Mad Hedge Technology Letter
August 6, 2018
Fiat Lux
Featured Trade:
(NEXT STOP IS $2 TRILLION),
(AAPL), (AMZN), (MSFT), (NFLX), (FB), (GOOGL), (TWTR), (CRM)
Another win for big tech.
Apple (AAPL) is the first company in America to have a trillion-dollar market cap and won't be the last as Amazon (AMZN) is close behind.
This also opens up the door for one of our favorite companies Microsoft (MSFT), which will shortly cross the $1 trillion threshold as well.
The milestone underscores the reliability and power of the tech sector that has propped up this entire market in 2018 as we continue the late stage cycle of the nine-year bull market.
Apple has entered into a hyper-charged expansion phase, and I will explain how this will boost shares to new heights.
The Mad Hedge Technology Letter has been hammering away on the software and services narrative since its inception.
As legacy companies are pummeled in the financial markets, the cloud has enabled a revolutionary industry catering toward annual subscriptions of all types.
Users no longer have to store gobs of data on computers. The cloud allows the data to be stored on remote data servers giving access to the information from anywhere in the world with an Internet connection.
A plethora of modern hybrid apps boosting productivity integrated with the cloud offers business a new-found way to collaborate with coworkers around this increasingly multicultural, multilingual, and globalized world.
Apple is perfectly placed to take advantage of the current technology climate and will wean itself from the image of being a hardware company.
Investors wholeheartedly approve of the conscious move to bet the farm on service and subscriptions.
After Apple's earnings came out, the stock traded up whereas in past quarters, the total sales unit was the crucial number investors hung their hat on and the stock would dip.
Apple missed iPhone total sale units registering 41.3 million compared to the expected 41.79 million units.
This slight miss in the past was enough for the stock to sell off on and instead the stock rose 3%.
This is the new Apple.
A software services company.
Investors can feel at peace that iPhone sales aren't growing. It's not that important anymore.
Apple's software and services segment pocketed $9.55 billion in revenue, a 31% jump YOY from $7.27 billion.
This has been in the making for a while as software and services has been a five-star performer for the past few quarters.
However, the performance is material now and the pace of improvement will take Apple into the next phase of hyper-growth.
This is all good news for the stock price.
Software and services revenue now comprise 17.9% of Apple's total revenue.
By year-end, this division could topple the 25% mark.
In the earnings call, Apple CEO Tim Cook was smitten with the software and services growth saying this particular revenue will double by 2020.
In the next few years, software and services will eclipse the 40% mark, all made possible inside an incredibly sticky and top-quality ecosystem.
The iPhone continues to be the best smartphone the market has to offer. If you marry the best hardware with top-quality software, this stock will chug along to higher share prices unhindered.
As the technology sector matures, the flight to quality becomes even more glaring.
The inferior platforms will be found out quickly heightening the risk of massive intraday sell-offs and revenue-depleting penalties.
Facebook and Twitter have seen 20% sell-offs hitting investors in the mouth.
These platforms have issues rooting out the nefarious elements that seek to infiltrate its operations and manipulate the platform for self-serving interests.
Apple does not have this problem. Neither does Microsoft, Amazon, Netflix (NFLX) or Salesforce (CRM), and I will explain why.
When you offer services for free such as Facebook (FB) and Twitter (TWTR) do, you get the good, bad, and ugly bombarding the system.
Even though it's free to use these platforms, Facebook and Twitter must spend to make it useable for the good forces that made these companies into tech behemoths.
Instead of rooting out these rogue elements, they turned a blind eye describing their businesses as a distribution system and were not accountable.
Then sooner or later one of the evil elements would get these companies in hot water. It happened.
Big mistake, and the chickens are coming home to roost.
The flight to quality means avoiding public tech companies that only offer free services.
You pay for what you get.
Alphabet also has seen its free model penalized twice in Europe with hefty fines, and it probably won't be the last time.
