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A Lesson in Blitzscaling

One of the fastest parts of technology growing at a rapid clip is fintech.

Fintech has taken the world by storm threatening the traditional banks.

Companies such as Square (SQ) and PayPal (PYPL) are great bets to outlast these dinosaurs who have a laser-like focus on technology to move the digital dollars in an efficient and low-cost way.

Another section of the technology movement that has caught my eye morphing by the day is the online food delivery segment that has soaring operating margins aiding Uber on their quest to go public next year.

There have been whispers that Uber could garner a $120 billion valuation dwarfing Chinese tech giant Alibaba’s (BABA) IPO which was the biggest IPO to date at $25 billion.

Uber is following in Amazon’s footsteps executing the “blitzscaling” method to suppress competition.

This strategy involves scaling up as quick as possible and seizing market share before anyone can figure out what happened.

The growth explodes at such speed that investors pile in droves throwing inefficient capital at the business leading the company to make bold bets even though profit is nowhere to be seen.

Blitzscaling has fueled American and Chinese tech to the top of the global tech charts and the trade war is mainly about these two titans jousting for first and second place in a real-time blitzscale battle of epic proportion.

The audacious stabs at new businesses usually end up fizzling out, but the ones that do have the potential to blaze a trail to profitability.

One business that has Uber giving hope of one day returning capital to shareholders is Uber Eats – the online food delivery service.

Total sales of restaurant deliveries will hit 11% of revenue if the current trend continues in 2022 marking a giant shift in consumer attitudes.

No longer are people eating out at restaurants, according to data, younger generations view ordering from an online food delivery platform as a direct substitute.

This mindset is eerily similar to Millennials attitude towards entertainment.

For many, Netflix (NFLX) is considered a better option than attending a movie theatre, and all forms of outdoor entertainment are under direct attack from these online substitutes.

One firm on the forefront of this movement has been Domino’s Pizza (DPZ).

You’d be surprised to find out that over half of the Domino’s Pizza staff are software developers.

They have focused on the customer experience doubling down on their online platform to offer the easiest way to order a pizza.

In 2012, the company was frightened to death that it still took a 25-step process to order a pizza.

By 2016, Domino’s rolled out “zero-click ordering” offering 15 different ways to order their product across many major platforms including Amazon’s Alexa.

This has all led to 60% of sales coming from online and rising.

The consistency, efficiency, and seamless online payment process has all helped Dominoes stock rise over 800% since May 2012 and that is even with this recent brutal sell-off.

Uber is perfectly positioned to take advantage of this new generation of dining in.

In the third quarter, Uber booked $2.1 billion of gross booking volume in their powerful online food delivery service.

The 150% YOY rise makes Uber Eats a force to be reckoned with.

Uber’s investment into e-scooters and bike transportation stems from the potential synergies of online food delivery efficiency.

It’s cheaper to deliver pizzas on a bicycle or anything without an internal combustion engine.

If you ever go to China, the electric powered three-wheel modified tuk-tuk with a storage compartment in the back instead of passenger seating is pervasive.

Often navigating around narrow alleyways is inefficient for a four-wheel automobile, and as Uber sets its sights on being the go-to last mile deliverer of food and whatnot, building out this vibrant transport network is vital to its long-term vision.

In fact, Uber is not an online ride-sharing platform, it will be something grander and its Uber elevate division could showcase Uber’s adaptability by making air transport cheap for the masses.

As soon as the robo-taxi industry gathers steam, Uber will ditch human drivers for self-driving technology saving billions in labor costs.

As it stands, Uber keeps cutting the incentive to drive for them with rates falling to as low as an average of $10 per hour now.

The golden age of being an Uber driver is long gone.

Uber is merely gathering enough data to prepare for the mass roll-out of automated cars that will shuttle passengers from point A to B.

It doesn’t matter that Lyft has gained market share from Uber. Lyft’s market share was in the teens a few years ago and has rocketed to 31% taking advantage of management problems over at Uber to wriggle its way to relevancy.

It does not reveal how poor of a company Uber is, but it demonstrates that Uber’s network is spread over different industries and the sum of the parts is a lot greater than Lyft can fathom.

Lyft is a pure ride-share company and brings in annual revenue that is 4 times less than Uber.

Naturally, Uber loses a lot more money than Lyft because they have so many irons in the fire.

But even a single iron could be a unicorn in its own right.

CEO Dara Khosrowshahi recently talked about its Uber Eats division in glowing terms and emphasized that over 70% of the American population will have access to Uber Eats by the end of next year.

Uber’s position in the American economy as a pure next-generation tech business reverberates with its investors causing Khosrowshahi to brazenly admit that Uber “suffers from having too much opportunity as a company.”

Ultimately, the amped-up growth of the food delivery unit feeds back into its ride-sharing division. These types of synergies from Uber’s massive network effect is what management desires and dovetails nicely together.

In 2018 alone, 40% of Uber Eat’s customers were first-time samplers.

A good portion of these customers have never tried Uber’s ride-sharing service and when they travel for business or leisure, they later adopt the ride-sharing platform leading to more Uber converts.

Uber Freight has enabled truckers to push a button and book a load at an upfront price revolutionizing the process.

