Mad Hedge Technology Letter
March 20, 2019
Fiat Lux
Featured Trade:
(LYFT), (UBER), (GRUB), (POSTMATES), (DOORDASH), (GOOGL)
The imminent launch of the Lyft IPO is telling investors that the next era of technology is upon us.
Does that mean that you should go out and buy Lyft shares as soon as they hit the market?
Yes and no.
30 million shares are up for grabs and the price of the IPO appears to be pinpointed between $62 and $68.
Even though this company is a huge cash burning enterprise, the fact is that they have been catching up to industry leader Uber and snatching away market share from the incumbent.
It was only in January 2017 that Lyft had accumulated 27% of the domestic market share, and in the recent filing for the IPO, that number had exploded to 39%.
If Lyft can start to gnaw into Uber's lead even more, shares will be prime to rise beyond the likely $62 to $68 level.
Let's remember that one of the main reasons for Uber giving up ground in this 2-way race is because of the toxic work environment embroiling many of the upper management and the subsequent damage to its broad-based public image.
If you wanted the definition of a public relations disaster, Uber was the poster boy.
Story after story leaked detailing payment problems to Uber drivers, a huge data leak revealing millions of lost personal information, and even a crude video of the founder berating a driver went viral.
There might be no Cinderella ending for this ride-hailing operation as litigious time bombs stemming from an aggressive high-risk, high-reward strategy skirting local taxi laws have flaunted the feeling of corporate invincibility in the face of government.
Being the first of its kind to hit the market, I do believe the demand will outstrip the supply.
There is a scarcity value at play here that cannot be quantified.
And an initial pop from the low-to-mid $60 range to about $80 is a real possibility in the short-term.
However, expect any robust price action to be met with rip-roaring volatility, meaning there is a legitimate chance that shares will consolidate back to $50 before they head up to $100.
Some of my favorite picks have echoed this same price action with fintech juggernaut Square (SQ) and streaming platform Roku (ROKU) mimicking heart-stopping price action with 10% moves up or down on any given day.
This doesn't mean that these are bad companies, but they do become harder to trade when entry points and exit points become harder to navigate around because of the extreme beta attached to the package.
The big winner of this IPO is ultimately self-driving technology.
Let's not skirt around the issue - Lyft loses a lot of money and so does Uber and that needs to stop.
It has been customary for tech companies to go public in order for the initial venture capitalists to cash out so they can rotate capital into different appreciating assets.
When companies are on the verge of ex-growth, maintaining the same growth trajectory becomes almost impossible without even more incremental cash burn relative to sales.
This leads to an even more arduous pursuit of revenue acceleration with stopgap solutions calling for riskier strategies.
What this means for Lyft is that they will need to double down on their self-driving technology because they are incentivized to do so, otherwise face an existential crisis down the road.
The most exorbitant cost for Uber and Lyft is by far employing, servicing, and paying out the drivers that shuttle around passengers.
I cannot envision these companies becoming profitable unless they find a way to eliminate the human driver and automate the driving function.
I will say that Uber benefitting from the Uber Eats business has been a high margin bump to the top line.
Yet, food delivery is not the main engine that will spur on these IPO darlings.
This part of the business is getting more saturated with margins getting chopped down every day.
What food delivery mainstays like Doordash and GrubHub don't have, is the proprietary self-driving technology that at some point will be present in every vehicle in the United States and the world.
What we are seeing now is a race to perfect, optimize, and implement this technology in order to further license it out to food delivery operations and other logistic heavy business that focus on the last mile.
The licensing portion out of self-driving technology will become a massive revenue driver eclipsing anything that the actual ride-hailing revenue from passengers can inject.
Well, that is at least the hope.
And because Lyft going public might force the company to remove the subsidies provided to the lift operators, this could translate into higher costs per unit.
The pathway is a no-brainer – Lyft needs self-driving technology more than the technology needs them.
And even though Google is head and shoulders the industry leader with Waymo, Lyft and Uber don't have a world-famous search engine that they can fall back on if the sushi hits the fan.
I believe Lyft passengers will have to pay more for rides in the future because of the demand for meeting short-term targets incentivizing management to raise fares.
Going public first will allow them to set the industry standards before Uber can participate in the discussion gifting a tactical advantage to Lyft.
That is why Uber is attempting to go public as fast as possible because every day that Lyft is a public company is every day that they can push their unique narrative and standardize what is a nascent industry that never existed 20 years ago with their new capital.
If high risk is your cup of tea, then buy shares when you get the first crack at it, otherwise, take a backseat with a bag of popcorn and watch history unfold.
This trade is not for the faint of heart and until we can get some more color on the business model and the ability or not of management to meet quarterly or annual expectations, there will be many moving parts with cumbersome guesswork involved.
To read up on Lyft’s IPO filing on the SEC website, please click here.
