Mad Hedge Technology Letter
June 24, 2022
Fiat Lux
Featured Trade:
(GETTING REAL WITH HOME-SHARING TECH)
(ABNB)
Airbnb’s (ABNB) stock has about halved from $206 at the tech market peak of 2021 to around $100 today.
The strength in the first half of 2021 resulted from the optimism coalescing in travel circles about the reverse of shelter-at-home lifestyle to unfettered international travel.
Remember back then, increasingly more countries were allowing Americans into their land with proof of 2 Pfizer shots.
The $130 to $206 rise was simple an overshoot.
Sentiment was at a generational low during 2020 and the upside was merely a result of the extreme reverse of great pessimism to ultra-optimism.
At a micro level, Airbnb’s business model mirrored the same sentiment of the 2020 tsunami of travel cancellations.
Bad optics has been a staple for CEO Brian Chesky.
Then the onslaught of arbitrary refunds to customers alienated the Airbnb host.
They slowly changed their policy to remove “extenuating circumstances” as a reason to get a full refund.
It wasn’t that I had a problem with Airbnb going to $206.
Like many tech growth stocks, they tend to go parabolic during good times.
Tech firms with better balance sheets haven’t halved in value like Airbnb.
That being said, Airbnb is not worth the current $60 billion and a 74 P/E ratio is too expensive at a fundamental level.
After halving, I still think the valuation is a tad bit too generous.
I believe the company is worth $60 billion only if interest rates are close to zero and not the 3.1% we have today on the 10-year US treasury.
The company is worth significantly less in its current form in 2022 and as rates accelerate from 3.1% to 3.5 or 4%, I expect the company to be worth $45 billion.
On the demand side, travel is a lot more expensive now than ever.
I am not only talking about airfare, but also airport car transfers, price for baggage, entertainment, food, and accommodation which are all trending above 40%-80% depending on the item in tourist areas.
However, Americans are making summer of 2022 the “revenge” trip of a lifetime.
The pre-pandemic overtones of fear of missing out (FOMO) and you only live once (YOLO) are back stronger than ever on short-form video platforms like TikTok and Instagram.
One might believe Airbnb stock should be cruising on auto pilot, right?
Well, the revenge travel of summer 2022 is already baked into the price of the stock since this behavior was largely understood 6-8 months before.
The drop in shares has to do more with the lack of incremental demand that will follow the summer of 2022 as the US barrels towards a recession.
Yes, travel will decelerate fast after summer 2022 as Americans blow their load while failing to reload for the 2nd half of 2022.
This is awful news for Airbnb stock.
Another element is gas prices.
The cost of gas and groceries is about to explode as Americans need to fill up their tank and buy groceries for Independence Day celebrations all in unison.
The pitiful energy infrastructure that has been gutted by the current administration won’t be able to handle the elevated demand.
This will 100% limit the budget of Airbnb for Americans.
Airbnb posted an average daily rate (ADR) of $168.46 in Q1, up 5.3% YoY.
However, its growth has decelerated from previous quarters and I expect it to fall even more later this year.
Until we capitulate, the downtrend likely won’t reverse because the business model isn’t that bad and they do boast a monopoly.
“Life is too short for long-term grudges.” – Said CEO and Founder of Tesla Elon Musk
Mad Hedge Technology Letter
June 22, 2022
Fiat Lux
Featured Trade:
(EARNINGS REVISION IN THE PIPELINE)
(SARK), (ARKK), (AAPL), (UBER), (LYFT)
“We could have a couple of negative quarters” – uttered Federal Reserve Bank of Philadelphia President Patrick Harker.
We badly needed to hear that, because the jargon we’ve been offered so far from federal representatives has not been honest enough.
Ironically enough, saying the truth could offer relief to the Nasdaq index as pricing in a recession moves us along, but that doesn’t mean we are out of the woods yet.
Harker also said it is possible the U.S. economy might see a modest contraction in growth, but he expects the job market to remain strong.
Let me translate that for you.
Harker expects a soft recession, and he feels that it is increasingly priced into stocks.
However, the Nasdaq isn’t priced for a hard recession today, which could be the potential driving force for another dip in the index.
Adding some validation to a possible leg lower is that one of the biggest dip buyers out there, Blackrock (BLK), has said that it is not buying the dip in stocks, as valuations haven’t really improved.
Maybe they are targeting more single-family homes!
To get a real reversal of momentum, we will need not only big stocks like Apple to participate, but also the big buyers.
