MACHINE)
(MSFT)
What this health crisis did was force us to understand how critical Microsoft (MSFT) and its products, especially Windows, are to the world.
The clamoring for its products whether it be software, hardware, or gaming, spoke volumes to Microsoft’s strategic footprint in the Silicon Valley ecosystem.
That’s part and parcel of why it’s been my go-to, iron-clad tech recommendation for as long as I can remember.
This Redmond, Washington company is an all-weather type of stock and even in an inflationary environment, the first place any business should lean on is Microsoft in order to understand how to ensure that they are able to carve out productivity gains.
And even dealing with constraints, for example, if you have supply chain constraints, one of the goals you want to achieve is run factories or even if that’s your work desk, at the leading edge of the efficient frontier.
That means tools like Microsoft’s cloud products, simulating success is going to make sure that every production run has the least amount of slippage.
So, I think any which way you look, whether it's in the knowledge department, first-line worker, or the cloud products and simulation, utilizing all the stallions in the stable are going to be the best way for any company to deal with inflationary pressures so that they can in fact accelerate productivity the fastest way possible and thereby calculate the fastest way to meet aggregate demand out there.
Microsoft is essentially the best at doing and it’s not even a toss-up.
In a strong inflationary environment, the case for digital transformation strengthens with Microsoft helping others, and this plan is hatched by deploying MSFT’s top-line services to spur digitization as a deflationary force that massages the bottom line.
The signs are everywhere that companies from all walks of life are doing this with Microsoft Cloud quarterly revenue surpassing $20 billion for the first time, up 36% year over year.
Businesses small and large can improve productivity and the affordability of their products and services by building tech in density.
The Microsoft Cloud delivers the end-to-end platforms and tools organizations need to navigate this time of transition and change.
Every organization will need a distributed computing fabric across the cloud and the edge to rapidly build, manage, and deploy applications anywhere.
MSFT is building Azure as the world's computer, with more data center regions than any other provider, delivering fast access to cloud services while addressing critical data residency requirements.
They are partnering with mobile operators from AT&T and Verizon in the United States to Telefonica and BT in Europe, Telstra and Singtel in Asia Pacific, as they embrace new business models and bring ultra-low latency, compute power, and storage to the network and the enterprise edge.
The numbers back up their achievements with 78% of the Fortune 500 using MSFT’s hybrid offerings.
LinkedIn now has nearly 800 million members. Confirmed hires on the platform increased more than 160% year over year. And this quarter, MSFT launched new ways to help job seekers discover roles that align with how they want to work. In a rapidly evolving labor market, companies are increasingly turning to LinkedIn Learning to upskill and reskill their employees.
The totality of MSFT’s dominance translated into MSFT notching first-quarter revenue of $45.3 billion, up 22%.
MSFT will surpass $200 billion of total revenue this year and they will easily surpass $300 billion annually in the next 18 months.
I am highly bullish MSFT — buy on every and all dips.
Mad Hedge Technology Letter
October 29, 2021
Fiat Lux
Featured Trade:
(APPLE HIT BY LOGISTIC CHAOS)
(AAPL)
The numbers tell the story for Apple (AAPL) — 745 million paid subs.
It’s not at Facebook levels yet, but Apple’s 745 million almost entirely can claim to buying multiple Apple devices.
Then step back and admire the increase of 160 million paid subs versus just 12 months ago and understand this minor dip in today’s shares is just another buying opportunity.
Being able to add 160 million paying subs in 12 months stems from the ability to continue to launch new services and new offerings within the services that they already have, new features that are game-changers.
In short, that’s how you grow a large business that does $68 billion in the last 12 months with levers that are diversified as any.
At a granular level, The Apple App Store notched a September quarter record.
This highlights the trend that consumers are paying on the platform and are happy to do it, which is why the services keep growing to double digits.
I applaud Apple for taking a stand against ad technology and giving privacy back to the user.
It’s a luxury they can afford, but I believe it will turn into a tailwind.
The feedback from customers is overwhelmingly positive.
Customers appreciate having the option of whether they want to be tracked or not.
It’s just another feature that goes into making Apple one of the best tech firms in the world.
Some more accomplishments this past quarter was setting an all-time record for Mac sales and quarterly records for iPhone, iPad, wearables, home, and accessories, representing 30 percent year-over-year growth in products.
This level of sales performance, combined with the unmatched loyalty of Apple’s customers and the ecosystem strength drove services to an all-time revenue record of $18.3 billion, up 26 on services.