The online food delivery service is the place to be right now and it would be worth your while to look at GrubHub (GRUB).

Quarterly sales are growing over 50% and quarterly EPS growth was 61% sequentially for this industry leader.

Profit Margins are in the mid-20% convincingly proving that the food delivery industry will not be relying on razor-thin margins.

Charging diners $5 for delivery and taking a cut from the restaurateurs have been a winning strategy that will resonate further as more diners choose to munch in the cozy confines of their house.

Blitzscaling has led Uber to the online food delivery business and they are pouring resources into it to juice up profits before they go public next year.

The ride-sharing business is a loss-making enterprise as of now, and Uber will need to exhibit additional ingenuity to leverage the existing network to find strong pockets of revenue.

I believe they have the talent on their books to achieve finding these strong pockets making this company an intriguing stock to buy in 2019.

August 22, 2018

Tech Letter

Mad Hedge Technology Letter
August 22, 2018
Fiat Lux

Featured Trade:
(WHAT’S IN STORE FOR TECH IN THE SECOND HALF OF 2018?),
(GOOGL), (AMZN), (FB), (UTX), (UBER), (LYFT), (MSFT), (MU), (NVDA), (AAPL), (SMH)

What’s in Store for Tech in the Second Half of 2018?

Tech Letter

Tech margins could be under pressure the second half of the year as headwinds from a multitude of sides could crimp profitability.

It has truly been a year to remember for the tech sector with companies enjoying all-time high probability and revenue.

The tech industries’ best of breed are surpassing and approaching the trillion-dollar valuation mark highlighting the potency of these unstoppable businesses.

Sadly, it can’t go on forever and periods of rest are needed to consolidate before shares relaunch to higher highs.

This could shift the narrative from the global trade war, which is perceived as the biggest risk to the current tech market to a domestic growth issue.

Healthy revenue beats and margin growth have been essential pillars in an era of easy money, non-existent tech regulation, and insatiable demand for everything tech.

Tech has enjoyed this nine-year bull market dominating other industries and taking over the S&P on a relative basis.

The lion’s share of growth in the overall market, by and large, has been derived from the tech sector, namely the most powerful names in Silicon Valley.

Late-stage bull markets are fraught with canaries in the coal mine offering clues for the short-term future.

Therefore, it is a good time to reassess the market risks going forward as we stampede into the tail end of the financial year.

The shortage of Silicon Valley workers is not a new phenomenon, but the dearth of talent is going from bad to worse.

Proof can be found in the controversial H-1B visa program used to hire foreign tech workers mainly to Silicon Valley.

A few examples are Alphabet (GOOGL), which was granted 1,213 H-1B approvals in 2017, a 31% YOY rise.

Alphabet’s competitor Facebook (FB) based in Menlo Park, Calif., was granted 720 H-1B approvals in 2017, a 53% YOY jump from 2016.

This lottery-based visa for highly skilled foreign workers underscores the difficulty in finding local American talent suitable for a role at one of these tech stalwarts.

Amazon (AMZN) made one of the biggest jumps in H-1B approvals with 2,515 in 2017, a 78% YOY surge.

The vote of non-confidence in hiring Americans shines an ugly light on American youth who are not applying themselves to the domestic higher education system as are foreigners.

For the lucky ones that do make it into the hallways of Silicon Valley, a great salary is waiting for them as they walk through the front door.

Reportedly, the average salary at Facebook is about $250,000 and Alphabet workers take home around $200,000 now.

Pay packages will continue to rise in Silicon Valley as tech companies vie for the same talent pool and have boatloads of capital to wield to hire them.

This is terrible for margins as wages are the costliest input to operate tech companies.

United Technologies Corp. (UTX) chief executive Gregory Hayes chimed in citing a horrid “labor shortage in the U.S. and in Europe.”

He followed that up by saying the company will have to grapple with this additional cost pressure.

Certain commodity prices are spiraling out of control and will dampen profits for some tech companies.

Uber and Lyft, ridesharing app companies, are sensitive to the price of oil, and a spike could hurt the attractiveness to recruit potential drivers.

The perpetually volatile oil market has been trending higher since January, from $47 per barrel and another spike could damage Uber’s path to its IPO next year.

Will Uber be able to lure drivers into its ecosystem if $100 per barrel becomes the new normal?

Probably not unless every potential driver rolls around in a Toyota Prius.

If oil slides because of a global recession instigated by the current administration aim to rein in trade partners, then Uber will be hard hit abroad because it boasts major operations in many foreign megacities.

A recession means less spending on Uber.

Either result will be negative for Uber and ridesharing companies won’t be the only companies to be hit.

Other victims will be tech companies incorporating transport as part of their business model, such as Amazon which will have to pass on more delivery costs to the customer or absorb the blows themselves.

Logistics is a massive expense for them transporting goods to and from fulfillment centers. And they have a freshly integrated Whole Foods business offering two-hour free delivery.

Higher transport costs will bite into the bottom line, which is always a contentious issue for Amazon shareholders.

Another red flag is the deceleration of the global smartphone market evident in the lackluster Samsung earnings reflecting a massive loss of market share to Chinese foes who will tear apart profit margins.

Even though Samsung has a stranglehold on the chip market, mobile shipments have fell off a cliff.

