Tech Letter Archives - Mad Hedge Fund Trader

The Race to Zero for Brokerage Commissions

The other shoe has dropped.

No more waiting for it as it was only a matter of time, but it was going to happen soon enough.

The acceleration of the race down to zero for brokerage commissions has moved into full throttle.

In a bid to engage new customers, especially millennials, J.P. Morgan (JPM) will offer its customers 100 free stock or ETF trades for one year.

The new service will be available on Chase’s mobile banking app called “You Invest” and also does not require a minimum balance as do so many of the competitors.

Last year, J.P. Morgan was still charging customers a horrific $24.95 per trade, a ridiculous sum in an age of brokerages slashing fees left and right.

Recently, I chronicled the start-up fin-tech brokerage Robinhood, which rolled out the zero-commission model to the chagrin of the traditional brokerages on the verge of major disruption.

Well, Wall Street has stood up and taken notice. There is no way back from this new normal.

The catalyst for J.P. Morgan to change direction was its lack of competitiveness in the digital brokerage space and a free model of luring in business is seen as a quick recipe to correct its ills.

J.P. Morgan has pumped in $300 million in the past two years into digital initiatives but still lacks the volume it was hoping for. This could help capture fresh accounts that could eventually turn into a meaningful business.

Freemium models made popular in Silicon Valley are catching fire in other parts of the economy as potential customers can dabble with the service first before committing their hard-earned money.

This is dreadful news for the fin-tech brokerage industry as it indicates a whole new level of acute pressure on margins and revenue.

The brokerage business has been under fire the past few years after regulators discovered Wells Fargo (WFC) was cunningly ushering clients into higher fee trading vehicles, taking a larger cut of commissions.

Wells Fargo did everything it could to rack up costs for high net worth clients. The atrocious behavior was a huge black eye for the entire industry.

Technology has forced down the cost of executing a trade and each additional trade is almost nil after fixed costs because of software and hardware carrying out these functions.

E-brokerages are set for a rude awakening and their cash cows are about to be disrupted big time.

Charles Schwab (SCHW) has 11.2 million brokerage accounts, and no doubt clients will get on the ringer and ask why Schwab charges an arm and a leg to execute trades.

Schwab might as well start charging clients for emails, too.

The cut in commissions has already started to affect margins with Schwab revenue per trade sliding from $7.96 in 2017 to $7.30 in the most recent quarter.

TD Ameritrade (AMTD) is experiencing the same issues with revenue per trade of $7.83 last year dropping to $7.30 last quarter.

The beginning of the year provided e-brokers with respite after euphoric trading sentiment pushed many first-time equity buyers into the markets, making up for the deceleration in revenue per trade.

However, that one-off spike in volume will vanish and margins are about to get punctured by fin-tech start-ups such as Robinhood.

J.P. Morgan’s move to initiate free trades is a huge vote of confidence for upstart Robinhood, which charges zero commission for ETFs, option trades, and equities.

I recently wrote a story on the phenomenon of Robinhood, and the new developments mean the shakeout will happen a lot faster than first anticipated.

TD Ameritrade, E-Trade (ETFC), Fidelity, and Charles Schwab could face a deeply disturbing future if Silicon Valley penetrates under the skin of this industry and flushes it out just like Uber did to the global taxi business.

E-Trade shares have experienced a healthy uptrend and it is now time to pull the rip cord with the rest of these brokerages.

It will only get worse from here.

Investors should be spooked and avoiding this industry would be the right move at least for the short term.

The golden age of trading commissions is officially over.

Turning this industry into a dollar store variety is not what investors want to hear or hope for.

The decimation of commission fees has coincided with the rise of passive investing.

Only 10% of trades now are performed by active traders.

Brokerages earn demonstrably less with passive investing as the volume of trading commission dries up with this buy-and-hold-forever strategy.

Index funds have been all the rage and quite successful as the market has returned 400% during the nine-year bull market.

When the market stops going up, the situation could get dicey.

The real litmus test is when a sustained bear market vies to implode these ETFs and what will happen with a massive unwinding of these positions.

A prolonged bear market would also scare off retail investors from executing trades on these e-brokerages.

Many will take profits at the speed of light not to be seen or heard again until the next sustained bull market.