Play with fire and you get burned.
It also offers Cook the moral high road, allowing him to non-stop criticize the low-quality platform companies, mainly Facebook, because it makes the whole tech sector look bad.
The bite back against technology in 2018 is largely in part due to these low-quality free platforms manipulating user data to ring in the profits.
Amazon has been public enemy No. 1 for the Washington administration but not to the public because the loathing of Amazon is largely a personal issue.
Amazon improves the lives of customers by giving users the best prices on the planet through its comprehensive e-commerce business.
Apple now constitutes 4% of the S&P 500 index.
Investors have been waiting for Apple's Cook to sweep them off their feet with the "next big thing."
Even though nearly not as sleek and sexy as a smartphone, the software and services unit are it.
Apple doubling down on high quality that I keep mumbling about shows up in average selling price (ASP) of the iPhone, which destroyed estimates of $694, coming in at $724 per unit.
The bump in (ASP) signals the high demand for its higher-end iPhone X model over the lower-tiered premium smartphones.
The iPhone X is the best-selling iPhone model because customers want the best on the market and will pay up.
The success of the iPhone X lays the pathway for Apple to introduce an even more expensive smartphone in the future with better functionality and performance.
If Apple can continue innovating and producing the best smartphone in the world, the price increases are justified, and demand will not suffer.
Perusing through some other parts of the earnings report, cloud revenue was up 50% YOY.
Apple pay has tripled in the volume of transactions YOY surpassing the billion-transaction mark.
China revenue has stayed solid even with the mounting trade tension. I have oftentimes repeated myself in this letter that Apple is untouchable in China because it provides more than 4 million jobs to local Chinese directly and indirectly through Apple's ecosystem.
This prognosis was proved correct when Apple announced revenue in China of $9.55 billion, a spike of 19% YOY.
Even though much of Apple's supply chain remains in China, Beijing isn't going to take a hammer and smash it up risking massive social upheaval and public fallout. In many ways, Apple is an American company masquerading as a Chinese one.
As for the stock price, the explosion to more than $208 means that Apple is overbought in the short term.
If this stock dips back to $200, it would serve as a reasonable entry point into this record-breaking hyper-growth software and services company.
And with the $234 billion in cash planned to be deployed in Apple's capital reallocation plan, the biggest hurdle is the federal daily limit Apple has in buying back its own stock according to Apple CFO Luca Maestri.
Even the problems Apple has right now are great.
Apple's Path to $1 Trillion
________________________________________________________________________________________________
Quote of the Day
Please be advised there will be no Technology Letter
Thursday, August 2, or Friday August 3,
as Editor Arthur Henry will be traveling.
Publication will resume Monday, August 6.
Thank you for your understanding.
Mad Hedge Technology Letter
August 1, 2018
Fiat Lux
Featured Trade:
(THE RACE DOWN TO ZERO),
(SCHW), (FB), (WMT), (AMZN), (FFIDX), (BOX)
It seems time after time, entire industries get flipped on their heads without notice.
The modern-day hyper-acceleration of technology is creating tectonic shifts in the economy that only some can truly understand.
There is the good, the bad, and the ugly.
The functionality of technology has helped enhanced our daily lives infinitely, yet there is a dark side of technology that has reared its ugly head threatening the future existence of mankind.
One industry next in line to be smashed to bits will have the effect of unimaginably reshaping Wall Street as we know it.
Gone are the days of brokers shouting from the trading pits, a bygone era where pimple-faced traders cut their teeth rubbing shoulders with the journeymen of yore.
The stock brokerage industry is at an inflection point with the revolutionary online stock brokerage Robinhood on the verge of shaking up an industry that has needed shaking up for years.
A common thread revisited by this newsletter is the phenomenon of broker apps being low-quality tech.
These apps can be built by a pimple-faced freshman college student in his dorm.
A broker ultimately serves little or no value to the real players among the deal, usually extracting huge commissions.
