Tech Letter Archives

Amazon's Big Disappointment

It is a basic concept of life that people will risk their lives for economic gain.

This is what the protests are about that have erupted all over the U.S. and will continue as families run out of food in the kitchen pantry.

Back in the world of the stock market where tech stocks have benefited from the Fed backstopping equities, Amazon (AMZN) reminded us that just because business is booming in volume, profitability can be a completely different story.

Amazons’ earnings disappointed after many analysts believed the quarter would be untouchable.

The company that my friend Jeff Bezos built became inundated with too many orders that almost broke their supply chain.

Amazon’s share price got ahead of itself which was up 34% on the year through last Thursday and only a beyond perfect earnings beat on the bottom and top line would propel the stock to newer highs.

The stock cratered by 8% after investors had time to digest the report.

Profitability came in significantly lower with Wall Street anticipating earnings per share of $6.25 and Amazon only producing $5.01.

The most important number in the earnings report was $4 billion which is the amount of additional expenses next quarter caused by the COVID-19 phenomenon.

The productivity headwinds in Amazon’s facilities were meaningful as the company spent on social distancing, allowing for the ramp-up of new employees and investments in personal protective equipment (PPE) for employees.

In addition, setting up an Amazon fulfillment center in the age of COVID-19 encompassed cleaning and sanitizing facilities, higher wages for Amazon’s hourly teams, and hundreds of millions of dollars to develop COVID-19 testing capabilities.

Amazon also needed to allocate another $400 million of costs related to increased reserves for accounts that participated in price gouging as Amazon third-party sellers tried to rip off buyers by jacking up prices to take advantage of the shortage in some products.

Amazon said they suspended more than 10,000 sellers from its platform for violating policies against price gouging.

The sudden spike in costs will result in an operating loss of $1.5 billion to an operating income of $1.5 billion based on its expectation of spending $4 billion on coronavirus-related costs.

The ultimate problem for Amazon’s eCommerce division was that “essential items” didn’t harvest the bumper type of premium that other products can command.

Not only did they suffer at the margins, but they also had to extend the shipping period from one to four days, and then further on non-essential items.

Groceries were the segment that saw explosive growth, but everyone knows that supermarkets have slim margins.

Amazon had to increase grocery delivery capacity by more than 60% and expanded in-store pickup at Whole Foods stores from 80 stores to more than 150 stores.

Amazon’s best of breed execution was utterly swamped by the health phenomenon.

It got so bad that Amazon had to restrict selected products that were coming into the warehouses and focus on essential products.

A big chunk of the new costs will come in the form of hiring an additional 175,000 new employees.

Inflated costs were the bombshell of Amazons’ earnings but looking down the road, the future looks bright.

Amazon is the only platform that can systematically service customers at scale and effectiveness during the crisis which will breed increased customer loyalty and faster adoption of e-commerce, despite higher costs in the near term.

Work-from-home dynamics are here to stay translating into significant Amazon market share gains and a longer Amazon growth runway.

This is also the first stage of Amazon developing a protective gear strategy for staff and customers as a potential point of competitive advantage.

Sterility of packages and products could be the new x-factor going forward and Amazon will likely lead in developing this new packaging and contactless delivery style.

This leads me to believe that the coronavirus is a springboard into the revenues of healthcare for big tech enabling unlimited resources with an industry offering unlimited low-hanging fruit.

Big tech is the only solution out there to America’s dysfunctional healthcare system, and Amazon could become the leader in setting off a new deflationary decade in healthcare costs.

Amazon and Microsoft are the best companies in the country and any pullbacks should be met with a torrent of fresh buying.

To visit Amazon’s webpage, click here and to see why Microsoft is the best tech company not named Amazon, then please click here.

