Mad Hedge Technology Letter
January 24, 2022
Fiat Lux
Featured Trade:
(BEST OF THE REST GETS SLAUGHTERED)
(MSFT), (SNAP), (GOOGL), (AAPL), (AMZN), (FB), (TIKTOK)
Popular nostrum has it that earnings will save the stock market.
The strength of corporate America time and time again is on display to show investors how high short-term growth follows through.
Anytime the Nasdaq enters a little rut, earnings bail us out and the next move is usually higher for tech shares.
Well, wait a second, things are different this time.
The bad news now is that confirmation of solid fundamentals during the upcoming earnings season, won’t make the Nasdaq index go higher.
The market is pricing in business as usually for the largest 5 tech stocks which are really the only ones that matter.
Internally, the rest of tech has been deeply damaged by this January sell-off and we are talking about 8-9% one-day sell-offs for the small cap tech growth and I haven’t even mentioned the peak to trough underperformance which is much worse.
Larger cap Enterprise and Cyber Security stocks still boast solid foundations and are going down less than the meme stocks, shelter-at-home stocks, and the best of the rest tech stocks.
Basically, we need to get through earnings because there is minimal upside for tech stocks as investors peruse through a lack of short-term catalysts.
We are stuck in a ditch where monetary and fiscal policy has been set dead straight against an environment of potentially appreciating tech stocks.
Until that changes, I don’t envision a snappy reversal apart from a dead cat bounce to sell into.
Chasing growth in a low-interest rate environment gave us an overshoot to the upside and now that is all working in reverse.
And for the big FANG stocks outperforming small cap, it just means shares are performing better than tech growth because they command lower volatility due to stronger balance sheets.
Resilience to indiscriminate selling is currency in today’s trading world.
Nothing wrong with growth, but they are what they are, so much so that if you cannot generate profitability now, sell-offs are indicative of their poor strategic position among bigger tech.
The carnage under the hood is stark today with Snap stock cratering after the social media company’s shares were downgraded amid risks to revenue growth and tough competition from rival TikTok.
Snap’s headwinds result from a weakening business profile stemming from IDFA headwinds, difficult [year-over-year comparisons] from stellar growth in 2020-21, and increasing competition from TikTok.
IDFA is a serious thorn in the side for the android-based systems of Google as well as for Facebook.
IDFA is Apple minimizing the reach of data harvesting platforms by turning off their data reach and these modifications by Apple (AAPL) to rules for advertising on mobile apps have forced companies like Snap to lower guidance.
When it reported quarterly earnings last October, Snap revealed that the impact on its advertising business could be long lasting and now we are experiencing that.
The IDFA issues could cut growth rates by half as these social media firms have been unable to remedy its loss of reach in digital advertising.
Snap has the unenviable position to not only be behind Google and Facebook, but they are also the next company to be upended by TikTok that has really come on the last few years.
TikTok has supplanted Snap as the go-to social media platform for teens and young adults.
In a rising interest rate environment, the best of the rest like Snap gets punished for not being the best of class.
Snap shares are down over 200% from its peak and threatening to close in on 300% in the red.
Snap represents the fortunes for the marginal tech stocks that rely on growth and that is not working in 2022.
Although not as loss-making as other tech growth, SNAP has been fairly pigeonholed as the tech you don’t want to own now.
It’s a dangerous position to fill in times of the VIX spiking to 30.
The problems don’t stop there with TikTok really threatening Snap’s position and the momentum signaling that Snap is prepared for a deeper slowdown than initially expected.
Snap’s foothold is strongest in the 13-34-year-old range in the U.S., Canada, the U.K., France, Australia, and the Netherlands, but TikTok’s audience is the most similar to Snap’s which means it puts both Snap’s user face time spent and ad dollars at risk.
From a monetary standpoint, digital advertisers will start to play off ad competition between TikTok and Snap, resulting in discounted ad revenue per unit which will narrow margins moving forward.
Not being able to command the prior ad premium is a stinging blow to Snap who thought they were in the driving seat to the third position behind Google and Facebook, but it shows that being a tech minnow is a harrowing experience and fending off toxicity is part of the playbook just to survive.
Head to higher waters in this volatile environment.
“Strip malls are history.” – Said CEO and Founder of Amazon Jeff Bezos
Mad Hedge Technology Letter
January 21, 2022
Fiat Lux
Featured Trade:
(FIVE TECH STOCKS TO LAP UP AT THE BOTTOM)
(MSFT), (TSLA), (GOOGL), (AAPL), (AMZN)
Tech has led the way to the downside as the macro picture sours in the short term.
