Mad Hedge Technology Letter
October 24, 2022
Fiat Lux
Featured Trade:
(GET WITH THE TIMES)
(META)
Posts
Brad Gerstner is the Founder and CEO of Altimeter Capital, a tech investment firm based in Silicon Valley and a big shareholder of Meta or Facebook.
On Monday morning, Gerstner wrote an “open letter” to the CEO of Meta Mark Zuckerberg essentially telling him that he has no idea what he’s doing and to get with the program.
Of course, the letter used a polite and courteous tone, but the content was damaging to say the least.
Some of his thoughts also back up exactly what I’ve been preaching.
Innovation in Silicon Valley has come to a screeching halt, and many of these incremental projects aren’t looking too attractive, like Metaverse.
Zuckerberg is also wildly out of step with the current times as bond yields have exploded, and tech stocks have been crushed. Yet the CEO has ramped up spending and getting very little bang for his buck.
He seems oblivious to all of it.
Gerstner wants juicing up of free cash flow through the existing platforms which focus mainly on digital ads, because they are still highly profitable.
He also criticized the amount of money used to develop the Metaverse and called for an imminent reduction in costs.
He later complains that META has increased its headcount from 25,000 to 75,000 heads in the past three years, but META is not squeezing out more productivity by this.
Gerstner recommends cutting the staff budget by 20% which would bring down staff costs to last year’s levels.
He didn’t say that the extra $40 billion in savings would go to shareholder returns, but one might conclude that he is lobbying for that decision that would benefit his wallet.
Essentially, “recommending” to invest $1-$2 billion is a direct show across the bow to Facebook management signaling not good enough at the top level.
Investors believe this technology is not only akin to a pet project, but also a failure of long-term strategic significance.
Remember that Zuckerberg is investing $30 billion in the metaverse in 2022 and wants to ramp up in 2023,.
My guess is that Zuckerberg adopts a defiant stance since he believes he’s the smartest guy in the room at all times.
He hates to be doubted and has an impulse to prove people wrong.
Even if the metaverse is the future, Zuckerberg is wildly early and investors want him to milk profits now from the ad business before he goes full steam into monetizing the metaverse.
Zuckerberg has super voting rights and is unable to get fired from the company he co-founded and investors gave him a pass for this situation for quite some time.
Now, moving forward, it appears as if Zuckerberg doesn’t care about Meta’s stock price anymore and will do anything to make this metaverse project work even if it doesn’t mesh with the balance sheet or the current cost of capital.
He doesn’t care because he views his legacy as intertwined with the prospects of the metaverse which is a dangerous path to choose.
It’s irresponsible for a CEO to crowbar a public company into a binary decision on a speculative technology when there’s no need for it.
Volunteering for high risk is a sign of bad leadership.
A CEO that cannot get fired is dangerous and it is coming back to haunt investors.
My guess is that Zuckerberg will double hiring, double investments and capital spending, double artificial intelligence engineers and triple down on this metaverse project because he views it as an existential proposition.
From an individual investor's point of view, reckless leadership means avoiding the stock.
I believe META’s stock is due for a terrible earnings report, poor forward guidance and I would sell any rally in META stock.
Mad Hedge Technology Letter
October 3, 2022
Fiat Lux
Featured Trade:
(ZUCK LOSING HIS MIDAS TOUCH)
(META), (RBLX)
It’s gotten so bad at Facebook’s Menlo Park headquarters that to attract high-level talent, they have to overpay by almost 5 times.
That’s how unattractive it is to work for Facebook now – almost a permanent stain on one’s resume.
It was just only a few years ago when Facebook or Meta (META) was the go-to growth story in upcoming technology, and its business model, which is still quite profitable, launched them into a trillion-dollar company.
Every Stanford MBA student was clamoring to get into the company at almost any cost. It was a blue chip tech company.
That was then and this is now.
