Mad Hedge Technology Letter
January 24, 2019
Fiat Lux
Featured Trade:
(ACTIVISTS LAY IN ON EBAY),
(EBAY), (AMZN), (PYPL), (GOOGL)
Tag Archive for: (GOOGL)
A highly compelling argument – that was my initial reaction after diving into Elliot Management’s letter to eBay’s (EBAY) shareholders after the ruthless investor activist announced an over 4% stake in one of the original online marketplace giants.
Not only that, hedge fund Starboard Value LP also has gotten in on the act with a position of less than 4%.
Starboard has doubled down agreeing with the general points of Elliot Management’s prognosis on the weakness of eBay’s business model
There are no two ways about it - eBay has been condemned to tech purgatory as of late and is in dire need of a facelift.
If you’re a manager of any sort of magnitude at e-commerce platform eBay, this was the letter of doom and gloom you hoped you would never get.
The equity Gods have been harsh to eBay as PayPal (PYPL), one of the Mad Hedge Technology Letter’s favorite picks in 2019, has risen over 130% after spinning off from eBay in 2015.
eBay is down substantially since that point in time reflecting a poorly run business in a secular growth industry that has produced home runs most evident in the performance of Jeff Bezos’ Amazon.com (AMZN).
The gist of Elliot’s diagnosis centered around the terrible operational execution at the Silicon Valley firm.
It essentially repeats this premise over and over throughout the content.
Current management is historically bad that any efficiencies implemented into the platform would boost growth reverting it back to a point closer to a trajectory that echoes closer to a normal high growth e-commerce company.
How did eBay peter out to mediocrity?
Let me explain.
There is a time-established pattern that Elliot Management identified – eBay management increasing spend to stimulate growth, failing to deliver the goods and reverting back to square one.
The result is paltry growth in the mid-single digits which can be seen in minimal growth numbers in the gross merchandise volume (GMV), a metric established to gauge the total amount of volume pushed through eBay.
The activist hedge fund claimed that shares could potentially double if their calculated plan could shortly be deployed.
The plan was straight forward and there was no innovative x-factors described or pivot to augmented reality or machine learning that many firms like to hype up.
Elliot’s strategy is purely operational relating to the core business – where is Tim Cook when you need him!
The argument originates from whether eBay management can allocate resources more efficiently, focus on boosting foundational growth in the core marketplace, and develop new verticals that were completely missed in its development, then the stock would react favorably.
I would even double down and say that if they do half of what they promise in the Elliot’s letter, shares should pop at least 30%.
eBay exists under a backdrop of massive secular drivers fueling e-commerce.
The industry is the most robust in the economy and is expanding in the mid-20% even as global sales are about to eclipse the $3 trillion mark.
E-commerce just has a penetration rate of 10% and the runway is long which should enable mainstay companies to grow their top and bottom line if not botched completely.
Average consumer spending is in the throes of major disruption from analog brick and mortar stores to digital e-commerce, and eBay’s strategic position offers an advantageous platform to carve out e-commerce success moving forward.
The first thing Elliot wants to do is reach up their sleeve for a little financial engineering magic by spinning out in-house mega-growth assets of StubHub, the e-ticket event vendor, and its portfolio of premium classified properties that possess double-digit sales growth and elevated margins.
Elliot argues that these two assets would perform better on a standalone basis because they wouldn’t be bogged down by eBay turning around the core business which could possibly result in some misallocated capital and delays.
The valuation of eBay’s Classified Groups assets is around $4.5 billion, but segment that out and the value could represent $10 billion.
The same boost in valuation applies to event ticket seller platform StubHub. The company is valued at just $2.2 billion under the umbrella of eBay but tear the baby out of eBay’s uterus and suddenly the valuation balloons to a rosier $4 billion.
Watching from afar, Elliot has pinpointed management’s “self-inflicted mis-execution” and management must summon all their power and resources to direct “singular attention to growing and strengthening marketplace.”
eBay has severely underperformed in share price relative to its peers by 107% in the past 5 years. Extrapolate the time horizon to 10 years and the underperformance shoots up to 371%.
