Tech Letter Archives - Mad Hedge Fund Trader

The Coming Revolution in 5G

5G is overhyped but that doesn’t mean everyone will be a loser.

The shift to fifth-generation wireless technology, or 5G, will offer investors numerous compelling investment opportunities.

It has been predicted that 5G phone shipments will rise from 17 million this year to 130 million in 2020 and 327 million in 2021.

However, on the flip side of it, 5G, especially for the technically astute consumer and at current prices, is oversold.

At least for 2020.

Some percentage of teens and students will want to watch movies and play high-bandwidth games on their phones but when they discover the data costs, they will retreat from such purchases.

Also, many who hype 5G aren't aware of the technical limitations especially for those outside of certain metro areas.

It could turn out to be a vanity buy for some or most.

It will benefit businesses, of course, but not the majority of the cell phone market. Certainly not in the US.

Even for me, everything I use on my smartphone wouldn’t need 5G.

If there is no noticeable effect, then do consumers really need this technology?

I would say not until something more comes out that requires us to need 5G and I do not see that on the horizon.

Back in the world of the stock market, many analysts understand that RF (radio frequency chip) supply chain companies are compelling in their new growth opportunities for 5G phones.

Even if many consumers do not need 5G, many device makers will splurge on their supply chain to get there, meaning chip companies who sell 5G components will gain.

The marketing of 5G entails the standard hyping-up of the shift to 5G.

And industry participants would say it is substantially important to the semiconductor and telecom industries, but it will take time to absorb on the consumer side.

Analysts expect 5G to deliver speeds 10 to 40 times faster than current 4G LTE networks. Its lower latency promises to enable new applications from augmented reality and automated factories to self-driving and cloud gaming.

But as I referenced above, there are only a handful of consumers that need cloud gaming and augmented reality.

Automated factories work with the current speed of technology and in a global slowdown, corporates will want to wait for a healthier environment to initiate a new CAPEX cycle.

Here are some chip stocks that supply chain could benefit from.

Taiwan Semiconductor Manufacturing (TSM) is a stock with thematic drivers that can potentially benefit from the upcoming 5G renaissance and global supply chain shifts.

TSM has a large foundry and advanced chip-making technology leadership.

Broadcom (AVGO) will also become a vital winner of 5G smartphone adoption while supplying specialized processors for 5G front and back haul.

Broadcom will supply chips to both Apple and Samsung for their 5G smartphones.

The rapid run of chip shares could have more to go for the end of the year as investors have front-run chip stocks for the past few months.

However, I do believe that the downdraft in smartphone demand and connected devices will hurt the end product sales.

Consumers will hold off on buying 5G-supported Huawei, Samsung, and Apple products, meaning chip stocks could stall out after this nice run.

September 20, 2019

Tech Letter

Mad Hedge Technology Letter
September 20, 2019
Fiat Lux

Featured Trade:

(MICROSOFT’S BOLT FROM THE BLUE)
(MSFT)

Microsoft’s Bolt from the Blue

Tech Letter

Microsoft (MSFT) has risen over 565% in the last 11 years and that is why they can boast of surpassing a market cap over $1 trillion every day since June 7.

They are the best tech stock in America that doesn’t have potential anti-trust risk and continue to parade us with their brilliance.

That is the crucial takeaway from their recent announcement that they will initiate a new share buyback program and dividend increase.

This vindicates my call last year that it was the only guarantee in the tech sector to finish higher this year.

To say the stock has generated outperformance is an understatement with the broader market feeling the heat but Microsoft shares mushrooming almost 40% YTD.

The other FANGs of Amazon and Apple have also outperformed the wider market up over 40% themselves.

Even though there has been no trade deal, Apple has benefited from the softening of rhetoric between the two nations.

Striking a deal seems far away but the rhetoric helps massage Apple shares higher.

Microsoft is poised to trudge higher as the hawkish rate cut by the Fed has led equities to price in a global slowdown, current earnings recession, more tech regulation, and uncertainty of more rate cuts.

The net effect is a conspicuously low bar to jump over for Microsoft and the dividend hike and fresh buyback program signal they need no freebies and neither does Microsoft’s shares.

The company has now hiked its quarterly dividend by 10.9% to $0.51 per share from $0.46. Microsoft raised its dividend by 9.5% last September, and by 7.7% in 2017.

The company’s annual dividend of $2.04 per share means a dividend payout ratio of 48%.

Oracle is another legacy company that often rewards shareholders through dividends and share buybacks too.

In its recently reported fiscal 2020 first quarter, Oracle increased its share repurchase authorization by $15 billion.

At the end of the day, strong free cash flow and revenue growth have been the lynchpin to Microsoft’s growth.

They manage to do this with growth divisions like the Azure cloud complementing a robust legacy business.

Microsoft bought back $19.5 billion, $10.7 billion, and $11.8 billion in stock in fiscal 2019, fiscal 2018, and fiscal 2017, respectively.

Microsoft’s double-digit earnings and sales growth grew its operating cash flow to $16.1 billion in fiscal 2019’s fourth quarter and returned $7.7 billion to shareholders through share repurchases and dividends in the quarter.

Consensus expects the company to grow earnings by 10.3% YoY in fiscal 2020 and around 13.5% YoY in fiscal 2021 and the buyback will help boost EPS metrics.

At some point, the law of large numbers will catch up with Microsoft because it’s not easy to grow fast at its size.

Expect shares to motor higher and any and every buyback should be bought while enjoying the higher dividend.

September 20, 2019 - Quote of the Day

Tech Letter

“Our industry does not respect tradition - it only respects innovation.” – Said current CEO of Microsoft Satya Nadella

September 18, 2019

Tech Letter

Mad Hedge Technology Letter
September 18, 2019
Fiat Lux

Featured Trade:

(WHY YOU SHOULD AVOID CHINESE TECH IPOS LIKE THE PLAGUE)
(TSLA), (BIDU), (NIO)

Why You Should Avoid Chinese Tech IPOs Like the Plague

Tech Letter

Millennials usually stick with the stocks that they know.

