Mad Hedge Technology Letter
July 15, 2020
Fiat Lux
Featured Trade:
(CLOUD 101)
(AMZN), (MSFT), (GOOGL), (DOCU), (CRM), (ZS)
If you've been living under a rock the past few years, the cloud phenomenon hasn't passed you by and you still have time to cash in.
You want to hitch your wagon to cloud-based investments in any way, shape, or form.
Amazon leads the cloud industry it created.
It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.
Amazon (AMZN) relies on AWS to underpin the rest of its businesses and that is why AWS contributes most of Amazon's total operating income.
Total revenue for just the AWS division would operate as a healthy stand-alone tech company if need be.
The future is about the cloud.
These days, the average investor probably hears about the cloud a dozen times a day.
If you work in Silicon Valley, you can triple that figure.
So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.
Think of this as a cloud primer.
It's important to understand the cloud, both its strengths and limitations.
Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest-growing companies in the world.
Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that's where I come in.
Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.
They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy, remember that the original Department of Defense packet-switching design was intended to make the system atomic bomb proof.
As a user, you can access any single server at any one time anywhere in the world. These servers are owned, maintained, and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.
The most important features of cloud storage are:
1) It is a service provided by an external provider.
2) All data is stored outside your computer residing inside an in-house network.
3) A simple Internet connection will allow you to access your data at any time from anywhere.
4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.
Once you start using the cloud to store a company's data, the benefits are many.
- No Maintenance
Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.
However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.
Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.
Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing IT staff of prima donnas.
- Greater Flexibility
Today's employees want to have a better work/life balance and this goal can be best achieved by letting them telecommute. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.
How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?
Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees.
With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.
It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.
- Better Collaboration and Communication
In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.
For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.
These products, which all offer free entry-level versions, allow users to access the latest versions of any document so they can stay on top of real-time changes which can help businesses to better manage workflow, regardless of geographical location.
- Data Protection
Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.
The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.
It's best to move data to the cloud, to avoid such disruptions because there your data will be stored in multiple locations.
This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.
- Lower Overhead
The cloud can save businesses a lot of money.
By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.
Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.
Mad Hedge Technology Letter
July 13, 2020
Fiat Lux
Featured Trade:
(WILL A.I. SAVE US)
(TSLA), (AMZN), (FB)
Anti-A.I. physicist Professor Stephen Hawking was a staunch supporter of preserving human interests against the future existential threat from machines and artificial intelligence (A.I.).
He was diagnosed with motor neuron disease, more commonly known as Lou Gehrig's disease, in 1963 at the age of 21 and sadly passed away March 14, 2018 at the age of 76.
Famed for his work on black holes, Professor Hawking represented the human quest to maintain its superiority against quickly advancing artificial acculturation.
His passing was a huge loss for mankind as his voice was a deterrent to A.I.'s relentless march to supremacy. He was one of the few who had the authority to opine on these issues.
Gone is a voice of reason.
Critics have argued that living with A.I. poses a red alert threat to privacy, security, and society as a whole. Unfortunately, those most credible and knowledgeable about A.I. are tech firms.
They have shown that policing themselves on this front is remarkably unproductive.
Mark Zuckerberg, CEO of Facebook (FB), has labeled naysayers as "irresponsible" and dismissed the threat. After failing to prevent Russian interference in the last election, he is exhibiting the same defensive posture translating into a de facto admission of guilt. His track record of shirking accountability is becoming a trend leading him to allow politicians to post untrue marketing material for the 2020 U.S. election.
Share prices will materially nosedive if A.I. is stonewalled and development stunted. Many CEOs who stake careers on doubling or tripling down on A.I. cannot see it die out. There is too much money to lose – even for Mark.
The world will see major improvements in the quality of life in the next 10 years. But there is another side to the coin which Zuckerberg and company refuse to delve into...the dark side of technology.
Tesla's (TSLA) CEO Elon Musk has shared his anxiety about robots flipping the script on humans. Elon acknowledges that A.I. and autonomous vehicles are important factors in the battle for new technology. The winner is yet to be determined as China has bet the ranch with unlimited resources from the help of Chairman Xi and state-sponsored institutions.
The quagmire with China has been squarely centered around the great race for technological supremacy.
A.I. is the ultimate X factor in this race and whoever can harness and develop the fastest will win.
Musk has hinted that robots and humans could merge into one species in the future. Is this the next point of competition among tech companies? The future is murky at best.
Hawking's premise that evolution has inbuilt greed can be found in the underpinnings of America's economic miracle.
Wall Street has bred a culture that is entirely self-serving regardless of the bigger system in which it finds itself, with one of the few winners of the coronavirus being the stock market.
Most of us are participating in this perpetual money game chase because our system treats it as a natural part of life. A.I. will help a select few do well in this paper chase to the detriment of the majority and even more so that the pandemic shed 50 million U.S. jobs with many of them to never come back.
Quarterly earnings performance is paramount for CEOs. Return value back to shareholders or face the sack in the morning. It's impossible to convince anyone that America's capitalist model is deteriorating since the ones who are set to gain are the exact people in power.