These have been the tech golden years and there is no feasible excuse to why this company hasn’t been able to perform better or equal relative to their peer group.
eBay is the second biggest e-commerce platform in the world but only trades at a PE of 12 showing the malaise of investor sentiment surrounding this name.
This is unfortunate because eBay has strong embedded actionable communities in South Korea, Australia, Italy, Germany, U.K., U.S., and Canada.
The tools are there but it is hard to take a stab when the tool is blunted by poor management.
Compare slow growth with the rocket-fueled growth of asset StubHub which has almost doubled revenue in the past 5 years.
eBay has lifted advertising spend by 70% since 2013 and revved up product development by 45% as well. This has surprisingly led to material margin declines because of the failure of these initiatives to take hold.
One of the missteps resulting in this margin softness is the dysfunctional execution of its online platform infected by technical problems and operational headwinds.
A few notable events were a 2014 broad-based password hack and the botched fix to that problem exacerbated by a muddied communication strategy.
During this time, eBay was outmaneuvered by Google’s (GOOGL) search algorithm resulting in a massive decline in traffic as a result of this painful change.
The next year was similarly awful with a shoddy mobile application that did not resonate with customers and was put out to pasture shortly after rolling it out.
An online marketplace offering a platform for over four million buyers and sellers to carry out business requires high-level functioning. A failure to deliver this experience has caused long-time users to jump ship to other niche vertical platforms.
Innovative endeavors aren’t part of this new strategy to remake the company.
The underlying strategy effectively spells out that eBay needs to become more like Amazon and any sort of moderate success in doing that will positively boost the stock price – let’s call it what it is – an operational overhaul and nothing more than that.
The complaints don’t stop there and last year eBay was inundated with technical issues that included incorrect billing, deleted photos, warped title presentation, and senior management took the blame in a podcast confessing that management needs to pull things together and they “don’t want to repeat (the same mistakes) on a number of levels. And the technology issues that we have had with the platform are on top of the list.”
eBay is not a startup and presides over a profitable business.
Returning capital to shareholders was part of the plan as well.
This entails repurchasing shares of up to $5 billion which was $1 billion more than the original guidance – Elliot Management is an activist investor after all hoping to super-charge shareholder income streams.
Elliot wants to implement a 1.5% dividend yield due to eBay’s high free cash flow model.
After 2020, Elliot wants to allocate 80% of free cash flow for share repurchases and earmark the other 20% for M&A activity.
It is difficult to surmise if this plan will work smoothly or not, but if Elliot can bring in the correct team to execute this plan, I would give them the benefit of the doubt as making this plan into a viable success seems realistic.
But it is yet to be seen how laborious it will be to get the people they want through the door.
eBay is truly a unique asset and the chopped-down nature of its shares would stage a remarkable turnaround if some proven management from Amazon’s executive team could be captured and convinced that eBay is a legitimate option.
Easier said than done, but this is a step in the right direction.
My Luger is firmly in my holster and waiting for some action - if there are any whiffs of a real turnaround then I’ll shoot out some eBay trade alerts.
Mad Hedge Technology Letter
January 23, 2019
Fiat Lux
Featured Trade:
(WHY TECH IS FLEEING SILICON VALLEY),
(AAPL), (CRM), (MSFT), (FB), (AMZN), (GOOGL)
When did Marc Benioff become a real estate agent?
That is the main takeaway from the interview he gave to the world from the annual powerful people conference in Davos, Switzerland.
During the interview, he cut straight to the chase and described the cocktail of negative unintended consequences that the tsunami of tech profits has spawned.
His thesis, though not new, parlayed admirably with Bridgewater Associates Founder Ray Dalio interview in chronicling an economic landscape in which geopolitical turmoil finally catches up meaningfully with the movement of tech shares because of the underlying threat to influence concrete economic policy moving forward.
Why is he a real estate seller?
Well, he might as well be one in second-tier cities with copious amounts of tech talent such as Austin, Nashville, Sacramento, Atlanta, and Portland because these metro areas are about to experience a wild ride in the property market rollercoaster.
Benioff just added fuel to this fire.
The robust housing demand, lack of housing supply, mixed with the avalanche of inquisitive tech money will propel these housing markets to new heights and this phenomenon is happening as we speak.
