QVMS - Throttling IT Budgets Okay? SouthWest's Fiasco Tells Us Cloud Transformation Is Existential

Summary

• This is not an article about the airline industry, it is about this false notion that transitioning to the cloud, is a luxury.
• This is about enterprises cutting their IT development budgets, this is tantamount to an enterprise cutting its own throat, and it is not just Southwest.
• Southwest Airlines is Exhibit A on why it is existential, yes I said existential to move corporate IT off of Mainframes with software developed decades ago.
• Even if old mainframe code was maintained to perfection it is not flexible enough to handle today's demands on IT, and development is s-l-o-w.
• The new model of development is a continual development using an agile methodology used in the development of software. The idea is to enable to update and improve applications very rapidly. It is based on an iterative and incremental process, where the end-user application is constantly improved.

You naturally are going to fall behind if you don't embrace cloud development pronto

I don't think it is necessary to go beyond the notion that agile development which is popular today is only used with the cloud. It is much faster and more flexible to develop applications in this environment. The ability to continuously improve applications means that you can create a subset of functionality and then continually add more capability. Mainframe development can take more than a year to update and is more difficult to connect and interoperate on the web. Moreover, no developers want to work in an architecture that is basically a half-century old. The old guard that kept the mainframe software patched up is retiring by the thousands.

It's not just Southwest, Southwest is just the most flagrant example of skimping on tech.

The fact that Southwest ( LUV ) skimped on their computing systems is now well known since the Pilots Unions accused LUV of not modernizing their software and is mostly responsible for the havoc of thousands of flights canceled las week.

One of the prime reasons for the Tech Titans and the whole tech ecosystem being sold off very hard on the notion that Cloud development is a luxury, and it's no biggie to cut it to the bone. Nay my friends the Southwest meltdown is the "tip of the iceberg", In fact, I bet there are other failures to perform financially due to poor execution because they scrimp on moving to a higher level of cloud technology. They are underperforming because the competition has better execution and a big part of that execution is computing, whether it is the new Machine Learning/Artificial intelligence, or IOT development.

Here's a very obvious case of another enterprise underperforming because they scrimped on Cloud transformation.

Here is a paraphrase of an investment conference in June for FedEx ( FDX ), their goal for FY 2025… FedEx holds an investor day meeting, and paints a picture of a promising future to investors and analysts - The company also announces significant profitability and shareholder return targets for '25. Here is the punch line; A presentation that got pride of place was a project coined Network 2.0, an initiative that's set to drastically increase the collaboration between all the delivery service giant's branded operating arms: FedEx Express, FedEx Ground, and FedEx Freight. Are you getting my drift? This may as well be FDX hanging out a sign we are so sorry we cut back on cloud transformation! Now it will take us 2 years to catch up after we see how badly we underperformed against our peers and other service companies. What is the fastest way to combine these separate or at least loosely connected, likely separately developed under legacy software on a mainframe? If you are not concluding that this is Exhibit A of an ideal cloud transformation t I am not doing my job here. Go back and look at the news flow of FDX it is clear that the underperformance was due to the lack of flexibility that you would have with a cloud application that can unify all these separate applications into a unified, more effective, flexible system. I would bet that there are many examples out there of large enterprises that were true "Pennywise and Billion Dollar Foolish". The talk was that it was so easy to drop a major transformation project because after all they still have their mainframe systems. I've gone through this exercise to illustrate a position that I have been supporting for about a year now. The tech titans, cloud platforms, and enabling hardware and software tools that support cloud transformation and digitization are going to be back in vogue at the "Wall Street Fashion Show". I suspect that now that the Fed's rate rises are going to come to an end, even moving above 5% and staying there (which I still doubt), the notion that technology companies are overvalued because of interest rates will lose its currency. PE ratios have come down enough, combined with earnings and revenue growth recovering. All your favorite tech names will be movin' on up. Shall I list some names for you? Amazon ( AMZN ), Alphabet ( GOOGL ), Microsoft ( MSFT ), Intuit ( INTU ), ServiceNow ( NOW ), Snowflake ( SNOW ), Asana ( ASAN ), Confluent ( CFLT ), HashiCorp ( HCP ), JFrog ( FROG ), and MongoDB ( MDB ).

Put them back on your watchlist

I am not saying that you go out and start buying shares in the above stocks with both hands. There might be some further downside in these names since this isn't yet a trend. I have not added to any of the above names. I can tell you that I have my eyes on several names that I exited several months ago that I would start adding back like SNOW, MDB, and perhaps adding to current positions such as Datadog ( DDOG ), HCP, and CFLT

I have been evolving my strategy to have a more even distribution between longs and shorts

Stock markets continue to be volatile and just because last week ended strong doesn't mean the possibility of a downward trend has been eliminated. So there will come a time with hedging indexes will be called for. On the other hand, there are always going to be opportunities for upside trades. I am adding to this mix individual stocks that I can see a downside. I have initiated short positions (via Puts) on Southwest Airlines ( LUV ), CarMax ( KMX ), and Nordstrom ( JWN ). The first two are obvious names to bet against. They had bad news associated with them. JWN turned out to be fortuitous since Macy's ( M ) issued an earnings warning Friday after the market closed. I suspect JWN will fall in sympathy with M, just lucky I guess. I also have Put options on Coinbase ( COIN ), and DoorDash ( DASH ). DASH is a name I am short for a number of reasons, but the primary one is the news that Instacart is going IPO. I believe that DASH will lose scarcity value and therefore will fall as Instacart goes IPO.

Good luck this week. Keep in mind that the CPI reveal is on Thursday. If the market rallies strongly to Wednesday and into premarket trading Thursday morning the chance that there will be a sell-off is much higher. Cash Management Discipline would dictate generating cash if the market continues going up. Our community at Dual Mind Research will be prepared for Thursday's economic data, by trimming shares as well.

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