“The next 30 years are going to be critical for the world. Make the technology inclusive, make the world change. Pay attention to those people who are 30 years old. Those are the internet generation. They will change the world.” – Said Founder of Alibaba Jack Ma
Mad Hedge Technology Letter
October 30, 2020
Fiat Lux
Featured Trade:
(THE TWO CAN'T-MISS CHIP COMPANIES)
(NVDA), (AMD), (XLNX), (ARM)
I want to talk about two companies that are the “no-brainers” of the semiconductor space that would give you a call option on the data center space.
Let’s take a quick look back at some of their latest moves and what it would mean for your tech portfolio.
A few months ago, Nvidia said it would buy British chip company Arm from SoftBank for $40 billion in a stock and cash deal.
CEO Jensen Huang admitted that while the company's acquisition of the rival British chipmaker was a little on the expensive side, it would make sense in the long-term.
“I had to pay you an arm and a leg for it,” the Nvidia CEO said, and “I told you I was going to be the last and highest bidder.”
Overpaying for high quality companies is something that is only possible from a position of strength.
Huang justified Arm’s price tag saying that the chipmaker’s network of customers made it worthwhile and that he wants to expose those customers to Nvidia’s artificial intelligence technology.
Cross-selling the products and services is where the synergies between the companies can be exploited.
AMD is the other player that is really crushing it along with Nvidia and they recently made a deal to acquire Xilinx.
The deal is a direct response to Nvidia’s attempts to become the leader in high performance computing.
Obviously, the acquisitions are made possible because of years of refining their balance sheets and buying into more growth is a time-honored strategy that tech companies focus on.
AMD will give Nvidia a run for their company with a combined additional 13,000 talented engineers and over $2.7 billion in annual R&D investments.
This is very much a talent grab as well as a revenue grab.
Xilinx offers AMD access to adaptive platforms in critical areas such as 5G and automotive.
The tie-up is a transformational opportunity to tap into a total addressable market of $110 billion, up from previous AMD standalone estimates of $79 billion for 2022.
Xilinx adds about $31 billion to the total addressable market and on the operational side, AMD will see gross margins spike from 45% to 51%.
Even more impressive, operating income margins will surge to 21%, up from 16%.
It’s not like AMD needed much help, as they smashed expectations by growing 55.6% and beating estimates by $240 million in the latest earnings report.
EPS beat analyst estimates by $0.06 providing the highest level of earnings in years at $0.41 per share.
The Computing and Graphics division beats estimates with revenues of $1.67 billion.
The ramp-up of new consoles and data center sales led to a mindboggling 101% sequential revenue increase.
The company’s server processor revenue almost doubled compared with the year earlier, and AMD is on track to begin shipping its next-generation server processors later this year.
The current and future status of gaming is very much tied to the fortunes of Nvidia and AMD and the pandemic has fueled massive migration to time spent playing video games.
Who would have thought if people can’t go outside, more video games would be played?
The new generation of consoles is set to launch in November from Microsoft (MSFT) and Sony (SNE) which has helped boost AMD’s gaming chip business.
Typically, this gaming chip segment drops in the fourth quarter, but this year it will mushroom because of the new console launches and ramp-up in production and sales.
Ultimately, in terms of the Xilinx (XNLX) deal, it is complimentary to AMD’s business – an appetizer to the main dish.
It will help improve the company’s ability to support data center customers and adds exposure to sectors such as automotive, aerospace, defense, and industrials.
Through Xilinx’s field-programmable gate array (FPGA) chips—or semiconductors that can be reprogrammed after production, unlike most semiconductors—AMD could benefit from the tail end of the 5G upgrade cycle, too.
That’s because with many emerging technologies, it’s too expensive to experiment with chips with instructions that are set in stone, and build emerging infrastructure such as 5G.
Xilinx’s businesses also tend to retain customers for longer because its strong designs can lead to longer product cycles.
Together, Xilinx and AMD will also operate at a significantly larger scale, which should improve margins and cash flow.
These deals will create a leading supplier of chips for edge-network base stations.
Unlike in the data center market where general-purpose chips win, edge networks require chips that are good at specific things: low-latency, custom-built, specific units.
Those are all things AMD and Xilinx are good at making. Edge computing is a concept that refers to moving processing power and data storage closer to where it’s needed, thus improving performance on local machines.
