Little Brother Is Watching You, Amazon v Google, Interest rates, Nvidia, more
Here’s part 1 of 3 from this week’s Live Q&A Conference Call. Part 2 and 3 will be out tomorrow.
Let’s start off with Amazon—Wow! That thing is on a terror. As I mentioned earlier today, I would be surprised to see it at least pause a little bit. I am not planning to trim any time soon. I think longer term you’ve got, as we talked last week, the Alexa business and the rest of everything else.
Amazon got a big upgrade earlier in the week for their advertisement business. The analyst simultaneously downgraded Google. BMO Capital basically said that Amazon’s advertising business is going to be $2-3 billion this year up 65% from last year. And Amazon hasn’t even been accounting for all of their actual advertising revenue as revenue, as they have been accounting for some of it in other places on their reports. Regardless Amazon’s ad business has a $2-3 billion run rate right now and it is growing quickly. People putting sponsored productions on the Amazon site and on the Amazon app is a huge growth business.
BMO’s analysts think Amazon’s ad business will take some market share from Google. But as those of you who have been following me for 10 or 15 years know, there’s more Revolution than competition going on between companies like Amazon and Google. Google/Amazon/Apple, yes they compete against each other, but they are also revolutionizing the world and all are sort of competing against old-world businesses and destroying those old-world businesses with the growth more than they are slugging it out with each other per se. Certainly, there are people at advertising agencies that make up decisions saying “Hey, let’s spend this money on Facebook instead of Google. Or let’s spend this money on Amazon instead of Facebook”, but Google, Amazon, Apple, Smartphones, retail over the internet, apps — these are all things that are secularly growing businesses. They’re not cyclical business as they not wholly dependent on a growing economy. These are things that are changing the world we are living in.
Let’s do a market overview: The $DJIA is up 150. The $COMP is trying to hit 6,000 isn’t it? Another all-time high today along with $AMZN and $AAPL. Interest rates are one of the things that has been very counter to the rest of the market and also counter to what everybody expected heading into the Trump administration. Obviously, there are some differences between Obama and Trump although both are curving the arc of our government towards ever more global corporate friendliness.
The yield on the Treasury dropped from its high of 2.60% a few weeks ago and is now down near 2.30%. As long as interest rates stay low or just slowly creep up, these games that we can play on a governmental basis will continue with borrowing trillions of dollars on balance sheets and trillions of dollars more off balance sheets and not having to worry very much about the interest payments. Such massive borrowing pulls forth a lot of prosperity and growth from future generations. (Of course, that doesn’t mean that these future generations won’t be so innovative and revolutionary on their own right that perhaps there will be plenty of growth and prosperity in this society and around the world anyway.)
To understand how we pull future prosperity forward, let’s break it down to real-life terms for Apple for example. If Apple goes out and borrows a trillion dollars today and does a one-time trillion-dollar dividend and/or invests in trillions of dollars of factories or new gadgets, software, technologies, it will look great for now. There will be a whole lot of growth. People will feel really rich. But at some point that money has to be paid back or certainly the interest has to be met. As long as interest rates for Apple and the US Government are near zero percent, they can borrow a lot of money. We can have wonderful times—stock buy backs, stock markets going up, financial engineering, some investment, some innovations. (Does Apple innovate anymore? Two hundred dollar iPad anybody? That was pretty exciting wasn’t it? Haha.)
Anyway, at some point all that money has to be paid back and just as importantly, at some point if interest rates rise, the interest payments themselves can weigh on future spending.
I am a little worried about $FB frankly, near term. I don’t know. Oculus Rift anybody? Do you use Oculus? Do you know anybody who uses Oculus? The virtual reality stuff that $FB spent billions of dollars buying Oculus Rift and billions of dollars more investing in it has not been a good thing so far. Maybe, it will pay off in 3-5 years, but it sure hasn’t been much of anything yet. Instagram obviously was the most brilliant acquisition of all time, for at least Facebook and Zuckerberg with them having paid a billion dollars for Instagram and it is worth at least 50-100 billion dollars alone in its own right now. I don’t know. I just think maybe the sentiment, the multiple around $FB, we’ve seen it happen before where for 3-6-9 months where the stock can pull back 10-20-30% even in a broader market rally. I am not selling my $FB any more than I have recently but as you do know, I did sell 10% here recently around $140.
Q. When you talk about how $AAPL uses debt, are you saying the the borrowing they do is on an adjusted interest rate or did they get to borrow at a fixed rate?
