Mad Hedge Technology Letter
August 10, 2020
Fiat Lux
Featured Trade:
(SCRAPING THE BOTTOM OF THE TECH BARREL WITH UBER)
(UBER), (LYFT), (FB), (AMZN), (GOOGL), (NFLX), (AAPL), (MSFT)
Tag Archive for: (NFLX)
The coronavirus and the resulting effects from it have had the single most sway on tech companies since the 2001 tech bust.
Marginal tech companies or even quasi-fraudulent ones have been exposed for what they are, while the secondary effects from the virus have supercharged the behemoths of the industry.
The stock market has no earnings growth in the past 5 years without the earnings from Microsoft (MSFT), Facebook (FB), Apple (AAPL), Google (GOOGL), Amazon (AMZN), and Netflix (NFLX). That means that without the Republican corporate tax cut, there has been negative earnings growth in the past five years.
One of those tech companies at the bottom of the barrel has been chauffeur service company Uber (UBER) and their latest earnings report is a glaring indictment of a shoddy business model that operates in a gray area.
The only reason this stock is at $33 is because of the piles of easy money printed by the central bank.
Uber needs all the help they can get, and shares are still trading 20% below the IPO price.
Competitor chauffeur service Lyft (LYFT) is doing even worse registering a 50% decline since the IPO.
Let’s do a little snooping around to see why these companies are doing so poorly and why you shouldn’t even think about investing in these companies long-term.
No matter how you dice it up, Uber’s core business, the one where they refuse to properly compensate their drivers, had a disaster of a quarter with gross ride volumes down 73% year-over-year.
Before we go any further with this one, I would like to point out yes, other areas of the business grew substantially, the problem is that the “other” part of the business is only 30% of total revenue.
Therefore, when 70% of your business that relies on pure volume to scale out crashes by 73%, it doesn’t really matter what else is in the report.
The only sensible idea now is capturing a snapshot of the silver linings, of which there were a few.
Delivery volumes through Uber Eats were up 49%, but the problem here is that first, it’s not profitable per delivery and second, it’s still a small part of the business.
Uber acquired Postmates who is another loss-making delivery service and the idea behind this is to achieve significant cost savings by scaling out these powerful assets.
The problem here is that it is essentially throwing good money on top of bad money because it’s proven that deliveries don’t make money per ride and that won’t change in the near future.
CEO of Uber Dara Khosrowshahi is on record saying Uber will become “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”
This is almost like saying we won’t lose as much money as before and ironically, Dara Khosrowshahi has withdrawn this statement as the ride-sharing model has been repudiated by the consumer during the coronavirus.
Nowhere in the earnings report is the explanation of how Dara Khosrowshahi plans to attract people to share a car ride with a stranger during a global pandemic.
He didn’t share a solution because there isn’t one, hence the 73% decline in ride volumes.
If we assume this company is semi-fraudulent, then the silver lining would be that ride volumes didn’t decline by 100%.
That is where we are now with U.S. corporate companies such as the airlines that fired their employees but have subsidized them to stick around even though there is no work.
Instead of re-imagining itself through bankruptcies, the Fed has encouraged many marginal companies by breathing life into their finances through cheap loans.
This gives failing firms a last chance to enrich management with the capital and “cash out” before they hand the business off to someone who will essentially plan to do the same.
I will say that traders might have a trade or two in this one, because it’s hard to imagine Uber posting another 73% loss in ride volume and a dead cat bounce trade could be in the cards.
Long term investors should steer clear of this one and allow Uber to struggle on its own and just maybe in 5 or 10 years, it might just be “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”
With so many high-quality tech companies and even one that is about to add super growth elements like TikTok into its portfolio, there are so many superior names to deploy capital in the tech ecosphere.
Either you must be galvanized by a gambler’s mentality to invest in Uber, or losing money is something that is habitual in your routine.
Mad Hedge Technology Letter
June 26, 2020
Fiat Lux
Featured Trade:
(GETTING READY FOR THE SECOND WAVE)
(DOCU), (TDOC), (NFLX), ($COMPQ)
The coronavirus is dangerously inching towards knocking out the main street economy which would finally land a heavy blow to the tech sector because of the knock-on effect of a substantial drop in future tech budgets.
This leads me to believe that tech stocks are overvalued in the short-term and are due for consolidation.
Daily coronavirus cases have more than doubled from 18,000 to 45,000 as of June 24rd as Americans reclaim the streets and the summer heatwaves kick into gear.
Florida, California, Arizona, and Texas appear to be the new ground zero of the coronavirus and 26 states are experiencing an explosion in cases compared to the prior week.
The blatant disregard for human safety after the reopening means that deaths are likely to spiral out of control in the short-term boding ill for the Nasdaq index but great for shelter-in-place tech stocks.
DocuSign (DOCU), Netflix (NFLX), and Teladoc Health (TDOC) could be in for another run-up.