Poor management has started to spiral out of control and that starts from the top down where co-founder and current CEO Mark Zuckerberg is notorious for being a difficult boss to work for.
He is also unfirable because he owns 51% of voting rights and rules with an iron fist like a Russian tsar.
Pouring sand on the fresh wound, Facebook has announced future job cuts for the first time in its history as a company. Might as well go out in style.
The trillion-dollar company that was once unstoppable is now shrinking its headcount to cut costs, an almost unimaginable situation just a few months ago.
This management move is essentially a mea culpa signaling that business decisions have been atrocious.
The flagship product Facebook is pretty much unusable now which is part of the multi-pronged problem.
It’s filled with so much chaos because every high-priced software engineer has attempted to put their stamp on the product by installing additional “improvements.”
The interface is now as convoluted as ever and things just get in the way.
Much like Microsoft word, it’s a software product that transcends time which is why I use Microsoft Word 2010. It also doesn’t force me to upload and save my Word document to Microsoft’s Cloud like the new iteration.
Facebook is the same, better as a slimmed-down simplified version, but that doesn’t boost short-term revenue.
Even if short-term capitalism gets in the way, it doesn’t deny the fact that competition has reared its ugly head and Zuckerberg and Facebook are flat-out losing.
The Chinese communist party-sponsored TikTok is the competitor and is hot with the young crowd with its short-form videos.
TikTok is securing market share from Facebook and Instagram while Zuckerberg pivots to virtual reality in the form of the metaverse.
Zuckerberg’s expensive shift to the metaverse also appears to be a failure which could turn out to be Zuckerberg digging his own Facebook grave.
The most successful metaverse platforms already exist in 2D, with Roblox Corp. (RBLX) and Epic Games Inc.’s Fortnight.
Success has been achieved in the form of regular users with incentives around building and sharing experiences.
Meta has instead focused on the immersive sensation of its virtual reality products, which isn’t all that appealing.
Overpaying software developers because the platform has fallen out of favor is a red flag.
Now, Meta has more red flags than a Chinese communist parade.
Meta now has a $360 billion valuation and the US economy, its biggest revenue driver, is facing a 2023 recession.
The upcoming recession is what first prompted the job cuts, but I believe this will trigger something more cynical in the form of gross underperformance of Meta’s business model and another leg down in its story.
We are inching to the point where Meta will need to perform backflips to turn around the titanic because nothing on the horizon suggests they have anything figured out.
The metaverse – not a solution.
Sell all rallies during the period of high-interest rates.
Meta clearly cannot solve the current challenges that are deteriorating by the day.
Mad Hedge Technology Letter
September 22, 2022
Fiat Lux
Featured Trade:
(POTENTIAL TECH REVERSAL PUSHED BACK)
(FED), (META), (AAPL)
Tech investors want nothing to do with an aggressive Federal Reserve, but that’s what we have.
I don’t choose this and neither do many others out there.
We have been spoilt in a world with low inflation, global peace, low energy, and high liquidity which was the perfect scenario for tech stocks.
The reverse has happened almost overnight and now it’s that much harder to earn your crust of bread in the tech world.
Gone are the days of buying Facebook for peanuts then going for a sauna and a nap. It’s not that easy right now.
Tech stocks don’t go up in a straight line anymore – there will be many zigs and zags along the way moving forward.
Tech stocks aren’t immune to these exogenous stocks and as anointed growth companies, they inherently need to borrow capital and grow more than the cost of it.
That endeavor is stretched to the limit as bond yield explodes to the upside with this latest rate rise.
Raising interest rates by 0.75% for the third consecutive time this afternoon was the consensus, but in fact, there was a 25% chance of a full 1% rate rise. We avoided that bullet.
Tech stock doves were hoping US Federal Reserve Governor Jerome Powell would save them, by initiating a pivot to save the stock market, but no do this time around.
It underscores that Powell is adamant about continuing this inflation battle even if I do believe it’s too little too late.