Benioff lamented that San Francisco, where ironically he is from, is a diabolical “train wreck” and urged fellow tech CEOs to “walk down the street” and see it with their own eyes to observe the numerous homeless encampments dotted around the city limits.
The leader of Salesforce doesn’t mince his words when he talks and beelines to the heart of the issues.
After relinquishing some of his CEO duties to newly anointed Co-CEO Keith Block, Benioff will have the operational time and a wealth of resources to get on top of the pulse of not only tech issues but bigger picture stuff and he now has a mouthpiece for it with Time magazine which he and his wife recently bought.
In condemning large swaths of the beneficiaries of the Silicon Valley ethos, he has signaled that it won’t be smooth sailing for the rest of the year in tech wonderland, and he urged companies to transform their business model if they are irresponsible with user data.
The tech lash could get messier this year because companies that go rogue with personal data will face a cringeworthy reckoning as the tech lash fury seeps into government policy and the social stigma worsens.
I have walked around the streets of San Francisco myself. Places around Powell Bart station close to the Tenderloin district are eyesores. South of Market Street isn’t a place I would want to barbecue on a terrace either.
Summing it up, the unlimited tech talent reservoir that Silicon Valley gorged on isn’t flowing anymore because people don’t want to live there now.
This tech talent, equipped with heart-tugging stories from siblings and anecdotes from classmates getting shafted by the San Francisco dream, has recently put the Bay Area in the rear-view mirror for many who would have stayed if it were 20 years ago.
This is exactly what Apple’s $1 billion investment into a new tech campus in Austin, Texas and Amazon adding 500 employees in Nashville, Tennessee are all about. Apple also added numbers in San Diego, Atlanta, Culver City, and Boulder just to name a few.
Apple currently employs 90,000 people in 50 states and is in the works to create 20,000 more jobs in the US by 2023.
Most of these new jobs won’t be in Silicon Valley.
Since the tech talent isn’t giddy-upping into Silicon Valley anymore, tech firms must get off their saddle and go find them.
The tables have turned but that is what happens when the heart of western tech becomes unlivable to the average tech worker earning $150,000 per year.
I also mind you that these external forces have nothing to do with pure technology, pure technology improves with each iteration and gaps up with each revolutionary idea.
That will not change.
Driving out young people who envision a long-term future elsewhere than the San Francisco Bay Area forces Silicon Valley to adapt to the new patterns revealing themselves.
Sacramento has experienced a dizzying rise of newcomers from the Bay Area itself.
Some are even commuting, making that 60-mile jaunt past Davis, but that will give way to entire tech operations moving to the state capitol.
Millennials are reaching that age of family formation and they are fleeing to places that are affordable and possible to become a new home buyer.
These are some of the practical issues that tech has failed to embrace and to maintain the furious pace of growth that investors' capricious expectations harbor.
Silicon Valley will have to become more practical adding a dash of empathy as well instead of just going by the raw and heartless data.
We aren’t robots yet, and much of the world still augurs to emotional decisions and disregards the empirical data.
My favorite tech companies are not only saying the right things but are doing the right things as well.
Microsoft (MSFT) just laid down a marker promising $500 million to build more affordable housing in Seattle.
Sustainability does not only mean building a sustainable business model on the balance sheet, but this definition is growing to be inclusive of upholding the stability and long-term prospects of a local area.
Microsoft has put the trust in its products at the fore of their business model.
Each time CEO of Microsoft Satya Nadella interviews, he preaches about the universal trust that consumers possess in Microsoft.
He is not off on his claims and Microsoft is riding this mantra all the way to the bank while sidestepping regulatory scrutiny.
Nadella is always smartly one step ahead.
All this screams going long Microsoft by buying the dips.
Sell the rallies in the names that have a crisis of trust such as Facebook (FB) and Google (GOOGL).
I was recently gouged $250 on my monthly phone bill by Google because of a technicality from cell phone service Google Fi.
All a specialist said was that according to the data, I should be charged almost as if I should be shamed for even questioning their business model.
Not only that, the best and brightest from Stanford, University of California at Berkeley, and Ivy league schools do not want to work for Facebook and Google anymore.
These brands have been tainted.
