Mad Hedge Technology Letter
December 13, 2021
Fiat Lux
Featured Trade:
(THE POTENTIAL NORMALIZATION OF 2022)
(ABNB), (BKNG), (ZM)
The last 2 years haven’t been a walk in the park for tech traders.
Before March 2020, the bull market and the trading patterns that followed were largely predictable.
Sure, there were our run-of-the-mill selloffs, but nothing like the Covid selloff of 2020.
Then the ensuing reversal that took us to new highs was a sugar high Fed-induced bounce that we are still buoying from, and that boost is largely wearing off.
As we near the end of 2021, it’s hard to believe that it’s been almost 2 years since the daily trading headline became a health care-driven headline.
There is the growing consensus that in the latter part of 2022, a synchronized global recovery story will emerge as the strongest plausible scenario.
This means that day-to-day business conditions which include international travel could revert back to what we had prior to March 2020 or a competing version of it.
I won’t get into the vaccine semantics of it, but a moderate health solution is only positive for tech stocks.
The “shelter at home” tech trade of 2020 was a one-off drawn-out event, and with normalization around the corner, we will return to the catalysts that originally drove tech shares — earnings growth, revenue growth, and financial engineering.
The lingering effects of this latest variant could start to wind down by early spring which will give way to the world of higher interest rates and costlier financing, but higher interest rates solving the inflation crisis.
Naturally, many things could side-swipe this scenario like another covid variant deadlier than the ones spreading around now.
If there is some iteration of normalization involved next year, a tech stock that will squarely harvest the gains from its strategic position at the intersection of the internet and remote working is accommodation sharing platform Airbnb (ABNB).
Airbnb will blast off from the biggest developing trend in the global economy today: workplace flexibility.
Like with Zoom (ZM) video conferencing tech making it possible to work from home. Airbnb makes it possible to physically work from any home, anywhere, and anytime.
While it’s not fair to draw a direct correlation from workplace flexibility to increasing Airbnb profits, it is clear that the company is poised to grow alongside the Web 3.0 revolution which will focus on decentralization, openness, and greater user utility.
As this new iteration of the internet takes hold and continues to spread, Airbnb's unique business structure will result in revenue produced from the sheer number of workers doing staycation remote working adventures.
This is a real thing.
Workers now go somewhere for a month then change their location to take in a different environment.
Riding this ongoing revolution and the steady reopening of global travel, Airbnb posted record revenue of $2.2 billion during its third quarter, which was 36% above Q3 2019.
If you want to look at the red-headed stepchild of the accommodation sharing platform services, then take a look at Booking.com (BKNG).
It’s not nearly as useful a platform as Airbnb and their exorbitant commission becomes quite prohibitive to hosts and users.
No wonder they do not grow their host volume like Airbnb.
Airbnb’s products also sell itself with the name of the company becoming a verb, while Booking.com is still reliant on spam-like internet searches using Google search to ramp up engagements.
This turns into an expensive marketing spend while Airbnb spends minimal to attract the next incremental customer.
ABNB shares have experienced a recent 20% pullback on the omicron threat, and I believe it’s a good time to start dollar cost averaging here into ABNB shares in the case that a bigger travel load 6 months from now follows through.
The upside to ABNB shares could be quite large if the business world somewhat normalizes next year because this scenario isn’t priced into ABNB shares yet.
“Broadcast TV is like the landline of 20 years ago.” – Said CEO and Founder of Netflix Reed Hastings
Mad Hedge Technology Letter
December 10, 2021
Fiat Lux
Featured Trade:
(AN EXPLOSIVE CHIP STOCK)
(MRVL), (FB)
One of the best semiconductor growth companies out there must be Marvell Technology, Inc. (MRVL).
Lately, performance has been clicking with revenue of 61% year over year.
And similar to the third quarter, MRVL is expecting another strong performance led by cloud customers across a broad range of products.
They expect data center revenue to more than double from a year ago, and project sequential growth in the double-digits on a percentage basis in the fourth quarter.
I am pleased with the strength of the cloud end market, which I expect will remain a strong driver of sustained growth for Marvell.
Looking out further in time, I believe there is immense potential for another phase of growth as large-scale virtual environments, such as Facebook (FB) is doing with their metaverse, start to gain traction.
In short, I expect many different implementations of virtual environments enabled by a broad set of companies and ecosystems that MRVL will be involved in.
Regardless of the form these environments take, the data sets will be exponentially larger compared to the current internet, which is largely two-dimensional, and latency will need to be extremely low to realistically simulate a real-world environment.
As a result, I expect the metaverse will significantly accelerate a number of key trends, which are already developing in the cloud today, including the need to store huge amounts of data in a secure environment, connected by high-speed electro-optic links to custom compute engines.
This next level of massive scaling makes the metaverse an even stronger candidate for cloud-optimized silicon solutions that Marvell is currently enabling.
This meshes perfectly with the core competencies MRVL has already developed across compute, storage, security, networking, high-speed electro-optics, and customization, which are driving their current success.
And these are equally applicable to the variety of virtual environments, which MRVL will develop over time.
The metaverse also has the potential to be a killer app for 5G, another area of strength for Marvell.
Multiple cloud customers have already engaged with MRVL, as they start designing the architecture of their next generation of data infrastructure to enable a significantly richer set of virtual applications and experiences.
Looking at the fourth quarter, I expect a strong ramp in MRVL’s 5G business of approximately 30% sequentially.