The jolt in death levels is not baked into tech shares yet, and if things get out of hand, Americans could voluntarily resort back to a shelter-in-place existence.
From March until today, the Nasdaq index has done nothing but sprint upwards due to the eclectic mix of the “re-opening” trade and copious amounts of fiscal stimulus.
If the re-opening trade is killed, the tech market will then go through another contentious referendum to test whether Jay Powell and the Fed are willing to save the equity market yet again.
Propping up the markets ultimately means propping up the tech markets.
If U.S. coronavirus cases re-accelerate from 45,000 to 70,000 then 100,000 per day, the streets could empty out in 1-day.
The risks are certainly to the downside now and the mushrooming of U.S. coronavirus cases could be the catalyst for mass profit-taking in tech names.
Saying the Nasdaq is a little frothy does not mean that tech shares can’t still go higher from here.
They certainly can and there is a legitimate base case surrounding the enormous amount of liquidity sloshing around in the system, meaning that every dip will be bought up.
Then we look forward to the next earnings and news like Apple re-closing 18 stores in coronavirus hot spots doesn’t help.
However, even in the throes of the pandemic, Apple is as innovative as ever - announcing plans to cut ties with Intel during its virtual Worldwide Developers Conference on Monday, saying that it will phase out the use of Intel’s chips in its Mac line of computers over the next two years to use its own in-house chips.
That’s a big deal.
Big tech has so many levers at its disposal.
This goes a long way in a pandemic when specific revenue avenues are blocked off.
Tech is nimble as ever.
Another prime example, after the success of video conferencing software Zoom Communications (ZM), Facebook, Google, and Microsoft posted replica software in a matter of weeks.
Even if their video communication replicas do not catch on, it shows you the vast resources they can muster to harness in whichever direction they please in a blink of an eye.
Many firms are confronting some harsh realities, but investors aren’t penalizing tech firms by selling.
Facebook has seen an ad boycott because of not doing enough against extremism and racism on their platform.
Their algorithms often pit two opposite opinions against each other stoking engagement and more hatred.
Companies including REI, The North Face, Magnolia Pictures, and Upwork have said they won't buy ads on Facebook at least through July as part of a boycott.
The boycott is mostly all bark and no bite and earnings won’t change in a meaningful way.
Uber is a less robust tech firm in the regulatory crosshairs with the state of California about to file court documents that could force Uber and Lyft to reclassify drivers as employees in less than a month.
This could wipe out a small tech company like Uber which is only a $53 billion company.
If the courts rule against Uber, the law would require them to grant drivers employment status while they await the outcome of a pending lawsuit over the issue which would crush the bottom line.
They are having a tough time figuring out how to become profitable.
Investors are doing their best to analyze what the tech industry will look like post-Covid-19 and the assumption is that tech and big tech will dominate which is why any sell-off is temporary.
Every big tech name will survive the pandemic with its business models intact.
Throw in that news of a vaccine and treatment inching forward to fruition and there is a solid bottom for any temporary dip.
It is irrelevant if big tech loses 10% or 20% of revenue this year just as long as they don’t structurally break.
Global Market Comments
June 23, 2020
Fiat Lux
Featured Trade:
(HERE ARE THE FOUR BEST PANDEMIC-INSPIRED TECHNOLOGY TRENDS),
(AMZN), (CHWY), (EBAY), NFLX), (SPOT), (TMUS), (ATVI), (V), (PYPL), (AAPL), (MA), (TDOC), (ISRG), (TMDI)
By now, we have all figured out that the pandemic has irrevocably changed the course of technology investment. Some sectors are enjoying incredible windfalls, while others are getting wiped out.
The digitization of the economy has just received a turbocharger. It has become a stock pickers market en extemus.
The good news is that we are still on the ground floor of trends that have a decade to run, like working from home, more online food purchases, and a rise in touchless payments. This means there's a huge upside for investors willing to make big bets on what’s expected to become some of the most important technologies in the years ahead.
Covid-19 is a wake-up call to accelerate trends that have been around for years and are now greatly speeding up. The pandemic seems to have triggered a new survival instinct: innovate fast or die. Let me list some of the frontrunners.
1. E-commerce
E-commerce is the No. 1 shelter-in-place beneficiary by miles, as a combination of stay-at-home orders, reduced spending on dining, and government stimulus have sent Americans in search of other ways to spend their money. Even though Covid-19 restrictions are now being eased, the e-commerce industry should still see about 25% growth across all of 2020.
The estimated $60 billion spent by consumers from their stimulus checks has also been a tailwind. While the world is now re-opening, we expect these buckets of available dollars to remain e-commerce tailwinds for the foreseeable future as we expect adjusted retail and travel spend to decline an aggregate of 18% in and for as much as half of all small retail stores to potentially close this year.
