Tech Letter Archives - Mad Hedge Fund Trader

The Sky Is the Limit

After Netflix (NFLX) laid an egg, the tech sector badly needed a cure to calm the fierce, open waters.

Netflix missed expectations by about a million subscribers and weak guidance shredded the stock almost 15% in aftermarket trading.

The FANG boat started to rock and large cap tech needed a savior to quell the increasingly downside risk to the best performing sector in the market this year.

You can rock the boat all you want, but when Microsoft (MSFT) shows up, the seas turn tranquil and placid.

Microsoft delivered a dominant quarter.

I expected nothing less from one of the best CEOs in America, Satya Nadella, and his magic touch is the main wisdom behind the loquaciousness when the Mad Hedge Technology Letter delves into the Microsoft business.

I rate Microsoft as a top three technology stock, and it should be a pillar of any sensible equity portfolio, unless you believe throwing away money in the bin is rational.

Born in Hyderabad, India, Nadella has worked wonders inheriting the reins from Steve Ballmer who was more concerned about buying an NBA team than running one of the biggest American companies.

Ballmer had Microsoft barreling unceremoniously toward irrelevancy.

It got so bad for Microsoft, the "L word" started to pop up.

Legacy tech is the lousiest label a tech company can be pinned with, because it takes years and gobs of cash to turn around investor sentiment, the business, and the share price.

Under Nadella's tutelage, Microsoft has burst through to another all-time high, which is becoming a regular occurrence in 2018 for Microsoft's shares that languished in purgatory for years.

If the macro picture holds up and if the administration can keep quiet for a few news cycles, investors can expect a minimum of 15% appreciation per year in this name.

And that is a conservative estimate.

Microsoft is already up over 20% in 2018.

Queue the applause.

Nadella has orchestrated a 300% jump in valuation during his four and half years at the helm.

Microsoft is now valued at more than $800 billion and climbing.

The only other tech members of the prestigious $800 billion club are Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL).

Apple leads the charge to claim the prize as the first trillion-dollar company, and it is within striking distance valued at $951 billion.

Nadella bet the farm on software subscriptions and migration to the cloud.

It was the perfect strategy at the ideal time.

Shares cracked the $108 mark at the market open even as the administration kept up its pugnacious rhetoric threatening to topple the overall market.

Tech has held up through these testy times confirming the fluid migration by the scared investor souls into big cap tech.

How can you blame them?

Amazon prime day saw record numbers visit its platform to the point it crashed from overloading the servers.

Coresight Research predicted users would fork over $3.4 billion on Prime Day in 2018, an increase of 40% YOY.

More than 100 million products were sold in the 36 hours.

The staggering Prime Day sales came on the heels of Alphabet being fined $5 billion for being too dominant in Europe.

The market shrugged it off as the fine does nothing to change Alphabet's dominance in Europe.

Android has harvested 80% of the smartphone market and was slapped on the wrist for bundling Google apps out of the cellophane packaging is a cheap trick by the European regulators.

Imagine frequenting a restaurant that cannot serve its own food.

Alphabet even allows users to download whatever bundle of apps through the Google Play app store. It should be enough.

Alphabet is another solid Mad Hedge Technology Letter pick, albeit it is the weaker tier of the vaunted FANG group and just celebrated all-time highs.

Amazon and Netflix (NFLX) still lead the charge at the top tier of the FANG group, and Facebook's risky business model has it grouped with Alphabet in the lower tier.

At the end of the day, a member of the FANG group is a member of the FANG group.

Microsoft should be part of the FANGs, but the acronyms start becoming too pedantic.

The breadth of the tech sector means many winners.

Microsoft is one of the biggest winners.

Microsoft's total revenue levitated 17% YOY to $30.1 billion.

The number every investor was patiently waiting for were insights into the cloud business.

Microsoft Azure was up 89% YOY and cemented together with strong guidance, ensured Microsoft's shares would continue on its merry way upward.

Gross margins for the commercial cloud offerings, grouped as Azure, Office 365, accelerated to 58% YOY from 52%.

Microsoft's intelligent cloud described by Nadella as "Microsoft's drive to build artificial intelligence into all its apps and services" rose 23% YOY to $9.6 billion.

Management said that it expects Cloud margins to ameliorate through the rest of 2018.

Even the hardware side of the operations caught an updraft with Microsoft Surface, a series of touchscreen Windows personal computers, pole vaulted by 25% YOY.

Simply put, Microsoft is a lean, mean cash-making machine. Last quarter's profit of $8.87 billion coincided with the first time the company eclipsed $100 billion in annual sales.

