“Our philosophy is that we care about people first.” – Said Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
February 21, 2020
Fiat Lux
Featured Trade:
(WHY THE GOVERNMENT IS GUNNING FOR GOOGLE AND FACEBOOK)
(FB), (GOOGL), (TWTR), (ADBE), (FTNT), (EBAY)
Google (GOOGL) and Facebook (FB) are dominant to the extent that the U.S. administration is hoping to dismantle them.
The two companies enjoy a flourishing duopoly and guzzle up digital ad dollars.
Governments around the world are scratching their heads attempting to figure out how to put a dent in these fortresses and so far, have been unsuccessful.
Big tech has made governments look bad, to say the least, and their response has been even more shambolic.
Alphabet installed Google CEO Sundar Pichai as the top decision-maker for all Alphabet assets preparing for the onslaught of digital privacy headwinds and regulation that the E.U., U.S., and everyone else will throw at them.
Luckily, they do not need to deal with the Chinese communist party as big tech minus Apple was effectively banned years ago.
What’s on Google and Facebook’s plate right now?
Attorney General William Barr has pointed the finger at these two platforms for hiding behind a clause that gives them immunity from lawsuits while their platforms carry material promoting illicit and immoral conduct and suppressing opinions.
Barr is currently looking into potential changes to Section 230 of the Communications Decency Act, which was passed in 1996 and has been also referred to as the supercharger to tech riches.
What could eventually come of this?
Barr could decide for the Justice Department to explore ways to limit the provision, which protects internet companies from liability for user-generated content.
This could open up Google and Facebook to higher costs of managing content on their platforms and lawsuits related to malcontent in which they fail to remove.
Even though platforms love to market that they actively thwart bad actors, at the end of the day, they aren’t on the hook for what happens.
Massive alterations could fundamentally weaken their business models and force them to review each word and photo that is thrown upon their platform.
They have already hired an army of hourly paid contractors, but at their massive scale, content is simply impossible to smother.
Content generators understand how to sidestep machine learning algorithms which are based on backdated data, meaning they would not be able to catch a new iteration of past content.
Absolving themselves of any responsibility for policing their platforms has been an important catalyst in the outperformance in shares for both Facebook and Google.
The social side of this has cringeworthy unintended consequences.
The Computer & Communications Industry Association, a tech trade group that counts Google and Facebook as members want the government to stay out of it as they believe they are overreaching.
Government has been slowly making inroads in combatting the strength of these digital platforms, and the first successful foray was when Congress eliminated the liability protection for companies that knowingly facilitate online sex trafficking.
Big tech won’t go with a whimper and they will propose a range of changes to avoid direct damage to their business model such as raising the bar a smidgeon on which companies can have the shield, to carving out other laws negating attempt to weaken their platforms, to delaying the repealing of Section 230.
There is too much shareholder value on the line and as the coronavirus rears its ugly head, it’s ironic that investors perceive safety in not only the U.S. dollar but in the vaunted FANG tech group.
Ultimately, the math wins out and these companies with gargantuan earnings can weather any storm with a moat as wide as ever.
It’s to the point that a $10 billion fine is a massive victory, and what other group of companies can boast about that?
We can only trade the market we have in front of us and not the one we want.
I pulled the trigger on a Google call spread and I believe this narrow group of power tech players and their partners in crime cloud stocks of the likes of Twitter (TWTR), eBay (EBAY), Fortinet (FTNT), Adobe (ADBE), and a few others will hoist the market on its back like I predicted it would at the beginning of the trading year.
Mad Hedge Technology Letter
February 19, 2020
Fiat Lux
Featured Trade:
(BUY THE CORONA DIP),
(VZ), (T), (TMUS), (S), (AAPL), (BABA), (CSCO), (EXPE)
The coronavirus hammer finally came down and hit one of the dominant soldiers of big tech.
Apple (AAPL) led morning headlines nationwide by slashing quarterly revenue guidance stemming from production delays and weak demand in China.
Deleting the China demand for new iPhones is enough for the company to signal a looming revenue miss and rightly so, coronavirus has been 24-hour news for the past 2 months on the Asian continent.
As we speak, the cruise liner named the Diamond Princess is parked outside the port of Yokohama with the victims of infected rising by the day.
The optics are ugly, and China’s cover-up of the spreading went awfully awry and now pandora’s box is open.
Naturally, tech stocks can expect a few percentage points shaved off of this year’s annual growth targets and short-term sluggishness in shares exposed to China revenue.