The result will be needing to overpay to secure the able forces needed to pursue growth and success.
Not only that, upper management has left in droves “pursuing new opportunities.”
Google is also grappling with an Apple problem - no new innovative products and it’s yet to be seen if Waymo, the autonomous driving business, can be that solid growth driver going forward.
As the economy creeps closer and closer to the end of the cycle, investors won’t be willing to drain money down some loss-making outfit in the name of growth.
Therefore, software companies based on innovation fused with stable profits will be the go-to formula in tech investing in 2019 and Amazon (AMZN), Salesforce (CRM), and Microsoft (MSFT) are ahead of the curve.
Don’t get me wrong - Silicon Valley is still alive and kicking.
But, instead of physical offices being planted in the Bay Area, the tech industry will give way to the “spirit” of Silicon Valley with offices in far-flung places.
And remember that all of these new tech talent strongholds will need housing, and housing that an IT worker making $150,000 per year desires.
Mad Hedge Technology Letter
January 9, 2019
Fiat Lux
Featured Trade:
(TOP 8 TECH TRENDS OF 2018),
(GOOGL), (FB), (WMT), (SQ), (AMZN), (ROKU), (KR), (FDX), (UPS), (CRM), (TWLO), (ADBE), (PYPL)
As 2019 christens us with new technological trends, building our portfolio and lives around these themes will give us a leg up in battling the algorithms that have upped the ante in our drive to get ahead.
Now it’s time to chronicle some of these trends that will permeate through the tech universe.
Some are obvious, and some might as well be hidden treasures.
- Smart Areas Will Conspicuously Advance
American consumers will start to notice that locations they frequent and the proximities around them will integrate more smart-tech.
The hoards of data that big tech possesses and the profiles they subsequently create on the American consumer will advance allowing the possibilities of more precise and useful products.
These products won’t just accumulate in a person’s home but in public areas, and business will jump at the chance to improve services if it means more revenue.
Amazon and Google have piled money into the smart home through the voice assistant initiatives and adoption has been breathtaking.
The next generation will provide even more variety to integrate into daily lives.
- Location-based Dispersion Will Ramp Up
The gains in technology have given the consumer broader control over their lives.
The ability to practically manage one’s life from a remote location has remarkably improved leaps and bounds.
The deflation of mobile phone data costs, the advancement of high-speed broadband internet services in developing countries, more cloud-based software accessible from any internet entry point, and the development of affordable professional grade hardware have made life easy for the small business owners.
What a difference a few years make!
This has truly given a headache for traditional companies who have failed to evolve with the times such as television staples who rely on analog advertising revenue.
Millennials are more interested in flicking on their favorite YouTuber channel who broadcast from anywhere and aren’t locally based.
Another example is the quality of cameras and audio equipment that have risen to the point that anybody can become the next Justin Bieber.
Music executives are even using Spotify to target new talent to invest in.
- Overhyped Bitcoin Will Finally Take A Siesta From The Mainstream
Blockchain technology has the makings of transforming the world we live in.
And the currency based on the blockchain technology had a field day in the press and backyard summer barbecues all over the country.
Well, 2019 will finally put this topic on the backburner even though Bitcoin won’t disappear into irrelevancy, the pendulum will swing the other direction and this digital currency will become underhyped.
The rise to $20,000 and the catastrophic selloff down to $4,000 was a bubble popping in front of us.
It made a lot of people rich like the Winklevoss brothers Cameron and Tyler who took the $65 million from Facebook CEO Mark Zuckerberg and spun it into bitcoin before the euphoria mesmerized the American public.
On the way down from $20,000, retail investors were tearing their hair out but that is the type of volatility investors must subscribe to with assets that are far out on the risk curve.
The volatility that FinTech leader Square (SQ) and OTT Box streamer Roku (ROKU) have are nothing compared to the extreme volatility that digital currency investors must endure.
- E-Sports Will Become Even More Popular
Video games classified as a spectator sport will expand up to 40% in 2019.
This phenomenon has already captivated the Asian continent and is coming stateside.
This is a bit out of my realm as standard spectator sports don’t appeal to me much at all, and watching others play video games for fun is something I am even further removed from.
