Mad Hedge Technology Letter
July 2, 2018
Fiat Lux
Featured Trade:
(THE CLOUD FOR DUMMIES)
(AMZN), (MSFT), (GOOGL), (AAPL), (CRM), (ZS)
If you've been living under a rock the past few years, the cloud phenomenon hasn't passed you by and you still have time to cash in.
You want to hitch your wagon to cloud-based investments in any way, shape or form.
Microsoft's (MSFT) pivot to its Azure enterprise business has sent its stock skyward, and it is poised to rake in more than $100 billion in cloud revenue over the next 10 years.
Microsoft's share of the cloud market rose from 10% to 13% and is catching up to Amazon Web Services (AWS).
Amazon leads the cloud industry it created, and the 49% growth in cloud sales from the 42% in Q3 2017 is a welcome sign that Amazon is not tripping up.
It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.
Amazon (AMZN) relies on AWS to underpin the rest of its businesses and that is why AWS contributes 73% to Amazon's total operating income.
Total revenue for just the AWS division is an annual $5.5 billion business and would operate as a healthy stand-alone tech company if need be.
Cloud revenue is even starting to account for a noticeable share of Apple's (AAPL) earnings, which has previously bet the ranch on hardware products.
The future is about the cloud.
These days, the average investor probably hears about the cloud a dozen times a day. If you work in Silicon Valley you can triple that figure.
So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.
Think of this as a cloud primer.
It's important to understand the cloud, both its strengths and limitations. Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest growing companies in the world.
Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that's where I come in.
Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.
They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy remember that the original Department of Defense packet switching design was intended to make the system atomic bomb proof.
As a user you can access any single server at any one time anywhere in the world. These servers are owned, maintained and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.
The most important features of cloud storage are:
1) It is a service provided by an external provider.
2) All data is stored outside your computer residing inside an in-house network.
3) A simple Internet connection will allow you to access your data at anytime from anywhere.
4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.
Once you start using the cloud to store a company's data, the benefits are many.
- No Maintenance
Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.
However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.
Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.
Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing IT staff of prima donnas.
- Greater Flexibility
Today's employees want to have a better work/life balance and this goal can be best achieved through letting them telecommute. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.
How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?
Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees. According to a recent survey, 79% of respondents already work outside of their office some of the time, while another 60% would switch jobs if offered this flexibility.
With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.
It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.
- Better Collaboration and Communication
In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.
For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.
These products, which all offer free entry-level versions, allow users to access the latest versions of any document, so they can stay on top of real-time changes, which can help businesses to better manage work flow, regardless of geographical location.
- Data Protection
Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.
The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.
It's best to move data to the cloud, to avoid such disruptions because there your data will be stored in multiple locations.
This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.
- Lower Overhead
The cloud can save businesses a lot of money.
By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.
Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.
_________________________________________________________________________________________________
Quote of the Day
"Life is not fair; get used to it," said founder of Microsoft Bill Gates.
Mad Hedge Technology Letter
June 29, 2018
Fiat Lux
Featured Trade:
(IS AIRBNB YOUR NEXT TEN BAGGER?)
I was not surprised to hear that the home sharing app, Airbnb, was given a $31 billion valuation in the latest venture capital funding round.
The big question for you and I is: Will the valuation soar tenfold to $300 billion, and how much of a piece of that will you and I be allowed to get?
To answer that question I spent six weeks traveling around Europe as an Airbnb customer. This enabled me to understand its business model, its strengths and weaknesses, and analyze its long-term potential.
As a customer the value you receive is nothing less than amazing.
I have been a five-star hotel client for most of my life, with someone else picking up the tab much of the time, so I have a pretty good idea on the true value of accommodations.
What you get from Airbnb is nothing less than spectacular. You get three or four times the space for one-third the price. That's a disruption factor of 7:1.
The standards are often five-star and at the top end, depending on how much you spend. I found I could often get an entire three-bedroom house for the price of a single hotel room, with a better location.
Or, I could get an excellent abode in rural settings, where none other was to be had, whatsoever.
That's a big deal for someone like me who spends so much of the year on the road.
You also get a new best friend in every city you visit.
On most occasions the host greeted me on the doorsteps with the keys, and then introduced me to the mysteries of European kitchen appliances, heating, and air-conditioning.
