Mad Hedge Technology Letter
August 15, 2018
Fiat Lux
Featured Trade:
(HOW TO PLAY THE NEW FORTNITE GAMING FAD),
(ATVI), (EA), (AMD), (NVDA), (MSFT), (AAPL), (GOOGL), (TWTR), (SNAP), (FB), (SPOT), (GAMR)
Each generation grows up in its own unique environment.
Childhood experiences differ more and more as the world rapidly changes because of hyper-accelerating technology.
Millennials are usually defined as children born between 1981 to 1996.
They were the last generation to grow up outside breathing crisp, fresh air and meandering around the neighborhood with their friends looking for excitement.
Generation Z is the first generation in America generally raised indoors because of their overwhelming preference and broad-based addiction to technology.
Social media stocks have been a huge winner from this new paradigm shift in the behavior of young adults.
Instead of running around the block in packs, children are laser focused on these platforms communicating with the entire world and propping up their social lives.
Children meet a lot less than they used to and convening on a social media platform of choice has become the new normal.
Platforms such as Twitter (TWTR), Instagram and Snapchat (SNAP) have convincingly won over these new eyeballs even so much so that the new "going out" is congregating on Snapchat with a group of friends.
Facebook (FB) is now considered a legacy social media platform full of millennials and the older crowd.
Generation Z do not fancy drugs or drinking like the youth before them, rather, their panacea is video games and a lot of them.
These new societal trends will hugely affect your portfolio going forward.
A battle royal game is a video game category mixing the survival, exploration and scavenging elements together with last-man-standing gameplay.
These types of games predominantly contain 100 players sharing the same experience on a broadband connection.
This genre has been all the rage with PlayerUnknown's Battlegrounds (PUBG) piling up 400 million gamers across the globe selling 50 million copies of the game.
Of the 400 million gamers, 88% access the game via mobile devices highlighting the vigorous shift to mobile for younger generations.
PUBG made more than $700 million in sales in 2017.
The rise of the billion-dollar video games is alive and well.
In fact, Activision Blizzard (ATVI) stakes claim to eight gaming franchises commanding more than $1 billion in annual revenue with titles such as Overwatch, Candy Crush, and Call of Duty.
The popularity of video games will drive GPU manufacturers Nvidia (NVDA) and AMD (AMD) to new heights because gamers require high-quality GPUs to effectively game.
Nvidia CEO Jensen Huang even spouted that "the success of Fortnite and PUBG are just beyond comprehension" boosting GPU sales and capturing the imagination of global youth.
Fortnite, a "Hunger Games" style battle royal video game mirroring PUBG, has taken the world by storm in 2018.
This cultural juggernaut surpassed the 125 million gamer mark in just one year.
In February 2018, Epic Games, the maker of Fortnite, earned $126 million in one month, and it was the first time it passed PUBG in monthly sales.
In April 2018, it followed up monster February numbers by pulling in $296 million.
The growth trajectory is parabolic. Hold onto your hats.
Fortnite sparkles in the sunlight because its free-to-play model does not exclude anyone and is available on all devices.
At first, Fortnite was available for iOS customers and Samsung Android holders because it inked an exclusive deal with Samsung.
This week is the first week Epic Games is rolling out Fortnite to non-Samsung Android users with an interesting caveat.
The Android version of Fortnite bypasses Google Play (Google's app store on Android) preferring to sell the game direct for download from its official website.
This highlights that content is truly king.
Epic Games is betting the surge in popularity for its juggernaut game will sell itself.
This decision will cost Alphabet (GOOGL) $70 million per year in commission.
Apple makes it mandatory that any app downloaded to its devices must be downloaded from Apple's app store.
However, Android doesn't have the same requirements as its system is more functional, open, and a developer's dream.
Simply put, there are ways to download the game on Android without ever touching Google Play.
Going forward this could have a similar effect Spotify (SPOT) had on Wall Street on its IPO.
The middlemen or broker app could get bypassed in favor of direct sales.
Apple pockets commission on 30% of all in-app spending raking in around $60 million from Fortnite.
In-game add-on revenue is how Fortnite makes money from this free-to-play game.
