(APPL) Archives - Page 4 of 10 - Mad Hedge Fund Trader

Make Facebook Great Again

Well, it doesn’t have to be the 2008 version, but Meta (META) CEO Mark Zuckerberg needs to go back to his roots, because this metaverse thing isn’t going to work out.

And if it does, it will be miles into the future.

For quite a few years now, Zuckerberg has focused on his pet project as if it's his real business.

That’s when the trouble started.

He even renamed his company after his new pet project - the Metaverse.

It's a vague concept that can describe a number of things, but broadly it's the idea of people connecting through virtual worlds rather than a traditional social network.

Meta's big move into the Metaverse was a catastrophe, resulting in a mediocre experience, increasingly expensive headsets, and a stock plunge of over 60% in 2022.

Even though Meta’s stock has experienced a dead cat bounce in 2023, it doesn’t make up for the stagnation of the business model.

What should Zuck do?

He should slow down and focus on strengthening his company's core apps, Facebook, Instagram, and WhatsApp.

While Meta poured $15 billion into its Metaverse project, the other apps were noticeably neglected.

Meta should boost engagement and revenue from these apps, which have billions of users worldwide. Meanwhile, Horizon Worlds, Meta's flagship Metaverse app, only has a pitiful 200,000 monthly active users.

Even though Instagram has faced headwinds of late, it's still Meta's crown jewel. Keeping users happy with the app and laying out a plan for the years to come should be the company's top priority.

Meta should spend its time and energy monetizing that usage as much as possible without alienating users.

The company should do the same with WhatsApp, the world's most popular communication app.

The platform does not contain advertising to preserve its identity as a user-friendly service.

However, Meta has promised to use its popularity in other ways to increase revenue, including with paid features.

But instead of focusing on its proven uses, Meta is investing billions of dollars in an idea that may not pay off for five or 10 years.

Left unaddressed, a bet of this magnitude risks alienating investors and employees while they face economic challenges.

Apple (APPL) was one of the main reasons for the swan dive in ad revenue. Last year, the tech giant rolled out a privacy change for iOS, asking users if they didn't want to be tracked on other companies' apps as well. Meta responded at the time by saying that advertisers "may see an overall decline in ad performance and personalization and an increase in cost per action."

To stave off competition, Zuckerberg is attempting to invent the next future platform.

The issue I take with this pivot is that Zuck thinks it’s a lay-up, but I believe it’s something closer to a Hail Mary.

It’s rarely the incumbents who invent the next big platform, which is why Zuckerberg's metaverse vision is more suited to a VC-funded startup than a company-wide rallying cry.

Apple has also been exploring future platforms, albeit far more quietly than Meta (its own VR headset is rumored to roll out in June 2023).

Apple’s stock price has ground sideways while Meta has borne the full brunt of investor skepticism.

That hasn't stopped Zuckerberg from making his Metaverse foray into a contest between Meta and Apple, which of course takes up a lot of space.

Ultimately, the smart move here would be for Zuckerberg to take a page out of Apple's book by prioritizing the tried and tested cash cows to keep investors happy and relegate the Metaverse stuff to the dustbin of history.

The stock has doubled since October 2022 and Meta should improve on its self-labeled “year of efficiency.”

I do believe Meta shares will rise from here if they keep firing staff and simplify the platform.

They still employ over 86,000 people and I believe they can streamline down to 25,000 employees.

January 13, 2023

Tech Letter

Mad Hedge Technology Letter
January 13, 2023
Fiat Lux

Featured Trade:

(BUY ANY TECH DIP)
($COMPQ), (APPL), (TSLA), (CPI)

Buy Any Tech Dip

Tech Letter

Deflation is back and hard to believe after a disastrous 2022.

Tech investors finally are cheering on the positive structural backdrop as the mother’s milk has been removed for quite some time.

Last year was so bad for big tech that CEO Tim Cook’s compensation sunk from $99 million in 2022 to only $48 million in 2023.

