Mad Hedge Technology Letter
December 6, 2019
Fiat Lux
Featured Trade:
(AUGMENTED REALITY IS HEATING UP),
(AAPL), (LITE), (QCOM), (NVDA), (ADSK), (FB), (MSFT), (SNAP)
First, what is augmented reality for all the newbies?
Augmented reality is an interactive experience of a real-world environment where the objects that reside in the real world are enhanced by computer-generated perceptual information, sometimes across multiple sensory modalities.
Augmented reality (AR) went rival in 2016 when the Pokemon Go mania captivated everyone from children to adults.
No sooner than 2021, the AR addressable market is poised to mushroom to $83 billion - a sizeable increase from the $350 million in 2018.
Much like machine learning, corporations are learning to marry up this technology with their existing products supercharging the performance.
Ulta Beauty, for example, has acquired AR and artificial intelligence start-ups to help customers digitally test the final appearance of makeup before users purchase the product.
That is just one micro example of what can and will be achieved.
Looking deeper into the guts, Qualcomm (QCOM) is hellbent on making their chips a critical part of the puzzle.
The company is better known for a telecom and a semiconductor play, not often lumped in with a list of AR stocks.
Qualcomm is strategically positioned to capitalize on the integration of augmented reality in mainstream corporate business embedding their chips into the devices.
Maximizing Qualcomm’s future role in the industry, the company announced in 2018 that it would be developing a chipset specifically for AR and VR applications.
This broad-based solution will make it easier for other developers to bring new glasses to the marketplace.
Autodesk (ADSK) is one of my favorite software stocks and a best of breed of industry design.
They sell 3D rendering software to designers and creators by offering a platform in which they can transform 2D designs into digital models that are both interactive and immersive, creating compelling experiences for end-users.
Autodesk has an array of powerful software suites to augment virtually any application, such as 3ds Max, a 3D modeling program; Maya LT game development software; its automotive modeling program VRED; and Forge, a development platform for cloud-based design.
Facebook (FB) has been piling capital into AR for years.
CEO Mark Zuckerberg wants to create an alternative profit-driver and is desperate to wean his brainchild from the digital ad circus.
One example is Facebook’s Portal TV and its Spark AR which is the platform responsible for mobile augmented reality experiences on Facebook, Messenger, and Instagram.
It supplies the virtual effects for consumers to play around with, but it is yet to be seen if consumers gravitate towards this product.
Lumentum (LITE) is the leader in 3D-sensing markets developing cloud and 5G wireless network deployments.
They manufacture 3D sensor lasers that can be used with smartphones to turn handsets into a sort of radar. Sensors are clearly a huge input in how AR functions along with the chips.
CEO of Apple (AAPL) Tim Cook put it best when he earlier said, “I do think that a significant portion of the population of developed countries, and eventually all countries, will have AR experiences every day, almost like eating three meals a day, it will become that much a part of you.”
He said that in 2016 and AR has yet to mushroom into the game-changing sector initially thought partly because the roll-out of 5G is taking longer than first expected.
Apple consumers will need to then adopt a 5G device or phone to really get the AR party started and that won’t happen until the backend of next year.
My initial channel checks hint that the Cupertino firm is planning a 5.4-inch model, two 6.1-inch devices, and one 6.7-inch phone, all of which will support 5G connectivity.
I surmise that Apple’s two premium devices will feature “world-facing” 3D sensing, a technology that could help Apple boost its augmented-reality capabilities and support other feature improvements on its priciest devices.
Apple has had a big hand in Lumentum's growth and will continue to buy their sensors, but other key component suppliers will get contracts such as Finisar, a manufacturer of optical communication components and subsystems.
Apple planned to debut AR glasses by 2020, but the rollout is now delayed until 2022.
They are clearly on the back foot with Microsoft (MSFT) further along in the process.
Microsoft already has a second iteration of its AR headset, HoloLens, and is compatible with several apps and has integration with Azure as well.
The head start of 2 years could really make a meaningful impact and might be hard for Apple to recover.
Facebook isn’t the only social media company going full steam into AR, Snap (SNAP) recently unveiled its newest spectacles, which feature AR elements.
Another application of AR is autonomous driving with Nvidia working on improving the driving experience by fusing AR with artificial intelligence.
Nvidia (NVDA) is already thinking about the next generation of AR technologies with varifocal displays, which improve the clarity of an object for a user.
It will take time to transform our relationship with AR, the infrastructure is still getting built out and many people just don’t have a device that will allow us to tap into the technology.
Investors must know that AR-related stocks will start to appreciate from the anticipation of full sale adoption and there could be a killer app that forces the mainstream user to take notice.
Until then, companies jockey for position and hope to be the ones that take the lion’s share of the revenue once the technology goes into overdrive.
