Global Market Comments
June 18, 2021
(JUNE 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(MS), (XOM), (FXI), (MSFT), (AMZN), (FB), (GOOGL), FCX), (CAT),
(GLD), (DIS), (GME), (AMC), (UBER), (LYFT), (TLT), (VIX)
Global Market Comments
June 18, 2021
(JUNE 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(MS), (XOM), (FXI), (MSFT), (AMZN), (FB), (GOOGL), FCX), (CAT),
(GLD), (DIS), (GME), (AMC), (UBER), (LYFT), (TLT), (VIX)
Nimble tech firms like online taxi company Lyft will be penalized in the coronavirus economy as it de-globalizes for a period of time.
If you read the Mad Hedge Technology Letter, you already know that I believe rideshare business models will never become profitable.
Fast forward to today and ask yourself how can these companies make profitability headway when the state mandates shelter in place policies?
The answer is they cannot.
It is not exactly the type of foundational policy that promotes more ride-sharing volume, so bad news for Uber and Lyft.
Uber CEO Dara Khosrowshahi told investors that ride volume has gone down by as much as 60%-70% in ground zero cities like Seattle, and that’s before you consider the pauses in some of its secondary services and the dubious distinction of becoming one of the earliest proof-of-concepts of just how fluid this virus really is.
But Khosrowshahi also told investors that Uber is “well-positioned” to ride the troubles out even in the worst-case scenario of rides down by 80% for the year. And even as ride volume crashes, it is also considering leveraging its network for delivering other things, such as medicine or basic goods.
Basically, Uber specializes in losing money and lots of it.
Then imagine how demoralizing it is for the inferior version of Uber, it’s little brother Lyft.
Lyft has no “other” businesses such as food delivery service Uber Eats, leading me to conclude that this massive retracement in shares must be a bear market rally that will run out of steam.
Finding entry points to short growth stocks is an imprecise endeavor but I do believe that poor revenue reports in the upcoming earnings season is going to cap this bear market rally in Lyft’s shares.
What do we know already?
A global and tech recession will be sharp and it will be worse than the global financial crisis possibly by a factor of 4.
Investors still cannot wrap their head around whether this contagion will spill over into being a depression.
Tech investors will need to respect the “new, new normal” following the pandemic, in which corporates make aggressive cuts to their spending side-- again, bad news for Uber and Lyft.
This type of scenario is especially problematic for Lyft who must spend illogically just to stay in business.
Lyft burned $463.5 million in the third quarter of 2019, which was almost twice the amount that the company lost over the same period of time the previous year.
The fourth quarter net loss includes $246.1 million of stock-based compensation and related payroll tax expenses as well as $86.6 million related to changes to the liabilities for insurance.
That translates into an adjusted net loss of $121.6 million, which is better than the adjusted loss of $245.3 million over the same period last year.
Considering the elevated amount of cash burn to Lyft’s model pre-virus and aware that nobody knows how long the cash burn will accelerate beyond Lyft’s earnings – investors are staring into a black hole of infinite losses moving forward as Lyft’s business model looks worse every day.
I must conclude that the post-coronavirus economy is highly likely to not be kind to marginal companies like Lyft who is a glorified taxi service.
Uber controls about 60% of the ride-sharing market in the US and managed to accomplish this by losing $5.2 billion in the Q2 2019.
Lyft has already slashed its R&D budget by deleting the autonomous vehicle development program.
Yes, the very program that was supposed to be the x-factor in its quest for real profits.
Laughably, Lyft’s executives emphasized that they believed the company will turn a profit in the fourth quarter of 2021, a year earlier than they had previously projected, but that forecasts looks foolish in hindsight.
The one miniscule silver lining for Lyft - fewer discounted rides than it did a year ago.
Lyft is also trying to boost the number of more-profitable rides, which are premium trips such as “airport” or “business” trips.
It’s a shame these premium trips have gone to zero.
The narrative has quickly pivoted to “grow at all costs” to “survive at all costs” and it’s not surprising to see Lyft grossly underperform the Nasdaq index in relative terms and most quality cloud stocks are in the midst of a v-shaped recovery.
Lyft is a sell on a rally type of stock.
Global Market Comments
March 27, 2020
(MARCH 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(ROM), (BA), (VIX), (UPRO), (SSO), (UBER), (LYFT), (MDT),
(GLD), (GOLD), (NEM), (GDX), (UGL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 25 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Since we flipped the off button on the economy, I don’t see how we can simply flip the on button and have a V-shaped recovery. It seems much more unlikely that it will get back to pre-recession levels.
