Mad Hedge Technology Letter
January 7, 2022
Fiat Lux
Featured Trade:
(THE DEATH OF VISA AND MASTERCARD)
(MA), (V), (SQ), (PYPL), (AFTPY), (AFRM), (AMZN)
Visa and Mastercard’s card networks are a relic of the past, not in terms of reach or footprint, but the technology of it.
This will cost their stock price and we are already seeing it play out in the market.
The canary in the coal mine was fintech players Square (SQ) and PayPal (PYPL) whose share prices were pummeled at the back end of last year.
PYPL is down 40% from its 2021 peak and SQ experienced a similar 42% drop.
This fierce competition and the crowded marketplace have investors paying less of a premium than ever before.
In a tightening rate environment, it’s clear the wolves are out for more flesh and the contagion will spread to those further up the food chain.
Fintech business models aren’t as robust or foundational as the bulwarks of MA and V, but questions must be asked if small businesses aren’t willing to pay an extra 2% on sales for outdated technology.
The fintech space has moved a long way in a short amount of time causing investors to be concerned about secular growth sustainability.
Among them are concerns that consumers are shifting to debit, away from higher-margin credit cards.
Consumers are also using more alternative payment methods that may bypass the card networks, including “buy now pay later” services offered by companies like Klarna, Afterpay (AFTPY), and Affirm (AFRM).
Visa has also come under pressure from a recent announcement by Amazon.com (AMZN) that next year it will stop accepting Visa-branded credit cards issued in the United Kingdom and this could be the beginning of a narrowing of Visas’ moat that could trigger a domino effect in other rich western countries.
The bulls would say that the stocks could undergo a reversal if the Omicron variant is not as bad as initially thought creating a tsunami of consumer spending massaging the bottom line for Visa and Mastercard.
But it’s looking more like V and MA are the victims of tightening travel restrictions around the globe and elevated positive cases that are immobilizing consumers.
The big card networks rely heavily on revenues related to cross-border travel as consumers and businesses use their cards for airfare, Airbnb’s, and Ubers, as well as duty-free gifts in foreign countries.
Multiples may need to come down if the Omicron variant puts the shackles on travel as countries reimpose bans or quarantine rules.
Investors had been counting on a recovery in cross-border travel to boost revenues for the card networks. This is definitely a kick in the nuts after initially seeing momentum as countries in general trended to loosening restrictions.
International transactions brought in $1.9 billion, or 21%, of Visa’s $8.9 billion in revenues for the 2021 fourth quarter.
The segment is highly profitable due to steep transaction and foreign-exchange fees. Cross-border margins come in around 69%, contributing significantly to Visa’s overall earnings per share.
The Christmas season has been confronted by a bevy of new restrictions as many places consider other measures to curb the spread of the Omicron variant.
Ultimately, even if MA and V can get positive reinforcement from increased short-term travel which seems unlikely, alternative business models are breathing down their neck as the technology of money has advanced.
The “buy now, pay later” phenomenon, although risky, is a rapid gut punch to the incumbents.
Then consider there is speculative technology like Bitcoin out there that bypasses these dinosaur networks altogether.
I believe 2022 is the year that MA and V get exposed as a luxury in a frugal world where small businesses can’t afford to give away 2% of revenue.
There’s too much money being invested into the technology of money for small businesses to reach for MA and V’s network.
Even open banking and digital networks can really dent the traditional payment networks.
Basically, I believe these companies have hit the high-water mark, and the likes of Zelle and Venmo will start to put pressure on these high fees.
Places like China don’t even use them by bypassing them through digital wallets like Wechat pay and Alipay.
Pie shrinkage and revenue decelerate — I believe this is one of the seminal trends we will see in fintech in 2022.
“Study hard so that you can master technology, which allows us to master nature.” – Said Argentine Revolutionary Che Guevara
Mad Hedge Technology Letter
January 5, 2022
Fiat Lux
Featured Trade:
(10 REASONS WHY THE DIGITAL ECONOMY IS THRIVING)
(QQQ)
The outlier out there is inexorably linked with technology because, since early 2020, we have experienced a renaissance in efficiency and productivity, largely driven by our weaponization of technology that strongly feeds into the overall economy.
This drove the United States economy to higher growth rates in 2021, and the market isn’t expecting close to 6% of US economic growth in 2022 after the Build Back Better bill was thrown in the dustbin by the Senate.