LYFT’S ARRAY OF SERVICES
“Any time there's significant change, there's going to be some people who embrace the change and others who are against the change.” – Said CEO of Uber Dara Khosrowshahi
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
March 20, 2019
Fiat Lux
Featured Trade:
(WHO THE GRAND NICARAGUA CANAL HAS WORRIED),
(SCAM OF THE MONTH)
Multinationals, Global development economists, and armchair military strategists are all watching with great interest China’s plans to build a Grand Nicaragua Canal.
The government in Managua inked a deal with a Hong Kong-based consortium in 2013 led by telecommunications magnate Wang Jing and broke ground on a minor access road on December 22. But that is a very long way from the mega project getting built.
The project is nothing if not ambitious. The 172-mile canal will connect the town of Brito on the Pacific coast with Punta Gorda on the Caribbean traversing Lake Nicaragua for 65 miles and crossing a minor mountain range.
The new passage has many merits. Much wider and deeper than the Panama Canal, it will be able to accommodate the new ultra “Triple E” super container ships now under construction in China and South Korea.
These behemoths, which are as large as the Empire State Building flipped on its side, carry a staggering 18,000 containers and are nearly four times larger than the standard “Panamax” ship, which can only hold 5,000 containers.
The Nicaraguan route would knock days off the 18-day trip from Los Angeles to New York, substantially dropping shipping costs, and stimulating international trade.
More important, it would give direct access from China to the US Gulf ports, enabling them to bypass troublesome strike-prone ports on the US West Coast. A prolonged strike brought traffic there to a virtual standstill in early 2015.
The aging Panama Canal, now over 100 years old, its infrastructure is getting rather long in the tooth, dating back to the era of Teddy Roosevelt, and still won’t be able to handle the new Triple Es.
Prices to transit Panama have also been rising and is now a major income earner for the country. Further expansion is mooted, if the China traffic can justify it.
The project is certainly being welcomed in Nicaragua, the second poorest country in the western hemisphere, just above destitute Haiti, and not far behind impoverished Cuba. Some 15% of the population earns less than $1.25 a day, and many don’t even own shoes.
The infrastructure of every description is sorely lacking, with paved roads scarce and cities subject to power brownouts or outright failure. A functioning cellular network is but a distant dream in most of the country.
The project is expected to cost $50 billion, but overruns could take the final price tag much higher. This compares to Nicaragua’s miniscule $11 billion GDP. The 2020 completion deadline is therefore considered fanciful. The project will create 50,000 jobs during the five years the canal is under construction.
The final boost to economic growth could produce as many as 200,000 jobs in a country with a population of 6 million and beset with chronic unemployment. If the project goes ahead, it will spark an unprecedented economic boom.
This isn’t the first time that a canal across Nicaragua has been contemplated. German and French companies drew up plans during the 19th century but fell victim to malaria, yellow fever, dysentery, and bankruptcy.
Roosevelt considered the country for his canal but passed over worries about erupting volcanoes, which Nicaragua prominently displayed on its postage stamps. In the end, smaller and weaker Panama was easier to take over by force via an imagined coup d’ etat.
The Grand Nicaragua Canal is not without its own challenges. Actual plans are somewhat murky, and the organizing Chinese group is clouded in secrecy.
Only $200 million has actually been raised from private investors. Transparency has been completely lacking. The prime organizer, a Chinese telecommunications tycoon, has no prior experience with a project of this size.
Some 100,000 peasants will have to be displaced whose legal title to the land they occupy is tenuous at best. Demonstrations against the Sandinista government of Daniel Ortega in the capital, Managua, have become commonplace. Workers have even refused to transport machinery to the project.
More than 1 million acres of virgin jungle and wetlands will have to be destroyed to make way for the canal, appalling environmentalists. Nicaragua is much more prone to hurricanes than Panama. Indeed, in 1998, Hurricane Mitch flattened the country and killed 3,800.
Having Chinese ships, notorious for dumping sewage and waste oil in foreign ports, crossing Nicaragua’s principal source of drinking water is adding further concerns.
US railroads will also be impacted by the canal which have prospered mightily by picking up Chinese imports on the west coast and moving them inland. American transportation infrastructure will have to convert from a predominantly East-West axis to more of a North-South one.
That is a big deal.
But Union Pacific’s CEO John Koraleski isn’t worried, citing this as the source of only 1% of their revenues. They, too, would be happy to be rid of the pesky unions there. For more depth here, please click “Will the Oil Bust Kill the Railroads”.
Chinese construction of the canal has piqued the interest of military observers around the world. It would give the Middle Kingdom’s naval vessels direct and rapid access to the Atlantic Ocean for the first time in history.
China has already refurbished a used Russian aircraft carrier, and work is underway on a second carrier it purchased from France. Could the Grand Nicaragua Canal ultimately pose a military threat to the US east coast?