A: Actually, all we really need is confidence. Confident people can go outside and not get sick. Once we start seeing a dramatic decline in the number of new cases, the shelter-in-place orders may be cancelled, and we can go outside and go back to work. It’s really that simple. So, we will get an initial V-shaped recovery probably in the third quarter, and after that, it will be a slower return spread over several quarters to get back to normal. Everybody wants to get back to normal and let's face it, there's an enormous amount of deferred consumption going on. I have hardly spent any money myself other than what I’ve spent online. All of those purchases get deferred, so in the recovery, there's going to be a massive binge of entertainment, shopping, and travel that is all being pent up now—that will get unleashed once the airlines start flying again and the shelter-in-place orders are cancelled. We’re not losing so much of this growth, we’re just deferring it. Obviously, some of the growth is gone permanently; you can forget about any kind of vacation in the next couple of months. I would say, the great majority of consumption in the US—and thus growth and thus stock appreciation—is just being deferred, not cancelled outright.
Q: Other than the ProShares Ultra Technology ETF (ROM), do you have any other leveraged sectors coming into the recovery?
A: There is a 50/50 chance the Roaring 20s started 2 days ago, on Monday, March 23 at the afternoon lows. We may go back and test those lows one more time, which at this point is 3,700 points below here, but we are clocking 1,000 points a day. It doesn’t take much, like a bad non-farm payroll number, to go back and test those lows. The good news is out; they're not going to spend any more money other than the $10 trillion they're putting in now.
Q: Would you buy Boeing (BA) here? Is this the bottom?
A: The bottom was at $94 on Monday; we went up 100% in three days and now we’re at $180. Incredible moves, and a total lack of liquidity. One reason I haven't added any positions lately is that they have closed the New Yok Stock Exchange floor and its not clear that of I send out a trade alert, it could get done. We have gone totally online, so I just want to see what happens as a result of that. I don’t want to be putting out trade alerts that no one can get in or out of, heaven forbid.
Q: What do you mean by “The spike to $80 in the Volatility Index (VIX) was totally artificial?”
A: When you have a series of cascading shorts triggered by margin calls, that is artificial. I have seen this happen many times before, both on the upside and the downside. This happened twice in the (VIX) in the last two years. When you go from a (VIX) of $25 to $80 and back down to $39 in days, which is what we did, you know it was a one-time-only spike and we are not going to visit the $80 level again— at least not until the next financial crisis because those positions are gone and are never coming back. A (VIX) of $80 means we are going to have 1,000 point move in the Dow Average for the next 30 days.
Q: I bought some ProShares Ultra Pro ETF (UPRO) which is the 3x long the S&P 500 at $1,829. Do I take profits by selling calls or just hold longer?
A: I would just sell the whole position outright. The (UPRO) is so incredibly volatile that you are rewarded heavily for just coming out completely and then reopening fresh positions on these big meltdown days. We will probably be doing trade alerts on (UPRO) or its cousin, the 2x long ProShares Ultra S&P 500 (SSO) sometime in the near future.
Q: With 2-year LEAPs, would you go at the money or out of the money?
A: This is the golden opportunity to go way out of the money because the return goes from 100% to 500%, or even 1000% if you go, say, 30%-50% out of the money. A lot of these stocks are ripe for very quick 30% bouncebacks, especially the (ROM). So yes, you want to do out of the money 20% to 30%. It will easily recover those losses in weeks if you are picking the right stocks. Over a two-year view, a lot of these big tech stocks could double by the time your LEAP expires, and then you will get the full profit. The rule of thumb is: the farther out of the money you go, the bigger the profit is. But I wouldn’t go for more than a 1000% profit in 2 years; you don't want to get greedy, after all.
Q: You called the Dow to hit 15,000. Is that still possible? We got down to the 18 handle.
A: Yes, if the coronavirus data gets worse, which is certain, we could get another panic selloff. How will the market handle 100,000 US deaths, given the exponential rise in cases we are seeing? With cases doubling every three days that is entirely within range. So, I would say, there is a 50% chance we hit the bottom on Monday at 18,000, and 50% chance we go lower.
Q: Do you know anything about the coronavirus stocks like Regeneron (REGN)?
A: Actually, I do, it's covered by the Mad Hedge Biotech & Health Care Letter, click here for the link. If you get the Biotech Letter, you already know all about stocks like Regeneron. Regeneron literally has hundreds of drugs in testing right now to work as vaccines or antivirals, and some of them, like their arthritis drug, have already been proven to work. So, we just have to get through the accelerated trials and testing to unleash it on the market. But for anybody who has a drug, it's going to take a year to mass-produce enough to inoculate the entire country, let alone the world. So, don't make any big bets on getting a vaccine any time soon—it's a very long process. Even in normal times, some of these drugs take months to manufacture.