Valuations have come down from the nosebleed levels and now is the time to pick and choose where to allocate capital for the next leg up in tech.
Avoiding growth tech is something that should be stapled to your bedpost, loss-making companies won’t be able to compete with more established revenue models.
You don’t want to catch a falling knife, but at the same time, diligently prepare yourself to buy the best discounts of the year.
Here are the names of five of the best stocks to slip into your portfolio in no particular order when we find a bottom.
Remember, tech ALWAYS comes back.
Apple
Steve Job’s creation is weathering the gale-force storm quite well. Apple has been on a tear reconfirming its smooth pivot to a software service tilted tech company. The timing is perfect as China has enhanced its smartphone technology by leaps and bounds.
Even though China cannot produce the top-notch quality phones that Apple can, they have caught up to the point local Chinese are reasonably content with its functionality.
That hasn’t stopped Apple from vigorously growing revenue in greater China 20% YOY during a feverishly testy political climate that has their supply chain in Beijing’s crosshairs.
The pivot is picking up steam and Apple’s revenue will morph into a software company with software and services eventually contributing 25% to total revenue.
They aren’t just an iPhone company anymore. Apple has led the charge with stock buybacks and will gobble up a total of $200 billion in shares by the end of 2021. Get into this stock while you can, as entry points are few and far between.
Oh, and their 5G phone is selling like hotcakes. Some one billion need to be replaced to bring consumers into the new high speed 5G world.
Amazon (AMZN)
This is the best company in America, hands down, and commands 5% of total American retail sales or 49% of American e-commerce sales. The pandemic has vastly accelerated the growth of their business.
It became the second company to eclipse a market capitalization of over $1 trillion. Its Amazon Web Services (AWS) cloud business pioneered the cloud industry and had an almost 10-year head start to craft it into its cash cow. Amazon has branched off into many other businesses since then, oozing innovation, and is a one-stop wrecking ball.
The newest direction is the smart home where they seek to place every single smart product around the Amazon Echo, the smart speaker sitting nicely inside your house. A smart doorbell was the first step along with recently investing in a pre-fab house start-up aimed at building smart homes.
Microsoft (MSFT)
The optics in 2021 look utterly different from when Bill Gates was roaming around the corridors in the Redmond, Washington headquarter -- and that is a good thing.
Current CEO Satya Nadella has turned this former legacy company into the 2nd largest cloud competitor to Amazon and then some.
Microsoft Azure is rapidly catching up to Amazon in the cloud space because of the Amazon effect working in reverse. Companies don’t want to store proprietary data to Amazon’s server farm when they could possibly destroy them down the road. Microsoft is mainly a software company and gained the trust of many big companies, especially retailers.
Microsoft is also on the vanguard of the gaming industry and deals like the $86 billion purchase of Activision (ATVI) mean that it will be difficult for another company to loosen MSFTs stranglehold at the top of the gaming ladder.
Alphabet (GOOGL)
Alphabet and Facebook boast a strong duopoly of ad technology. Alphabet generated 80% of its revenue from Google's advertising services in 2020. Google's non-advertising businesses (including subscriptions and hardware) accounted for 12%, while another 7% came from Google Cloud.
Alphabet's total revenue rose 13% in 2020, even as the pandemic throttled the growth of Google's advertising business in the first half of the year. The growth of Google Cloud throughout the year also cushioned that blow.
Google's advertising business recovered in the second half of the year, and Alphabet's operating margin expanded from 21% in 2019 to 23% in 2020. Its diluted earnings per share (EPS) also grew 19%.
In the first nine months of 2021, Alphabet's revenue rose 45% year over year as Google's advertising and cloud business grew in tandem.
Its array of different businesses like LinkedIn, YouTube, and Google Maps means this revenue pipeline is as fertile as can be.
Google’s robust balance sheet will protect itself from any downtrend in business that they might ever suffer.
Tesla (TSLA)
The influential EV leader has really surged ahead of the competition during the pandemic.
Demand for its product is off the charts as they delivered 184,800 Model 3 and Model Y cars in the first quarter, beating expectations and setting a record for Tesla.
However, the company also said it produced none of its higher-end Model S sedans or Model X SUVs for the period ending March. It delivered 2,020 older Model S sedans and Model X SUVs from inventory.