Microsoft Azure's 16 percent share of the global cloud infrastructure market, according to data by research firm Canalys in April, is rapidly approaching Amazon's Amazon Web Services (AWS) business.

A Morgan Stanley poll of 100 U.S. and European CIOs gleaned insight into the broad-based acceptance of Microsoft's products.

The poll saw 34% planned to upgrade to a higher and more expensive tier of Office 365 software in the next two years, and more than 70% plan to deploy Microsoft Azure and its collection of hybrid cloud solutions.

Microsoft still has its cash cow business injecting healthy profits into its business with Microsoft's productivity and business processes unit, including Office 365, rising 13.1% YOY to $9.67 billion.

The tech sector needs the mega cloud stocks to stand up and be accountable at a precarious time when the macro picture is doing its best to suppress the robust tech sector.

Amazon and Alphabet are in the limelight next week, and Amazon will divulge frighteningly strong cloud numbers along with the braggadocio numbers about its record-breaking Prime Day.

The more I look at Microsoft's last quarter performance, it becomes harder and harder to identify any chink's in Microsoft's armor.

This is not your father's Microsoft.

This is the flashy, innovative Microsoft on top of the most influential trend in the technology sector - the migration to the cloud.

Sticking to this stock could be the rich new uncle of which you've always dreamed. But in this case, it's Satya Nadella providing the free flow of funds.

The spike in the shares is well deserved and any remnant of a retracement should be bought with two hands.

Saying that I am bullish about Microsoft's prospects is an understatement.

________________________________________________________________________________________________

Quote of the Day

"Your margin is my opportunity," said founder and CEO of Amazon Jeff Bezos.

July 20, 2018

Tech Letter

Mad Hedge Technology Letter
July 20, 2018
Fiat Lux

Featured Trade:
(A SELLERS' MARKET)
(CSCO), (MSCC), (GOOGL), (MCHP), (SWKS), (JNPR), (AMAT),
(PANW), (UBER), (AMZN), (AVGO), (QCOM), (CA), (CRM)

A Sellers' Market

Tech Letter

I bet you are wondering where all that money from the tax cuts is going.

Believe it or not, the No. 1 destination of this new windfall is technology companies, not just the stocks, but entire companies.

In fact, the takeover boom in Silicon Valley has already started, and it is rapidly accelerating.

The only logical conclusion in 2018 is that tech firms are about to get a lot more expensive. I'll explain exactly why.

The corporate cash glut is pushing up prices for unrealized M&A activity in 2018. U.S. firms accumulated an overseas treasure trove of around $2.6 trillion and the capital is spilling back into the States with a herd-type mentality.

I have chewed the fat with many CEOs about their cash pile road map. All mirrored each other to a T: strategic acquisition and share buybacks, period. The acquisition effect will be felt through all channels of the tech arterial system in 2018.

As the global race to acquire the best next generation technology heats up, domestic mergers could pierce the 400-deal threshold after a lukewarm 2017.

Spend or die.

Apple alone boomeranged back more than $250 billion with hopes of selective mergers and share buybacks. Cisco (CSCO), Microsoft (MSFT), and Google (GOOGL) were also in the running for most cash repatriated.

The tech behemoths are eager to make transformative injections into security, big data, semiconductor chips, and SaaS (service as a software) among others.

Hint: You want to own stocks in all of these areas.

Even non-traditional tech companies are getting in on the act with Walmart concentrating the heart of its strategic future on the pivot to technology.

Walk into your nearest Walmart every few months.

You'll notice major changes and not for decorative measures.

U-turns from legacy technology firms hawking desktop computers and HDD's (Hard Disk Drive) suddenly realize they are behind the eight ball.

M&A activity will naturally tilt toward firms dabbling in earlier-stage software and 5G supported technology. This flourishing trend will reshape autonomous vehicles and IoT (Internet of Things) products.

The dilemma in waiting to splash on a potential new expansion initiative is that the premium grows with the passage of time. Time is money.

It's a sellers' market and the sellers know this wholeheartedly.

Unleashing the M&A beast comes amid a seismic shift of rapid consolidation in the semiconductor sector. Cut costs to compete now or get crushed under the weight of other rivals that do. Ruthless rules of the game cause ruthless executive decisions.

The best way to cut costs is with immense scale to offer nice shortcuts in the cost structure. Buying another company and using each other's dynamism to find a cheaper way to operate is what Microchip Technology's (MCHP) culling of Microsemi Corporation (MSCC) in a deal worth $10bn was about.