Q: Are there any ventilator stocks out there?
A: There are; a company called Medtronic (MDT), which the Mad Hedge Biotech & Healthcare Letter also covers. They are the largest ventilator company in the US. Their normal production is 100 machines a week. Now, they are increasing that to 500 a week as fast as they can, but it isn’t enough. We need about 100,000 ventilators. China is now selling ventilators to the US. Elon Musk from Tesla (TSLA) just bought 1,000 ventilators in China and had them shipped over to San Francisco at his own expense, and Virgin Atlantic just flew over a 747 full of ventilators and masks and other medical supplies from China. So yes, there are stocks out there to play these things, they have already had large moves. We liked them anyway, even before the pandemic, so those calls were quite good. And China thinks their epidemic is over, so they are happy to sell us all the medical supplies they can make.
Q: Why did 30-year mortgage rates just go up instead of down? I thought the Fed rate cuts were supposed to take them down; am I missing something?
A: In order to get 30-year mortgage rates down, you have to have buyers of 30-year loans, and right now there are buyers of nothing. The lending that is happening is from banks lending their own money, which is only a tiny percentage of the total loan market. When the Fed moves into the mortgage market, you will see those yields move to the 2% range. The other problem is how to get a loan if all the banks are closed. They are running skeletal staff now, and you can’t close on real estate deals because all the notaries and title offices are closed; so essentially the real estate industry is going to shut down right now and hopefully, we’ll finish that in a month.
Q: Do you think Uber (UBER) and Lyft (LYFT) will go bankrupt?
A: It is a possibility because one to one human contact inside a car is about the last situation you want to be in during a pandemic. Their traffic was down 25% according to a number I saw. It’s very heavily leveraged, very heavily indebted, and those are the companies that don’t survive long in this kind of crisis. So, I would say there is a chance they will go under. I never liked these companies anyway; they are under regulatory assault by everybody, depend on non-union drivers working for $5 an hour, and there are just too many other better things to do.
Q: Is this the end of corporate buybacks?
A: To some extent, yes. A future Congress may make it either illegal or highly tax corporate buybacks, in some fashion or another because twice in 12 years now, we have had companies load up on buying back their own stock, boosting CEO compensation to the hundreds of millions—if not billions—and then going broke and asking for government bailouts. Something will be done to address that. If you take buybacks out of the market (the last 10,000-point gain in the Dow were essentially all corporate buybacks), we may not see a 20X earnings multiple again for another generation. Individuals were net sellers of stock for those two years. We only reached those extreme highs because of buybacks, so you take those out of the equation and it's going to get a lot harder to get back to the super inflated share prices like we had in January.
Q: How long before an Italian bank collapses, and will they need a bailout?
A: I don’t think they will get a collapse; I think they will be bailed out inside Italy and won’t need all of Europe to do this. But the focus isn't on Europe right now, it's on the US.
Q: Do you think this virus is really subsiding in China based on their past history of dishonest reporting?
A: Yes, that is a risk, and that's why people aren’t betting the ranch right now—just because China is reporting a flattening of cases. And China could be hit with a second wave if they relax their quarantine too soon.
Q: What's your opinion on how the Fed is doing and Steve Mnuchin in this crisis?
A: I think the Fed is doing everything they possibly can. I agree with all of their moves—this is an all-hands-on-deck moment where you have to do everything you can to get the economy going. Notice it’s Steve Mnuchin doing all the negotiating, not the president, because nobody will talk to him. For a start, he may be a Corona carrier among other things, and you’re not seeing a lot of social distancing in these press conferences they are holding. About which 50% of the information they give out is incorrect, and that's the 50% coming from Donald Trump.
Q: What do you think about no debt and no pension liability?
A: That’s why Tech has been leading the upside for the last 10 years and will lead for the next 10. You can really narrow the market down to a dozen stocks and just focus on those and forget about everything else. They have no net debt or net pension fund liabilities.
Q: Why have we not heard from Warren Buffet?
A: I'm sure negotiations are going on all over the place regarding obtaining massive stakes in large trophy companies that he likes, such as airlines and banks. So that will be one of the market bottom indicators that I mentioned a couple of days ago in my letter on “Ten Signs of a Market is Bottoming.”
Q: What’s the outlook for gold?