“If you think you deserve a raise, you should just ask.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
December 4, 2019
Fiat Lux
Featured Trade:
(THE RUSH TO BUY ONLINE),
(AMZN), (WMT), (TGT), (W), (ETSY), (SHOP), (ADOBE)
There are several overarching seminal tech trends that I swear by.
The generational broad-based migration from analog to digital is a critical foundation that underpins the success of not only tech stocks as a unified sector, but the outperformance of the Mad Hedge Technology Letter.
You’ll be pleased to discover that 2019 is right on queue with digital sales exploding by the American consumer over the holiday shopping period and Americans ditching brick and mortar stores in droves.
Amazon (AMZN) broke records on Cyber Monday bragging that in terms of the number of items sold, it had its "single biggest shopping day."
Black Friday was a big success too selling “hundreds of millions" of products between Thanksgiving and Cyber Monday.
Consumers scooped up the toys, home, fashion and health, and personal care products on Amazon’s e-commerce platform.
Hot ticket items on Black Friday included Amazon's own Echo Dot and Fire TV Stick with Alexa Voice Remote, Play-Doh Sweet Shoppe Cookie Creations, Keurig K-Cafe Coffee Maker and LEGO City Ambulance Helicopter Kit.
Adobe (ADBE) Analytics estimates that the sales for the shopping bonanza easily eclipsed $29 billion, or 20% of total revenue for the full holiday season.
This is the aha moment when digital integration into shopping forced a paradigm shift to the business environment by capturing the focal point of American wallets.
Digital used to be the minority, but going forward, it will dictate the terms of engagement.
What does this mean in the bigger scope of things?
Mobile is the biggest winner of this brave new world.
Shopping apps gave consumers the platform to use their phones as a digital wallet.
Salesforce data discovered that Thanksgiving sales as a proportion of U.S. digital sales grew 17% and mobile sales rose 35% on Black Friday with 65% of total e-commerce executed through a mobile device.
“Black Friday broke mobile shopping records and even when shoppers went to stores, they were now buying nearly 41% more online before going to the store to pick up,” said Taylor Schreiner, principal analyst and head of Adobe Digital Insights.
Shopify (SHOP) did over $900 million in sales this year and 69% were from phones and only 31% from desktop computers.
Black Friday was "the biggest day ever for mobile," tracking $2.9 billion in sales from smartphones alone, or 39% of all e-commerce sales, a 21% increase year over year.
The data also showed that smaller e-commerce outfits had a harder time driving sales than large e-commerce platforms.
The network effect truly works both ways and the success of the biggest and best also correlated to a meaningful decline of physical shopping visit to stores of 6% on Black Friday.
According to The NPD Group's Holiday Purchase Intentions Survey, 20% of sales were picked up in the store. This click-and-collect business has been a huge winner for the likes of Walmart (WMT).
E-commerce leaders are having enormous success introducing omnichannel approaches to the selling channels.
The average order value on Black Friday rose 5.9% year over year to $168, a new record, in part because shoppers have become more comfortable buying expensive items online because the sales are even juicier.
Unfortunately, the rise in volume has meant lower margins.
Discounts averaged between 37% to 47% and home and consumer electronics products were popular.
With all the rumblings of tariff trauma and an approaching recession, the American consumer displayed robustness that largely met the consensus of analysts.
The takeaway is that e-commerce is as healthy as ever and should prolong not only the strength in e-commerce companies but the overall American economy.
The winners are the behemoths of Amazon, Target (TGT), Shopify, and Walmart. Shares should receive a moderate tailwind through the New Year.
Avoid smaller niche players like Etsy (ETSY) and Wayfair (W).
“We want Google to be the third half of your brain.” – Said Co-Founder of Google Sergey Brin
Mad Hedge Technology Letter
December 2, 2019
Fiat Lux
Featured Trade:
(THE DRONE WARS HAVE STARTED),
(DJI), (AMZN), (WMT), (UBER), (GOOGL), (FDX), (UPS)
Drones whip by like mini whirling dervishes but are actually hardworking aerial robots that carry out surveillance and inspections for utilities, construction sites, airplanes, and trains from onboard cameras.
Drone delivery appears to be the next transportation bottleneck in the e-commerce wars as Amazon (AMZN) and Uber (UBER) pile capital investment into the technology.
In 2013, Founder and CEO of Amazon Jeff Bezos audaciously said that Amazon would have drone delivery operational by 2018.
But the Federal Aviation Administration (FAA) did not acquiesce to Bezos’s ambitious timeline.
Progress has been slow.
When it comes to consumer appetite, the demand for drones will be voracious but only if delivered in a way to add value to the customer experience.
The last thing the world needs is billions of unmanned drones polluting the sky and parked in the sky.
More than 60% of consumers would accept the delivery of dry goods through a drone delivery service, it contrasts to only 26% of fresh produce or meat.
Clearly, fresh foods are more complicated to deliver because of temperature requirements to accommodate the products, and more R&D will need to take place to find a solution.