Technology and now blockchain technology vie to completely remove this exorbitant layer from the business process.
Well, for the stock brokerage industry, that time is now.
Robinhood is an online stock brokerage company based in Menlo Park, Calif., trading an assortment of asset classes including equities, options, and cryptocurrencies.
So, what's the catch?
Robinhood does not charge commission.
That's right, you can invest up until the $500,000 threshold protected by the Securities Investor Protection Corporation (SIPC) and you can go along with your merry day trading for free.
The online brokerage industry has been getting away with murder for years.
How did the online brokers get away with this in a technological climate where industries such as the transportation sector are being flipped on their head?
They got comfortable and stopped innovating - the death knell of any company.
Effectively, high execution costs reaping massive profits were the norm for brokers, and nobody questioned this philosophy until Robinhood exposed the ugly truth - unreasonably high rates.
Peeking at a monthly chart of brokerage costs will make your stomach churn.
For instance, a trader frequently executing trades with an account of $100,000 would hand over $1836 in commission in 2017 if their account was with Fidelity.
On the cheaper side, Interactive Brokers would charge $854 for its brokerage services to habitual traders per month.
The outlier was Tradier, a start-up brokerage founded in 2014 using the powerful tool of an API (Application Programming Interface), which charged $213 per month to trade frequently.
An API is described as a software intermediary allowing two applications to communicate with each other.
This model helped cut costs for the online brokerage because Tradier did not have to focus its funds on the trading platform that was delegated to various third-party platforms.
Tradier is largely responsible for the aggregation of data and charts thus employing an army of developers to meet their end of the business.
This model is truly the democratization of the online brokerage industry, which has been coming for years.
Cost are cut to a minimum with equity trades at Tradier costing investors $3.49 per order and option contracts costing $0.35 per contract with a $9 options assignment and exercise fee.
Technology has defeated the traditionalist again.
Day traders will tell you their largest worry is keeping a lid on execution costs.
Volume traders plan their strategies according to bare bones commission.
Marrying technology with online brokerages has the deflation effect that Amazon (AMZN) deftly took advantage to perfection.
Brokerages do not pay higher costs for an incremental bump in trading volume. Costs are mainly fixed.
If you hold an account in one of these legacy brokers charging an arm and a leg to trade with them, jump ship and join the revolution.
So how does Robinhood generate revenue if the broker trades for free?
Hawk ads? No.
They are not rogue ad sellers as is Facebook (FB).
The plethora of accounts opened with Robinhood earn interest, and Robinhood collects the earned interest as revenue.
Also, Robinhood has one paid service for sale.
Robinhood Gold is a subscription allowing traders to use margin. The margin accounts will set traders back $10 per month adding up to $120 per year, and they won't be charged interest on the funds.
This is peanuts compared to what other traditional brokerages are charging clients for margin account interest.
This is also a data grab with the proprietary data building up profusely turning into a potential Masayoshi Son SoftBank Vision fund acquisition.
Robinhood has already registered more than 5 million accounts for a company that started its operations in 2013.
The rise of these 5 million accounts coincided with the explosion of the price of bitcoin breaching the $20,000 level.
This price surge inspired a whole generation of millennials to get off the sofa and start trading cryptocurrencies.
More than 80% of Robinhood's accounts are owned by millennials.
Trading cryptocurrencies acts as a gateway asset to springboard into other asset classes such as equities and derivative contracts.
Vlad Tenev, co-CEO of Robinhood, indicated that Robinhood will have to modify its radical business model to monetize more of the business in the future, but he is comfortable with the current business model.
But Tenev has already seen fruit borne with the likes of Robinhood applying fierce pressure to the legacy brokerages' pricing models.
The traditionalists are locked in a vicious pricing war with each other slashing their commission rates to stay competitive.
The longer the likes of Charles Schwab (SCHW) feel it necessary to charge $4.95, down from the January 2017 cost of $8.95, the better the chances are that Robinhood can build its account base rapidly.