Microsemi, based in Aliso Viejo, California, focuses on manufacturing chips for aerospace, military, and communications equipment.

Microchip's focal point is industrial, automobile and IoT products.

Included in the party bag is a built-in $1.8 billion annual revenue stream and more than $300 million of dynamic synergies set to take effect within three years. The bonus from this package is the ability to cross-sell chips into unique end markets opposed to selling from scratch.

Each business hyper-targets different segments of the chip industry and is highly complementary.

Benefits of a relatively robust credit market create an environment ripe for mergers. Some 57% of tech management questioned intend to go on the prowl for marquee pieces to add to their arsenal.

Then we have chip company Broadcom (AVGO) led by CEO Hock Tan, whose entire strategy is based on M&A and minimal capital spending.

His low-quality strategy of buying market share will ultimately fritter out. His lack of capital spending was also a salient reason for blocking Broadcom's purchase of Qualcomm (QCOM), which if stripped of its capital spending budget would have fallen behind China's Huawei to develop critical 5G infrastructure.

Tan's strategy flies in the face of the most powerful tech companies that are using M&A to enhance their products expanding their halo effect around the world.

Gutting innovation and skimming profits off the top is an entirely self-serving, myopic strategy to the detriment of long-term shareholders.

Investors punished Broadcom for it's latest investment of CA Technologies (CA) for $18.9 billion, even though this pickup signals a different tack.

CA Technologies is a leading provider of information technology (IT) management software, which suggests a belated move into the enterprise software market dominated by incumbents such as Salesforce (CRM).

Better late than never.

No need to mince words here as 2018 won't see any discounts of any sort. Nimble buyers should prepare for price wars as the new normal.

Not only are the plain vanilla big cap tech firms dicing up ways to enter new markets, alternative funds are looking to splash the cash, too.

Sovereign wealth funds and private equity firms are ambitiously circling around like vultures above waiting for the prey to show itself.

Private equity firms dove head first into the M&A circus already tripling output for tech firms.

Highlighting the synchronized show of force is none other than Travis Kalanick, the infamous founder of Uber. He christened his own venture capital fund that hopes to invest in e-commerce, real estate, and companies located in China and India.

The new fund is called 10100 and is backed by his own money. All this is possible because of SoftBank CEO Masayoshi Son's investment in Uber, which netted Kalanick a cool $1.4 billion representing Kalanick's 30% stake in Uber.

It is undeniable that valuations are exorbitant, but all data and chip related companies are selling for huge premiums. The premium will only increase as the applications of 5G, A.I., autonomous cars start to pervade deeper into the mainstream economy.

Adding fuel to the fire is the corporate tax cut. The lower tax rate will rotate more cash into M&A instead of Washington's tax coffers enhancing the ability for companies to stump up for a higher bill. Sellers know firms are bloated with cash and position themselves accordingly.

Highlighting the challenges buyers face in a sellers' market is Microsemi Corp.'s (MSCC) purchase of PMC-Sierra Inc. Even though PMC-Sierra had been looking to get in bed with Skyworks Solutions Inc. (SWKS) just before the MSCC merger, PMC-Sierra reneged on the acquisition after (SWKS) refused to bump up its original offer.

(SWKS) manufactures radio frequency semiconductors facilitating communication among smartphones, tablets and wireless networks found in iPhones and iPads.

(SWKS) is a prime takeover target for Apple. (SWKS) estimates to have the highest EPS growth over the next three to five years for companies not already participating in M&A. Apple (AAPL) could briskly mold this piece into its supply chain. Directly manufacturing chips would be a huge boon for Apple in a chip market in short supply.

In 2013, Japan's Tokyo Electron and Applied Materials (AMAT) angled to become one company called Eteris. This maneuver would have created the world's largest supplier of semiconductor processing equipment.

After two years of regulatory review, the merger was in violation of anti-trust concerns according to the United States. (AMAT), headquartered in Santa Clara, California, is a premium target as equipment is critical to manufacturing semiconductor chips. (AMAT) competes directly with Lam Research (LRCX), which is an absolute gem of a company.

Juniper Networks (JNPR) sells the third-most routers and switches used by ISP's (Internet Service Providers). It is also No. 2 in core routers with a 25% market share. Additionally, (JNPR) has a 24.8% market share of the firewall market.

In 2014, Palo Alto Networks (PANW), another takeover target focusing on cybersecurity, paid a $175 million settlement fee for allegedly infringing (JNPR)'s application firewall patents.

In data center security applications, (JNPR) routinely plays second fiddle to Cisco Systems (CSCO). Cisco, the best of breed in this space would benefit by snapping up (JNPR) and integrating its expertise into an expanding network.

