“It has become appallingly obvious that our technology has exceeded our humanity.” – Said German-born Theoretical Physicist Albert Einstein.
Mad Hedge Technology Letter
August 24, 2022
Fiat Lux
Featured Trade:
(ZOOMING TO FAILURE)
(ZM), (MSFT), (TDOC)
Let’s call it what it is – a one-hit wonder.
Zoom Video Technologies (ZM) was the darling of 2020 as we idled in our homes and succumbed to digital use if we liked it or not.
ZM became the hot item because they had an edge in the video conferencing product and their stock price boomed as we were all hooked on their software.
Fast forward to today and ZM CEO Eric Yuan wishes conditions were similar to 2020 so he can somehow combat the growth of Microsoft Teams which is essentially the same product as ZM but offered for free from competitor Microsoft (MSFT).
Teams keeps adding new features and when the inflationary monster disrupts the balance sheet too much, enterprises stop paying for ZM.
ZM is having a tough time battling it out with free software.
The company also cut its annual revenue forecast, saying it’s losing sales from consumers and small business faster than anticipated.
Zoom’s breakneck growth during the pandemic has cooled considerably as offices reopen and other software copycats take shape.
Online sales to consumers and small businesses are expected to decline 7% to 8% this year, Chief Financial Officer Kelly Steckelberg said on a conference call.
Zoom has responded by intensifying its focus on larger enterprise clients and pitching an expanded line of products such as software for customer contact centers.
In June, the company unveiled a new service bundle, Zoom One, to highlight offerings like internet-connected phones and physical conference rooms.
I’m not positive on these secondary offerings, particularly Zoom Phone, and see few use cases for it moving forward.
Sales to enterprise customers are expected to grow by more than 20% this year.
The company also reduced its annual sales forecast to about $4.4 billion from its May projection of as much as $4.55 billion. About $115 million of the cut is due to the “broader economic environment” and $35 million is due to the stronger US dollar.
ZM has effectively glamorized Facetime on the computer and the bad news is that there is no moat around this proprietary technology.
Zoom Phone is literally Facetime with no computer.
Good luck finding the incremental client.
This is the reason for big tech catching up to ZM so quickly and after relinquishing their first mover advantage, there has been no second act or even 1.5 act. It’s a quickly eroding wasteland for the ZM brain trust.
Then the company referenced the “broader economic environment” as to reasons for a lower forecast confirming what many people already know that we are barreling straight into a 2023 recession and ZM will be a discretionary service that gets cut with ease.
Not even the newly crowned federal student loan forgiveness group will spend their new bonuses on this unneeded software.
To be fair, it hasn’t only been ZM that has been body slammed, the other lockdown darling Teladoc (TDOC) which specializes in remote health consultations is trading at 5-year lows.
The stock is almost 10X lower than at its point in February 2021.
Even if there’s an apocalypse, users won’t gravitate to ZM highlighting the outsized risks of a one-trick pony with no competitive advantage.
Stay away from this stock.
“Formal education will make you a living; self-education will make you a fortune.” – Said American entrepreneur Jim Rohn
Mad Hedge Technology Letter
August 22, 2022
Fiat Lux
Featured Trade:
(SELF-DRIVE TO HIGHER PRICES)
(TSLA), (FSD)
If you thought prices couldn’t go any higher and a reversion to the mean is in store, you are painfully wrong.
Sure, maybe you might catch the low inventory 10% sale on the old model, but I can guarantee you that the next iteration will be aggressively pricing itself higher.
If you think your next iPhone will be cheaper than the last, then please give me a call, I would love to debate.
Let me just lay down this one caveat by saying even if inflation falls to 5-7% and the administration calls it deflation or what-not, the aggregate inflation over the past few years will be felt at the individual level, but at the algorithmic stock market trading level, 5-7% is better than 9.1% meaning the stock market will slingshot higher.
Remember that trading is controlled by the algos, it’s around 87% of trading in 2022.
Pulsating price increases are on the menu at EV bellwether Tesla (TSLA) and my best friend Elon Musk’s company.
Elon announced just over the weekend that the price of Tesla’s Full Self-Driving system (FSD) will increase by $3,000 next month, the second time it has risen in price this year.
I can almost guarantee you there will be a 3rd increase by Christmas and 4th increase early in 2023.
That’s just the word out there on the streets.
Tesla began rolling out its FSD Beta software update release version 10.69. Consumers will see the price rise as of Sept. 5.
Every new Tesla vehicle comes with a driver assistance package called Autopilot, which the company says aims to reduce the driver’s overall workload.
That package contains features such as “Traffic-Aware Cruise Control” through which Tesla vehicles can automatically detect stop signs and traffic lights and automatically slow the vehicle down, as well as “Autosteer.”
These rely on eight external cameras fitted in the vehicle along with “powerful vision processing,” sensors, and various software to ensure the vehicle remains within a clearly marked lane and at the same speed as surrounding traffic.
Currently, Tesla’s FSD software costs $12,000 or consumers can purchase a subscription of $199 per month.
