“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)
Here we go again.
The Bitcoin bulls have crashed the party and they have good reason to celebrate as the so-called digital gold surged from its nadir of $3,715 in January 2019 to over the $11,000 mark today.
The currency was in the doldrums after the crash from $20,000 with many investors left holding the bag.
The Mad Technology Letter doesn’t often foray into the speculation of Bitcoin, predominantly because the asset is untethered to fundamentals, but the price action of late has made us take notice.
There has been resistance at the $10,000 mark and $10,500 mark. Blowing through this resistance signals that Bitcoin could be in for a sustained rally.
What is moving the digital gold?
The gyrations in the digital currency come as gold prices have surged amid a mad migration for assets that are considered alternatives to cash and stocks fueled by the COVID-19 pandemic that has driven much of the developed world into a deep recession.
Gold hasn’t been this high since 9/11 and it’s on the verge of surging past the $2,000 mark.
Prices for gold and bitcoin have climbed as a gauge of the U.S. dollar hit its weakest level since 2018 and the dollar is at a 9-month low.
Not only has the virus dampened sentiment around the global economy, but the insane spending by governments to help prop up economies battered by pandemic has supported bullion prices.
U.S. Treasury Secretary Steve Mnuchin and the GOP are in the works to push through yet another massive stimulus and who knows what is after that.
Bitcoin has benefited from the knock-on effects of gold being a safe haven trade.
The fact is that Bitcoin shares gold’s key characteristics of being a store of value and scarcity— and could potentially knock gold off from its perch in the future as the world becomes ever more tech-driven.
Bitcoin is also thriving as it updates itself.
Bitcoin has much more intrinsic value today than it did a year ago just from an infrastructure perspective.
The Lightning network is working, sidechains are working. The currency is just a lot more rock-solid foundationally that it has ever been.
Security has always been a black eye for this asset class and rightly so as who would want their digital fortune pickpocketed by a hacker.
The Lightning network is a second-layer technology for bitcoin that scales the blockchain’s ability to conduct transactions and it is facilitating the ability to operate the network smoothly.
It’s more than just increasing capacity driving the surge in investor interest and prices.
The supply of available bitcoin continues to shrink — a function of the halving of coins in circulation which happened earlier this year.
Another x-factor will be the continuing adoption of financial institutions using bitcoin.
This offers investors more confidence in the security and fungibility of the assets.
Many experts forecasted the digital currency to surge in the third quarter or early fourth quarter solely based on the enhanced infrastructure to support transactions and activity on the blockchain.
A reaction to the halving of currency in circulation was also another inflator.
The coronavirus was just the supercharger to the equation.
With legitimate institutions holding bitcoin for customers, the average person will begin to feel more secure dabbling in Bitcoin, and this will support wide-scale adoption and acceptance of the digital gold.
No doubt that the concept of Bitcoin is hampered by this cult of life characters that go on air to try to bid up the currency saying their yearend targets are $30,000.
The overhyping of Bitcoin is something of an eyesore, but I can definitely vouch for the increasing relative legitimacy of Bitcoin and this asset class is not going away.
There certainly is a case for Bitcoin to go to $15,000 and $20,000 if a much predicted “second wave” hits this fall in large swaths of the world forcing developed governments into yet another stimulus package.
Once Brazilians, Russians, and Americans take their late European summer vacations, it’s hard to not see another lockdown in Europe.
Many investors can observe numerous governments just not having their act together feeding into the Bitcoin narrative and honestly contributing to its legitimacy as well.
It’s hard to remember when faith in certain governments was lower.
I don’t advocate pouring one’s life savings into Bitcoin though, it’s just too untested and needs to prove itself more as a financial asset.
If technology and the digital revolution is the story to believe in, then invest in a Nasdaq exchange listed fintech company.
These platforms offer Bitcoin to customers for purchase as well and are the growth companies that many tech investors dream of.
Mad Hedge Technology Letter
July 27, 2020
Fiat Lux
Featured Trade:
(IS BIG TECH JUST A FLASH IN THE PAN?),
(MSFT), (AMZN), (AAPL), (GOOGL), (FB)