May 1, 2020

Tech Letter

Mad Hedge Technology Letter
May 1, 2020
Fiat Lux

Featured Trade:

(MICROSOFT KNOCKS IT OUT OF THE PARK)
(MSFT), (AMZN), (FB), (GOOGL)

Microsoft Knocks It Out of the Park

Tech Letter

Armed with the best management and stickiest tech products in the U.S., Microsoft (MSFT) has shown why every tech investor needs to own shares.

We just took profits from deep-in-the-money MSFT bull call spread and I’d be looking to get back into this name on any and every dip.

This tech company is unstoppable and the data underpinning their greatness reaffirms my point of view.

Microsoft said that 2 years of digital transformation has happened in the past 2 months.

The health crisis has shown that consumers cannot function without Microsoft and that will help fend off the regulatory monkey off their back.

Microsoft announced $35 billion in quarterly sales when analysts forecasted just $33.76 billion.

Tech companies have had to reduce their future projections as the health scare has done great damage to consumer demand with many pulling guidance completely.

Overall, tech companies were locked in for a 5% earnings decline which was the best out of any industry, but they are coming in higher than that.

Even more impressive, Microsoft’s management disclosed that COVID-19 had “minimal net impact on the total company revenue.”

That was really all you need to know about Microsoft who possesses services that consumers can never get rid of.

Everything else is just a cherry on top.

To get into the weeds a little, Azure cloud-computing business and Teams collaboration software, have become mainstay products as workers are forced to stay home and their companies need computing power and tools to support them.

Many of those products are bundled with ones that may not fare as well, however — for instance, Microsoft combines revenue from on-premises server sales with its Azure business.

The “Intelligent Cloud” segment that includes Azure rose to $12.28 billion in sales from $9.65 billion a year ago, beating the average analyst prediction of $11.79 billion.

“Productivity & Business Solutions,” which comprises mostly of the cloud software assets, including LinkedIn, grew to $11.74 billion from $11.52 billion a year ago, beating analyst predictions of $11.53 billion.

The most important nugget awaiting the masses was forward guidance.

Microsoft expects continued demand across Windows OEMs, Surface and Gaming to shift to remote work play and learn from home.

The outlook assumes this benefit remains through much of Q4, though growth rates may be impacted as stay-at-home guidelines ease.

Reduced advertising spend levels will impact search and LinkedIn and the commercial business.

A robust position in durable growth markets means Microsoft expect consistent execution on a large annuity base with continued usage and consumption growth.

LinkedIn will suffer from the weak job market and increased volatility in new, longer lead-time-deal closures.

A sign of strength and a pristine balance sheet was when Microsoft signaled that they could absorb higher costs by saying, “a material sequential increase” in capital-expenditure spending in the current quarter will “support growing usage and demand for our cloud services.”

Even best tech companies have mostly been trimming capex and freezing hiring in anticipation of weaker revenue targets.

I knew when Google announced 13% annual sales growth and Facebook saying that ad revenue “stabilized” meant that Microsoft would only do better.

The tech market had priced Microsoft doing quite positively which is why shares did not rocket by 8%.

Microsoft is not a one-trick pony like Google and Facebook either and simply doesn’t need a potential vaccine to boost sales moving forward.

They preside over a vast empire of diversified assets with even a growth lever in streaming platform YouTube.

Even if LinkedIn and the hiring that fuels it will suffer, the rest of its portfolio will keep churning out revenue in literally any type of economic environment.

Lastly, the tech market has been utterly cornered by policymakers who, according to the IMF, have thrown $14 billion of liquidity with a chunk of that following through into big tech shares.

The level of propping up from the Fed cannot be understated and their behavior feels as if there is no way anyone could ever be underweight Microsoft because of the Fed’s unlimited balance sheet.

On top of that, we are getting a steady stream of positive health reports in the form of antiviral medication Remdesivir and who knows when the next positive announcement will come.

To cap it off -they are led by the best CEO in the U.S. Satya Nadella, who is an expert on the cloud, and this company has to either be the best or second-best company in the country along with Amazon.

