Mad Hedge Technology Alerts!
Chegg (CHGG) is toast.
That is what artificial intelligence has done to their business model and we are in the early innings.
The company said to kiss growth goodbye.
Artificial intelligence is already putting a massive dent in some industries.
Education has changed dramatically in the past generation where more than half of Americans say a 4-year degree is not worth the price of admission anymore.
Now, moving forward, the little value extracted in terms of workable knowledge in the classroom is effectively zilch as generative artificial intelligence will do the job of a million university teachers for free.
There simply is no use case for taking geography studies or getting a basket weaving degree from Wesleyan College.
It doesn’t make sense anymore.
The scary thing is this is just the beginning and other industries are about to get t-boned as well.
Only the nimblest will survive.
Workers need to retrain, network, and preserve and expand skill levels.
Shares of virtual language-learning company Duolingo fell 9% while American depositary receipts tied to shares of London-based Pearson fell 12.5%.
Chegg offers subscription-based academic services that help students with writing and math assignments as well as study materials.
Management said the company didn’t see a significant effect on its business from ChatGPT until March, when the company behind the product, OpenAI, launched GPT-4.
Chegg said the popularity of ChatGPT among students is affecting its customer-growth rate.
The red alarm from Chegg and the subsequent selloff are among the most glaring indications that this isn’t some cute niche thing that can be downplayed or diminished.
AI is coming for most white-collar jobs and workers should be scared if not mortified.
Many of the job losses will occur in big corporations and America has some of the biggest and most profitable.
The tailwind for corporate management is that they don’t need to pay benefits or social payments to AI so big cost savings that will fall down to the bottom line.
Wall Street will be applying this technology to the utmost too.
To say this technology is transformative doesn’t do justice to the word transformative.
This isn’t going to be an all tides lift all boats scenario.
Bloomberg news noted that nearly 40% said that children currently in elementary school will be best off with a job in health care if they want to avoid being displaced by artificial intelligence.
What about tech?
There will be serious winners and losers as this shakes out. It’ll be like a slow-motion car crash for workers while tech firms profit in real-time.
Technology stocks will hollow out similar to how we see the behemoths pull ahead lately muscling out smaller companies with their solid balance sheets.
This has essentially become a 7-stock tech sector.
Tech companies will absolutely be chomping at the bit to fire computer engineers whom many command in excess of $150,000 in pre-tax gross salary.
Of course, the lower-level computer engineers will be thrown by the wayside first then slowly the terminations will reach higher up the value chain.
If a computer engineer wants to survive in the future, they will need to dive into generative artificial intelligence themselves which will easily offer the highest salaries in technology.
AI is now the new bitcoin and the best talent will flood that space. It’s easy to see how starting salaries with start with a 3 and end with 5 more numbers.
As for tech investors, this shows that getting into these little micro tech stocks is more and more treacherous as the landscape has dictated a hard future ahead.
That is why I tripled up on a bearish position in Zoom technologies (ZM). All big tech companies have some sort of version of video conferencing tech and it is easy to replicate. Stay with the strongest during this bank crisis.
Mad Hedge Technology Letter
May 1, 2023
Fiat Lux
Featured Trade:
(GRINDING HIGHER)
(META)
It’s clear that the cost of gaining each incremental load of revenue is a lot harder than it used to be for Meta (META) platforms.
This is why expenses have exploded out of control, but I wouldn’t say that it’s time to take profits because they benefit from the “too big to fail” mantra just like other systemically important stocks.
I don’t believe they will rekindle sales growth of yore because there isn’t anything on the horizon that strikes me as something that would be a game changer.
The metaverse which they are sinking a fortune into has turned into a black hole of capital.
CEO Mark Zuckerberg himself couldn’t explain on the conference call when there would be tangible results that would deliver help to the bottom line.
That means open-ended funding to R&D and that is not what you want to hear from shareholders.
The pay-as-you-go elements to this don’t bode well, because they still don’t understand how they can monetize AI.
The silver lining here is that Meta is still quite profitable.
The top line of $28.6 billion was up 3% year over year.
It was the first year-over-year revenue growth Meta has been able to muster since the first quarter of last year. Per-share earnings of $2.20 also topped the consensus of $2.02.
Sales guidance for the quarter currently underway was also better than expected, with the company forecasting a top line of somewhere between $29.5 billion and $32 billion.
Q1's net income of $5.7 billion is 24% less than the bottom line from the first quarter of 2022 showing that even though they make a lot of money, profitability is slowing.
While Meta did sequentially add 60 million daily users to its services last quarter, most of that growth came from the Asia-Pacific market or the "rest of the world" - not Europe, Canada, or the U.S.
Those two markets experience the lowest ARPU (average revenue per user) figures among all the ones Meta serves.
And in both of those cases, ARPU figures have been essentially stagnant since the second quarter of last year.
It’s increasingly worrisome that the growth part of META is low quality.
Zuckerberg knows that it’s a fight to the bottom with his existing business which is why he is hell-bent on making the metaverse work.
Don’t forget that META shares fell from $360 per share last year and many investors can describe the recent price action as a reversion to the mean.
Expect higher costs to eat into META’s bottom line, but not so damaging that it will kill the business model.
The gains are there to be had, but don’t expect any high growth to come from META – those days are essentially over.
META will most likely grind higher and I do believe investors should buy the dip when available.
When the trend isn’t broken, then don’t fight against it.
Don’t forget they will benefit from another tailwind of end of 2023 rate cuts.
Tech business models aren’t as good as they used to be, but that doesn’t mean these stocks won’t go up.
A tepid META receiving investor love also shows how bad things are at the bottom of the barrel from SPACS to lockdown darlings.
Small growth stocks have little to no chance to compete moving forward so investors should only focus on “too big to fail” tech stocks in a world of higher rates.