Unsurprisingly, health care is the other sector experiencing a tidal wave of M&A, and it's not shocking that health care firms accumulated cash hoards abroad too. The dots are all starting to connect.

Firms want to partner with innovative companies. Companies hope to focus on customer demands and build a great user experience that will lead the economy. Health care costs are outrageous in America, and Jeff Bezos could flip this industry on its head.

Amazon (AMZN) pursuing lower health costs ultimately will bind these two industries together at the hip and is net positive for the American consumer.

Ride-sharing company Uber embarked on a new digital application called Uber Health that book patients who are medically unfit for regular Uber and shuttle them around to hospital facilities.

Health care providers can hail a ride for sick people immediately and are able to make an appointment 30 days in advance. It is a little difficult to move around in a wheel chair, and tech solves problems that stir up zero appetite for most business ventures. Apple is another large cap tech titan keeping close tabs on the health care space.

It's a two-way street with health care companies looking to snap up exceptional tech and vice versa.

It's practically a game of musical chairs.

Ultimately, Tech M&A is the catch of the day, and boosting earnings requires cutting-edge technology no matter how expensive it is. Investors will be kicking themselves for waiting too long. Buy now while you can.

Yes, It's All Going Into Tech Stocks

________________________________________________________________________________________________

Quote of the Day

"Companies in every industry need to assume that a software revolution is coming," - said American venture capitalist Marc Andreessen.

July 19, 2018

Tech Letter

Mad Hedge Technology Letter
July 19, 2018
Fiat Lux

Featured Trade:
(AVOIDING THE BULLY),
(MSFT), (AMZN), (WMT), (GME), (ORCL), (GE), (CPB)

Avoiding the Bully

Tech Letter

A bully stealing your lunch is not fun.

Partnering up to subdue a bully isn't only happening on the school playground.

Walmart (WMT) is doing it now, too.

Let me explain.

The Amazon (AMZN) effect is understood as the disruption of traditional brick-and-mortar business by Amazon's domination in e-commerce sales.

This phenomenon was all about how Amazon would take over, and by all means they are, and in brisk fashion.

That is why Amazon trade alerts from the Mad Hedge Technology Letter are nestled away in your email inbox.

Desperate times call for desperate measures.

Amazon competitors are facing an existential crisis they have never seen before.

The newest member of the FANG group, Walmart, is transforming into a tech company, and this metamorphosis is picking up steam.

To read my recent story about Walmart's headfirst dive into India, the newest battleground country, by way of its purchase of Indian e-commerce juggernaut Flipkart, please click here.

The second part of its strategy was revealed by announcing that Walmart would partner with Microsoft's (MSFT) cloud platform Azure to tap into the deep A.I. (artificial intelligence) and machine learning expertise.

If you can't beat them, find another competitor to help you change the status quo.

The five-year deal is a game changer in a coveted cloud industry pitting David vs. Goliath.

Amazon's footprint is wide reaching and bosses 33% of the cloud market it invented, far and away surpassing runner-up Microsoft, which garners just 13% market share.

Microsoft is catching up fast and that 13% was just 10% in 2016.

Microsoft and Walmart have a common foe that haunts them in their dreams.

These companies feel they are better served combining forces than being isolated from each other.

In an exclusive Wall Street Journal interview with Satya Nadella, Microsoft's CEO, Nadella directly confirmed what people already knew.

This strategic move "is absolutely core to this (Amazon threat)."

Walmart will use Microsoft's advanced cloud technology to optimize its operations from managing inventory, selecting the most suitable products to display, and running its equipment efficiently.

In 2016, Walmart's purchase of e-commerce company Jet.com was thoroughly integrated onto the Microsoft Azure. This further cooperation will help boost a company that has been aggressively vocal about its tech exploits.

High-quality products sell themselves and the story has played itself over again.

Microsoft is a master at luring in business through the front door, and padlocking the front gate procuring business for decades.

This case is no different and a vital reason the Mad Hedge Technology Letter has pinned down Microsoft as a top three tech stock.

Walmart also has made it crystal clear that a prerequisite for doing business with them is not doing business with Amazon Web Services (AWS), Amazon's lucrative cloud division.

Any profit dropping down to the (AWS) bottom line is used to wield against the retail landscape, damaging Walmart's prospects.

The Amazon effect is starting to work against Amazon, as the threat is forcing other businesses to adopt the same mind-set as Walmart.

Snowflake Computing, a private data firm focused on warehouse databases established by Bob Muglia in 2014, was exclusively available on the AWS platform.