Pre-stocking the refrigerator with fresh milk, coffee, tea, and jam seems to be a tradition the hosts pick up in their Airbnb orientation course.
One in Waterford, Ireland, even left me a bottle of wine, plenty of beer, and a frozen pizza. She read my mind. Thanks, Mary!
She then took me on a one-hour tour of their city, divulging secrets about their favorite restaurants, city sights, and nightspots. Every one proved golden.
After you check out, Airbnb asks you to review the accommodation. These can be incredibly valuable in deciding your next pick.
I had one near miss with what I thought was a great deal in London, until I read, "The entire place reeks of Indian cooking."
Similarly, the hosts rate you as a guest.
One hostess shared a story about picking up her clients from town after they got drunk and lost in the middle of the night. Then they threw up in the back of the car on the way home.
Guests forgetting to return keys are another common complaint.
Needless to say, I received top ratings from my hosts, as fixing their Wi-Fi to boost performance became a regular habit of mine.
After my initial fabulous experience in London, I thought it might be a one-off, limited to only the largest cities. So, I started researching accommodations for my upcoming trips.
I couldn't have been more wrong.
Just the Kona Coast alone on the big island of Hawaii had an incredible 50 offerings, including several bargain beachfront properties.
The center of Tokyo had more than 300 listings. The historic district in Florence, Italy, had a mind-blowing 351 properties.
Fancy a retreat on the island of Bali in Indonesia and tune up your surfing? There are more than 197 places to stay!
While we weren't looking, Airbnb has truly gone global.
Airbnb's business model is almost too simple to be true, involving no more than a couple of popular applications. Call it an artful melding of Google Earth, email, text, and PayPal.
While no one was looking, it became the world's largest hotel at a tiny fraction of the capital cost.
The company has 2 million hosts worldwide, and 100 million customers. That supply/demand imbalance shifts burden of the cost to the renters, who usually have to fork out a 12% fee, plus the cost of the cleaning service.
Hosts only pay 3% to process the credit card fees for the payment.
The tidal wave of revenues this has created has enabled Airbnb to become San Francisco's second largest privately owned "unicorn," right after the $70 billion behemoth ridesharing app, Uber.
To say that Airbnb has created controversy would be a huge understatement.
For a start, it has emerged as a major challenge to the hotel industry, which is still stuck with a 20th century business model. There's no way hotels can compete on price.
One Airbnb "super host" in Manhattan is managing 200 apartments, essentially, creating out of scratch, a medium-sized virtual "hotel."
Taxes are another matter.
Some municipalities require hosts to pay levies of up to 20%, while others demand quarterly tax filings and withholding taxes. That is, if tax collectors can find them.
Airbnb may be the largest new source of tax evasion today.
In cities where housing is in short supply Airbnb is seen as crowding out local residents. After all, an owner can make far more money subletting their residence nightly than with a long-term lease.
Several owners told me that Airbnb covered their entire housing cost for the year, while paying off the mortgage at the same time.
Owners in the primest of areas, such as in midtown Manhattan off of Central Park or the old city center in Dubrovnik, Croatia, rent their homes out as much as 180 days a year.
It is doing nothing less than changing lives.
That has forced local governments to clamp down.
San Francisco has severe, ironclad planning and zoning restrictions that only allow 2,000 new residences a year to come on the market.
It is cracking down on Airbnb, as well as other home-sharing apps such as FlipKey, VRBO, and HomeAway by forcing hosts to register with the city or face brutal $1,000-a-day fines.
So far, only 1,675 out of 9,000 hosts have done so.
Ratting out your neighbor as an off-the-grid Airbnb member has become a new cottage industry in The City by the Bay.
Airbnb is fighting back with multiple lawsuits, citing the federal Communications Decency Act, the Stored Communications Act, and the First Amendment covering the freedom of speech.
It is a safe bet that a $31 billion company can spend more on legal fees than a city the size of San Francisco.
The company also has become the largest contributor in San Francisco's local elections. In 2015, it fought a successful campaign against Proposition "F," meant to place severe restrictions on its services.
An Airbnb stay over is not without its problems.
The burden of truth in advertising is on the host, not the company, and inaccurate listings are withdrawn only after complaints.
A 20-something-year-old guy's idea of cleanliness may be a little lower than your own.
Longtime users learn the unspoken "code."
