“Your most unhappy customers are your greatest source of learning.” – Said Co-Founder of Microsoft Bill Gates
Mad Hedge Technology Letter
February 5, 2020
Fiat Lux
Featured Trade:
(HOW TO TRADE THE CORONAVIRUS)
(APPL), (MSFT), (TSLA), (MU), (WDC), (ZM)
Like a powerful mule, I believe the American tech sector will muscle through the shock of the China coronavirus.
The tech sector will do what it does best, take the lead and put the entire American economy on its back and carry it through when doubts of decelerating global growth are asked of it.
I quantify this as an opportunity for the American tech sector.
Let’s look at some of the short-term contagion American tech companies are absorbing, as well as some opportunities in tech delivered by this sad pandemic.
Apple (AAPL) has made the decision to shutter all Apple stores in mainland China.
Their corporate offices have also gone into sleep mode and that means 10,000 people will need to make do with work stoppages which also include the component makers that supply Apple.
The stoppage is until February 9th, but only if the coronavirus has been effectively thwarted.
The Chinese populace isn’t willing to go out on the street and have barricaded themselves inside their apartments to avoid catching the virus.
Quarantining large areas is an unprecedented move from the Chinese communist party highlighting the poor handling of the situation in the early stages.
China is a critical revenue driver for Apple constituting 15% of revenue.
The delay in manufacturing will result in 3% of iPhone unit shipments being pushed out from March to June.
However, if the lockdown spills into late February or March, then there will be a major hit to the Chinese consumer which could muddy Apple’s bottom line.
Apple’s supply chain could get up-and-running if the shutdown lasts a few weeks but if we are talking months then project dates could get put on the permanent back burner.
Apple is arguably the most prominent American tech company to be affected deeply by the coronavirus but there are others.
The Chinese communist party has put the operation of the new Shanghai Tesla (TSLA) factory on ice which will delay the company’s production of the Model 3 there.
The ramp-up of the Model 3 production will be delayed by a week and a half and the shutdown may “slightly” impact the company’s profitability in the first quarter of 2020, said Tesla’s finance chief Zach Kirkhorn.
As of now Tesla has estimated a 10-day delay to the Shanghai-built Model 3s due to a government-required factory shutdown and the facility will remain locked until February 9th.
Tesla have been churning out cars at its Shanghai factory only since the end of 2019.
The deliveries are an emerging revenue driver as Tesla hopes to gain a foothold in China, the world’s largest market for electric vehicles.
Fortunately, Shanghai-produced Teslas only make up a tiny part of Tesla’s overall revenue, meaning there will be minimal impact to the financials.
The outbreak could have a positive effect for some domestic semiconductor companies.
The chaos resulting from the virus will likely upset operations at Wuhan-based Yangtze Memory Technologies Co. and Wuhan Xinxin Semiconductor Manufacturing Corp., who have been stealing market share from their American competitors.
Yangtze Memory Technologies is China’s leading NAND flash memory producer.
NAND chips are the flash memory chips used in USB drives and smaller devices such as digital cameras as opposed to DRAM, or dynamic random access memory, the type of memory commonly used in PCs and servers.
Micron (MU) and Western Digital (WFC) could swoop in to meet the extra demand.
Another company that could seize a great opportunity because of the coronavirus is Zoom Video Communications (ZM).
The CEO of Zoom Video said, “If you cannot travel ... you need to have a very reliable secure tool like Zoom” and product usage “is very, very high since the last of the month, last week. Almost every day - that’s a record usage.”
Since Chinese tech workers are barricading themselves indoors, Zoom has been the tool of choice to collaborate with coworkers who are in the same situation.
Not that the video conferencing software company needed help, I have recommended this company as a solid buy and hold since the stock dipped to $62.
This new boost will pour gas on the flames and the stock price reacted in lockstep by rocketing 15% in just one trading day.
When the likes of Alphabet’s Google, Facebook, Apple, Microsoft, and Ford Motor are ordered to work from home, videoconferencing, online meetings, chat and mobile collaboration services shoot through the roof.
Video conferencing will become a $43 billion total addressable market in the coming years, and I believe Zoom is easily a $150 stock.
In short, the coronavirus will hurt some tech companies short-term, benefits others, and have no effect on tech firms with negligible China exposure.
Facebook is a stock that I recently executed a call spread on, and they are blocked from operating in the mainland and will feel no difference from this virus outbreak.
Looking even deeper into the matter, the short-term hit to revenues will only be temporary unless this virus wipes out most of China.
The most likely scenario is that less than 1,000 people will eventually die from this and 99.9% of that will be deaths in mainland China.
Investors should look at buying on any substantial dip – the tech narrative is still unbroken.
“Being the richest man in the cemetery doesn't matter to me. Going to bed at night saying we've done something wonderful, that's what matters to me.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
February 3, 2020
Fiat Lux
Featured Trade:
(CAN’T HOLD DOWN AMAZON)
(AMZN)
The recent Chinese pandemic over the coronavirus is overshadowing a sensational start to tech earnings.
The big have only gotten bigger!