The central bank’s new benchmark borrowing rate is now between 3.0% to 3.25%, up from the current range of 2.25% to 2.5%. This would bring the fed funds rate to its highest level since 2008.
Tech stock reacts most sensitively to the change in Fed Funds rates which is why we have seen CEO and Founder of Meta (META) or Facebook Mark Zuckerberg lose $71 billion of his net wealth this year.
Not only is the macroenvironment squarely against him, but his flagship product Facebook is losing steam, and his new product the Metaverse has garnered tepid reviews from outsiders.
How long does the Fed intend to increase rates?
The updated consensus for the Fed Funds Rate shows it at 4-4.25% by the end of 2022, another hike to 4.25-4.5% at end of 2023, and one more cut in 2024 and two more in 2025.
The answer is quite a while longer.
In the meantime, this will initiate a “reverse wealth effect” and tech stocks are the biggest losers, and the US dollar is an unmitigated winner.
Delaying lower Fed Funds rates means delaying the reversal in tech stocks which need lower rates to explode higher and without it, they are quite ordinary.
Signaling higher rates for longer is designed to tame inflation, but there are so many unintended consequences for US tech stocks.
The most important themes to be concerned about are revenue and financing.
The .75% increase in rates will mean that tech stocks will produce lower annual revenue because financing costs will be higher.
This is already at a time when general costs have exploded higher such as an uncontrollable wage spiral, supply chain bottlenecks, health care costs, transportation costs, and energy costs.
It’s a great deal harder to keep the numbers down enough to profit which basically means gross margins will compress further from today.
Tech stocks will come back because they always do. They are the profit engine of corporate America, and that will never change.
I see great tech companies like Apple (AAPL) installing the framework so they can maximize on the next move up when the bull market reignites.
They are doing this by moving iPhone production to India and other tablet production to Vietnam to get out of lockdown China.
Now is the time to reset before tech bounces back and it’s painful to see tech get slaughtered, but this is a necessary evil after a wonderful bull run from 2012 to November 2021.
US FED GOVERNOR GIVES NO LOVE TO TECH STOCKS
Mad Hedge Technology Letter
September 19, 2022
Fiat Lux
Featured Trade:
(READING THE TECH TEA LEAVES)
(GOOGL), (FDX), (META), (SNAP)
Logistics company FedEx, although not a tech company, offers a fascinating insight into the health of the economy and the current state of the tech world.
Unfortunately for tech readers, the shipping company rang the alarm on the rapidly deteriorating state of the economy in August.
It’s my job to tell you how it will shake out for tech stocks.
FedEx’s earnings report disappointed signaling that tech stocks too, could be on the chopping block. I would agree with that too.
This debunks the myth of the “soft landing” that the US Central Bank likes to refer to with their challenge of high inflation. I believe the soft landing is priced into tech stocks, but not a hard landing yet.
The result is possibly more downside price action to tech stocks.
CEO Raj Subramaniam painted a gloomy picture of what to expect in terms of lower volumes.
FedEx could be the canary in the coal mine signaling ugly earnings for other large tech companies that do business around the world.
The tech companies that come to mind are Apple, Google, Facebook or Meta (META), and Snapchat (SNAP).
Raj is not the only executive who is spooking the tech market.
CEO of Alphabet or Google Sundar Pichai had his own gloomy opinion that adds insult to injury to the already negative sentiment prevailing in trader sentiment.
He said he feels “very uncertain” about the macroeconomic backdrop, and he is one of the few who has deep insight into the different layers of this complicated US economy.
He also warned that layoffs could be in the cards as the company seeks to boost its efficiency by 20% while staving off fierce economic headwinds and antitrust investigations.
A large element of such downbeat forecasts by executives is the roaring price hikes from everything like diapers to salami.
The one ironic tidbit that I took away from the last inflation report was that the recent explosion in inflation has been in rental housing.