Damaging market share loss to Chinese smartphone makers Xiaomi and Huawei are undercutting Samsung products. Chinese companies offer better value for money and are scoring big in the emerging world where incomes are lower making Chinese phones more viable.

The same trend is happening to Samsung’s screen business and there could be no way back competing against cheaper, lower quality but good enough Chinese imitations.

Pouring gasoline on the fire is the Chinese investigation charging Micron (MU), SK Hynix, and Samsung for colluding together to prop up chip prices.

These three companies control more than 90% of the global DRAM chip market and China is its biggest customer.

The golden days are over for smartphone growth as customers are not flooding into stores to buy incremental improvements on new models.

Customers are staying away.

The smartphone market is turning into the American used car market with people holding on to their models longer and only upgrading if it makes practical sense.

Chinese smartphone makers will continue to grab global smartphone market share with their cheaper premium versions that western companies rather avoid.

Battling against Chinese companies almost always means slashing margins to the bone and highlights the importance of companies such as Apple (AAPL), which are great innovators and produce the best of the best justifying lofty pricing.

The stagnating smartphone market will hurt chip and component company revenues that have already been hit by the protectionist measures from the trade war.

They could turn into political bargaining chips and short-term pressures will slam these stocks.

This quarter’s earnings season has seen a slew of weak guidance from Facebook, Nvidia (NVDA) mixed in with great numbers from Alphabet and Amazon.

Beating these soaring estimates is not a guarantee anymore as we move into the latter part of the year.

Migrating into the highest quality names such as Amazon and Microsoft (MSFT) with bulletproof revenue drivers would be the sensible strategy if tech’s lofty valuations do not scare you off.

Tech has had its own cake and ate it too for years. But on the near horizon, overdelivering on earnings results will be an arduous chore if outside pressures do not relent.

It’s been fashionable in the past for market insiders to call the top of the tech market, but precisely calling the top is impossible.

The long-term tech story is still intact but be prepared for short-term turbulence.

________________________________________________________________________________________________

Quote of the Day

“By giving people the power to share, we're making the world more transparent,” – said cofounder and CEO of Facebook Mark Zuckerberg.

July 20, 2018

Tech Letter

Mad Hedge Technology Letter
July 20, 2018
Fiat Lux

Featured Trade:
(A SELLERS' MARKET)
(CSCO), (MSCC), (GOOGL), (MCHP), (SWKS), (JNPR), (AMAT),
(PANW), (UBER), (AMZN), (AVGO), (QCOM), (CA), (CRM)

A Sellers' Market

Tech Letter

I bet you are wondering where all that money from the tax cuts is going.

Believe it or not, the No. 1 destination of this new windfall is technology companies, not just the stocks, but entire companies.

In fact, the takeover boom in Silicon Valley has already started, and it is rapidly accelerating.

The only logical conclusion in 2018 is that tech firms are about to get a lot more expensive. I'll explain exactly why.

The corporate cash glut is pushing up prices for unrealized M&A activity in 2018. U.S. firms accumulated an overseas treasure trove of around $2.6 trillion and the capital is spilling back into the States with a herd-type mentality.

I have chewed the fat with many CEOs about their cash pile road map. All mirrored each other to a T: strategic acquisition and share buybacks, period. The acquisition effect will be felt through all channels of the tech arterial system in 2018.

As the global race to acquire the best next generation technology heats up, domestic mergers could pierce the 400-deal threshold after a lukewarm 2017.

Spend or die.

Apple alone boomeranged back more than $250 billion with hopes of selective mergers and share buybacks. Cisco (CSCO), Microsoft (MSFT), and Google (GOOGL) were also in the running for most cash repatriated.

The tech behemoths are eager to make transformative injections into security, big data, semiconductor chips, and SaaS (service as a software) among others.

Hint: You want to own stocks in all of these areas.

Even non-traditional tech companies are getting in on the act with Walmart concentrating the heart of its strategic future on the pivot to technology.

Walk into your nearest Walmart every few months.

You'll notice major changes and not for decorative measures.

U-turns from legacy technology firms hawking desktop computers and HDD's (Hard Disk Drive) suddenly realize they are behind the eight ball.

M&A activity will naturally tilt toward firms dabbling in earlier-stage software and 5G supported technology. This flourishing trend will reshape autonomous vehicles and IoT (Internet of Things) products.

The dilemma in waiting to splash on a potential new expansion initiative is that the premium grows with the passage of time. Time is money.

It's a sellers' market and the sellers know this wholeheartedly.

Unleashing the M&A beast comes amid a seismic shift of rapid consolidation in the semiconductor sector. Cut costs to compete now or get crushed under the weight of other rivals that do. Ruthless rules of the game cause ruthless executive decisions.

The best way to cut costs is with immense scale to offer nice shortcuts in the cost structure. Buying another company and using each other's dynamism to find a cheaper way to operate is what Microchip Technology's (MCHP) culling of Microsemi Corporation (MSCC) in a deal worth $10bn was about.

Microsemi, based in Aliso Viejo, California, focuses on manufacturing chips for aerospace, military, and communications equipment.

Microchip's focal point is industrial, automobile and IoT products.

