Mad Hedge Technology Letter
April 25, 2022
Fiat Lux
Featured Trade:
(HIGH STAKES OF TECH EARNINGS)
(AAPL), (MSFT), (AMZN), (NFLX), (FB)
We get a deeper view into the current state of the tech market with the tech behemoths reporting this week.
I don’t expect a Netflix shocker, but the market doesn’t need one for tech stocks to trend lower.
Alphabet, Microsoft, Meta, Amazon, and Apple earnings are on deck at a time when $30 billion of outflows were sucked out of the equity market in the past 2 weeks.
As the falling knife dips lower, many traders are looking out for a decent counter-trend rally, I am too, but you better sell the rip as well. So we stay in a no man’s land of individual stock picking at a time when the garden variety of blasé indexing is now dead.
Another paradigm shift that needs to be addressed is the death of the FAANGs.
The writing has been on the wall for quite some time with Meta or Facebook signaling to the outside world that its business model is broken and news of today of Apple’s factory in Kunshan, China ordered for covid closure is a bad omen for Apple earnings.
At a broader level, Head of the IMF Kristalina Georgieva today suggested sovereign debt defaults are coming down the pipeline which means the IMF will most likely construct a rescue deal that ends in understanding why the national debt mattered.
The world continues this sovereign crisis in all emerging corners of the world from Sri Lanka and Turkey because when the US Fed raises rates, it raises rates on the whole world.
Georgieva also said that Ukraine needs $5 billion per month for the Ukraine economy to survive and that economy is already down more than 50% year to date.
The continuing of debt plugging around the world doesn’t necessarily breed confidence in tech stocks as this industry is heavily reliant on globalization working and cheap rates.
Many sovereigns are starting to freak out about the debt dilemma as we see Japan’s yen forge ahead to 130 to $1 USD.
It appears that we are getting a temporary reprieve in oil and fertilizer stocks because China is so locked down that demand destruction will improve the balance of supply and demand.
Clearly, many of these external factors are unsustainable, and yet they are deeply affecting the Nasdaq index.
The rise in interest rates will have many unintended consequences and the one that matters most for us is delivering higher financing costs to the tech sector.
Without the globalization tailwinds, investors must ditch the double and triple standards of before and solely focus on the fundamentals of a tech firm.
What a thought!
Now that tech firms are accountable for their own performance, we will finally see who can punch above their weight.
Specifically, issues in dire need of netting out are the cloud, enterprise, and the state of the American consumer.
FAANG + Microsoft have lost more than $2.1 trillion in combined market value between them since December, representing nearly half of the S&P 500’s $4.4trn loss over the same period.
This has left five of the six in bear market territory with falls of more than 20%, with Apple the sole exception.
I am expecting strong numbers from Microsoft and Apple as part of branching out in the tech story, where software, semiconductors, cyber security, and product-driven names such as Apple are on the winners’ side of the ongoing digital transformation.
Yet, I believe Microsoft and Apple will use this as a convenient time to guide weak which won’t help the stock prices.
It appears as many of the strong tech performances have been met with giant selloffs and management is acutely aware of that.
Before, liquidity was what mattered and now that has tremendously reversed and the quality of earnings matters more than ever at this point.
"The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge," said the late Professor Stephen Hawking.
Mad Hedge Technology Letter
April 22, 2022
Fiat Lux
Featured Trade:
(THE FALLOUT FROM IBUYING)
(Z)
The real estate platform Zillow (Z) continues to underperform.
Readers should not buy the stock and I will tell you why.
Many of us, including me, want to overperform in business and we concoct all sorts of extreme strategies as the vehicle to take us to riches.
Zillow was not different.
They thought their business was too vanilla and wanted to snort that pixie dust to supercharge their business model.
That is why in 2018, Z launched a new initiative coined Zillow Offers, where it began purchasing homes of its own.
Fast forward about three years and a couple of billion dollars worth of home purchases later, and the company is now in the process of completely shutting down Zillow Offers.
The debacle wasn’t as bad as Bill Ackman’s 3 months pump and dump of Netflix, but it was of the same vein.
Exiting iBuying
The value of the homes Zillow acquired deviated big time. This hurt Zillow's profitability and increased the riskiness of its balance sheet, as the value of the homes could swing wildly.
Zillow Offers, however, was starting to weigh on their normal business of selling ads to people who look at real estate on their platform. Also, 90% of Zillow's offers on homes were rejected by sellers, suggesting that Zillow was hurting its reputation with many homeowners.
Next is where one might believe Zillow can wash its hands of past failures and move on.