If this is the case, then high-income individuals, who mostly own rental real estate, are passing on inflationary costs to their tenants who are strapped with a worse financial profile.
This means that high-income individuals still harness the resources to spend, spend, spend.
Why not go lease a new Maserati or Aston Martin?
If that’s the case, we could see this group pick up the slack and power spending all the way until Christmas which is a net negative for tech stocks because it delays the Fed pivot.
Warnings from Subramaniam and Pichai indeed have weight to them, but keep in mind that these businesses are optimized for scale and reflect the general situation of Americans, not just rich people.
High net worth individuals reloading the consumer bazookas don’t move the needle for the entire US economy, but they do have enough gunpowder to trigger another bout of inflation or rental increases to build on the already high inflation existing in US prices.
Short-term traders should focus on selling rallies in poor tech stocks as upside momentum cannot be sustained in the face of anticipated interest rate rises.
Mad Hedge Technology Letter
September 14, 2022
Fiat Lux
Featured Trade:
(JOB MARKET WORKING AGAINST TECH STOCKS)
(TWLO), (META), (NFLX)
As the tech job cuts go from bad to terrible, how does this shake out the tech sector?
Just this morning, Twilio (TWLO) announced a major purge sacking 11% of its workforce to focus on reducing operating costs and improving margins.
Is this the end of it for the mighty tech machine?
Hardly so.
Tech companies will get more lean, efficient, and cutthroat which many might argue they should have been like that in the first place.
It’s somewhat true that tech business models got somewhat bloated in the era of euphoria.
Some unnamed big tech companies almost became like adult daycare centers.
Like overshooting in terms of revenue, development, and achievements to the upside in tech, and I acknowledge there was a lot to celebrate, I believe that the same works in reverse.
Staff at tech companies will be disposed of ruthlessly, and tech companies will most likely overcut jobs as a way to get their points across and show shareholders that they will flesh out costs during tough times.
Tough times in the big tech world mean less than growth margins, but they are still doing better than any small business who are outright going bankrupt.
Tech companies are in an advantageous position because the technology they harness can be used to scale up using software.
Less staff that manufactures higher productivity is an executive’s dream.
This time around, I firmly believe that automation will start to reach further up the employment chain because automation gets better with each iteration.
Humans also complain, get sick, need bathroom and coffee breaks, ask for promotions and raises when software code doesn’t.
We aren’t to the point of one CEO and the rest bots and software, but that’s the direction we are headed.
The silver lining for many of these fired tech workers is that the labor market is on fire. Although the unemployment rate ticked up to 3.7% last month, it’s still hovering at a 50-year low. The data is there – there are about two job openings for every unemployed person.
More than 50,000 tech workers have been laid off since the beginning of this year.
These fired tech workers will be able to find new jobs rapidly and in many cases with a juicy promotion, higher wage, and better benefits like 100% remote work opportunities, because there is still a huge shortage of qualified workers. Skills are fungible too.
Many will be able to pivot into the financial world and find jobs on Wall Street, who for the past generation have been losing talent to tech.
As interest rates rise, banks become winners.
Lastly, the pedestrian interest rate rises executed by the US Central Bank means that the job market will stay a lot hotter than first expected.
Even if they do get to 4% in the Fed Funds rate by the end of 2023, 4% is still historically low and companies will still be hiring albeit with a more measured approach and lower wages.
The slow pace of rises hurt tech because it allows the fired workers more time and better opportunities to get entrenched in a new sector while job offers are still plentiful.
The net result is the opposite of what the Fed wants which is more inflation as fired tech workers rotate into better-paying jobs spending even more money on goods and services.
This feeds into the higher inflation problem.
In short, this is a death-by-a-hundred-cuts sort of reaction for tech stocks. Tech stocks won’t explode to the upside until the workers can’t just re-up to a cushy healthcare job or Wall Street job like now.
Short every rally in wounded tech stocks like Facebook (META) and Netflix (NFLX).
