Mad Hedge Technology Letter
August 16, 2023
Fiat Lux
Featured Trade:
(CORD CUTTING IS TAKING OVER)
(NFLX), (GOOGL), (AMZN), (CMCSA), (DIS)
Tag Archive for: (AMZN)
Cord-cutting is going into overdrive as linear TV viewership has just fallen below 50% nationally in July for the first time.
Big changes are about to happen.
This has major ramifications for not only the tech sector but for the broader economy, society, and geopolitics.
We are here to talk about the tech and the sinking of linear TV does mean relative gains for online streamers.
Broadcast and cable each hit a new low of 20% and 29.6% of total TV usage, respectively, to combine for a linear television total of 49.6%.
Has the quality of linear TV channels soured in quality or what is the deal?
It could be a functional reason, as Baby Boomers are watching linear tv because they haven’t figured out the streaming thing yet.
The ease of flipping on the tv with a remote cannot be understated.
In the future, the result is that linear tv penetration will be down to 20% level in around 20 years.
The players that will begin advancing further center stage into the national consciousness are YouTube (GOOGL), Netflix (NFLX), and Amazon Prime Video (AMZN).
They saw month-over-month viewership increases of 5.6%, 4.2%, and 5%, respectively, in July.
Don’t expect a rebound, because linear tv is bleeding viewers reflecting how bad TV channels have become.
Ad revenue across our media network coverage fell 13% on average in Q2, down from -8% in 1Q, which included the Super Bowl.
That being said, certain streamers haven’t exactly cracked the code either, as Peacock, Disney+, Hulu, ESPN+, Paramount+, Max and Discovery+ were down by about 500,000 combined.
However, on the whole, subscriber growth was 8.5% year-over-year with highlights like Netflix adding 5.9 million subscribers in the second quarter.
Comcast's Peacock (CMCSA) was able to grow its subscriber base 84% year-over-year to 24 million, up from the prior 13 million, as the streamer works to catch up to its peers amid a significant lag.
Direct-to-consumer advertising (DTC) grew 27% on average across media companies including Disney (DIS), Comcast, Warner Bros. Discovery (WBD), and Paramount (PARA). That's double from the 13% growth posted in the first quarter.
Comcast is the farthest behind, as only 14% of its estimated revenues are expected to come from DTC in 2024 with the other 85% stemming from its linear networks. Disney is the farthest along, with DTC revenue expected to surpass linear network revenue for the first time in 2024.
As linear tv is headed to the dustbin of history, streaming is also getting more expensive.
Personally, that is what I have seen as many platforms are starting to push the $100 plus per month level.
Many might remember when streaming was $20-$40 per month.
Therefore, I am not surprised to see single-digit growth for streaming as high prices crimps demand.
It’s true that mass media is fracturing into different niches and communities and that isn’t so fantastic for big media corporations as it could mean higher costs and a smaller total addressable audience.
I still do believe there is growth in streaming but not at the elevated levels like the 20% or 30% range.
Customer acquisition will also become more difficult and expensive as people really need to be convinced to move platforms or online channels.
The golden age of streaming growth is over and now each inch will be fought tooth and nail by more competition.
In the short term, I believe a dip in CMCSA should be bought, as they are still driving users to the Peacock platform. NFLX is still worth a trade on the dip as well, but I would avoid DIS until they structurally upgrade the company.
Mad Hedge Technology Letter
August 2, 2023
Fiat Lux
Featured Trade:
(SPOT ON WITH SPOTIFY)
(SPOT), (AMZN), (APPL)
Many industries have experienced consolidation in the last few years and music streaming has been no exception.
The strong emergence of a few companies running the show has resulted in these same companies wielding extraordinary pricing power.
Spotify (SPOT) has been one of the leading music streaming platforms for years, and when companies harness pricing power, they can raise prices to compensate for higher expenses.
That is exactly what Spotify did recently as their stock sold off on a wider-than-expected loss for the second quarter, even though subscribers surged.
The streaming service posted a net loss of 302 million euros.
Monthly active users (MUAs) beat estimates of 530 million to hit 551 million — a 27% improvement compared to the year-ago period. Net additions of 36 million represented Spotify's largest quarterly net addition performance in its history.
Premium subscribers also surpassed expectations of 217 million, jumping another 17% year over year to hit 220 million.
In its first-quarter report, the company said it expected to add 15 million new monthly active users in Q2, bringing its total to 530 million. It also expected revenue of 3.2 billion euros and to report 217 million paid subscribers in the quarter.
Spotify is continuing to invest in advertising, and its ad-supported revenue grew 12% year over year. The company said podcast advertising revenue growth reaccelerated to more than 30% year over year.
Spotify will increase the price of its Premium subscription offerings by as much as $2, which translates to a 20% rise for some plans.