But that’s what the youth like and how they grew up, and this trend shows no signs of stopping.
Industry experts believe that the U.S. is at an inflection point and adoption will accelerate.
Remember that kids don’t play physical sports anymore because of the risk to head trauma, blown ligaments, and the sheer distances involved traveling to and from venues turn participants away.
Franchise rights, advertising, and streaming contracts will energize revenue as a ballooning audience gravitates towards popular leagues, tapping into the fanbase for successful video game series such as Overwatch.
The rise of eSports can be attributed to not only kids not playing physical sports but also younger people watching less television and spending more time online.
Soon, there will be no difference in terms of pay and stature of pro athletes and video gaming athletes.
The amount of money being thrown at the world’s best gamers makes your spine tingle.
- Data Regulation Will Tighten
The era of digital data regulation is upon us and whacked a few companies like Google and Facebook in 2018.
Well, this is just the beginning.
The vacuum that once allowed tech companies to run riot is no more, and the government has big tech in their cross-hairs.
The A word will start to reverberate in social circles around the tech ecosphere – Antitrust.
At some point towards the end of 2019, some of these mammoth technology companies could face the mother of all regulation in dismantling their business model through an antitrust suit.
Companies such as Amazon and Facebook are praying to the heavens that this never comes to fruition, but the rhetoric about it will slowly increase in 2019 because of the mischievous ways these tech companies have behaved.
The unintended consequences in 2018 were too widespread and damaging to ignore anymore.
Antitrust lawsuits will creep closer in 2019 and this has spawned an all-out grab for the best lobbyists tech money can buy.
Tech lobbyists now amount to the most in volume historically and they certainly will be wielded in the best interest of Silicon Valley.
Watch this space.
- Software Favored To Hardware
The demand for smart consumer devices will fall off a cliff because most of the people who can afford a device already are reading my newsletter from it.
The stunting of smart device innovation has made the upgrade cycle duration longer and consumers feel no need to incrementally upgrade when they aren’t getting more bang for their buck.
The late-cycle nature of the economy that is losing momentum because of a trade war and higher interest rates will see companies look to add to efficiencies by upgrading software systems and processes.
This bodes well for companies such as Microsoft (MSFT), Salesforce (CRM), Twilio (TWLO), PayPal (PYPL), and Adobe (ADBE) in 2019.
- Logistics Gets A Boost From Technology
This is where Amazon has gotten so good at efficiently moving goods from point A to point B that it is threatening to blow a hole in the logistic stalwarts of UPS and FedEx.
Robots that help deploy packages in the Amazon warehouses won’t just be an Amazon phenomenon forever.
Smaller businesses will be able to take advantage of more robotics as robotics will benefit from the tailwind of deflation making them affordable to smaller business owners.
Amazon’s ramp-up in logistics was a focal point in their purchase of overpriced grocer Whole Foods.
This was more of a bet on their ability to physically deliver well relative to competition than it was its ability to stock above average quality groceries.
If Whole Foods ever did fail, Amazon would be able to spin the prime real estate into a warehouse located in wealthy areas serving the same wealthy clientele.
Therefore, there is no downside short or long-term by buying Whole Foods. Amazon will be able to fine-tune their logistics strategy which they are piling a ton of innovation into.
Possible new logistical innovations include Amazon attempting to deliver to garages to avoid rampant theft.
This is all happening while Amazon pushes onto FedEx’s (FDX) and UPS’s (UPS) turf by building out their own fleet.
Innovative logistics is forcing other grocers to improve fast giving customers better grocery service and prices.
Kroger (KR) has heavily invested in a new British-based logistics warehouse system and Walmart (WMT) is fast changing into a tech play.
- Tech Volatility Won’t Go Away
Current Chair of the Federal Reserve Jerome Powell unleashed a dragon when he boxed himself into a corner last year and had to announce a rate hike to preserve the integrity of the institution.
Markets whipsawed like a bull at a rodeo and investors lost their pants.
Tech companies who have been leading the economy and trot out robust EPS growth out of a whole swath of industries will experience further volatility as geopolitics and interest rate rhetoric grips the world.
Apple’s revenue warning did not help either and just wait until semiconductors start announcing disastrous earnings.