Moreover, it is certain the global trade war is scaring off retail investors from their trading platforms as the uncertainty weighing on the markets has thrown a spanner into the works.

Tech has been the savior to the overall market with the top dogs dragging up the rest, but for how long can this continue?

Other industries are experiencing minimal earnings growth and tech cannot go up forever.

Regulations are starting to bite back at the once infallible tech narrative.

Chinese tech is also having its own headaches where Tencent has been perpetually stymied by local regulators blocking access to gaming licenses needed to monetize blockbuster video games.

Tencent missed badly on its earnings report and there is no end in sight to the delay.

Social media has been torn apart as of late and the weaponization of its platforms is accelerating with government operations moving onto them to fight against each other.

Interest rate revenues are the saving grace for these brokerages that account for 50% or more of revenue.

As interest rates rise, there will be a bump in interest rate revenues. However, as competition heats up and commission falls to zero, will these clients stick around for the e-brokers to reap the interest rate revenues or not?

Millennials are hard-charging into Silicon Valley start-ups such as Robinhood, and the traditional brokers’ clientele are mainly directed on the lucrative middle-age cohort.

The next development for e-brokers is who can best harness artificial intelligence to best enhance their customer experience and products.

If the Charles Schwab’s of the world must compete with nimble Silicon Valley start-ups in technology, then they will find a hard slog of it.

One of these big e-brokers is likely to implode setting off another round of consolidation.

The race down to zero is fierce, and I would avoid this whole industry for now.

There are better secular stories in technology such as the e-gaming phenomenon capturing the hearts and minds of global youth.

________________________________________________________________________________________________

Quote of the Day

“Expect the unexpected. And whenever possible, be the unexpected,” – said Twitter and Square cofounder and CEO Jack Dorsey.

August 22, 2018

Tech Letter

Mad Hedge Technology Letter
August 22, 2018
Fiat Lux

Featured Trade:
(WHAT’S IN STORE FOR TECH IN THE SECOND HALF OF 2018?),
(GOOGL), (AMZN), (FB), (UTX), (UBER), (LYFT), (MSFT), (MU), (NVDA), (AAPL), (SMH)

What’s in Store for Tech in the Second Half of 2018?

Tech Letter

Tech margins could be under pressure the second half of the year as headwinds from a multitude of sides could crimp profitability.

It has truly been a year to remember for the tech sector with companies enjoying all-time high probability and revenue.

The tech industries’ best of breed are surpassing and approaching the trillion-dollar valuation mark highlighting the potency of these unstoppable businesses.

Sadly, it can’t go on forever and periods of rest are needed to consolidate before shares relaunch to higher highs.

This could shift the narrative from the global trade war, which is perceived as the biggest risk to the current tech market to a domestic growth issue.

Healthy revenue beats and margin growth have been essential pillars in an era of easy money, non-existent tech regulation, and insatiable demand for everything tech.

Tech has enjoyed this nine-year bull market dominating other industries and taking over the S&P on a relative basis.

The lion’s share of growth in the overall market, by and large, has been derived from the tech sector, namely the most powerful names in Silicon Valley.

Late-stage bull markets are fraught with canaries in the coal mine offering clues for the short-term future.

Therefore, it is a good time to reassess the market risks going forward as we stampede into the tail end of the financial year.

The shortage of Silicon Valley workers is not a new phenomenon, but the dearth of talent is going from bad to worse.

Proof can be found in the controversial H-1B visa program used to hire foreign tech workers mainly to Silicon Valley.

A few examples are Alphabet (GOOGL), which was granted 1,213 H-1B approvals in 2017, a 31% YOY rise.

Alphabet’s competitor Facebook (FB) based in Menlo Park, Calif., was granted 720 H-1B approvals in 2017, a 53% YOY jump from 2016.

This lottery-based visa for highly skilled foreign workers underscores the difficulty in finding local American talent suitable for a role at one of these tech stalwarts.

Amazon (AMZN) made one of the biggest jumps in H-1B approvals with 2,515 in 2017, a 78% YOY surge.

The vote of non-confidence in hiring Americans shines an ugly light on American youth who are not applying themselves to the domestic higher education system as are foreigners.