Some people in the industry and some people outside the industry thought that the pandemic would reduce demand, they pulled their orders down, things reset. And what really happened was demand went up and went up even more than a straight trend would predict. And so, the industry is working through that now.
When everything is working, it’s hard to pick the bad out. However there was one black eye, and I would say nothing structural, but a consequence of the external variables Apple can’t always control, i.e. supply.
“Constraints” reared its ugly head to the tune of a $6 billion revenue dollar impact, driven primarily by industrywide silicon shortages and COVID-related manufacturing disruptions.
Supply constraints cost Apple $6 billion and it affected the iPhone the iPad and the Mac.
Chips are becoming harder to secure, especially the legacy variation.
Next, was the pandemic-related manufacturing disruptions in Southeast Asia which produce many of Apple’s products.
However, the situation has eased in Southeast Asia, and fewer disruptions in October bode well for next quarter’s earnings.
But from a demand point of view — demand is very robust.
Apple supply simply can’t meet the global demand for its own products, which has grown over the pandemic.
Long term, I look at this as a good problem, because the supply chain will get sorted, and bottlenecks will fix themselves.
CEO Tim Cook likes to say that Apple’s operational team is “world-class” and him being an operational guy himself originally, I can give him the benefit of the doubt.
There is nothing to worry about with Apple.
They remain incredibly profitable and efficient, and any short-term weakness is an appetizing buying opportunity for investors.
“We also welcome any regulation that helps the marketplace not be a race to the bottom.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
October 27, 2021
Fiat Lux
Featured Trade:
(WHY I SUCCESSFULLY PREDICTED STELLAR ALPHABET EARNINGS)
(GOOGL)
Alphabet is a company whose tentacles effectively reach into every pocket of human life and commerce, and businesses of all kinds are increasingly adopting tools like AI-driven automation and insights to connect with customers no matter what stage of the recovery they're in.
Take 150-year-old Dutch luxury retailer, de Bijenkorf, that turned to Google Clouds’ local insights and automation to speed up cross-border expansion beyond the Netherlands and Belgium to Germany, France, and Austria.
With a multipronged approach, including shopping campaigns, de Bijenkorf drove substantial growth throughout the pandemic.
This is just one example of thousands that crystallize the impact Alphabet and its array of services can provide companies.
Returning visitors to online stores were up fourfold in the first half of 2021 versus 2020, and retail had another stellar quarter.
This is just one little snippet into how Alphabet does $65.1 billion of revenue per quarter, which is up 41% year over year.
I cannot sit here and describe every use case, but broadly speaking, Alphabet has been the beneficiary of explosive growth in digital over the last 20-some months.
As the world begins to reopen, shoppers are returning to stores.
Brick-and-mortar isn't dead. Instead, omnichannel is in full force.
Searches for open now near me are up 4 times globally versus last year.
Strong growth in local shopping queries means people are researching their visits to stores more often before they go. As a result, Google has seen more advertisers include in-store sales alongside e-commerce goals to drive omnichannel growth.
Adoption has nearly doubled over the past year.
Of course, these insights are all possible with a robust search system that almost all of us use — Google Search.
The company also experienced continued momentum in the Google Cloud with Q3 revenue growing 45% year-over-year to $5 billion last quarter.
At Cloud Next two weeks ago, Google unveiled hundreds of new capabilities, services, and solutions.
They also announced 20 new and expanded partnerships to support the growth and scale of Google customers around the world.
Google Cloud provides real-time data, analytics and AI is winning customers like Carrefour Belgium, Deutsche Post DHL, and Wendy's, who are unlocking data to deliver unique business outcomes.
More examples are GE Appliances, a Haier company that is integrating Vision AI into their next-generation smart home appliances. And iCare Retail is using recommendations AI to drive a 30% increase in customer click-through rate.
Customers see value in Google’s open scalable infrastructure that enables them to run workloads anywhere, on Google cloud, at the edge, or in their data centers.
Alphabet recently surpassed 50 million music and YouTube premium subscribers, including those on trial period, and YouTube Shorts continues to see higher adoption rates. In the past year, the average number of daily first-time creators more than doubled.
YouTube's reach is increasingly supplanting TV.
Advertisers and brands of all sizes continue to buy YouTube ad inventory at both ends of the funnel to create future demand while they convert existing demand. They're seeing upside.
A few recent launches include easier ways for businesses to show the local services they offer from hair extensions to auto repair across Search and Maps.
Second, local inventory ads that highlight which products are in stock and when to pick them up.
Third, instantly shoppable images with Google Lens and a new visual browsable experience on Google Search.
YouTube will offer shoppable live stream experiments with retailers like Sephora, Target, and Walmart directly from their favorite creators’ videos.
