Mad Hedge Technology Letter
June 28, 2021
Fiat Lux
Featured Trade:
(HOW TO STOP RANSOMWARE-AS-A-SERVICE)
(CRWD)
The world has changed, and protecting one’s network has been thrusted to the top of every CEO's checklist and the CFO is there to make it happen smoothly as well.
Just how to protect the most critical computer networks is still a work in progress; many firms still haven’t got a clue.
Just recently, oil pipeline operator Colonial Pipeline revealed that it had opted to pay hackers a $4.4 million ransom to regain control of its infrastructure.
Another headline rattler, major meat company JBS learned they, too, had been hacked.
The ultimate cost of all this hacking?
Cybersecurity Ventures currently pegs the annual figure at around $6 trillion, though further estimates that the ransomware "business" will be worth $10.5 trillion by 2025.
Threat actors are well resourced and becoming more sophisticated as we speak.
Crazily enough, ransomware-as-a-service sites are making it simpler for even novice e-criminals to run successful and lucrative campaigns, which is contributing to the proliferation of ransomware activity.
This is highly illegal yet actors from abroad feel almost immune wielding their power from offshore authoritarian strongholds where dictators usually chuckle on the news that western companies have been hacked again.
The 2020 CrowdStrike Global Security Attitude Survey revealed that more than half of organizations surveyed worldwide had suffered a ransomware attack within the previous 12 months.
A scary fact is that many of these ransomware attacks, failures and successes, are not publicly reported because companies don’t want the negative publicity and the accompanying stock sell-off with it.
Some hacks are just too big to hide under the carpet.
At the same time, organizations need to transform their businesses in order to keep up with evolving business needs such as work from anywhere and moving their critical applications and workloads to the cloud.
Naturally, this is the perfect time for hackers, new and old, to pounce on the transitory nature of deploying networks into a work-from-home set-up.
CrowdStrike’s Falcon platform is at the epicenter of restoring trust to the security apparatus of companies worldwide.
The integration of threat intelligence and threat hunting into the Falcon platform provides deep insight into the adversaries and how they operate.
Extensive capabilities of the Falcon platform significantly set CrowdStrike apart from both legacy and next-gen vendors.
This includes their acquisition of Preempt and Humio, which could not have been timelier as companies are discovering new ways to shore up protection of their active directories, stop lateral movement and have even greater real-time visibility and search into their endpoints, identities, applications, network edge and cloud from a single data layer.
CRWD was also recognized as the best cloud computing security solution and best managed security service at the 2021 SC Awards where Shawn Henry, president of services and chief security officer, received a Security Executive of the Year award as well.
This growth company has the accelerating metrics to back up its hubris.
In the first quarter, they reached a new milestone as subscription customers surpassed the 10,000 mark.
They added 1,524 net new subscription customers including the customers CRWD acquired from Humio. On an organic basis, the net new subscription customers added in the quarter grew 69% year over year. In total, they now service 11,420 subscription customers worldwide.
To sum up the positivity, the outperformance is attributed to CRWD’s Falcon platform's ability to fully utilize the power of the cloud and AI to stop breaches and provide community immunity.
Also helpful, is the ability to easily and rapidly deploy lightweight agent at scale across both endpoints and workloads without requiring a reboot, while other next-gen vendors fail to scale and require reboots.
The platform is easy to use and easy to manage all from a single user interface; and their ability to leverage the power of the cloud to collect data once and solve many real-world business problems that deliver better outcomes and immediate ROI for customers.
It is entirely possible that with the rate of ransomware accelerating, CRWD will be able to grow the service base from over 11,000 now to 100,000 in less than 2.5 years.
They should be able to achieve this while accelerating their subscription gross-margin target to 85% which would represent an acceleration of the current gross rate margin of 77%.
This company is growing faster and becoming more profitable, what’s there not to like?
In light of the strength I just mentioned, a pullback to $230 would be a great entry point to ride to over $400.
If the firm can at least deliver 70,000 customers in the next few years, the stock is easily at least $400 which would make it around a $100 billion company.
That is entirely doable for CRWD.