Wall Street has an insatiable hunger for cutting-edge technology from companies that sequentially beat earnings and raise guidance. Flourishing technology companies enrich the participants creating a Teflon-like resistance to downside market risk.
The issue with Stephen Hawking's work is that his timeframe was too far in the future. Professor Hawking was probably correct, but it will take 25 years to prove it.
The world is quickly changing as science fiction becomes reality.
People on Wall Street are a product of the system in place and earn a tremendous amount of money because they proficiently execute a specialized job. Traders are busy focusing on how to move ahead of the next guy.
Firms building autonomous cars are free to operate as is. Hyper-accelerating technology spurs on the development of A.I., machine learning, and enhanced algorithms. Record profits will topple, and investors will funnel investments back into an even narrower grouping of technology stocks after the weak hands are flushed out.
That is exactly what is happening with 6 tech companies dominating during the health crisis with everyone falling out of the race.
Professor Hawking said we need to explore our technological capabilities to the fullest in order to avoid extinction. In 2020, exploring these new capabilities still equals monetizing through the medium of products and services.
This is all bullish for equities as the leading companies associated with A.I. to reap the benefits.
And let me remind you that technology is still the least regulated industry on the planet even with all the recent hoopla.
It is having its cake and eating it too. Hence, technology is starting to cross over into other industries demonstrating the powerful footprint tech has extracted in economics and the stock market.
The only solution is keeping companies accountable by a function of law or creating a third-party task force to regulate A.I., but as many can see, global governance is failing miserably already with keeping global citizens safe from the health crisis.
In 2020, the thought of overseeing robots sounds crazy.
...The future will be here sooner than you think.
"The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge," said the late Professor Stephen Hawking.
Mad Hedge Technology Letter
July 10, 2020
Fiat Lux
Featured Trade:
(HOW TWITTER KNOCKED IT OUT OF THE PARK)
(TWTR)
Twitter (TWTR) shares have really been explosive in the last 5 trading days moving higher in excess of 15%.
Speculation has been coalescing around a new project that is in the works that has Twitter launching a subscription service.
The social media juggernaut posted a job advert for engineers to develop a subscription platform.
“We are building a subscription platform, one that can be reused by other teams in the future,” the listing stated and investors took that cue to buy shares by the bucketful.
The new web engineers will be deployed on the company’s Gryphon team, which collaborates closely with the payroll team and the Twitter.com group.
An employee close to the discussion said the company is exploring “alternative revenue sources.”
The social media firm currently generates about 85% of its revenue from advertising, and it is safe to say they are a one-trick pony like Facebook.
Therefore, a subscription service would help diversify as businesses rein in their marketing budgets amid ongoing uncertainty.
The aggressiveness on show by Twitter’s CEO Jack Dorsey and his fellow management team is unsurprising.
Don’t forget that it was just in March that vulture fund investor Elliot Management, who owns a good chunk of Twitter, vowed to overthrow Dorsey after he announced plans to run both his creations, Twitter and Square, in Africa.
Running two Silicon Valley firms at the same time from Africa remotely stretched Elliot’s patience a tad thin and they hoped to go in for the kill and remove him cleanly.
Dorsey relented to Elliot’s demand and agreed to sideline his African safari and focus on juicing up its ad business.
Well, push comes to shove and Dorsey has decided on rolling out the time-honored way of tech companies making money – subscription as a service (SAAS).
Simply put, Twitter isn’t profitable enough and the buck stops at Dorsey.
Despite Twitter adding 14 million new users in the first quarter, its revenues rose just 3% from the March 2019 quarter, the smallest increase in over two years.
There is a substantial chance that the firm would be more likely to launch an offering utilizing its data and analytics, rather than moving to paid tiers for Twitter usage.
At the bare minimum, they will bring out some type of high-level tools to give ad buyers a way to pull away from the competition and that is worth paying for.
Twitter quickly changed the language of the job ad to make it look less conspicuous.
This isn’t out of left field.
In 2017, former CFO and COO Anthony Noto (now CEO of online lending start-up SoFi) had discussed the idea of adding premium services to TweetDeck, while acknowledging the separation of Twitter remaining a free-to-use service.
Global ad spending has been damaged due to the pandemic and investors are clamoring for more growth for a company that has several levers at their disposal.
They are finally putting these levers to work, and as global growth starts to slowly make a comeback, Twitter will be even better positioned than before.
Dorsey did agree with Elliot Management that Twitter should achieve a target to grow monetizable daily active users (mDAUs) by 20% in 2020 while accelerating revenue growth.
It is clear that Elliot Management is becoming impatient with Dorsey and will most likely look to make some waves in 2021 and finally replace the co-creator of Twitter.
Elliot Management is ruthless, but I do commend them on their magic in creating shareholder value even if they ruffle some feathers.
They have a track record of raising the profiles of other tech stocks and one that comes to mind is eBay.
