Mad Hedge Technology Letter
August 5, 2020
Fiat Lux
Featured Trade:
(MICROSOFT GOES FROM STRENGTH TO STRENGTH)
(MSFT), (GOOGL), (FB), (AMZN)
Microsoft (MSFT) is on the cusp of becoming the best tech company in America and that is the reward they get for staying out of the data privacy quagmire that the other tech titans find themselves in.
A TikTok acquisition would offer a major platform to rival Facebook and Google-owned YouTube and will revamp its image with young people.
TikTok itself will grow into a $300 billion company in the next 5-7 years just by itself.
This purchase is a massive blow to Facebook (FB) and Google’s (GOOGL) prospects as their once-fortified duopoly morphs into a 4-way race between Microsoft, Amazon (AMZN), Google, and Facebook (FB).
This would make up for all the prior missteps with Nokia’s handset business and Skype.
This could be described as the "crown jewel" snapped up at a discount.
This is essentially an asset with 100 million users, massive momentum, engagement, advertising revenue, and something they could cross-sell into the broader Microsoft base.
The treasure trove of data is what makes this deal a can’t-miss proposition.
Think about Microsoft in building software and hardware projects, and not just Xbox. For the first time, it would have proprietary data on a level that they can understand consumer behavior and not just with their enterprise customers.
Data privacy is Microsoft’s biggest selling point to the Trump administration which is concerned about TikTok’s ties to the Chinese government.
TikTok, which is currently owned by a Chinese company, has come under scrutiny and investigation in the U.S. over allegations it is supplying user data to Beijing, a charge that company officials have denied, but have no way to prove that they don’t bend to the whims of the Chinese Communist Party.
This episode follows on the heels of the U.S. effectively banning Chinese telecom giant Huawei in the U.S.
TikTok represents the dual threat of destroying America's edge in technological dominance.
TikTok has become the fastest-growth social platform in history and its inception as a Chinese technology threatens the U.S. reputation.
What specific data is TikTok able to aggregate from U.S. users?
Personal location, app usage, behavioral trends, thematic trends, and economic indicators.
This personal data could be used to take advantage of the American population through military or economic means.
India was first to ban TikTok and didn’t allow a sale of the Indian data to a local firm. They didn’t want money flowing back into Chinese hands.
China is notorious for the mishandling of data and most of the data is resold infinitely inside of mainland China.
How will Microsoft earn dollars from TikTok?
Digital ads.
TikTok would boost Microsoft’s share of the U.S. digital display ad market.
This year, eMarketer predicts Microsoft to hold just 1.5% of that market, slightly ahead of Snapchat but well behind Facebook’s 42% and Google’s 10.4%.
That is about to change.
Just how popular is TikTok?
TikTok is a disruptive force in social media and video.
In the second quarter, TikTok had 30% penetration of U.S. respondents 18 and older in a survey of 2,500 U.S. consumers.
Among respondents 18 to 24, TikTok's popularity is even greater, at about 42%, versus 65% for Facebook, 78% for Instagram and 63% for Snapchat.
Along with this, Microsoft finally gets the “cool factor” they have been missing for generations.
What are the chances of Microsoft buying TikTok?
I would put it at 85%-90%.
ByteDance needs to seal a deal or they leave the table with zilch and at the same time kicked out of America.
The company, a massive social media player in China, is valued at about $100 billion, half of which is due to TikTok.
The deadline gives Microsoft the added effect of increased negotiating leverage and it will be interesting to see what concessions they get from TikTok.
No other major tech company has been given the green light to make the deal and Microsoft has plenty of cash available to make this deal happen.
The deal could be especially beneficial for Microsoft because the TikTok business in the U.S. is valued in the $40-billion range but could eventually reach $300 billion if they nurture it properly.
I would be shocked if Microsoft flubs this golden opportunity to add a trophy asset to put in their trophy cabinet.
CEO Satya Nadella is too shrewd to let this once-in-a-lifetime chance to cement Microsoft as the top dog go to waste.
I was highly bullish on Microsoft before this news, and I can easily say now that this is not only the best American tech company but the best company overall in the world.
“Our industry does not respect tradition – it only respects innovation.” – Said Current CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
August 3, 2020
Fiat Lux
Featured Trade:
(THE MASTERY OF TIM COOK)
(AAPL)
Apple (APPL) is a $2 trillion company and their latest jaw-dropping earnings report was by far beyond a best-case scenario.
They crushed top-line revenue beating estimates by over $7 billion and profitability was just as impressive beating estimates by over half a dollar.
Going into the iPhone 12 product cycle, the results mean that moving forward, the company could benefit from 20% growth as the momentum becomes a true tailwind of sorts.
Surely, this was the quarter that Apple could have taken a quick siesta, they even had an out with the pandemic and all, right?
But no, they stuck to their guns and delivered another resilient earnings report.
Some investors were wary even second-guessing the company going into these earnings because of the health crisis forcing 25% of Apple stores to close.
But that proved immaterial and physical store sales actually only comprise 6-7% of sales.
The data was undeniable showing that customers went online to buy Apple’s products in droves.
Not offering guidance, second quarter in a row, plays into Apple’s hands.
This gives them the leeway to never give forward guidance again.
Apple has done enough that they are afforded the wiggle room from investors that feed into the “buy the dip” mentality.
This will be the biggest iPhone refresh cycle since iPhone 6 and it will come thick and fast.
Supply chain might bottleneck, and iPhone might delay by a month, but that is splitting hairs.
In a digital economy where wielding a smartphone is king, consumers will tough it out and upgrade to the iPhone 12.
It’s easy to cut out vacations, but impossible to get rid of your phone or car.