Incorrect.
As the 30-year fixed mortgage rate has climbed to 5.20% at the time of this writing, that has turned off many potential buyers and visitors to the website by pricing them out of the market.
Potential buyers are the most ravenous consumers of Zillow’s platform because they hope to jump on a new listing after its listed and convert this info into a new house.
As the fixed mortgage becomes exorbitant, prices have not come down because of a dearth of inventory as builders stick to only building luxury dwellings.
These new record highs in American real estate prices have been achieved on scant volume which is bad news for Zillow’s platform.
As the overarching economy exhibits more stagflation, potential buyers will allocate finite budgets to essentials like food and gas.
Downsizing or upsizing isn’t in the cards for many.
Especially families with children who will essentially need to leave their city if they sold their house and their 2.5% mortgage rate. The move to the sun belt from coastal areas has largely run its course.
The net net of everything is that everybody is staying in place, renters are extending leases even contacting their landlords 4.5 months before the end to lock another year in. People aren’t migrating to other cities as well.
Homeowners are stuck in their houses avoiding a scenario where they can’t find a rental or a new purchase if they sell their current house.
No traffic means no eyeballs for Zillow (Z) and their ad business will suffer.
This is why they were so desperate to supercharge the business model by grasping at straws that glamorously backfired.
Unfortunately, Zillow is still confined by the market we are in amid a backdrop of spiking rates and souring consumer sentiment.
Like the very consumers it services, Zillow, too, cannot upsize and upgrade its situation.
It’s not like they have $43 billion in secured funding to buy a social media company or anything like that.
Now is a time to pull back and sell any tech rallies because innovation at many levels in tech has become stale.
There are many mature models out there that need reinvention or risk becoming zombie companies.
Readers shouldn’t touch Zillow until mortgage rates become more reasonable for the median buyer.
“It has become appallingly obvious that our technology has exceeded our humanity.” – Said Scientist Albert Einstein
Mad Hedge Technology Letter
April 20, 2022
Fiat Lux
Featured Trade:
(PEAK EYEBALLS)
(DIS), (CURI), (ROKU), (PTON), (ZM), (WBD), (FUBO), (NFLX)
Online streamers now have no pricing power.
Remove jacking up prices from the equation and streamers like Netflix (NFLX) and Disney (DIS) look quite mediocre and that’s what the 35% drop in NFLX shares are telling us.
NFLX Ahh factor has vanished.
It used to be that they knew they could raise prices whenever they wanted and that tool in their kit kept investors on board.
CNN+’s dismal foray into pay tv was another red flag when owner Warner Bros. Discovery (WBD) decided to pull all marketing spend because of the paltry viewing results.
There’s just too much competition out there and instead of creating more leeway, growth was pulled forward the past 2 years, and now the chickens are coming home to roost.
Shelter-at-home stocks like Peloton (PTON) and Zoom (ZM) are now surplus to requirements.
It was just not that long ago, that fresh streaming TV options launched at a frenzied pace.
With many subscription services available, streaming entertainment became ubiquitous in U.S. homes as consumers spent large quantities of time and money on streaming media.
As economies reopen following the end of the health situation, and consumers spend more time outside of their homes, there still are just other things to do like going outside.
The idea that there are still many years of streaming growth lie ahead for the streaming industry has turned out to be an utter fallacy.
These are some tech companies impacted.
- Disney (DIS)
The much-anticipated Disney+ streaming service was launched in late 2019, just in time for the health situation.
It added tens of millions of subscribers worldwide in its first year and quickly became the second-largest subscription streaming service after Netflix. Disney also owns the streaming services Hulu and ESPN+ in the U.S. but they still don’t turn a profit on many of these streaming assets yet.
It is unlikely that new content will reverse generating excessive losses.
Better Disney stick to the amusement parks.
- Roku (ROKU)
Streaming TV has been a boon for the smart TV and streaming device maker.
Roku has become the largest TV platform in the U.S., distributing content via The Roku Channel and acting as a hub for households to manage all of their streaming subscriptions.
Roku distributes its smart TV software and streaming devices at minimal cost, making money instead on advertising and by managing subscriptions.
With peak eyeballs on streaming, don’t expect any explosive growth from Roku, in fact, they could go with a whimper and wait for a buyout.
This is a warning sign for any tech company that chooses to not produce their own in-house content and relying on others to draft the narrative of future health is awfully dangerous in a zero sum game.
- fuboTV (FUBO)
Streaming service fuboTV, a relative newcomer to the streaming media industry, went public in 2020.