The bulk of spending comes in the form of costumes better known as skins, where players pay to dress up their character in various garments selected for purchase.
The other revenue stream is a season subscription on sale for $10.
The tech sector has been migrating to subscription-based offerings and video games are no different.
This could play havoc with Alphabet's Google Play and Apple's app store down the line if prominent content producers choose to bypass their stores to sell directly.
The lack of video game exposure to the FANG group is mind-boggling. It seems they have their finger on the pulse of every other major trend in technology but have missed out on this one.
Microsoft (MSFT) is the closest FANG-like stock deep inside the video game ecosphere by way of its famous console Xbox.
In fact, Microsoft earns more than $10 billion per year from its gaming segment surpassing Nintendo at $9.7 billion per year.
This doesn't eclipse Sony's gaming revenue, which is $17 billion per year, but the 36% YOY growth in Xbox-related revenue signals its intent in the gaming industry that plays second fiddle to its cloud and software businesses.
Gaming is just a side business for Microsoft right now.
Ironically, Tencent has a 40% stake in Epic Games and is patiently waiting for government approval to sell Fortnite in China, which could be painstakingly arduous.
If Tencent gets the green light, Fortnite could develop into a monster business in 2018, and this is just the beginning.
Regrettably, Tencent has been mired in regulatory issues with the communist government reluctant to approve selling in-game products, which usually make up the bulk of revenue.
Recent blockbuster hit "Monster Hunter: World" was blocked by censors after debuting to great fanfare on August 8, 2018.
This title was expected to be one of the most popular video games of 2018.
Chinese state censors are on a short-term crusade to block the video game industry from receiving critical licenses and is the main reason for Tencent shares' headwinds.
Tencent shares peaked in January and are down almost 15% in 2018 because of uncertain gaming revenues.
Investors need to wake up and understand the gaming industry is about to mushroom because of demographics and the migration away from outdoor activity.
Following generations will have an even stronger bias toward technology-based indoor entertainment.
We are entering into the unknown of $4 billion per year video game businesses based on just one title and not one company.
Fortnite made PUBG's $700 million in revenue last year look paltry.
Gamers will soon see the rise of a $5 billion game franchise in 2019 and the sky is the limit.
This industry has growth, growth, and more growth and these single titles could surpass revenue of large semiconductor or hardware companies.
Don't underestimate the power of your child gaming away in your basement, he or she is part and parcel of a wicked tech growth driver about which not many people know.
Unfortunately, Epic Games is not a public company and shares cannot be purchased, but the success of Fortnite means that investors must pay heed to these new developments.
I am highly bullish on the video game sector and a big proponent of Activision (ATVI). A secondary name would be EA Sports (EA), which curates the Madden and FIFA franchises.
ATVI has felt the Fortnite effect in its share price selling off 11% because of investors' nervousness of Fortnite siphoning off ATVI gamers.
This short-term drop is a nice entry point into a solid video gaming company with various successful franchises that have withstood the test of time.
The 200-day moving average has provided ironclad support on the way up, and the Fortnite phenomenon won't last forever.
I would avoid the video game ETF ticker symbol GAMR because it includes one of my bona fide shorts - GameStop (GME).
It's mainly comprised of American, Japanese, and a Korean name but it would be sensible to focus on the companies with the highest quality comprehensive content.
The ETFs recent drop is also due to the strength of Fortnite.
________________________________________________________________________________________________
Quote of the Day
"Companies in every industry need to assume that a software revolution is coming." - said Silicon Valley venture capitalist Marc Andreessen.
Mad Hedge Technology Letter
August 14, 2018
Fiat Lux
Featured Trade:
(BUY ADVANCED MICRO DEVICES ON THE INTEL STUMBLE),
(AMD), (NVDA), (INTC)
It's not an ideal time to own chip stocks because of the trade war jading the chip sector that has inextricable revenue links to mainland China.
But if you feel audacious and want a name to sink your teeth into that is hitting all the right notes, readers must look at Advanced Micro Devices, Inc. (AMD).
After all, what follows a trade war is trade peace, and the chips are the most oversold tech sector out there.
