“The sidelines are not where you want to live your life. The world needs you in the arena.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
May 20, 2020
Fiat Lux
Featured Trade:
(IT’S ALL ABOUT THE CLOUD),
(CLOUD), (WCLD), (SKYY)
The x-factor for the last tech generation has been none other than – the cloud.
Any portfolio manager that hasn’t aligned performance with this transformational phenomenon is most likely not a portfolio manager anymore.
Now, as we enter into an unknown world, if you thought the cloud was the x-factor of the tech in the last generation, then the 2020s will make the cloud contributions to growth in the last generation appear meek.
About 1/3 of small businesses recently surveyed admitted there is really no path back to reopening. Who would really want to shoulder financial risk in an economic environment that outwardly punishes businesses that operate around anonymous customers in close proximity?
Many of these owners, even with generous government funding, have chosen not to fight against the path of strongest resistance.
When the dust settles, even if a vaccine arrives out of thin air tomorrow, the work at home thing, or should I say the work from anywhere but the office phenomenon will persist like a bad flu, no pun intended.
The Cloud is the winner, and everything associated with it will drive the economy forward.
It has emerged as the cog in the works, that no company can live without.
Not only is the cloud highly effective but it's also cheaper than traditional systems.
It also provides nimbleness in scaling up or down computing capacity according to business requirements.
Search for growth companies that do not deploy the cloud as a critical pillar of operational execution.
They hardly exist now.
Whether it’s the vanguard of the cloud plays such as Amazon (AMZN), the second in show nipping at Amazon’s heels, Microsoft’s (MSFT), or any other small cloud play, they are all profiting off the monstrous pivot to digital commerce and cord-cutting.
In China, Tencent, Alibaba, and Huawei are cloud companies doing so well that the U.S. government has tried to shut them down to allow a wider moat around U.S. companies.
What’s the simplest way to carve out significant exposure to cloud equities?
A barrage of ETFs (exchange-traded funds) has come online to serve your needs.
They are also durable enough to endure stormy and uncertain times.
Here are three that should whet your appetite.
The First Trust Cloud Computing ETF (SKYY) tracks a modified equal-weighted index of infrastructure, platform, and software cloud companies. Microsoft, Amazon, and Alphabet are its secret sauce.
The Global X Cloud Computing ETF (CLOU) consists of companies that are positioned to benefit from the increased usage of cloud computing. While Amazon, Microsoft, and Alphabet are included in the portfolio, the fund’s top holdings are pure-play cloud companies like Zscaler (ZS) and Shopify (SHOP).
The WisdomTree Cloud Computing ETF (WCLD) tracks an equal-weighted index of emerging companies with DocuSign (DOCU) and RingCentral (RNG) among the largest holdings.
What’s more, let’s remember that every cloud company is about to embark on a massive round of expense cuts by getting rid of the physical office.
Twitter (TWTR) even has allowed workers to work from home on a permanent basis.
Yes, this means San Francisco commercial real estate prices are about to nosedive, but as it relates to the tech industry, operation costs will benefit in one fell swoop boosting earnings.
This also paves the way for many tech companies to re-establish tax headquarters in Nevada, Texas, or Florida which will act as another supercharger to growth.
Elon Musk has called out the Bay Area politicians in Alameda County, California because of a convoluted response and conflicting rules with regards to restarting the Fremont, California factory.
Covid-19 is most likely the straw that breaks the camel’s back as many Bay Area tech workers start to question what on earth they are doing paying $4,000 per month to rent a “cozy” 400 square foot apartment in Cupertino or San Francisco.
The mass exodus from high tax states to low tax states is just another supercharger out of many cloud superchargers on top of growth.
What more can I say?
“It's better to be a pirate than to join the Navy.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
May 18, 2020
Fiat Lux
Featured Trade:
(CHINA’S BIG SEMICONDUCTOR PLAY),
(SMH), (SOXX), (DOCU), (AKAM), (NVDA), (AMD), (XLNX)
We received a convincing data point as to why we trade cloud companies and not the semiconductor chips.
