Mad Hedge Biotech and Healthcare Letter
May 8, 2025
Fiat Lux
Featured Trade:
(A DOUBLE HELIX OF OPPORTUNITY)
(CRSP), (NTLA)
I never fully appreciated the potential of gene therapy until last fall when my college friend Eric called with surprising news. His 14-year-old daughter Sophie, who'd struggled with sickle cell disease her whole life, had undergone treatment with Casgevy, a CRISPR-based gene therapy developed by CRISPR Therapeutics (CRSP) and Vertex (VRTX). Six months later, she hasn't needed a single blood transfusion or hospitalization—a transformative outcome for a girl accustomed to spending more weeks in hospital rooms than classrooms.
"The doctors keep using phrases like 'functionally cured,'" Eric told me. "I just know she's planning her first summer camp experience. That's miracle enough for me."
Eric's story prompted me to dive deeper into gene-editing therapies and the companies working on them. What struck me the most is that despite groundbreaking science, market volatility has created a disconnect between technological progress and stock valuations.
Gene therapy stocks like CRISPR Therapeutics and Intellia Therapeutics (NTLA) had a rocky first quarter of 2025, with shares dropping 2.82% and 24.19%, respectively. The broader market mirrored this instability, with the S&P 500 down nearly 3%. Yet, beneath these headline fluctuations lies an intriguing opportunity for patient long-term investors.
CRISPR is particularly interesting. It's sitting pretty with $1.9 billion in cash and equivalents as of the end of 2024. That's enough runway to keep the scientists doing what they do best for years without financial pressure.
More importantly, they're expecting their flagship product Casgevy to be accretive from late 2025, meaning actual revenue is on the horizon – not just the promise of future miracles.
Casgevy's approval for sickle cell disease and beta-thalassemia underscores CRISPR Therapeutics' tangible progress. With a cost of $2.2 million per patient, the price seems steep until compared against lifetime management costs of these conditions. Additionally, their pipeline extends beyond blood disorders into cardiovascular treatments like CTX-310 and CTX-320. These therapies aim to permanently eliminate the need for daily medications—a seismic shift in a market projected to grow from $156 billion in 2025 to nearly $215 billion by 2034.
CRISPR Therapeutics' strategic advantage is further enhanced by their U.S.-based manufacturing facility, strategically positioned to mitigate risks from reshoring trends and global supply chain disruptions.
On the other hand, Intellia faces a tighter financial outlook. With $861.73 million in cash and equivalents, they project operations funding through the first half of 2027. However, this timeline feels restrictive, especially since their first products aren't anticipated until at least 2027.
Although their financial runway is limited, Intellia's therapeutic breakthroughs still command attention. Their treatments NTLA-2002 for hereditary angioedema and Nex-z for transthyretin amyloidosis have shown extraordinary results. I remember a conversation with a trial participant who shared, "I went from planning my life around my disease to barely remembering I have it." Such transformative experiences underline the real-world potential of Intellia's science.
However, Intellia must dramatically reduce its annual cash burn from $592 million to around $345 million to ensure survival until commercialization. This aggressive belt-tightening could jeopardize their momentum.
Both companies currently trade at attractive valuations given their prospects. CRISPR Therapeutics holds a price-to-book ratio below the sector median, with cash comprising 57% of its market cap. Intellia's cash reserves represent an astounding 94% of its market cap, suggesting significant market undervaluation of its intellectual property and promising pipeline.
For investors able to tolerate short-term volatility, this disconnect offers a potentially lucrative entry point, particularly with CRISPR Therapeutics’ imminent commercial revenue.
As I told Eric, the market currently undervalues these revolutionary companies despite proven science. Eventually, stock prices will reflect this reality. I'm cautiously building positions during these dips, anticipating the long-term transformative impact of these therapies.
Just ask Sophie, who’s packing for summer camp instead of preparing for another hospital stay.
Tech giant Alphabet (NASDAQ: GOOGL) witnessed a tumultuous day in the markets, with its shares plunging by as much as 8% after damning statements from Apple’s Senior Vice President of Services, Eddy Cue, who suggested that Artificial Intelligence is poised to supplant traditional search engines. Cue’s testimony, delivered during Google's ongoing antitrust trial, sent immediate shockwaves through Wall Street, raising profound questions about the future of Google's search dominance and its lucrative advertising empire.
The sell-off, which saw Alphabet’s stock dip sharply, wiping off tens of billions of dollars in market capitalization, underscores mounting investor anxiety regarding the disruptive potential of AI on Google's core business. Reports from the trial indicated Cue’s belief that AI assistants will inevitably make conventional search methods obsolete, a sentiment that clearly spooked investors who have long viewed Google Search as an unshakeable behemoth.