Intel Corporation's (INTC) loss is (AMD)'s gain.
It's a zero-sum game where companies are battling for the same contracts.
Chip companies are under relentless pressure to innovate and enhance bit growth and chip capacity.
They spend billions of dollars to retain and expand their talent pool and on R&D to produce the type of high-end chips for which end product companies clamor.
Sometimes, the development process stifles, delaying chip production and delivery of the chips.
Intel botching the 10nm (nanometer) process technology is a kick in the teeth opening up the pathway for (AMD) to harvest further market share gains.
Intel is experiencing a management crisis as of late with former CEO Brian Krzanich resigning in humiliation after details of an inappropriate relationship with an employee surfaced which breached company rules.
The delay is further proof that Intel fails to execute and develop chips relative to competition, and these announcements hurt investor sentiment and the bottom line.
AMD's comparable 7nm Rome is set to hit the market six to nine months before the Intel chips.
This time frame will allow AMD to make an all-out assault on the CPU market and adoptees will be plenty.
The recent success of AMD has coincided with the heaps of innovation generated by this reinvigorated company.
Namely the Radeon GPUs and Ryzen mobile processors have knocked the cover off the ball.
The Ryzen processors are hot because of their competitive power mixed together with a relatively lower cost.
With Intel on the back burner, these prominent chip models will boost earnings growth for AMD in the short term explaining AMD's meteoric rise from a year-to-date low of $9.50 on April 3, 2018, to an intraday high of more than $20 on July 30, 2018.
Any company that doubles in four months warrants my attention.
How did this all happen?
December 1, 2005 represented the high-water mark for (AMD) when shares surged past $40 only to crumble like a stale cookie down to $2 on September 1, 2008.
The price action was nothing short of horrific, and the three years of sequential decline was an investors nightmare.
The story starts in 1993 when AMD created a 50-50 partnership with Fujitsu called FASL to manufacture flash drives.
This monumental loss-making subsidiary later changed its name to Spansion and tore into AMD's profitability losing more than $250 million in its last nine months being an arm of AMD.
AMD divested from this business with Spansion spinning itself out into its own public company.
Spansion was a disaster operating solo leading the company to file for Chapter 11 bankruptcy on March 1, 2009 and sacking 3,000 employees without severance pay.
AMD's turnaround started in 2014 when it hired Dr. Lisa Su who was once vice president of IBM's semiconductor research and development center.
She replaced Rory Read whose PC background made him highly expendable and unsuitable for the future of AMD as well as lacking the technical pedigree to make the decisions for the long-term vision of AMD.
His background as chief operating officer of Lenovo Group, Ltd. influenced him to heavily bet the ranch of the PC flash drive market, which has been in sequential decline for years.
This masterstroke is paying dividends for AMD.
Out of the gates, Lisa Su presented her vision in May 2015 when she detailed her long-term blueprint focusing on developing high-performance computing and graphics technologies for three growth areas: gaming, datacenter, and "immersive platforms" markets.
The change in direction worked out for AMD increasing top-line growth from $4 billion in 2015 to $5.33 billion in 2017.
The outperformance continues with AMD ringing in $3.41 billion for the first two quarters of 2018.
Because of Lisa Su, AMD chips found their way into Microsoft Xbox consoles among other businesses and the long-term vision is playing out positively to the benefit of shareholders.
AMD goes mano a mano with Nvidia (NVDA) in the highly lucrative GPU segment and data center.
Many analysts believed there was no way to come out of this unscathed. But as we have found out, this market is not a winner-takes-all market and there is space for other players to take a piece of the pie.
The Data Center market is poised to eclipse $70 billion by 2021.
AMD server chip projects to command 5.5% of market share in 2019, up from the 2.2% market share in 2018.
Two years later should be even healthier for AMD whose market share will rapidly grow to around 9.5%.
Crypto mining-based purchases of AMD GPU's were all the rage in 2017 with their products flying off shelves like hotcakes.
Last year saw crypto mining make up a material 10% of revenue because of Bitcoin's dazzling run up to $20,000.
High demand for Ryzen and Radeon products continues unabated and this segment will take in more than $4 billion in 2018.