Supply chain issues are likely to remain a challenge for Tesla this year as many EV makers are having a hard time sourcing semiconductor chips.
Tesla is now aiming to produce 2,000 Model S and X vehicles per week later this year.
The company said Monday it expects more than 50% vehicle delivery growth in 2021 overall, which implies minimum deliveries of around 750,000 vehicles this year.
This stock is a must-buy when tech reverses.
Mad Hedge Technology Letter
January 19, 2022
Fiat Lux
Featured Trade:
(MICROSOFT TAKES A GIANT LEAP FORWARD)
(MSFT), (ATVI), (PINS), (GOOGL), (AAPL), (AMZN)
CEO of Microsoft (MSFT), Satya Nadella, and his management team have made an aggressive step towards making inroads to the metaverse.
Gaming will be the launching pad to the metaverse that will first start as digital communities and later evolve into interoperable and integrated digital worlds.
The rest of the metaverse will germinate via these gaming communities and Microsoft knows that which is why they purchased Activision (ATVI) in cash for $68 billion and change.
The price was 3X higher than what they paid for LinkedIn but equally as strategic as many tech behemoths look forward to the next “big thing.”
The deal will mean MSFT will be one of the biggest gaming companies in the world just nudging out China’s Tencent and Japan’s Sony.
In the U.S., they will be by far the biggest gaming company and Nadella has made it a point of emphasis to navigate the gaming world by tapping M&A.
Remember, it was Nadella who built the MSFT cloud from scratch and Microsoft possessing its own stand-alone cloud asset dovetails nicely with their deep dive into gaming.
There are intrinsic synergies resulting from owning both.
The lack of native cloud infrastructure was a critical reason why ATVI gave up, as Chief Executive Officer Bobby Kotick said in an interview, “You look at companies like Facebook and Google and Amazon and Apple, and especially companies like Tencent — they're enormous and we realized that we needed a partner in order to be able to realize the dreams and aspirations we have,” he said.
This was the best Kotick could have wished for and I’ve mentioned this overarching trend of the best Silicon Valley companies getting stronger and now it’s even more pronounced as we are on the verge of exiting this pandemic this year.
In a higher interest rate environment, cash hoarders like Microsoft, Apple (AAPL), and Amazon (AMZN) simply have more ammunition than these smaller outfits who get penalized because of a harder route to access cheap capital making future cash flows costlier.
Now many of these smaller companies are realizing that they need to stand on their own two feet and that’s a scary thought for many CEOs who have been accustomed to tapping the capital markets to paper over the cracks.
What’s good about ATVI?
Activision owns mobile-gaming studio King, maker of Candy Crush, one of the most popular mobile games of all time.
Microsoft has almost zero presence in mobile gaming.
Nadella wants his gaming empire to facilitate direct payment like Apple’s App Store.
That’s effectively the holy grail of today’s gaming.
Microsoft has been at war with Apple and Google, over the fees the app stores charge for games.
It’s no surprise that Microsoft wants complete control over its ability to distribute games and content.
The deal also allows Microsoft an access point to secure an influential pool of gamers creating their own gaming content and worlds.
After adding Minecraft, LinkedIn, and GitHub, Nadella has been on the hunt for a game-changing asset that will drive the bottom line of MSFT via a large community of creators.
He failed to land social video service TikTok, while negotiations with Pinterest (PINS) and Discord were rebuffed.
ATVI is really a feather in the cap for Nadella, who won’t stop there and knows it’s just one battle of a greater war for tech supremacy.
These high-quality assets don’t get cheaper over time either.
Simply put, Microsoft loves subscription businesses, and gaming is among the best of them, and they are the stickiest around with recurring revenue that makes predicting future cash flows that much easier.
The ATVI pickup will raise the price of buying gaming assets across the board as I foresee a rush into these types of assets where not only can a company purchase the content, licenses, and gaming platform, but they can also add top-notch gaming developers which are equally as important as Microsoft tries to outmuscle Apple and Google.
This move is highly bullish for MSFT, so much so, that anti-trust regulators might cast a suspicious eye on this deal.
“Well, if you can buy 1,000 of anything, it doesn't belong on Etsy” – Said CEO of Etsy Josh Silverman
Mad Hedge Technology Letter
January 14, 2022
Fiat Lux
Featured Trade:
(AVOID ARKK INNOVATION FUND LIKE THE PLAGUE)
(ARKK), (GOOGL), (TDOC), (ZM)
I was a little taken aback by the content and attitude of boutique investment fund CEO and CIO of Ark Invest Cathie Woods as I watched her podcast -- set in a palatial estate with vaulted ceilings.