Unfortunately for Dorsey, Elliot Management’s time-honored strategy usually comes in the form of wholesale changes in management boding poorly for Dorsey to cling on to his job through 2021.
Twitter is a great tech company, a unique asset in the tech ecosphere and Elliot simply believes Dorsey isn’t pressing the right keys on the piano right now.
This is a way of telling Dorsey that he is on thin ice and he is responding with some last-ditch efforts that could save his job.
However, I would like to point out that tech companies are benefitting from a once-in-a-generation tailwind of the coronavirus accelerating the migration to digital.
This essentially means that mediocre tech firms should have an easy time hitting expected targets even if they are lofty.
Just look at Thursday’s trading and the Dow index fell 360 points while the Nasdaq finished the day up 55 points.
The relative outperformance is just the beginning of tech’s dominance.
Dorsey just isn’t delivering the “growth” that comes to be expected from tech firms of Twitter’s caliber in the stage it’s at.
Hopefully, this will be the final wake up call because he certainly has the capacity to deliver what the vulture investors want, it will boil down to if he can apply the focus needed to acquire those mandated results.
“Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.” – Said Hungarian-American billionaire investor George Soros
Mad Hedge Technology Letter
July 8, 2020
Fiat Lux
Featured Trade:
(THE ONLY RETAIL PLAY YOU WANT TO KNOW)
(OSTK), (W)
As U.S. virus cases explode, the shelter-in-home trade is back in full force, meaning investors need to look at Overstock.com, Inc. (OSTK).
We are talking about parabolic action in a stock price with shares up 16% yesterday alone and even doubling in the last 40 days.
The U.S. is now hugging that 50,000 cases per day mark and it is only a matter of time until the health crisis spirals so far out of control that everybody will be back inside online shopping again on their touchpads.
And if it doesn’t get that bad, it certainly will trend in that direction which is why Overstock.com will be back in vogue.
The short-term performance validates my thesis that Overstock.com is going through a renaissance as it goes from the edge of the periphery to a tech darling.
Revenue in April and May were up 120% year-over-year as the company expects to see continued momentum in the near-term, Overstock CEO Jonathan Johnson remarked during a Fox Business interview.
Consumers "still aren't ready" to return to furnishing stores to test couches, beds, and other furniture due to the coronavirus pandemic, Johnson said. The online venue clearly remains "the place" to buy home furnishing items.
Overstock.com wholeheartedly believes they will experience "strong" double-digit growth rate through the summer.
The mother of all tailwinds has legs and you might think of Overstock as a smaller e-commerce store in the mold of Amazon.com, but they have really taken the business model up a notch.
Overstock started out as a pure play on online retail operations, based on a low-cost business model that involves the selling of excess inventory from factories and other retailers at discounted prices.
Overstock.com Inc. became a household name as an e-commerce pioneer, but in recent years, excitement in the investment community was focused more on the company’s blockchain efforts.
The pandemic changed the world and the company is dusting off its e-commerce playbook.
Mushrooming sales at Overstock’s retail business have helped transform a timid stock to one of the Covid-era’s best performers, an irony for a division that had long been considered for sale.
Overstock shares have gained nearly 11-fold since closing at a record low on March 16, and this is just the beginning as the administration hopes to convince the population that the virus doesn’t need any managing.
Sweeping the carnage of the virus under the carpet makes no sense, and with the internet disseminating information and disinformation, will Americans be inclined to believe the virus has no teeth?
It’s hard to wrap our heads around the US government’s response to a global health crisis and the bountiful harvest the tech sector is collecting.
They hardly needed it.
Tech was crushing it before the pandemic.
If you strip out the earnings of the Big 6 of Facebook, Amazon, Apple, Microsoft, Netflix, and Google, there is no earnings growth for the last five years in any sector.
Stocks went up purely based on excess liquidity and a monstrous corporate tax break.
Then the administration’s disregard of the health crisis gifted accelerating revenue to the tech sector while every other sector was cruelly pillaged.
Granted, the U.S. administration had no intention to hammer non-tech businesses, but that is exactly what is playing out.
So now this is what you get – a once sluggish tech stock like Overstock.com turning into an e-commerce pandemic play on steroids overnight.
The stock is frantically gapping up almost every day and it was just a few years ago when the company was really grasping at straws by jumping on the cryptocurrency bandwagon.
The U-turn by CEO Jonathan Johnson says it all as he has “no interest” in selling the e-commerce business which he was desperate to sell last month.
And just based on the news that Johnson didn’t sell the e-commerce unit last month, the stock doubled.
It’s unfathomable times in the tech sector.
The decor and home improvement market could end up benefiting from a total of $200 billion in an annual tailwind because of the pandemic’s effect on consumers.
If consumers are looking for a similar e-commerce play, then Wayfair (W) should fit the bill.
It’s getting to the point where if the late first wave or early second wave hits harder than the initial wave in March, there might be nowhere else to buy home furnishings and décor but at e-commerce stores.
I am bullish Overstock.com