The Catalyst: Eddy Cue's Bombshell Testimony
Eddy Cue’s provocative predictions emerged during his testimony in the closely watched Google antitrust case. He stated that Apple is "actively looking at alternatives to enhance our search capabilities," a comment that directly implicates the multi-billion dollar deal Google has with Apple to be the default search engine on Safari. According to reports, Cue revealed that the number of Google searches within Safari experienced its first-ever decline last month, a startling admission considering Google has paid Apple an estimated $18 to $20 billion annually for its prime placement.
"Prior to AI, my feeling around this was, none of the others were valid choices," Cue reportedly testified, alluding to potential new entrants. "I think today there is much greater potential because there are new entrants attacking the problem in a different way." He specifically mentioned that Apple has had discussions with AI-native search companies like Perplexity about potential Safari integration, though no definitive plans were shared.
Cue didn't stop at Apple's internal considerations. He painted a broader picture of technological evolution, suggesting that AI-powered solutions are fundamentally changing how users will seek and receive information. His assertion that "AI search providers... will eventually supplant standard search engines like Google" served as a direct challenge to Alphabet's foundational business. Some reports even highlighted Cue's more radical speculation that the iPhone itself could be outdated in a decade due to AI advancements.
Market Tremors: Alphabet's Stock Takes a Beating
The market reaction was swift and brutal. Alphabet’s shares, which closed at $165.20 on May 6, saw a midday trading drop of 8.18% on May 7, before recovering slightly. The 8% figure represents one of the most significant single-day drops for the company in recent memory directly tied to competitive AI threats. This plunge reflects deep-seated fears that Google’s search-based revenue model, which accounts for the lion's share of its profits, is facing an existential threat.
Analysts immediately weighed in, with opinions divided on whether the drop was an overreaction or a justified recalibration of Alphabet's future earnings potential. "Cue's comments are a stark reminder that the moats around Google's search castle are not as impenetrable as once believed," commented one tech analyst. "The fear is not just about losing Apple's default status, which is a huge financial hit in itself, but about a fundamental paradigm shift in user behavior driven by AI."
This isn't the first time AI competition has rattled Alphabet investors, but the directness of Cue's statements, coupled with Apple's explicit exploration of alternatives, has lent a new sense of urgency to the threat.
The Core of the Threat: AI vs. Traditional Search
The fundamental premise behind the fear driving Alphabet’s stock down is the perceived superiority of AI in information retrieval for many types of queries. Traditional search engines, primarily Google, rely on users typing keywords and then sifting through lists of links (Search Engine Results Pages, or SERPs). While highly refined, this model can still lead to information overload and require users to do significant work to find specific answers.
AI, particularly large language models (LLMs) and generative AI, offers a conversational paradigm. Users can ask complex questions in natural language and receive direct, synthesized answers, often compiled from multiple sources. This can be faster, more intuitive, and provide a more complete understanding without needing to click through multiple websites.
The vision is a shift from "searching for documents" to "receiving solutions." AI-powered assistants, integrated into operating systems, browsers, or standalone applications, could become the primary interface for accessing information, potentially bypassing traditional search engines altogether. As one industry expert put it, "Users don't want a list of links; they want answers. AI is getting remarkably good at providing just that."
Alphabet's Achilles' Heel?: The Search Engine Empire
Google's business model is overwhelmingly reliant on its search engine. For the first quarter of 2025, Google Search revenue was reported at $50.702 billion, constituting approximately 56.2% of Alphabet's total revenue. In 2024, Google Search and other related revenues accounted for $198.1 billion, or 56.6% of Alphabet's $350 billion total revenue. This massive revenue stream is primarily generated through advertising displayed alongside search results.
If AI-driven interfaces become the norm and provide direct answers, the number of traditional SERPs displayed could plummet. Fewer SERPs mean fewer opportunities for ad impressions and clicks, directly threatening Google's cash cow. This is the "existential threat" that has investors on edge. The current model, where Google acts as the gatekeeper to information and monetizes that position through ads, could be fundamentally undermined.
Apple's Angle: A New Frontier or Strategic Maneuvering?
Apple's motivations, voiced through Cue, are likely multifaceted.
- Genuine Belief in Technological Shift: Apple executives, like many in Silicon Valley, may genuinely believe AI is the next evolution of information access. Apple has been investing heavily in its own AI capabilities, dubbed "Apple Intelligence," focusing on on-device processing and privacy – core Apple tenets.
- Strategic Leverage: Cue's statements during an antitrust trial against Google could be a strategic move to pressure Google or to signal to regulators that viable alternatives to Google Search are emerging, potentially lessening regulatory scrutiny on Apple's lucrative deal with Google.