“When we (Amazon) have a full drone fleet, you'll be able to order anything and get it in 30 minutes if you live near a hub that's serviced by drones," said Amazon’s CEO of Worldwide Consumer Jeff Wilke
Amazon has spent more than six years developing drones which may one day drop packages in backyards assuming regulators green light it.
Timely delivery is important but the diversity of products that can be delivered is just as important.
This is not a one-size-fits-all solution.
Amazon has already ravaged through more than $35 billion on shipping costs this year, more than double what it spent two years ago.
It is yet to be determined whether the four-wheeled delivery robots they are testing that roll on sidewalks will ultimately be slipped into the delivery process, but at least they are making headway and allocating new resources to it by announcing plans for a new facility outside Boston to design and build robots.
Major companies such as Alphabet (GOOGL), FedEx (FDX) and UPS (UPS) are all investing in drone delivery all hoping to be the ones to lead this industry in the future.
The drone battles are taking place under the backdrop of military and political gamesmanship because drones have a large and legitimate role in military affairs.
Even though America’s e-commerce companies hope to take drones and nicely fit it into their delivery service, America is not even close to dominating.
One word – China.
The US-China Economic and Security Review Commission recommended that the US government promote advanced manufacturing and robotics technologies, monitor China’s advances, review bilateral investments and cooperation, and consider closely vetting proprietary academic research.
The Shenzhen, China-based drone company DJI Technology is the dominant worldwide market leader in the civilian drone industry, accounting for over 75% of the global drone market.
In 2017, the U.S. Army banned the military application of DJI drones because the Pentagon was worried that DJI would leak data to the Chinese government.
In 2018, the Defense Department banned the purchase of all commercial off-the-shelf unmanned aircraft system (UAS).
An amendment from Sen. Chris Murphy in the 2020 defense policy bill would ban all Chinese-made drones and Chinese-manufactured parts from military purpose.
DJI’s dramatic rise in the drone race has been nothing but breathtaking dwarfing Western competitors such as France’s Parrot.
They are cost-effective, making them the go-to product for individual consumers.
China has not only succeeded in pulling ahead in the drone wars, but are also pushing the envelope in areas like hypersonic weapons, artificial intelligence, and 5G.
The U.S. military has limited options now because of a generation of underinvestment and inactivity causing a dwindling of U.S. supply of the smallest class of unmanned aerial systems (UASs) that are needed for reconnaissance missions.
DJI has a near-monopoly for one of the most important pieces of technology moving forward.
“We don’t have much of a small UAS industrial base because DJI dumped so many low-price quadcopters on the market, and we then became dependent on them,” said Ellen Lord, the Pentagon’s chief weapons buyer. “We want to rebuild that capability,” she added.
China’s DJI was hit by the recent tariff tsunami levied by the U.S. administration and the drone maker has decided to pass on the cost to the consumer.
DJI has also been banned from bidding for any U.S. military contracts because the Trump administration has concerns that DJI is a national security threat.
DJI reacted to the move by commenting that they are “obviously false” and is “unsubstantiated speculation.”
The second tranche of tariffs, which is scheduled to go live on December 15th, will put an additional 15% tariff on virtually everything that comes to the United States from China, including laptops, smartphones, and drones.
The DJI Mavic Air, now costs $919 on Best Buy instead of $799. Similarly, the DJI Mavic 2 Pro which I have crowned as the best drone to buy in 2019 will cost $1,729, up from $1,499.
Apart from DJI, China has state money pouring into the sector with the most cutting-edge drone technology in the works called Tianyi quadcopter built by a subsidiary of a state aerospace corporation.
It is designed to carry out ground-level reconnaissance and hyper-targeted strikes in cities.
The unmanned aerial vehicles (UAV) are still in the works, but once ready, could be available on the international market as a cheap and versatile option widening the gulf between America’s military in drone technology.
The drone is designed to be controlled by soldiers on the ground, has an operational distance of 5km (3 miles) and has a vertical range of 6km.
It will be loaded with infrared and laser detectors to enable night surveillance operations and is armed with two 50mm rockets designed to strike from up to 1km.
Sadly, there are no quality drone plays on the American public markets that I can confidently recommend.
The seriousness of the lack of investment really appears in the weakness of U.S. military drone capabilities and on the consumer side of things, drones will be a supercharger input to revenue growth for the likes of Walmart (WMT), Amazon, and the e-commerce companies.
It might be time to wake up and support the creation of a national champion in this critical technology then spin off the commercial synergies in similar fashion to how the personal computer and the internet developed.
The longer we wait, the further we fall behind.
DJI Mavic Air for $919
“We made an entry-level product to prevent competitors from entering a price war.” – Said CEO of DJI Frank Tao
Mad Hedge Technology Letter
November 27, 2019
Fiat Lux
Featured Trade:
(THE SAD TRUTH ABOUT DIGITAL MARKETING),
(FB), (YELP), (GOOGL)