"Cozy" can mean tiny, "as is" can be a dump, and "lively" can bring the drunken screaming of four-letter words all night long, especially if you are staying upstairs from a pub.
And that spectacular seaside view might come with relentlessly whining Vespa's on the highway out front. Always brings earplugs and blindfolds as backups.
Researching complaints, it seems that the worst of the abuses occur in shared accommodation. Learning new foreign cultures can be fascinating. But your new roommate may want to get to know you better than you want.
In one notorious incident a Madrid guest was raped. The best way to guard against such unpleasantries is to rent the entire residence for your use only, as I do.
Another problem arises when properties are rented out for illegal purposes, such as prostitution or drug dealing.
More than once, an unsuspecting resident woke up one morning to discover they were living next door to a new bordello.
Wild parties that trash the dwelling, annoy the neighbors, and bring in the police is another worry.
Of course, the million-dollar question is, "When will the company go public?"
The current "unicorn" philosophy is to milk the company for all it's worth, and take it public when it is about to go ex-growth.
That's what happened to Twitter (TWTR), which grew exponentially, and then saw shares dive a gut-churning 72% after its initial public offering. It has since recovered.
On seeing the massive crowds of new tourists packing Europe this summer, my conclusion is that the travel industry is entering a hypergrowth phase. Blame the emerging middle-class Chinese who seem to be everywhere.
That means that at whatever price Airbnb goes public, there may not be a ten-bagger left for you. But a two or three bagger may be possible.
The real shock came when I left Airbnb and stayed in a regular hotel. Include the fees and the cleaning charges, and the service is no longer competitive for a single night stay.
In any case, most hosts have two- or three-night minimums to minimize hassle.
When I checked in at a Basel, Switzerland, five-star hotel, all I got was a set of keys and a blank stare. No great restaurant tips, no local secrets, no new best friend.
I spent that night surfing Airbnb, planning my next adventure.
_________________________________________________________________________________________________
Quote of the Day
"There are just not enough human buyers in the market," lamented Edward Perkin, chief equity investment officer at Eaton Vance.
Mad Hedge Technology Letter
June 28, 2018
Fiat Lux
Featured Trade:
(WHY TECH IS REGULATION PROOF),
(UBER)
Regulation lost again.
If regulation was a team at the 2018 Russian World Cup, they would have already been sent packing in disgrace.
Even if regulators want to regulate, tech companies swiftly respond with an army of well-paid lawyers fighting fiercely for its interests.
Tech is more powerful than government now and the desperation of government intervention after the fact falls on deaf ears.
Investors have even seen this happen in communist China where there are whispers in Beijing that China's BATs are getting too powerful for their own good.
In a major victory in the run-up to the 2019 IPO, Uber one-upped the Brits.
Uber won back its license to operate in the city of London, one of Uber's major growth engines, when British judge Emma Arbuthnot turned over the ruling and gave Uber a 15-month license.
Tech is invincible against the institutions attempting to clamp down on wild business practices involving data.
And this win proves that every emerging tech company should act brazenly and push the line when it can.
If regulations set tech in its crosshairs, this proves there is no recourse.
Tech is disrupting regulation.
Tech is changing so fast that regulators cannot keep up because of the creaky, bureaucratic nature of big government.
Once regulators wrap their heads around a new technology, the next technology is on its way to universal rollout.
If you want to boil everything down to the nuts and bolts, tech is just too nimble.
It can simultaneously morph into anything it wants in a jiffy because any morphing these days involves a computer, Internet connection, and execution ability.
This phenomenon has created a scenario where regulators will always be one step behind the tech companies, which at the same time are staying one step ahead of the hackers trying to skim off their profits or plain out blow a hole in their company.
It is hard to regulate something you do not know about or do not understand.
Even worse, if a technology becomes firmly embedded into popular culture, it's even harder to root it out.
The result is that Uber and the ride-sharing economy is here to stay. Now the most anticipated IPO in 2019 has its best European business up and running again.
When I say nimbleness, this does not just refer to staying ahead of regulators but also the agility to operate in certain geographic specific locations.
In just a few months, Uber shut up shop in Southeast Asia selling its business to Grab, the leading ride-sharing app in Southeast Asia, while receiving a 27.5% stake in Grab.
I have chronicled the problem with American companies entering into Southeast Asia, and this stake proves a shrewd move.
