Mad Hedge Technology Letter
August 21, 2018
Fiat Lux
Featured Trade:
(THE CHIP MINI RECESSION IS ON),
(NVDA), (AMD)
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.
Mad Hedge Technology Letter
August 20, 2018
Fiat Lux
Featured Trade:
(IS WALMART THE NEXT AMAZON?),
(AMZN), (WMT)
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.
Mad Hedge Technology Letter
August 16, 2018
Fiat Lux
Featured Trade:
(WILL AMAZON EAT GOOGLE'S LUNCH),
(AMZN), (FB), (GOOGL)
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.
________________________________________________________________________________________________
Quote of the Day
"What's dangerous is not to evolve." - said Amazon founder and CEO Jeff Bezos.
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.
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Quote of the Day
"Especially in technology, we need revolutionary change, not incremental change," - said cofounder and CEO of Alphabet Larry Page.