This division's performance is the main reason why AMD annual revenues will increase 47% YOY in 2018 after a YOY rise of 50% in 2017.
Not only are GPU chips needed for crypto mining, the main buyers of GPU are companies developing artificial intelligence and machine learning.
The data center business is tied to the cloud industry, which is one of the hottest parts of technology in the world.
These robust secular trends and AMD's migration to these premium businesses solidifies the genius decision to allow Dr. Lisa Su to steer the ship.
Veering away from the legacy business that cratered its share price down to $2 and being part of a high-growth industry with great products will fuel the share price skyward.
The technology sector has been rife with M&A activity in 2018 with successful and failed mergers happening left and right.
AMD has been rumored for takeover numerous times. The share price received short boosts highlighting the attractiveness this name commands to outside investors.
Top-line growth is what is driving AMD in 2018, and it is in the middle of a growth sweet spot.
Nvidia has gone up 1,750% in the past five years while laying claim to 70% gross margins in its vaunted GPU division.
It will be demonstrably bullish if AMD can mildly replicate this growth trajectory, and I believe it will.
The Mad Hedge Technology Letter has advised readers to stay away from chip companies because of the complicated trade war.
If the trade war subsides or even ends, semiconductor chips will be the first group of stocks whose shares explode to the upside.
In any case, it's always great to understand the premium names in each industry, and I am bullish on AMD.
After the spike to more than $19, a pullback is warranted but it won't be long before these shares go back into overdrive.
Directly after the macro headwinds pass by will be the preferred time to enter into AMD unless you are a long-term investor and plan to buy and hold.
________________________________________________________________________________________________
Quote of the Day
"Especially in technology, we need revolutionary change, not incremental change," - said cofounder and CEO of Alphabet Larry Page.
Mad Hedge Technology Letter
August 13, 2018
Fiat Lux
Featured Trade:
(GOOGLE'S NEW CHINESE PLAY),
(GOOGL), (BABA), (AAPL), (JD), (BIDU), (MU), (INTC)
As a bolt from the blue, Google search is headed back to China.
The project coined Dragonfly commenced in early 2017 as Google sought a way back into the lucrative Chinese market to sell its products.
The retracement to China then later sped up after Google CEO Sundar Pichai secretly met with a top Chinese official in December 2017.
The censored Google search application could be launched in the next six months to a year upon approval from the communist party.
Why China?
There are three times more smartphones in China than in the U.S. This market represents celestial scale unfounded in any other country.
The Chinese Internet population has roughly 772 million people with Internet penetration levels at about 55%.
The U.S. has maxed out its penetration level at 89% and there is little room to snatch up a new group of mass users. This is not the case in China, which has ample amounts of room to run.
In addition, Google hopes to roll out a news aggregation app mirrored on Chinese newsfeed app Jinri Toutiao that implements personalized artificial intelligence to cater toward each unique user's needs.
As of December 2017, users spent an average of 73 minutes per day on this app.
Jinri Toutiao has 120 million daily active users and has been given a valuation of around $35 billion.
The unbridled potential for American large cap tech companies in China is unrivaled.
But navigating around China's murky business environment under the comprehensive controls of the Great Firewall has proved cumbersome highlighting the executional prowess of Apple's (AAPL) iPhone business in China.
Why did Google leave in the first place?
The issue of censorship was the catalyst leading Google search to the exits.
Google was stunned by the exploits of the Chinese communist government, which maneuvered around Google's system targeting human rights activists among other things.
Operating abroad, companies do not always have complete control over the systems they build and the business processes that revolve around it.
Beijing continued to press Google to filter its search results in 2010, and anything but compliance spelled doom for Google's future in China.
Restricting speech is commonplace for many undeveloped countries with brutal regimes.
The U.S. has one of the most lenient free press laws in the world underlying the backbreaking hassle of operating in a country that actively and aggressively suppresses free speech deemed negative to the people in powerful positions.
After Google started rerouting mainland Chinese Google search to its filter-less Hong Kong servers, Google search was unceremoniously shut down within months.