For the lucky ones that do make it into the hallways of Silicon Valley, a great salary is waiting for them as they walk through the front door.

Reportedly, the average salary at Facebook is about $250,000 and Alphabet workers take home around $200,000 now.

Pay packages will continue to rise in Silicon Valley as tech companies vie for the same talent pool and have boatloads of capital to wield to hire them.

This is terrible for margins as wages are the costliest input to operate tech companies.

United Technologies Corp. (UTX) chief executive Gregory Hayes chimed in citing a horrid “labor shortage in the U.S. and in Europe.”

He followed that up by saying the company will have to grapple with this additional cost pressure.

Certain commodity prices are spiraling out of control and will dampen profits for some tech companies.

Uber and Lyft, ridesharing app companies, are sensitive to the price of oil, and a spike could hurt the attractiveness to recruit potential drivers.

The perpetually volatile oil market has been trending higher since January, from $47 per barrel and another spike could damage Uber’s path to its IPO next year.

Will Uber be able to lure drivers into its ecosystem if $100 per barrel becomes the new normal?

Probably not unless every potential driver rolls around in a Toyota Prius.

If oil slides because of a global recession instigated by the current administration aim to rein in trade partners, then Uber will be hard hit abroad because it boasts major operations in many foreign megacities.

A recession means less spending on Uber.

Either result will be negative for Uber and ridesharing companies won’t be the only companies to be hit.

Other victims will be tech companies incorporating transport as part of their business model, such as Amazon which will have to pass on more delivery costs to the customer or absorb the blows themselves.

Logistics is a massive expense for them transporting goods to and from fulfillment centers. And they have a freshly integrated Whole Foods business offering two-hour free delivery.

Higher transport costs will bite into the bottom line, which is always a contentious issue for Amazon shareholders.

Another red flag is the deceleration of the global smartphone market evident in the lackluster Samsung earnings reflecting a massive loss of market share to Chinese foes who will tear apart profit margins.

Even though Samsung has a stranglehold on the chip market, mobile shipments have fell off a cliff.

Damaging market share loss to Chinese smartphone makers Xiaomi and Huawei are undercutting Samsung products. Chinese companies offer better value for money and are scoring big in the emerging world where incomes are lower making Chinese phones more viable.

The same trend is happening to Samsung’s screen business and there could be no way back competing against cheaper, lower quality but good enough Chinese imitations.

Pouring gasoline on the fire is the Chinese investigation charging Micron (MU), SK Hynix, and Samsung for colluding together to prop up chip prices.

These three companies control more than 90% of the global DRAM chip market and China is its biggest customer.

The golden days are over for smartphone growth as customers are not flooding into stores to buy incremental improvements on new models.

Customers are staying away.

The smartphone market is turning into the American used car market with people holding on to their models longer and only upgrading if it makes practical sense.

Chinese smartphone makers will continue to grab global smartphone market share with their cheaper premium versions that western companies rather avoid.

Battling against Chinese companies almost always means slashing margins to the bone and highlights the importance of companies such as Apple (AAPL), which are great innovators and produce the best of the best justifying lofty pricing.

The stagnating smartphone market will hurt chip and component company revenues that have already been hit by the protectionist measures from the trade war.

They could turn into political bargaining chips and short-term pressures will slam these stocks.

This quarter’s earnings season has seen a slew of weak guidance from Facebook, Nvidia (NVDA) mixed in with great numbers from Alphabet and Amazon.

Beating these soaring estimates is not a guarantee anymore as we move into the latter part of the year.

Migrating into the highest quality names such as Amazon and Microsoft (MSFT) with bulletproof revenue drivers would be the sensible strategy if tech’s lofty valuations do not scare you off.

Tech has had its own cake and ate it too for years. But on the near horizon, overdelivering on earnings results will be an arduous chore if outside pressures do not relent.

It’s been fashionable in the past for market insiders to call the top of the tech market, but precisely calling the top is impossible.

The long-term tech story is still intact but be prepared for short-term turbulence.

________________________________________________________________________________________________

Quote of the Day

“By giving people the power to share, we're making the world more transparent,” – said cofounder and CEO of Facebook Mark Zuckerberg.