A: Up. We just had to get the financial crisis element out of this before we could go back into gold, so I would be looking to buy SPDR Gold Shares ETF (GLD), the gold miners like Barrick Gold (GOLD) and Newmont Mining (NEM), the Van Eck Vectors Gold Miners ETF (GDX), and the 2X long ProShares Gold ETF (UGL).
Q: Does the Fed backstop give you any confidence in the bond market?
A: Yes, it does. I think we finally may be getting to the natural level of the market, which is around an 80-basis point yield. Let’s see how long we can go without any 50-point gyrations.
Q: Do you foresee a depression?
A: We are in a depression now. We could hit a 20% unemployment rate. The worst we saw during the Great Depression was 25%. But it will be a very short and sharp one, not a 12-year slog like we saw during the 1930s.
Good Luck and Good Trading and stay healthy.
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 12 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What do you think about Facebook (FB) here? We’ve just had a big dip.
A: We got the dip because of a double downgrade in the stock from a couple of brokers, and people are kind of nervous that some sort of antitrust action may be taken against Facebook as we go into the election. I still like the stock long term. You can’t beat the FANGs!
Q: If Bernie Sanders gets the nomination, will that be negative for the market?
A: Absolutely, yes. It seems like after 3 years of a radical president, voters want a radical response. That said, I don't think Bernie will get the nomination. He is not as popular in California, where we have a primary in a couple of weeks and account for 20% of total delegates. I think more of the moderate candidates will come through in California. That's where we see if any of the new billionaire outliers like Michael Bloom or Tom Steyer have any traction. My attitude in all of this is to wait for the last guy to get voted off the island—then ask me what's going to happen in October.
Q: When should we come back in on Tesla (TSLA)?
A: It’s tough with Tesla because although my long-term target is $2,500, watching it go up 500% in seven months on just a small increase in earnings is pretty scary. It’s really more of a cult stock than anything else and I want to wait for a bigger pullback, maybe down to $500, before I get in again. That said, the volatility on the stock is now so high that—with the short interest going from 36% down to 20%—if we get the last of the bears to really give up, then we lose that whole 20% because it all turns into buying; and that could get us easily over $1,000. The announcement of a new $2 billion share offering is a huge positive because it means they can pay off debt and operate with free capital as they don’t pay a dividend.
Q: Is Square (SQ) a good buy on the next 5% drop?
A: I would really wait 10%—you don't want to chase trades with the market at an all-time high. I would wait for a bigger drop in the main market before I go aggressive on anything.
Q: What about CRISPR Technology (CRSP) after the 120% move?
A: We’ve had a modest pullback—really more of a sideways move— since it peaked a couple of months ago; and again, I think the stock either goes much higher or gets taken over by somebody. That makes it a no-lose trade. The long sideways move we’re having is actually a very bullish indication for the stock.
Q: If Bernie is the candidate and gets elected, would that be negative for the market?
A: It would be extremely negative for the market. Worth at least a 20% downturn. That said, according to all the polling I have seen, Bernie Sanders is the only candidate that could not win against Donald Trump—the other 15 candidates would all beat Trump in a 1 to 1 contest. He's also had one heart attack and might not even be alive in 6 months, so who knows?
Q: I just closed the Boeing (BA) trade to avoid the dividend hit tomorrow. What do you think?
A: I’m probably going to do the same, that way you can avoid the random assignments that will stick you with the dividend and eat up your entire profit on the trade.
Q: When do you update the long-term portfolio?
A: Every six months; and the reason for that is to show you how to rebalance your portfolio. Rebalancing is one of the best free lunches out there. Everyone should be doing it after big moves like we’ve seen. It’s just a question of whether you rebalance every six months or every year. With stocks up so much a big rebalancing is due.
Q: I have held onto Gilead Sciences (GILD) for a long time and am hoping they’ll spend their big cash hoard. What do you think?
A: It’s true, they haven’t been spending their cash hoard. The trouble with these biotech stocks, and why it's so hard to send out trade alerts on them, is that you’ll get essentially no movement on them for years and then they rise 30% in one day. Gilead actually does have some drugs that may work on the coronavirus but until they make another acquisition, don’t expect much movement in the stock. It’s a question of how long you are willing to wait until that movement.
Q: Is it time to get back into the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?
A: No, you need to maintain discipline here, not chase the last trade that worked. It’s crucial to only buy the bottoms and sell the tops when trading volatility. Otherwise, time decay and contango will kill you. We’re actually close to the middle of the range in the (VXX) so if we see another revisit to the lows, which we could get in the next week, then you want to buy it. No middle-of-range trades in this kind of market, you’re either trading at one extreme or the other.