When Amazon shares were at $1,000, I wrote a report calculating that its breakup value was at least $3,000 a share. It looks like Amazon may hit that target before yearend….without the breakup.
Want to know the winners? Try Amazon (AMZN), Chewy (CHWY), and eBay (EBAY).
2. Digital Entertainment
The Covid-19 pandemic has also left more Americans in search of digital, at-home entertainment, a trend that’s delivered a huge push for companies like Activision Blizzard that develop online games. New users, time spend gaming and in-game purchases are only accelerating and spell even more lasting benefit for game developers.
Content names like video streaming site Netflix (NFLX), as well as bandwidth and connectivity companies including Comcast (CMCSA) and T-Mobile (TMUS), are names to focus on.
This increased use of high bandwidth applications is likely to continue post-COVID-19 and has the impact of similarly increasing the demand for bandwidth and connectivity. This increases the value of upstream assets in the infrastructure sectors like fiber-based wireline broadband networks and nascent 5G build-outs.
Names to play the space: Netflix (NFLX), Spotify (SPOT), T-Mobile (TMUS), Activision Blizzard (ATVI).
3. Touchless payments
Another trend the stock market still underappreciated is a generational surge in contactless payments, which has recently seen a jump higher amid Covid-19 fears and efforts to minimize physical contact. Companies like Visa (V), Mastercard (MA), and PayPal (PYPL), already integral to the payments world, should be major beneficiaries in the years ahead.
The market assumes that COVID-19 related adoption of digital payments is a near-term benefit for payment service providers, offsetting some of the consumer spending headwinds. However, digitization of payments is part of a multi-year secular growth driver, with COVID-19 as just the latest accelerator.
Names to play the space: Visa (V), PayPal (PYPL), Apple (AAPL), and Mastercard (MA).
4. Telemedicine
Healthcare is one of the most inefficient industries left in the United States. I call it a 19th century industry operating with 21st century technology. While progress has been made, those massive stacks of paper records are finally disappearing, there still is a long way to go.
These days, even doctors don’t want to see patients in person, as they may contract the Coronavirus. Far better to see them online, which could address 90% of most patients. Teledoc (TDOC) does exactly that (click here for my full report).
So does Intuitive Surgical (ISRG), maker of DaVinci Surgical Systems, which enables remote operations for a whole host of maladies. Titan Medical (TMDI) is another name to look at here.
Names to play the space: (TDOC), (ISRG), (TMDI).
Mad Hedge Technology Letter
June 15, 2020
Fiat Lux
Featured Trade:
(DON’T TAKE YOUR EYES OFF BIG TECH SHARES),
(GOOGL), (AAPL), (MSFT), (NFLX), (FB), (AMZN), (IBM), (CSCO)
There is literally no possible scenario in a post-second-wave lockdown where the 7 tech stocks of Facebook, Google, Apple, Microsoft, Netflix, Facebook, and Amazon don’t shoot the lights out unless the world ceases to exist.
25,891 – that is the number of new coronavirus cases registered in the U.S. on June 13th, 2020 which is about in line with the recent near-term peaks of total daily U.S. coronavirus cases.
Why is this important?
Traders are calculating whether a “second wave” will possibly rear its ugly head to crush the frothy momentum in tech stocks.
That is where we are at now in the tech market.
Tech stocks could possibly ride another magnificent ride up in share appreciation if the reopening of the economy can kick into second gear.
Skeptics are sounding the alarms that this is not even the “second wave” and we still in the latter half of the first wave.
Consensus has it that this could be just a head fake.
The jitters are real with recent dive in tech shares.
The five biggest tech companies burned more than $269 billion in value last Thursday - the worst day for U.S. stocks since March and the 25th worst day in stock market history.
Nasdaq stocks ended the day largely 5% in the red with Microsoft shedding $80 billion in market cap in just one day.
Larger drops were led by IBM who lost 9% and Cisco who lost 8%.
It was a dreadful day at the office, to say the least.
We are teetering on a knife's edge and the tension is running high in the White House with Treasury Secretary Steven Mnuchin already announcing that the U.S. can’t afford another lockdown.
It’s not up to him in the end, it’s about how consumers will assess the confronted health risks.
Tech will undoubtedly be dragged down with the rest on the next lockdown sparing few survivors.
The housing market might actually go down as well as the initial push to the suburbs will dissipate and fresh forbearances will explode higher.
Consumers might not even have the cash to pay for their monthly Apple phone service or internet bill if the worst-case scenario manifests itself.
The health scare has already dented new software purchases by small and medium businesses (SMBs) and tech companies in industries such as travel, retail, and hospitality; online ad spending by the likes of automakers and online travel agencies; and smartphone, automotive and industrial chip purchases.
Small business has held off on reducing their tech software spending too much on the expectation that macro conditions will perform a V-shaped recovery.