It will materially add to the top and bottom line once Uber goes public.
Southeast Asia is China's sphere of influence, and the special relationships Beijing has procured in the region offers Beijing unfettered access to claim it as its own turf.
This is going on while the Japanese "zaibatsu" and Korean "chaebols" are licking their chops to penetrate the Southeast Asian markets after grappling with an aging society and stagnant profitability.
SoftBank's Masayoshi Son, a recent investor of Uber, has applied pressure on Uber to focus on its premium markets and drop the third world pivot.
Effectively, Uber has done well to seize a stake in a region oozing with Chinese interests in a premium unicorn.
As Facebook has showed, the highest average revenue per user stems from North America and Europe.
Whether it's hawking ads or sharing transportation, companies can extract more profit per user in these two regions.
Migrating up the value food chain is bullish for its financials come the IPO.
London represents a huge opportunity for Uber.
Uber has cornered the London market with more than 3.6 million users serviced by more than 45,000 Uber drivers.
Digging its nails further into its core market will encourage the closing down of the cash burn model that Uber promulgated in its early days.
Before Uber sold its interests in China, it was burning $1 billion per year fighting domestic stalwart Didi Chuxing, one of China's best and brightest unicorns.
The $2 billion Uber lost in two years was enough and avoiding future China risk sealed the move out of China.
That move looks great considering the tariff war playing out in Washington.
The trend of western tech firms doubling down on western markets will strengthen going forward as Europe has the same worries about Chinese tech hijacking Europe's best technology such as China's Midea Group purchase of Germany's best robotic company Kuka in 2016.
China cannot do that anymore in Europe or America.
Uber Eats, one of Uber's hottest growth businesses, has no chance of succeeding in third world countries where delivery charges are a pittance due to cheap labor costs.
This business can only succeed in high transport cost societies.
Uber ran into headwinds using controversial UberPOP, Uber's compact vehicle app in Europe, in countries including Spain, Denmark, Germany, Italy, Finland, Japan, Hungary, and Bulgaria.
Aside from Bulgaria and Hungary, these locations represent high purchasing power countries that fit with Uber's business model.
Each victory in court will create additional income streams, and I am willing to bet on Uber's lawyers in the developed world, rather than a hodgepodge of uninformed regulators.
Imagine how regulators will police artificial intelligence (A.I.) in the future?
Only A.I. engineers understand what is happening under the hood of the car.
Uber will find the will and a way to enter into every market it considers healthy for its technology.
Under the new rules in London, Uber must now report crimes to the police instead of to the transport authority of London.
Drivers can only offer rides in locations where they have proper certifications to work for Uber.
Uber must now give a mandatory six-hour break to Uber drivers who have worked for 10 straight hours.
These new laws are hardly anything extreme and should already have been written into stone beforehand.
As expected, Uber blamed the debacle on Travis Kalanick, the maverick founder and former CEO of Uber. And Uber being "not fit" to operate was entirely convenient to use Kalanick as the scapegoat.
Uber has increased private hired vehicles in London 92% since 2009. Without London, Uber's future profitability and growth story becomes questionable.
Uber has interests in more than 600 cities worldwide and more than 40 of these are in England.
Uber can avoid any major damage with the Brighton's of the world refusing to cooperate, but it cannot lose its higher-grade locations in London, New York, San Francisco, and almost every major mega city in the western world.
They did it.
Tech disrupted regulation again, and next year's IPO should be a stunning spectacle.
It is normal in the current climate for expectations of tech darlings to explode, and 2019 will bring self-driving technology to the public markets creating even more demand for this asset scarce industry.
That is exactly what tech does.
Tech builds industry from scratch and regulators have no chance to control it.
Uber's ultimate goal is to profit from flying cars by 2023, in a new business called Uber Elevate that will cause regulators to fall even further behind the regulation curve as tech makes science fiction a reality in the near future.
_________________________________________________________________________________________________
Quote of the Day
"We're in a political campaign, and the candidate is Uber and the opponent is an asshole named Taxi," said founder and former CEO of Uber Travis Kalanick.
Mad Hedge Technology Letter
June 27, 2018
Fiat Lux
Featured Trade:
(DON'T NAP ON ROKU)
(MSFT), (ROKU), (AMZN), (AAPL), (CBS), (DIS), (NFLX), (TWTR), (SQ), (FB)
Unique assets stand the test of time.