A comeback is in the works at a time when China and America are at each other's throats in a tit-for-tat trade war, complicating the move to reinsert itself back in the Middle Kingdom.
Let's make no bones about it, this is a high-risk, high-reward strategy for Alphabet, which seeks to add yet another growth driver to its profit-making machine.
Out of the FANG group, only Apple has emerged to unlock the Chinese market with outstanding success.
All other American tech competition was rooted out. Only chip names such as Micron (MU) and Intel (INTC) latched onto the Chinese market largely because of the Chinese demand for chips.
This unfortunate development opened the path for the BATs to dominate in China, which is comprised of Baidu (BIDU), Alibaba (BABA), and Tencent.
Rewind back to 2010, Google search was directly competing against China's Baidu headed up by founder Robin Li.
Google had just 14% market share in search and was trailing far behind Baidu, which had 79% of market share.
In 2010, the difference in the quality of the search algorithms between the two couldn't have been larger.
When comparing these search engines, 85% of Google searches would populate vastly different results compared to Baidu's search platform.
Upon further inspection, Google search was deemed far more accurate than the market share leader Baidu, and that has not changed.
China's inferior technological abilities are well noted. The shortage of talent has forced them to institute forced technological transfers from western companies working in China, outright theft of technical know-how by state sponsored hackers, and the use of government loans to finance M&A activity in technological advanced countries.
In fact, Google leaving China robbed the Chinese tech sector of legitimate competition crushing the innovation trajectory or any remnants of one.
This led to the BATs running riot making money hand over fist but still trailing American tech by a country mile in terms of technical ability and innovation.
A lack of competition breeds complacency.
The reintegration of Google search into China will bring a whole new level of top-class ad technology into China.
This could be the beginning of a monumental ramp up in digital ad spend in China, which trails far behind North America and Europe in average revenue per person.
Discretionary spending is robust in China and advertisers want a piece of the action.
As much as this could be an opportunity for Alphabet to invigorate its cash-making enterprise, it is also a chance to enhance the overall Chinese tech sector.
Upon hearing Google will return, Baidu's Li laid down the gauntlet retorting that Baidu will "win one more time."
Having the communist party on your side as a tag team partner goes a long way in China and has been the main reason of foreign firms fleeing in droves in the past.
Alphabet won't have the same help.
Yet, it could learn a great deal from heading into this sensitive opportunity that could also lay the groundwork to operate in other countries with repressive governments bent on destroying freedom of speech.
Naturally, Alphabet employees weren't impressed with this new direction.
Silicon Valley is centered on left-wing social mores and adjusting its model to accommodate a totalitarian regime does not sit well with many workers.
Google saw a mini employee revolt because of Project Maven, a national defense program marrying artificial intelligence with combat operations in the United States.
Allowing Google's technology to possibly fall into the hands of Beijing would be unforgivable and a national embarrassment.
This idea is definitely not part of the low hanging fruit initiative.
This fruit is 20 feet high dangling from a distant branch.
If Alphabet pulls this off, it could add another surging driver to its portfolio, which prints money because of its digital ad segment.
It could potentially increase revenue by 30%.
Alphabet's successfully bringing in its Google search engine back from the cold, albeit censored search engine, could lay the groundwork for other American tech companies to enter the Chinese market, which would crush Alibaba, JD.com (JD), Tencent, and Baidu's share price.
Baidu dropped more than 6% upon this announcement.
The tech expertise level would naturally rise in China if American tech companies were permitted to set up shop, enhancing the total Chinese tech sector.
It would also apply pressure on China's communist government to open up its industries and do away with the protectionist stance that has been a bedrock policy fueling China's unbelievable rise from rags to riches.
China's top-level politicians must understand inward policies of this ilk do not mesh with the status of a country that is the world's second biggest economy. And it was only a matter of time before unyielding backlash ensued.
From the political side, it could possibly offer additional ammunition to the American administration if China wholeheartedly rejects Google's foray into the mainland, even if it complies with every miniscule, arcane rule Beijing throws at them.
It will prove that China is not willing to compromise or make a deal with the deal-obsessed American administration. And it will signal a dead-end road for any large cap American tech company with China aspirations.