Charles Schwab has more than 10 million accounts, only double the number of Robinhood, after being founded in 1971.
The 42-year head start over Robinhood has not produced the desired effect, and it is ill-prepared to battle these tech companies that enter the fray.
Robinhood has been able to add a million new accounts per year. If Charles Schwab relatively performed at the same rate, it would have 47 million accounts open today.
It doesn't and that is a problem, because the company can be caught up to.
The lack of urgency to combat the tech threat is astounding. Companies such as Walmart (WMT) have taken the initiative to transform the narrative with great success.
The race to zero is a grim reality for the Fidelities (FFIDX) of the world, and adopting a Robinhood approach will be the playbook going forward.
Brokerages and a slew of other industries are turning into a legion of top-level developers fighting tooth and nail to stay relevant.
The transportation industry has grappled with this harsh reality lately, but the economy is on the cusp of many other industries digitizing to the extreme.
My guess is that Robinhood starts rolling out a slew of subscription services catering toward specific investors.
The age of specialization is upon us with full force, and customer demand requires care and diligence that never existed before.
Robinhood continues to enhance its offerings of various products adding Litecoin and Bitcoin Cash to the crypto lineup.
Only Bitcoin and Ethereum were offered before.
The company is not without headline investors boasting the likes of Andreessen Horowitz, the venture capitalist firm based in Menlo Park, Calif., Box (BOX) CEO Aaron Levie, and hip-hop mogul Snoop Dogg.
Expect Robinhood to pile the funds into improving the technology, data accuracy while offering a new mix of hybrid products.
The enhancements will attract another wave of adopters spawning another wave of panic from the legacy brokers.
To visit the pricing information at Robinhood, please click here.
________________________________________________________________________________________________
Quote of the Day
"When something is important enough, you do it even if the odds are not in your favor," - said Tesla founder and CEO Elon Musk.
Mad Hedge Technology Letter
July 31, 2018
Fiat Lux
Featured Trade:
(THE BEST IN THE BUSINESS),
(AMZN), (FB), (GOOGL), (AAPL), (NVDA), (CRM)
Scale works, and Amazon (AMZN) is proving it.
Jeff Bezos' company is hyper-charging its levers and pumping out growth to the tune of $2.5 billion in net profit as of last quarter.
This is a big deal for a company that has largely been considered using the AWS engine to fund the e-commerce business.
The topline growth is mind-boggling for a company poised to seize 50% of U.S. e-commerce sales by the end of 2018, up from the current 44%.
It's truly an Amazon stock market in 2018.
The razor-thin e-commerce margins are what Amazon is most renowned for, but it's high margin divisions are creating a higher quality company.
Investors are willing to pay a higher multiple for this version of Amazon in the future.
That is a very bullish sign going forward.
Tech shares sold off last Friday because the Amazon fireworks came to an end and no other company will be able to compare with its earnings.
This is another knock off effect from Amazon existing.
Of the vaunted FANG group, only Alphabet and Amazon impressed during this crunch earnings season at a pivotal time in the market that has looked short on ideas.
FANGs are not created equal and Amazon is by far the creme de la creme of this cohort.
The AWS cloud unit and its digital advertising division are the fodder allowing Amazon to take risks elsewhere.
Amazon is the most efficient business in America. In the past quarter it experienced more fluid data centers and warehouse operations.
If you do this for as long as Amazon has, you eventually learn all the tricks to the trade.
Hyper-accelerating technology offers Amazon a new way to implement new efficiencies, non-existent even a quarter ago boosting operational margins.
AWS surged 48.9% YOY to $6.11 billion improving on 48.7% last quarter.
AWS is also comprising a larger stake of the business than before.
This quarter AWS attributed 11.5% to total revenue compared to 10.8% last year.
The topline growth is staggering for a company duking it out with Apple (AAPL) to be the first trillion-dollar company.
