“When you offer consumers choice, let them vote with their wallets.” - Said Co-Founder of Airbnb Nathan Blecharczyk
Mad Hedge Technology Letter
March 13, 2019
Fiat Lux
Featured Trade:
(NVIDIA STEPS UP ITS GAME),
(NVDA), (INTC), (MSFT), (ANET), (CSCO), (MCHP), (XLNX)
Nvidia (NVDA) was right to pull the trigger – that was my first reaction when I first learned that they had aggressively acquired Israeli chip company Mellanox for $6.9 billion.
The fight to seize these assets were fierce triggering a bidding war -American heavyweights Intel and Microsoft were also in the mix but lost out.
CEO of Nvidia Jensen Huang touted the importance of the deal by explaining that “the emergence of AI and data science as well as billions of simultaneous computer users, is fueling skyrocketing demand on the world's data centers."
Therefore, satisfying this demand will require holistic architectures that connect massive numbers of fast computing nodes over intelligent networking fabrics to form a giant datacenter-scale compute engine.
Mellanox and its capabilities cover all the bases for Nvidia and will nicely slot into its portfolio offering, an added bonus of cross-selling and upselling opportunities to existing clients.
The strategic motives behind the deal are plentiful with increased importance of connectivity and bandwidth enhancing Nvidia's ability to provide datacenter-scale computing across the full stack for next-generation high-performance computing and AI workloads.
The agreement is the result of the company's shift toward next-gen technology as adoption of cloud, AI, and robotics ramps up and Nvidia will be at the forefront of this massive migration.
As the fourth industrial revolution advances, Nvidia is best of breed of semiconductor companies and the imminent adoption of 5G will aid the likes of Microchip Technology (MCHP) and Xilinx (XLNX).
Technology is rapidly changing, and the data center is the segment that is accelerating at a faster clip than in previous years translating into de-emphasizing current revenues of gaming and autonomous on a relative growth basis.
These segments will be secondary to the addressable opportunity in data center and signing up Mellanox is a key strategic initiative to exploit this growth opportunity.
Missing the boat on this compelling opportunity could have dragged Nvidia into an existential crisis down the road as the missed opportunity costs of lucrative data center revenues would begin to bite, and with no quick fix on the horizon, Nvidia’s growth drivers would be potentially disarmed.
Investors need to remember that Nvidia derives half of its revenue from China and up until this point, gaming had been a huge tailwind to its total revenue, however, the Chinese communist party has identified gaming addiction in young adults as a national crisis and have been refusing to deliver new gaming licenses to gaming creators.
As the data center via the cloud begins its next ramp-up of insatiable demand, Nvidia was acutely aware they could not miss the boat and to grab a foot hole against larger player Intel.
Almost overpaying to have more skin in the game does not do justice to what the ramifications would have been if Intel or even Microsoft were able to hijack this deal.
The two-fold victory will in turn boost sales of Nvidia's data center products long term while depriving Intel of extending the lead in data center.
And after the lack of recent underperformance in the prior quarter, Nvidia needed a gamechanger to cauterize the blood flow.
Nvidia's total revenue plunged more than 24% YOY in Q4 of 2018, and shareholders have been looking for remedies, especially after the once mythical cryptocurrency business blew up and the company was stuck with a glut of inventory.
The purchase of Mellanox will help Nvidia start competing with other dominant players like Cisco Systems (CSCO) and Arista Networks (ANET).
Mellanox is one of a handful of firms selling hardware that connects devices in the data center through network cards, switches, and cables.
The deal still needs regulatory approval and could be a stumbling block if Chinese authorities drag this into the orbit of the trade war and make it a bullet point in negotiations.
The net result is positive to the overall business model, and this move will breathe oxygen into Nvidia’s long-term narrative with a flow of revenue set to come online once the 5,000 Mellanox employees are integrated into Nvidia’s levers of operation.
Shares should be the recipient of short-term strength and after getting smushed by a poor last quarter, there is substantial room to the upside.
A dip back to $150 would serve as a good entry point to strap on a short-term bullish trade in Nvidia shares.
Mad Hedge Technology Letter
March 12, 2019
Fiat Lux
Featured Trade:
(FIREEYE’S LAST LINE OF DEFENSE),
(FEYE), (MSFT), (AMZN), (GOOGL), (ORCL), (EFX), (IBM)
A potential cataclysmic threat potentially wreaking havoc to our financial system is no other than cybercrime – that is one of the few gems that Fed Chair Jerome Powell delivered to the American public in a historic interview with 60 Minutes this past weekend.
Powell has even gone on record before claiming that Congress should do “as much as possible (against cybercrime), and then double it.”
The Fed Chair clearly has intelligence that retail investors wish they could get their hands on.