Don’t look at the Saudi’s either, they are busy earnings $2 billion a day selling oil.
From behind the scenes talks, there is still the hush hush feeling that positioning indicates that we are in for a sharp V-shaped rebound.
How do I know this?
Tech earnings still have a highly optimistic tinge to them, and lower inflation is built into earnings’ calculations.
Don’t forget that many garden-variety tech CFOs built low inflation into their 2nd half of the year revenue models.
Inflation, according to them, is supposed to subside triggering earnings’ beats around the pantheon of great tech companies.
This is what is supposed to happen if consensus plays out.
It rarely does.
Adding fuel to the fire is a proposed federal gas tax holiday by the current administration which is extraordinarily inflationary even if it does help marginal tech companies like Uber (UBER) and Lyft (LYFT) in the short run.
A tax holiday will destroy oil capacity by disincentivizing oil companies in capital investments.
Supply will also crash by encouraging gas hoarding by clever consumers and CEOs hellbent on taking advantage of this brief tax holiday.
The 800-pound gorilla in the room is clearly China.
Imagine if the Communists finally start to peel back their dystopian arbitrary lockdowns and what that will do for rampant inflation.
Pork prices will rise 25% and more importantly oil prices will revisit the peak we had from the on set of the military event East of Poland.
All of this matters for tech companies that consummate contracts for chips, parts, pay salaries to inflationary traumatized coders and build computers.
The conundrum here is that CFOs and CEOs might be guilty of being too positive in regard to the economic cycle.
Consensus estimates (IBES data by Refinitiv) still show very healthy levels of earnings growth. S&P 500 earnings per share for 2022 remain at +10.8%, but the expectations for 2023 continue to reflect a probably optimistic +8.1% growth, with revenues up 4%.
This is ridiculously overly optimistic and isn’t in tune to the realities on the ground.
It is highly plausible we will experience another bear market rally in tech only to be reminded by upcoming earnings’ revisions that there’s still multiple contractions that needs to be rammed down our throat.
Tech stocks will be the most volatile during this period and traders looking for the best bang for a buck should look at smaller positions but in higher beta names like Tuttle Capital Short Innovation ETF (SARK) for the post-bear market rally and ARK Innovation ETF (ARKK) for the current bear market rally.
It’ll be interesting to see if stocks like Apple (AAPL) can eclipse their previous bear market rally peak of $151.
Apple stands at $138, and I presume with these lower gas prices, it should eke out at least $145 before another acid test.
“If you really look closely, most overnight successes took a long time.” – Said Co-Founder and Former CEO of Apple Steve Jobs
When the sushi hits the fan – the sushi really does hit the fan.
We are at the beginning of a massive tech reckoning, and many will shed a tear because of the new changes.
The lavish era of artificially rock-bottom-priced interest rates that fueled an unconscionable tech bubble has now reached an end.
There wasn’t even a main street parade for the closing.
Many fortunes were christened over the past 13 years, mostly by the "Who’s Who" of Silicon Valley as founders and CEOs.
This meant that wild speculation was the flavor of the day which was a force that delivered the equity markets astronomically high tech valuations that we have never seen before.
Those likely won’t be back any time soon.
Many investors haven’t adjusted to the new normal yet.
Similar to 2009, the founders & executives that run VC-backed companies have been quick to figure it out.
They understand that the cost of capital is now exorbitantly high and that high cash burn rates are now impossible.
These artisanal tech companies with zero killer technology like Uber, Lyft, and Peloton are more or less screwed in this new environment.
Even though the executives and founders get what is going on, the same can’t be said on the field of play.
Tech employees who may have enjoyed higher than average success aren’t prepared to enter this new era where accountability and costs matter.
When I talk about employees, I am referring to the ones working in technology in the Bay Area.
Up until now, tech employees have been used to pretty much naming their benefits and compensation package and companies fighting over them.
A rude awakening meets them as tech companies who once showered stock options on new employees now wait in horror as that same method of payment is demonstrably less attractive to future employees with low stock prices.
Most employees have only experienced this amusement park-like setting in the Bay Area, which is what led to many employees dictating the work-from-home situation.
Unfortunately, they might now have to come into the office or get fired.
In many ways, this is not their fault. Excess capital led to excessive showering of employee benefits and heightened expectations.
Unfortunately, you can't ignore the fact that if your company isn't cash flow positive & capital is now expensive, you are living on borrowed time.
During the arbitrary societal lockdown, many companies experimented with remote workers, most from outside of the Bay Area.