- Ecosystem Control & Services Revenue: Apple has a strong incentive to control the user experience on its devices. An Apple-controlled or deeply integrated AI search/answer engine within its ecosystem (iPhones, iPads, Macs) could enhance user stickiness and create new service revenue opportunities, aligning with its growing emphasis on its services division. Apple recently announced plans to spend over $500 billion in the U.S. over the next four years, with a significant focus on AI, silicon engineering, and infrastructure like data centers to support Apple Intelligence.
- Reducing Dependency: The multi-billion dollar payments from Google, while profitable, also make Apple reliant on a competitor. Developing or partnering for its own AI-driven information solution could reduce this dependency in the long run.
The AI Search Landscape in 2025
The threat isn't purely theoretical. Several AI-powered search alternatives are already gaining traction. Companies like Perplexity AI, along with AI chatbots from OpenAI (ChatGPT with search capabilities) and Anthropic, are pioneering conversational search and direct answer generation. While their market share is still small compared to Google's (a recent study showed only 14% of people rely on AI-driven searches daily, though 71.5% use AI tools for search), they represent the vanguard of this potential shift.
These tools often excel at complex queries, brainstorming, and synthesizing information. However, challenges remain for AI search, including the high computational cost of AI queries, the potential for "hallucinations" (generating incorrect information), and user habits deeply ingrained around traditional keyword search for simple queries. Studies indicate that for quick facts and local business searches, traditional engines like Google still dominate.
Alphabet's Defense: The AI Counteroffensive
Alphabet is far from a passive observer in the AI revolution; it has been a pioneer. Google's DeepMind and Google AI divisions are at the forefront of AI research. The company has been aggressively integrating AI into its own search product through initiatives like "AI Overviews" (formerly Search Generative Experience or SGE) and its powerful Gemini family of models. Google reported that AI Overviews are already used by over a billion people monthly and have been upgraded with Gemini 2.0 for more complex queries.
Google is also experimenting with a new "AI Mode" in Search Labs, designed to provide AI responses for an even wider range of searches, utilizing advanced reasoning and multimodal capabilities. Furthermore, Google is trying to protect its ad revenue by testing ad placements within AI chatbot conversations and rolling out "AI Max for Search campaigns" to help advertisers leverage AI for better ad performance in this evolving landscape.
The critical challenge for Google is the classic "innovator's dilemma": how to embrace a disruptive new technology (AI search) that could cannibalize its immensely profitable existing business (traditional search advertising). It must innovate aggressively enough to lead the AI transition while carefully managing the financial impact.
Navigating the Uncharted Waters: The Future of Information Access
The potential shift from traditional search to AI-driven information access has profound implications beyond Apple and Google:
- Content Creators and SEO: The traditional Search Engine Optimization (SEO) industry may need to evolve towards "Generative Engine Optimization" (GEO), focusing on making content easily digestible and citable by AI models. The value of ranking #1 on a SERP may diminish if users get answers directly from AI.
- The Open Web: If AI synthesizes information and presents it directly, it could reduce traffic to original content websites, impacting publishers and the ad-supported open web.
- Misinformation and Bias: AI models can inherit biases from their training data, and the potential for generating convincing but false information (hallucinations) is a significant concern. Ensuring accuracy and neutrality will be paramount.
- Data Privacy: AI systems often require vast amounts of data to personalize responses, raising ongoing privacy concerns that companies like Apple, with its on-device processing focus, are trying to address.
Conclusion: The Search for a New Equilibrium
Eddy Cue's statements have ignited a firestorm, crystallizing fears that have been simmering in the tech world for the past couple of years. The 8% drop in Alphabet’s stock is a clear vote of no confidence from some investors in Google's ability to seamlessly navigate this AI-driven sea change.
While it's unlikely that traditional search will disappear overnight – user habits are sticky, and AI search still faces cost and reliability hurdles – the trajectory towards more AI-integrated information discovery seems undeniable. Alphabet faces a monumental task: to reinvent its core product and business model in the face of fierce competition and rapid technological advancement, all while its existing empire is under scrutiny.
The coming months and years will be critical. Can Google leverage its immense resources, data, and AI talent to not just defend its turf but lead the charge into the next era of information access? Or will a new generation of AI-first companies, perhaps championed by giants like Apple, redefine how the world finds answers? The tech industry, and indeed the world, watches with bated breath.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Technology Letter
May 7, 2025
Fiat Lux
Featured Trade:
(AI AND LOWER EMPLOYEE WAGES)
(TSLA)
Students hoping to become bankers shouldn’t study finance, they should dive into programming.
This is the big takeaway from how investment banks are run these days.