Included in the party bag is a built-in $1.8 billion annual revenue stream and more than $300 million of dynamic synergies set to take effect within three years. The bonus from this package is the ability to cross-sell chips into unique end markets opposed to selling from scratch.

Each business hyper-targets different segments of the chip industry and is highly complementary.

Benefits of a relatively robust credit market create an environment ripe for mergers. Some 57% of tech management questioned intend to go on the prowl for marquee pieces to add to their arsenal.

Then we have chip company Broadcom (AVGO) led by CEO Hock Tan, whose entire strategy is based on M&A and minimal capital spending.

His low-quality strategy of buying market share will ultimately fritter out. His lack of capital spending was also a salient reason for blocking Broadcom's purchase of Qualcomm (QCOM), which if stripped of its capital spending budget would have fallen behind China's Huawei to develop critical 5G infrastructure.

Tan's strategy flies in the face of the most powerful tech companies that are using M&A to enhance their products expanding their halo effect around the world.

Gutting innovation and skimming profits off the top is an entirely self-serving, myopic strategy to the detriment of long-term shareholders.

Investors punished Broadcom for it's latest investment of CA Technologies (CA) for $18.9 billion, even though this pickup signals a different tack.

CA Technologies is a leading provider of information technology (IT) management software, which suggests a belated move into the enterprise software market dominated by incumbents such as Salesforce (CRM).

Better late than never.

No need to mince words here as 2018 won't see any discounts of any sort. Nimble buyers should prepare for price wars as the new normal.

Not only are the plain vanilla big cap tech firms dicing up ways to enter new markets, alternative funds are looking to splash the cash, too.

Sovereign wealth funds and private equity firms are ambitiously circling around like vultures above waiting for the prey to show itself.

Private equity firms dove head first into the M&A circus already tripling output for tech firms.

Highlighting the synchronized show of force is none other than Travis Kalanick, the infamous founder of Uber. He christened his own venture capital fund that hopes to invest in e-commerce, real estate, and companies located in China and India.

The new fund is called 10100 and is backed by his own money. All this is possible because of SoftBank CEO Masayoshi Son's investment in Uber, which netted Kalanick a cool $1.4 billion representing Kalanick's 30% stake in Uber.

It is undeniable that valuations are exorbitant, but all data and chip related companies are selling for huge premiums. The premium will only increase as the applications of 5G, A.I., autonomous cars start to pervade deeper into the mainstream economy.

Adding fuel to the fire is the corporate tax cut. The lower tax rate will rotate more cash into M&A instead of Washington's tax coffers enhancing the ability for companies to stump up for a higher bill. Sellers know firms are bloated with cash and position themselves accordingly.

Highlighting the challenges buyers face in a sellers' market is Microsemi Corp.'s (MSCC) purchase of PMC-Sierra Inc. Even though PMC-Sierra had been looking to get in bed with Skyworks Solutions Inc. (SWKS) just before the MSCC merger, PMC-Sierra reneged on the acquisition after (SWKS) refused to bump up its original offer.

(SWKS) manufactures radio frequency semiconductors facilitating communication among smartphones, tablets and wireless networks found in iPhones and iPads.

(SWKS) is a prime takeover target for Apple. (SWKS) estimates to have the highest EPS growth over the next three to five years for companies not already participating in M&A. Apple (AAPL) could briskly mold this piece into its supply chain. Directly manufacturing chips would be a huge boon for Apple in a chip market in short supply.

In 2013, Japan's Tokyo Electron and Applied Materials (AMAT) angled to become one company called Eteris. This maneuver would have created the world's largest supplier of semiconductor processing equipment.

After two years of regulatory review, the merger was in violation of anti-trust concerns according to the United States. (AMAT), headquartered in Santa Clara, California, is a premium target as equipment is critical to manufacturing semiconductor chips. (AMAT) competes directly with Lam Research (LRCX), which is an absolute gem of a company.

Juniper Networks (JNPR) sells the third-most routers and switches used by ISP's (Internet Service Providers). It is also No. 2 in core routers with a 25% market share. Additionally, (JNPR) has a 24.8% market share of the firewall market.

In 2014, Palo Alto Networks (PANW), another takeover target focusing on cybersecurity, paid a $175 million settlement fee for allegedly infringing (JNPR)'s application firewall patents.

In data center security applications, (JNPR) routinely plays second fiddle to Cisco Systems (CSCO). Cisco, the best of breed in this space would benefit by snapping up (JNPR) and integrating its expertise into an expanding network.

Unsurprisingly, health care is the other sector experiencing a tidal wave of M&A, and it's not shocking that health care firms accumulated cash hoards abroad too. The dots are all starting to connect.

Firms want to partner with innovative companies. Companies hope to focus on customer demands and build a great user experience that will lead the economy. Health care costs are outrageous in America, and Jeff Bezos could flip this industry on its head.

Amazon (AMZN) pursuing lower health costs ultimately will bind these two industries together at the hip and is net positive for the American consumer.

Ride-sharing company Uber embarked on a new digital application called Uber Health that book patients who are medically unfit for regular Uber and shuttle them around to hospital facilities.