It's exciting to see MRVL step up in the 5G business, and I expect significant additional growth over the next several years as 5G adoption continues to grow around the globe, combined with Marvell content gains from designs.
Lastly, the future of technology in cars is all about electrification and intelligence, with embedded security and onboard storage in a fully networked environment.
Similar to the rise of optimized silicon and cloud, automotive OEMs are realizing that to differentiate their products and need unique technology and IP to be embedded in compute silicon optimized to their specific platforms.
In short, MRVL is at the intersection of growth and opportunity of every major technological innovation that carries weight.
From the metaverse, data center, and electric cars, their products are the heartbeat of how these technologies will evolve.
Buying this stock is a bet on technology accelerating which it surely will and long term, I don’t see how this stock isn’t up from today.
“I don't think of Apple as a stock. I think of it as our third business.” – Said Legendary U.S. Investor Warren Buffett
Mad Hedge Technology Letter
December 8, 2021
Fiat Lux
Featured Trade:
(A HEAD-SCRATCHER IN SILICON VALLEY)
(SFIX), (AMZN)
I don’t get Stich Fix (SFIX).
It’s not that they shouldn’t be a company--I’ve seen worse ideas that didn’t get left on the drawing board--but I don’t see how they ever become successful.
They probably should have invested in Bitcoin at the beginning of the year.
That might be an exaggeration, but it brings home the point that their competitive advantage is marginal, and they haven’t done enough to differentiate themselves amongst competition.
For a company that is fighting for relevancy, they have made some boneheaded mistakes.
For one, customers don’t receive a great sales price on the clothes. Unless you keep the entire box (5 items), you won't get a discount. You also won't find any coupons online for Stitch Fix. You pay retail prices, which can sometimes be high, depending on the brand they send.
For many tech companies that preach the freemium model, Stich Fix is asking customers to pay a premium for the clothing off the bat, and I believe that is turning off a lot of potential customers.
SFIX hasn’t done enough to fetch a premium for its services.
I understand SFIX isn’t willing to discount any clothing, unless it’s the entire box, and this is because the unit economics of this business model is quite poor.
Revenue grew 19% year over year to $581 million, yet they forecasted just 9% revenue growth for the next quarter — that’s not what I call a tech growth company.
A tech company with only $2 billion in annual revenue shouldn’t be growing only 9% year over year. In fact, I would say a company this small needs to be accelerating revenue to somewhere around 40% to command respect among the incremental investors.
It’s no shocker that the stock is down around 300% in the past 365 days.
That’s horrible considering the “reopening trade” was supposed to cause a massive demand in people wearing proper clothes again and not just pajama pants.
To miss that opportunity epitomizes the company’s lack of marginal advantage which I was just banging on about.
Another issue I have with the company is that the clothes are not affordable, and I am not talking about a discounted price relative to the retail price.
If you are a bargain bin fanatic, the sight of SFIX’s service will turn you off.
Stitch Fix claims the average price of items is around $55, but that the items can cost anywhere between $20 and $400.
You can set price ranges for each category, but that doesn't mean your stylist will always follow those instructions.
Pigeonholing oneself as a luxury service but hoping to scale broadly and fast like a tech company is counterproductive.
Many Americans simply won’t pay up to $500 for a 5-piece set of clothing no matter who is styling it.
This sounds like a service for a computer programmer in San Francisco with a $200,000 annual salary--which isn’t a bad thing, but it won’t get the masses interested.
This leads me to my next point of the company overselling the personalized stylist aspect of it.
Is the stylist really that much better than me just picking out a few pieces at the store or online, and being able to keep it?
They even have Stitch Fix “Freestyle” category now that is SFIX without the styling fee, where the customer can personally choose their clothes. But then, isn’t that the same as any other online retailer but with higher price?
Again, I don’t get the roadmap here and it’s basically admitting that their styling is not good.
In fact, there is quite robust competition that undercuts SFIX such as Amazon (AMZN) Prime Wardrobe.
Amazon Prime Wardrobe is an exclusive program just for Prime members. This service gives users the chance to have chosen clothing items shipped to their home for them to try on before buying. The difference here is that the user selects the item which, for me at least, makes sense instead of SFIX blindly shipping clothes that aren’t ok’d. I just don’t think a “stylist” can get it right more than half the time. You only pay for what you keep and you have 7 days to make up your mind.
The biggest headscratcher is the $20 SFIX styling fee if you don't keep anything.
Seriously, what is that about?
If you hate their expert stylish decisions, you get blamed for it and pay $20 for nothing! Shouldn’t it be SFIX paying the user $20 for failed style sense?
Any person with a brain understands that paying $20 just to try something on then sending it back sounds like the worst way to convince someone to become a long-term customer.
And this is without even mentioning the pain of resending the clothes!
So, in an era where software companies have made software as a subscription (SaaS) almost a religion, there is no subscription service for SFIX.
This means there is a high number of churn where customers use their service once then never again, most likely after they are charged $20 to try on clothes they don’t like and have to send back the failed styled clothing.
Marginally, this company doesn’t cut it, we will check in with the next iteration of SFIX sometime in the future, but in it its current form, the 300% drawdown in the stock is absolutely logical.
“Often you have to rely on intuition.” – Said Founder and Former CEO of Microsoft Bill Gates
Mad Hedge Technology Letter
December 6, 2021
Fiat Lux
Featured Trade:
(THE HAWKS ARE HERE)
(ROKU), (ZM), (TWLO), (SNAP), (SQ), (MSFT), (CRM), (ADBE)