The narrow breadth of the nine-year bull market is becoming even narrower, raising risk levels in the short term.
AWS is expected to grow into a $42 billion business by 2020, a nice double of what it is today.
Jeff Bezos does not need to respond to the administration's digital criticism of him because he doesn't need to. Taking the high road is the solution. If he wants to say something, he can publish it through a proxy via the Washington Post, which he owns.
Amazon's digital ad business has been a revelation.
The bad news is that Alphabet (GOOGL) and Facebook (FB) have cornered the global digital ad market taking in 73%, a nice bump from the 63% in 2015.
And of the global digital ad growth, they are collecting 83% of that growth.
That hasn't stopped Amazon from taking a stab at the digital ad market itself which is the logical move with the number of eyeballs attracted to its platform.
The ad business did $2.2 billion in sales last quarter, a nice increase of 132% YOY.
Even though in its infancy, this super-charged digital ad division could eventually give Alphabet and Facebook a run for its money - another reason Facebook is trading in bear market territory.
Facebook's platform quality is far inferior than Amazon, which uses it for e-commerce rather than posting free user content.
Facebook is still pocketing tons of cash but it's growth narrative has been exhausted shown by the dismal guidance for the second half of the year.
Amazon is incrementally raising the quality of the company in all facets, evident in the topline growth and jump in profitability.
Amazon absolutely does care about the bottom line. Watch for the net profits to surge past $3 billion in the third quarter in its resurgent digital ad business.
And with the ad tech quality floating out there, Amazon will be able to invest in poaching top dogs from Facebook and Google to build this division swiftly into tens of billions of dollars in revenue per year.
It could crescendo into another AWS-esque monster.
In Q2 2017, Amazon posted total revenue of $37.96 billion. Fast forward to 2018 and revenue raced ahead to $52.9, a robust $14.94 billion improvement.
The $14.94 billion in one quarter year-over-year improvement in Amazon total revenue is more than many tech companies earn in one year including outstanding companies such as Salesforce (CRM) and Nvidia (NVDA).
It is important for tech companies to have many irons in the fire and Amazon proves this theory correct.
The competition is cutthroat to the point that large tech companies are morphing into each other then abruptly diverging.
The brilliant ideas are copied, then the next set of ideas filter in to be copied again.
Luckily, these ideas are coming from Amazon, which is one of the most innovative companies in the world with top-level management.
This all adds up to why Amazon posted its third straight profitable quarter of more than $1 billion in profits.
Prime members didn't flinch with the price increase of an annual Amazon prime subscription showing management understands the true pulse of its customers.
Under-promise and overdeliver time and time again and a customer will be stuck with you for life.
In the past, investors only bought this company for topline growth. Now, we have a different animal on our hands turning into a model company with bottom line growth flourishing.
Management has proved that strategically investing in the right businesses bear fruit.
It takes time for these businesses to develop but when they do they turn into cash cows.
Investors will take delight in seeing Amazon's brand as just a topline growth company slowly fading away.
Increasing profits offers more opportunities and funds to create new drivers as well.
Increasing profits also adds more opportunities to reallocate capital to shareholders opening up a new investor base.
The network effect is truly alive and well, and the Mad Hedge Technology Letter has routinely identified this company as the best in the tech industry.
________________________________________________________________________________________________
Quote of the Day
"Technological progress has merely provided us with more efficient means for going backwards," said British writer Aldous Huxley.
Mad Hedge Technology Letter
July 30, 2018
Fiat Lux
Featured Trade:
(INSTAGRAM TO THE RESCUE),
(FB)
He did it.
Facebook CEO Mark Zuckerberg decided it was time to pull the plug and reset.
After the data leak scandal, Facebook's torrid rise from the pullback of $157 to $219 was one of the best trades of the quarter.
Management felt this was the perfect time to snatch breathing room to fix the faults weighing down the business.
No doubt the daily pounding of negative stories crucifying Zuckerberg in the press took its toll.