The line that stuck out to me was when she began to explain that the ARK Innovation ETF (ARKK) is made up of “real companies with real revenue.”
Well, so is the liquor store down the street and that doesn’t mean we should all bandy together with each other, sing kumbaya and bet the ranch on this ETF fund that dabbles in ultra-high growth tech stocks.
She continued to praise her strategy by comparing ARKKs relative success with the dot com crash where companies were based on thin air and accrued massive valuations for nothing.
That’s a bad comparison because it was a different era and time, and just because that market then was frothy, it has nothing to do with a higher ARKK stock price in the short term.
She then explains to us viewers that she has never been so convinced by companies like Teledoc (TDOC) and this is a company that has experienced about a 400% drop in share price in the past 365 days.
The reason she gives support for TDOC is because they do $2 billion in annual revenue and then she followed that up by saying how great Zoom Video (ZM) is because their revenue has gone up “4-fold during the coronavirus” but fails to mention that their stock is down about 400% since October 2020.
She laments that these stocks have recently been treated as “stay at home” stocks and I believe that giving such an excuse to why these stocks have been performing poorly lately makes her look like she doesn’t know what she is doing.
If she champions TDOC for doing $2 billion in annual revenue, then why not invest in Alphabet (GOOGL) which does $180 billion of revenue per year. According to her math, GOOGL is a 90X better investment than TDOC.
In her video interview, she starts to explain the inflationary monster which of course, she has an incentive to downplay. Low rates mean a better environment for growth stocks to operate in.
She continues to explain that used car prices are up 60% but that “bubble has burst” because sales are down 4 recently.
Again, she is grasping for straws here because she has an incentive to.
Another data point she tries to spin off as anti-inflationary is the increase in average wages and explains that a 0.6% increase is the “lower end of the guidance” so that certainly will trend down.
Again, nominal wages have exploded in all industries, and this is again proof she likes to reverse engineer stats to fit her own interests.
During this interview or fireside chat, Woods appears to be an expert at cherry-picking data points that are in her best interest.
She fails to acknowledge that her timing of equity purchases is just as important as the type of stocks bought, and her recent timing has been terrible.
Her response to the underperformance was to blame the market and pontificate that the “dismissal (of her ARKK fund ETF) is misplaced” and “analysts and investors aren’t doing their homework.”
Her attempt to shift blame on the market is comical and the real traders in the room know that the market decides the prices of assets and not anyone or any organization can dictate the market to the market.
Showing a little humility might do her a little good as Ark Innovation ETF suffered an outflow of $352 million Wednesday, the biggest one-day drop since March.
She explains the Fed policy towards higher rates as just “jawboning” and begins to explain how she is seeing some anti-inflationary data coming down the pipeline imminently.
I will tell Woods that this “jawboning” isn’t just that, it’s real. The Fed is poised to react to combat inflation and not raising interest rates as fast as she thought doesn’t mean the narrative immediately evolves into something even close to anti-inflationary.
We are so far from that sentiment and her reaction is to dismiss anything that is a threat to her fund.
Sadly enough, she wants things how it was in 2020, massive amounts of quantitative easing for that capital to flow into her ARKK fund.
I am not saying that won’t ever happen again, but the zeitgeist must overcome the higher rates narrative that has completely consumed the broader market which is why tech growth has been hammered lately.
Her failure to act has meant her investors are down 50% in the last 13 months. Buying at tops are dangerous and even more important, she doesn’t describe the current market and describes only what she wants to happen in the future as it relates to higher ARKK prices.
I wouldn’t call that breaching her fiduciary responsibilities, but she is playing a snake oil saleswoman at her finest.
This could be a case of her thinking that she is playing with houses’ money, a longer time frame shows that ARKK is still up more than 300% since 2017.
If you ever feel like getting into high tech growth, avoid this fund, just buy the stocks you like outright.
This is an example of how ETFs will not work in today’s climate, as ETFs only function properly if they go up every year.
The markets could spend the first third of the year grappling with higher rates, and there will be another time to buy tech growth. For Woods to completely ignore her failure of timing the tech growth market, it shows she isn’t looking out for your best interest as an investor.
Avoid tech growth today until we get through the short-term challenges.