A. Apple basically borrows at a fixed rate. Most recently, Apple borrowed a few billion dollars in Japan and they borrowed basically in yen and got a negative interest rate. The Japan-based borrowed were basically paying Apple a penny a year to take money from them. Apple was able to buy back stock and do other things with that type of money. All money obviously being fungible on the balance sheet in many ways although as one of the big themes in the rally these past months since Trump got elected is that there is expectation that trillions of dollars of somewhat-fungible money that is being kept overseas (not like this we are talking about where Apple borrowed money overseas and then used it here in the United States), but money that Apple, Facebook, Google and other companies have routed around the world to avoid paying income taxes to keep our streets, and judges, and military paid. The point being that I do think in the next 2-3 years, the Republican-Democrat regime, one of the few things they will come together on conceivably from the very high level, is corporate tax reform or whatever you want to call it. Essentially, the government is going to allow trillions of dollars from overseas to come back into the U.S. without having to pay any taxes and small businesses can continue to struggle against giant conglomerates that are able to do that. There will be so many loopholes custom-written by corporate lobbyists in any cash repatriation that most giant corporations will end up paying almost no tax on that money. PS. Amazon just last week started paying retail tax here in New Mexico.
Q. Aside from the morality of whether Apple or anyone else is paying their fair share of taxes, do you see a door opening for Apple to repatriate its overseas money and what do you see for the stock? Clearly, its going to be good.
A. Well, I wonder again how much of that is already priced in. With the cash repatration being such a discussion item for the last 4-5 months since the election, I think the expectations are very high that there will be a serious repatriation tax break. Again, I expect the giant US-based corporations will end up being able to bring that cash back to the US at near zero percent tax rates because the government will throw in so many loopholes for the giant conglomerates to use with whatever bill passes to bring that money home. As I’ve talked about for 12-15 years ever since I’ve been writing in public about this stuff, whenever the entire global government and our own United States Government is so focused on stock markets, and stock prices, and specifically corporate profits and the ability for corporations to build up a big war chest and pay as little in taxes as possible, you’ll have Bubble and Bust cycles.
Since interest rates since the late 1970s/early 1980s have come down from 15-18%, (the Fed rates and the mortgage rates have come down in the past 15-30 years) to zero, one, two percent. You know what kind of interest rates people are able to get today. Those dynamics create bubbles that create things that we try to be in front of that we do want to benefit from even as politically and morally I object to these things. But we have to live in this world and I am not going to sabotage my own prosperity when this is the world we are presented. I will continue to in my way to fight the good fight, but in the meantime ride $AAPL because it is going to be a trillion-dollar market cap at some point in the next three years as tax repatriation comes through.
Q. With the resilience of the US equity markets and the possibility of repatriation, is there a possibility to maybe do some shorts or puts on the European markets?
A. Oh, that is a nice curve bell there at the end of your question. Great question. The DAX is up like 20-30% since the election.
Subscriber response: Yes, it just seems like they are riding the US markets up and if we see a pullback, they are going to see an even bigger pullback.
A. That’s a really interesting theory. I like it. I like it a lot frankly. As you know I bought some puts on the small cap ETF, $IWM. I actually shorted a little bit of it. I am actually still up on my short, I think around $138-$139 was where I shorted it and I think it is $136-$137 now. Using the same logic that I used when shorting the IWM — mostly as a hedge to broader portfolio — I like your broader thesis better. I like the fact that it still doesn’t seem like it is too late since the rally on those European stock markets has continued somewhat relentlessly for the past few weeks in addition to the bottoms they put in around November election.
Subscriber response: Yes, and you have a couple of European elections that are contentious and could create some movement.
A. I suppose those elections could become catalysts. Of course, as we have seen over the years, so many of those elections from Brexit to Trump are exactly opposite of what anybody expects the result to be and the market’s reaction is opposite of what anyone thought the reaction would be. That being said, I like what you said as basically a hedge against $AAPL, $GOOGL $AMZN and our $NVDA and $AXGN. These names that we’ve got that have had big runs and we’ve trimmed some. I don’t really want to trim any more right now. I want to be patient, but I wouldn’t mind looking for a few hedges out there. I like the thesis. Let me think about it a little more. I’ll do some work on it.
Q. $NVDA? Have you commented on it in terms of the downgrading? Do you have a lot of faith in the stock and are you going to pick a price point to jump back in?
A. Well, I’ve sort of had a rough playbook for the last three or four months that has included looking for $NVDA to pullback into the low $90s or high $80s. We bought it at $28-$30. We trimmed $NVDA, I think the first time at $70. Trimmed a little more in the $105-$110 area. I didn’t get the top, of course, at $115-$120. Again, my theory lately has been that we will get a chance to buy nibble more shares again in the $90s or high $80s at some point. It did get to $98 a month ago, pulled back from $115-$120. I didn’t pull the trigger yet. I wouldn’t mind buying some more around $90, maybe $85. I bought a pretty decent sized position when we started nibbling at it. I didn’t get a full position like we wanted, but we got more than a triple in it.