Don't Miss the August 22 Global Strategy Webinar

Newsletter, Tech Letter

My next global strategy webinar will be held on Wednesday, August 22 at 12:00 PM EST, which I will be broadcasting live from Silicon Valley in California.

Mad Day Trader Bill Davis will be my willing co-conspirator.

I'll be giving you my updated outlook on stocks, bonds, commodities, currencies, precious metals, energy, and real estate.

The goal is to find the cheapest assets in the world to buy, the most expensive to sell short, and the appropriate securities with which to take positions.

I will also be opining on recent political events around the world and the investment implications therein.

I usually include some charts to highlight the most interesting new developments in the capital markets. There will be a live chat window with which you can pose your own questions.

The webinar will last 45 minutes to an hour. International readers and new subscribers who are unable to participate in the webinar live will find it posted on my website within a few hours. I look forward to hearing from you.

To log into the webinar, please click on the link we emailed you entitled, "Next Bi-Weekly Webinar - August 22, 2018" or click here.

August 21, 2018

Tech Letter

Mad Hedge Technology Letter
August 21, 2018
Fiat Lux

Featured Trade:
(THE CHIP MINI RECESSION IS ON),
(NVDA), (AMD)

The Chip Mini Recession is On

Tech Letter

Now is not a good time to put new money to work in the semiconductor space.

American chip companies are some of the major exporters of domestic technology in a world that has been taken over by a contentious global trade war.

The administration shows no signs of backing down digging into the trenches and not giving up an inch.

Damocles' sword is hanging over chip revenues waiting for the final verdict giving investors a great short-term reason to avoid semiconductor companies.

It’s not the time to be cute in the market, but there is still one must-buy name in the chip space that is best in show and that is Nvidia (NVDA).

"Turing is NVIDIA's most important innovation in computer graphics in more than a decade," said Nvidia CEO and founder Jensen Huang.

Huang made this announcement of the eighth-generation Turing graphics architecture at a conference in Vancouver last week.

There have been recent leaks in the press that Nvidia will roll out two new GPU products shortly, the RTX 2080 and RTX 2080 Ti adding to its already stellar lineup of gaming hardware.

The quality shines through with the real-time ray-tracing offering gamers newly enhanced lighting effects.

Nvidia’s new GeForce RTX 2080 series of graphics cards is derived from the company’s Turing architecture.

To check out a demo that shows off production-quality rendering and cinematic frame rates then click here.

Innovation has been a hallmark of Nvidia’s approach for quite some time and the high quality of products has always attracted a diverse set of customers.

Enhancing its GPU products is a boon because a myriad of gamers, professional and casual, will end up upgrading to these chips that vie to stay ahead of the fierce gaming competition.

Gaming is Nvidia’s core revenue stream comprising more than 58% of sales.

Global exports revenue projects to surge 30% higher in 2018, eclipsing $906 million and could swell to $1.65 billion by 2021.

The new Turing GPU is poised to elevate margins because of its $2,500-$10,000 price point.

The Turing architecture incorporates enhanced Tensor Cores offering six times the performance of the previous generation architecture.

The steep price will entice content creators and developers to drop a wad of cash on state-of-the-art GPUs improving their own products.

The step up in price reflects the addition of modern AI and ray-tracing acceleration into the design that previous generations lacked.

Ray tracing is the act of simulating how light bounces in the physical world smoothly transferring it to a virtual image.

The new Turing architecture will produce 25 times the performance of the previous generation.

Content creators are drooling over these new possibilities.

Profit margins will increase starting from the fourth quarter when shipping commences.

Nvidia has chimed in before describing that the GPU addressable market will rake in 50 million potential customers and will be a $250 billion industry.

Innovation is Nvidia’s bread and butter and instead of resting on its laurels, it has gone out and pushed the limits further with these new GPU technologies.

Advanced Micro Devices (AMD) will have a hard time replicating Nvidia’s success after Nvidia’s second generation of products with integrated AI acceleration is lapping up praises by industry specialists.

Nvidia has adopted the playbook that so many tech companies have found useful. It has a mix of businesses that complement its core business.

The gaming division is by far its main driver. However, the rest of the 42% of revenue is made up of a collection of mainly the data center comprising 23.8% of sales, and its automotive segment bringing up the rear with 5.2% of revenue.