However, more and more retailers such as Walmart started banging on Snowflake Computing's door demanding that it offer its cloud services on a cloud platform that is not its competitor.

Snowflake Computing obliged and is now up and running on Microsoft Azure.

Can you imagine the competition being able to sift through troves of data understanding every strength and weakness?

It's a one-way street to bankruptcy court.

Perhaps that explains why GameStop (GME) is such a poor performer, as its operations are entirely on (AWS).

GameStop is a stock that I am bearish on, because selling video games as a middleman is a legacy business.

Kids just download everything direct from the manufacturer from their broadband connection, making GameStop's business model obsolete.

It has a turnaround plan, apparently Oracle (ORCL) has one too, but it's barely begun.

Microsoft is a bad choice as well for GameStop, which is heart and center in the video game industry as well.

There are many alternatives; someone should notify recently installed GameStop CEO Daniel A. DeMatteo about one.

(AWS)'s dominance is benefitting Microsoft Azure explaining the rapid pace of cloud market share advancement.

This is just the tip of the iceberg. Walmart has some other irons in the fire.

Enter Project Kepler.

This is Walmart's response to Amazon Go stores, a partially automated retail store with no cashiers or checkout station, which currently has one functional location in Seattle.

Project Kepler is being developed by Jet.com co-founder and CTO Mike Hanrahan. And guess who is providing the technology for this alternative retail experience store - Microsoft.

Microsoft poached a computer vision specialist from Amazon Go who will help develop the appropriate sensors and computer vision algorithms necessary to get this store up and running.

These same sensors can be found in autonomous driving technology.

Shopping cart cameras could also be added to the mix to ensure quality and hopefully avoid the teething pains new technology grapples with.

Microsoft Azure CTO Mark Russinovich commented lately saying firms are on the front foot utilizing "A.I. and machine learning to automate processes to get insights into operations that they didn't have before."

Microsoft is perfectly set up to harvest many of these new contracts.

The deals have started to roll in.

Microsoft is successfully broadening its relationship with GE (GE), using the Azure data analytics capabilities to transform GE Digital's industrial IoT solutions.

This week also saw Microsoft scoop up Campbell Soup Company (CPB) as a new client, which decided on Microsoft Azure to modernize its IT infrastructure.

Campbell Soup will deploy Azure for real-time access to critical operations data, offering deeper intelligence for Campbell's senior management team.

This robust business activity is all because Microsoft is not Amazon, along with having a stellar product about which companies gloat.

Retailers have chosen Microsoft as the cloud platform of choice and expect the majority of retailers to tie their futures to Microsoft.

That's not the only iron in the fire.

Jetblack is another experimental retail service that Walmart is testing as we speak.

The service is still in beta mode in Manhattan targeting urban, high net worth mothers.

It emphasizes a personalized shopping experience in a narrow segment of goods that include household products, cosmetics, health and beauty products.

Shoppers will be able to snap photos of products and send them to Jetblack, receiving them at home with free shipping.

Customer service will be carried out by a high-quality lifelike bot, and Walmart intends to charge a membership fee to take part in this specialized shopping experience.

Microsoft subsidiary LinkedIn has also been leaning more on its parent company's technology lately.

LinkedIn software engineer Angelika Clayton wrote in her blog that "dozens of languages" are being converted into English via Microsoft Translator Text application programming interface, ballooning the candidate database for English speaking headhunters.

Could foreign language learning soon go way of the dodo bird and woolly mammoth?

Machine learning and A.I. have that type of power.

Tech analysts on the street must avoid issuing reports boasting that "everything is priced in," because these tech behemoths are driving innovation faster than people can understand it.

Walmart has turned into one of the most innovative companies around.

Who would have imagined this development a few years ago?

Nobody, not even Walmart itself.

Everything Microsoft touches lately turns into gold, along with being one of the more trusted tech titans out of the motley crew that has ruffled a few feathers this year.

Walmart is aggressively experimenting, systematically attempting to hop on new trends in retail hoping one or two will catch fire.

The credit must go to CEO Doug McMillon who has brought a tech first approach since being installed as CEO in 2014.

Even though conservative Walmart investors have penalized Walmart for the heavy spending, they must come to terms that Walmart's model is plain different now.

It's either spend or die in 2018.

Microsoft is in store to report its status on its pursuit of AWS, and I expect the company to inch closer with each earnings report.

Its outperforming Azure cloud business is in the first stages of a marathon, and sometimes it's not always salubrious to be the schoolyard bully because everybody starts avoiding you like the plague.

