“Don't be afraid to change the model.” – Said Co-Founder and Co-CEO of Netflix Reed Hastings
Mad Hedge Technology Letter
April 13, 2022
Fiat Lux
Featured Trade:
(THE RISE AND FALL OF SEMICONDUCTORS)
(NVDA), (AMD), (SMH)
The once smoking hot semiconductor industry and its stock prices have rolled over.
First, let me refresh some memories of how we got here in the first place.
During the pandemic and lockdowns, it was thought that semiconductor companies were the winners as consumers, unable to leave their homes, were forced to huddle inside glued to their screens.
Never had the world’s demand for electronics been so elevated and the bringing forward of economic overperformance is now on the downtrend.
It appears that chip companies will be unable to follow up that performance with an encore.
November 2021 represented the short-term high-water mark for chip companies as many stocks in the best of breed have cratered by 50% since then.
AMD (AMD) has dropped to $97 from $155 and the price action is emblematic of boom-bust cycles that chip companies are infamous for.
Now the short-term future doesn’t seem as rosy as it once was and the current uncertainty has delayed investments as chip companies have read the tea leaves and given up capital investments like new chip factories.
Top dog Nvidia (NVDA) which produces CPUs and is at the core of every cutting-edge technology in the world has also been stung by its share price dropping around 30% since the peak in November 2021.
This isn’t the death of the chip industry, and the share price will need to digest the confluence of bad news.
Chip companies are also highly volatile in their price action with the same type of pullback in Apple or Microsoft 3X less volatile.
Peeling back the layers, what is the situation closer to the ground?
The US Central Bank turning on the hawkish turbo boosters mean that many parts of the equity market are feeling their impulsive reaction.
No doubt the Fed has been behind the curve for almost a year, but that’s another topic.
Their sudden reversal means they have no choice but to bring forward a recession by hiking rates faster than expectations and the losers in this is growth tech.
At the consumer level, higher inflation means that sticker prices for electronics have trended higher for various items.
Not only that, the inflation across the board and deep hits to the overall cost of living have taken purchasing power out of the pockets of the median US shopper.
The math simply doesn’t work out if shoppers are paying more for gas, groceries, and housing, they are simply less inclined to refresh their phones, iPads, TVs, and so on.
Other big-ticket items on the chopping block are products like appliances.
There is a major guzzler of chips like washing machines, fridges, and heating and cooling systems that all require sensors.
The semiconductor market is cyclical. When the economy is thriving, it is doing well because when consumers are confident, they tend to spend on the incremental device.
Adding insult to industry is that the tightening of capital markets will make borrowing more expensive and the path to profits narrower.
Just as critical, no CEO or CFO likes to discover that the cost of capital has jumped to a prohibitive rate, because these are the tool they tap to build multi-billion dollar factories.
Holding off on investments sacrifices long-term growth and capacity for short-term balance sheet strength.
Without too much pretentious banter, high interest rates mean relatively less profit.
Much of the decline is starting to get priced into the stock prices of NVDA and AMD.
I believe investors should be dollar cost averaging as these stocks fall possibly another 5-10%.
I would be shocked if these stocks fall another 20% from here.
“Our industry does not respect tradition – it only respects innovation.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
April 11, 2022
Fiat Lux
Featured Trade:
(SMALL EV PLAYERS HIT HARD)
(RIVN), (TSLA), (NIO)
A killer tornado is coming for the global EV sector in the short-term and smaller firms like Rivian (RIVN) will bear the brunt of the damage.
That’s not to say that leaders like Tesla (TSLA) have a slam dunk situation as well.
It’s been rough going of late as the already well-documented spiking inflationary pressures could be followed by even worse inflationary gut punches.
How do I know this?
China.
China’s zero covid policy has made the country incredible successful at defending the health of their population against the novel coronavirus.
The Middle Kingdom has only recorded around 4,000 deaths and they are by far the most successful country partly due to their mass lockdown policies.
However, when large swaths of the population are on the subs bench, the vaunted Chinese manufacturing sector is out of order as well.
Tesla’s Shanghai Giga factory was only supposed to shut down for 4 days, but that has been extended as Shanghai’s spread of the virus has expanded to all parts of the city.
This particular factory is Tesla’s most successful and efficient factory producing 16,000 Teslas every week.
A week’s work usually consists of 6,000 Model 3s and 10,000 Model Ys.
As it stands, Tesla’s Gigafactory in Shanghai was supposed to open this Monday, but again, that date has been pushed back yet again bringing a painstaking wait to 17 days.
That means, in total, an opportunity cost of 40,000 units of Shanghai Teslas that were unable to be completed.
Tesla will again, try to open on April 14th which would represent a full 3 weeks of delays and 48,000 cars unable to be produced.
Elon Musk was a legendary genius to build a Gigafactory in Shanghai and avoiding all US raw material import tariffs.
Romanticizing about a cheap source of labor and reduced building construction costs by 75% definitely help companies stay ahead.
In practice, life as an American corporation in an authoritarian country has its downsides.
Ironically enough, Musk was always unhappy about California’s hostile take on allowing his enterprise to run free from covid restrictions.
I wonder what his thoughts are about cooperating with the Chinese communist party, and does he believe they will cave on the covid restrictions?
Maybe California isn’t so bad for Elon.
The news comes on the heels of another EV firm Nio (NIO) announcing they would stop production because of supply chain issues.
Nio’s supplier partners in several cities including Jilin, Shanghai and Jiangsu suspended production making it impossible to finish the cars in production.