The total addressable market for artificial intelligence will be in the ballpark of $50 billion by 2023 offering a huge pipeline of potential deals in its data center and autonomous driving divisions.

Nvidia rings in just 5.2% of revenue from autonomous driving segment and the mass rollout of robot-taxis will ignite this segment into a meaningful part of its portfolio.

The first hurdle is the mass adoption of Waymo vehicles because they are first in line to make this futuristic industry into modern day reality.

Either way, Nvidia is advancing its technology to be in pole position to capitalize on the shift to automotive driving by developing a driverless car supercomputer named Drive PX Pegasus aimed at helping automakers create Level 5 self-driving vehicles.

Even though this industry is still in its incubation stage, a projected 33 million autonomous vehicles will be cruising around streets by 2040 ballooning from the 51,000 cars forecasted by 2021.

Nvidia’s have struggled as of late.

The post-earnings sell-off happened even though it beat the current quarter’s projections, but the all-important guidance was light.

Guidance fell short because of bitcoin’s fall from grace cratering from $20,000 to $6,000.

Low cryptocurrency prices suck the air out of the demand for GPUs required to mine cryptocurrency.

The softness in demand was reflected in last quarter’s crypto-based revenue coming in at a paltry $18 million.

The previous quarter was a different story with crypto-based revenue boosting top-line revenue substantially with quarterly revenue registering $289 million, which was 9% of total quarterly revenue.

Huang has confided that crypto-based revenue is not the main driver for Nvidia going forward. And latching itself to an unstable digital currency with governments out to drown out the fad is not sustainable.

The guidance, even though less than expected, is still healthy representing 23% YOY growth.

The sell-off offers a prime entry point in a stock that is the best publicly traded chip company in America right now.

No doubt the enhanced GPU chips will kick-start another round of increasing revenue. The lighter-than-expected revenue guidance sets the stage for Nvidia to resoundingly beat next quarter’s earnings estimate.

Crypto-based revenue was never an assumed part of Nvidia’s revenue engine and was at best a one-off boost to the bottom line.

Nvidia is still a great company producing hardware with duopoly playmate AMD, which has seen a double in its share price in the past four months.

As Nvidia retraces from its all-time high, $225 is the next level of support that would provide a timely entry point into a company that leads its industry.

These types of companies do not grow on trees and if you choose to buy into any chip stock, Nvidia would be the favorite because of its dominant position grabbing 66% of market share in the GPU market leaving runner-up AMD with the scraps.

________________________________________________________________________________________________

Quote of the Day

"It's OK to have your eggs in one basket as long as you control what happens to that basket," – said Tesla founder and CEO Elon Musk.

August 20, 2018

Tech Letter

Mad Hedge Technology Letter
August 20, 2018
Fiat Lux

Featured Trade:
(IS WALMART THE NEXT AMAZON?),
(AMZN), (WMT)

Is Walmart the Next Amazon?

Tech Letter

Warren Buffett is right, retail is a tough game in the face of the Amazon (AMZN) threat.

I wouldn't want to face off with them either.

Technology has been the biggest catalyst fueling a tectonic shift in the retail climate with large cap technology players usurping market share decimating competition.

The rise of e-commerce platforms has been nothing short of spectacular.

Management has also used technology to modernize the global supply chain, in-house operations, and ramp up the hyper-targeting of prime customers.

The treasure trove of big data collected has been the key to pinpointing the weaknesses and finding solutions.

Amazon knew all of this before everybody else. And, Jeff Bezos has already annihilated a large swath of the retail community that will never return.

Walmart was one of the first retailers to wipe out the small brick-and-mortar shops, and Amazon is attempting to do what Walmart did to others in the past.

Luckily, the sleeping giant of Walmart (WMT) has awoken and is laying the groundwork to launch a full-frontal assault on Amazon.

Better late than never.

More than 90% of Walmart's customers live within a 15-minute drive of one of their stores, but why drive 15 minutes with exorbitant gas prices when Amazon says you don't have to?

Once a laggard, Walmart is now instilling its newfound e-commerce operation with a new sense of zeal and purpose, offering Amazon a real threat and copying its best ideas such as two-day free shipping.