Painting a picture of an out-of-touch-with-reality villain, stacking his cash in a luxury Palo Alto estate, did not sit well with Zuckerberg.
Flat North American daily active users (DAU) growth and a slight dip in European usership caused by General Data Protection Regulation (GDPR) was baked into the pie.
Investors already knew that.
Facebook even increased its average revenue per user in North America to $25.91 per user from $23.59 the quarter before.
There were many positives from the earnings report.
Revenue clocked in at $13.23 billion, slightly lower than expectations but nothing to cry your eyes out over and still a 42% YOY rise.
Then came the guidance.
In one word - cataclysmic.
Facebook dropped off a cliff in the aftermarket trading session sliding as much as 24%, a haircut of $150 billion of market share in a span of just an hour.
In all reality, the run-up to such towering levels ignited fears of acrophobia after a nine-year bull market leaving tech as the strongest pillar driving equities higher.
Profit taking was swift.
The same dilemma presents itself with many other top-quality tech stocks trading at all-time highs after similar parabolic moves up because the expectations are excessive.
Facebook rather chop down the tree now than face the music next quarter or the quarter after that, especially in a tech sector transforming at the speed of light.
Management said revenue growth rates would deteriorate "as much as high single digit percentages" in the second half of the year.
Uttering this one-line reversed investor's vertigo in Facebook shares.
This raises the question, has social media peaked?
No, social media is morphing with its users' needs and desires into something that might not look like the "traditional" social media of yore.
Instagram is the new growth driver for Facebook and could produce 20% of revenue by 2020.
Instagram is what Facebook was years ago with robust user growth and solid engagement numbers.
Facebook announced that comprehensive users totaled 2.5 billion users, which include Facebook, WhatsApp, and Instagram platforms.
Instagram's unit is expected to eclipse $8 billion in revenue in 2018.
The reset is code for Facebook's management believing the days of 40% revenue growth is over.
Decelerating into the 30% range is not game over for the stock.
It was bound to happen.
If you told most companies annual revenue would climb by 30%, they would be dancing in the streets.
Users' preference for a story-driven social media experience has made standard Facebook a relic.
Instagram is dynamic and a social media favorite for young adults and youth.
Videos and photos posted vanish in 24 hours catering toward the attention span deprived youth, while also shuttering out all the side bar noise streamlining the visuals.
Its sleek formatting is perfect for the mobile screen at a time when the migration to mobile is picking up a full head of steam.
It's the modern day social media of 2018 and betting the farm on this asset going forward is a risk worth taking.
Investors must remember when Facebook became popular and generated astounding growth numbers. Quality smartphone cameras, high-quality video performance, augmented reality, and photo editing apps weren't at the tip of the users' fingertips yet.
They are now.
Instagram is the response to that, incorporating all these new mechanisms to cater toward the new technology infiltrating our smartphone platforms.
When Millennials want to stay in touch with someone, they ask for an Instagram hashtag first and are shocked if you don't have one.
That never used to happen before.
Welcome to 2018.
The metrics reinforce the move to monetize Instagram.
Instagram recently surpassed the 1 billion monthly active user (MAU) number, up from 500 million in June 2016. Just only recently as September 2017, numbers were strong at 800 million.
Facebook does not disclose ad revenue, but many industry specialists believe Instagram could pull off a sensational year with revenue increasing 70% YOY in 2018.
Maintaining the 5% MAU growth won't happen forever as Facebook proved the past few quarters.
The metric maturation has unfolded the past few quarters forcing Facebook to focus on bumping up the average revenue per user.
Striking while the iron is hot makes even more sense and that means throwing all of its weight behind Instagram.
Facebook is not growing its users in the developed world and they need a response.
This is it.
Certainly, the 2018 version of social media is Instagram.
Social media will morph again in the future, who knows what it will look like, but when it happens, the eyeball migration will happen even faster than the monumental pivot to Instagram.