The truth is that America has never been better at creating quality growth, and that largely flies in the face of mercantilist economies who build inefficient ghost cities or spew out pollution to register growth.
There has never been a better time to be employed in the United States, and the pandemic brought on a revelation of newly formed companies offering highly specialized services in droves.
If you travel abroad, many countries have in fact lost services in aggregate and have largely not replaced because many emerging cities don’t have the spirit of entrepreneurship, access to robust digital infrastructure, or access to cheap capital like in the US.
Although working remotely is not entirely unique to the United States, the U.S. has integrated this phenomenon into the social fabric of daily work life better than almost any other country.
Japanese workers are still required for in-person office time to use the office fax machine and Europe has made inroads to working remotely but workers often don’t push back on their bosses because of the nominal lack of jobs on the European continent.
Here is a list and explanation of the new type of economy we are thriving in in 2022 and the present synergies that could lead the US economy to surprise to the upside for the foreseeable future.
- Increased Efficiency and Productivity
Technology has always been a catalyst for efficiency.
Adopting modern technology like the cloud, mobile devices, big data, and analytics help businesses achieve higher levels of efficiency and productivity.
Supplementing these platforms is the ability to sprinkle in AI to supercharge the performance by harnessing data to make predictive decisions in real-time.
- Optimal Resource Management
Firms need to maximize their resources for optimal growth, from capital and labor to suppliers and inventory.
Cloud computing has been adopted widely to support resource sharing across different departments within organizations from an IT standpoint.
The internet of things (IoT) is helping businesses track their resources in near real-time, offering greater visibility into how they are being used and where improvement is needed.
- Added Resiliency and Agility
Technology is an enabler for business agility. Companies can leverage new technologies like IoT and blockchain to develop highly resilient business ecosystems.
- Enhanced Digital Presence
Every company is turning into a digital company if they like it or not. This means having a well-designed website and being easy to navigate, active on social media platforms, and engaging with customers online. The end game here is being able to bypass retail and communicate directly with customers.
- Improved Customer Engagements
To overperform, businesses need to engage with their customers meaningfully.
Technology can help businesses do this by providing tools to understand their customer’s needs and wants. Data analytics and AI, for example, can be used to create customer profiles, which can then be used to provide personalized customer experiences.
- Increased Responsiveness To Business Needs
Top companies today deploy IT systems with built-in flexibility and scalability, which deliver instantaneous service when need be.
These AI-based technologies can perform repeatable tasks, freeing employees to focus on more valuable work requiring human intelligence. Also, robotic chatbots can assist human employees in providing high-quality customer service.
- Cutting Edge Innovation
Today’s employees are technologically savvy, and they expect to use technology in their work.
New technologies like IoT and AI can help harness hidden knowledge within data and transform it into actionable business insights. Such insight-driven companies can make smarter decisions and identify new revenue streams.
- Shorter Time To Deliver A Product
Today’s market is full of innovative startups who are able to harness technology so well that they can deliver new products in days if not hours. Businesses need to be able to sense emerging threats and opportunities early on, and being able to bring products to market faster than the competition is crucial to staying ahead.
- Increased Revenue Opportunity
Businesses can use big data analytics to identify new market opportunities and potential customer segments. They can also use data-driven marketing techniques like predictive analytics to create targeted marketing campaigns.
- Increased Transparency and Visibility
To make informed and timely decisions, businesses need accurate and up-to-date information.
Digital technologies can offer a better understanding of the current realities of the industry and how that translates onto a balance sheet. This allows for better decision-making, more effective business processes, and a more robust overall company culture.
In a Yahoo Finance interview with hedge fund manager Jeffrey Gundlach, Gundlach espouses that he has benefited big by betting the ranch on the American economy up until now, and he pauses to say that emerging economies’ equities are cheap, and he likes to buy assets that are cheap.
But he fails to realize that these economies are cheap for a reason, and even if the quality of life has improved drastically in places like Central Europe and Southeast Asia in the past 30 years, it does not mean the foundations are there for a catch-up trade, let alone a tech catch up trade, that relies on momentum investing.
In fact, America has extended its lead as the place everyone wants to invest in, which is why sovereign wealth funds of all sorts have been looking to get into American single-family homes since the pandemic started.
I believe there is a nice surprise to the upside when it comes to tech stocks because companies are using the 10 different ways listed above to supercharge their business models.
Of course, this also depends on the Fed pulling back from its aggressiveness which isn’t guaranteed.