Numerous tech firms have cited “demand stabilization,” but it’s not guaranteed to last if we revert to another lockdown.
If a lockdown happens again, it will be another referendum on Fed’s enormous liquidity impulses versus the drop in real earnings or flat out losses to tech business models.
Even with the media’s onslaught of vicious fearmongering campaigns, I do believe this is the time for long-term investors to scale into the best of tech such as Amazon, Apple, Google, Microsoft, Facebook, Netflix.
If you thought these 7 companies had anti-trust issues before, then look away.
We could gradually head into an economy where up to 40% of the public markets comprise of only 7 tech stocks which is at a mind-boggling 25% now.
Never waste a good crisis – tech is following through like no other sector!
Bonds don’t make money anymore and hiding out now means putting your life savings into these 7 premium tech stocks.
In the short-term, this is a good opportunity for a tactical bullish tech trade.
Mad Hedge Technology Letter
June 5, 2020
Fiat Lux
Featured Trade:
(EUROPE’S BIG TECH TAX GRAB),
(COMPQ), (NFLX), (APPL), (AMZN), (GOOGL), (MSFT)
Big Tech regulation gets the protection of the U.S. government.
The U.S. government has announced that it is looking into aggressive regulation originating from foreign countries that would die to have a FANG themselves.
This is just another salient data point to which tech will lead us through the maze of complexity that the world now finds itself in.
Many jumped on the bandwagon saying it was a matter of time before regulation destroys big tech, but I will argue that big tech has become too big to fail and the value generated from stock appreciation and tax revenue has become even more important.
Tech has been the only industry to not get pummeled by the coronavirus and the ramifications of social unrest.
The U.S. government doesn’t want to tip over the last remaining pillar the U.S. economy is clinging to, they are desperate to allow the U.S. tech models to stay intact.
The Federal and State budgets have massive holes in them and crushing tech’s contribution to the revenue coffers would be political suicide.
Understanding how the administration cherishes big tech means viewing them through the prism of how other countries treat U.S. tech companies hoping to take a piece of the pie themselves through clever “regulation.”
The European Union, the Czech Republic, and the U.K. plan to siphon off tax revenue from big tech even though confronted by possible trade sanctions from the U.S.
The U.S. probe also will look into the digital services tax plans of Austria, Brazil, Indonesia, Italy, Spain, and Turkey because they are all looking to skim some cash off of big tech’s cash cow.
To read more about the tax fiasco, please click here.
Europe and the emerging economies have been hit harder than the U.S., not in terms of deaths, but in relative economic terms because they don’t possess the rolodex of Fortune 500 companies that can just issue more corporate debt or a Fed central bank that is delivering trillions in liquidity that has saved the stock market.
Washington has specifically been eying up France for a section 301 investigation after it became the first country to fully implement a digital sales tax in July 2019.
France has been quite aggressive in calling out big tech for undermining and exploiting their economy by not paying tax due.
French Finance Minister Bruno Le Maire has been sharp-tongued criticizing America’s big tech companies for running wild in European markets.
A 3% digital sales tax was in the cards before the U.S. slapped on a counter tariff to French goods which delayed the frosty confrontation.
Europe’s vast network of splintered resources and unbalanced innovation combined with Europe’s infamous avalanche of bureaucracy meant that developing a famous tech company fell through the cracks.
Nothing even remotely close to Silicon Valley was ever conjured up inside the confines of the European Union.
The consequences have been costly with most Europeans relying on Apple cell phones, Google software, Netflix subscriptions, and Microsoft enterprise products to get them through the day just like most Americans.
The tax grab is out of desperation as the EU confronts a post-coronavirus world where they are increasingly controlled by decisions from the Communist Chinese and subject to a graying population that delivers a reduced tax revenue base.
The European Union is one of the biggest losers from the coronavirus.
The hands-off warning by the U.S. government on its own big tech companies puts a premium on their existence to the U.S. economy.
Instead of twisting their arm to squeeze every extra tax dollar out of them, they will most likely get more access to deliver the services most Americans are hooked on.
It’s not a secret that current U.S. President Donald Trump is hellbent on destroying big tech but there is no way to do it without destroying the U.S. economy and the U.S. stock market.
At this point, just a handful of tech companies comprises over 22% of the S&P and this will most likely continue as other industries are still licking their wounds with some analysts believing it will take 10 years to get back to late 2019 economic levels.
The most likely scenario for big tech is that the array of crises has delayed real regulation indefinitely and the U.S. will protect big tech from a tax grab abroad.
The best-case scenario is zero regulation leading to zero extra costs.
Either way, stock appreciation is in the cards for tech’s future.
The end result is that big tech could eventually comprise up to 30% of the S&P in the next 3 years which dovetails nicely with a recent analyst call that Microsoft will hit over $2 trillion in market capitalization in the next 2 years.