The network effect will ensure the ad dollars and usership will traverse over to Instagram. In some ways, Facebook is a legacy business in the throes of reinventing itself.
Lowballing next quarter's estimates was a shrewd move.
Notice the time horizon of companies turning into legacy companies is quickening, reinforcing cash-rich tech companies to bet big on a few projects in anticipation of market demand for a hot new industry.
Hits or misses are common, or if you are SoftBank's Masayoshi Son, just invest in all of them. Can't go wrong with that.
This trend speaks volumes of the innovation percolating throughout the corridors of Silicon Valley and why the American tech sector is the crown jewel of the American economy.
And we haven't even talked about WhatsApp yet, the chat messenger that Facebook pocketed for $19 billion in 2014.
WhatsApp has 1.5 billion MAUs and 450 million DAUs.
Brian Acton, the co-founder of WhatsApp, quit in disgust as Zuckerberg piled on the pressure to manipulate data in the same way Facebook has been doing for years.
This departure is the go ahead signal for Zuckerberg to start selling ads on the ad-less WhatsApp platform.
Ka-ching!
WhatsApp is next in line to be monetized after the Instagram pivot, and will harvest a whole new income stream channel for Facebook boosting the stock.
This is not a dead company by far, but tech companies must recalibrate as their cash cows become stale. It's the nature of the tech environment we have thrust ourselves in whether we like it or not.
What to do about the stock?
Allow the stock to show some consolidation around these levels. A strong support level is just below at $160.
We could get around that $160 level if we get a few analyst downgrades, which could be in the cards the next few days.
A long-dated, deep-in-the-money call spread incorporating strike prices around $140 would be worth pulling the trigger on if Facebook can demonstrate it can stay above the technical support.
Facebook has set itself up for an earnings' beat next quarter, as the deterioration it forecasts seems implausible to the extent management described it.
Management wants to shake out all the crud before the next move up commences.
We are entering into a new phase of Facebook. And Facebook has the brute resources and innovational prowess to readjust itself in a tech environment that has remarkably changed since 2017.
Facebook's New Lifeline
________________________________________________________________________________________________
Quote of the Day
"Computers are like bikinis. They save people a lot of guesswork," said former Chicago White Sox baseball player Sam Ewing.
Mad Hedge Technology Letter
July 26, 2018
Fiat Lux
Featured Trade:
(THE TRADE WAR'S COLLATERAL DAMAGE),
(SWKS), (ACIA), (CRUS), (XLNX), (ROKU), (SQ)
As the trade ruckus rumbles on for the foreseeable future, there are some places to deploy cash and some places to avoid like the zika virus.
The one area of tech to avoid that is clearer than daylight is the small cap chips companies.
Like a fish out of water, you should not feel comfortable holding shares in this type of equity amid the backdrop of an unresolved trade skirmish.
Although the Mandarins ironically need our chips, the uncertainty permeating around small chip firms means it's not time to hold let alone initiate new positions.
Investors still don't know how this standoff with shake out.
Until, there is more clarity going forward, give way to the next guy who can take the heavy loss.
Keep the powder dry for better times.
The long-term demand picture is healthy with IoT, cloud, and software companies never being thirstier for chips.
Short term is a different story with many of these smaller chip companies subscribing to grotesque charts that will make your jaw drop.
Take Skyworks Solutions, Inc. (SWKS) whose shares have spent the majority of 2018 trending lower and are stuck in purgatory.
(SWKS) produces semiconductors deployed in radio frequency (RF) and mobile systems.
This stock has been tainted by the horrid reality that it generates 25% to 30% of revenue from China.
If you have been living in a cave for the past eight months, technology is the battleground for global supremacy pitting two of the leading technological heavyweights in the world against each other in a fiercely contested, drawn-out conflict.
Any American listed chip company doing at least 20% of revenue in China has the same chart trajectory and that is not up.
Adding insult to injury, (SWKS) generates 35% to 40% of its total revenue from Apple.
