“The only true wisdom is in knowing you know nothing.” – Said Greek Philosopher Socrates
Mad Hedge Technology Letter
January 19, 2024
Fiat Lux
Featured Trade:
(ANOTHER CHIP NAME BESIDES NVIDIA)
(AVGO), (AAPL), (AI)
Broadcom (AVGO) has gone through several major transformations since its founding in 1991, and a chart of the stock looks like a hockey stick.
AVGO is now worth close to $600 billion and the show isn’t over yet folks, there is more yet to come.
AVGO has a history of buying growth using debt.
Prior to buying Broadcom, Avago had already acquired a long list of smaller companies to expand its portfolio of wireless, optical, and data storage chips.
By paying $37 billion for Broadcom, it gained even more mobile, networking, wireless, and industrial chips. That inorganic growth strategy made it one of the world's largest chipmakers.
Broadcom subsequently expanded into the infrastructure software market by buying CA Technologies in 2018, Symantec's enterprise security division in 2019, and the cloud software giant Vmware in 2023.
Those acquisitions should diversify its business away from the cyclical semiconductor market and curb its dependence on Apple, which still accounted for 20% of its revenue over the last two fiscal years.
Growth in the 20% range should be driven by three long-term catalysts.
First, the expansion of the generative artificial intelligence (AI) market should trigger stronger sales of its data center and infrastructure chips over the next few years.
Second, its sales of chips to mobile and IT infrastructure customers should heat up again as the macro environment improves.
Apple also signed a new blockbuster deal to buy Broadcom's 5G radio frequency components and other wireless connectivity components for several more years last May, so it won't lose its top semiconductor customer anytime soon.
Broadcom's aggressive expansion strategies have been lucrative, but the sprawl could weaken the company. If that happens, investors will be a lot less forgiving of its rising debt and dilution.
I fully expect strong double-digit revenue growth in the company's AI-related businesses.
I anticipate a proliferation of Gen AI across a broad set of data center workloads to drive strength in Broadcom's custom compute offload and next-generation Networking businesses both in the near- and medium term.
There is also a strong chance of a cyclical recovery in the company's non-AI business.
In addition, I expect synergy capture following the acquisition of VMware, to drive operating margin expansion and earnings growth well in excess of the industry average.
The last lever that will affect stock appreciation will come in the form of shareholder returns.
I do believe that AVGO will ramp up the dividends as revenue accelerates.
Profits went from around $11.5 billion 2 years ago to $14 billion last year.
It’s easy to see the chip company blow by $16 billion this year as well.
It is well on its way to becoming a trillion-dollar company.
I do believe they will reach that goal around 2030.
The stock has more or less gone parabolic and now sitting around $1,200 per share.
It’s been like that for a while now.
Any dip to around $1,100 or $1,000 would be classified as a buying opportunity.
Mad Hedge Technology Letter
January 17, 2024
Fiat Lux
Featured Trade:
(GROW WITH CROWDSTRIKE)
(CRWD), (NVDA)
CrowdStrike (CRWD) is expensive by any metric, but so are other tech stocks like Nvidia (NVDA).
The trajectory of the stock still looks bright.
The cybersecurity company truly dishes out impressive growth numbers.
They are expected to grow sales by 39% over the next year and growth remains voluminous with no headwinds appear in the short term.
I’d be foolish not to mention one of the largest tailwinds in the tech sector in the form of defending and deterring digital malicious actors.
It’s real and capital is being allocated towards it.
The global cost of cybercrime is expected to double by 2028.
Sporting a market capitalization of $68 billion, CrowdStrike would need annualized returns of 18% to reach the $1 trillion club by 2040.
What do they mainly do?
Sifting through trillions of data points every week, CrowdStrike's single-agent, cloud-based cybersecurity platform grows more robust for each additional customer that joins its platform.
Quickly expanding its solutions from focusing primarily on endpoint protection (think laptops, printers, and servers) to becoming a complete security platform, CrowdStrike has grown from three security modules in 2016 to 27 today.
