“New technology is not good or evil in and of itself. It's all about how people choose to use it.” – Said Writer Jason Pargin
Mad Hedge Technology Letter
September 25, 2019
Fiat Lux
Featured Trade:
(WHAT’S BEHIND THE NETFLIX SLIDE)
(DIS), (NFLX), (AAPL), (T)
Don’t blame the weatherman for the weather forecast.
The writing is on the wall.
Television is dead as the latest iteration of the Emmy’s bombed, reaching just 10.2 million viewers who tuned in to watch Amazon's "The Marvelous Mrs. Maisel" win best comedy and "SNL's" Michael Che and Colin Jost charm the audience.
The paltry numbers were a follow-up to last month's MTV Video Music Awards which reached a record low of 5.23 million viewers, scoring lower ratings than that night's network evening news broadcasts.
Why are viewers dropping like a dead fly on the wall?
It’s difficult to deduce but live TV events including the Super Bowl have lost viewership across the board.
I would attribute part of the blame to the death of the shared center in the American experience.
There are just too many content alternatives.
Viewers have a bevy of channels to choose from and if they aren’t watching television, they have already cut the cord.
This development has removed many millennials out of the traditional TV viewership pool.
To economize time, many consumers review the highlights through a truncated version on YouTube too.
As for the Emmys, the high quantity of content available online means that many people do not even know what shows are up for awards anymore.
We are at “peak tv.”
And the development of content could simply mean that award shows aren’t interesting anymore.
Nobody has time to sit around for hours of commercials when Netflix is one click away.
We have never had so much content before.
Does that mean investors should all buy Netflix and the world is all well and good?
It did before but we need to revisit their narrative.
Netflix doesn’t exist in a vacuum and the internet content space is a fluid situation.
They scooped up the lion shares of the spoils when on-demand streaming content was a monopoly which in fact was an industry created by them.
But the launch of services that could threaten its top position has crashed Netflix’s (NFLX) shares and they are now negative for 2019.
Shares were trading around a comfortable $380 just three months ago and have parachuted down to $250 today.
The alarming underperformance in shares goes hand in hand with an avalanche of negative news engulfing the company.
One of its most popular legacy show “The Office” was sent packing back to its originators NBC, then Netflix followed off that nasty bit with an earnings report that showed negative domestic new subscriber growth for the first time since 2011.
The growth in the international part of the business was underwhelming too, to say the least.
Without much time to recover, Apple (AAPL), Disney (DIS), NBC, and AT&T (T) announced plans to debut new streaming services that would peel off a substantial amount of Netflix demand.
This news, in effect, puts a cap on Netflix raising the price for their streaming service while confronted with the dreadful future of needing to pay higher prices to generate premium content.
The premise behind Netflix was always the super growth engine that superseded any negative aspects.
To add a little more color, most of these new streaming services are priced to undercut Netflix and investors must wonder how Netflix will be able to overcome these various headwinds at a time when growth companies are getting punished by an outsized rotation to value.
I believe that a dead cat bounce should be met with selling short Netflix.
“Broadcast TV is like the landline of 20 years ago.” – Said CEO and Founder of Netflix Reed Hastings
Mad Hedge Technology Letter
September 23, 2019
Fiat Lux
Featured Trade:
(THE COMING REVOLUTION IN 5G)
(MSFT), (TSM), (AVGO)
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.
Mad Hedge Technology Letter
September 20, 2019
Fiat Lux
Featured Trade:
(MICROSOFT’S BOLT FROM THE BLUE)
(MSFT)
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.
“Our industry does not respect tradition - it only respects innovation.” – Said current CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
September 18, 2019
Fiat Lux
Featured Trade:
(WHY YOU SHOULD AVOID CHINESE TECH IPOS LIKE THE PLAGUE)
(TSLA), (BIDU), (NIO)
