Tech Letter Archives - Mad Hedge Fund Trader

Take A Deep Breath With AI

Stocks and firms tethered to artificial intelligence won’t always have a one-way joyride to profits.

The honest truth is that the road will be met with drawbacks some years and the sector will need time to digest the new developments.

Mainstream tech has made most people believe that AI can do no wrong in the short-term future.

There is a consensus that it’s the panacea for everything and anything.

The Magnificent 7 tech firms are priced for an AI boom and the hype is there, but it will take some time for AI to really filter into meaningful balance sheet development.

We are still in the beginning stages.

It’s not surprising that the Massachusetts Institute of Technology published a study that sought to address fears about AI replacing humans in a swath of industries and found that artificial intelligence can’t ACTUALLY replace the majority of jobs right now in cost-effective ways.

It’s important to note this report because much of AI has been celebrated with no mention of cost control or benefit versus the price or expenses incurred.

Any corporate tech will need to evaluate whether it’s worth gutting whole divisions to replace it with AI.

In many cases in early 2024, this type of strategy to a workforce could turn into an unmitigated disaster.

For instance, a new AI study found only 23% of workers, measured in terms of dollar wages, could be effectively supplanted. In other cases, because AI-assisted visual recognition is expensive to install and operate, humans did the job more economically.

The adoption of AI across industries accelerated last year after OpenAI’s ChatGPT and other generative tools showed the technology’s potential. Tech firms from Microsoft and Alphabet in the US to Baidu and Alibaba in China rolled out new AI services and ramped up development plans which could serve as a canary in the coal mine for things to come. Fears about AI’s impact on jobs have long been a central concern.

Computer vision is a field of AI that enables machines to derive meaningful information from digital images and other visual inputs, with its most ubiquitous applications showing up in object detection systems for autonomous driving or in helping categorize photos on smartphones.

The cost-benefit ratio of computer vision is most favorable in segments like retail, transportation, and warehousing.

The study was funded by the MIT-IBM Watson AI Lab and used online surveys to collect data on about 1,000 visually assisted tasks across 800 occupations. Only 3% of such tasks can be automated cost-effectively today, but that could rise to 40% by 2033 if data costs fall and accuracy improves.

When getting academic about the subject, many projections feel way too ambitious.

AI won’t take over the workforce in the next few years and will struggle to make inroads before 2030.

That doesn’t mean firms like Nvidia, AMD, Qorvo, and Broadcom will not sell AI-based chips promising better AI.

That doesn’t mean firms like Google, Apple, Microsoft, Amazon, and Meta won’t feel a small AI bump in revenue.

There certainly will be some changes, but wholesale transformation is a ways off.

I believe the AI hype has gotten too far over its skis.

Tech needs to slow down and make sure it’s properly implemented and the real effects will be seen after 2030.

January 22, 2024 - Quote of the Day

Tech Letter

“The only true wisdom is in knowing you know nothing.” – Said Greek Philosopher Socrates

January 19, 2024

Tech Letter

Mad Hedge Technology Letter
January 19, 2024
Fiat Lux

Featured Trade:

(ANOTHER CHIP NAME BESIDES NVIDIA)
(AVGO), (AAPL), (AI)

Another Chip Name Besides Nvidia

Tech Letter

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.

January 17, 2024

Tech Letter

Mad Hedge Technology Letter
January 17, 2024
Fiat Lux

Featured Trade:

(GROW WITH CROWDSTRIKE)
(CRWD), (NVDA)

Grow With Crowdstrike

Tech Letter

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.

January 17, 2024 - Quote of the Day

Tech Letter

“I think that technology is the best thing that ever happened to mankind.” – Said CEO of JP Morgan Jamie Dimon

January 12, 2024

Tech Letter

Mad Hedge Technology Letter
January 12, 2024
Fiat Lux

Featured Trade:

(FINANCE TURNS TO AI)
(C), (AI)

Finance Turns To AI

Tech Letter

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.