Apple, Microsoft, and now Amazon and Founder Jeff Bezos have clearly tweaked the business into a well-oiled machine.
I won’t lie – expectations were a little shaky going into the earnings’ report because of expense worries on turning the 2-day free shipping for Amazon Prime members into a 1-day affair.
The narrative was whether Amazon could deliver enhancements that could overcome the high cost of making Amazon Prime better.
It’s not cheap to make the logistical improvements in the warehouses and transportation functions.
A lot of money has been poured into air cargo transport efficiency and last-mile developments as well.
Profitability was supposed to bear the brunt of the expense surge, but just take a peek at EPS performance of $6.47 per share vs. expectations of $4.03 per share, and rejoice in relief that expense worries were overblown.
The only conclusion that I can make is that the spoils from investments into logistics have outweighed the costs of the investments.
In total, revenue expanded 21% to $87.44 billion for the quarter which is a robust growth trajectory for a company as gargantuan as Amazon.
Amazon unleashed the head turner metric this time around too sharing that Amazon already has over 150 million Amazon Prime members.
That is almost the equivalent of half of the U.S. population paying Amazon $119 per year.
The higher logistic costs were deemed necessary to stay in front of the rest and expectedly ballooning costs showed up in the earnings report with shipping expenses up 43% year over year to $12.9 billion.
Other segments of the business have been just as prolific as Kansas City Chief’s quarterback Patrick Mahomes.
Streaming and subscriptions pulled in a massive $5.24 billion for the quarter, up 32% from the year-ago period.
Amazon’s cloud business AWS was up 19% to almost $10 billion last quarter.
The 19% represents a significant slowdown from the 35% they grew during the 3rd quarter of last year but still brings in the lion's share of the profits.
Are there any other dark horse growth drivers in Amazon’s arsenal?
Certainly, Amazon’s advertising segment can be pigeonholed as the rising star and generated $4.8 billion in revenue during the quarter, a 41% increase from the year-ago period.
Amazon is also bullish on the Amazon’s “stores,” allowing the company to customize and curate a multipage digital storefront.
Stores are getting a refresh and the company has added features like shoppable images and the ability to schedule updates like new releases or seasonal changes.
Other advertising tools like the ability for brands to create posts, which consumers can view to discover products and brands through a curated feed, will help the company become an advertising juggernaut.
The company launched “Posts” in beta last year which shows that Amazon plans to double down in marketing.
The marketing space serves as a critical area for incremental growth potential and profitability flow-through.
This is because the marketing space is the largest and least penetrated total addressable market, ahead of retail, cloud, and business-to-business segments.
Amazon is a sure-fire buy and hold tech company because it simply is the second-best tech company behind Microsoft.
There will also be opportunities to trade this short-term from the long side, but the volatility might turn off some investors.
“Our philosophy is that we care about people first.” – Said Seller of User Data Mark Zuckerberg
Mad Hedge Technology Letter
January 31, 2020
Fiat Lux
Featured Trade:
(APPLE OUTSHINES THE REST)
(AAPL)
I'll give credit when credit is due.
Apple CEO Tim Cook pulled off a quarter to remember.
And yes, I've been hypercritical of his lack of innovation, but I can't question the way he’s insulated the company from being exposed to softness in mainland China.
Analysts expected $88 billion in revenue and Apple easily surpassed this number by posting $91 billion.
When you look under the surface, there are usually some chinks in the armor.
But this time around Apple's quarter was practically flawless albeit with some frosty guidance.
It's no secret that the quality of a Chinese smartphone has picked up and now rivals some of Apple's best products.
However, Apple turned a weakness into a strength and sales of iPhones was one of the highlights of an outstanding quarter.
In fact, it was the iPhone 11 that carried the load this time.
In total, iPhone Revenue rose 8% to almost $56 billion and they shipped 72.9 million units.
The outperformance doesn't just end there.
Wearables have become a meaningful revenue driver in itself.
Specifically, ear buds and the Apple watch have captivated Apple customers who are scooping up these products in droves.
In the prior quarter, 75% of people who bought the Apple watch were first time buyers.
This added up to wearables clocking in $7.3 billion in revenue this past quarter.
Apple’s outperformance dovetails nicely with my overarching theme of the FANG group plus Microsoft separating themselves from the other tech companies in 2020.
The network effect that these companies possess is unrivaled and the longer they stay in business, the stronger these effects seep in.
If there was a negative part of the quarter, Tim Cook failed to delve into the new Apple streaming product and avoided giving too much detail.
Fortunately, Apple has not bet the ranch on streaming and have stuck to what they know best.
Ultimately, Cook struck a lukewarm tone, especially with the spread of China’s coronavirus threatening to shut down production operations for several manufacturers.
The company has restricted employee travel and shut one store due to the outbreak.
Looking forward, management said “there will definitely be an impact on China in terms of consumption.”
Apple is slated to release its first 5G phone later this year which has been the catalyst for the price appreciation in shares.
Apple continues to be a multiprong revenue machine and any dip should be bought.
This is the type of company that should be part of any multi-asset portfolio.
“I love museums but I don't want to live in one.” – Said CEO of Apple Tim Cook