Other tech is stalling, such as the likes as Google who recorded 2% declining revenue growth for the first time ever.
Not all tech has been created equally.
Apple’s overperformance is just a taste of what we will likely see in performance over the next 9-12 months. It is highly unlikely they will botch the new iPhone distribution, servicing, and production of it.
The company was able to beat iPhone revenue projections by $4 billion last quarter and this segment comprises 46.6% of the total revenue now.
I see this number sliding down as services pick up more. In 2021, iPhone revenue could be in the high-30s which is a number management is more comfortable with.
Hardware isn’t the future and propping up and servicing the apps and software is where the real premiums hide.
Apple also did its best to prove it's not just an “iPhone company” anymore.
Air pods and Apple watch are doing particularly well. Air pods project 90 million units in 2020 after 65 million the year before, and 19 million in 2018.
Ironically, the earnings report was disclosed after Tim Cook’s government testimony to avoid the wrath of the politicians.
Granted, Apple didn’t want to offer more ammunition to the interrogators timing the blowout earnings report after the testimony ended.
Apple’s App store is the crown jewel of the business model and the 30% commission is something Cook and the company will defend at all costs.
Regulatory risks are mostly tilted towards Facebook and Amazon, and I do not think there is enough evidence against Apple to meaningfully penalize them.
The argument that if developers do not wish to agree to Apple’s 30% commission has always had the freedom to switch to Android hold water no matter if one likes it or not.
Investors are not viewing anti-trust problems as a major risk and that was evident in the price action last Friday when the stock rose over 10%.
The path to profits has been smoothed over and this clears the way for any dip to be bought until 2021.
The stock usually does not have major corrections, therefore, any 3-4% dips can be described as optimal entry points.
Apple continues to under promise and overdeliver.
If more companies did this, there would be fewer bankruptcies.
I am highly bullish Apple and the rest of big tech.
“You can converge a toaster and a refrigerator, but those things are probably not going to be pleasing to the user.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
July 31, 2020
Fiat Lux
Featured Trade:
(BIG TECH IS UNSTOPPABLE)
(FB), (AAPL), (AMZN), (GOOGL), (MSFT)
The big loser at the Congress hearing grilling the top 4 CEOs in big tech was by far and away the U.S. government.
The U.S. government accused big tech of operating as illegal monopolies and big tech’s answer was largely indifference, betting that the government is too disjointed to actually hit them with some venom.
The only member of congress who was on point with her questions was Democratic Rep. Pramila Jayapal, who used internal Facebook documents to show data theft artist Mark Zuckerberg suppressing competition when he purchased Instagram in 2012.
Jayapal then cornered Amazon (AMZN) CEO Jeff Bezos into a corner, peppering him with questions about Amazon’s 3rd party data handling.
There has been a long-lasting campaign against Amazon in regard to them using internal data to hijack 3rd party sellers’ products deemed successful by recreating them as in-house products and catapulting their in-house branded products to the top of the Amazon search results.
The success of Congress stopped at Jayapal, as the rest of the motley crew appeared so out of touch with what real tech issues exist that it felt they were unfit to ask questions.
Playing into their inefficient display was the fact that they chose a time delegated for antitrust issues to complain about anti-conservative bias in social media, which is a separate issue entirely.
These arguments were armed with zero data to back up the claims, and gave the tech leaders an easy way out by just grandstanding about the issue.
The biggest winner was the company that was not invited to the session – Microsoft (MSFT).
They were the only tech company over $1 trillion that wasn’t in attendance, and for good reason.
Microsoft CEO Satya Nadella has been able to position the company as a trust-first cloud enterprise and refuse to traverse into that gray area where conflicting interests exist.
They are living proof that tech companies don’t need to swindle personal data to grow revenue, which is why I keep putting on call spreads in this brilliant company.
Microsoft is in great strategic position to expand their business, and the same cannot be said for Facebook because unlike Microsoft, Facebook produces nothing of meaningful substance.
This was evident as Congress picked on Zuckerberg’s company the most, even catching him in a bold face lie.
The most convenient line of reasoning for these tech companies doing what they do was the “American-first” playbook.
Highlighting China’s rise as tech competitor, fearmongering that China could one day be at the top of the tech pyramid but actually just demonstrating another way of avoiding the real issues.
Watching this discussion made me realize that these tech companies have reached a level of power that supersedes the government.
Politicians are only invested in short-term interest and protecting their tenure in government. Bezos, Zuckerberg, Cook, and Pichai can play the long game.
This is exactly why investors pour capital into these 4 stocks plus Microsoft.
Apple earns over $55 billion in profits annually on $260 billion of revenue.
Amazon makes up 40% of U.S. online sales.
Facebook (FB) has 2.6 billion users which is 34% of the world’s population.
Lastly, 90% of internet searches are done through Google (GOOGL) search.
The real question should be: when will these companies hit the $2 trillion mark?
And even if Congress could conjure up some meaningful regulation against these 4, they certainly have the resources to navigate around it, especially when half of Congress still doesn’t understand what they actually do.
As it stands, these data empires are left to go their merry way and Congress is failing to protect individual user data on an epic scale.
To put the cherry on top, I would argue that the coronavirus has done big tech’s dirty work wiping out many businesses while big tech gets stronger.
I am bullish big tech.
“These companies as they exist today have monopoly power. Some need to be broken up, all need to be properly regulated and held accountable.” – Said U.S. Representative David Cicilline
Mad Hedge Technology Letter
July 29, 2020
Fiat Lux
Featured Trade:
(ANOTHER DIGITAL GOLD RUSH?),
(BITCOIN)