The rift between blacklisted telecom equipment giant Huawei Technologies and the U.S. administration has had a dramatic side-effect on the business models of U.S. chip companies.
The U.S. commerce department now will require licenses for sales to Huawei of semiconductors made abroad with U.S. technology signaling more turbulent times ahead.
Huawei is the Chinese smartphone maker and telecom provider who has stolen intellectual property from the West and used mammoth subsidies funded by the Chinese communist party to build itself into one of the premier telecom equipment sellers and number two maker of smartphones in the world.
I seldom issue trade alerts on semiconductor chip companies because I'd rather not compete with the Chinese communist party and their capital funding capacity.
China is hellbent on subsidizing its own chip capacity as many Western chip companies are blocked from doing deals with them.
A recent example is the Chinese communist party injecting $2.25 billion into a Semiconductor Manufacturing International Corp. wafer plant to ramp up development in the sector.
To read about this, click here.
Exploiting the economic freedom and laws of the West has worked out perfectly for Chinese tech enabling them to develop juggernauts like Tencent and Baidu.
In fact, state-sponsored hacking of Western intellectual property is not considered a malicious activity in China.
There is the Chinese notion that everything is fair game in business and war and protecting company secrets falls on the shoulders of the cybersecurity sector.
To read more about the fallout in the West from China’s aggressive trade strategy, click here.
The concept that you should only blame yourself if you allow your secrets to get stolen prevails in China.
The consequences are impactful with U.S. chip companies suffering large drops in revenue without notice.
Leading up to the coronavirus, chip companies experienced a revenue slide of 12% in 2019 to $412 billion largely due to the trade war.
An example is Xilinx Inc. (XLNX) who will fire 7% of its workforce citing lower revenue from Huawei and delayed adoption of superfast 5G networks.
Along with the West getting smacked by the trade war, the ripple effect of increased uncertainty and guide-downs across the semiconductor supply stems from China’s economy being hit even worse than the U.S. economy.
There are no winners here and it will be a hard slog back from the nadir.
Either way, the sabre-rattling doesn’t stop here and each tweet and counterpunch will cause heightened volatility in chip shares.
Then consider that the existence of supply chains will most likely uproot, and we got indication of that type of activity with Taiwan Semiconductor’s (TSM) announcement to build a new chip factory in Phoenix.
To read more about this impactful deal then click here.
This would have never happened during prior administrations where all manufacturing was offshored to China.
As it stands, China has been circumventing existing U.S. law to clampdown chip sales by buying U.S. chips from 3rd party channels.
Once many of the supply chains come back, it will be almost impossible for Chinese to procure those same chips.
The Taiwan semiconductor manufacturing facility in Arizona will ultimately employ 1,600 high-tech workers.
Building is slated for 2021 with production targeted to begin in 2024.
Moving forward, the U.S. administration will make it implausible for many U.S. chip companies to offshore using the reasons of national security and domestic job demand to ensure that many factories are rerouted back to U.S. shores.
The boom and bust nature of chip companies make for treacherous spikes and drops in share prices.
The insane volatility is why I stay away from them as the Mad Hedge Technology Letter mainly opts for short-term options trades.
Nvidia (NVDA) and AMD (AMD) are great individual chip stocks that I would encourage readers to buy and hold.
Another option is to just park your money in the semi ETF VanEck Vectors Semiconductor ETF (SMH) or iShares PHLX Semiconductor ETF (SOXX).
On the flip side, cloud stock’s backbone of recurring monthly revenue is just too savory.
The constant cash flow with minimal international risk along with pristine balance sheets is what makes U.S. cloud companies top on the list of trade alert candidates.
That won’t stop anytime soon as the pandemic has offered us more conviction into the moat between cloud stocks and the rest of technology.
I apologize if I sound like a broken record, but I love my Akamai’s (AKAM) and DocuSign’s (DOCU), they have the growth portfolio that backs up my thesis.