Someone must stand up to Amazon. And Walmart with its massive embedded base of loyal and fervent customers and revenue is the ideal challenger.

Currently, Amazon has extracted more than 49% of the U.S. e-commerce market in 2018.

Walmart trails Amazon by a wide margin, and the investment into developing its e-commerce business will boost the 3.7% e-commerce market share.

If Walmart maintains the drive to enhance tech operations, its e-commerce division could double its market share to more than 7.5% from its low base.

This is entirely manageable as it would only need to convert a small percentage of current non-digital customers into using its digital portals whose quality has remarkedly improved the past few years.

Redesigning the official website was timely as the new interface is sleeker, more functional than past versions, and just plain better.

There is even a tinge of Amazon in the design borrowing the best parts of its foe's design and integrating it into a modern look.

The statement of intent is there, and Amazon won't have a frictionless pathway to profits anymore.

Walmart CEO Doug McMillon has been the main man to ramp up the tech side of the business and has injected a fresh batch of youth into the management style.

Online purchases only comprise less than 20% of sales and that runway is still long and wide for a company that has only barely scratched the surface of its tech strategy.

Most tech companies are in the first innings of a long game, but Walmart is even further behind meaning there is ample room to grow.

Even McMillon believes that Walmart will morph into a certain "kind of technology company" going forward.

Not only is it beefing up its digital commerce strategy, but physical stores are getting makeovers to extract additional marginal revenue from each customer.

Walk into your nearest Walmart and you might notice it looks completely different than your father's Walmart.

It is also dabbling a bit with augmented reality to boost the in-store customer experience.

Walmart has installed an avalanche of self-checkout kiosks at the front of the store to ease and quicken customer payment.

The use of big data analytics is now aiding decisions on how to best create the optimal shopping environment for its customers.

In-store pickup automated machines called towers help customers in picking up their goods if they choose to drive to the physical store, thereby enhancing the customer service quality.

Walmart is no longer playing defense and sticking to what it knows.

It is on the front foot and should be.

Walmart announced e-commerce sales spiked 40% YOY in Q, and the man responsible for this execution is Marc Lore.

Who is Marc Lore?

Marc Lore is the chief executive officer of Walmart eCommerce U.S., and the showdown against Amazon is a personal gripe for him.

Lore joined Walmart when his e-commerce company Jet.com was snapped up for $3.3 billion in 2016.

This was more of a talent and expertise grab that Walmart needed at the time to learn the ropes of the e-commerce business to better understand how to respond to Amazon.

Before Jet.com and Walmart, Lore was on the books at Bezos' Amazon.com where his feud began.

Lore joined Amazon by way of his e-commerce company Quidsi, which he cofounded and which was bought by Amazon for $545 million in 2011.

Following Amazon's purchase, Lore and Bezos did not always see eye to eye on how Quidsi would operate inside the confines of Amazon, creating long-lasting tension that has turning into bad blood.

Quidsi specialized in certain genres such as baby products and household goods. After Amazon sucked all the knowledge and life out of Quidsi, it fired the remaining 260 employees at its New Jersey headquarters and closed down the firm.

Bezos cited "unprofitability" for shuttering Quidsi, and the thinly veiled parting shot at Lore registered deeply inside the back of his mind.

Lore reinvented himself and launched a new e-commerce business called Jet.com.

After being absorbed by Walmart, Lore was repositioned to the top of Walmart's e-commerce division leading the helm.

Lore understands how to take on Amazon after working inside its Seattle headquarters for years after the Quidsi integration and knows how to beat the company at its own game.

He is the perfect person to help Walmart infuse success into its e-commerce division. Walmart is the optimal platform for Lore to get revenge against Jeff Bezos.

A win-win proposition.

Walmart e-commerce business is on track to rise 40% in 2018.

A few changes he set off right away were the expansion of Walmart's online selection adding more than 1,100 brands, setting up a creative discount program attracting more shoppers into physical stores, cooperating with Google to integrate voice-activated shopping mechanisms, and signing up a new in-house brand called Bonobos to design an exclusive portfolio of brands mirroring Amazon's 76 private labels on its platform.

