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
Mad Hedge Technology Letter
August 17, 2022
Fiat Lux
Featured Trade:
(HERE WE COME VIETNAM)
(AAPL), (WMT)
There is definitely jet fuel left in Apple’s (AAPL) tank.
I guarantee it.
I like some of their recent moves, like today when they announced that they are in talks with Vietnam for the Apple Watch and MacBook to be produced in the country.
Cutting the China risk is a big deal.
The lockdown-obsessed country is a terrible place to headquarter manufacturing operations.
Apple has deadlines to meet and shareholder value to accrue, and that’s not going to cut it when the government doesn’t allow workers to work.
Vietnam’s government and Apple most likely have a wink, wink – nod, nod agreement to chill on the overbearing lockdowns, otherwise, I cannot fathom why they would move from one lockdown-prone country to another one.
Maybe Apple management just like the Vietnamese spring rolls over the Chinese, but I bet most unlikely.
Oh yeh, almost forgot about the tax breaks, Vietnam most likely will load those up to the eyeballs to convince Apple to put factories there.
Brand name companies don’t put their resources in Podunk places for free.
Another bright spot in Apple is the massive stock buyback and large dividend.
Must love a tech company that rewards shareholders and that’s why Warren Buffet loves this gravy train.
Next, the biggest fish in the largest body of water is still churning out its prized iPhone.
Now we are onto number 14 coming to you later this winter!
Demand for the iPhone remains strong. During Apple's third quarter, revenue from this segment rose 2.8% to $40.7 billion.
Selling more iPhones isn't just a matter of generating revenue for Apple. It also helps the company grow its installed base, provided a customer not previously part of Apple's network purchases a new device. That seems to be at least part of the story, as Apple reported that its installed base reached all-time highs across all its products during its latest quarter.
The long-run implications of these developments are significant. The more people are plugged into Apple's services network, the more it can monetize these users, and the more it can grow its services revenue. During Apple's third quarter, the tech giant's services segment grew faster than the rest of its business, recording total sales of $19.6 billion, 12.1% higher than the year-ago period.
This segues nicely to more eyeballs viewing Apple ads. The annual $4 billion ad business will get upgraded as Apple plans to post more ads around its ecosystem. Ad buyers will be chomping at the bit to flood Apple’s network with ads galore. I see this as a great move to add strength to the balance sheet.
The consumer is still consuming. The top 39% of US income earners who are exposed to the stock market are responsible for 65% of consumption so it is a chicken and egg thing…they will feel like they have the license to spend because they feel wealthier.
That’s what I like because the people who cannot even afford iPhones, won’t buy the iPhone 14 and never had a chance to buy an iPhone when they are shopping at the Dollar store.
There will be zero churn here in iPhone usage and I would argue that the attrition rate becomes healthier.
True, I saw that report from Walmart about higher-income families more concerned about rising prices, but this doesn’t mean their budget will exclude the iPhone 14.
Many of these higher-income families need the iPhone 14 for work purposes and many of them have work-from-home jobs where they need an Apple device always glued to their face.
The Apple monster should keep chugging along, and out of all tech companies, this is the one to ride to profits.
“Intellectual property has the shelf life of a banana.” – Said Co-Founder of Microsoft Bill Gates
Mad Hedge Technology Letter
August 15, 2022
Fiat Lux
Featured Trade:
(JUST LET IT FLOW)
(ADAM NEUMANN), (WE), (AAPL)
Flow, a residential real estate company helmed by a famous tech CEO, and a famous tech venture capitalist, is worth $1 billion and has 0 revenue.
Adam Neumann is back!
If many have forgotten, Neumann was that guy who shook down Softbank’s Masayoshi Son by buying up commercial offices and subletting them as shared office space with a pay-as-you-go subletting model.
This was bizarrely branded as a tech company called WeWork (WE).
From the get-go, the business model sounded illogical, but Softbank went with it and before downgrading the valuation to $9 billion, it was supposed to be worth around $50 billion.
Neumann exited the business with a $480 million payout after Softbank negotiated the payout down from $960 million.
The hefty golden parachute is the capital he’s leveraging for his new residential real estate business that now has venture capital backing it.
Famous venture capital giant, known for investments in 100-baggers like Twitter, LinkedIn, and Facebook, Andreessen Horowitz led by Marc Andreesen said it would invest $350 million in Adam Neumann’s residential real estate company Flow.
Andreesen comically claimed that Neuman is a “visionary leader.”
In the same blog, Andreesen explains that renters need a “sense of genuine ownership.”
Smaller housing is now what developers are doing to combat inflation.
My guess from Andreesen’s blog is that giving “renters a sense of security” could mean taking Neumann’s massive real estate portfolio and creating an atrocious tiny house or sleeping pod network.
They could then resell these mini clusters for a giant profit before Neumann’s next victory lap.
Neumann might install free artisanal coffee or frisbee golf for the “making it cool” effect like he did for his office sharing space as well.
According to a Wall Street Journal report in January, Neumann had acquired majority stakes in over 4,000 apartments, valued at $1 billion altogether.
Why not chop them up into 20,000 units, claim these assets are $5 billion, and double the rent or sell them for a higher price?
It’s low-hanging fruit, right?
Flow is scheduled to launch in 2023 and I can tell you there is nothing “visionary” about Adam Neumann and his insidious entrepreneurial spirit.
This is just a glaring example of the late cycle euphoria of tech that will most likely result in the median American living worse off and Andreesen losing $350 million.
This is not only a late cycle but the latest this cycle can get with this type of idea.
We are still living off the Apple (AAPL) iPhone technology and we are on version 13 and up to well beyond a $1,000 price point.
Innovation has hit a saturation point, and once we start getting to iPhone 15 or 17 at a $3,000 or $5,000 price point, the diminishing returns will accelerate.
Investing in a “transformative” big tech-infused residential real estate company headed by Adam Neumann sounds like a suicide mission for Andreesen’s reputation.
Monetizing small apartments is bad optics for Andreesen. It’s not his bread and butter…it’s not cutting edge.
Andreesen’s behavior most likely reveals that one of the leading VCs thinks the metaverse is just a bunch of castles in the sky.
However, these developments also show how minuscule the opportunities are in the land of big tech today.
Lastly, Flow has kept under wraps the master plan for this revolutionary company because of fear of giving away the new secret sauce to residential real estate.
It’s most likely because the secret sauce is not that tasty.
THE GENIUS TECH CEO THAT IS NOT A TECH CEO
“If you don’t have a mobile strategy, you're in deep turd.” – Said CEO of Nvidia Jensen Huang
Mad Hedge Technology Letter
August 12, 2022
Fiat Lux
Featured Trade:
(WAITING FOR LIFT-OFF)
(AMZN), ($COMPQ)