“All of technology, really, is about maximizing free options.” – Said Risk Analyst Writer Nassim Nicholas Taleb
Mad Hedge Technology Letter
June 23, 2021
Fiat Lux
Featured Trade:
(IGNORE THE GOOGLE COMPLAINTS)
(GOOGL), (AAPL), (MSFT), (FB), (AMZN)
Another part of the tech bull case that gets overlooked is the more than $700 billion in buyback authorizations that could manifest itself in tech shares in the near term.
Right now, that buyback authorization is holding steady at $500 billion but primed to grow.
This powerful combination of shareholder returns and continuous strong earnings are likely meaningful catalysts that could take us to higher highs in technology stocks later in the year.
Certainly, we have seen a massive rotation back into growth stocks the last few weeks that have buoyed tech shares.
The likes of PayPal (PYPL) are bouncing off technical weakness.
Just take a look at Apple which is the buyback alpha male of the S&P this year and trailing 12-months.
When you consider that apart from the dividends and buybacks, they generate over $110 billion in free cash flow, it’s hard not to like the stock.
Apple itself has authorized $90 billion in buybacks and the company is the biggest in the world.
Yes, the stock underperforms sometimes, but don’t overthink this name.
Apple is easily a $170 stock with no sweat.
The iPhone maker repurchased $19 billion of stock in the March quarter, bringing the total for the past fourth quarters to around $80 billion.
Luca Maestri, the company’s chief financial officer, said in a conference call that “we continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time.”
That is code for many buybacks in the near to medium term and investors must love it.
Apple had $83 billion of net cash at the end of the quarter.
Apple’s aggressive stock buyback plan is one reason that Berkshire Hathaway CEO Warren Buffett is so interested in the company.
Berkshire (BRK.A and BRK.B) holds a 5% stake in Apple and is one of its largest investors.
The same thing is happening at other tech firms.
Google repurchased a record $11.4 billion of stock in the quarter, up from $8.5 billion a year earlier, and Facebook (FB) bought back $3.9 billion, triple the total a year ago.
Apple’s share count declined by almost 4% year-over-year and by over 20% since the end of 2016.
With its elevated repurchase program, Alphabet is slicing into its share count, which fell almost 2% year-over-year in the March quarter. The buybacks are comfortably exceeding Alphabet’s ample issuance of stock compensation to employees. Alphabet authorized an additional $50 billion of stock repurchases.
Facebook’s buyback program hasn’t dented its share count, which was little changed year-over-year at 2.85 billion.
Microsoft (MSFT) is making more headway, with its buyback reducing its share count by nearly 1% in the past year. Microsoft bought back about $7 billion of stock in the March quarter and $20 billion in the first nine months of its fiscal year ending in June.
Apple and Microsoft also return cash to holders through dividends, although both now have yields under 1%. Alphabet and Facebook don’t pay dividends.
Although buybacks have not yet reached pre-health crisis levels, the trend seems to be heading in that direction.
Tech firms are ratcheting up the buybacks, meaning they are comfortable expending that cash in the current economic climate as opposed to holding onto it as reserves or using it for R&D.
There is always unpredictability in the economic environment, but these tech stocks are saying, things are a lot better than 2020 and there are many CFOs out there pulling the trigger on dividends, buybacks, and reducing share count which is a highly bullish signal to the rest of the tech market.
Since 2009, asset inflation has gripped global equity funds everywhere and the most convincing winner in terms of asset classes has to be the Nasdaq index which has experienced a 900% return during that 12-year time span.
You must believe that buybacks are just another reason why this overperformance of 900% has happened.
Tech is still where almost all earnings’ growth resides and that capital flow is being recycled into shareholders’ pockets and catalyzing tech CFOs to execute financial gymnastics by reducing share count.
It’s hard to discount that strength which is why there are always buyers on the dips whether that buyer is a domestic pension fund, short-term speculator, a multibillion-dollar family office, or a foreign hedge fund.
“The only constant in the technology industry is change.” – Said CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
June 23, 2021
Fiat Lux
Featured Trade:
(IGNORE THE GOOGLE COMPLAINTS)
(GOOGL), (AAPL), (MSFT), (FB), (AMZN)
The five largest tech companies last Fall 2020, Apple, Microsoft, Amazon, Alphabet, and Facebook, accounted for 23.8% of the S&P 500 and now that figure has surpassed 25%.
