July 16, 2019

Global Market Comments
July 16, 2019
Fiat Lux

Featured Trade:

 (ADSK), (WDAY), (SNE), (NVDA), (MSFT),
(CORN), (WEAT), (SOYB), (DBA), (MOS)

The Biggest “Tell” in the Market Right Now

I am constantly looking for “tells” in the market, little nuggets of information that no one else notices, but gives me a huge trading advantage.

Well, there is a big one out there right now. San Francisco commercial real estate prices are going through the roof, smashing new all-time records on a monthly, if not weekly, basis.

The message for you traders is loud and clear. You should be picking up the highest quality technology growth stocks on every dip for they all know some things that you don’t. Their businesses are about to triple, if not quadruple, over the coming decade.

Technology stocks, which now account for 26% of stock market capitalization, will make up more than half of the market within ten years, much of that through stock price appreciation. And they are all racing to lock up the office space with which to do that….now.

San Francisco office rents reached a record in June as the continued growth of tech — now turbocharged by nearly $100 billion in new capital raised in a series of initial public offerings — met a severe space crunch.

Asking rents rose to a staggering $84.16 per square foot annually for the newest and highest quality offices in the central business district and citywide asking rents for such spaces known as Class A are up over 9% from the prior year. The citywide office vacancy rate was 5.5% in June, down from 7.4% a year ago.

Demand shows no sign of stopping. Brokerage CBRE reported around 20 large tenants are seeking more space. Google and Facebook each want to lease as much as 1 million square feet in additional San Francisco office space — room for more than 6,500 employees.

Google (GOOGL) confirmed on Tuesday that it recently signed an office lease at the Ferry Building, its fifth expansion since 2018.

First Republic Bank (FRC) signed the biggest lease of the second quarter. It expanded by 265,000 square feet at 1 Front St. Financial firms and companies in other sectors continue to scrap with tech companies for space.

What’s the tech connection here? The bank’s expansion is fueled largely by the rise of tech. Its clients include wealthy tech employees, and it could benefit from the wave of local stock-market debuts — an example of how the booming tech sector also lifts the financial sector.

In addition, local Bay Area home prices could get a turbocharger by the fall when restrictions on stock sales expire for some companies that went public in the spring.

San Francisco companies that have gone public continue to grow by leaps and bounds. Pinterest (PINS), Slack (WORK), and Uber (UBER) also signed office leases this year with room for thousands of new employees.

Tech companies Autodesk (ADSK) and Glassdoor also signed deals at 50 Beale St. in the spring. In a sign of the city’s rapidly changing economy, old line construction firm Bechtel and Blue Shield, the legacy health insurer, are both moving out of 50 Beale St. Sensor maker Samsara, software firm Workday (WDAY), and Sony’s (SNE) PlayStation video game division also expanded.

Globally, San Francisco has the seventh-highest rents in prime buildings. It’s still behind financial powerhouses Hong Kong, London, New York, Beijing, Tokyo and New Delhi (San Francisco’s average office rents beat out New York.)

Downtown San Francisco’s office costs in top buildings, including service charges and taxes, are $130 per square foot, while Hong Kong’s Central district is the world’s highest at $322 per square foot.

Only a handful of new office projects are being built, and future supply is further constrained by San Francisco’s Proposition M which limits the amount of office space that can be approved each year. That is creating a steadily worsening structural shortage. Only two large office projects are under construction without tenant commitments.

Which tech stocks should you be picking up now? NVIDIA (NVDA) has recently suffered a major haircut, thanks to the trade war with China. Microsoft (MSFT) seems hellbent on making its way from $140 to $200 a share due to its massive expansion into the cloud.



Suddenly, it’s Getting Crowded in San Francisco

June 28, 2019

Mad Hedge Technology Letter
June 28, 2019
Fiat Lux

Featured Trade:


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.


June 19, 2019

Mad Hedge Technology Letter
June 19, 2019
Fiat Lux

Featured Trade:


Freelancing to the Tune of the Gig Economy

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.


June 17, 2019

Mad Hedge Technology Letter
June 17, 2019
Fiat Lux

Featured Trade:


The Flight Path of Uber

If you want a bull out of the gate type technology stock, those are few and far between at this point in the late economic cycle.

There’s another deep-lying value out there and a company who promises the stars and the moon is Uber who announced some eye-opening developments.

Uber Elevate, a division of Uber developing urban flight ridesharing, will have to hold on to its ridesharing business serviced by combustion engine-based cars for quite a while before the company can literally take flight.

This is the type of investment that used to only be reserved for venture capitalists, but Uber going public has given the average American a chance at staking out and holding one of the most controversial yet forward-thinking tech companies in the world.

If Uber can get this up and running, the underlying stock promises to become a ten bagger.

The United States-based subsidiary of the Embraer, EmbraerX, focuses on the development of disruptive businesses.

EmbraerX fundamental pillar is the formation of the future experience of air transport users.

Last week turned heads by debuting a small electric-powered vertical takeoff and landing (eVTOL) vehicle that should transform the future for Uber and other ridesharing companies.