What are the ramifications?
Telecom companies are in the incubation period of building out 5G wireless networks.
Naturally, tech shares will receive a bounce as network deployment gains traction as management commentary, during company earnings calls, on 5G business heats up.
However, the Mobile World Congress was cancelled by organizers stealing the chance for 5G stocks to hype up their position in 5G.
It is almost guaranteed at this point that China coronavirus will slow down the schedule for 5G wireless network buildouts.
Think about this, SARS lasted roughly half a year during 2002-2003, and the coronavirus appears to be worse than that.
Chinese telcoms will need to delay 5G and related equipment along with business that has around 150 million Chinese ensnared by the domestic quarantine.
Apple’s 5G iPhones in late 2020 could be delayed if there is no meaningful breakthrough in the contagion of the coronavirus and its ill effects on global business.
Apple stock appreciated on the hope that 5G iPhones aim to deliver the first meaningful consumer upgrade cycle in several years with a hefty price tag of $1,250.
This next generation iPhone could get pushed back to 2021 as Apple’s supply chain has been put on ice in mainland China.
If Verizon Communications (VZ), AT&T (T), T-Mobile US (TMUS) and Sprint (S) desire to aggressively expand their 5G networks, they might be in for a rude awakening because semiconductor companies might be stretched to limit and cannot provide the right components with supply chains pressured everywhere.
The truth is that supply chains are impacting diverse and interconnected sectors of the electronics industry.
And the epidemic, arriving at dawn of 5G's mainstream deployment phase, is guaranteed to disrupt the progress of the next-generation wireless standard, as the crisis slows the production of key smartphone components, including displays and semiconductors.
Chip companies and their shares have naturally been rocked by the recent news and they aren’t the only ones.
Expedia (EXPE), the online travel company, revealed it will avoid providing a full-year forecast as the online travel services company reevaluates the impact of the coronavirus outbreak on its operations.
Investors can imagine that on mainland China, the situation is grim exerting a fundamental impact on the country’s consumers and merchants and will slice off revenue growth in the current quarter.
Alibaba (BABA), the Amazon of China, told investors that the virus is undermining production and output in the economy because many workers are stuck at home.
The virus has also changed the commerce patterns of consumers by pulling back on discretionary spending, including travel and restaurants.
The Chinese e-commerce giant’s revenue surged year-over-year by an impressive 38% to 161.5 billion yuan ($23.1 billion), while net income rose 58% to 52.3 billion yuan, but that could symbolize the high-water mark.
Chief Executive Officer Daniel Zhang and Chief Financial Officer Maggie Wu were explicit in mentioning that risks from the pandemic could deaden a piece of revenue moving forward and they weren’t shy about stating this.
Sound bites such as “overall revenue will be negatively impacted,” and expecting growth to be “significantly” negative is quite black and white.
China is almost certain to print weak GDP growth numbers because of cratering imports and a big drop in demand.
Echoing Alibaba’s weakness was network infrastructure company Cisco (CSCO) with a revenue shortfall of 3.5% year-over-year as major product categories like Infrastructure Platforms and Applications were hit.
Cisco must find new cycles in core activities to regain any momentum and chip companies must do the same as the administration turns the screws on Huawei and injects more barriers to U.S. chip companies selling abroad.
This adds to the broader risks of elevated corporate debt and the upcoming U.S. election where tech management is nervous that a new President could throw big tech under the bus.
The coronavirus pours fuel on the flames.
The silver lining is the blows to these companies are softened by the ironic fact that big tech has become the safety trade to the coronavirus and even if 5G is delayed, chip stocks will eventually benefit from a fresh wave of revenue drivers when the 5G network is finally deployed.
However, it is way too early to announce the death of big tech, there are far too many secular tailwinds driving these companies.
The tech bull market is still intact and there will be opportunity to buy.
"When something is important enough, you do it even if the odds are not in your favor." - said Tesla founder and CEO Elon Musk.
Mad Hedge Technology Letter
February 14, 2020
Fiat Lux
Featured Trade:
(DATA TELLS THE WHOLE STORY)
(FB), (GOOGL), (NFLX), (AMZN), (EBAY), (TWTR)
Behavioral trends have a sizable say in which tech companies will outperform the next and a recent report from SimilarWeb offers insight into how much users navigate around the monstrosity known as the internet.
The optimal way to comprehend the trends are from a top-down method by absorbing the divergence between desktop traffic and mobile traffic.
