“There is no art which government sooner learns of another than that of draining money from the pockets of the people.” – Scottish Economist Adam Smith
Mad Hedge Technology Letter
September 13, 2023
Fiat Lux
(A GREAT CHIP STOCK TO BUY AND HOLD)
(QCOM), (APPL), (SOC), (SAMSUNG), (TSM)
If there is a company I would tell my grandkids to work for then it would be semiconductor company Qualcomm (QCOM).
Why?
Even Apple (APPL) can’t replace them so easily and that counts for a lot in this day and age.
We learned just as much as Qualcomm said that it will supply Apple with 5G modems for smartphones through 2026.
Qualcomm expected to lose the Apple smartphone business, because they expected Apple to use an internally developed 5G modem starting in 2024.
They couldn’t develop the product fast enough so it is back snapping up modems with QCOM.
QCOM is the best of breed for smartphone chips and they can be found in every flagship Android device.
I am specifically referring to QCOM’s Snapdragon products which are a suite of system on a chip (SoC) semiconductor products for mobile devices.
The Snapdragon's central processing unit (CPU) uses the ARM architecture.
This line of chips is incredibly competitive and one of the foundational reasons to hold the stock.
Samsung’s SoC competitor named the Exynos is still a far cry from the Snapdragon no matter how hard they try and it seems like each iteration of the Exynos flagship SoC is always a generation behind the Snapdragon.
Apple do use their own SoC with the newest one named the Apple A17 Bionic, but QCOM will still monopolize the Android market with their own Snapdragon that is actually slightly better than the A17 Bionic chip.
The Snapdragon 8 Gen 3 beats the CPU clock speed of the A17 Bionic.
This doesn’t always translate to better real-world performance, but it’s still an impressive feat.
People believe the new Taiwan Semiconductor Manufacturing Company (TSM) 3 nanometer (nm) processing can lose to the advanced 4nm node on the 8 Gen 3.
However, Apple will probably maintain a CPU lead, thanks to better software tuning and more transistors in the same area thanks to a smaller 3-nanometer node.
Basically, Snapdragon is a little faster but Apple has higher performance because of its superior software.
There is no denying that Apple has fantastic software.
On the revenue side, this is great news for the staying power of Snapdragon products and continued sales to Apple will boost Qualcomm’s handsets business, which reported $5.26 billion in sales in the past quarter and could soften the blow of potentially losing a critical customer.
About 21% of Qualcomm’s fiscal 2022 revenue of $44.2 billion came from Apple.
APPL purchased Intel’s smartphone modem division in 2019 to build its own modem. However, evidence suggests that it will be challenging for Apple to move away from Qualcomm’s chips because of their complexity.
Qualcomm also makes money from Apple through cellular licensing fees, which were about $1.9 billion in 2022.
Qualcomm continues to collect royalties from Apple under a six-year agreement. That agreement was struck at the end of a legal battle between Apple and Qualcomm over royalties that was settled in 2019.
Qualcomm says that it expects to only supply 20% of the modems needed for Apple’s 2026 smartphone launch, signaling that it likely still expects the Apple business to eventually decline.
Apple’s new iPhone called iPhone 15 uses QCOM modems as do many other high-end smartphones.
It’s hard to believe that QCOM’s market capitalization is only $125 billion. The eye test alone makes me think this is a half a trillion-dollar company.
Revenue is accelerating and they offer a 2.9% dividend yield.
I can’t talk more about the high quality of products made by QCOM.
This company will have staying power and even if Apple decides to move on, there are a slew of companies ready to gobble up QCOM chips.
Readers shouldn’t trade this stock, but they should buy and hold for the long haul.
Mad Hedge Technology Letter
September 11, 2023
Fiat Lux
Featured Trade:
(DEATH OF LEGACY MEDIA)
(CHTR), (DIS), (NFLX), (NXST), (DISH)
Negotiations between Spectrum’s parent company, Charter Communications (CHTR), and Walt Disney (DIS) finally got over the impasse and they struck a deal.
No deal for both would have been catastrophic for both.
Disney faced the potential loss of 14.7 million Charter pay TV subscribers, or 20% of ESPN's current linear subscriber base of 74 million.
That equates to linear revenue losses of roughly $5 billion, or 6% of overall revenue.
Cord-cutting has been occurring at a brisk pace in the last few years, but the lack of solidarity among the legacy media negotiators appears to turn the trickle into a breaking of the dam.
What am I talking about?
Disney decided to go nuclear by removing its channels from the cable provider. Charter (CHTR) proposed that Disney (DIS) offer its customers free access to Disney’s streaming services, especially ESPN; Disney rebuffed the offer, but CHTR finally agreed to add Disney+ Basic ad-supported offering being provided to Charter customers who purchase the Spectrum TV Select package at no additional cost, "as part of a wholesale arrangement."
This is really the beginning of the end for legacy media and this melee could trigger a swift bout of consolidation as disagreements become the norm and not the outlier.
It’s no surprise the cost of creating content is going up and these channels like DIS feel they can just pass the costs
Remember that many people pay for cable just to watch college football and the NFL.
Roughly 25% of Charter’s clients engage with Disney content, Charter said on a call last week.