Each module provides a unique security solution and can be added by customers to fit their specific needs - all by relying upon just one agent, CrowdStrike's Falcon platform. The average number of agents on an endpoint today is 13 or more, so CrowdStrike's platform offers much-needed vendor consolidation for businesses looking to simplify their operations.
CrowdStrike is gradually becoming a one-stop shop for businesses' cybersecurity needs. Its growth potential and optionality seem almost boundless as it releases new modules tailor-made for its customers' desires. Look no further than two of its recent module advancements, each highlighting the company's ongoing shift toward becoming a complete security platform:
Falcon ID: CrowdStrike's identity protection and detection modules could become the company's next massive growth outlet. With 80% of global attacks stemming from exploited IDs, sales for these solutions grew from $7 million in annual recurring revenue (ARR) in Q3 of 2021 to over $200 million in Q2 of 2024.
Falcon Cloud: Bolstered by its recent acquisition of Bionic, which focuses on identifying and protecting items in the cloud, CrowdStrike now offers a complete cloud security solution. Growing its ARR from $106 million in Q4 of 2022 to nearly $300 million today, this cloud unit operates in a market expected to be worth over $32 billion by 2028.
Crowdstrike also landed an eight-figure deal from the federal government in its latest quarter. It counts less than 1% of the public sector as customers, so deals like this ignite a juicy channel of new revenue.
Thanks partly to its land-and-expand business model, CrowdStrike sees increasing profit margins for each additional module it sells to existing clients and each new customer it adds.
Who doesn’t like accelerating revenue and hypergrowth?
That’s what you get from CRWD.
The stock has been in overdrive pushing to new heights so I wouldn’t chase it right here.
It was only 365 days ago that the stock was at $101 and just touched $283.
That extraordinary rise is not the norm but is common with hyper-growth stocks.
It’s time to take the foot off the pedal and wait for a large dip which I do believe we will get.
That will be the next buying opportunity around $240 per share for CRWD.
“I think that technology is the best thing that ever happened to mankind.” – Said CEO of JP Morgan Jamie Dimon
Mad Hedge Technology Letter
January 12, 2024
Fiat Lux
Featured Trade:
(FINANCE TURNS TO AI)
(C), (AI)
Tech is at it again and I mean artificial intelligence doing the dirty jobs for senior executives.
Citigroup (C) CEO Jane Fraser is doing the extreme by slashing a big portion of the staff and a reason to feel very comfortable about this is the upcoming implementation of generative AI into the company.
The New York bank said that it expects to eliminate 20,000 positions by 2026, which will save it $2.5 billion. It also intends to shed another 40,000 when it lists its Mexican consumer unit Banamex in an initial public offering.
Each year moving forward, investment banks need less humans, because software is replacing the need.
Gone are the moments when finance degrees were the hottest commodity, now it is all about generative AI.
That would leave Citigroup with 180,000 workers, which would likely make it the smallest of the big four banks in the US and reduce the overall size of its workforce by 25%. It ended in 2023 with 240,000.
Eventually, generative artificial intelligence (AI) could replace the equivalent of 300 million full-time jobs, a report by investment bank Goldman Sachs says.
It could replace a quarter of work tasks in the US and Europe but may also mean new jobs and a productivity boom.
And it could eventually increase the total annual value of goods and services produced globally by 7%.
Generative AI, able to create content indistinguishable from human work, is "a major advancement", the report says.
Silicon Valley is keen to promote investment in AI in not only the United States but in a way that will ultimately drive productivity gains across the global economy.
AI will complement the way bankers work, not disrupting it - making finance jobs better, rather than taking them away.
The report notes AI's impact will vary across different sectors - 46% of tasks in administrative and 44% in legal professions could be automated but only 6% in construction and 4% in maintenance, it says.
The first layoffs began in November 2023, affecting senior managers. Those cuts amounted to roughly 10% of senior manager roles or approximately 300 managers
The disclosure came on a day when Citigroup reported a net loss of $1.8 billion in the fourth quarter resulting from an FDIC assessment of $1.7 billion and other charges and reserves it previously disclosed.
