“I fear the day when technology overlaps with our humanity. The world will only have a generation of idiots.” – Said German-born Theoretical Physicist Albert Einstein
Mad Hedge Technology Letter
July 1, 2022
Fiat Lux
Featured Trade:
(WHO’S BEING HONEST?)
(META), ($COMPQ)
It’s fair to take a look at the Nasdaq index and predict there’s a substantially strong chance for the Nasdaq ($COMPQ) to hit 9,310 which is around 12% from here.
The people in charge have been sounding out how great the US economy is with Federal Reserve Chair Jerome Powell saying the US economy is in “strong shape” and the central bank can reduce inflation to 2% while maintaining a solid labor market.
I believe Powell is overplaying his hand and the economy isn’t as strong as he says it is.
Energy stocks were up 29% in the first half of 2022 and their outperformance contributed to pushing other sectors down like technology.
The re-rating of the economy to worse than first thought will translate into worse than expected earnings projections and take us down closer to 9,310 on the technology-heavy Nasdaq index.
That’s only about 12% from today.
The US central bank is still fighting an uphill battle to contain inflation.
Let’s do some simple math.
The Fed Fund’s rate is currently sitting at 1.75%.
Considering that inflation is at 8.65%, the Fed would need to raise rates another 6.85% for real inflation to be zero.
The Fed said they hope to get to 4% by the end of 2023 which would still represent relative inflation of 4.65%.
That’s also 17 months away and worse unintended consequences could manifest along the way which is why raising it all at one time would probably be better than not at this point.
Powell’s comments came at a panel discussion at the European Central Bank’s annual policy forum in Sintra, Portugal.
Ironically, peel back a layer and the environment is starting to unravel in Silicon Valley.
One bellwether to take note of is Meta (META) or Facebook which announced they will cut plans to hire engineers by at least 30% this year, CEO Mark Zuckerberg told employees on Thursday, as he warned them to brace for a deep economic downturn.
“If I had to bet, I'd say that this might be one of the worst downturns that we've seen in recent history,” Zuckerberg told workers in a weekly employee Q&A session.
Zuckerberg confirmed that layoffs are also coming saying the company was “turning up the heat” on performance management to filter out staffers unable to meet more aggressive goals.
“Realistically, there are probably a bunch of people at the company who shouldn't be here,” Zuckerberg said.
Chief Product Officer Chris Cox said that the company must “prioritize more ruthlessly” and that the economy is in “serious times here and the headwinds are fierce.”
Powell’s comments are diametrically opposed to what Zuckerberg and Cox are revealing to their staff and these Facebook executives have access to much more detailed data on the state of the consumer than Powell.
Who should we believe?
Powell just got re-elected to another 4-year term which in fact was a reason why he said he was late to raise rates.
Zuckerberg and Cox can’t afford to wait to get “re-elected” because in the game of public businesses there are only the ones who are left behind and the ones who do the leaving behind.
Powell can slow play the rate situation and pedal out false narratives because he is guaranteed a 4-year term which will most likely be his last before retiring to a nice benefits package and pension.
Zuckerberg is presiding over a failing Facebook business where Meta is sucking up lots of capital expenditure to develop an uncertain metaverse.
My bet is that we will see many tech companies reinforce what Zuckerberg and Cox laid out.
Companies will need to tighten up shops and shave off the fat.
The incremental eyeball is much harder to secure and monetize in July 2022 than it was during the great bull market of 2018 and 2019.
Tesla CEO Elon Musk has also reiterated similar talking points and the odd man out appears to be Powell.
9,310 could be here sooner than we think.
“I fear the day when the technology overlaps with our humanity. The world will only have a generation of idiots.” - Said Theoretical Physicist Albert Einstein
Mad Hedge Technology Letter
June 29, 2022
Fiat Lux
Featured Trade:
(CHINESE TECH ROTATION)
(NIO)
When stocks capitulate, the initial reversion to the mean often is a lucrative bounce.
Chinese tech stocks are going through that honeymoon process right now.
After being targeted systematically, the Chinese communist party changed its tune.
A clearer and more defined regulatory framework around these internet businesses is a definite positive.
There is a growing consensus that the “worst is behind us” for Chinese tech stocks and investment banks have been shooting out stock upgrades.
However, I would recommend readers to never touch Chinese tech stocks like your life depends on it.
Having traveled and lived in the country numerous times, I can say that the foundations are rotten to the core there causing buildings literally to fall over and balance sheets even more rotten than the felled buildings.
Even more damning is that locals assume that everyone else is being shady as well which they feel justifies themselves to participate in less than stellar business practices.
So when I read a report of Chinese EV maker NIO (NIO) denying a report published by short-seller Grizzly Research claiming the company is exaggerating revenue and profit margins, I am not surprised.
Grizzly Research said that NIO is playing “accounting games to inflate revenue and boost net income margins to meet targets.”
The report examined the company’s creation of Wuhan Weineng Battery Assets Company.
The company was created in 2020 and includes NIO, EV battery giant Contemporary Amperex Technology.
The business owns the batteries that NIO drivers can, essentially, pay a monthly fee for in what NIO calls BaaS, short for battery as a service.