Is that Putin’s fault too?

Jokes aside – yeh - it’s that bad for the tech CEOs so you can imagine how bad it is for the part-time worker censoring Facebook posts.

It’s not going all smooth at Apple either.

Apple is in the process of moving production from China to India and Vietnam.

Chinese factories aren’t as cheap as they used to be and they aren’t open consistently.

The 6.5% CPI was right bang on consensus yesterday and confirms the notion that prices are coming down fast.

Just look at some prices like used cars – prices are down 8.8% year over year.

The end result is that a recession will be delayed and the tech market won’t crash because of rapidly sinking earnings, but propped up by rapidly sinking interest rates.

Just look at the bond market – the U.S. 10-year rate has crashed.

Earnings won’t be great and tech has led the way with firings from many of the famous big tech firms.

It’s true that this is a down patch for big tech, but big tech will come roaring back like it always does.

The leaders will most likely be different motley crew this time around.

Tech companies aren’t doing great right now, but it could be worse.

The ones with strong balance sheets are looking to add growth externally such as Microsoft’s potential investment in OpenAI.

The dirty secret is that many tech companies aren’t looking to add cash-burning companies which prevent a lot of potential deals since most start-ups aren’t profitable.

Another clear sign that tech is on sale is the much-publicized Tesla price cuts so lower revenue is definitely on tap or at best – revenue plateauing.

Consumers can now get their Tesla for an eye-watering discount – just don’t anger the CEO or he’ll turn your software off.

The discounts have spread to Europe, in Germany, Tesla cut prices on the Model 3 and the Model Y from 1% to around 17%, depending on the configuration. Tesla’s Model 3 was the bestselling electric vehicle in Germany in December 2022, followed by the Model Y.

Part of the real reason that tech has rallied so hard to begin the year is because the sector was battered so badly last year.

We cannot claim victory after just 2 weeks of positive price action – only politicians get to claim victory for nothing – the rest of the year won’t be easy by any metric.

The world is wonky where the American consumer is tapped out, but much of the job firings have been limited to tech. Former tech workers can still rotate into other sectors to find work as tech companies become streamlined. I expect a very different tech sector moving forward with far less waste. I forecast something more similar to a single CEO delegating work to an army of bots and algorithms.

Tech overhired in the first place, so going back to 2020 staffing levels supersede any sensationalist headline that tech is over. I believe tech companies need to go back to 2015 staffing levels.

As long as deflation is priced into tech shares for the rest of 2023, tech stocks will be a buy-the-dip type of asset class.

However, in the short term, we have run quite hot for the first 2 weeks as the tech sector sets up for the first dip of the year.

December 16, 2022

Tech Letter

Mad Hedge Technology Letter
December 16, 2022
Fiat Lux

Featured Trade:

(AMERICAN SUPER APP)
(APPL), (WECHAT), (META), (GRAB), (RAPPI)

American Super App

Tech Letter

America will never achieve a “super app,” and what does that mean for Silicon Valley?

These “killer apps” thrive in other places but not in America.

WeChat is the super app in China, while there is Careem in the Middle East, Rappi in Latin America, and Grab in Southeast Asia.

Any attempt to move in on that territory has been stymied by Washington.

A Super app is roughly a place where ecommerce, daily and monthly payments, financial management, social chats, social media, and daily services like ride-hailing co-exist in harmony on one app.

American tech companies are getting blocked from incorporating new payments into their apps while legacy payment systems remain.

Facebook’s attempts to build out standalone payment capabilities through the Libra/Diem blockchain project failed, but other apps in its family such as Instagram and WhatsApp are bolting on payment and e-commerce functionality.

As Zuckerberg and his team seem to have noticed, payments are critical to any would-be super app.

Half of US smartphone users are expected to adopt mobile payments as late as 2025, according to eMarketer research.

By contrast, 64% of China's population had made a payment on their phone by the end of 2021, according to a report from China UnionPay, the state-owned financial services firm.

