Mad Hedge Technology Letter
June 28, 2019
(THE PATH TO THE HOLY GRAIL)
Mad Hedge Technology Letter
June 28, 2019
(THE PATH TO THE HOLY GRAIL)
The pieces are starting to fall together.
This is what Lyft and Uber were hellbent on and they will finally get their cake and eat it too.
At least one of them will.
The holy grail of Lyft and Uber is eliminating the human element to the business.
Phoenix, Arizona is the first site for Lyft’s app collaborating with Waymo’s technology to offer autonomous rides via Lyft’s platform.
This could be the beginning of the end for Uber if Lyft meaningfully pulls ahead.
Why is the human element a roadblock?
Humans complain, get sick, file lawsuits for a lack of benefits, and humans post exposes on companies running amok.
Doing away with that will not only rid Lyft and Uber of high-risk liabilities, but it will boost profitability to the point where these companies will be healthily in the green.
Uber riders were only on the hook for 41% of the actual cost of transportation in 2016, the rest was comprised of generous subsidies making up part of the payments to the driver on top of the driver’s wage.
Let me put this in perspective. Lyft made $2.2 billion in revenue last year according to the filing for their IPO, and they lost $900 million from servicing this revenue.
Everybody knows that the gig economy is just a stop-gap measure until tech companies can go full on autonomous and direct operations with one click of a button buttressed by an all-terrain algorithm.
If you thought Uber was a tad better, then you were wrong. Operating losses of $3 billion on $11.8 billion in revenue and a total debt on $8 billion is tough to stomach.
If Lyft were finally able to remove the subsidies because of cost associated with human drivers and then kick the driver to the curb, margins would explode by around 50%.
Being a public company now, the competition will rise to a fever pitch.
The first to remove the driver is effectively an existential dilemma for both companies and I believe Lyft partnering with best in class Waymo will give them the upper hand.
Giving the keys to a vaunted FANG to supercharge your business isn’t a bad idea.
And remember, if you short Lyft, you are betting against Alphabet engineers who have made Waymo into the best in show.
You could do a lot worse.
And it could so happen that Lyft might even tap more Alphabet expertise to hypercharge its business.
It’s definitely not in the realm of fantasy and I already know that Lyft is receiving substantial help from Google ad.
Pre-IPO days were all about jockeying for market share to see who could grab the most volume and now the battle stands with Lyft holding 34% of the market with Uber pocketing with the rest.
Uber has relinquished much of their dominance after bleeding users stemming from bad management decisions.
Now the pendulum is swinging towards the big question of how soon will these companies be profitable?
Luckily for Uber and Lyft, future trends are quite favorable, with data showing that by 2040, 33 million of the vehicles sold annually will be fully autonomous.
Nearly every automaker is developing self-driving systems right now, and semi-autonomous features such as automatic braking, lane-keep assist, adaptive cruise control already are complementary in new vehicles.
Now the game is to continue the subsidies in order to tighten market share but integrate autonomous cars into the business model as fast as possible.
This is all about execution and the management behind the reigns.
By doing this, Lyft and Uber will reduce its expenses and finally become profitable, it would almost be akin to if Spotify stopped paying for music royalties.
Lyft has set the first cone on the floor and I found it interesting that it was Lyft and not Uber.
When we peel back the layers, investors must understand that Alphabet made bets on both Uber and Lyft.
Six years after making what at the time was its largest venture investment ever, Google’s $258 million bet on Uber has multiplied by about 20-fold to be worth more than $5 billion.
But it’s not about the appreciating assets that matter the most.
Alphabet knows that one of these platforms will dominate in the end and want to benefit from it either way.
CapitalG, the late stage investing arm of Alphabet, has almost tripled the value of its investment in Lyft at today’s prices after investing $500 million in Lyft in October 2017.
Alphabet has its fingerprints all over Uber and Lyft at this point with not only supplying the map that is displayed on these platforms through Google maps but also leading the marketing operation infusing its best of breed ad tech into these platforms.
It’s obvious that Alphabet has covered its bases with the autonomous transport services and whether its Lyft or Uber that wins out, Waymo taking the initiative to partner with these platforms will make Alphabet the clear winner.
Lyft has all its eggs in one basket with a domestic transportation app while Uber has different interests which could be dragging them away from the autonomous driving opportunity.
Uber did have major setbacks after their technology was the fault of several fatalities.
The first-mover advantage is the key to seizing the bulk of the market.
I am interested to see when Uber will partner with autonomous technology, but for the moment they aren’t because they are developing their own self-driving tech.