Lore even took a page out of Amazon's playbook and made two-day free shipping possible for millions of products through its website.

Warren Buffett has said in the past that not investing in Amazon and not investing more in Walmart when he had the chance were two of his most regrettable mistakes.

It could be true that this time around Buffett jumped the gun in unloading his Walmart shares. I agree that retail can be scary, but not all retail is created equal.

For some particular retailers such as Walmart, the future doesn't look so bad.

I agree with Buffett that Walmart has more than tough competitors, but if Walmart emphasizes its digital first strategy via mobile and desktop, there is a lot of wiggle room to harvest gains from these positive changes.

Walmart has been used to growing 1% to 2% in U.S. same-store sales per year, and it was habitually assumed as a constant.

The growth of 4.5% proves that tech investments are paying dividends and even though margins are pressured, it's a must to stay competitive.

If Walmart can lure in growth investors who believe in the evolving tech narrative, it would expand the variety of investors interested in Walmart.

Walmart has a lot going for them and sometimes that gets lost around all the hoopla about the Amazon threat.

Walmart has the mind-boggling scale retailers dream of and migrating its own customers online is the key to unlocking new value.

Certainly, these customers will purchase more products after algorithms identify the products customers desire to buy.

Margins will suffer somewhat from this new strategy, but growing pains and reinvestment are sorely needed to turn around the ship.

Luckily, this legacy retailer is on the right path and has hit on the right strategy.

Once the technology is running efficiently, the average revenue per user will start to rise as with for all top-tier technology companies because of leveraged scale making it possible to boost profits.

In addition, there is potential digital ad business to nurture along if Walmart can shift a decent number of legacy customers to mobile or desktop platforms.

The future doesn't look so bleak for Walmart, neither does its share price.

________________________________________________________________________________________________

Quote of the Day

"We will compete with technology, but win with people." - said CEO of Walmart Doug McMillon.

August 16, 2018

Tech Letter

Mad Hedge Technology Letter
August 16, 2018
Fiat Lux

Featured Trade:
(WILL AMAZON EAT GOOGLE'S LUNCH),
(AMZN), (FB), (GOOGL)

Will Amazon Eat Google's Lunch?

Tech Letter

And then there were three.

That's right, Amazon (AMZN) will join Facebook (FB) and Alphabet (GOOGL) as the last member of the triumvirate dominating the global digital ad industry.

That is what all signs are pointing to.

In a survey conducted by PricewaterhouseCoopers (PwC), the global digital ad industry increased by 21% YOY to $88 billion in 2017.

Of that growth, Facebook and Alphabet commanded 90% of it.

Mobile ad growth exploded last year because of the migration to smartphones increasing by 36.2% YOY in 2017.

Mobile ad revenue accounted for 56.7% of the digital ad dollars.

Search ad growth decelerated from 48% to 46% market share, but overall revenue climbed 18% to $40.6 billion reflecting the preference for older generations to use desktop search as their go-to platform.

Younger generations prefer dynamic video advertising, which suits mobile devices and tablets.

This segment grew 33% to $11.9 billion and is set to eat into search ad market share going forward.

This all bodes well for Amazon, which can take advantage of these various channels to pump through more ads that companies are clamoring to buy on Amazon's e-commerce platform.

Video ads would be ripe for Amazon Prime Video too, Amazon's on-demand media content service.

By 2021, Amazon's digital ad profits will eclipse its cloud profits solidifying Amazon as the best American tech company because of its multitude of premium profit drivers.

As time goes by, the quality of Amazon's company ascends with no restraints.

The Mad Hedge Technology Letter rates Amazon as the best publicly traded tech stock and that will not change anytime soon.

Amazon's digital ad revenue shot up 129% YOY to $2.2 billion.

This growth rate would make any investor drool.

Amazon might want to shift this business over from the "other" line item on its earnings report because it is blossoming into a main engine of growth and profit.

As Facebook and Alphabet have demonstrated, the digital ad game is a high profit, zero sum game, and Amazon is in perfect position to capitalize going forward.

Amazon's e-commerce business is the foolproof platform that can attract digital ad dollars in droves.

Not only are customers already buying products on Amazon.com, but they are usually purchasing numerous items highlighting the suitability of Amazon populating relevant ads to its customers.