Digital nefarious attacks have been all the rage resulting in public blowups at Equifax (EFX) and North Korea’s state-sponsored hack on International Business Machines Corporation (IBM) just to name a few.
At the bare minimum, this means that cybersecurity solution companies will be the recipients of a gloriously expanding addressable market.
Powell’s testimony to the public was timely as it provides the impetus for investors to look at cybersecurity firms that will actively forge ahead and protect domestic business from these lurking threats.
Considering a long-term investment in FireEye Inc. (FEYE) at these beaten down prices could unearth value.
For all the digital novices, FireEye offers cybersecurity solutions allowing organizations to pre-emptively plan, prevent, respond to, and remediate cyber-attacks.
It offers vector-specific appliance, virtual appliance, and a smorgasbord of cloud-based solutions to detect and thwart indistinguishable cyber-attacks.
The company deploys threat detection and preventative methods including network security products, email security solutions, and endpoint security solutions.
And when you marry this up with my 2019 underlying thesis of the year of the enterprise software subscription, this company is on the verge of a breakout.
Last year was a year full of milestones for the company with the firm achieving non-GAAP profitability for the full year for the first time and generating positive operating and free cash flow for the full year.
The company was able to attract new business by adding over 1,100 new customers.
The cloud is where the company is betting all their chips and crafting the optimal subscription-as-a-service (SaaS) product is the engine that will propel the company’s shares higher.
The heart of their cloud initiative relies on Helix - a comprehensive detection and response platform designed to simplify, integrate and automate security operations.
This intelligence-led approach fuses innovative security technologies, nation-grade FireEye Threat Intelligence and world-renowned expertise from FireEye Mandiant into FireEye Helix.
By enhancing the endpoint products and email protection, sales of both products exploded higher by double digits YOY as FireEye successfully displaced incumbent vendors and legacy technology to the delight of shareholders.
As a result, the firm’s pipeline of opportunities continues to build.
As for network security, FireEye plans to extend the reach of their market-leading advanced threat protection capabilities further into the cloud with protection specifically aimed for cloud heavyweights Microsoft (MSFT) Azure, Amazon Web Services (AWS), Google (GOOGL) and Oracle (ORCL) Cloud.
They are collaborating with these major cloud providers on hybrid solutions that integrate seamlessly with their technologies so FireEye solutions will easily snap into a customer's cloud deployments.
Cloud subscriptions and managed services were the ultimate breakout performer highlighting the successful outsized pivot to (SaaS) revenue.
This segment increased 31% sequentially and 12% YOY, highlighting underlined strength in the segments of managed defense, standalone threat intelligence, Helix subscriptions, and cloud email solution.
The furious growth was achieved even though Q4 2017 billings included a $10 million plus transaction and if this deal is excluded, cloud subscriptions and managed services would have grown more than 30% YOY in Q4 2017 demonstrating the hard bias to the cloud has been highly instrumental to its success.
Recurring billings expanded 12% YOY, a small bump in acceleration from 11% in Q3, but if you remove that big deal in Q4 '17, recurring billings grew over 20% YOY in Q4 2018.
The growing chorus of product satisfaction can be found in the customer retention rate of 90%.
Transaction volume was at record levels for both deals greater than $1 million and transactions less than $1 million, signaling not only that customer renewals are expanding, but also explosion of new revenue streams captured by FireEye is aiding the top line.
This story is all about the recurring revenue and I expect that narrative to perpetuate throughout 2019 as an overarching theme to the strength of the firm’s revenue drivers.
The 10% billings growth last quarter paints a more honest trajectory of the true growth proposition for FireEye.
I believe the 6%-to-7% revenue guide for fiscal 2019 is down to the accounting technicals manifesting in the appliance revenue that is fading from the overall story.
The solid billings growth underpinning the overall business meshing with diligent expense control is conjuring up a massive amount of operating leverage.
Shares are undervalued and offer an attractive risk versus reward proposition.
If the company delivers on its core growth outlook, which I fully expect them to do plus more, shares should climb over $20 barring any broad-based market meltdowns.
I am bullish FireEye and urge readers to wait for shares to settle before putting new money to work.
“It takes 20 years to build a reputation and few minutes of cyber-incident to ruin it.” Said Global Chief Information Security Officer at Société Générale International Banking Stéphane Nappo
Mad Hedge Technology Letter
March 11, 2019
Fiat Lux
Featured Trade:
(THE BEST TECH PLAY IN HEALTHCARE),
(ISRG), (GOOGL), (JNJ)
Seeking for a great long-term buy and hold tech name?
Then look no further than Intuitive Surgical, Inc. (ISRG).