This is a risky strategy because Lyft has understood its shortcomings and paid heed to the more sophisticated technology being Waymo and is now actively partnering with them.
They probably understood that they would never be able to beat Waymo.
This unit started off shrouded in secrecy in 2008, a full 5-years before anyone moved a finger of autonomous driving.
Uber is developing its own autonomous fleet which in theory could become a larger business than Waymo and Lyft, but they are battling a company who had a 7-year start and the result of that is Uber trying to shortcut to the top resulting in its technology getting sidelined.
Uber’s self-driving unit is in the bad graces of safety regulators and I would only give Uber a 15% chance of usurping the leader Waymo.
To this point, I believe Lyft will be the main transport app for Waymo in the future, and Waymo having the highest chance to be rolled out nationally.
This is incredibly bullish for Lyft and Alphabet.
Uber still isn’t on the radar with its self-driving technology and being a frenemy in this sense with Alphabet will hurt Uber.
If Alphabet cashes out on its Uber shares, not only could they earn a hefty profit, but it would signal that Lyft will be their main transport app for autonomous driving and Uber has lost out on self-driving technology.
I am now bullish on Lyft and neutral on Uber but waiting on how Uber responds to this massive leg up by Lyft.
Mad Hedge Technology Letter
June 19, 2019
(FREELANCING TO THE TUNE OF THE GIG ECONOMY)
(FVRR), (LYFT), (UBER), (UPWK)
The company who exploits workers in the gig economy, Fiverr International Ltd. (FVRR), went public and is a terrible long-term buy and hold for investors.
I’ll tell you exactly why you should stay away from it like the plague.
Take a look at one of the sad side effects of the tech industry – 58% of full-time gig workers said they would have a hard time finding $400 to cover an emergency bill compared to 38% of people who don’t work in the gig economy.
The large discrepancy indicates that the informal economy is far more destabilized from Silicon Valley than investors care to admit.
And in many cases, the brutal economic conditions don’t underline the lack of upward mobility too.
While some are drawn to flexible roles, the gig-economy has faced condemnation, particularly because it has enabled companies to marginalize workers as contractors rather than employees who would be entitled to benefits and wage protections.
What about the risks of Washington smushing their business models?
Fiverr confesses that policy changes could destroy their business model if the ability to designate their workers as contractors is banned.
The freelance model could also become less attractive if it means higher regulatory risk or even higher perceived regulatory risk.
Another stain on Fiverr’s reputation is that, like many other tech companies of its ilk, it is loss-making.
Fiverr posted a net loss for 2018 of $36.1 million, compared to a net loss of $19.3 million in the prior year.
The lack of profitability is absorbed for the ultimate goal of gouging a total addressable market within the U.S. of $100 billion.
Fiverr’s $82.5 million in trailing revenue is less than a third of fellow freelance platform operator Upwork (UPWK) at $263.1 million.
Uber (UBER) and Lyft (LYFT), ridesharing services, are considerably larger than that as Uber and Lyft command trailing top-line results of $11.8 billion and $2.5 billion, respectively.
Revenue expanded 45% last year and this year 42% annualized through the first three months of 2019.
Fiverr is growing faster than Upwork with just a 16% top-line gain in the first quarter and Uber which decelerated to a 20% increase in the same reporting period.
But all three gig-economy players still trail behind Lyft with its first-quarter revenue surge of 95%.
None of these companies are currently profitable.
Is it worth it to pay a premium for cash burners?
Fiverr, Upwork, Uber, and Lyft are fetching between six- and nine-times trailing revenue.
Fiverr shares are 50% above its IPO price after just two days of trading and is somewhat misleading but mister market is always right.
Lyft and Uber have been losers this year after going public and the jury is out to whether they are really worth a long-term duration trade.
It can be argued that Uber is a better bet long-term bet because of a bold aerial service that could eventually unlock massive value, but I would say its current model is somewhat underwhelming and could be called a fancy taxi service.
The best type of tech companies right now are software companies insulated from the turmoil of the trade war.
If you are interested in pure software companies, there are a handful of names out there that fit the bill, but if you are looking at a company attempting to crowbar itself into the idea of a software company then Fiverr is it.
That unflattering description is entirely justified as well.
Don’t forget they have real competition in the marketplace to supply freelance jobs in Upwork who has a bigger market share.
These type of broker apps do not have much pricing power and their only sell is the prospect of scaling as fast as possible meaning a volume play.
I can honestly ask, why buy Fiverr when there is a much better option out there?