It doesn’t help that relations between Washington and Managua have never been cordial. In fact, Ronald Reagan financed right-wing death squads there for nearly a decade against none other than president Ortega himself (remember Iran-Contra?).
I have watched many of these gigantic projects take shape over the years. The 31-mile underwater Eurotunnel connecting England and France wiped out all of its original investors, and the initial cost doubled to $15 billion before it was done.
I covered France for Morgan Stanley in those days, and my institutional clients used to wear me out with a torrent of complaints about how much money they lost on the channel tunnel. But then, the French will complain about anything.
Still, it is a nice ride today, but it took 20 years to complete. And that was with an entire continent behind it with unlimited budgets.
Like the California bullet train, these megaprojects look great on paper and attract many avid followers, but are very difficult to pull off.
I’ll believe it when I see it.
A New "Triple E"
"Risk is measurable. Uncertainty is not" said Sandra Navidi, CEO of Beyond Global, and international macro economic consultancy
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to the six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
March 19, 2019
Fiat Lux
Featured Trade:
(TURBULENCE AT BOEING), (BA),
(AN AFTERNOON WITH BOONE PICKENS)
You would think that with all the bad news out, Boeing shares would finally hit bottom.
All Boeing 737 Max 8 planes have been grounded. The 58 new $100 million planes a month scheduled for delivery have been suspended. That means one of the largest companies in the United States is banned from selling far and away its most important product.
Wrong!
This morning we learned that Federal prosecutors are investigating Boeing as to whether it was criminally negligent in obtaining the troubled aircraft’s original FAA certification. Subpoenas for emails and documentation have been issued, and a general ruckus created.
This was a guaranteed outcome. You want deregulation? This is what you get. You cut budgets? This is also what you get. I highly doubt that Boeing will be found criminally culpable for the two crashes. This is all an outcome from the US government’s withdrawal from oversite of the private sector.
The truth is that the technological and cost advantages of the Boeing 737 Max are so enormous that airlines have little choice but to stand behinf them. That explains why Boeing has a ten-year, 4,636 plane order book for the plane. Boeing has to fix this problem or there will be NO aircraft industry.
This is why Southwest Airlines (LUV) has ordered 249 of the cutting edge planes, followed by 123 for United (UAL) and 76 for American (AAL).
Having been a commercial pilot for most of my life, and once owning a European air charter company I have some insights into this issue.
These two crashes are not a software problem, which can be fixed in days. It is a pilot training issue. And I have been subjected to this training myself hundreds of times until I can do it blindfolded and in my sleep. Whenever you have a runaway autopilot problem, you PULL THE DAMN CIRCUIT BREAKER!
However, if you are poorly trained, as are many emerging airline pilots, and can’t remember which of the 100 circuit breakers you need to pull with a runaway autopilot then the plane will crash. The harsh truth here is that MOST modern-day pilots can’t hand fly a plane without an autopilot.
I am therefore willing to bet that Boeing shares are near or at a medium-term bottom, now $75 off its high from only weeks ago.
Boeing Aircraft (BA) is one of the great icons of American manufacturing, and also one of the country’s largest exporters. I was given a private, sneak preview of the new Dreamliner at the Everett plant days before the official launch with the public, and I can tell you that this engineering marvel is a quantitative leap forward in technology. No surprise that the company has amassed one of the greatest back order books in history.
I can also tell you that my family has a very long history with Boeing (BA). During WWII, my dad got down on his knees and kissed the runway when the B-17 bomber in which he served as tail gunner (two probables) made it back despite the many holes. It was only after the war that he learned that the job had one of the highest fatality rates in the services.
Some 40 years later, I got down on my knees and kissed the runway when a tired and rickety Boeing 707 held together with spit and bailing wire which was first delivered as Dwight Eisenhower’s Air Force One in 1955, flew me and the rest of Reagan’s White House Press Corp to Tokyo in 1983 and made it there in one piece.
I even tried to buy my own personal B-17 bomber in the nineties for a nonprofit air show I was planning but was outbid by the late Paul Allen on behalf of his new aviation museum. Note to self: never try to outbid a co-founder of Microsoft on anything.
So it is with the greatest difficulty that I examine this company in the cold hard light of a stock analyst. There is nothing fundamentally wrong with the company. But its major customers around the world are suffering from some unprecedented stress.
US airlines are getting hammered by the rising cost of fuel. Delta even resorted to the unprecedented move of buying its own refinery to assure fuel supplies. Europe, where Boeing competes fiercely against its arch enemy, Airbus, is clearly in recession. Government-owned airlines there are in ferocious cost-cutting mode.
China, another one of Boeing’s largest customers, is also slowing down, thanks to the trade war. As for Japan, the economy there is going from bad to worse. All Nippon Airways was awarded the first Dreamliner for delivery because it is such a large customer. It is just a matter of time before this harsh reality starts to put a dent in the company’s impressive earnings growth.
This is not for the weak of heart.