________________________________________________________________________________________________

Quote of the Day

"They broke the law on several occasions after being warned," said Larry Kudlow, director of the United States National Economic Council, when asked about Chinese company ZTE, which sold telecommunications equipment to Iran and North Korea.

July 18, 2018

Tech Letter

Mad Hedge Technology Letter
July 18, 2018
Fiat Lux

Featured Trade:
(IS NETFLIX DEAD?),
(NFLX), (AMZN), (FB), (TWTR), (DIS), (GOOGL), (QQQ)

Is Netflix Dead?

Tech Letter

Too far out over their skis.

For the first time in five quarters, Netflix (NFLX) was unable to eclipse the alpine level like expectations prognosticated by its own senior management.

Netflix and Amazon (AMZN) have been given luminary status at the Mad Hedge Technology Letter because the straight-line price action offers such agonizing entry points for investors, along with the best business growth models in the American economy.

Chasing this stock has usually worked out for the better, but leading up to the latest quarterly earnings report, Netflix started to scrunch up.

The firing squad loaded up its bullets and after Friday's close, shots were rained down on Netflix's parade as it failed to beat the only metric significant to Netflix investors - new subscribers.

The numbers were not even close.

Netflix fizzled out on its domestic subscriber's growth metric by 560,000, when 1.23 million new subscribers were expected.

International numbers succumbed to the inevitable, but less in percentage terms, failing to surpass the expected 5.11 million, only successfully adding 4.47 million new subscribers.

The 5.2 million adds out of the expected 6.3 million expected is the best news that has happened to Netflix in a long time if you are underinvested in this name.

Ravenous investors looking to jump on Netflix's bandwagon are licking their chops.

After-hours trading saw the stock tank, falling down the rabbit hole by almost 15%.

The stock had only recently been trading around an all-time high of $419. Fluffing their lines has given investors a much-awaited entry point into one of the creme de la creme growth stories in the vaunted tech sector.

Let's get a little more granular, shall we?

Even for high-flying tech stocks, the velocity of the price surges has put off many investors calling the stock "overbought."

Netflix shares were up 108% in 2018 before profit taking commenced before the earnings call. It was unusual to see Netflix intraday slide of 4%.

Investors smelled a rat.

It was only a matter of time before normal investors were finally given a chance to swiftly pile into this precious gem of a stock.

That time is now.

UBS analyst Eric Sheridan recently declared Netflix's growth story as "all priced in."

I don't buy it.

Yes, the shares got ahead of itself, but the Netflix narrative is still intact.

Over the earnings call, Netflix CEO Reed Hastings gushed about the current state of the company remarking that "fundamentals have never been stronger."

The bad news is that it missed on overzealous estimates; the good news is it added 5.2 million new subscribers.

Don't forget that in Q1 2018, Netflix beat total estimates by a herculean 920,000 subscribers, which is around what it missed by in Q2 2018.

The most recent quarter was overwhelmed by World Cup 2018 fever, with audiences migrating toward probably the most dramatic and exciting World Cup in history and the first to be streamed.

The most popular sporting event in the world gave Netflix a short-term kick in the cojones, delaying many new subscription sign-ups until after France lifted the trophy for the second time in its illustrious history.

The Twitter (TWTR) and Facebook (FB) numbers back up this thesis, experiencing explosive engagement and ad buying over the monthlong tournament boding well for their next earnings results.

Don't worry investors.

These eyeballs are just temporary.

The tournament offering a short-term bump to social media stocks clearly is just a one-off event that happens one summer out of every four.

Any recent profit taking will see the same investors eyeing a lower cost basis after this share dump.

Netflix won't be down for long.

Let's briefly review some of Netflix's cornerstone advantages:

The massive user migration from linear television to over-the-top content (OTT) led by cord-cutting millennials, responsible for a growing slice of domestic purchasing power.

The inherent advantages of a global over-the-top content (OTT) streaming model, applying massive scale with the cheap marginal cost of current technology.

The first-mover advantage that has allowed Netflix to have its own cake and eat it.

And the competition's laggardly response to Netflix eating its own cake.

Netflix CFO David Wells' take on the missed targets was "lumpiness" in the business and brushed it off like a bug crawling up your leg.

Hastings also chimed in about the increased competition shaping up and Disney (DIS), HBO, and other players finally getting their act together.

He mentioned there is room for multiple players in this industry, but they better not show up to the gunfight with a knife.

Netflix has been weaning itself from Disney's, Fox's and other third-party content for years, along with spending 50% more on marketing in 2018.