The success of Fiverr is reliant on maintaining and expanding the scale of operations to generate a sufficient amount of revenue to offset the associated fixed and variable costs.
In my eyes, growing the number of users to benefit from the scale might happen after it does not exist anymore.
Investors must really ask themselves if gig workers will even be around in 8-10 years.
Why is that?
The gig economy is a battle down to zero and as tech companies become more sophisticated with expanding their artificial intelligence capabilities, it will remove the demand for gig economy taking away a huge swath of the addressable market with it.
This stock is a bet against artificial intelligence and the application of it, and if anyone has been reading this newsletter, they know it would be akin to throwing your hard-earned money down the toilet.
Specifically speaking, every cornerstone industry from national defense, consumer products, the trappings of Wall Street, industrial production, robotics, autonomous driving technology, and transportation is moving full speed ahead with implementing and harnessing artificial intelligence.
The technology isn’t quite there yet and humans are just a quick stop-gap until the optimal technology can be achieved.
Then it will be arrivederci to the human element, stripped away like my innocence in high school.
This is a bet on the upward trajectory of gig economy workers and the fate of them and that is a bad gamble to make long-term.
Mad Hedge Technology Letter
June 3, 2019
(WHY THE UBER IPO FAILED)
Do you want to invest in a company that loses $1 billion per quarter?
If you do, then Uber, the digital ride-sharing company, is the perfect match for you.
Uber couldn’t have chosen a worse time to go public, smack dab in the middle of a trade war almost as if an algorithm squeezed them into tariff headlines that are currently rocking the equity markets.
The tepid price action to Uber’s first period of being a public company has been nothing short of disastrous with the company tripping right out of the gate at $42.
The company that Travis Kalanick built would have been better served if they decided to go public in the middle of their growth sweet spot a few years ago.
Hindsight is 20/20.
Uber took in $2.58B last year during the same quarter and they followed that up with 20% growth to $3.1B, hardly suggesting they are delivering on hyper-growth an investor desire.
It will probably become the case of Uber hoping to manage growth deceleration as best as it can.
Infamously, the company has been busy putting out fires because of past poor leadership that threatened to blow up their business model.
The fall out was broad-based and current CEO of Uber Dara Khosrowshahi was brought in to subdue the chaos.
That worked out great in 2017 and damage control nullified further erosion in the company, but since then, management has not carved out an attractive narrative.
Just as bad, investors have no hope on the horizon that Uber can mutate into a profitable company.
It seems that costs could spiral out of control and even though the company is growing, the company is not a growth company anymore.
Investors must look themselves in the mirror and really question why they should invest in this company now.
In the short-term, positive catalysts are scarce.
The reaction to their first earnings report was slightly positive as management indicated that competition is easing up, spinning a negative issue into a positive light.
Remember that Uber bled market share after their management issues that I mentioned and Lyft (LYFT) has caught up significantly.
Lyft has also grappled with poor price action to their stock after they went public.
The result from both companies going private to public around the same time means that they will not be able to undercut each other on price because public investors will not give the same type of leash that private investors did.
This will cause losses to cauterize because subsidizing drivers will decelerate, and the pool of drivers will shrink.
In addition, passenger fares could rise because Uber will have no choice but to consider profitability when pricing rides meaning higher costs to the user.
What I am saying rings true for many tech companies and raising prices to satisfy shareholders is not a groundbreaking phenomenon.
As I see it, offering rides on the cheap could be coming to a screeching halt and nurturing margins could be the new order of the day.
The subsidizing effect can be found in the higher than normal gross bookings for the quarter of $14.65 billion, up 34% from the same period in 2018.
Cheaper fares will drive demand, and if Uber stopped helping out with the cost of rides, the 34% would fall to single digits in a heartbeat.
Even more worrying is the negative core platform contribution margin falling 4.5%, meaning the amount of profit it makes from its core platform business divided by adjusted net revenue is on the down.
Uber was able to post a positive 17.9% growth rate during the same period last year.
When the core business is reacting negatively, it’s time to go back to the drawing board.
I believe that the underlying problem with Uber is that they aren’t making any big moves to their business model that would put them in the position to foster hyper-growth.
Incremental changes like removing drivers who fail to collect a 4.6 or above rating and creating a subscription model for its higher growth Uber Eats division are just a drop in the bucket of what they could be doing with its brand and clout.
If investors were waiting for a big step forward with shiny announcements during the first earnings call as a public company, then they were left thirsting for more.
Uber gave us a mini baby step when they need leaps in 2019.