NIO pioneered separating the car purchase from the battery purchase. A NIO buyer can choose to buy an EV for a lower price and then pay for the battery on a monthly basis. It’s a way to lower the cost of an EV and make it more comparable to buying and filling up a gasoline-powered car.
NIO recognizes sales when it sells batteries to Weineng. That’s the issue Grizzly has with the company.
Plastering fake sales on the balance sheet that are in effect a sale to oneself and clocking that as gross income is not a shocker.
In fact, I would be surprised if that is all they are doing behind the scenes. Usually, it’s a million times worse in China.
At least there is a product and it’s not a Potemkin product!
Chinese tech companies are not beholden to the same accounting standards as United States registered companies.
They are not GAAP-stamped companies and more or less just fill out their balance sheet as they see fit.
They then register on America’s public exchanges as an American Depositary Receipt (ADR) which doesn’t stringently check the financial health to the same degree as if an American company went public in New York.
Even more bonkers, Chinese management isn’t exposed to any criminal or civil liability which emboldens Chinese tech firms listed as ADRs to lie and cheat as much as possible to boost the share price.
It is now fashionable to say investors are rotating back into China after a year of heavy selling that wiped out almost $2 trillion.
Just be aware that your money could experience a covid zero reaction from the Chinese government and these companies are all dealing in fake numbers to a substantial degree.
That is why I can never recommend buying any Chinese tech stock.
There are so many better opportunities in America.
“A founder is not a job, it's a role, an attitude.” – Said Founder and CEO of Twitter and Square Jack Dorsey
Mad Hedge Technology Letter
June 27, 2022
Fiat Lux
Featured Trade:
(NOTHING ZEN ABOUT ZENDESK)
(ZEN)
Zendesk (ZEN) bought out for $10.2 billion is good business.
This is after ZEN declined a $17 billion offer just 4 months ago which in hindsight looks highly illogical.
This event crystallizes the souring mood in growth technology that has seen a colossal re-rating of its assets during a cringe-worthy stock market sell-off.
These micro-events bode poorly for growth tech and expect desperation from the illiquid.
Remember that the quickest way to go out of business is to not have any money.
Interest rates skyrocketing has really harmed the ability of growth tech to pay interest on their corporate bonds or to even issue reasonable debt.
The attack on balance sheets is what everybody is scared of and rightly so.
The investor consortium buying the company includes Hellman & Friedman, Permira, a subsidiary of the Abu Dhabi Investment Authority, and Singapore’s GIC sovereign wealth fund. Subject to shareholder approval, the deal is likely to close in Q4 this year, after which time ZEN will operate as a private company.
ZEN isn’t all that bad of a company based on pre-pandemic metrics.
However, fast forward to today and the goalposts have switched
, and investors will look at the last 4 years of unprofitable growth as a liability even if gross revenue has been gaining at a nice clip.
Investors need standalone businesses now, not later, and the zombie company of old are receiving the cold shoulder.
Mikkel Svane, Founder and CEO of Zendesk, had hoped to persuade shareholders to buy into a planned $4.1 billion takeover of Momentive Global Inc, owners of the SurveyMonkey platform.
But this was rejected by shareholders following lobbying by a number of activist investors. Around the same time, the firm rejected an unsolicited takeover bid from an unnamed private equity firm, reportedly offering $17 billion.
Svane clearly needs to be offloaded for such a rookie move.
The reading of the tea leaves in the short term is positive for ZEN as a business model with 30% growth rates year-over-year still in play.
My synopsis is that the next solution will be what private equity usually does, gut the company of high costs including expensive workers and spin it out into a profitable enterprise.
Outsource to poor countries like Moldova, and cancel all in-person office facilities.
Then go back to the public markets to fetch a premium before it goes ex-growth and collects a nice profit.
ZEN’s customers with more than $250,000 Annual Recurring Revenue (ARR) make up 39% of the total, up from 34% last year, while customers with more than $1 million ARR were up 65% year-on-year.
The management and shareholder kerfuffle highlights the sensitive times we are in for unprotected tech companies which are essentially the non-Apple, Microsoft, and Google tech firms.
It’s been a whole economic cycle since public tech companies really had any type of stress, and the stress in 2022 is disguised from all directions.
Just look at Founder of Tesla Elon Musk whose Tesla shares are down almost by half from its 2021 peak and most people will understand that it will be harder to buy Twitter when Tesla shares are crashing.
Existing on public tech markets is just harder when the Nasdaq is in a bear market.
Unfortunately for some, the bear market doesn’t treat everybody the same, and now the goal is survival.
Sure, management wants to fight workers on working remotely too much, but in a tight labor market, they understand it’s a battle to fight another day or just outsource abroad.
Egos must be put aside and when a firm fails to accept an offer $7 billion higher than what they settle on, it’s embarrassing.
This must be characterized and recorded as an unmitigated failure.
For a tech firm that only has revenue of $350 million per year, $17 billion is a ridiculous sum to pay.
I value this software company at half of that - $8.5 billion and paying $10 billion for it in this climate is plausible.
The financing for the deal will be provided by Blackstone, almost guaranteeing this will be a thorough gut job and spin back to the public arena.
Gone is the day of overpaying for mediocre tech.
“I don't want to fight old battles. I want to fight new ones.” – Said CEO of Microsoft Satya Nadella