Q: Could you please explain how the Fed involvement in the overnight repo market affects the general market?
A: The overnight repo market intervention was a form of backdoor quantitative easing, and as we all know quantitative easing makes stocks go up hugely. So even though the Fed said this wasn't quantitative easing, they were in fact expanding their balance sheet to facilitate liquidity in the bond market because government borrowing has gotten so extreme that the public markets weren’t big enough to handle all the debt; that's why they stepped into the repo market. But the market said this is simply more QE and took stocks up 10% since they said it wasn't QE.
Q: What about Cisco Systems (CSCO)?
A: It’s probably a decent buy down here, very tempting. And it hasn't participated in the FANG rally, so yes, I would give that one a really hard look. The current dip on earnings is probably a good entry point.
Q: Should we buy the Volatility Index (VIX) on dips?
A: Yes. At bottoms would be better, like the $12 handle.
Q: When is the best time to exit Boeing?
A: In the next 15 minutes. They go ex-dividend tomorrow and if you get assigned on those short calls then you are liable for the dividend—that will eat up your whole profit on the trade.
Q: Do you like Fire Eye (FEYE)?
A: Yes. Hacking is one of the few permanent growth industries out there and there are only a half dozen listed companies that are cutting edge on security software.
Q: What are your thoughts on the timing of the next recession?
A: Clearly the recession has been pushed back a year by the 2019 round of QE, and stock prices are getting so high now that even the Fed has to be concerned. Moreover, economic growth is slowing. In fact, the economy has been growing at a substantially slower rate since Trump became president, and 100% of all the economic growth we have now is borrowed. If the government were running a balanced budget now, our growth would be zero. So, certainly QE has pushed off the recession—whether it's a one-year event or a 2-year event, we’ll see. The answer, however, is that it will come out of nowhere and hit you when you least expect it, as recessions tend to do.
Q: Would you buy gold (GLD) rather than staying in cash?
A: I would buy some gold here, and I would do deep in the money call spreads like I have been doing. I’ve been running the numbers every day waiting for a good entry point. We’re now at a sort of in between point here on call spreads because it’s 7 days to the next February expiration and about 27 days to the March one after that, so it's not a good entry point this week. Next week will look more interesting because you’ll start getting accelerated time decay for March working for you.
Q: When are you going to have lunch in Texas or Oklahoma?
A: Nothing planned currently. Because of my long-term energy views (USO), I have to bring a bodyguard whenever I visit these states. Or I hold the events at a Marine Corps Club, which is the same thing.
Q: Would you use the dip here to buy Lyft (LYFT)? It’s down 10%.
A: No, it’s a horrible business. It’s one of those companies masquerading as a tech stock but it isn’t. They’re dependent on ultra-low wages for the drivers who are essentially netting $5 an hour driving after they cover all their car costs. Moreover, treating them as part-time temporary workers has just been made illegal in California, so it’s very bad news for the stocks—stay away from (LYFT) and (UBER) too.
Q: Is the Fed going to cut interest rates based on the coronavirus?
A: No, interest rates are low enough—too low given the rising levels of the stock market. Even at the current rate, low-interest rates are creating a bubble which will come back to bite us one day.
Q: Household debt exceeded $14 trillion for the first time—is this a warning sign?
A: It is absolutely a warning sign because it means the consumer is closer to running out of money. Consumers make up 70% of the economy, so when 70% of the economy runs out of money, it leads to a certain recession. We saw it happen in ‘08 and we’ll see it happen again.
Good Luck and Good Trading
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Autonomous or bankrupt; that is the ultimate fate of Uber (UBER).
In the short-term, Uber is a master at moving the goalposts in order to breathe life in the stock.
CEO of Uber Dara Khosrowshahi can only pray that the Fed will continue to pump cheap money into the market because without artificially low-interest loans, tech firms like Uber would implode.
Is it really time to give Uber the benefit of the doubt?
No more hype, just profits? Is the calculus to profits legitimate?
That's what we call a bubble. Bubbles always burst. Here's the scary part.
Many people are counting on the continued existence of Uber and Lyft to provide "cheap transportation."
Commuters will have to get suddenly unused to it.
There are many companies today that are running the same scheme as Uber in the “gig economy.”
It’s true that management loves to use a lot of flowery language to disguise a lack of profitability.
But as the conditions are ripe for a leg up in tech, the tide rises, and even Uber’s boat rises with it.
I have yet to see even one realistic analysis of how Uber or Lyft is going to become profitable - not even basic math!