In an era of unprecedented disruption, unique assets' strength begets strength.
This is one of the big reasons the vaunted FANG group has carved out power gains in the business landscape bestowed with a largesse dwarfing any other sector.
As the FANGs trot out to imminent profitability by supercharging massive scale, the emerging tech environment gives food for thought.
These up-and-coming companies fight tooth and nail to elevate themselves to FANG status because of the ease of operating in a duopoly or an outright monopoly.
Microsoft (MSFT) is the closest substitute to an outright FANG. In many ways CEO Satya Nadella has positioned himself better than Facebook (FB) and Apple.
The Mad Hedge Technology Letter has pounced on the newest kids on the block offering subscribers buy, sell or hold recommendations zoning in on the best first and second tier companies in tech land.
The top echelon of the second tier is led by no other than Jack Dorsey and both of his companies, Square (SQ) and Twitter (TWTR), offer idiosyncratic services that cannot be found elsewhere.
I have devoted stories to Dorsey gushing about his ability to build a company and rightly so.
Another solid second tier tech company bringing uniqueness to the table is Roku (ROKU), which I have talked about in glowing terms before when I wrote, "How Roku is Winning the Streaming Wars."
To read the archived story, please click here.
Roku is a cluster of in-house, manufactured, online streaming devices offering OTT (over-the-top) content in the form of channels on its proprietary platform.
The word Roku means six in Japanese and it was chosen because Roku was the sixth company established by founder and CEO Anthony Wood commencing in 2002.
Cord-cutting has been a much-covered topic in my newsletters and this generational shift in consumer behavior benefits Roku the most.
In 2017, 25% of televisions purchased were Roku TVs. According to several reports, more than half of all streaming players purchased last year were Roku players.
This would explain how Roku has shifted its income streams from the physical box itself to selling ads and licensing agreements.
Yes, Roku earns the lion's share of its profits similar to the rogue ad seller Facebook.
Roku does not actually sell anything physical except the box you need to operate Roku, which earned Roku a fixed $30 per unit.
The box serves as the gateway to its platform where it sells ads. Migrating to higher caliber digital businesses like selling ads will stunt the hardware revenue part of its business.
That is all part of the plan.
A new survey conducted regarding fresh cord-cutters demonstrated that out of 2,000 cord-cutters questioned, 70% already had a Roku player and felt no need to pay for cable TV anymore.
Second on the list was Amazon Fire TV at 34%, and Apple TV (AAPL) came in third at 10%.
The dominant position has forced content creators to pander toward Roku TV's platform because third-party content creators do not want to miss out on a huge swath of cord-cutter millennials who are entering into their peak spending years and spend most of their time parked on Roku's platform.
Surveys have shown that millennials do not need a million different streaming services.
They only choose one or two for main functionality, and in most cases, these are Netflix (NFLX) and Amazon (AMZN).
Roku allows both these services to be integrated onto its platform. Cord-cutters can supplement their Netflix and Amazon Prime Video binge with a few more a la carte channels to their preference depending on points of interest.
In general, this is how millennials are setting up their entertainment routine, and all roads don't lead through Rome, but Roku.
If the massive scale continues at this pace, 2020 could be the year profitability explodes through the roof.
The next 18 months should give way to parabolic spikes, followed by consolidation to higher lows in the share price.
When I recommended this stock, its shares were trading at a tad above $32 on April 18, 2018, and immediately spiked to $47 on June 20, 2018.
The tariff sell-off hit most second tier tech companies flush in the mouth. The 5% and occasional 7% intraday sell-offs churn the stomach like Mumbai street food during the height of the Indian summer.
That is part and parcel of dipping your toe into these rising stars.
The move ups are parabolic, but the sell-offs make your hair fall out.
Well, glue your locks back onto your scalp, because we have reached another entry point.
Roku is now trading back down in the low $40 range, and I would bet my retirement fund that Roku will end the year above $50.
This unique company is expected to grow its subscriber base by at least 20% annually, and in five years total subscribers will eclipse 45 million users.
Reinforcing its industry leadership, traditional media companies such as Disney and CBS do not have built-in streaming viewership that comes close to touching Roku.
This has forced these traditional media giants to push their content through Roku or lose a huge amount of the 18 to 34 age bracket for which advertisers yearn.