Health care providers can hail a ride for sick people immediately and are able to make an appointment 30 days in advance. It is a little difficult to move around in a wheel chair, and tech solves problems that stir up zero appetite for most business ventures. Apple is another large cap tech titan keeping close tabs on the health care space.

It's a two-way street with health care companies looking to snap up exceptional tech and vice versa.

It's practically a game of musical chairs.

Ultimately, Tech M&A is the catch of the day, and boosting earnings requires cutting-edge technology no matter how expensive it is. Investors will be kicking themselves for waiting too long. Buy now while you can.

Yes, It's All Going Into Tech Stocks

________________________________________________________________________________________________

Quote of the Day

"Companies in every industry need to assume that a software revolution is coming," - said American venture capitalist Marc Andreessen.

Why Tech is Regulation Proof

Tech Letter

Regulation lost again.

If regulation was a team at the 2018 Russian World Cup, they would have already been sent packing in disgrace.

Even if regulators want to regulate, tech companies swiftly respond with an army of well-paid lawyers fighting fiercely for its interests.

Tech is more powerful than government now and the desperation of government intervention after the fact falls on deaf ears.

Investors have even seen this happen in communist China where there are whispers in Beijing that China's BATs are getting too powerful for their own good.

In a major victory in the run-up to the 2019 IPO, Uber one-upped the Brits.

Uber won back its license to operate in the city of London, one of Uber's major growth engines, when British judge Emma Arbuthnot turned over the ruling and gave Uber a 15-month license.

Tech is invincible against the institutions attempting to clamp down on wild business practices involving data.

And this win proves that every emerging tech company should act brazenly and push the line when it can.

If regulations set tech in its crosshairs, this proves there is no recourse.

Tech is disrupting regulation.

Tech is changing so fast that regulators cannot keep up because of the creaky, bureaucratic nature of big government.

Once regulators wrap their heads around a new technology, the next technology is on its way to universal rollout.

If you want to boil everything down to the nuts and bolts, tech is just too nimble.

It can simultaneously morph into anything it wants in a jiffy because any morphing these days involves a computer, Internet connection, and execution ability.

This phenomenon has created a scenario where regulators will always be one step behind the tech companies, which at the same time are staying one step ahead of the hackers trying to skim off their profits or plain out blow a hole in their company.

It is hard to regulate something you do not know about or do not understand.

Even worse, if a technology becomes firmly embedded into popular culture, it's even harder to root it out.

The result is that Uber and the ride-sharing economy is here to stay. Now the most anticipated IPO in 2019 has its best European business up and running again.

When I say nimbleness, this does not just refer to staying ahead of regulators but also the agility to operate in certain geographic specific locations.

In just a few months, Uber shut up shop in Southeast Asia selling its business to Grab, the leading ride-sharing app in Southeast Asia, while receiving a 27.5% stake in Grab.

I have chronicled the problem with American companies entering into Southeast Asia, and this stake proves a shrewd move.

It will materially add to the top and bottom line once Uber goes public.

Southeast Asia is China's sphere of influence, and the special relationships Beijing has procured in the region offers Beijing unfettered access to claim it as its own turf.

This is going on while the Japanese "zaibatsu" and Korean "chaebols" are licking their chops to penetrate the Southeast Asian markets after grappling with an aging society and stagnant profitability.

SoftBank's Masayoshi Son, a recent investor of Uber, has applied pressure on Uber to focus on its premium markets and drop the third world pivot.

Effectively, Uber has done well to seize a stake in a region oozing with Chinese interests in a premium unicorn.

As Facebook has showed, the highest average revenue per user stems from North America and Europe.

Whether it's hawking ads or sharing transportation, companies can extract more profit per user in these two regions.

Migrating up the value food chain is bullish for its financials come the IPO.

London represents a huge opportunity for Uber.

Uber has cornered the London market with more than 3.6 million users serviced by more than 45,000 Uber drivers.

Digging its nails further into its core market will encourage the closing down of the cash burn model that Uber promulgated in its early days.

Before Uber sold its interests in China, it was burning $1 billion per year fighting domestic stalwart Didi Chuxing, one of China's best and brightest unicorns.

The $2 billion Uber lost in two years was enough and avoiding future China risk sealed the move out of China.

That move looks great considering the tariff war playing out in Washington.

The trend of western tech firms doubling down on western markets will strengthen going forward as Europe has the same worries about Chinese tech hijacking Europe's best technology such as China's Midea Group purchase of Germany's best robotic company Kuka in 2016.

China cannot do that anymore in Europe or America.

Uber Eats, one of Uber's hottest growth businesses, has no chance of succeeding in third world countries where delivery charges are a pittance due to cheap labor costs.

This business can only succeed in high transport cost societies.

Uber ran into headwinds using controversial UberPOP, Uber's compact vehicle app in Europe, in countries including Spain, Denmark, Germany, Italy, Finland, Japan, Hungary, and Bulgaria.

Aside from Bulgaria and Hungary, these locations represent high purchasing power countries that fit with Uber's business model.

Each victory in court will create additional income streams, and I am willing to bet on Uber's lawyers in the developed world, rather than a hodgepodge of uninformed regulators.

Imagine how regulators will police artificial intelligence (A.I.) in the future?

Only A.I. engineers understand what is happening under the hood of the car.