This small service has gained popularity as a live TV platform, and it’s a top option for those who want to watch live sporting events.
The smaller they come, the harder they fall.
Smaller streaming companies have little recourse when multiple exogenous forces impact the company.
fuboTV is nowhere near profitability and has lost close to half a billion dollars in each of the past 2 years.
Public companies are often harangued for going ex-growth the second they are tradable in New York, and this is the epitome of what I am talking about.
The stock has gone from $35 to $5 today in the past 5 months.
Don’t catch a falling knife here.
- CuriosityStream (CURI)
CURI is another newbie to the dying streaming industry.
This streaming media company focuses on documentaries and science content and was founded by Discovery’s
CURI is competing against some well-entrenched rivals in the non-fiction TV space, including Discovery and Disney’s National Geographic (available on Disney+).
The young company keeps its content creation costs relatively low since it focuses on educational material and partners with universities, but who really wants to see this type of content anyway.
This company sounds boring and naïve.
CURI’s stock price has gone from $17 to $2 in the past 5 months.
Avoid like the plague!
Mad Hedge Technology Letter
April 18, 2022
Fiat Lux
Featured Trade:
(OMINOUS SIGN FOR TECH EARNINGS)
(NFLX)
A market nostrum I religiously follow of not catching a falling knife could not resonate more with the current situation at streaming giant Netflix (NFLX).
The stock has imploded from $690 to $330 in less than 6 months.
November 2021 represented the high-water mark for many tech growth stocks and NFLX has been dragged into this mess as institutions and hedge funds rush to de-lever their tech portfolio as the panic of higher rates sets into the trading environment.
Does this mark the end to the NFLX model that was the darling of this bull market for so long?
Investors must grapple with this salient question.
NFLX must tap into the bond market to secure funding in order to supply us with high-quality content, so this question is really the crux of the issue.
We are certainly reaching an inflection point where many questions are still in need of answers.
As we approach NFLX’s earnings report tomorrow, the bar has been set extremely low for NFLX.
The backdrop is poor with weekly earnings adjusted for inflation decelerating at the fastest since the housing crisis of 2008.
There’s not a lot to look forward to in the tech world as higher expenses are destroying demand, delaying capital investments, and wage increases are depressing the bottom line at a time when supply chain bottlenecks are going from bad to awful.
NFLX is a product that isn’t essential to daily life like energy or food and non-essential services are the services that are getting cut in 2022.
NFLX also has a Russia problem as the company suspended operations in Russia on March 6 with no end in sight to when or if they might return.
Russia had 1 million NFLX subscribers which only represents a drop in the bucket of the 221 million total NFLX subscribers.
Therefore, I must say that the hit to the bottom line will be miniscule if anything.
However, this proves the point of NFLXs arduous slog through iterating in the emerging world. It’s not as easy when you enter a territory with different rules, currency, culture, and rule of law.
For instance, NFLX isn’t even allowed in China and India has fierce competition from local streaming bulwarks.
If they want to return to Russia, NFLX must first answer to breaking Russian law when they refused to abide by a new law that would require the streamer to include 20 "free-to-air" Russian State TV channels.
NFLX remains heavily focused on the emerging world as it looks to aggressively expand its footprint overseas. Four Russian originals were in the midst of production prior to the suspension. The projects have since been put on ice indefinitely.
Sadly, the saturation of NFLX’s cash cow in America and other rich Western democracies has reared its ugly head.
A multipronged revenue slowdown could spiral out of control.
The low-hanging fruit has been plucked and NFLX is still a model that relies on explosive growth to net the incremental subscriber.
It’s not working anymore and there is no plan B which could result in underperformance of the content quality.
Most of the bullishness in the stock’s price action coalesces around higher than expected subscription adds and without that, there is a dark future waiting for NFLX.
In addition to subscriber growth, analysts predict that management will have to answer other key questions, with a particular focus on business operations and profitability, the company's password sharing crackdown, gaming strategy, M&A, and more.
In the near term, NFLX’s guide is more important than ever.
In the heat of deglobalization, a leveraged globalized strategy triggers cognitive dissonance. A strategic reset is needed.
I can envision NFLX winning in some countries and losing in others, but to copy and paste that strategy to every emerging country, which usually has a weak rule of law, sounds like a recipe for continuous weak guidance in the new normal we are in.
Even more worrisome, as high inflation bites more at home, Americans might start to cut back on their NFLX and substitute it with free ads on YouTube and that’s the tail risk that’s not baked into the price of the stock yet.