These traditional players are armed with robust ad budgets, and a good bulk of it is allocated to Roku among others.
For each additional a la carte channel users sign up for on Roku, the company earns a sales commission.
As a tidal wave of niche streaming channels plan to hit the market, the first place they will look to is Roku's platform and this trend will only become stronger with time.
A prominent example was Sling TV, which showed up at Roku's front door first before circling around the rest of the neighborhood.
The runway for Roku's three main businesses of video ads, display ads, and licensing with streaming partners, is long and robust.
The one caveat is the fierce competition from Amazon Fire TV, which puts its in-house content on Amazon front and center when you start the experience.
Roku has head and shoulders above the biggest library of content, and the Amazon effect could scare traditional media for licensing content to Amazon.
We have seen the trend of major players removing their content from streamers because of the inherent conflict of interests licensing content to them while they are developing an in-house business.
It makes no sense to voluntarily offer an advantage to competition.
Roku has no plans to initiate its own in-house original content, and this is the main reason that Amazon and Netflix will lose out on Disney (DIS), CBS (CBS), NBC, and Fox content going forward.
These traditional players categorize Roku as a partner and not a foe.
To get into bed with the traditional media giants means digital ads and lots of them. In terms of a user experience, the absence of ads on Netflix and Amazon is a huge positive for the consumer experience.
But traditional players have the option of bundling ads and content together on Roku making Roku even more of a diamond in the rough.
In short, nobody offers the type of supreme aggregator experience, deep penetration of cord-cutting viewership, and the best streaming content on one graphic interface like Roku.
It is truly an innovative company, and it is in the driver's seat to this magnificent growth story.
It's hard to argue with CEO Anthony Wood when he says that Roku is the future of TV.
He might be right.
If Roku keeps pushing the envelope enhancing its product, it will be front and center as a potential takeover target by a bigger tech company.
Either way, the scarcity value of these types of assets will drive its share prices to the moon, just avoid the nasty sell-offs.
_________________________________________________________________________________________________
Quote of the Day
"Google's not a real company. It's a house of cards," - said former CEO of Microsoft Steve Ballmer.
Mad Hedge Technology Letter
June 26, 2018
Fiat Lux
Featured Trade:
(THE CHIP DILEMMA)
(MU), (NFLX), (AMZN), (NVDA), (AMD), (RHT)
The hawks are circling around 2019 chip guidance and that is bad news for chip equities.
Perusing through recent earnings reports, it's not a surprise that investors are uncertain whether tech can bail the rest of the equity market out of this slow macro malaise.
The deterioration in the macro climate has given added dependence to the tech vanguard with investors piling into large cap tech as a flight to quality ensues.
It helps when the tech sector is at the heart of every and any future business.
Names such as Amazon (AMZN) and Netflix (NFLX) are so far above their 50-day and 100-day moving averages that investors will take this mild sell-off as a healthy sign of consolidation.
This also means that traders will pin down Netflix's and Amazon's 50-day and 100-day moving averages as the line in the sand for technical support.
The equity weakness underscores that not all tech names are created equal, and firms without moats have been the leakiest.
Red Hat, the up-and-coming enterprise cloud company, became the scapegoat for mid-cap cloud companies triggering a massive sell-off dipping 14.23% instigated by weak guidance.
It was one of the first cloud snafus for a few quarters fueling an intense risk off surge in cloud and chip names.
It seems not a day goes by where the administration does not announce another provocative countermeasure to the tit-for-tat trade skirmish being played out at the highest levels of government.
Analysts have been trigger-happy as the few bears out there are incentivized to be the first one to call the peak of the chip market.
Careers are made and lost with these bold calls.
As bad as the Red Hat (RHT) miss was to the tech narrative, Micron (MU) made a big splash on its quarterly earnings report boding well for large cap tech names.
Micron beat estimates and surprised on the upside on guidance.
Micron was the first recommendation of the Mad Hedge Technology Letter at a cheap $41.
To read the first article of the Mad Hedge Fund Technology Letter about Micron, please click here.
The stock rocketed to more than $60 at the end of March and the end of May, each time dragged down by big picture headwinds.
Micron is a great long-term hold and the volatility in the stock is not for everyone.
If you want to avoid mind-numbing volatility, then stay away from chip stocks as the boom-bust nature of this sector has created a paranoia bias among analysts generating stock downgrades.