The short volatility industry crashed last February, and the unwinding of the Fed’s balance sheet mixed with the Chinese avoiding treasury purchases due to the trade war will insert even more volatility into the mix.
Powell attempted to readjust his message by claiming that the Fed “will be patient” and tech shares have had a monstrous rally capped off with Roku exploding over 30% after news of positive subscriber numbers and news of streaming content platform Hulu blowing past the 25 million subscriber mark.
Volatility is good for traders as it offers prime entry points and call spreads can be executed deeper in the money because of the heightened implied volatility.
Mad Hedge Technology Letter
December 31, 2018
Fiat Lux
Featured Trade:
(NEWSPAPERS REALLY KNOW WHO YOU ARE),
(TPCO), (AMZN), (FB), (GOOGL), (USPS), (SFTBY)
Mad Hedge Technology Letter
December 27, 2018
Fiat Lux
Featured Trade:
(THE HIGH COST OF DRIVING OUT
OUR FOREIGN TECHNOLOGISTS),
(EA), (ADBE), (BABA), (BIDU), (FB), (GOOGL), (TWTR)
There is only so much juice you can squeeze from a lemon before nothing is left.
Silicon Valley has been focused mainly on squeezing the juice out of the Internet for the past 30 years with intense focus on the American consumer.
In an era of minimal regulation, companies grew at breakneck speeds right into families' living quarters and it was a win-win proposition for both the user and the Internet.
The cream of the crop ideas was found briskly and the low hanging fruit was pocketed by the venture capitalists (VCs).
That was then, and this is now.
No longer will VCs simply invest in various start-ups and 10 years later a Facebook (FB) or Alphabet (GOOGL) appears out of thin air.
That story is over. Facebook was the last one in the door.
VCs will become more selective because brilliant ideas must withstand the passage of time. Companies want to continue to be relevant in 20 or 30 years and not just disintegrate into obsolescence as did the Eastman Kodak Company, the doomed maker of silver-based film.
The San Francisco Bay Area is the mecca of technology but recent indicators have presaged the upcoming trends that will reshape the industry.
In general, a healthy and booming local real estate sector is a net positive creating paper wealth for its local people and attracting money slated for expansion.
However, it's crystal clear the net positive has flipped and housing is now a buzzword for the maladies young people face to sustain themselves in the ultra-expensive coastal Northern California megacities.
The loss of tax deductions in the recent tax bill makes conditions even more draconian.
Monthly rental costs are deterring tech's future minions. Without the droves of talent flooding the area, it becomes harder for the industry to incrementally expand.
It also boosts the costs of existing development/operations staffers whose capital feeds back into the local housing market buying whatever they can barely afford for astronomical prices.
Another price spike ensues with first-time home buyers piling into already bare-bones inventory because of the fear of missing out (FOMO).
After surveying HR tech heads, it's clear there aren't enough artificial intelligence (A.I.) programmers and coders to fill internal projects.
Compounding the housing crisis is the change of immigration policy that has frightened off many future Silicon Valley workers.
There is no surprise that millions of aspiring foreign students wish to take advantage of America's treasure of higher education because there is nothing comparable at home.
The best and brightest foreign minds are trained in America and a mass exodus would create an even fiercer deficit for global dev-ops talent.
These U.S.-trained foreign tech workers are the main drivers of foreign tech start-ups.
Dangling carrots and sticks for a chance to start an embryonic project in the cozy confines of home is hard to pass up.
Ironically enough, there are more A.I. computer scientists of Chinese origin in America than there are in all of China.
There is a huge movement by the Chinese private sector to bring everyone back home as China vies to become the industry leader in A.I.
Silicon Valley is on the verge of a brain drain of mythical proportions.
If America allows all these brilliant minds to fly home not only to China but everywhere else, America is just training these workers to compete against American workers.
A premier example is Baidu co-founder Robin Li who received his master's degree in computer science from the State University of New York at Buffalo in 1994.
After graduation, his first job was at Dow Jones & Company, a subsidiary of News Corp., writing code for the online version of the Wall Street Journal.
During this stint, he developed an algorithm for ranking search results that he patented, flew back to China, created the Google search engine equivalent, and named it Baidu (BIDU).