May 1, 2020 - Quote of the Day

Tech Letter

“Culture eats strategy for breakfast.” – Said CEO of Microsoft Satya Nadella

April 29, 2020

Tech Letter

Mad Hedge Technology Letter
April 29, 2020
Fiat Lux

Featured Trade:

(TAKING A LOOK AT RINGCENTRAL)
(RNG), (ZM)

Taking a Look at RingCentral

Tech Letter

Tech stakeholders have won out by corporate American extracting a King’s ransom in the form of a favorable stimulus and unwavering government support for the next lucrative explosion upwards in tech shares.

We have moved into a post-industrial capitalistic apocalyptic world for better or worse and I will give you another hot tip - RingCentral, Inc. (RNG).

The company is poised to rise with all corporate tech boats moving forward.

Inside the deep underbelly of U.S. Capitalism 2.0, the financial fallout and response to it mirrors the last crisis of 2008 signaling to investors to buy tech growth stocks and lots of it.

That might be a cynical take of how the cookie is crumbling but just look at the Teflon tech market that shrugs off the unemployed who are standing in food lines.

Then consider that many of the small business loans were front run by the corporate crowd by hijacking almost $900 million in funds allocated to the small business relief program that was meant to go to main street.

It’s a sign of the pecking order of the future and investors must input the new data into their models going forward.

Corporate America value and its economic extraction machine are powering ahead leaving main street behind offering opportunities for tech-savvy investors.

What does this mean? This is demonstrably bullish for the tech sector and could initiate the Golden Age of 5G investing.

Big tech will get bigger and corporate America will lurch out of the coronavirus epidemic positioned the strongest precisely because they have been best, fully funded, and the strongest tech companies have the country’s best balance sheets.

I advise investors to look at tech growth and RingCentral is one of the leaders in this field.

RingCentral is a robust cloud communications company that is at the vanguard of the Unified Communications as a Service (UCaaS) space.

RingCentral has about 2 million users on its platform and according to management is “the last service to be turned off” in this wonky economy that is mostly shut down.

The knock-on effect of the coronavirus is that RingCentral app downloads are up 400% month over month, online meetings on the platform are up over 200%, and messaging is up over 90%.

RingCentral is regarded as one of the originators of the UCaaS market, which projects to grow at a double-digit pace for the next ten years.

Unified Communications as a service (UCaaS) is the concept of integrating enterprise communication services, such as messaging, voice, and video, into one platform and ecosystem.

The company is brilliantly placed to turn rising demand for UCaaS services into real revenues in Q2 and Q3.

RingCentral (RNG) has launched its highly effective RC Video product for meeting applications.

RingCentral Video is bundled across the entire RC Office portfolio for free and preliminary analysis indicates that the product outperforms for basic multi-user video conferencing requirements via the Chrome browser, including screen sharing.

RingCentral is fighting with Zoom to be at the top of the food chain.

The company’s robust cloud communication platform ties together message, call, and video.

The open platform nature allows for easy integrations and strong brand equity.

The stats don’t lie with RingCentral reporting 30%-plus revenue growth in each of the past three years.

The company is growing out of their ears and when you add in a favorable margin profile, this robust revenue growth will lead into equally robust profit growth cycle.

I will assume in my model that the company will grow 20% over the next 10 years with several hundred basis points of gross margin expansion.

If the company can hit these moderate performance targets, I can’t imagine anything other than the stock being much higher than it is today in the future.

Secular tailwinds cannot be understated as the stock is on the verge of surpassing its prior high of $245, making a perfect V-shaped recovery from the nadir of $139, and breaking out as the rest of the economy comes back online.

The almost doubling of the stock can be extrapolated to many other tech growth stocks that have experienced similar price action in the past 45 days.

Slip this one into your portfolio as tech goes from strength to strength.