I have met a plethora of drivers for both companies, and hope they do well, but there is only so long that one can put lipstick on a pig.
So here we are, Uber in the green everyday because they moved the goalposts yet again and promise us earlier than expected profitability but still losing billions of dollars.
Lyft and Uber have apparently increased revenues somewhat by reducing promotional discounts to riders, but that does not project to even a breakeven point and the unit economics tell me no even if my heart says yes.
The only trick up their sleeve seems to be fare increases, but where is the roadmap detailing this treacherous path?
Once we get to the point in time when Uber is supposed to be profitable, I bet that management will call in another trick play and move the goal posts yet again.
It is quite laughable when so called “tech experts” want Uber to join the ranks of Facebook Inc. (FB), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Alphabet Inc.’s Google (GOOGL) as part of a FANGU acronym.
Reasons for this new bundle is thought to be because of the ability to take advantage of its massive scale while working toward profitability.
Uber is the global ridesharing leader and is becoming the global food delivery leader, but do they really add value?
What if the local government finally got their finger out and built a proper transport system?
They are merely taking advantage of a broken system and passing on the costs of paying drivers to the drivers themselves by designating them as hourly workers.
Are we supposed to celebrate when Uber becomes more “rational?”
Meaning that players have limited their attempts to undercut one another with the sorts of pricing and big discounts that had at one time suggested the business might be a race to the bottom.
Uber projected a lower loss than analysts were expecting for 2020, does less loss mean profits in 2020?
And I do agree that it is encouraging that the company is finally disclosing more data, but shouldn’t they be doing that in the first place?
Love it or hate it, there is a “war” going on between profitability and growth at Uber as the company manages the trade-offs.
Uber had previously talked up that it would become Ebitda profitability by the end of 2021, but Khosrowshahi now forecasts profitability for the fourth quarter of this year.
He says it is possible because Uber initiated a “belt-tightening program” in the last half of 2019, exiting unprofitable ventures and laying off about 1,000 employees.
For instance, Uber sold its food-delivery business in India to a local startup, Zomato, in return for a 9.9% stake in that company.
I do believe that they haven’t done enough to build credibility with investors and the stock’s price action is behaving as we should trust Uber’s management with whatever comes out of their mouths.
The lack of visibility and uncertainty around trends in ridesharing and Eats outside the U.S. continue to be hard to quantify.
So that sounds great! Uber is more serious than ever about becoming profitable and investors have backed them up with the stock flying to the moon.
The trend is your friend and I would suggest readers to get out of the way of this one because you could get trampled on just like the Tesla bears.
And I do support Uber in making steps in the right direction and it also can be said that stocks appreciate the fastest when they transform from a horrible company to a less horrible company.
But there is no way that I am giving Khosrowshahi a pass for Uber’s current situation and no chance I am praising him to the hills.
It is what it is, and Uber is less bad than before, and if they don’t meet their targets, I don’t think investors will believe Khosrowshahi version of a spin doctor forecast anymore.
Uber will rise in the foreseeable future and if they fail to become profitable by 4th quarter, expect a massive drawdown.
If they succeed, expect a vigorous wave of new players to buy into Uber shares.
The stakes have never been higher for Uber and Khosrowshahi.
The demise of the gig economy is upon us.
That is the latest takeaway from a slew of negative news overflowing the news wires lately.
As many of you know, I hate this niche of tech with a passion, and it has been discovered as nothing more than a marginal fly-by-night sub-sector passing off the cost of employees and their wages to the investor.
They also contribute no meaningful technology that moves the needle.
When the hammer fell on Adam Neumann’s WeWork, the hammer fell equally as hard on the gig economy business model that brought public markets the likes of Uber and Lyft.
The path to venture capitalist’s cashing in abruptly closed off was the end development to all this mayhem.
So I was not surprised when online food deliverer Grubhub (GRUB) had a dead cat bounce after rumors of them looking for a sale to their badly run company.
Then last Friday was the day the chickens came home to roost with Grubhub shares cratering over 8%.
If there is a sale, at what heavily discounted price will it go for?
We could see a marked down shell of its former self.
Grubhub naturally came out and rejected the notion that they are about to be sold off.
Where there is smoke – there is fire.
They did, however, admit they are in the process of “consulting” about certain acquisitions which could mean purchasing inorganic growth to juice up their numbers ahead of a sale.
There are four market leaders who control roughly 80% of the food delivery service business.
But the food war is far from over as competitors undercut each other time after time.
Competition in the food delivery market is driving down the unit economics of online food delivery to a nadir at a time when they can least afford it.