In short, Nvidia and AMD are the leading lights of the semi-chip industry involved in all the growth industries from artificial intelligence, data centers, video gaming, and self-driving technologies.
I am highly bullish both.
Quote of the Day
“If you don’t have a mobile strategy, you're in deep turd.” – Said CEO of Nvidia Jensen Huang
Mad Hedge Technology Letter
October 28, 2020
Fiat Lux
Featured Trade:
(THE CLOUD MOVEMENT IS INTACT)
(FFIV), (CRM), (CLOU)
We got another solid sign that the software-as-a-service (SaaS) phenomenon is sticky as ever. You can simply play this with cloud ETF — Global X Cloud Computing ETF Global X Cloud Computing ETF (CLOU)
One of the leading cloud barons of our time, Salesforce.com (CRM) Chief Executive Officer Marc Benioff criticized German rival SAPs business performance in explicit words, rejecting the idea that the German software giant’s challenges are a sign of things to come for his company.
Benioff said that at “SAP, you can see they’re having very significant troubles with the CEO transition they’re going through…they, as you know, moved from one CEO to two, they fired one of those two CEOs. The CEO transition is just not going well and their customers are saying that. Now you can see that their revenues are also reflecting this trouble.”
Protecting his industry makes sense as SAP have decided to blame the cloud industry on their woes and not their management.
Fair enough but Benioff is clearing the debris off the runway and offering a more accurate and rosier snapshot of the current cloud industry.
It’s certainly investor’s every right to worry over SAP’s decision to cut its full-year forecast that helped drag down other software makers, including Salesforce.
Benioff also chimed in and said, “SAP’s troubles, I think, are unique to them.”
Salesforce hasn’t felt the same weakness in guidance, and it was only just this past August, Salesforce reported quarterly sales increased 29% and jacked up its revenue forecast for the year.
The addressable market is growing, and Salesforce is making headway in that market.
Even weaker cloud companies are still showing a healthy heartbeat like Seattle-based F5 Networks (FFIV) saw shares rise after its fiscal fourth quarter earnings report beat expectations.
The company posted revenue of $615 million, up 4%, and non-GAAP earnings per share of $2.59. Wall Street expected revenue of $606 million and EPS of $2.37.
F5 Networks continues to benefit from its move into software and services, expanding beyond its traditional networking hardware business. Software revenue was up 36% from the year-ago quarter and their hardware business drags the overall growth number down to single digits.
The SaaS success is why President and CEO of F5 François Locoh-Donou has indicated that F5 is jumping headfirst into SaaS and nothing will stop this strategy apart from an apocalypse.
Locoh-Donou laid out the company’s strategy to enable “adaptive applications” that can adapt based on the environment.
F5 plans to leverage its traditional application delivery technologies along with its $1 billion acquisition of Shape Security and $670 million acquisition of web server NGINX to position itself as a key player amid a larger trend of automation and artificial intelligence driving advances in software applications and computer networks.
Cloud companies are held up so well that Locoh-Donou told employees that F5 won’t make layoffs during its fiscal year 2020.
I believe that this upcoming earnings season will offer more olive branches into why software stocks continue to be solid, but it's is not to say they aren’t expensive in the short-term.
The software-as-a-service (SaaS) business model continues to be a buckle-your-seatbelt-up growth leader, but other cloud-based services are poised to eclipse it as it matures.
SaaS applications are expected to deliver a highest-ever $105 billion in revenue this year, even as global technology spend dropped 8%, or about $300 billion.
The largest x-factor to SaaS was the broad-based pivot to cloud applications to accommodate remote working.
Even after workers return to the office, SaaS will continue growing because of the computing power and agility it could offer that otherwise couldn't afford it if they had to buy an on-premises or enterprise solution.
SaaS revenue is poised to surpass $121 billion next year and $141 billion in 2022.
For the five-year period between 2018 and 2022, SaaS will grow at a 12% annual rate.
We are now entering the consolidation phase for SaaS where companies are slowly replacing the last on-premises stalwarts in their portfolio, but the low-hanging fruit has mostly been harvested.
The applications with the strongest business case for SaaS have mostly been implemented.