Senior managers are mostly all bark and no bite these days as their work tasks have become irrelevant.
I believe the entire front office staff will be reduced to a pittance soon and by that, I mean single-digit staff.
According to research cited by the report, 60% of workers are in occupations that did not exist in 1940.
However, other research suggests technological change since the 1980s has displaced workers faster than it has created jobs.
The job cuts are part of an internal restructuring that Fraser has called the "most consequential" change to how Citigroup operates in nearly two decades.
Lower wage expense and higher output is a perfect recipe for higher share prices and that is exactly what we will get from Citigroup.
It’s not a surprise that C is investing aggressively in technology and IT.
The playbook is out there and employing a bare-bones staff is the new Silicon Valley and banks are applying the same model too.
Investment banks are the new tech company as every company is forced to become a tech company.
Mad Hedge Technology Letter
January 10, 2024
Fiat Lux
Featured Trade:
(LITHIUM CRATERS)
(TSLA), (NIO), (RIVN), (LCID)
EVs were the darling of tech until the hype ran out.
How do I know this?
The price of lithium has nosedived.
The lack of interest is undermining projects, nixing deals, and triggering a scramble for cash that has put a damper on the EV industry.
If anyone thought that EVs would really move the needle for tech, then think again because tech is over-reliant on AI to save the day in 2024. Throw in the Fed pivot too.
Lithium has dropped by 80% in price since the end of 2022 signaling a dramatic slowdown in the electric vehicle market.
The demand for this product isn’t what it used to be.
Sure, there are those (TSLA) lovers in big coastal cities who can’t get enough of the product, but these types max out at 3 Teslas and sit on them until an upgrade a few years later.
With inflation wreaking havoc in every part of American society, this promises to elongate the refresh cycle for tech products like iPhones and Teslas.
Nickel and cobalt have also tumbled, weighed down by an influx of new production amid concerns that the shift to EVs may not be as smooth and quick as predicted.
It’s a dramatic reversal from the froth of recent years that sent prices soaring and sparked a rush by some of the auto industry’s biggest players to secure future supply.
Chemaf Resources Ltd. last year put itself up for sale after a slump in the cobalt price left it struggling to finish key projects in the Democratic Republic of Congo, and London-based Horizonte Minerals Plc scaled back work on its Brazilian nickel mine as it searches for funds to complete construction, and announced an emergency $20 million financing late last year.
Building new mines takes years and sometimes decades, and stalled projects can often be hard to restart. And while most crucial battery markets are now in surplus, shortages are already forecast toward the end of the decade as the greening of the economy accelerates.
In the case of lithium — a once-tiny commodity market that has been catapulted into the global spotlight due to its vital role in EV batteries — the extreme boom and bust of the last few years shows the difficulties in trying to forecast future supply-demand balances and prices, for both producers and their investors.
Yet supply charged ahead as demand growth underwhelmed, and the price won’t come back for years.
It’s highly possible that lithium could be in a drought until close to 2030.
Cobalt has lost two-thirds of its value since a recent peak in 2022, with top-two supplier Glencore Plc forced to build stockpiles of the metal.
Nickel tumbled 45% last year, weighed down by a flood of low-cost supply from Indonesia, where new techniques to produce battery-grade material are threatening to completely upend the industry.
Jumping off the EV bandwagon, the consumers aren’t impressed as much, and snagging the next incremental EV buyer has become hard.
The bad is out there for everybody to see such as the annoyance of running out of electricity and not getting those software updates properly.
Consumers are starting to remove those rose-tinted glasses and look at Ev's dark side too.
This explains why Tesla was discounting its vehicles so aggressively because management sensed the lack of desire from new buyers.
Unfortunately, this could be a bust year for Tesla as they give way to software companies to carry the load. Smaller EV firms like Rivian (RIVN) and Lucid (LCID) are some that I would avoid. Nio (NIO) is another EV company in free fall. I would say stay away from the EV sector in the short term.