Nio also has a large part of the production process placed in Shanghai such as the testing sites and its factory.
Shanghai is home to the country's greatest number of EV-related companies, totaling 18,200.
This is a gargantuan setback for the global EV sector and this Shanghai lockdown is poised to shake out the bottom line of many of these companies who are exposed to China.
The situation is on the verge of spiraling out of control as another Chinese megacity, famous for its industrial prowess, Guangzhou is now in the early stages of initiating a full-scale zero lockdown as well.
These Chinese supply bottlenecks aren’t just a one-off for the EV players, the Eastern European military conflict has forced Rivian to reduce forecasts and lower expectations for a company that is supposed to become the new Tesla.
Large issues such as shortages of critical parts like semiconductors and other materials and equipment necessary for vehicle production have forced it to make changes to its internal processes that have only increased its expenses.
Skyrocketing bills for essential materials such as nickel, lithium, cobalt, and aluminum have hamstrung RIVN.
The price spikes have forced the EV sticker price to spike as well and an uproar ensued as RIVN even raised prices to customers who pre-booked and already paid their initial deposit.
Rivian later walked back the price hikes to the existing purchases and settled for the price hikes for future RIVN purchase.
Ripping off the first swath of customers is bad management.
In the EV world, we are closely approaching the levels of meaningful demand destruction as many consumers could start balking at extortionate pricing especially when RIVN is already struggling to ramp up production and also when RIVN has yet to prove their quality to the median EV buyer.
Ultimately, the headwinds are real for an upstart like Rivian and they have pulled back production targets of 40,000 this year to 25,000 representing a massive blow to the growth trajectory of the company.
Even the 25,000-unit forecast could get another cut to 15,000 if Chinese zero lockdowns persist, and the Eastern European military conflict unleashes another level of inflationary contagion which is highly plausible.
With Tesla producing record quarterly units, that appears as if it will represent a short-term high-water mark for the EV industry as the fracturing of global supply chains forces many of these companies to go into survival mode.
In the short term, I am highly bearish on NIO and RIVN, but TSLA has more tools at its disposal to find better solutions while having the magic of Elon Musk. Shorting TSLA never makes sense from a trading perspective, but other EV firms do.
“Western upper-middle-class professionals who work through a screen are totally abstracted from tangible physical reality and the real-world consequences of their opinions and beliefs.” – Said American Venture Capitalist Marc Andreessen
Mad Hedge Technology Letter
April 8, 2022
Fiat Lux
Featured Trade:
(BEYOND MEAT CAN’T CATCH A BID)
(BYND), (K)
Food tech was on a run when quantitative easing was generous, and many thought those times would never end.
QE even had the added bonus of propping up zombie companies that were hopeless at turning a profit and in tech, there are many that fit that bill.
With a crashing thud, food tech is going through a cringe-worthy reckoning as a drip of data points suggest that food tech’s growth phase could be in the rear-view mirror.
It’s pretty much inexcusable that something like this happens so early in the growth cycle.
This must be a kick in the teeth for the company Beyond Meat (BYND) which produces the plant-based burger called Beyond Burger.
Total revenue in 2021 of $465 million and a loss of $182 million is hard to swallow.
Exposed at the worst possible time while capital markets close off the spigots means that management will need to turn around this company without the tailwind of low rates.
This could go from bad to worse for BYND and that is why the stock has felt the full force of the pessimism with the stock pulling back from $200 in 2019 to $43 today.
There simply is a reduced appetite for growth tech and food growth tech is on the outer edge of what would be considered reasonable in terms of the risk paradigm.
Investors have deserted this stock in unison, and I expect a cold winter for BYND’s stock as investment research firm Piper Sandler just released its latest teen survey, and it contained a barrage of highly negative news for BYND.
Not only are teens losing interest in plant-based meat alternatives, they also don’t have much of a preference for branded plant-based meat.
Piper analyzed the results of the firm’s survey work with more than 7,000 teens and found that 43% either eat plant-based meat or are willing to, down from 47% last fall and 49% in the spring of 2021.
Of the teens who don’t eat faux meats, 34% said they were willing to try it, down from 38% in the fall, when Piper Sandler last polled consumers.
This huge reversal means that people actually do like eating real animal-based meat instead of the fake stuff ,or the technology morphing plants into fake meat is not good enough.
I believe it’s a mixture of the two.
People want that cow-based steak or burger and there simply isn’t a substitute for it.
The incremental case for eating a Beyond burger is now null and void, consumers might as well microwave some frozen chicken nuggets.
There is no advantage for the Beyond burger and it appears as if BYNDs management got a little too arrogant with their product that isn’t up to snuff.
Limitations are hard to stomach but I should say the truth: plant-based burgers just aren’t that good, period.
Beyond Meat is still the No. 2 preferred brand, just behind privately held Impossible Foods, and ahead of Kellogg’s (K) Morningstar Farms.
While Beyond Meat’s scale is a positive, given it has the resources to develop new products and partner with high-profile partners, a lack of loyalty means it may not be enjoying much of a first-mover advantage.
Often, it can be hard to turn around such negative sentiment.
I would advise investors to not believe in this reversal at this point in the economic cycle.
The Fed is more hawkish by the day and that doesn’t scream to me that investing my money into food tech is a great idea.
The cold winter for food tech is here and better to wait it out and watch from the sidelines.
“It's simple science: exercising creates endorphins and endorphins make us happy. On the most basic level, Peloton sells happiness.” – Said CEO of Peloton John Foley