SaaS companies are also facing increased competition and the numbers validate this as SaaS companies typically competed against three other companies in 2012, but by 2017, a SaaS startup could expect to face nine competitors in the same market segment.
Take for instance the digital market industry, the number of SaaS products increased from about 500 to 8,500 during that 5-year period.
The SaaS model has proven to be robust and critical to business continuity.
It will continue to be the preferred deployment mechanism for most applications and until this overarching strategy shifts, the money will be poured into SaaS software.
The first-mover advantage will take hold as the more marginal SaaS applications appear; the more customers will migrate into “brand” names.
For companies like Salesforce and F5 Networks, this means tailwinds, but it will virtually be impossible to become a new SaaS start-up in 2020 as this industry starts to mature.
“There are few companies today as entrenched in the world of technology and software as Microsoft.” – Said American investor David Einhorn
Mad Hedge Technology Letter
October 26, 2020
Fiat Lux
Featured Trade:
(WHAT DOES DIGITAL UPSKILLING MEAN TO TECH?)
(AAPL), ($COMPQ)
The signals are there offering the impetus to the U.S. workforce to become increasingly tech-savvy in a hurry.
A word was even coined for it: “Digital upskilling.”
The idea of this development in digital skills is, in fact, the reason why every investor needs to look at tech growth stocks as the cornerstone of their investment portfolio.
To understand the trajectory of tech growth stocks, analyzing the entry level of industry employment offers a clearer snapshot of the meat and bones of the industry.
The tech workforce is upskilling precisely because they are incentivized with the opportunity to secure higher salaries.
The higher salaries exist precisely because tech corporations can afford to pay their workers more when they participate in a business cycle that delivers 40% higher revenue than the year before.
It’s a virtuous cycle that not only enriches the shareholder but is a golden chance for U.S. workers to secure a high-quality life when other U.S. industries like retail, hospitality, and energy have crashed and burned.
The very day that tech companies stop doling out larger than life salaries will be the cue that we are at ex-growth and investors must be able to pivot quickly to target the next growth part of the economy.
The great x-factor of technology is that there will always be a new start-up tech reshaping the industry and old technologies just become obsolete like the fax machine and Atari game console.
Therefore, the upskilling at all levels of the tech ladder means the possibility that someone will strike it rich by discovering a new technology that is able to revolutionize the industry.
Companies are even offering in-company courses to encourage employees to hone their skills.
This can often lead to exciting promotions even in a time where the economy has been throttled to a standstill.
The latest accelerator has been none other than the coronavirus as corporations have been forced to continue operations without the help of a physical office.
Corporations are fast-tracking their embrace of digital technologies and enabling workers to learn wherever they are, whenever they want, on any device.
Around 86% of top-performing companies reported that digital training programs boosted employee engagement and performance.
The aim of tech companies is to load itself with employees skilled in data science, data storage technology skills, tech support, and digital literacy.
Other marketable skills include software development, digital marketing, and IT administration.
The real hurdle in digital upskilling lies in execution, making an entire workforce digitally savvy is a tough chore and there will always be stragglers bringing up the rear.
Corporates have ploughed full steam into upskilling and even though Silicon Valley hasn’t moved on from the smartphone, it is squeezing as much juice from this grapefruit as it can.
We are now onto the Apple (AAPL) iPhone 12 and who knows, we might get to the iPhone 20 or 30.
We are onto the Apple iPhone 12 because it’s a cash cow and that won’t stop which is why investors need to feed their appetite for premium US tech stocks.
Stocks are divided into “value” and “growth” halves. The former consists of the stocks that are cheapest in relation to net assets, current cash flow, and so on. These tend to be older, duller, and less exciting companies.
The other half, “growth,” tends to consist of the glamorous companies that have monopolies.
Just look at the performance of value stocks. The average U.S. large company “value” mutual fund has lost 8% so far this year, even including reinvested dividends.
The average growth fund? It’s up a stunning 30%. And this gap has been going on for years: “Growth” funds have beaten “Value” funds since as far back as 2007, market data show.
From the upskilling at entry-level jobs, there are signs everywhere that investing in high growth tech is the way to go and if you compare tech to the rest of the market in 2020, the numbers are a no-brainer.
“I would trade all of my technology for an afternoon with Socrates.” – Said Co-Founder of Apple Steve Jobs