Lastly, what really caught my attention in the Q&A session with management was the plan to equip YouTube in terms of making it work well with VR, AR.
Management outlined that initiative as a major area of investment in terms of how to put the software and hardware together for this platform.
Naturally, my mind spins when I try to add up what type of revenue tailwind this might be, and at the bare minimum, it’s a game-changer.
Alphabet has separated itself from the rest of the pack and is one of the best tech companies today. Investors need to jump at the chance to buy shares if any discounts present themselves.
This revenue story has legs, and anyone would be a fool to write off Alphabet who clearly has a rock-solid plan going forward.
Alphabet should be bought on any dip or just held long term because their cash cow businesses are in-tact, and their strategic plans are as good as any other firm.
“If you are a big company, a big website, and lots of users come to your website, you will have attacks, and you have to deal with that.” – Said Founder and CEO of Baidu Robin Li
Mad Hedge Technology Letter
October 25, 2021
Fiat Lux
Featured Trade:
(HOW TO PLAY THE TECH EARNINGS SEASON)
(MSFT), (FB), (GOOGL), (AAPL), (SNAP)
The big guns of tech are coming up to the plate for earnings and they could use a strong showing as big tech’s narrative is on the ropes.
They are still the apex warriors of the stock market, and that position is hardly under threat, but there are whispers of a slowdown.
A recipe of high expectations mixed with cruddy forecasts could give us a dip to buy into.
This is what our portfolio would love to be gifted.
Don’t forget we have already seen some misses from tech companies like Snap (SNAP) which plunged 27% after warning that customers are cutting back on digital advertising spending.
The fallout sent other ad tech companies like Twitter and Google significantly lower.
This never used to happen to these companies and that’s important to point out because we just exited an era where ad tech companies could do no wrong.
Now it almost seems like they can’t do no right.
Readers got spoilt, earnings after earnings, these tech companies used to knock it out of the park and much of that high expectation is still leftover, perhaps a legacy concept from the bull market from 2008 to 2021.
These are the bellwether stocks of the broader market that have single-handedly put the rest of their market on their back and carried it higher.
Everyone wants to know if they can still hack it?
Technology companies in the S&P 500 Index are projected to report revenue growth of roughly 19% for the third quarter such as Alphabet at 38% growth, followed by Facebook at 37% and Apple (AAPL) at 31%.
I do believe that they will achieve these lofty estimates but they won’t overperform to the point where buyers line up in spades.
We aren’t in that type of environment now.
These companies have pricing power, and combined with underlying growth drivers, they generate high returns and reinvest in the business and perpetuate that strength.
The price action backs up my concerns with 85% of tech companies having beaten profit estimates, but the stocks have fallen an average of 2.4% the following day.
The lack of response means we are long in the tooth.
If this does become a “buy the rumor, sell the news” type of event, this will give us plenty of discounts to cherry-pick the next day.
The challenge of justifying their valuations means these companies aren’t getting their “free pass” that they used to pocket and manipulate.
They aren’t the darlings of the business world anymore — that title goes to cryptocurrency and bitcoin.
Facebook will tell us how badly Apple’s privacy changes are affecting its ad revenue model.
Consensus is looking for revenue growth of nearly 40% this quarter in Alphabet which in a normal year wouldn’t be that hard to beat but it’s a new normal now.
Ongoing monetization improvements in search advertising through product/AI-driven updates, along with greater-than-expected contributions from businesses like YouTube and Google Cloud can seem them meet their forecasts.
Microsoft (MSFT) expects revenue to grow around 20% in the quarter and we need to look out for if their cloud-computing business maintains strong demand.
Year-over-year comparisons get progressively tougher throughout the year which is an obstacle for MSFT’s durable growth portfolio of Azure/Security/Teams.
Apple could deliver great iPhone sales, but semiconductor shortages are a limiting factor, and the China risk is another big quagmire.
At what point will the Chinese Communist Party stop giving Apple such an easy go of it in China?
Regulatory uncertainty is an overhang — implications of the App Store ruling remain a wild variable.
Amazon is dealing with supply-chain challenges and labor shortages.
Last quarter, revenue missed expectations for the first time since 2018, and the company warned of the reverse of the pandemic-related tailwind for online retail.
Revenue is expected to grow a little more than 16%, the slowest pace since 2015.
The stock has been dead weight this year, which is unlike Amazon.
I do believe we will get a sprinkling of fairy dust that includes margin expansion, but some of these companies will experience a pullback and I will be waiting to aggressively take advantage of these deals.