Ted Sarandos, chief content officer of Netflix, let it be known that 85% of new spending will be on original content in 2018.

Out of $8 billion earmarked for content in 2018, a colossal $6.8 billion is set to be splashed on in-house productions.

Compare this with the competition of Amazon, which plans to spend $4.5 billion on original content in 2018 and Hulu's plan to spend $2.5 billion in 2018.

Down the road, Netflix will have greater ability to finance its expensive content spend as it has flipped to a profit-making entity.

Amazon uses its AWS (Amazon Web Services) arm to fund its various subsidiaries.

The high level of quality content is reflected in the 40 Emmy nominations garnered by Netflix, in effect crushing stalwart HBO.

Netflix is aggressively courting Hollywood's A-list and poaching them in droves.

Proven content creators such as Ryan Murphy, Shonda Rhimes, Shawn Levy and Jenji Kohan are now on Netflix's payroll, and are a vital reason for the uptick in quality programming.

This successful harvest will result in added brand recognition and elevated prestige for current and future eyeballs.

Netflix will push out around 1,000 original programs in 2018. More than 90% of Netflix's subscribers habitually watch its vast portfolio of original programming.

The only way Netflix can be stopped is if it stops itself.

The pipeline is plush, and it is not all priced into the stock yet.

Next year could be the year India and Japan massage the bottom lines to greater effect, as Netflix double downs on the international arena.

Netflix's first original Indian series "Sacred Games" has been a winner, and its first original movie "Lust Stories" is creating a stir among avid Indian movie followers.

CEO Hastings has gone on record stating the "next 100 million" Netflix subscribers will derive from the land of Taj Mahal and chicken tikka masala.

Netflix has a lot of work to do to catch up with entrenched leaders Hotstar and Alphabet's (GOOGL) YouTube India.

About 800 million Indians have never been online before. The screaming potential India offers cannot be found elsewhere, especially with films historically, deeply embedded inside India's ancient culture.

Next month will see the release of "Ghoul," based on critically acclaimed work by authors Salman Rushdie and Aravind Adiga.

Slated for imminent release is also Mumbai Indians, a documentary about a top team in the locally obsessed Indian Premier League cricket tournament.

GBH Insights' internal research has found that Netflix is watched 10 hours per week in American households.

That number will inevitably grow as the quality of content goes from strength to strength for this first-rate company.

And how did Netflix's shock miss affect the Nasdaq (QQQ) on the next trading day?

It showed the resiliency and intestinal fortitude that has been a hallmark of the tech sector bull market.

The latest earnings result snafu is a surefire chance to finally have a little taste of Netflix. It will be back over $400 in no time.

________________________________________________________________________________________________

Quote of the Day

"If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner," - said retired U.S. Army General Omar Bradley.

July 17, 2018

Tech Letter

Mad Hedge Technology Letter
July 17, 2018
Fiat Lux

Featured Trade:
(THE PATH AHEAD),
(IBM), (AMZN), (FB), (MSFT), (NFLX), (QQQ), (AAPL), (DBX), (BLK)

The Path Ahead

Tech Letter

The Red Sea has parted, and the path has opened up.

Technology has been a beacon of light providing comfort to the equity market, when a trade war could have purged the living daylights out of bullish investor sentiment.

If an increasingly hostile, tit-for-tat trade skirmish threatening overseas revenue can't bring tech equities to its knees, what can?

It seems the more bellicose the administration becomes, the higher technology stocks balloon.

Does this all add up?

The Nasdaq (QQQ) continues its processional march skyward. If you were a portfolio manager at the beginning of the year without technology exposure, then polish off the resume before it picks up too much dust.

The Nasdaq has set all-time highs even after a brutal 700-point sell-off at the end of January.

Apple (AAPL), Microsoft (MSFT), Netflix (NFLX), and Amazon (AMZN) can take credit for 83% of the S&P 500's gains in 2018.

And that fearsome four does not even include Facebook (FB), which has left the shorts in the dust.

Each momentous sell-off has proved to be a golden buying opportunity, propelling tech stocks to higher highs and retracing to higher lows.

And now the path to tech profits is gaping wide, luring in the marginal investor after two highly bullish events for the tech world boding well for the rest of fiscal year 2018.

Xiaomi, one of China's precious unicorns, which sells upmarket smartphones, went public on the Hong Kong Hang Seng market last week.

The timing couldn't be poorer.

The rhetoric between the two global leaders reached fever pitch with the administration proposing $200 billion worth of tariffs levied on Chinese imports.

China reiterated its entrenched stance of not backing down, triggering a tense war of words between the two global powers.