Intuitive Surgical develops and produces robotic products designed to enhance clinical outcomes for patients through minimally invasive surgery, its most well-known product is the da Vinci surgical system.
Healthcare is one sector that I have rarely touched on, but not only will this cross-pollination with tech serve a social good, investors have a chance to rake in future profits.
The da Vinci systems and Intuitive Surgical are the best of breed and have had almost zero competition in the past 20 years.
The systems are placed in operating room used for invasive surgery for various types of ailments from cancer to hernia, and the systems were successfully used over one million times for surgery last year.
The da Vinci systems aren’t cheap – they cost $1.5 million and the customers, usually the hospitals, buy the add-ons of extra parts and supplies that inflate the price another $1,900.
As you would expect, net profit margins are compelling, being over 30% which e-commerce companies would give a left leg for translating into numbers that make the company incredibly profitable.
The story of the da Vinci systems starts way back in the 80s with the Defense Advanced Research Projects Agency (DARPA) hoping it could figure out how to offer surgeons the ability to operate remotely on soldiers wounded on the battlefield.
SRI International (SRI), an American nonprofit scientific research institute and organization took the painstaking time to develop the technology.
SRI's intellectual property was eventually acquired in 1994 and incorporated a new company named Intuitive Surgical Devices by the founders.
It took another 4 years for the FDA (Food and Drug Administration) to finally approve usage of the da Vinci Surgical System.
The first available surgery was for general laparoscopic surgery used to address gallbladder disease and gastroesophageal disease.
The next year saw another harvest of approvals with the FDA giving the green light to use the system for prostate surgery.
The approvals started to flow like a waterfall with thoracoscopic surgery, cardiac procedures performed with adjunctive incisions, and gynecologic procedures also approved by the FDA.
Fast forward to 2019 and the company couldn’t be financially healthier looking back at the year of 2018 in review.
Instruments & Accessories revenues came in at $1.96 billion comprising 52.7% of total revenue.
System sales crushed it with $1.13 billion, growth of 30.3% YOY and service sales amounted to $635.1 million up 17% YOY.
And in the latest quarter, Intuitive Surgical reported 19% YOY growth in worldwide da Vinci procedure volumes which contributed to bumping up revenue 18% YOY in the instruments and accessories segment.
The company is seeing the same type of success abroad with foreign revenues totaling $307 million, up 24% YOY.
Intuitive Surgical installed 115 systems in the previous quarter outside of America compared with 86 in the quarter before last.
55 of these new systems were installed in Europe, 31 in Japan, and nine in Brazil.
Procedure growth is forecasted to expand between 13-17%, fueled by U.S. general surgery and procedures.
Unfortunately, the stock sold off after earnings because adjusted operating expenses are expected to rise 20-28% reminding investors that the stock can’t always move up in a straight line.
The harm to operating margins is a tough pill to swallow in the short-term, but that does not take away the gloss from this leading tech company.
Intuitive Surgical plans to branch out from the da Vinci systems with its new Ion system, a robotic-assisted bronchoscope awaiting FDA clearance, a revolutionary way to kill cancer cells inside the lung.
After decades of unbridled market leadership, there are a few icebergs ahead in the distance in the form of competition.
Verb Surgical, a collaboration between Johnson & Johnson (JNJ) and Alphabet (GOOGL), will enter the healthcare robot surgery market in 2020.
Johnson & Johnson recently indicated it will splurge $3.4 billion in cash for Auris Health, a robotics startup with a device to perform lung biopsies that could compete with Intuitive Surgical’s Ion system.
Auris Health was approved by the FDA in March 2018 for this device that performs lung biopsies and Intuitive Surgical promptly sued citing patent infringement.
Auris Health was established by the co-founder of Intuitive Surgical Dr. Frederic Moll who pioneered the field of surgical robotics but left Intuitive in 2003 after 8 years there.
Intuitive could rub up on some more competition in the future, that is a stark possibility, but the pathway to profits are still open as the company rolls out different systems, services, and has the capital to fund new directions.
Hospitals that already have existing relationships with Intuitive will be less inclined to switch over to competing services if they are satisfied with the quality, service, and price points of the equipment.
This will help Intuitive build on the current strong momentum and ensure their products are in the pipeline to be adopted by the next batch of future demand.
Shares of the company are sky-high and expensive with a PE multiple of 55.
The big investment into R&D is in no doubt to fend off the potential competition around the corner, but I view that as a net positive.
It would be logical to wait for a pullback to buy shares, this one is a keeper.
“We think coding should be required in every school because it's as important as any kind of second language.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
March 7, 2019
Fiat Lux
Featured Trade:
(WILL NIO EAT TESLA’S LUNCH?),
(TSLA), (XPENG), (NIO)