The other three involved are Uber Eats division of Uber (UBER) as well as Postmates and DoorDash.
Grubhub mentioned that there will likely be opportunities to acquire market share, but at what cost?
Acquiring inorganic revenue is at peak cost in 2020.
Cost per unit matters more now than any other time in the past 10 years boding ill for Grubhub and its competition.
And until they adequately address the unit economics in detail, readers must assume that Grubhub is on a suicide mission and you won’t know how close they are to the end until there is a dramatic announcement describing it.
The big takeaway here is that conditions are ripe for consolidation in the online delivery business.
As we go further out on the risk curve, private unicorns are in dire straits too.
Taking a barometer of this subsector allows investors to digest the level of risk premium in the overall markets that can be applied to safer parts of the tech ecosphere through extrapolation techniques.
Venture capitalist Masayoshi Son is infamous for overpaying a slew of tech growth firms and in 2020, so far, it has not been kind to him.
Oyo allows customers to book hotel rooms in more than 80 countries through its app.
It even converts struggling local hotels into Oyo franchises, puts up some money to remodel the interior, and takes commission on every booking.
The startup is dumping 5% of its staff in China and another 12% of employees in India, as part of a reorganization.
Oyo is the third company in SoftBank's portfolio to shed jobs in a week, following the layoffs at robotic pizza startup Zume and car rental company Getaround.
Oyo has sucked in more than $3 billion in capital and the last insane tranche of investment values the company at more than $10 billion.
SoftBank has been throwing money at the company since 2015.
The firm is otherwise known as the "SoftBank's jewel in India" for being one of the country's most valuable private companies.
However, there has been a recent barrage of sub-optimal reports suggesting they have accelerated sales by underhanded business practices.
A peek into the firm showed explicit evidence that Oyo rented thousands of rooms at unlicensed hotels and guesthouses then allowing police and other officials use the service for free to avoid trouble with the authorities.
The pain for Softbank doesn’t just stop at Oyo, Rappi has been dragged down as well.
The Latin American delivery startup is laying off 6% of its workforce, less than a year after Japan’s SoftBank Group pumped in nearly $1 billion in the company.
Softbank is putting pressure on local management to trim the fat off their models and forcing them to become profitable now.
Rappi has expanded to nine countries since its founding in 2015.
It plans to be the swiss army knife of online deliveries by getting into groceries, restaurant meals, medication, furniture, and has even foolishly branched out into scooter rental, travel, and basic banking services.
Softbank plans to pour another $4 billion into South American startups but one must beg to ask, are they throwing good money on top of bad money?
Certainly seems so.
When asked how soon Rappi would turn in a profit, co-founder Sebastian Mejia was adamant that his sole priority was to grow fast, and that investors were on board with the plan.
This is code name for NEVER!
Softbank and its vision fund are set for more death by a thousand cuts in 2020, and being in the wrong place at the wrong time aggravates the mess they find themselves in.
Short all companies reliant on gig economy workers in the public markets and prepare for a gloomy IPO pipeline that will last through the end of 2020.
As I stare at my trading screen, Uber (UBER) is down over 10% intraday after a better than horrendous earnings report.
I thought share prices go up if companies beat consensus estimates?
In most cases – yes.
But the market is telling us that they do not believe in Uber’s story.
Just because a company loses $1.2 billion which bettered last quarter’s loss of $5.2 billion doesn’t mean investors will handpick the stock and save it from falling through the cracks.
Parsing through the rest of the earnings report, there is not much to really hang your hat on.
First, Lyft (LYFT), its smaller and more targeted competitor, turned up the pressure on Uber claiming they will become profitable on an adjusted earnings basis at the end of 2021, which is a year ahead of its original projection.
This forced Uber CEO Dara Khosrowshahi to hesitantly explain on a call that Uber’s management “hasn’t finalized planning” but is targeting being profitable for financial year 2021.
The claim is farfetched bordering on disingenuous and forcibly made because growth companies are effectively dead if they say it will take three years or more to become profitable.
The investing climate has changed that quickly thanks to Adam Neumann and the fallout at The We Company.
I would be more inclined to say that if Uber has a string of miraculous years with no adverse regulation against them, then there is a fractional chance they might become profitable by 2021.
Honestly, there was nothing that Uber showed me to make me think that I should consider investing in the company.
Momentum keeps slipping as we head into the day when 1.7 billion shares will become eligible for sale, roughly 90% of the total, and my guess is that investors will cut their losses.