In the U.S., Spotify’s Premium Individual offering now costs $10.99, up from $9.99, and the price of its Premium Duo plan changed to $14.99, up from $12.99. The company’s Premium Family plan is now priced at $16.99, up from $15.99, and the Student offering costs $5.99, up from $4.99.
Spotify doesn’t expect a drawdown in product demand from the price increase, and let’s face it, most people can handle paying an extra 2 bucks for something they use every day.
Music streaming is definitely close to becoming an industry participated in by just a few for as long as it’s a viable business.
That means Spotify will also have the opportunity to raise subscription prices again in the future.
The licensing issues alone are too much of a hurdle for most companies to get to launch so to really compete takes a high amount of upfront funds and in the world of high interest rates, tech firms can’t fund this type of retread business again.
Spotify isn’t a pure monopoly.
The others involved are Apple Music, Amazon, Tidal, Deezer, and Pandora.
SPOT’s stock has increased by over 85% after the earnings pullback, and at one point they were up over 100%.
Growing subscriptions at 27% is still considered something that a growth company does at a time when growth companies are hard to find.
It doesn’t matter that they aren’t profitable yet, as long as they add more subscribers, which they have strongly indicated they will.
The stock has pulled back from $175 and once the negative shakeout fades away, traders should get into SPOT while they still can.
Is it worth it to invest in the “next Tesla” or is it way too optimistic there could even be a next Tesla?
This upstart challenger to Tesla, Lucid (LCID) is more or less what I thought about Tesla a few years ago – buy the car and not the stock.
Like many businesses in the world – it comes down to time and place.
Tesla benefited from generous federal subsidies, first mover advantage and LCID is just a little late to the action.
Why does that matter?
Tesla had its knife and fork at the table by itself when nobody else wanted to join them.
The problem with legacy automakers is that it took them too long to realize that EVs were a tsunami instead of a splash in a pond.
I know with conviction that EV makers like LCID are slogging through because of the numbers that materialize in their earnings reports.
The numbers are a manifestation of the time and place phenomenon that I just mentioned.
LCID continues to face major cash flow issues and will be lucky to exist in a few years.
A high burn rate is a hallmark of smaller EV companies and even Tesla had to be saved at the last second it its early days.
LCID simply doesn’t have the expertise and economies of scale to bring down the unit economics where it delivers a profit.
This achievement is also pushed out far into the future.
We are also seeing a widening gap in its production and deliveries, with approximately 4.76K units undelivered, with a growing inventory value of $1.01B.
LCID's resale value appears to be drastically impacted, with one recently auctioned for $85K, compared to the base model of $110,000.
The intense capital burn has forced LCID management to issue more common stock which dilutes current shareholders and suppresses the stock price.
While LCID may have won the battery competition through its longest driving range and market-leading design, the management's choice to go premium has clearly undermined the mass market.
This is a segment that fellow automakers such as Tesla (TSLA) and BYD (OTCPK:BYDDF) have invested great efforts while improving their supply chain and pricing strategies.
This alone suggests LCID's highly niche market segment based on the hefty price tag of $150K per unit, compared to TSLA at $40K and BYD between $20K to $30K (in China), effectively will stoke higher cash burn levels.
For now, LCID has not achieved break-even, selling every EV at a loss.
This signals weak consumer demand for LCID.
This automaker's expanded annualized production capacity of up to 90K vehicles in the AMP-1 facility and up to 155K in the Saudi Arabia facility.
Production is still miles behind Tesla at a time when supply chains and material costs are squeezing EV makers even more.
When we consider that the stock was trading at $20 per share just 1 year ago, the stock languishing at $7.50 today represents quite a pitiful performance.
I do acknowledge they make quite a nice EV.
However, it’s still highly debatable whether its business model is sustainable.
I do believe that around $4 per share is a good entry point for this EV maker.
Any pop from $4 should be sold.
There is no reason to overpay for LCID right now in a market that values accelerating and positive free cash flow.
Better the stock come to you than to go fishing for it.
Mad Hedge Technology Letter
July 14, 2023
Fiat Lux
Featured Trade:
(BAD TECH EARNINGS ARE PRICED IN)
(AAPL), (TSLA), (AMZN), (FB)
There are many so-called “experts” and “economists” dumping on the upcoming tech earnings season.
I got it – they won’t be the best ever.
No need to beat a dead horse when it’s down.
They say that the optimism of a soft landing for the economy is dissipating as stubbornly high inflation keeps central banks hawkish.
It’s hard to believe that tech stocks have been on a tear in 2023 during a period of hawkishness.
Higher for longer luckily has not affected tech stocks yet, yet many are saying this earnings season could be the straw that breaks the camel’s back.
I must admit, at the intro level such as venture capitalism and start-ups, the rate environment has been nothing short of catastrophic.
Investors aren't giving money for just ideas anymore.
The good news is that at the incubator level, nobody cares because these paltry numbers don’t move the stock market and are decades away from going public.