Robin Li is now one of the richest people in China with a fortune of close to $20 billion.
To show it's not just a one-hit-wonder type scenario, three of the top five start-ups are currently headquartered in Beijing and not in California.
The most powerful industry in America's economy is just a transient training hub for foreign nationals before they go home to make the real moola.
More than 70% of tech employees in Silicon Valley and more than 50% in the San Francisco Bay Area are foreign, according to the 2016 census data.
Adding insult to injury, the exorbitant cost of housing is preventing burgeoning American talent from migrating from rural towns across America and moving to the Bay Area.
They make it as far West as Salt Lake City, Reno, or Las Vegas.
Instead of living a homeless life in Golden Gate Park, they decide to set up shop in a second-tier American city after horror stories of Bay Area housing starts to populate their friends' Instagram feeds and are shared a million times over.
This trend was reinforced by domestic migration statistics.
Between 2007 and 2016, 5 million people moved to California, and 6 million people moved out of the state.
The biggest takeaways are that many of these new California migrants are from New York, possess graduate degrees, and command an annual salary of more than $110,000.
Conversely, Nevada, Arizona, and Texas have major inflows of migrants that mostly earn less than $50,000 per year and are less educated.
That will change in the near future.
Ultimately, if VCs think it is expensive now to operate a start-up in Silicon Valley, it will be costlier in the future.
Pouring gasoline on the flames, Northern California schools are starting to fold like a house of cards due to minimal household formation wiping out student numbers.
The dire shortage of affordable housing is the region's No. 1 problem.
A 1,066-sq.-ft. property in San Jose's Willow Glen neighborhood went on sale for $800,000.
This would be considered an absolute steal at this price but the catch is the house was badly burned two years ago. This is the price for a teardown.
When you combine the housing crisis with the price readjustment for big data, it looks as if Silicon Valley has peaked or at the very least, it's not cheap.
Yes, the FANGs will continue their gravy train but the next big thing to hit tech will not originate from California.
VCs will overwhelmingly invest in data over rental bills. The percolation of tech ingenuity will likely pop up in either Nevada, Arizona, Texas, Utah, or yes, even Michigan.
Even though these states attract poorer migrants, the lower cost of housing is beginning to attract tech professionals who can afford more than a burned down shack.
Washington state has become a hotbed for bitcoin activity. Small rural counties set in the Columbia Basin such as Chelan, Douglas, and Grant used to be farmland.
The bitcoin industry moved three hours east of Seattle for one reason and one reason only - cost.
Electricity is five times cheaper there because of fluid access to plentiful hydro-electric power.
Many business decisions come down to cost, and a fractional advantage of pennies.
Globalization has supercharged competition, and technology is the lubricant fueling competition to new heights.
Once millennials desire to form families, the only choices are regions where housing costs are affordable and areas that aren't bereft of tech talent.
Cities such as Las Vegas and Reno in Nevada; Austin, Texas; Phoenix, Arizona; and Salt Lake City, Utah, will turn into hotbeds of West Coast growth engines just as Hangzhou, China-based Alibaba (BABA) turned that city into more than a sleepy backwater town with a big lake at its center.
The overarching theme of decentralizing is taking the world by storm. The built-up power levers in Northern California are overheated, and the decentralization process will take many years to flow into the direction of these smaller but growing cities.
Salt Lake City, known as Silicon Slopes, has been a tech magnet of late with big players such as Adobe (ADBE), Twitter (TWTR), and EA Sports (EA) opening new branches there while Reno has become a massive hotspot for data server farms. Nearby Sparks hosts Tesla's Gigafactory 1 along with massive data centers for Apple, Alphabet, and Switch.
The half a billion-dollars required to build a proper tech company will stretch further in Austin or Las Vegas, and most of the funds will be reserved for tech talent - not slum landlords.
The nail in the coffin will be the millions saved in state taxes.
The rise of the second-tier cities is the key to staying ahead of the race for tech supremacy.
Mad Hedge Technology Letter
December 24, 2018
Fiat Lux
Featured Trade:
(THE CLOUD FOR DUMMIES)
(AMZN), (MSFT), (GOOGL), (AAPL), (CRM), (ZS)