The beginning of March saw the Shanghai stock market nosedive through any remnants of support levels.

The 50-day moving average, 100-day, and 200-day were smashed to bits and Shanghai kept trending lower.

The trade skirmish has had the reverse effect on Chinese equities compared to the Nasdaq's brilliance, and combined with the strong dollar, has seen emerging markets hammered like the Croatian soccer team in Moscow.

Xiaomi's IPO was priced in the range of HK$17 to $22, and when it opened up on the first day at HK$16.60, investors were holding their breath.

Take the recent IPO triumph of cloud company Dropbox (DBX), whose IPO was priced in the expected range of US$18 to $20. The first day of trading showed how much appetite there is for to- quality cloud companies, with Dropbox starting its trading day at US$29, 40% higher than the expected range.

Dropbox finished its first day at a lofty US$28.48, a nice 35% return in one trading day.

No doubt Xiaomi's shares were not expected to perform like Dropbox, but it held its own.

Astonishingly, this company did not even exist nine years ago and is now the fourth-largest smartphone manufacturer in the world, grossing $18 billion in revenue in 2017.

The unimaginable pace of development highlights the speed at which the Chinese economy and consumer zigs and zags.

Chinese retail sales were up a staggering 9% YOY for the month of June 2018. Its overall economy met its 6.7% target for the second quarter of 2018.

The price range settled for the IPO gave Xiaomi a valuation of $54 billion.

Instead of getting roiled, Xiaomi came through with flying colors posting a 26% gain after the first week of trading.

Poor price action could have given Beijing ammunition to cry foul, laying blame for the underperformance on the U.S. tariffs.

The healthy price action underscores there is still room for Chinese and American companies to flourish in 2018, albeit through a highly politicized environment.

Specifically, Apple comes through unscathed as a disastrous Xiaomi IPO could have resulted in negative local press stoking higher operational risks in greater China.

Apple is in the eye of the storm, but untouchable because it employs more than 4 million local Chinese employees throughout its expansive ecosystem and has been praised by Beijing as the model foreign company.

Apple earned $13 billion in revenue from China in Q2 2018, a 21% YOY increase.

Hounding Apple out of China will be the inflection point when tech investors know there is a serious problem going on and need to hit the eject button.

If this ever happens, The Mad Hedge Technology Letter will be the first to resort to risk off strategies.

BlackRock's (BLK) CEO Larry Fink let everyone know his piece saying, "the lack of breadth in the equity markets is troubling."

Investors cannot blame tech companies for executing their way to the top behind the tailwind of the biggest technological transformation in mankind.

And even in the tech industry, winners can turn into losers in a blink of an eye, such as legacy tech company IBM (IBM).

Someone better tell Fink that this is the beginning.

Amazon recorded 44% of total U.S. e-commerce sales in 2017, equaling 4% of total retail sales in the U.S.

This number is expected to breach 50% by the end of 2018.

The second piece of bullish tech news was lifting the ban on Chinese telecommunications company ZTE.

It is open for business again.

From a national security front, this is an unequivocal loss. However, it saved 75,000 Chinese jobs and gave a small victory to American regulators attempting to patrol the mischievous behemoth.

The U.S. Department of Commerce lifted the seven-year ban even after ZTE sold telecommunication products to North Korea and Iran.

ZTE was fined $1 billion, changed the senior management team, and put into place an American compliance team that will monitor its business for the next 10 years.

Diluting the penalty lowers the operational risk for American tech companies because it shows the administration is willing to reach compromises even if the compromise isn't perfect.

China is a lot less willing to ransack Micron and Intel's China revenues, if America allows China to save face and 75,000 local jobs.

This is a big deal for them and their employees.

America has a strong hand to play with against China because China still requires Uncle Sam's semiconductor components to build its future.

This hand is only effective if Chinese still thirst for American technology. As of today, America is higher on the technological food chain than China.

The move is also a model of what the U.S. Department of Commerce will do if Chinese companies run amok, which Chinese tech companies often do because of the lack of corporate governance and transparency.

These two recent China events empower the overall American tech sector, and the market will need a berserk shock to the tech ecosphere foundations to make it crumble.

As it stands, the tech sector is handling the trade war fine, and with expected blowout tech earnings right around the corner, short tech stocks at your own peril.

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Quote of the Day

"All of the biggest technological inventions created by man - the airplane, the automobile, the computer - says little about his intelligence, but speaks volumes about his laziness," - said author Mark Kennedy.

July 16, 2018

Tech Letter

Mad Hedge Technology Letter
July 16, 2018
Fiat Lux

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