Mad Hedge Technology Letter
October 7, 2022
Fiat Lux
Featured Trade:
(TECH GROWTH NOT GROWING)
(PTON)
Peloton (PTON), the glamorous fitness-bike-with-a-tablet company, is going through a gut-churning 4th round of job cut this year.
I call this bad management, because it is.
If a company is going to cut jobs, get it over with one sharp cut of the sword, otherwise, the wounds don’t start to heal.
I can’t imagine how low company morale is in the virtual offices of Peloton as the tech firm lurches from one round of job cut to the next.
It’s hard to understand how anybody gets anything done at Peloton because they are too busy going under company review.
The extra cherry on top for this 4th job cut is the CEO has told us the company has 6 months to prove it can survive as a standalone company.
This is again poor management as it essentially signals to workers to find an imminent backup plan before the rate hikes destroy all job openings.
Yes, there is a name that goes with this dark face and that is CEO Barry McCarthy.
The genius management is one of the big reasons why the stock is down 75% so far this calendar year.
Peloton’s recent strategic changes have sparked speculation that it could be looking to sell itself, but at this point, it’s only worth pennies on the dollar from what it once was at the height of late 2020 and early 2021.
That was when Peloton was strutting around like it could no wrong.
They had the hot product but unfortunately failed to capitalize on their head start.
Head starts don’t last long for marginal firms or in the tech world for that matter.
It only takes months for other tech firms to iterate mediocre products into their lineup and PTON let the short-term success get to their head.
Even more surprising was the overconfident nature of the management when they were still a massively loss-making operation.
My recommendation would have been to roll into a more stable cash flow business during the arbitrary lockdowns, but no, PTON is still an analog company when others have gone digital.
They are still selling the same Podunk stationary bike when the smart consumer figured it out by purchasing a stationary bike themselves and installing a tablet stand.
If you want to argue that the PTON exercise classes were worth the subscription then I would also say a smart consumer can just exercise themselves with a timer and self-selected music.
Small backwater firms only get 15 minutes of fame once in a lifetime, yet management did little to launch them into a more stable operational situation and they lost $1.2 billion just last quarter.
Taking a step back, growth tech has been crushed by these interest rate hikes and only the holy grail of tech products is surviving at this point.
Before, zombie firms used to be able to go back to the debt markets to kick the can down the road, but not anymore as loan costs have soared.
No more excesses fueled by cheap capital – it's sink or swim time.
Clearly, management didn’t get the memo and I don’t see growth tech reversing until we are further through the rate rise cycle and debt servicing costs become lower.
Mad Hedge Technology Letter
October 5, 2022
Fiat Lux
Featured Trade:
(THE DEAL GOES THROUGH)
(TWTR), (TSLA)
I believe there are still more twists and turns in the Elon Musk chasing after his favorite social media platform saga.
It’s getting a little out of hand now.
It seems like it’s the story that will never burn out, yet it gives us deep insight into the state of the tech industry.
It could be just a giant ploy to buy Twitter (TWTR) shares on the open market by Musk as it traded all the way down to $35 per share in July.
Musk could have feigned problematic to drag the price of shares down and scoop them up on the cheap to bring down the cost basis of the sale.
This could be the reason why Musk has offered to conclude a $44 billion acquisition of Twitter in a dramatic turn of events.
The SpaceX Chief had written to Twitter yesterday offering to close the deal at the original price of $54.20 a share.
Musk had been set for a courtroom duel with Twitter with multiple legal commentators warning he had a slim chance of succeeding in his attempt to scrap the deal.
On the surface, it certainly does appear as if Musk has been pacified and content with pushing the deal through.
However, the caveat, funding must be secured for this to go through and since the interest rate environment has turned from bad to atrocious, the other question that must be asked is whether banks can provide the necessary funding at exorbitant rates.
Musk is already thinking 5 steps ahead tweeting that the acquisition could be an “accelerant” to “creating X, the everything app”, adding the process would be accelerated by up to five years without giving further details.
Musk’s initial argument in reneging on his offer to buy the company was that it had miscounted the number of spam or bot accounts on its platform.
An “everything app” could mean something similar to China’s WeChat.
A super app in which you can do everything from paying the gas bill, to ordering pizza, and even finding a new girlfriend.
No doubt if the deal goes through, Twitter and Tesla will be inextricably linked with services of each on both.
Getting down to the nuts and bolts, Twitter is a great technology asset and one that is highly scarce.
It’s the center of conversation for anyone who is of high visibility.
Although I believe the price Musk is paying is way too high and $25 billion seems more appropriate, Musk is a victim of his own brinkmanship.
I also believe that a sharp recession that we could experience in 2023 was the real reason for securing the deal now and not later.
If Tesla’s stock tanks in 2023, it would be cringe-worthy to sell stock at depressed prices to fund a Twitter deal.
Musk saw a clear path to financing this deal and that is the clincher. It also bodes ill for tech stocks in 2023 if Musk thinks he needs to cash in now before they head lower as the Fed raises rates aggressively.
However, something tells me this deal will still get dragged out.
“Bitcoin is probably rat poison squared.” – Said Legendary U.S. Investor Warren Buffett
Mad Hedge Technology Letter
October 3, 2022
Fiat Lux
Featured Trade:
(ZUCK LOSING HIS MIDAS TOUCH)
(META), (RBLX)
It’s gotten so bad at Facebook’s Menlo Park headquarters that to attract high-level talent, they have to overpay by almost 5 times.
That’s how unattractive it is to work for Facebook now – almost a permanent stain on one’s resume.
It was just only a few years ago when Facebook or Meta (META) was the go-to growth story in upcoming technology, and its business model, which is still quite profitable, launched them into a trillion-dollar company.