Gone are the moments when finance degrees were the hottest commodity; now it is all about generative AI.
Artificial intelligence (AI) could replace the equivalent of 300 million full-time jobs, a report by investment bank Goldman Sachs says.
It could replace a quarter of work tasks in the US and Europe, but may also mean new jobs and a productivity boom.
And it could eventually increase the total annual value of goods and services produced globally by 7%.
Generative AI, able to create content indistinguishable from human work, is "a major advancement", the report says.
Silicon Valley is keen to promote investment in AI not only in the United States but in a way that will ultimately drive productivity gains across the global economy.
The report notes AI's impact will vary across different sectors - 46% of tasks in administrative and 44% in legal professions could be automated, but only 6% in construction and 4% in maintenance, it says.
Journalists will therefore face more competition, which would drive down wages unless we see a very significant increase in the demand for such work.
Consider the introduction of GPS technology and platforms like Uber (UBER). Suddenly, knowing all the streets in London had much less value - and so incumbent drivers experienced large wage cuts in response, of around 10% according to our research.
The result was lower wages, not fewer drivers.
Over the next few years, generative AI is likely to have similar effects on a broader set of creative tasks.
According to research cited by the report, 60% of workers are in occupations that did not exist in 1940.
However, other research suggests technological change since the 1980s has displaced workers faster than it has created jobs.
Nobody understands how the technology will evolve or how firms will integrate it into how they work.
Lower wages and higher output is a perfect recipe for higher technology share prices, and that is exactly what we will get.
Currently, we are experiencing a mild pullback from the AI mania, but that is simply because it got too far ahead of its skis.
Tesla is also in a prime position to apply AI to power robot-taxis, which would create a windfall.
Tesla’s self-driving tech needs high volumes of AI chips to outfit their EV cars, but they have signaled to investors that they are experiencing trouble reaching that “2nd wave” of incremental buyers for their car.
Why buy a Tesla when a robo-taxi Tesla is around the corner?
Tech as a whole is not in trouble, but individual companies will find an imbalance treatment to their stock.
The AI pixie dust might have leveled off in the short term, and the broader tech market is being dragged down by a confluence of headwinds like spiking interest rates, geopolitical strife, beaten-up consumers, and diminishing addressable market revenue.
I do believe in the AI hype, but these trends don’t go up in a straight line and need time to digest, which often results in short-term pullbacks.
“Life is too short for long-term grudges.” – Said CEO of Tesla Elon Musk
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
(A RETEST OF THE LOWS IS QUITE LIKELY)
May 7, 2025
Hello everyone
The bounce since the lows on April 8 has been quite strong on easing angst about tariffs and Federal Reserve independence.
The strength and breadth of the rally have triggered some positive technical signals. However, it would be foolish to believe that we have escaped the bear in the woods altogether just yet.
History provides a sobering reminder about bear market psychology.
Let’s revisit 2008.
During the Global Financial Crisis, the S&P 500 experienced rallies averaging 10% each (typically lasting less than two months), while ultimately losing 57% over a year and a half. The Tech Bubble saw seven rallies averaging 14% over five-month periods amid a 49% overall decline spanning two and a half years.
Dan Niles, founding partner of Alpha One Capital Partners, explains that “the desire to believe it was the bottom was quite high during each of those rallies, but earnings estimates, and trailing PE (share price to earnings) multiples had to still go lower, which ultimately drove the stocks lower.”
Niles argues that finding the market bottom will normally take more time unless there is fiscal stimulus or easier monetary policy. However, the government is currently prioritizing spending cuts and as Niles points out, “the Fed is on hold given their concerns over tariff-driven inflation in the pipeline, and unemployment still remains low.”
U.S.-China relations remain a significant market variable. Prospects of a meaningful resolution in the short term, at least, appear dim.
As we head into the second half of the year, it appears likely that underlying weakness in the economy will show up in the data and will lead to negative GDP growth in the third quarter and S&P500 earnings expectations being revised lower.
Given this scenario, the current Wall Street estimates for over 10% S&P 500 earnings per share growth for 2025 look optimistic and should instead be dialled back down to flat. If we enter a recession, EPS growth is likely to go negative.
This means that the market’s current valuation multiple is too high. The S&P trailing multiple at 23x should probably be closer to 19x at the current inflation levels. Niles explains that in a recession, this PE is usually closer to mid-teens.
Niles comments that the above factors will probably cause a retest of the lows for stock prices at the very least.
The U.S. dollar will continue to fall
The dollar index (DXY) has tumbled 9% below its January peak and tumbled to a three-year low. After a near-term bounce, more dollar weakness is on the horizon.
Cheers
Jacquie