Since Tesla’s FSD system began rolling out in 2019 at a price of $5,000, Musk has regularly increased the price. In 2020 it jumped to $10,000 and in September 2021, it rose again to $12,000.
The strategic gambit sees no end.
Very much like the price of a dozen eggs at the grocery store, prices aren’t going down anytime soon.
Any short price reduction is met with a huge price increase in the future.
Technology is feeling many of the same headwinds such as supply chain headwinds, wage spirals for tech developers, stock compensation not logically based on lower stock prices, diminishing returns of technology, cash crunch on balance sheet, and explosive interest rates.
What does this all mean?
Technology, again like current Manhattan rental prices, becomes a luxury.
Your monthly broadband price will become more expensive upon signing the next contract.
Your iPhone and MacBook will get more expensive by the tune of 30%.
Your streaming subscriptions will become more expensive like Disney Plus and Hulu’s $4 per month price hike.
US tech companies producing these must-have items will pass 100% of cost increases to the end consumers knowing the end user cannot progress career and life without critical technologies.
Tech has checkmated us and more importantly, they bask in their strategic position.
Long-term they will still be very successful with much higher stock prices even if Google’s ad revenue tanks in the upcoming recession.
Tech will come back because it always does, and the US economy will not be in a never-ending recession once rates go back to 0.
Naturally, if this scenario plays out, only the Goliaths prosper, and everybody gets wiped out which is why we are seeing tech start-ups going to hell in a handbasket.
When observing the cream of the crop venture capitalist Marc Andreesen deliver $350 million to fantasist Adam Neumann to become a property manager, it’s clear that there are not enough good ideas in tech now and that interest rates are still way too low.
PREMIUM SOFTWARE FOR A PREMIUM CAR
“It's better to be a pirate than to join the Navy.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
August 19, 2022
Fiat Lux
Featured Trade:
(A WALK IN THE PARK)
(RIVN), (AAPL), (LCID)
Rivian (RIVN) produces nice EVs, but their business model still needs to work out the kinks.
Creating an EV company from scratch these days is something that doesn’t get a lot of attention.
Bellwether EV company Tesla (TSLA) built its reputation when doing something like this was easier. We assume it’s like a walk in the park.
Now the post-health situation world has really put the clamps on business with energy not cheap anymore, made in China not working smoothly, and the strong dollar making sales from abroad lower in greenback terms.
Naturally, RIVN has felt all these bottlenecks and the usual result is losing money.
This has forced RIVN to raise prices as it is discontinuing the cheapest versions of its pickup truck and SUV models, citing low customer demand.
Eliminating the base version, coined the Explore package, now means the most affordable pickup truck in the R1T model line will have a price of $73,000—an increase of $5,500, Rivian said. The least expensive version of its all-electric SUV, the R1S, is now $78,000.
These mid-$70,000 EV pickup trucks will most likely be closer to $100,000 in 2-3 years as inflation isn’t going anywhere.
RIVN isn’t profitable when selling at the lower price point and raising prices will effectively lower demand but not by too much.
This isn’t the first time RIVN has jacked up prices, but truthfully, it is just a sign of the times.
Actually, this is the second time that Rivian has gone rogue citing rising raw-material costs, particularly for batteries, and manufacturing difficulties that have led the company to report a $1.7 billion loss for the second quarter.
Today, the world's biggest nickel producer, Indonesia, may impose a tax on exports of the metal this year, President Joko Widodo says.
It pours fuel on the fire.
Back in March, RIVN raised prices by $20,000, even the ones who had already put down a $1,000 deposit to reserve their vehicles.
RIVN is now in an unenviable position of slashing costs to conserve cash and giving priority to certain trims of its vehicles in an effort to boost factory output.
Rivian said it aims to produce 25,000 vehicles this year from its plant in Normal, Ill.
Luckily, the Federal government has given EVs a new subsidy where any electric truck or SUV selling for over $80,000 would become ineligible for the $7,500 tax credit under the planned revisions.
Naturally, after the $80,000 price point breaches, it’s a mere formality that prices will need to compensate the lost tax credit and go straight to $90,000 and above like a runaway train.
As expected, the company is losing lots of money and at the end of June, it had about $15.46 billion in cash and cash equivalents, about $1.5 billion less than at the close of the first quarter.
The company has a great product that consumers want, but producing these cars at scale at an affordable price is the issue.
I would wait for the stock to drop from $35 to $25 then hold long term and incrementally add as the stock goes down.
If the operations teams can pull out a few victories here and there, then sourcing the next factory is in the cards to increase output.
It’s not just a RIVN problem, Tesla (TSLA) and Lucid (LCID) have also increased prices as well, but Tesla has a larger balance sheet and a profitable busine model.
Scale into this stock at lower levels and put it away for the long term. If the company survives, the stock price will be higher in the long term especially if someone can get the Chinese back in the factories.
“Life's too short to hang out with people who aren't resourceful.” – Said Founder and CEO of Amazon Jeff Bezos