That’s all fine until it takes a bite out of their wallet.

Some of these decisions based on the products that represent this generation have been stock market disasters of late.

Sadly, many Millennials were too young to catch the ride up for Tesla.

Many older generations got into the stock at $20, $40 and $100 and rode the elevator up with an ultra low-cost basis.

I can’t say the same for Millennials as many came of age and finally had the money to splurge for shares after the stock had plateaued.

This was a cringe-worthy lesson that just because a company has a great product doesn’t always mean the stock is just as great.

Electric Vehicles (EV) are front and center of the Millennial consciousness and that also meant that many scooped up NIO which is the Chinese version of Tesla.

After peaking at $10 in March, the stock is now trading at $3.

Many Chinese IPOs that go public in New York are of a pump-and-dump mentality as they shower the public with losses.

In fact, many Chinese IPOs only have the goal of going public without the goal of doing much more after that.

NIO has yet to be found out completely, but the Chinese economy is hurting and the Chinese consumer has reigned back the purse strings as times become lean.

As we head into a global slow down, electric car companies that lose boatloads of money will be in the firing line for value revaluations.

In fact, I would urge any reader to steer clear of any Chinese company traded on the public markets because of opaque financials that are intentionally obfuscated.

Baidu is another favorite of the Millennial generation pigeonholed as the “Google search of China.”

That moniker is an impressive catchphrase but it doesn’t do much to rejuvenate the large loss in market share that Baidu has ceded to Alibaba and WeChat platforms.

Baidu has lost its mojo and is bleeding usership and it will be hard to reverse it as Baidu never evolved with the changing trends of Chinese consumers.

Baidu peaked in April 2018, at $250 and is now trading at less than $108 and the slide isn’t over yet as Baidu has no adequate response to the domination of the other Chinese tech behemoths.

Yes, many tech trends have legs and are secular shifts that have major ramifications to the global economy.

But the devil is in the details and peels back the layers to be aware of developments such as CEO of Tesla Elon Musk building an American Gigafactory in Shanghai at the worse time in economic history as a legitimate canary in the coal mine.

As robust as the Chinese consumer has been, the latest contagion of African swine flu that culled a major amount of Chinese pigs has raised the price of pork by over 45%.

Chinese consumers are hyper-aware of these economic developments in the year of the pig.

After a massive ride up in Chinese tech shares and electric car story that took many investors breath away, we are at the beginning of a meaningful revaluation that will change the narrative moving forward.

Timing is everything in this game.

September 18, 2019 - Quote of the Day

Tech Letter

“I don't care about revenue.” – Said Founder of Alibaba Jack Ma

September 16, 2019

Tech Letter

Mad Hedge Technology Letter
September 16, 2019
Fiat Lux

Featured Trade:

(GILLETTE’S MARKETING FLUB)
(PG)

Gillette's Marketing Flub

Tech Letter

The pitfalls of getting it wrong can bring you tears.

Proctor and Gamble (PG) got a taste of precisely that.

We underestimate the power of digital marketing and how it can make or break a company’s fortune.

Even many small businesses rely on media platforms such as YouTube, Patreon, Snapchat, Twitter and so on to disseminate their message and nurture their brands.

But what if it goes badly wrong?

The story of personal grooming brand Gillette is a stark warning for companies to stay in their lanes and not reach too far when it comes to their digital marketing campaigns.

Once companies start diving into delicate social issues, they risk alienating half or more of their targeted audience.

In January, Gillette debuted a short film in part of continuing their woke campaign with a self-titled phrase called “toxic masculinity.”

To see the short video please, click here.

Gillette’s underlying message suggested that men in general pose a deep problem in society.

Their self-coined phrase “toxic masculinity” rolls through clips of portraying a young boy being bullied by other boys, sexual harassment, catcalling, and a man speaking over a woman in a meeting highlighting the disappointment in the male gender.

Instantly, the backlash from Gillette’s core demographic, men who shave, were heard from in full force with many shouting from the rooftops for a boycott on Gillette’s and even Procter and Gamble’s products.

Gillette didn’t blink and doubled down on their woke campaign rolling out a “fat acceptance” ad.

They did not stop there and tripled down distributing an ad depicting a father's first time teaching his female-to-male transgender child how to shave.

Gillette were defiant in their beliefs and felt an obligation to dip into social discourse and take a stand for what they think is the right message to sell razors.

Just a mere seven months after Gillette’s social justice campaign began, Gillette's parent company Procter & Gamble took an eye-popping $8 billion write-down citing a painful charge for Gillette’s personal grooming division.

The company would have produced net profits without this ghastly charge.

Granted that Gillette was already having a tough time selling more razors as a combination of trends and demographics decrease the volume of male shaving, but the exacerbation of underperformance was purely due to the revolt against the digital marketing campaign which drove away their core customer.

Gillette’s excuse was currency fluctuations and increasing competition but that can in no way explain the giant uptick in customer deterioration.

Management’s strategy of profiting from woke capitalism on the back of the #MeToo movement blew up in their face and many men chose to respond with their wallets.

This also represents the viral nature of digital marketing in 2019 and it really works both ways.

It also indicates how powerful these tech platforms are as the cradle of human discourse and underscores how reliant even the largest of corporations are on digital marketing through the likes of Instagram, Facebook, Google, Amazon and the who’s who of Silicon Valley.

September 16, 2019 - Quote of the Day

Tech Letter

“A squirrel dying in front of your house may be more relevant to your interests right now than people dying in Africa.”