The U.S. administration would use this as an "I told you so" moment, highlighting a history of perpetual unfair trade practices. Hopefully, it never gets to this point.
As it stands, many American large cap tech companies won't touch the Chinese market with a 10-foot pole, but the breathless scale is hard to pass up for others.
If Google is stonewalled, expect an even tougher response from the American administration hell-bent on preventing technological transfers to China.
Currently, the Committee on Foreign Investment in the United States (CFIUS) is attempting to recreate the rules to counteract the China threat.
The trade war is ultimately about global supremacy and being able to harness the biggest tool to achieve world hegemony, which is high caliber technology.
The treatment of Chinese and American tech companies by each other's government will give investors deep insight into how this all plays out.
This is Alphabet's last gasp chance at entering China. If it evolves into a spectacular failure, it always has its digital ad business to fall back on and the upcoming mass rollout of Waymo, its autonomous self-driving taxi business.
So why not take a stab at it?
________________________________________________________________________________________________
Quote of the Day
"If Google re-enters the market, it gives us the opportunity to player kill with real swords and spears and win one more time," - said founder and CEO of Baidu Robin Li.
Mad Hedge Technology Letter
August 9, 2018
Fiat Lux
Featured Trade:
(WHY SNAPCHAT IS GOING DOWN THE SOCIAL MEDIA DRAIN),
(SNAP), (FB), (NFLX), (AMZN), (GOOGL), (TWTR), (BB)
Companies this small should be growing.
Growth companies and tech go hand in hand, especially at the incubation stage where there is little resistance hindering growth.
The law of numbers dictate that small companies only need marginal gains to generate high growth in terms of percentages.
Once a company becomes as big as Amazon (AMZN), it becomes harder to move the needle.
Snapchat (SNAP), which is in the same social media game as Facebook, is vastly smaller than the incumbent that hoovers up the digital ad dollars.
Facebook (FB) boasts 1.47 billion daily active users (DAU) and is one of the members of a powerful digital ad duopoly along with Alphabet.
Snapchat added 4 million net (DAU)s in Q1 2018 and blew its chance for sequentially increasing usership by losing 4 million (DAU)s last quarter.
The stock sold off hard in after-hours trading, down 11% at one point but rebounded big time with the earnings commentary with Snapchat revealing guidance for the first time.
Snap opened the next trading day demonstrably lower reflecting the disenchantment of investors.
Evan Spiegel's creation has really had a hard go of it lately. The app redesign was a cataclysmic failure of epic proportions denting the popularity of this app.
The fallout was sacking 100 engineers.
Overall, there were some positive takeaways from the earnings report, mainly, the revenue beat was satisfying, and profitability shone through with average revenue per user (ARPU) shooting up 34% YOY.
Another victory was the boost in ad revenue, up 48% YOY, which is the main driver of revenue in the company.
The hairiest issue with this company is the fundamentals are excruciatingly apathetic.
Stagnating usership growth at this stage is a red flag.
Social media stocks were bashed in recent trading sessions with Twitter (TWTR) dropping from $46 to $31 because of diminishing usership and soft guidance.
The amount of monthly active users dropped from 338.5 million to 335 million, and financial guidance was brought down a few notches.
Twitter has made a poignant attempt to clean up its system from the debris molding around the edges.
To "improve the health" of the Twitter platform, Twitter purged 6% of all accounts rooting out the influences undesirable to its ethos.
Social media companies must take the initiative to protect its platforms, instead of being a silent bystander to a stabbing in a dark alley.
Facebook was the mother of all drops in the social media space collapsing from an all-time high of $218 to $171, a drop in one trading day.
Guidance tore apart this stock after a rapid run-up to the earnings report that saw unbelievable strength rising almost every day.
Poor guidance reflects the ill-effects of the recently enacted General Data Protection Regulation (GDPR), which tainted the European numbers.
The epicenter of data regulation has crimped profitability and popularity of social media in the Eurozone.
If Facebook and Twitter are facing tough short-term headwinds, then imagine how Snap feels.
They are the small fish in the big pond, and they are running out of places to hide.
Every new user Instagram picks up is one less potential user missed for Snapchat.