Companies will struggle to generate the volume needed to make a super app work the way WeChat does, which has accumulated more than 1 billion users thanks to its mix of services and payments that ensure people don't have to look elsewhere.

In emerging market countries, payments skipped cards altogether because the infrastructure was weak.

Instead of bank cards, citizens went from cash to paying by phones using their local super app.

This could never happen in America because card payment options are diverse and trustworthy.

America has a reliable network of fragmented services and regulators have become so emboldened that they would never allow a financial payment system on a super app to ever develop.

There's another clear reason why the most successful super app has emerged in China.

Beijing has shut out foreign competitors from offering Chinese consumers any alternative.

Under Lina Khan, the FTC is becoming more sharply focused on competition and user privacy. Creating super apps would almost certainly require aggressive consolidation through acquisitions — a surefire way of attracting scrutiny.

As it stands, American regulators are now hawkish against American tech.

There's also the issue of Apple.

With the iOS system, Apple doesn’t allow the type of access needed to be able to build a super app on an iPhone.

Even if Apple wants to build a super app, there are still plentiful Android users in America that wouldn’t be captured either.

Apple would also need to backtrack on its pledge to safeguard personal data which is very unlikely to happen.

The best bet is probably Elon Musk’s Tesla, Twitter, and Space X combo.

He has two strong elements needed for a super app, but he doesn’t have a payment system and there is almost no chance in this regulatory climate of getting that approved.

The best way forward is tech firms with strong balance sheet picking up the best of breed in tech sub-sectors and eventually, they will all merge together.

However, that’s proved difficult as well with Microsoft’s blocked acquisition of video game firm Activision.

In a high interest rate world, profitable tech firms with strong balance sheets will be rewarded the most if they buy smaller tech companies which will be additive to their profit model.

The cash burners have a tough time competing in a high rate world and zero chance of achieving that super app status.

December 2, 2022

Tech Letter

Mad Hedge Technology Letter
December 2, 2022
Fiat Lux

Featured Trade:

(ACCOMMODATING TECH CORPORATIONS)
(APPL), (AMZN)

Accommodating Tech Corporations

Tech Letter

Wage growth is too strong to even think about pivoting – that was the takeaway from the latest jobs report.

Granted, tech firms have been firing employees left and right, but that can be contextually misleading.

Essentially, tech firms overhired during the government lockdowns and in most cases are only now cutting back to a headcount that reflects the same number as around a year or 2 ago.

The sensationalist headlines are riveting, but going two steps forward and one step back isn’t really a big deal.

The overarching theme of wage growth in white collar jobs means that the leftover tech workers are handsomely paid and possess a lot of leverage.

Since 2020, many tech workers jumped ship or were poached for a 50% pay rise.

Those gaudy wages have tapered off somewhat in technology as the sector slows down, but in many cases, workers don’t care if their 2023 salary is “frozen” after a 50% increase the prior year.

In fact, many of the recent tech firings were either the weakest of a specific team or the "last in, first out" type of hire and fire.

Employers added 263,000 jobs in November and the unemployment rate held steady at 3.7%.

For the three months through November, average hourly earnings rose at a 5.8% annualized rate, the Labor Department said Friday.

Strong demand for labor and high inflation is triggering the formation of a wage-price spiral.

To be honest I am not surprised by the most recent data.

A 3.75% Fed Funds rate is still ultra-accommodative.

How do I know that?

Tech firms are still borrowing massive amounts of borrowed funds at cheap rates.

Amazon (AMZN) sold investment-grade bonds for general corporate purposes, its second offering this year.

The bond deal is $8 billion of senior unsecured bonds in as many as five parts.

The longest portion of the offering, a 10-year security, yields 1.15% over US Treasuries.

Big tech is still tapping the debt markets for its operations and it’s the smart thing to do with a Fed Funds rate at 3.75%.

Amazon isn’t the only one.