The annual Uber Elevate conference in Washington, D.C. offered a glimmer of hope for Uber Elevate, the company is hellbent on realizing the holy grail of ridesharing transport transforming into autonomous flying vehicles.

A business model concocted with this input would pay dividends for a company who is doling out subsidies to gas-guzzling drivers on the road to service.

Yes, this is the future, but the future is here sooner than you think.

The EmbraerX eVTOL will only be able to handle a few passengers from the get-go.

Unfortunately, autonomous piloting will integrate into the process slowly.

The goal is for the vehicle to be absolutely autonomous according to the manufacturer aligning with Uber’s much-prophesized aim of going fully autonomous.

Dreams aside, there appear to be many technical issues with executing this transformation such as how will a new generation of flying Ubers prevent nonstop collisions above a city?

Uber has buddied up with an army of air traffic controllers, academics, pilots and industry experts to study this issue, while EmbraerX has proposed a pragmatic, simple and robust urban air space design to allow more aircraft to operate in urban environments.

Uber’s flying division plans on rolling out their service by 2023 which is an ambitious target, to say the least.

EmbraerX is partnering up with Uber to try and make this happen.

The locations of Los Angeles and Dallas have been pinpointed as places they plan to demonstrate flight capabilities next year.

The timeline is excruciating tight if Uber plans to get all their ducks in a row and make this a reality.

Uber has toyed with other launch locations such as Brazil, France, and India.

Other aircraft manufacturers are in the mix as well allowing Uber to diversify the risk in case EmbraerX can’t deliver the goods.

Similar air products are being crafted by Aurora Flight Sciences, a Boeing subsidiary, Bell and Karen Aircraft, and a Slovenian manufacturer named Pipistrel Vertical Solutions.

The entire premise behind the aerial ridesharing involves delivering a network of airports.

It will not morph into a door to-door service because a lack of capabilities on last mile deliverability that gas-based cars possess.

The concept of skyports or skystations have been bandied around and will theoretically force passengers to find their way to these launch stations to take advantage of aerial capabilities.

Uber could deliver a 2-1 service with road-based cars delivering the passengers to the sky stations all through the Uber app and a receiving a windfall of 100% of the transport revenues.

Uber is collaborating with renowned architectural and engineering firms on that piece of the project to solve complex challenges.

The sky stations must be built around commercial and retail hubs making this problem even more frustrating because the lack of infrastructure and crowded nature of these tight spaces means this project absolutely cannot fail.

Can you imagine a failed blighted sky port hanging above the retail and tourist mecca of Times Square in Manhattan?

Then there is the issue of these sky ports being monumental eye sores ruining picturesque skylines that many people hold dear to their heart.

The San Francisco skyline and the property owners with panoramic views would lose enormous property value if they were holed up next to an Uber aerial flight route.

The company has brainstormed around building on top of existing under-utilized urban structures like parking garages or even big box malls.

Some of the designers see them as providing not just takeoff and landing platforms for eVTOL vehicles, but an all-inclusive mix of retail, entertainment, and commercial with fitness clubs, supermarkets, and fine dining integrated into the concept similar to Tokyo subway stations.

In terms of time, the benefits would be compelling with flights able to cut commutes down from 2 hours to 15 minutes.

This type of time savings is applicable to megacities such as New York and the San Francisco Bay Area where many employees reside in outer suburbs to only commute into the heart of the city with their cars.

Shared flights would mitigate traffic on the ground giving a 3D solution to the massive traffic problem megacities face.

Meanwhile, as a way of dipping its toe into the waters of urban aerial transportation, Uber is due to launch a new service in New York City on July 9 that relies on an existing technology: helicopters.

The new Uber Copter service is by way of the Uber app allowing customers to call for helicopter rides between lower Manhattan and JFK Airport, pegged at a price of about $250 per person.

Times will be reserved for the afternoon rush hours on weekdays – and only for Platinum and Diamond members of the Uber Rewards loyalty program.

Newark-based HeliFlite will operate this part of Uber offering 5 seats per helicopter.

This test roll-out will give Uber valuable insight into the pitfalls of running an aerial transport network and long-term feasibility of it.

What does this mean for Uber?

Part of accessing the public markets was to supercharge their Uber Elevate division.

It is happening.

The company will be able to access the debt market to fund its deep-lying value divisions much like Google’s autonomous driving division Waymo has been financed by its parent company Alphabet.

Regulatory headwinds still represent a doozy of a thorn in its side.

There is a real chance of Uber Elevate being ready before the government is ready to allow them to flood the sky with aircrafts, and a 2-year delay suddenly grounding the planes with shareholders footing the costs will sap the momentum.

Facebook has grown uncontrollably for over a decade and the government still can’t get their finger out and figure out what to do.

A decade hiatus would be catastrophic for Uber Elevate as flight crashes have a more graphic consequence than personal data being hijacked. 

I give Uber a 40% chance of creating a full-fledged, up and running aerial ridesharing service by 2023.


June 3, 2019

Mad Hedge Technology Letter
June 3, 2019
Fiat Lux

Featured Trade:


Why Uber the 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.