Now, let’s step back. Away from the price action and what I am doing with it. The Nvidia fundmentals, the outlook, the company itself. The company got downgraded the other day. Again, it was sort of a paired upgrade/downgrade. The guy upgraded Skyworks and he downgraded Nvidia. His theory being that the iPhone 8, or whatever the new iPhone that will come out soon will be called will be real beneficial for Skyworks specifically.
With Nvidia, the analyst’s theory is that it has been such a great run and he’s worried about saturation in the desktop/laptop/computer market. Sure, yeah..but that was true a year ago too. Nvidia has benefited from Oculus and the virtual reality world that has burgeoned a little but that I was complaining about earlier not being as mainstream as you might have hoped by now as people buy high end graphic computers to do virtual reality these days. Regardless of the VR world today, I do think over the next 5-10 years, there will be a lot easier ways of getting Nvidia chips that enable virtual reality that doesn’t tether you to a laptop and a big processor, but it’s not here right now.
Nvidia, you have the artificial intelligence, you have the driverless car business. It’s not just exciting the number of units, the number of driverless cars that are out there. It’s not just exciting the number of companies that are getting into deep learning and artificial intelligence that use the Nvidia platform. It is the fact that the Nvidia platform, both the deep learning and the artificial intelligence, are so chip-intensive. There are hundreds of chips that go in. Nvidia has a lot of margins on those chips and if they establish themselves, as it looks like, as the de facto standard. Oh man, it is a $50 billion market cap right now and it could be a $200-300 billion market cap eventually in, say, 5-10 years.
Q. Taser was out this morning announcing that they are going to supply every police officer in America with a free body cam. What does that mean for the derivative suppliers to their camera business?
A. I like your thinking. Who cares if it is good for Taser. The fact is that there are tens of millions of cameras from Taser that are going to be moved for free in the next 3-6 months and Taser has to be the chips to build the cameras. Is that what you are getting at?
Subscriber response. Yes, who makes the chips for them?
A. Taser has traditionally used Amberalla chips in their body cameras. I heard that news this morning when I was driving about them changing their name to Axon and giving out free body cameras. What Taser is selling to investors is that they are a cloud company or technology company now. They don’t want to be known as the zapper prison police weapons company. Taser has a lot of political controversy around their name and it is probably smart to change the name. If Axon delivers on being the law enforcement, cloud company, well that’s a different question though. Here is a story for you.
Ten or twelve years ago, I bought the website and I actually copyrighted this term “Little Brother Is Watching You.” I wrote an article on it for the Financial Times and The Street.com ten years ago about this and my theory that Orwell had it all wrong. It wasn’t “Big Brother” who was going to end up watching everyone, at least not exclusively. It would also be “Little Brother” empowered with cell phones, smartphones, YouTube and free distribution of the video around the world.
You guys know that my political leanings are outside of what you would consider mainstream conservative and mainstream liberal. I give free Trading With Cody subscriptions to active police officers. (I do give free Trading With Cody subscriptions to active military soldiers.) I support and love our military and our police force. We need them. I am not an anarchist of something. But, at the same time, I do believe that we need to have cameras rolling. The government is the one that should be accountable. “Little Brother” should be watching “Big Brother”. We do need to make sure that every police officer is filmed in this day and age. We should be able to look back at every interaction any police officer is doing when representing the government, when he is engaged in the public. I would love to see funding for that. I would love to see transparency, as much as possible, in every police and military operation. I love policemen and policewomen and our soldiers…I do not love their leaders very often.
Point being, I don’t know if Axon can actually make the transition to being the “Little Brother Is Watching You” cloud company. It would be a Netflix-like transition if they are able to pivot from being a weapons-related product company to something that is actually providing transparency. The margins would be huge. Cloud-based businesses are great. Whoever does end up becoming the de facto standard for law enforcement body cameras and cloud-based monitoring of the people who are supposed to be watching us, it will be a tens of billions of dollars’ kind of company. Taser is a billion-dollar market cap right now.
All that said, I don’t have enough faith in the company. I don’t know the management. I have never been a big fan of the Taser business anyway. I have had friends in the hedge fund business who have owned and or shorted that stock at every possible juncture for the last 15 years, and I’ve followed it for the whole time, but I am not interested in trading it. I don’t think they will be very huge as a cloud company. But, God bless them for trying and trying to create transparency.
Part 2 and 3 coming tomorrow…