It’s no secret that the last decade delivered consumers a massive leap in mobile phone performance in which tech companies were able to neatly package applications that acted as monetization platforms by offering software and services to the end-user.
Thus, it probably won’t shock you to find out that desktop traffic is down 3.3% since 2017 as users have migrated towards mobile and the trend has only been exaggerated by the younger generations as some have become entirely mobile-only users.
All told, the 30.6% expansion in mobile traffic has penalized tech firms who have neglected mobile-first strategies and one example would be Facebook (FB), who even though has a failing flagship product in Facebook.com, are compensated by Instagram, who is showing wild growth numbers.
The fact that mobile screens are smaller than desktop screens means that users are staying on web pages not as long as they used to – precisely 49 seconds to be exact.
This trend means that content generators are heavily incentivized to frontload content and scrunch it up at the top of the page. This also means that sellers who don’t populate on Google’s first page of search results are practically invisible.
The high stakes of internet commerce are not for the faint of heart and numerous companies have complained about algorithm changes toppling their algorithm-sensitive businesses.
Even using a brute force analysis and investing in companies that are in the top 15 of internet traffic, then the companies that scream undervalued are Twitter (TWTR) and eBay (EBAY).
Twitter is a company I have liked for quite a while and is definitely a buy on the dip candidate.
The asset is the 7th most visited property on the internet behind the likes of Instagram, Google, Baidu, Wikipedia, Amazon, and Facebook.
This position puts them just ahead of Pornhub.com, Netflix, and Yahoo.
And if you take one step back and analyze traffic from the top 100 sites, traffic is up 8% since 2018 and 11.8% since 2017 averaging 223 billion visits per month.
Rounding out the top 15 is eBay who I believe is undervalued along with Twitter - these two are legitimate buy and holds.
Ebay was the recipient of poor management for many years and they are now addressing these sore points.
Certain content is suitable for mobile such as adult sites, gambling sites, food & drink, pets & animals, health, community & society, sports, and lifestyle.
And just over the last year or two, other categories are gaining traction in mobile that once was dominated by desktop such as news and media, vehicle sites, travel, reference, finance, and others.
Many consumers are becoming more comfortable at doing more on mobile and spending more to the point where people are making large purchases on their iPhones.
The biggest loser by far was news - they are losing traffic in droves.
Traffic at the top 100 media publications was down 5.3% year-over-year from 2018 to 2019, a loss of 4 billion visits, and down by 7% since 2017.
Personally, I believe the state of the digital news industry is in shambles, and Twitter has moved into this space becoming the de facto news source while pushing the relevancy of news sites down the rankings.
Facebook and Twitter are essentially undercutting the news by forcing news companies to insert them between the reader and the news company because they have strategized a position so close to the user’s fingertips.
The negative sentiment in news is broad based on popular news, entertainment news and local news all showing decreases of more than 25%.
Finance and women’s interest news categories are the only ones showing positive traffic growth.
The state of internet traffic growth supports my underlying thesis of the big getting bigger and the subsequent network effect stimulating further synergies that drop straight down to the bottom line.
The top 10 biggest sites racked up a total of 167.5 billion monthly visits in 2019, up 10.7% over 2018 and the remaining 90 largest sites out of the top 100 only increased 2.3%.
This has set the stage for just five gargantuan tech firms to become worth more than $5 trillion or 15.7% of the S&P 500’s market value and 19.7% of the total U.S. stock market’s value.
Now we have real data backing up my iron-clad thesis and these cornerstone beliefs underpins my trading philosophy.
Many of the biggest wield a two-headed monster like Google who has Google.com and YouTube video streaming and Facebook, who have Facebook.com and Instagram.
It doesn’t matter that Facebook has lost 8.6% of traffic over the past year because Instagram compensates for Facebook being a poor product.
And if you are searching for another Facebook growth driver under their umbrella of assets then let’s pinpoint chat app WhatsApp who experienced 74% year-over-year traffic.
Beside the news sites, other outsized losers were Yahoo’s web traffic shrinking by 33.6% and Tumblr, which banned adult sites in 2018, leading to a 33% loss in traffic.
If I can sum up the data, buy the shares of companies who are in the top 15 of internet traffic and be on the lookout for any dip in eBay or Twitter because they are relatively undervalued.
“Some people don't like change, but you need to embrace change if the alternative is disaster.” – Said Founder and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
February 12, 2020
Fiat Lux
Featured Trade:
(UBER’S DARK FUTURE)
(UBER), (LYFT), (FB), (AMZN), (NFLX), (GOOGL)