Let me remind you that Instagram is boosting its monthly average usership (MAU) 5% per year.
Instagram recently surpassed the 1 billion (MAU) mark after eclipsing the 800 million mark in September 2017.
Instagram added 200 million users, more than the entire (DAU) for Snap, in 11 months.
Big trouble for Snap.
Effectively, Snap is the inferior version of Instagram for young kids and that narrative does not bode well for the future.
For every $1 Snapchat spends, it earns -$6 on that $1. Kids aren't the biggest distributors of wealth. It would help if Snap matured its interface to accommodate older millennials who are tech savvy to boost its average revenue per user.
As it stands, Facebook earns $9 per daily active user while Snapchat earns a smidgeon over $1 per daily active user.
I cannot say that Facebook is a quality platform, but it has successfully monetized the platform.
What's more, CEO Evan Spiegel blamed the drop in usership on the redesign.
Yes, the redesign didn't help, but the usership would have dropped anyway because of draconian data laws in Europe and the general malaise stigmatized toward current social media platforms.
Management is not executing effectively at Snap, and it is out of touch with its core base without opening up new sources of growth.
If a company redesigns an app, enhance the app, do not make it unusable such as the Snap redesign.
Snap's eggs are all in one basket. And that basket is shrinking in the high revenue locations of North America and Europe.
It only earned $2 million from non-digital ad revenue.
As FANGs power on to pass a trillion dollars of market cap, the diversity in their segments are nothing short of impressive.
Snap has no other irons in the fire and is overly reliant in an industry in which it will slowly bleed to death.
The only savior is in reinventing itself, but that takes guts and a bold CEO with a revolutionary strategy.
There is precedence for this transformation such as BlackBerry (BB), one of the original smartphone makers, which has morphed into an autonomous driving technology company.
Another good example is Netflix, which started out in the DVD industry and pivoted to online streaming.
What Snap is doing has its limits and it needs to shake up its business model or slowly rot.
The company must wake up to the stark realization that its platform is not engaging.
Many analysts believed Snap could become half as big as Facebook and that seems highly unlikely.
I have been bearish on Snap for the entire existence of the Mad Hedge Technology Letter.
And it has been the perfect sell on the rallies stock because of its poor performance, even poorer management, and awful fundamentals.
A telltale sign was the last earnings call.
It was the second quarter in a row of blaming the redesign on bad performance.
If Spiegel underperforms next quarter again - meaning negative growth usership - it will be interesting if he blames the redesign again.
Third times a charm.
Where does this all lead?
Facebook offered to purchase Snapchat after its IPO because management was worried it would steal market share from Instagram.
Snapchat rebuffed the advances and decided to lock horns directly with Instagram.
Well, the David and Goliath battle is playing as most would assume, boding ill for the fate of Snapchat.
Instagram will keep weakening Snapchat moving forward. And Facebook might end up scooping up Snapchat down the road for a discount.
It doesn't look good for Snapchat, and investors should consider shorting this stock after a dead cat bounce.
________________________________________________________________________________________________
Quote of the Day
"The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model and it might not be successful," - said former Apple cofounder Steve Jobs in a Rolling Stone interview, 2003.
Mad Hedge Technology Letter
August 7, 2018
Fiat Lux
Featured Trade:
(WHAT TO DO ABOUT TECH NOW),
(AAPL), (FB), (NFLX), (AMZN), (GOOGL), (AMD), (MSFT)
Is it time to dump tech?
Short term, yes - long term, no.
Recently, a series of big tech earnings misses throttled the market tearing into the positive investor sentiment, which was holding up nicely after the early year sell-offs.
Every precipitous and steep drop this year has followed with a mammoth dip buying spree lifting stocks to newer highs.
This is the type of robustness investors rejoice in when talking about the price action of technology stocks.
Not only is the dip buying awe-inspiring, but the lack of hesitation in the dip buying is even more impressive.
Investors have scant time to pick up these precious names before the entry points disappear like an invisibility cloak.
Ditch these stocks at your peril, because the buying queue represents the likes of all the tech behemoths waiting to buy back their own stock, namely Warren Buffett, and the flight to quality brigade that view big cap stocks as a de-facto cash sanctuary.