Based on anecdotal conversations, this trend is likely to continue post-pandemic. This means the Bay Area employee is now competing with a broader set of alternatives.
In today's world, positive cash-flow matters & surviving requires outmaneuvering competitors.
You need teammates that are ready to grit it out and not whine like an adolescent teenager.
Sadly, we may have conditioned a contingent of employees in a way that is incongruent with this mindset.
As we enter the cusp of layoffs, the guy at the bottom is clearly hurt the most or the last one in is usually the first out.
There is nobody to blame for this situation.
The low rates encouraged that type of poor behavior because they could get away with it.
When everybody is making money, most companies don’t clamp down and top employees can’t get away with a lot.
Tech firms like Teledoc (TDOC) and DocuSign (DOCU) are in real trouble if the capital markets only offer them 10% cost of capital for the next few years.
As the greater economy looks to reset, the goalposts have narrowed in the technology sector and the firms considered “successful” from here on out will have a checkmark next to profitability.
Growth at all costs has now been substituted with survive at all costs in Silicon Valley, so get used to it.
“I do not fear computers. I fear a lack of them.” - Said American writer and former professor of biochemistry at Boston University Isaac Asimov
Mad Hedge Technology Letter
June 15, 2022
Fiat Lux
Featured Trade:
(HIGH STAKES)
(LCID), (RIVN), (TSLA)
CEO of Tesla (TSLA) Elon Musk commented in an interview that he thought EV makers Rivian (RIVN) and Lucid (LCID) would go bankrupt.
Musk can’t seem to avoid media scrutiny.
Yet while there are indeed elements of truth in his words, we should take it with a grain of salt.
Tesla was once in the same position as RIVN and LCID.
Out of everyone in the world, Musk knows how it feels to be in their position now, and it most likely feels like the world caving in on you.
The pressure from shareholders can be intense, and defying gravity by creating new industries can be incredibly tedious.
What are my thoughts?
Give it some time, even though there isn’t much of it.
Musk’s timing for a sucker punch couldn’t be more cruel as we head into the Fed meeting where there is a 95% chance of a 75-basis point.
In an industry where to become profitable takes many years of losses, it hurts to hear that borrowing money will be at least .75% higher tomorrow.
This matters for Rivian and Lucid because they most likely will need to tap the debt market to keep existing.
The debt markets can either be your friend or foe as a startup.
Musk quipped that raising prices will reduce customers.
Talk about stating the obvious and yes, he is technically accurate, but I think that the comments need some color that wasn’t offered during the interview.
Rivian bled $1.5 billion last quarter, and it has significant negative gross margins and so do many unproven tech firms.
If it keeps hemorrhaging on electric vehicles it sells and delivers, it will go bankrupt unless it can raise more money, which is getting more expensive literally by the day.
Lucid is in a similar situation.
They can also sell a stake and release control over the operation which isn’t great either.
However, this is where you’d expect Rivian and Lucid to be at this stage in their evolution and Tesla was in a very similar situation around the same time.
Tesla was losing money and relied on raising more capital for a long time before it got its costs under control.
Costs are out of control because the global supply chain is in chaos, and Musk shouldn’t make it seem like he’s not dealing with the same external forces as Rivian and Lucid.
Tesla has also been raising the prices of their vehicles too so it’s not only Rivian.
Musk also can’t afford to piss off the Chinese communist party so I would say that each company has rather outsized idiosyncratic risk but in different shapes and forms.
Rivian has $16 billion in cash and even if that pile dwindles, it most likely will be enough gunpowder to get them where they need in the short run.
It’s easy for Musk to lash out from his ivory tower and he has every incentive for RIVN and Lucid to fail because every one of their customers potentially converts to Tesla.
Perhaps, he would also buy these bankrupt car companies for a discount if they did happen to topple.
Both Lucid and Rivian have good products that are sleek and what you would imagine from a new EV car.
Getting through the short-term to enjoy economies of scale is where they are trying to go and just like Tesla, it’s a hard slog with many infrastructure problems building new gigafactories along the way.
Oh, and don’t forget that not everybody is still in love with Tesla either.
There are still haters like vaccine entrepreneur Bill Gates who wagered $1 billion in put options against Tesla.
Many aren’t sold on Tesla the business yet even though the car is great.
In the short-term, I believe it’s a rate story and rising rates induced by Central Bank negligence doesn’t invite higher stock prices, nor if a recession hits next year.
On the other side, high oil prices are driving customers to EV purchases and once rate hikes are priced in later this year, EV stocks have a chance to rebound.