“I want to put a ding in the universe.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
January 3, 2022
Fiat Lux
Featured Trade:
(TESLA SETS THE TONE)
(TSLA), (F)
The 87% year-over-year increase in Tesla deliveries this past quarter really sets the tone for Tesla for rest of 2022.
They are picking up where they left off last year and Tesla’s stock price at the end of the year could be substantially higher than it is now.
It’s been a while since I’ve heard from the Tesla haters — and if you remember correctly, there were angry flocks of them up until just recently.
But that’s what overperformance will do to the naysayers, ironically. They’ve never been this quiet, and rightly so, after crushing delivery expectations by 12%
In the same quarter last year, they registered 180,000 deliveries, and the math is stunning with the company adding an extra nominal 128,000 this past quarter to 308,000 units at a time where supply chain shocks and semiconductor shortages are rocking the EV industry.
This leads me to believe that if Tesla can carve out stellar performance at the height of snarled supply chains, imagine what they can do when the world isn’t clogged up.
We must take it seriously when management predicts 50% gains in deliveries year over year for the foreseeable future and what I mean by that is — multiyear.
Ultimately, there is a strong correlation between accelerating Tesla deliveries and an appreciating Tesla stock price and readers shouldn’t overcomplicate things.
The rest is just fluff and readers need to zone it out.
Readers also get the added bonus that Tesla easily outperforms the S&P benched against any standard metric and they are in online brokerage Robinhood’s top stocks to buy based on the data from their own traders.
The delivery beats against consensus are also widening for Tesla who just in 2020 was only able to overdeliver unit deliveries by 3%, which is no small feat, but the under-promising and over-delivering is getting more impressive by the quarter which is the hallmark of a great company with over 10% beats versus consensus the norm today.
The average consensus for gross 2022 deliveries of about 1.4 million looks highly attainable if Tesla can keep up at this clip, which I have faith they can.
Fortifying their already enviable position is the success of the Shanghai Gigafactory, and the potential to sell 60,000 Tesla’s to Chinese customers this year.
Gazing into our 2022 crystal ball, the EV story and the narrative underpinning it look healthy and, more importantly, sustainable.
Over the past decade, the EV market has gone from a drip of EV choices to a full-out avalanche of options on the US market these days.
Recent surveys back up the concept of insatiable thirst for new EV buyers, and higher oil prices have added an extra turbocharger to EV demand.
A private survey showed that the percentage of U.S. adults who say they would consider purchasing an EV in the next 10 years has seen active growth over the course of 2021, as announcements of new models and new charging infrastructure add gloss to the already emerging industry.
One might surmise that this could be the year of an EV inflection point when it comes to getting bums in EV seats.
This could be the year where the numbers gap up and put gas-powered engines in the rear-view mirror.
The number of options in 2022 starts from roughly 62 models currently available to at least 100 later this year.
But U.S. consumers love to buy pickup trucks, crossovers, and SUVs, and their dramatic arrival on the EV market is one of the main reasons 2022 could be unprecedented for adoption.
The next big blockbuster launch — Ford (F) is beginning production on its F-150 Lightning pickup truck in Spring 2022, giving consumers the option of purchasing an electric version of the best-selling car in the country.
58% of Gen Z and 60% of Millennials have shown a willingness to dip into the future EV market, and by that purchase time, options will be everywhere.
The one true knock against Tesla is the lack of developing a Tesla pick-up truck. Their much-hyped “Cybertruck” has been delayed now over a year to the end of 2022 because of continuous bumps in the supply chain.
This could turn out to be another cash cow for Tesla, with potential Cybertruck revenues topping $400 million in 2023, potentially rising to about $7 billion by 2026.
The takeaway from the Cybertruck project is that Tesla is still in the early stages of its growth cycle, and will be expanding at a 50% rate while ingratiating its diehard audience with more products than they can handle.
Tesla products are backlogged to the hills, try inputting a new Tesla X for online purchase, and their official website spits out an estimated delivery date of January 2023.
That’s how great this product is, so don’t diminish it or its ever-higher stock price.
It’s high for a reason and will be higher in the future.
“AI doesn’t have to be evil to destroy humanity – if AI has a goal and humanity just happens to come in the way, it will destroy humanity as a matter of course without even thinking about it, no hard feelings.” – Said Founder and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
December 29, 2021
Fiat Lux
Featured Trade:
(AUTOMATION AND BANKING)
(SQ), (PYPL), (APPL), (AMZN)