Essentially, any big tech corporate stalwart with a strong balance sheet would be an idiot not to take out debt at these levels.

The iPhone company Apple also tapped the debt markets just in August.

Apple sold $6.5 billion in four parts as the tech giant increasingly looks to return cash to shareholders.

The longest portion of the offering, a 40-year security yields 0.92% above US Treasuries.

Proceeds from the sale are earmarked for general corporate purposes, including share repurchases, dividend payments, funding for capital expenditures, and acquisitions.

Although I am not privy to discussions at an operations level at Apple and Amazon, I do believe some of these billions will be used to pay staff higher wages which in turn will fuel higher inflation.

It takes money to stay on top and instead of allowing the best talent at Apple and Amazon to walk for bigger raises, firms have been stumping up the cash.

I expect wage growth to continue to exhibit strong numbers in 2023.

Without crushing the jobs market, inflation will regress somewhat but then take off again in the back half of 2023.

It all means we are range bound as we juxtapose slower rate hikes with deteriorating earnings forecasts.

November 30, 2022

Tech Letter

Mad Hedge Technology Letter
November 30, 2022
Fiat Lux

Featured Trade:

(WEAK SALES FOR 2023)
(CRWD), (APPL), (SNAP), (DASH)

Weak Sales for 2023

Tech Letter

Tech growth needs a timeout.

The recent earnings report from cyber security software firm CrowdStrike (CRWD) illustrates the difficulty for firms to project strength in forward guidance.

2023 isn’t looking so rosy for selling security software.

CRWD management offered us weak guidance citing a weakening macroeconomic picture and specifically telling us that small businesses are reluctant to sign new contracts for 2023.

The macroeconomic picture at best isn’t getting better, therefore, some of the forward guidance is coming in tepid.

The natural reaction is for tech stocks to sell off.

In 2022, it’s never been more difficult being a tech CEO and some of the best tech growth companies are getting haircuts that we used to never see before.

Even more worrisome is that tech companies like Apple and Twitter are starting to cannibalize each other because tech is now perceived as a zero sum game more than at any other time I can remember it.

Firms simply don’t think the pie is big enough to share.

This is why ecosystems like Apple and others are executing policies that directly hinder competition.

Unfortunately, cyber security is another add-on that is being sacrificed as tech companies become leaner and meaner.

Many tech companies can still function by skimping on the security defenses.

Shaving the fat to the bone is what we are currently seeing and that doesn’t bode well in the short term for tech stocks that are used to thriving in the excesses.

Another example is Snapchat (SNAP), which ordered back staff to a 4-day in-office work week starting February.

And it’s not just Snapchat or CrowdStrike.

The belt tightening has been broad-based in technology with DoorDash cutting another 1,250 jobs today.

Many of these growth companies over-hired during the government-mandated lockdowns and now are regressing back to the mean.

Since there are no more lockdowns in non-Chinese countries, there is no need for the giant number of DoorDash food deliverers.

Yet the US consumer is still spending even if they get less for each incremental $1 spent.

CrowdStrike reported annual recurring revenue (ARR) of $2.34 billion, up 54% year over year. The company also added 1,460 net new subscription customers for the quarter.

In high times, CrowdStrike and the tech growth with superior business models are unique and stand out.

However, in overwhelming macroeconomic weakness, CRWD gets lumped in with the rest.

I don’t recommend buying CRWD on the dip even if it feels cheap.

The peak CRWD share price almost reached $300 meaning the current stock price is only around 35% of what it once was.

Tech growth will overshoot to the upside when it finds it mojo again, which won’t come back until sometime in 2023.

The lockdowns brought forward a tsunami of demand, revenue, and momentum.

Now we are experiencing the reversing of those tailwinds which is why the stock price has suffered.

Avoid tech growth for now, they will have their time in the sun once again once the headwinds have been digested and CRWD should be on your list for a tech growth stock to purchase on the way up.

crwd