As we approach every earnings season, the story rewinds and plays again to loud applause.
A slew of analysts appears on air condemning Apple promulgating lower iPhone sales due to surveys taken across various key suppliers giving them a snapshot into production numbers.
Each time, the analysts are proved wrong. However, the avalanche of downgrades that ensues knocks the stuffing out of the small chip companies dipping viciously, at times more than 10% or more on the headline.
One of the larger Chinese contracts that was signed by (SWKS) was with ZTE. Yes, that ZTE, the one the U.S. administration temporarily put out of business for selling telecommunication equipment to North Korea and Iran.
That was the nail in the coffin.
According to the (SKWS) official website, it has an ongoing, expanding relationship with ZTE and its chips would be "powering data cards and USB modems" in ZTE-manufactured next-generation tablets.
Luckily, the American government reversed its initial decision restoring operations to ZTE.
That does not mean it is out of the woods yet as lingering risks still overhang over this company.
This revelation underscores the massive contract risk for companies that unlike behemoths such as Micron, are desperately reliant on just a handful of contracts to propagate short-term revenue.
Effectively, the U.S. administration views American chip companies as collateral damage to the bigger picture.
The only reason the ZTE ban was lifted was because it was a prerequisite to restart talks between both sides.
If the ban was upheld, 75,000 Chinese workers would have needed to polish the dust off their resumes to start a fresh job search.
The inability to sell components to service the Chinese consumer will strike where it hurts most: the bottom line.
Chip producers did $1.5 billion in sales with ZTE in 2017. That business is in a precarious situation when a tweet can just wipe out those contracts in one fell swoop.
Acacia Communications, Inc. (ACIA) churns out high-speed coherent interconnect products.
The stock was beaten down then beaten some more in 2018.
(ACIA) revealed 30% of its $385.2 million revenue derived from one contract with guess who...ZTE.
On word of ZTE ban, (ACIA) plummeted from $40 to $27.50 in one trading day.
The disappearance of a contract this vital to survival is tough for a small business to handle even if temporary.
Layoffs and a squeezed financial situation apply unrelenting pressure on management to find an elixir.
Cirrus Logic Inc. (CRUS) pumping out a mix of analog, mixed-signal, and audio DSP integrated circuits (ICs) was trading more than $62 just a year ago.
Fast forward to today and its shares are at a measly $39.
To say Cirrus Logic's eggs are in one basket is an understatement.
(CRUS) procures 80% of revenue from Apple.
It's all hunky-dory to develop a close relationship with Apple, but in light of this unpredictable economic climate, shares have been hit hard and there is no end in sight.
(CRUS) even won a contract to help produce Apple's noise canceling and water-resistant AirPods, but that does not do anything to change the narrative.
The vultures are circling around this name and it was time to abort a long time ago.
Xilinx, Inc. (XLNX) is another small chip company and the first to create the first fabless manufacturing model headquartered in San Jose, California.
This company, founded in 1984, procures around 35% of revenue from China
The trade headwinds have set this stock in the crosshairs, being the victim of frequent 5% drops and two 10% slides in 2018.
It is a miracle this stock is slightly in the green this year, and (XLNX) is one of the lucky ones.
Skim through the rest of small cap chips stocks and the charts look the same. Dreadful with massive rally busting sell-offs.
The extreme volatility in and of itself is a sensible reason to steer clear of these names.
The headline risks that splash across the morning news spreads are a daily reminder that chip stocks, big and small, aren't out of the woods yet.
The Johnny-come-latelies must expose themselves to higher quality, unique assets which possess little or no China exposure.
For the experts, trade the volatility at your peril. But if volatility is what you want with scarcity of value, leg into Roku (ROKU) or Square (SQ) on moderate sell-off days.
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Quote of the Day
"Technological progress is like an ax in the hands of a pathological criminal," said German-born theoretical physicist Albert Einstein.