Every Stanford MBA student was clamoring to get into the company at almost any cost. It was a blue chip tech company.
That was then and this is now.
Poor management has started to spiral out of control and that starts from the top down where co-founder and current CEO Mark Zuckerberg is notorious for being a difficult boss to work for.
He is also unfirable because he owns 51% of voting rights and rules with an iron fist like a Russian tsar.
Pouring sand on the fresh wound, Facebook has announced future job cuts for the first time in its history as a company. Might as well go out in style.
The trillion-dollar company that was once unstoppable is now shrinking its headcount to cut costs, an almost unimaginable situation just a few months ago.
This management move is essentially a mea culpa signaling that business decisions have been atrocious.
The flagship product Facebook is pretty much unusable now which is part of the multi-pronged problem.
It’s filled with so much chaos because every high-priced software engineer has attempted to put their stamp on the product by installing additional “improvements.”
The interface is now as convoluted as ever and things just get in the way.
Much like Microsoft word, it’s a software product that transcends time which is why I use Microsoft Word 2010. It also doesn’t force me to upload and save my Word document to Microsoft’s Cloud like the new iteration.
Facebook is the same, better as a slimmed-down simplified version, but that doesn’t boost short-term revenue.
Even if short-term capitalism gets in the way, it doesn’t deny the fact that competition has reared its ugly head and Zuckerberg and Facebook are flat-out losing.
The Chinese communist party-sponsored TikTok is the competitor and is hot with the young crowd with its short-form videos.
TikTok is securing market share from Facebook and Instagram while Zuckerberg pivots to virtual reality in the form of the metaverse.
Zuckerberg’s expensive shift to the metaverse also appears to be a failure which could turn out to be Zuckerberg digging his own Facebook grave.
The most successful metaverse platforms already exist in 2D, with Roblox Corp. (RBLX) and Epic Games Inc.’s Fortnight.
Success has been achieved in the form of regular users with incentives around building and sharing experiences.
Meta has instead focused on the immersive sensation of its virtual reality products, which isn’t all that appealing.
Overpaying software developers because the platform has fallen out of favor is a red flag.
Now, Meta has more red flags than a Chinese communist parade.
Meta now has a $360 billion valuation and the US economy, its biggest revenue driver, is facing a 2023 recession.
The upcoming recession is what first prompted the job cuts, but I believe this will trigger something more cynical in the form of gross underperformance of Meta’s business model and another leg down in its story.
We are inching to the point where Meta will need to perform backflips to turn around the titanic because nothing on the horizon suggests they have anything figured out.
The metaverse – not a solution.
Sell all rallies during the period of high-interest rates.
Meta clearly cannot solve the current challenges that are deteriorating by the day.
“I'd rather Apple cannibalize Apple than somebody else cannibalize Apple.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
September 30, 2022
Fiat Lux
Featured Trade:
(CARVANA ISN’T NIRVANA)
(CVNA), (KMX), (TSLA)
Avoid Carvana (CVNA) stock.
Don’t expect a quick reversal in this digital used-car dealer after the car buying frenzy over the past couple of years.
Why?
We have reached the high water mark in American automobile sales setting up a sharp cliff edge as increasingly, US consumers are either priced out of buying a new used car or have decided to drastically cut back discretionary spending on larger items.
This has sent shockwaves for used car retailer CarMax (KMX) whose stock cratered by 24% and our tech play derivative CVNA who dropped 20% when CarMax’s poor earnings report came out. The price action of these two stocks mirrors each other.
Remember that stocks are forward pricing mechanisms and not backwards to the detriment of these two stocks.
KMX and CVNA are inextricably linked and offer deep insights into the state of each other’s companies.
In a quite damaging earnings report, CarMax was able to increase its gross profit per vehicle by boosting its average vehicle sales price. That’s about all that went right. This appears more like a one-off.
Carvana has a history of overpaying for supply during the boom of used car sales over the past few years.
The numbers are clearly working against CVNA.
Even more worrisome, CVNA is facing an uncertain and rapidly deteriorating macroeconomic environment moving forward.
The data bodes ill for future earnings reports as US consumers abruptly pull back on spending especially at the middle-class to lower income levels.
Just as precarious, many in the middle class to lower echelon prefer to secure automobile loans to finance a new used car purchase.
With interest rate yields exploding to the upside, it sets the stage for not only mass automobile loan delinquency and nonpayment, but it also prices out new car shoppers by making the monthly payment too exorbitant.
There will be few buyers using bank financing to get that new used car they have always wanted. And what non-rich person has a car’s worth of cash lying around these days?
At the ground level, things are bleak.
US consumers are increasingly prioritizing paying the utility and food bills over upgrading, upsizing, or even styling their used cars.
For most US consumers, a brand new car sits in the realm of fantasy as the prices of new cars surge because of high input, logistical, and manufacturing costs. A fresh car from the factory is now a luxury many can’t afford which is why many have turned to the used market.
The worsening consumer sentiment will absolutely negatively impact the volume and nominal price of each individual car sale moving forward.
I believe the data will show up in the last quarter of 2022 and 2023.
As the price of cars falls, CVNA are stuck with a higher cost basis because they snapped up many cars at premium prices and now buyers have vacated. These car dealers’ algorithms haven’t adjusted yet to the paradigm shift.
CVNA will need to consider taking a loss on these automobile units to shed inventory otherwise they are on the hook for high carry costs.
Sadly, the short-term outlook doesn’t provide any silver linings and is getting grimmer by the day.
I fully expect gross margins to crater and nominal sales to fall sharply, causing a severe downgrading in annual revenue.
If the high-end consumer holds up, better to migrate into Tesla (TSLA) stock, but that’s a big if.