Buy cloud stocks on the dip.
“If you are a big company, a big website, and lots of users come to your website, you will have attacks, and you have to deal with that.” – Said Founder and CEO of Baidu Robin Li
Mad Hedge Technology Letter
May 15, 2020
Fiat Lux
Featured Trade:
(WHY UBER IS BUYING GRUBHUB),
(GRUB), (UBER)
To understand the unintended consequences of the Fed’s helicopter money to U.S. capitalism, we can put a magnifying glass over Uber’s (UBER) recent takeover attempt of Grubhub (GRUB) as what’s in store for not only the tech sector but the wider public markets.
Zombie companies parade around Europe and Japan because of an era of low interest rates and cozy bank relationships that keep these companies from dying out.
To read more about Allianz Economic Advisor Mohamed El-Erian’s take on zombie companies – click here.
It’s not a surprise that Japan and Europe are highly unproductive, and innovation ceases to exist when capital is being tied up in marginal companies with management happy to let capital slosh about without adding extra added value.
I get it that the Fed is trying to “save” the wider U.S. economy by bringing out the bazookas and even by buying junk-graded debt which was once seen as heresy.
But what we have now are inferior companies that will never turn a profit masquerading as real companies that would be on life support if not for cheap capital.
In almost every instance, the only winners are the executive management who pillage the system and cash out when they are allowed to sell their stock.
U.S. Representative for Rhode Island David Cicilline hit the nail on the head when he described the fluid situation by focusing on two of the bad apples, saying “Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub — which has a history of exploiting local restaurants through deceptive tactics and extortionate fees — marks a new low in pandemic profiteering.”
Uber is a taxi service that undercompensates its highest expense - the driver, and Grubhub delivers restaurant food but rips off the restaurants in doing it.
I defined exorbitant delivery fees as up to 40% which Grubhub is infamous for charging.
Yes, even with predatory practices, they cannot turn a profit.
Now, in this new normal of coronavirus, it would be a miracle to make any operational headway.
Uber’s attempted market grab is a giant red flag.
My guess is that they are doing this in order to jazz up the balance sheet and concoct some ridiculous new metric showing a pathway to growth.
By adding growth to revenue, Uber would be able to preach “growth” even if it’s of bad quality.
I thought the tech market was done looking through to grow by essentially killing off the “WeWork model.”
However, Uber is going for a model that is one notch above that model and repurposing it as something actually meaningful, which of course, it’s not.
They are already in litigious hell regarding driver’s remuneration, and that will not die down and could even destroy Uber.
Uber has in fact ignored California state orders to reclassify its drivers as employees and have appealed the court’s decision.
The New York state government has validated my theory of these fly-by-night delivery outfits being a net negative for business and society.
The New York City Council compared food ordering apps Grubhub and UberEats to blood-sucking parasites this week before passing emergency legislation aimed at helping struggling restaurants lower delivery costs during a precarious time.
During the state of emergency, a new vote passed capping food ordering and delivery app fees at 15% in delivery fees and 5% “other” takeout order fees.
To read more about this decision by the New York City Council – click here.
This was done to give some power back to the restaurants that have been getting fleeced.
The balance sheet shows the whole story with Uber's net loss totaling more than $8.5 billion in 2019 and in February, they reported a net loss of $1.1 billion in the fourth quarter.
Let me remind readers that Grubhub posted a net income loss of $27.7 million for the last reported quarter as well.
As it turned out, Grubhub rejected Uber’s offer believing it didn’t meet their valuation of the company.
It would appear natural that a predatory company with no competitive advantage would set a market premium that would align with their borderline extortionate ways.
Do not own either one of these companies – there are far better ones out there in tech and no need to scrounge at the bottom of the barrel.
Monthly Grubhub bill for Chicago Pizza Boss During the Epidemic
“My goal was never to make Facebook cool. I am not a cool person.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