As much as we like to bring out the champagne and celebrate how well big tech has done, the euphoric times often lay the groundwork for the dramatic downfall.
A few warning signs have started to rear their ugly head.
These business models are rock-solid now, but that doesn’t mean the people who manage these business models are always rock-solid too.
Today, I would like to zone in on one of the architects of big tech that have taken one of these behemoths and juiced it up for shareholders — Alphabet CEO Sundar Pichai.
I am not arguing that returning capital to shareholders is bad, but when other critical elements are ignored, it sets the stage for toxicity to fester from the top down.
Don’t get me wrong, revenue and profits are charting new highs every three months for Alphabet.
They are now worth $1.67 trillion and rising. Google and its array of apps have made themselves indispensable in the lives of everyday Americans.
But an increasingly hostile workplace is taking hold that has been made worse by decisive leadership and improving the company has been shelved for a stultifying mindset of incrementalism and bureaucracy.
This is the 2021 version of Alphabet and attrition rates have soured at the management level.
Many of these key managers blame Pichai for leaving mentioning a bias toward inaction and a fixation on public perception as the real mantra inside Google headquarters.
This has created a workplace that has devolved into culture fights, and Pichai’s attempts to “wait out” the problems have an air of arrogance about it that employees don’t like.
Internal surveys are also hard to analyze as employees are indirectly encouraged not to speak out against positions of authority.
However, recently left employees do admit that Google is a more professionally run company than the one Pichai inherited six years ago.
During Pichai’s leadership, it has doubled its workforce to about 140,000 people, and Alphabet has tripled in value. It is not unusual for a company that has grown so quickly to get cautious.
At least 36 Google vice presidents have left the company since last year, according to profiles from LinkedIn.
Google executives proposed the idea of acquiring e-commerce firm Shopify as a way to challenge Amazon in online commerce a few years ago.
Rumor has it that Pichai was turned off by the high price of the asset even though SPOT has tripled in value since then.
As time goes by, Pichai is becoming known as the steward of what Google built before he got there and just a guy there to squeeze out the numbers.
Google was once known as the scruffy start-up and it’s only natural that it has become more conservative in its approaches. They simply have more to lose now.
The meteoric growth has also led to rising concerns about the U.S. stock market becoming increasingly concentrated in a just a few names.
The total market capitalization of U.S. tech stocks reached over $11 trillion, eclipsing that of the entire European market—including the UK and Switzerland, which is now valued at $9 trillion.
Although there are some flaws popping up in Google’s business model, and management appears to be getting worse, I don’t believe we are even close to any sort of in-house meaningful reckoning that would adversely affect its share price.
The external risks are currently far greater than the risk of Google blowing up from the inside.
And while I do acknowledge, it might not be the workplace it once was and much less than ideal, it still pumps out record earnings and the degree to which it outperforms earnings’ expectations is uncanny.
That’s why I would recommend trading this stock aggressively in the short-term while rumors of broken management model are unfounded, because fundamentally and technically, it’s hard to find a better business model and more beautiful chart.
While the golden goose is feeding you eggs, you eat as many eggs as you can and ride this trade until Google management finally runs into REAL problems and I am not talking about petty anti-trust fines by European regulators.
Simply put, even the best companies run into vanity problems that are storms in teacups. Artificially creating problems sure has to be a first world problem and until there is true evidence that Google’s ad tech is being dismantled, I don’t believe investors have anything to worry about with the ad dollars coming in.
Big tech is on the verge of breaking out after being range-bound, and it would be daft to overthink this move and not participate in the melt-up.
Short-term, I would be inclined to buy on any big or little dip in GOOGL, take profits, and wait for the next dip to get back into the same position.
“Cinema reflects culture and there is no harm in adapting technology, but not at the cost of losing your originality.” – Said Hong Kong-born Actor Jackie Chan
Mad Hedge Technology Letter
June 21, 2021
Fiat Lux
Featured Trade:
(SOFTBANK’S EPIC COMEBACK)
(SOFTBANK), (CS), (CPNG), (GRAB), (AAPL), (GOOGL), (BABA)