Uber will find the will and a way to enter into every market it considers healthy for its technology.

Under the new rules in London, Uber must now report crimes to the police instead of to the transport authority of London.

Drivers can only offer rides in locations where they have proper certifications to work for Uber.

Uber must now give a mandatory six-hour break to Uber drivers who have worked for 10 straight hours.

These new laws are hardly anything extreme and should already have been written into stone beforehand.

As expected, Uber blamed the debacle on Travis Kalanick, the maverick founder and former CEO of Uber. And Uber being "not fit" to operate was entirely convenient to use Kalanick as the scapegoat.

Uber has increased private hired vehicles in London 92% since 2009. Without London, Uber's future profitability and growth story becomes questionable.

Uber has interests in more than 600 cities worldwide and more than 40 of these are in England.

Uber can avoid any major damage with the Brighton's of the world refusing to cooperate, but it cannot lose its higher-grade locations in London, New York, San Francisco, and almost every major mega city in the western world.

They did it.

Tech disrupted regulation again, and next year's IPO should be a stunning spectacle.

It is normal in the current climate for expectations of tech darlings to explode, and 2019 will bring self-driving technology to the public markets creating even more demand for this asset scarce industry.

That is exactly what tech does.

Tech builds industry from scratch and regulators have no chance to control it.

Uber's ultimate goal is to profit from flying cars by 2023, in a new business called Uber Elevate that will cause regulators to fall even further behind the regulation curve as tech makes science fiction a reality in the near future.

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Quote of the Day

"We're in a political campaign, and the candidate is Uber and the opponent is an asshole named Taxi," said founder and former CEO of Uber Travis Kalanick.

June 19, 2018

Tech Letter

Mad Hedge Technology Letter
June 19, 2018
Fiat Lux

Featured Trade:
(TRAVIS IS BACK!),
(UBER), (RDFN), (Z), (LEN), (CRM), (MSFT), (AAPL)

Travis is Back!

Tech Letter

Travis Kalanick is back in full force after his Uber fiasco.

His creation kicked him to the curb preferring a more rigid approach to corporate governance as the 2019 IPO draws closer.

It didn't take much time for him to take stock of his piggy bank.

Yes, the $1.4 billion payout he received means he has nothing to do with Uber anymore.

Some piggy bank.

Travis intends to wield this wad aggressively using his new fund "10100" as his finance vehicle to pounce on hot, new tech names.

Travis doesn't know any other way, and investors should be alert to where he turns to find his new Uber and his new baby.

Future foes should understand Kalanick is one of the most feared disruptors on the face of the earth.

He co-founded Uber in 2009 growing it into the premier transportation platform.

The whirlwind few years launched him from a nobody to one of the premier tech names in Silicon Valley.

So, what's the deal?

What I can tell you is that house prices are about to get a whole lot pricier and there is nothing you can do about it.

Travis Kalanick's investment into house flipping app Opendoor will be the first stage of a torrential stampede of tech capital flowing into this sector.

More importantly, it's a sign of intent by Kalanick.

The real estate industry is the unequivocal prehistoric dinosaur that hasn't changed for decades.

It's almost a matter of time before the process of buying a house becomes digitized, either partially or fully.

Remember, Uber functions as a broker app matching drivers and passengers through a platform built on algorithmic software.

It would make logical sense for tech companies to attack the low-hanging fruit - meaning every industry that places brokers at the heart of business.

The broker app software is tried and tested with a gold stamp of approval. It works, and tech executives understand how to monetize the data.

Traditional brokers would get pummeled in this scenario, as the data applied to a new real estate broker app would eclipse anything a real human would be able to accomplish removing human error.

Real estate is next on disruption pecking order, and tech is coming for its bacon because of the huge sums of money associated with American real estate.

The real estate industry is not a scooter sharing business and requires boat loads of money to get ahead.

Tech has the cash but needs to figure out execution and its future road map.

The bulk of tech capital has been funneled into M&A that has seen tech companies pay multiples above what were guessed as fair value.

Share buybacks have been another hot source of investment.

Opendoor is a house-flipping firm intent on changing the status quo.

The business model entails snapping up distress properties, fixing them up, and selling them for a profit.

Opendoor receives a 6% commission for facilitating this whole process.

Opendoor has already served 20,000 customers saving more than 400,000 of prep time.

It is already on the hook for $1.5 billion in loans. SoftBank's vision fund is knocking on the door eager to become the next investor.

In 2016, this company was valued at $1 billion and after the latest round of financing giving Opendoor another $325 million, that number has crept up to $2 billion.

I have heard from solid sources that the SoftBank capital could be delivered in the next few months, likely paying another solid premium boosting tech valuations across the board.

Paying up has been a universal theme in 2018.

Microsoft's (MSFT) purchase of GitHub and Salesforce's (CRM) purchase of MuleSoft seem like overpaying but appear cheap in hindsight.

With the new cash ready to deploy, Opendoor seeks to expand to 50 cities by 2020, a swift upward jolt from its current 10 cities.

Not only will tier 1 cities feel the brunt of this new development, Opendoor plans to go into the lesser known cities and plans to double its staff from 650 to 1,300 in the upcoming year.