It doesn’t matter to the tech market that the next Amazon or Facebook has a tough time borrowing with these sky-high rates.
Nobody cares because most people hold Apple and Tesla stock.
I am also willing to call B.S. on the negativity for the upcoming tech earnings season and will say it should be just fine.
I am not diminishing the belt-tightening going on inside the offices, it certainly is happening.
Tech companies are hunkering down, which is true because the low-lying fruit has been plucked off the branch.
42% of respondents from a recent survey said the biggest negative for the earnings season will be the impact of further tightening of financial conditions.
I would say that if that is the biggest risk out there to respondents, then tech shares will certainly end the year higher from today.
There’s also a widespread belief that earnings per share (EPS) will fall off a cliff and then rebound to growth in the final three months of the year, according to data by Bloomberg Intelligence.
This seems like the perfect setup for tech executives to lower the bar.
While the tech rally was boosted by the hype around artificial intelligence, over 70% of survey participants say the impact of AI on tech earnings is overblown.
Amid the gloom, the biggest positive drivers for equities will be any signs of easing inflation and cost cutting, according to the majority of those surveyed.
Ultimately, it has already been baked into the pie that margins will come under pressure as companies lose the ability to keep raising prices when inflation cools and as growth slows.
That doesn’t mean there will be anything more than a technical and orderly pullback which I have been championing for.
A result like that would be healthy for tech stocks.
Tech shares simply cannot go up in a straight line forever, but they keep defying gravity in the first 7 months of the year.
Even if the big 7 tech stocks signal some downshifting revenue trajectories, it won’t be more than a few days' drop in shares signifying a marvelous opportunity to finally get into some of these premium names that rarely offer optimal entry points.
Expect nothing special from this earnings season and buy any garden variety dip from premium tech stocks.
Mad Hedge Technology Letter
June 28, 2023
Fiat Lux
Featured Trade:
(REGULATION HEATS UP)
(AMZN), (MSFT), (GOOGL), (NVDA)
Silicon Valley has gone from the least regulated industry to trending the other way. On a global scale, draconian regulations are rearing their ugly head to really stymy places like China and artificial intelligence.
The European Union just rolled out a slew of proposed regulations on AI that could hamper its ability to embed itself in many tech companies.
The net result is highly bullish for Silicon Valley companies minus the chip companies that are experiencing revenue cuts.
When rules tighten, the entrenched benefit disproportionately and this could trigger a continuation of the tech rally that has been blistering hot this year.
Inversely, it will become even more difficult for start-ups to become unicorns, because they suffer more at smaller sizes to digest the higher amount of regulation that mature tech companies never faced.
Much of this is occurring at the highest level as the White House is considering new restrictions on exports of artificial intelligence chips to China, potentially adding to a list of banned semiconductor technology from Nvidia, Advanced Micro Devices, and other US companies.
The U.S. Department of Commerce could prohibit shipments of chips from Nvidia and others to customers in China as soon as early next month.
Nvidia, which produces graphics chips that drive the technology behind OpenAI Inc’s ChatGPT and Alphabet Inc’s Bard chatbots, is one of those chip companies that could see a slide in revenue in the short term.
Across the pond where governments are specialists at regulation, the European Parliament has approved draft legislation to regulate AI-powered technology.
The Act applies to anyone who creates and disseminates AI systems in the EU, including foreign companies such as Microsoft, Google, and OpenAI.
As outlined in the Act, EU lawmakers seek to limit or prohibit AI technology they classify as unacceptable or high risk.
It’s a little vague who will be deemed high risk but in the crosshairs are technologies such as predictive policing systems and real-time, and remote biometric identification systems.
Silicon Valley cash cows can function without these intrusive elements.
The AI Act would give the European government the authority to levy heavy fines on AI companies that do not abide by its rules.
Financial penalties may be steeper than GDPR penalties, amounting to €40 million or an amount equal to up to 7% of a company’s worldwide annual turnover, whichever is higher.
Beyond the government’s power to enforce the Act, European citizens would have the power to file complaints against AI providers they believe are in breach of the Act.
European officials expect to reach a final agreement on the rules by the end of 2023 after spending years developing the legislation. Such swift and consistent momentum to regulate technology in Europe stands in stark contrast to the United States, where lawmakers are still grappling with initial regulatory steps.
If passed, the Act is expected to become law by 2025 at the earliest.
It’s a lot easier for tech firms to operate in the Wild West when there are no rules, but if there are rules, it’s better than American tech has already built cash cows to keep the party moving right along.
It’s true there won’t be much competition and possibly an oligarchy, but it will translate into much higher share prices for the likes of Apple, Tesla, Meta, Microsoft, Google, and Amazon.
Mad Hedge Technology Letter
June 26, 2023
Fiat Lux
Featured Trade:
(AMAZON JOINS THE PARTY)
(AMZN), (MSFT), (GOOGL), (NVDA)