Cloud stocks are succinct, zeroing in on the few growth metrics that matter.
The guesswork involved in chip stocks is the perfect formula that leads to downgrades, because the silicon is distributed to other companies for end products of which are hard to keep tabs.
Hence, the chips industry has experienced a tidal wave of wrong analysts calls that unfairly taint chip stocks and the price action that follows.
Micron's data center cloud revenue, a huge driver of DRAM chips, were up 33% QOQ.
The cornerstone of Micron's business and the reinvestment into cloud products has made this stock best of breed in the chip sector and a top 3 chip stock of the Mad Hedge Technology Letter.
The only other stocks that compare with this outstanding growth story and that are at the cutting edge of innovation are hands down Nvidia (NVDA) and Advanced Micro Devices (AMD) in that order.
Next year's profit margins are the next conundrum for the chip industry.
The huge sums of money required to stay ahead of competition could crush profitability.
Pricing is currently stable but stagnant.
The additional marginal costs could be the reason for investors to flee.
More specifically DRAM pricing for 2019 is under the microscope and soft numbers could spell doom for a company that extracts 71% of its revenue from DRAM chips.
All these negative whispers come at a time where DRAM chips are lifting Micron shares to the heavens. And if there was no international friction, the share price would be substantially higher than it is today.
As of today, the chip industry is still grappling with DRAM supply shortages causing costs per unit to spike.
When you consider that DRAM demand is so healthy that China is once again investigating large cap chip companies, investors should be jumping for joy.
These probes are unfounded and are brought about because DRAM pricing is one of the main inputs to setting up data centers and self-driving technology among other businesses.
If China is forced to pay exorbitant prices for groundbreaking chips that can only be found at American and Korean companies, it makes producing every digital end product costlier. infuriating Chinese management.
SK Hynix, Samsung, and Micron comprise more than 90% of the DRAM market, to which Chinese companies need unfettered access.
DRAM chips, unlike other hardware components, are traded on a transparent public market and the probe highlights the building anxiety if Chinese companies are priced out of this sector.
China views the price spike phenomenon in chips as entirely favoring foreign companies that lap up the DRAM profits like money falling from the sky.
Micron carves out half its sales from China, but it is untouchable because loads of chips are required to fuel its global technological supremacy initiative, which is being chipped at by the administration.
CEO of Micron Sanjay Mehrotra has continued to brush off the China threat because he knows Chinese firms cannot fabricate its products.
If this ever happened, kiss the preferential DRAM pricing goodbye, because China would flood the market with substitutes, which has happened to various end markets in the digital and non-digital ecosphere.
The investigation could end in some sort of monetary slap on the wrist and could be payback for blasting a massive hole in Chinese telecommunications hardware conglomerate ZTE's business model.
The administration's heavy-handed response to ban Chinese investment in technology is a long-term victory for Micron, SK Hynix, and Samsung, which have the DRAM market cornered.
These three companies will corner the market even more going forward thanks to help from Washington, widening each moat.
China is not short on funds; it is short on technological expertise because a generation of copy and paste youth cannot compete with the best and brightest minds in Silicon Valley.
Not only can it not compete, it cannot lure the best and brightest to the mainland capitulating local innovation standards.
Its only hope was to pay premium prices for emerging American technology and now that spigot has been turned off.
Technology is in its infancy and is in the early innings of a stunning growth trajectory with a one-way ticket to singularity.
There will be zigs and larger zags on the way. If you thought the Chinese could just ignore Micron and buy from the Koreans, you were wrong.
The relentless demand for DRAM chips is wilder than a British soccer hooligan. Cutting off access to one massive avenue of DRAM chips would be a death knell for any scalable production process that relies on heavy shipments of DRAM chips.
Although markets have been haywire lately, these developments are incredibly bullish, unless China can suddenly produce high-quality chips, which won't be anytime soon.
For the short term, try to pick up the best chip names at yearly lows as tech will not stay suppressed forever.
If you want to scale down the risk, park your funds in the best cloud tech names to weather the storm.
_________________________________________________________________________________________________
Quote of the Day
"We've had three big ideas at Amazon that we've stuck with for 18 years, and they're the reason we're successful: Put the customer first. Invent. And be patient," - said founder and CEO of Amazon Jeff Bezos.