DirecTV is also embroiled in its own content squabble with local broadcast network Nexstar (NXST), which recently pulled over 200 stations in more than 100 metro areas from DirecTV’s network over a similar price dispute.
While the cable TV business has been declining for years, there’s concern this is the last hurrah.
Down the road, the winners out of all of this may be internet TV operators, including YouTube TV, Hulu TV, FuboTV, and Dish’s DISH’s (DISH) Sling. Some of these have been gaining steady traction even before negotiations soured, with Hulu’s web traffic up 7.2% year-over-year in July and Sling’s traffic up 11.8%.
Web traffic may pick up as consumers look for ways to watch their regularly scheduled programming. Online search interest in five major live TV streaming services picked up Sept. 1 when news of Disney’s blackout became public, according to Google Trends data.
I believe that online momentum will translate to a long-term subscriber bump for these companies.
CEO of CHTR Christopher Winfrey and CEO of DIS had to make this deal.
The ongoing chaos in the legacy media markets signals that cord-cutting will supplant the legacy markets within the next 10 years.
Baby Boomers are the last stalwarts of the legacy media market and they are retiring in droves.
Netflix (NFLX) is another streamer that is in line to pick up some of the demand for streaming content.
With high rates, the era of excesses is rearing its ugly head.
Platforms are being careful with the type of agreements they make as less quality content is facing a bleak future.
Live professional sports are lynchpin to why many consumers don’t quit cable.
I believe the next contract cycle will see many pro sports leagues go all streaming much like the American soccer league MLS did with Apple TV.
When pro sports migrate 100% into digital, expect to be outsized winners and losers while distributors like SlingTV should sink like a rock.
“A good sign as to whether there’s free speech is: Is someone you don’t like allowed to say something you don’t like? If that is the case, then we have free speech.” – Said Owner of X formerly Twitter Elon Musk
Mad Hedge Technology Letter
September 8, 2023
Fiat Lux
Featured Trade:
(THE SUSHI HITS THE FAN IN CUPERTINO)
(APPL), (MCHI),
When it rains – it pours. Let’s talk about China (MCHI) and Apple (AAPL) CEO Tim Cook.
I admit that I was quite harsh on Tim Cook 7 years ago when writing this Mad Hedge Technology letter.
I routinely delivered scathing critiques of him and perpetuated the narrative that he was only an operations guy.
Then I lightened up as he drove the company to higher highs even though the company didn’t foray too far from its bread and butter the iPhone.
My fierce criticism revolved around Cook betting the ranch on an Eastern adversary at a time when deglobalization started to pick up pace.
After knocking out the $2 trillion market cap and vaulting past $3 trillion, I gave Cook a pass for the time being.
Fast forward 7 years and the sushi has hit the fan and Cook has an absolute fiasco on his hands.
The trouble brewing in China is not necessarily entirely his fault, but sleep with the enemy, and it is hard to whine about the consequences.
In one fell swoop, 60 million hardcore Apple customers are dropping Apple products.
It’s a swift kick in the nuts for Cook.
Funnily enough, just a few months ago, Tim Cook was one of the few U.S. CEOs to venture to China after its reopening with his usual kowtowing to the communist party.
In March, he declared that Apple and China had a “symbiotic kind of relationship.”
It is bizarre to hear such an important figure in the American technology apparatus so infatuated with the Chinese.
Beijing is ordering officials in all departments to stop using iPhones.
Then Beijing extended the ban to state-owned enterprises.
How important is China to Apple?
China is key to Apple’s supply chain and to its sales.
About half of Apple’s smartphones are made in a giant factory complex in Zhengzhou, nicknamed “iPhone City”, operated by electronics manufacturer Foxconn.
China is also a significant consumer market for Apple, as it is the largest market outside the U.S. The company generated $15.8 billion in sales from China alone last quarter, 20% of its total.
Chinese consumers gravitate to the iPhone too: Apple has 65% market share for premium phones over $600.
There is a big element here in getting Chinese people to use their own smartphones.
I know many people who use Chinese smartphones because they are flagship quality but 40% cheaper than iPhones.
The only piece lacking is usually the Apple quality high-end camera, but most people don’t use their phone for a high-definition YouTube channel.
My sense is that the 60 million white-collar Chinese people will grumble about the brand downgrade to Huawei or Xiaomi, but the drop-off in performance isn’t so crazy that they are willing to go rogue and find a roundabout way to use an iPhone.
This sets the stage for all Apple products to get banned full-stop in China which is 20% of Apple’s revenue.
That includes Apple watches, earbuds, computers, and the whole shebang even the services part of the equation.
Deglobalization is rearing its ugly head again and this event could be a catalyst to take Apple shares back down to more affordable levels.
I would look at buying the dip once this negative news works itself through the system.
However, this event is akin to the tech sector getting stunned with a left hook to its face, and it will take time to recover don’t expect any American corporations to do business in China anytime soon under these souring conditions.
“The art of living is more like wrestling than dancing.” – Said Roman Leader Marcus Aurelius
Mad Hedge Technology Letter
September 6, 2023
Fiat Lux
Featured Trade:
(SEPARATING THE WHEAT FROM THE CHAFF)
(PTON), ($COMPQ), ($TNX)