The bigger success might be that Uber had no monumental blow ups which is a telling sign that Uber has at least stabilized operations.
The downside with its food delivery business is that private businesses such as Postmates and DoorDash are private and can still tolerate even bigger losses which will put pressure on Uber Eats to endure the same type of losses.
As it stands, net revenue for its Uber Eats segment rose 31% to $239 million, but then investors must understand this business is scarily exposed and could be attacked by the venture capitalists boding ill for the stock.
Then considering that Uber’s fastest growing geographical segment is Latin America, last quarter was nothing short of abysmal with revenue cratering by 13% to $450 million.
Regulatory risks will cause American companies to take big write-downs the further away they operate from America, and Indian regulation is rearing its ugly head with e-commerce companies bearing the brunt of it.
Looking down the road, Uber has a faulty business model because of a lack of autonomous driving technology, and they will need to partner with a Waymo or Tesla which will destroy margins even more.
Uber has no chance of profitability in the near term, and the data suggests they have lost their growth charm.
Do not buy Uber here, it will become cheaper, and at some point, around $30, this name will be a good trade.
Management needs to up the ante in order to show investors why they are better than Lyft.
Global Market Comments
May 17, 2019
(APRIL 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(MSFT), (GOOGL), (AAPL), (LMT), (XLV), (EWG), (VIX), (VXX), (BA), (TSLA), (UBER), (LYFT), (ADBE),
(HOW TO HANDLE THE FRIDAY, MAY 17 OPTIONS EXPIRATION), (INTU),
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 15 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Where are we with Microsoft (MSFT)?
A: I think Microsoft is really trying to bottom here. It’s only giving up $8 from its recent high, that’s why I went long yesterday, and you can be hyper-conservative and only do the June $110-$115 vertical bull call spread like I did. That will bring in a 13.68% profit in 28 trading days, which these days is pretty good. This morning would have been a great entry point for that spread if you couldn’t get it yesterday.
Q: How will tariffs affect Apple (AAPL) when they hit?
A: The price of your iPhone goes up $140—that calculation has already been done. All of Apple’s iPhones are made in China, something like 220 million a year. There’s no way that can be moved, they need a million people for the production of these phones. It took them 20 years to build that facility and production capacity; it would take them 20 years to move it and it couldn’t be done anywhere else in the world. So, that’s why Apple led the charge on the downside and that’s why it will lead the charge to the upside on any trade war resolution.
Q: How bad is the trade war going to get?
A: The market is betting now by only going down 1,400 Dow points it will be resolved on June 28th in Osaka. If that doesn’t happen it could get a lot worse. It could get down to my down 2,250-point target, and if it continues much beyond that, then we’ll get the whole full 4,500 points and be back at December lows. After that, you’re really looking at a global recession, a global depression, and ultimately nearing 18,000 in Dow, the 2016 low.
Q: Will global trade wars force US Treasuries down to around 2.10% on the ten year?
A: Yes. Again, the question is how bad will it get? If we resolve the trade war in six weeks, treasuries will probably double bottom here at around a 2.33% yield. If we go beyond that, then 2.10% is a chip shot and we go into a real live recession. The truth is no one knows anything, and we really don’t have any influence over what happens.
Q: How will equities digest and increase in European tariffs for cars?
A: It would completely demolish the European economy—especially that of Germany (EWG) which has 50% of its economy dependent on exports (primarily cars) and mostly to the U.S. And if we wipe out our biggest customer, Europe, then that would spill over here very quickly. Anybody who sells to Europe—like all the big Tech companies—would get slaughtered in that situation.
Q: Is it time to buy the Volatility Index (VIX)?
A: It’s too late to buy (VIX) now. I don’t want to touch it until we get down to that $12-$13 handle again because the time decay on this is enormous. Time decay is more than 50% a year, so your timing has to be perfect with trading any (VIX) products, whether it’s the (VXX), the (VIX) futures, the (VIX) options, or so on. There are countless people shorting (VIX) here, and they will short it all the way down to $12 again.
Q: What should I do about Boeing at this point?
A: We went long, got out, took our profit and caught this rally up to $400 a share. Then (BA) gave it up and it broke down. It’s a really tempting long here. Along with Apple, Boeing has the largest value of exports to China of any company. They have orders for hundreds of airlines from China, so they are an easy target, especially if there is a ramp up in the intensity of the trade war. That said, something like a June $270-$300 vertical bull call spread is very tempting, especially with elevated volatility up here, so I’m watching that very closely. We’re looking for the recertification of the 737 MAX bounce which could happen in the next few weeks; if that does happen it should rally at least back up to 380.