Kalanick caught onto this investment opportunity after one of his former Uber minions, Gautam Gupta, made the jump to Opendoor as COO and liaised CEO Eric Wu with Kalanick to hash out a deal.

It's nice to have friends in high places as Kalanick knows very well.

Even traditional home builders are getting in on the venture capitalist act.

Lennar was one of the investors in the latest round of Opendoor investment, underscoring the existential threat these traditional companies face.

It makes more sense to partner now and form a budding relationship than get utterly wiped out down the road.

Uber hopes to deploy this strategy with Waymo as Kalanick's former company knows it will never possess superior self-driving technology over Waymo.

The Lennar investment also gave Jon Jaffe, the COO of home builder Lennar, a seat on Opendoor's board.

Opendoor is the first serious tech foray into the housing business. It is initiating business on the periphery by focusing on fixer uppers.

This will allow Opendoor to cut its teeth and learn more about the industry before it migrates into higher margin business such as downtown condos that Millennials love.

A swift migration of other tech names will briskly follow into this undisrupted industry if Opendoor can pry open its floodgates.

Fixing up distressed houses is the gateway into brokering and the holy grail of constructing.

Tech could eventually wipe out everyone and control the whole process just like what investors have seen in the transportation industry.

I can imagine a future where tech companies will be the best firms to construct smart houses, which all houses will eventually become.

One massive aftereffect is that the average quality of housing will rise dramatically in all metropolitan areas.

Once the data amasses, Opendoor will be able to identify every property from where it can extract value allowing America to transform into a nation of pristine, smart houses.

Renovating a house and selling it will boost the prices of current houses.

Effectively, tech with gentrify housing creating higher quality but higher priced properties.

Millennials, who have had an awful time jumping on the property ladder, will have an even more difficult task finding a starter home if every starter house turns into a beautiful Tuscan-styled villa from a shabby shed.

Vice-versa, beautiful Tuscan-styled villas that cannot be "flipped" will become smart homes creating even more demand for IoT smart products and higher prices per square foot.

Andreessen Horowitz, a venture capitalist firm based in Menlo Park, California, has been one of the avant-garde tech investors seizing stakes in Twitter, Facebook, Skype, Coinbase, and Lyft.

And these were just some of its investments before 2014!

An industry where Travis Kalanick, SoftBank, and Andreesen Horowitz are piling in must have real estate agents shivering in their wake.

If the general trend keeps up, the Oracle of Omaha Warren Buffett could be next on this powerful list.

He usually likes to buy things he understands with healthy cash flow. I am sure he understands real estate more than Apple (AAPL), in which he had no problem investing.

Traditional home builders and real estate agents aren't the only players that could be left in the dust.

Zillow (Z), the online real estate database company, reacting from the Opendoor threat launched its new business to buy and sell homes.

It was only three years ago that Zillow CEO Spencer Rascoff determinedly hunkered down telling investors "we sell ads, not houses."

Innovation, tech disruption, and competition changes everything.

The stock sold off hard due to the exorbitant costs related to buying homes on the announcement of buying and selling houses.

Margins will get massacred in this scenario, but I applaud the decision to move up higher on the value chain diminishing the existential threat.

This whole industry is about to be flipped on its head, and the winners will be the most innovative companies that incorporate data best.

Rascoff further expanded saying, "I can say without exaggeration, that no company understands the American homebuyer and home seller better than Zillow Group."

Zillow is 12 years old and the12-year treasury trove of data will give it an optimal chance to pivot from selling ads to buying and selling houses.

Seattle-based Redfin (RDFN), Zillow's arch nemesis competitor founded in 2004, has an even larger treasure trove of data dating back 14-plus years and has moved in the same direction.

Redfin was anointed the top tech company to work for in Seattle in 2017 by Hired.com.

There is enormous potential to add another monstrous business to Redfin and Zillow's top line.

The real estate industry is next in line to be digitized, and the Mad Hedge Technology Letter will be the first to know when it's time to dip your toe in.

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Quote of the Day

"As a tech entrepreneur, I try to push the limits. Pedal to the metal," - said former cofounder of Uber Travis Kalanick.

June 7, 2018

Tech Letter

Mad Hedge Technology Letter
June 7, 2018
Fiat Lux

Featured Trade:
(THE NEW TECHNOLOGY PLAY YOU'VE NEVER HEARD OF),
(GM), (UBER), (WMT), (GOOGL)

The New Technology Play You've Never Heard of

Tech Letter

Welcome to the new cutting-edge high-tech play - General Motors (GM).

The tectonic shifts permeating through the tech landscape seem like there is no end.

Another blockbuster announcement hit the airwaves melding together a brand-new partnership between SoftBank and GM's self-driving unit Cruise.

SoftBank invested an eye-popping $2.25 billion into Cruise for a 19.6% stake, adding to its scintillating arsenal of big data assets focusing on transportation including Uber, India's Ola, China's DiDi, and Southeast Asia's Grab.

GM disclosed it will divvy up a further $1.1 billion into the deal.

The Mad Hedge Technology Letter has been an astute follower of the autonomous driving technology race because the technology will be the next proprietary technology to change the world, creating enormous windfalls for the few involved.

The timeline commences later this year, when Waymo, a subsidiary of Alphabet (GOOGL), rolls out a robo-taxi commercial service.