The anxiety was palpable when Netflix's (NFLX) management badly miscalculated new subscription business after a brilliant earnings report from Microsoft.
Investors got another wrench in their stomach when Facebook (FB) followed Netflix with dismal guidance ripping apart the growth narrative and pivoting toward ameliorating its controversial business model giving investors a fresh dose of uncertainty.
All eyes were planted on Alphabet (GOOGL), Amazon (AMZN), and Apple to provide some calm to the markets.
That's exactly what they did.
Part of the problem now is that expectations are so exaggerated, these companies have little wiggle room to overdeliver.
Industry specialists largely believe tech profits to rise 20.9% YOY this earnings season. The lion's share of the growth has been contained to the headliner names such as Amazon, which has grown like no company has ever grown before.
Estimates show a slide in YOY tech profits for the third-quarter earnings decelerating down to less than 15%. While still good, it's not the 20% growth YOY, and over that it has been fueling tech's rise in increasingly precarious market conditions.
The downshift in profit growth has been anticipated for the past few quarters, as investors thought a trip wire would at some point bring down the entire FANG group.
What we have found out is that not all FANGs are created equal. Some are more equal than others.
The past earnings performance indicated this with Amazon's emphatic top-line growth numbers blowing away the most adamant bear.
Netflix's narrative is still intact, and consolidation is badly needed for a stock that has gone parabolic in 2018.
The short-term capitulation of Facebook and Netflix is proof that large cap tech also has downside risk embedded in its model.
It was starting to seem like down days were never in the cards.
Lowered tech guidance for next quarter will really test the market's resiliency during next earnings season.
If these numbers miss spectacularly, expect the tech sector to give back a good chunk of the year's gains back.
Decelerating profits is never a positive sign. However, after coming from Mt. Everest profit levels, will the markets brush it off and power higher?
There is a lot more juice left in this tech story, and sharp corrections should still be bought.
Tech is becoming quite frothy at these levels and choosing the right tech story will go a long way to sleeping well at night.
It will be excruciatingly difficult for tech companies to impressively beat on the upside next quarter.
However, the secular story and unique earnings growth are treasures compared to other sectors that are getting beaten into submission.
When you delve into the numbers, the success becomes comical.
Apple is the first company to cross the $1 trillion of market cap.
This company prints money to the tune of $11 billion in profits each quarter.
It possesses a devoted userbase, surging software and services segment, and premium grade smartphones allowing Apple to cash in profits to the extent they do.
CEO Tim Cook sent an email to Apple's employees downplaying the milestone, instead saying "financial returns are simply the result of Apple's innovation."
He is completely correct.
The innovation has fed back through spiking profits and boosting sales allowing Apple to make money hand over fist.
This in turn is a big reason why Apple's share price has almost quadrupled with Cook at the helm.
The best and brightest tech companies in 2018 share one unified trait: innovation.
And it is not a surprise that Amazon and Microsoft (MSFT) will be next to join the trillion-dollar club as they boast some of the most innovative staff in the world.
As these two companies pass the trillion-dollar market cap, it will encourage the next tier of flourishing tech companies to make the jump to the trillion-dollar club.
The tech sector is still eating everybody's lunch with every business in the world migrating to their front yard.
Some weakness in the extended tech shares have been a matter of when and not if.
Advanced Micro Devices, Inc. (AMD) is a stock gaining 22.8% just in the month of July underlining the overheated price action of some of these tech names.
I am largely staying away from chip stocks now because trade tensions have bred uncertainty around Chinese chip revenues.
The tech sector has many moving parts and a trade war can hurt one part of tech while others remain unblemished.
Another front of concern is data regulation headlines rearing their ugly heads from time to time.
There are more hurdles for tech stocks going forward, but that does not mean they will get tripped up.
I am in a tech holding pattern until I find an opening to issue my next slew of tech trade alerts.
Year Over Year Profit Growth
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Quote of the Day
"I will always choose a lazy person to do a difficult job because a lazy person will find an easy way to do it." - said founder of Microsoft Corporation Bill Gates.