Q: Are your moving averages simple or exponential?
A: I just use the simple. I find that the simpler a concept is, the more people can understand it, and the more people buy it; that’s why I always try to keep everything simple and leave the algorithms for the computers.
Q: What stocks are insulated from a US/China trade war?
A: None. When the whole market goes risk off, people sell everything. Remember that an overwhelming portion of the market is now indexed with passive investment funds, so they just go straight risk on/risk off. It makes no difference what the fundamentals are, it makes no difference who has a lot of Chinese business or a little—everyone gets hit and everyone will get boosted when the trade war ends. There is no place to hide except cash, which is why I went 100% cash going into this. People seem to forget that cash has option value and having a lot of cash going into one of these situations is actually worth a lot of money in terms of opportunities.
Q: Do you have any thoughts on Uber’s (UBER) bad performance?
A: Yes, the whole sector was wildly overvalued, but no one knew that until they brought it to market and found out the real supply and demand for the issue. The smartest company of the year has to be Lyft (LYFT), which got a nice valuation by doing their issue first and keeping it small. So, they kind of rained on Uber’s parade; at one point, Uber was down 25% from their IPO price. That’s awful.
Q: Is Trump forcing the Fed to drop rates with all this tariff threat?
A: Yes, and if you remember, Trump really ramped up the attacks on the Fed in December. And my bet is at the first sign the trade talks were in trouble, they wanted to lower rates to offset the hit to the U.S. economy. There was no economic reason to suddenly demand huge interest rate cuts last December other than a falling stock market. The tariffs amount to a $72 billion tax increase on the American consumer, felt mostly at the low end, and that is terrible for the economy in that it reduces purchasing power by exactly that much.
Q: Would you buy the dollar as a safe haven trade?
A: No, I would not. The dollar may actually go down some more, especially with the collapse in our interest rates and European interest rates bottoming at negative levels. The best thing in the world in a high-risk environment like this is cash—don’t try to get clever and buy something you think will outperform. You could be disappointed.
Q: Why is healthcare (XLV) behaving so badly?
A: You don’t want to get into political football ahead of an election. That said, they’re already so cheap that any kind of recovery could very well take healthcare up big, especially on an individual company basis. This is a sector where individual stock selection is crucial.
Q: Would you buy deep in the money calls on PayPal (PYPL)?
A: Yes, I would. Wait for a down day. Today we’re up slightly, but if we have a weak afternoon and a weak opening tomorrow morning, that would be a good time to add more longs in technology. PayPal is absolutely at the top of the list, as are names like Adobe (ADBE) and Alphabet (GOOGL).
Q: Should I be buying LEAPS in this environment?
A: No; a LEAP is a one-year long term deep out-of-the-money call spread. That was a great December bottom trade. The people who bought leaps then made huge fortunes. We’re too high here to consider leaps for the main market unless it’s for something that’s just been bombed out, like a Tesla (TSLA) or a Boeing (BA), where you had big drops—then I would look at LEAPS for the super decimated stocks. But the rest of the market is still too high for thinking about leaps. Wait a couple of months and we may get back to those December lows.
Q: What happened to your May 10th bear market call?
A: Actually, it’s kind of looking good. It’s looking in fact like the market topped on May 2nd. If saner heads prevail, the trade war will end (or at least we’ll get a fake agreement) and the market will go to a new high. If not, then that May 10th target forecast I made two years ago IS the final top.
Q: You’re saying today we’re at a bottom?
A: We’re at a bottom for a short-term trade with a June 21st target. That was the expiration date of the options spreads I did this week. Whether this is the final bottom in the whole down move for a longer term, no one has any idea, even if they try to say differently. This is totally dependent on political developments.
Q: What do you have to say about Lockheed Martin (LMT)?
A: This sector usually does well with a wartime background. Expect that to continue for the foreseeable future. But at a certain point, the defense stocks which have had fantastic runs under Trump will start to discount a democratic win in the next election. If that does happen, defense will get slaughtered. I would be using any future strength to sell out of the whole defense area. Peace could be fatal to this sector.
Global Market Comments
May 6, 2019
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE’S ANOTHER BOMBSHELL),
(DIS), (QQQ), (AAPL), (INTU), (GOOGL), (LYFT), (UBER), (FCX))
Mad Hedge Technology Letter
May 6, 2019
(PAYPAL GOES FROM STRENGTH TO STRENGTH)
(PYPL), (SQ), (GOOGL), (LYFT)