General Motors is right on Waymo's heels rolling out its own commercial service "sometime in 2019."

This momentous investment by SoftBank solidifies (GM) as the No. 2 industry player going forward.

This is a huge victory.

The historic shift symbolizes the next gap up in the technology movement.

Tech stocks have been on a tear of late leaving other equities in the dust.

Waymo was the first mover and confidently never relinquished the top-dog position while avoiding any big disasters along the way.

The unparalleled success of Waymo's self-driving unit has led analysts to put a valuation figure ranging anywhere from $75 billion to $125 billion.

GM paid a measly $1 billion for Cruise in 2016, which is peanuts in today's thriving tech landscape.

Analysts estimated the valuation of Cruise at $4 billion just before the SoftBank investment. The almost 20% stake for $2.25 billion puts the new valuation number over $11 billion, three times more than analysts initially speculated.

Tech acquisitions have exploded in 2018 and show no signs of slowing down.

The hallmarks of Waymo's operation hinge on safety-first initiatives, which went a long way to upholding its industry leader position.

The safety-second attitude led Uber to attempt to short circuit its way to the top from a position of weakness to ill effect.

Uber's technology failed, and the result of the Phoenix, Arizona, casualty was a suspended operation.

Game over.

To stick the blade cleanly through the back, Uber CEO Dara Khosrowshahi revealed that talks are ongoing between Waymo and Uber to add Waymo's technology to Uber's broker app service.

This revelation is interesting considering Uber infuriated Waymo. It means Uber will effectively recede itself from competing with Waymo in self-driving technology.

The company doesn't need to anymore and it burns too much cash.

The protracted court ruling revealed Uber had stolen trade secrets using poached Waymo engineers.

This time, it really is the nail in the coffin for Uber's self-driving technology.

It will change strategy and refine its core app that made them famous in the first place.

The SoftBank investment into Cruise has clear synergies with Uber.

If Waymo refuses to go into bed with Uber, the natural logical step would be for the GM Cruise technology to be integrated with the Uber platform since they are both SoftBank investments.

SoftBank's management will clearly push for this arrangement. It makes no sense to use the Lyft platform with the GM Cruise division.

The tie up with GM Cruise was the catalyst for Uber seeking "talks" with Waymo, knowing very well if talks failed, a backup plan was hatched and would be able to partner up with Cruise's technology.

This is the luxury Uber has now since it is part of the SoftBank umbrella along with the GM Cruise division.

This nullifies the existential threat Uber was anxious about as it is guaranteed a certain slice of the pie leading to material future revenue stream post IPO.

The SoftBank investment is a stamp of approval for the quality of GM self-driving technology.

SoftBank only invests in the most innovative firms.

The conundrum with legacy car companies is that the bulk of revenue is reliant on selling combustion-engine cars that will soon become obsolete.

Any large commitment to R&D, unfocused on its main profits levers, hurt margins. Investors do not buy American car manufacturers that operate at a loss.

Therefore, legacy companies are penalized for spending on new businesses that could be hit or miss.

They stick with their bread and butter through thick and thin because that is what investors expect them to do. This was why Walmart (WMT) sold off when it acquired a stake in Flipkart.

A certain type of Walmart investor would be aghast at this unexpected new direction and amount of dollars drained.

In support of Walmart, CEO Doug McMillon has been positively vocal about the pivot to tech and e-commerce.

It should not be a surprise.

Old technology gets swept into the dustbin of history. Examples are legion.

Let me explain why.

The shift from horse-drawn carriages to the automobile was an equally jaw-dropping development at the time.

Not all horse-drawn carriage manufacturers were able to make the massive leap from creating simple horse-carriage passenger vehicles to automotive vehicles with combustion engines.

When Abraham Lincoln was transported to the Ford Theatre the night of his assassination, he was rolling in a Studebaker horse-drawn carriage.

Studebaker, which was established in 1852 with $68 of capital and a tool belt, was the only top-notch horse-drawn carriage manufacturer to make the gigantic shift from horse-drawn carriage builder to automotive producer.

The other players shriveled up and waved the white flag.

Studebaker actually manufactured both horse-drawn carriages and cars from 1902-1920.

The company mutated again during World War II making military vehicles, M29, M29C, and engines for B-17 bombers.

Financial mismanagement ruined the company. In 1963 it shuttered its South Bend, Indiana, factory and then went out of business by 1967, missing out on a chance to take on Uber and Waymo by about 55 years.

Such are the annals of history.

(GM) is the first American legacy car company to make the complicated transition from traditional American car producer to self-driving technology player.

And it could be the only one.

The deal will raise the price range for the Uber IPO planned for 2019. The (GM) cruise division will report financials separately from the rest of the (GM) balance sheet, which could be the precursor to spinning it out as its own company creating more shareholder value.

No matter how you dice this up, (GM) is the real deal. Investors voted with their feet causing the stock to explode skyward closing 13% higher on the news of the investment.

Buy (GM) on the next sell-off instead of chasing the bolted stallion out of the starting gate.

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Quote of the Day

"Indian software engineers are the best in the world; even in Silicon Valley, the best software engineers are Indians," - said CEO of Softbank Masayoshi Son