Uber will have to gut many parts of the model to get to profitability and they have started the process by slashing employee costs cutting over 1,000 employees over the last quarter, or 2% of its entire workforce.
They will have to slash another 30% to get numbers on their side.
They might have to kill the parts of the business that aren’t delivering enough like Uber Freight and the autonomous driving unit.
The company still hasn’t found a solution for competing with taxi drivers without subsidizing each ride at a loss.
No matter how you dress it up, if the company can’t create solutions for this fundamental barrier to profits, investors will stay away.
It’s also a good reason for you and your money to stay away no matter how cheap Uber becomes.
It’s easy to envision if the state of California rebuffs the online food delivery firms' desire to put a cap on driver costs, that the stock could drop into the high teens.
Dara Khosrowshahi’s thesis of the scale and brand power working in Uber’s favor is flat out false.
Scale can be technology companies’ friend and savior, but when your company is literally a loss-making chauffeur service with zero competitive advantage, what is great about scaling that?
Sure, Uber is great for consumers especially in cities which have horrid public transport which is most of America.
I get that.
But Uber will either be forced to raise prices because they will pay the drivers more due to California law or because they lose too much money.
Who wants to hold a stock with these two crappy options on the near-term horizon?
If a gunman put a pistol to my head and asked me to invest in one, Lyft is the better option, it’s the lesser of two evils.
Yes, sadly we are at this point with these types of companies.
It took me precisely 28 days and not a day more.
That’s how long it took for my bearish call on desperate online food delivery company, GrubHub (GRUB) to come to fruition.
I wrote an overly negative report on the company which was published on October 2nd explaining why this company and its terrible unit economics were set for a rude awakening.
I usually don’t revisit the same company within the same month in this newsletter, but when I looked at the price this morning, it took me a few minutes to wrap my head around the 44% daily decline.
I will go one more step now and profusely recommend that nobody in their right mind should currently take any bullish positions on any company reliant on employing the gig economy.
The gig economy has been found out for what it is – an elaborate scheme enriching tech stakeholders while shorting American blue-collar labor.
Instead of proper wages flowing to the Uber driver or in this case the GrubHub driver, management has maneuvered its way through some nifty alternative classifications enabling companies to divert a chunk of capital back into the business model.
If these companies can’t make money with skimping on driver pay, how will they make money when American law mandates them to cover sick leave, paid vacations, health insurance, and overtime pay which could soon be coming?
And on top of the subsidies which add to the overall unit cost, how on earth will they piece together a solution that would satisfy shareholders?
Then mix the unworkable unit economics and fuse it with a boatload of competition and my conclusion is clear - profitability is a pipedream.
Buttressing my claims of unprofitability and market stagnation in a note to shareholders, the company admitted, “supply innovations in online takeout have been played out.”
The pitiful food delivery company slashed fourth-quarter revenue projections to between $315 million and $335 million making a mockery of the $387.3 million consensus.
The house of cards is finally collapsing.
Who is the competition?
There are three fierce contestants in UberEats, DoorDash and PostMates.
And to add even more spice inside the fajita, PostMates has recently shelved a planned 2019 IPO because of “market conditions,” a testament to the poor growth prospects for online food deliveries.
I believe no food delivery stock will ever go public again unless they revalue themselves 65% lower from today’s prices.
Much of the value in these companies is a mirage.
To give GrubHub credit, they didn’t put up Chinese walls in their guidance and mentioned that competition is wreaking havoc detailing that their customers are not “extremely loyal.”
They should expect investors to not be extremely loyal either.
Existing customers are now price-shopping by surfing around different apps to take advantage of price promotions proving my point that these gig economy companies contribute minimal incremental value to the end user.
Their secret sauces are hardly secret.
These apps are commodities and yes, there is value in their proprietary algorithms, but by no means are the barriers of entry so colossal that it would take North Korean engineers 10 years to reverse-engineer these same algos.
And with wielding low-grade tech and resigned to “low double-digit” growth, the bullish case behind this stock and the industry as a whole becomes almost laughable.
Don’t bring a knife to a gunfight!
If Uber can perform miracles and reach $40 or if Lyft can snake its way up to $55, these would be the perfect entry points to scale into these cash burn disasters from the short side.
As for GrubHub, don’t buy the dead cat bounce.
Global Market Comments
September 6, 2019
(SEPTEMBER 4 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (FXY), (FXB), (USO), (XLE), (TLT), (TBT),
(FB), (AMZN), (MSFT), (DIS), (WMT), (IWM), (TSLA), (ROKU), (UBER), (LYFT), (SLV), (SIL)
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