Amazon's strategy to sell high-volume, good value for money products fits nicely into the digital ad strategy with plenty of opportunity for ad buyers to roll out ad campaigns to the masses.

Amazon continues to augment its digital ad tech team creating new tools and has now started directly approaching brands directly racking up digital ad sales.

Amazon's gain is Facebook and Alphabet's loss.

If Amazon goes full steam into the ad tech game, it could do what it has done to brick-and-mortar retail - deflate prices.

This is a worrying sign for Facebook, which is already on the ropes after realizing its business model has some major holes.

Alphabet's strategic position is superior to Facebook's, but it is very much still a one-trick ad tech pony.

The attempt to reintegrate a censored version of its Google search into China makes sense when other FANGs are coming for their lunch stateside.

This epitomizes the current tech climate - evolve now or die.

Amazon is working on a new video ad product that it will place in its search results.

This new product is currently in beta testing mode.

These video ads will be 90 seconds or less and will direct customers to a custom landing page or directly to an official website where they can purchase the item.

The video ad will only be shown for users of iPhones and iPads initially.

Amazon is requiring companies to pay a minimum of $35,000 for this new type of ad campaign. Some of its prominent ad buyers such as Procter and Gamble are already testing out this service to curate the perfect video ads to place inside Amazon search.

At first, the inventory for these video ads will be restricted.

Amazon Media Group is the in-house sales team responsible for selling these new products.

For example, in Germany, the habitual Amazon customer carries out a systematic routine to buy Amazon products.

First, customers will perform astute research on potential products and analyze different price points to gain a comprehensive picture of the market using their smartphone.

The customer later adds the desired items into the shopping cart.

At a later date, the customer purchases the item on a different device, and in many instances, mobile is used just to research products when the customer is out and about.

This multi-leg buying process gives Amazon multiple chances where it can fit in some video ads for the customers.

It is true that the minimum $35,000 will make it harder for small businesses to compete, but this is tailor-made for larger companies to offer a compelling case to customers while leveraging their brand awareness.

It is entirely possible that Amazon will surpass $8 billion in digital ad revenue in 2018 and then blow by $16 billion by 2020.

Of that $16 billion in revenue, $12 billion could be booked as operating profit showing off the juicy margins that make this industry so attractive for the neutral observer.

Yes, Amazon has the largest and best product search engine in the world, and it's time to start leveraging this asset to drive monetization growth.

Specifically, the ability for customers to click on an ad and be shuttled over to Amazon.com for final purchase.

This is the x-factor missing out on Facebook and Google search models.

Amazon has the capability to cherry-pick revenue from each part of the process up until the delivery to the door.

This opens a slew of extra revenue down the road as it enhances the shopping experience because Amazon has full control over the whole process.

This runs parallel with Amazon changing how its ad tech operates to accommodate the emphasis on generating huge growth numbers in ad volume and sales.

Small ad buyers usually work through an agency to integrate with Amazon while larger ad buyers work with Amazon's in-house team.

In the next few weeks, sponsored websites outside of Amazon's ecosystem will start advertising to shoppers who are able to click a link directly moving the buyer back to Amazon.com.

The sponsored ad route is a direct shot at Google search and Facebook.

Unsurprisingly, Amazon converts sales at a 350% higher rate than Google, underscoring the effectiveness of digital ads for Amazon.

When customers are already on the Internet to shop, shoppers could do a lot worse than clicking on a direct link funneling them to Amazon.com.

Posting baby photos on Facebook is not likely to convert users into product buyers.

Neither is checking your Gmail account, translating foreign language on Google Translate, or using Google Search to populate results usually not related to shopping.

These methods fail to convert an Internet surfer to product buyers to the detriment of Facebook and Google search.

Amazon has the perfect business model for selling digital ads.

This robust ad business will spur Amazon shares more than $2,000, and the quality of the sum of the parts keeps rising.

Execution is the only roadblock. And as most of us know, Amazon is one of the most innovative and cleanly executed companies in the world with visionary strategists.

That is why it is Amazon.

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Quote of the Day

"What's dangerous is not to evolve." - said Amazon founder and CEO Jeff Bezos.