April 29, 2020 - Quote of the Day

Tech Letter

“I am not trying to chase what other people are doing.” – Said Softbank Founder and CEO Masayoshi Son

April 27, 2020

Tech Letter

Mad Hedge Technology Letter
April 27, 2020
Fiat Lux

Featured Trade:

(FRONT RUNNING THE MICROSOFT EARNINGS)
(MSFT), (AMZN), (WORK)

Front Running the Microsoft Earnings

Tech Letter

It’s hard to imagine that Microsoft’s earnings report on Wednesday will be anything other than remarkable as their growth drivers plow ahead in a digital-first economy.

The only risk that could soften shares following the report is the forward guidance.

Bill Gates asserted that the U.S. economy will come back to “semi-normal” in the next 2 months, and I wouldn’t bet against management putting a positive spin on the path going forward tying the company’s short-term prospects with the comeback of the wider economy. By semi-normal, he means still falling economic growth, just at a slower rate.

There is a high probability that this “semi-normal” state of the economy will last for longer than we think, but even in that scenario, Microsoft will outperform competition widening the gap between the haves and have nots.

Another theme picking up traction is the massive volume of business that will migrate digitally and will want to work with a quality cloud provider who is not their direct competitor Amazon.

What is there to like about Microsoft?

Almost all of it is the short answer.

Momentum in Microsoft’s cloud computing platform is strong and has experienced a surge in usage becoming a lifeline to many companies that have been forced to go all digital.

Even in the cutthroat COVID-19 environment, I still believe Microsoft’s Azure cloud expanded 50% year over year in the past quarter.

Even more successful, Microsoft’s workspace communication product, Teams, has seen a dramatic surge in popularity as co-workers try to solve company problems remotely.

Teams broke a daily record of 2.7 billion meeting minutes, up 200% from 900 million minutes on March 16.

In late March, Teams has 44 million daily active users (DAU), and 93 firms have implemented Microsoft Teams in the Fortune 100.

Another strong data point is Microsoft 365 and Dynamics 365 suite of solutions.

Every company needs these platforms as a utility to boost enterprise productivity.

The subscriber base has benefited from the avalanche of remote workers with their array of tools.

Microsoft’s professional network LinkedIn platform is likely to show outperformance adding to the top line in the quarter to be reported.

Another outstanding segment that can’t be overlooked is gaming, and specifically a meaningful increase in the Xbox Live monthly active users and a boost in the adoption of Game Pass subscriptions.

The only negative segment that is probable will most likely be the hardware segment as a deteriorating trend in PC shipments in the first quarter rears its ugly head because of coronavirus crisis-induced supply constraints.

A demand shock doesn’t help as well.

Consumers just don’t have the cash to upgrade their Microsoft Surface computer-tablet hybrid device.

Total PC shipments in first-quarter 2020 declined 12.3% year over year to 51.6 million units.

Another damper on profitability could come in the form of higher investments in cloud and AI engineering, amid stiff competition from Amazon (AMZN) in the cloud computing vertical and Slack (WORK) in enterprise communication domain.

Even with the global economy coming to a standstill, growing cloud sales by 50% would represent a massive relative victory in the broader scheme of things.

As the economy opens back up, Microsoft is well-positioned to capture much more of the rapid transformation into digital the has been a dramatic side-effect form this pandemic.

The company is already worth over $1.3 trillion and in a new economic world where big tech gets bigger, I see nothing in their path that will slow them down.

The anticipation of the new reality that Microsoft will become more influential post-COVID gives way to a rapid recovery in shares that will only gain steam as the 5G revolution approaches.

Microsoft will easily become a $200 stock and if the U.S. economy opens up sooner than people expect, then nail down this stock for a price of $230 a share by year-end.

I am strongly bullish Microsoft for the rest of 2020.

April 27, 2020 - Quote of the Day

Tech Letter

“The bulk of the story will be what happens next.” – Said Co-Founder of Microsoft Bill Gates when talking about the pandemic