Mad Hedge Technology Letter
December 3, 2021
Fiat Lux
Featured Trade:
(THE ULTIMATE TECH SUPPLY CHAIN SHOCK)
(TSLA), (CMOC), (AAPL), (DRC)
China is monopolizing the raw materials industry in Africa at such a fast pace that it might be a thorn in the side of American EV makers like Tesla and other US tech companies soon.
Tesla (TSLA) has decided to veer its business interests and kowtow to China and is really doubling down there with a Shanghai Gigafactory which now produces more cars than its plant in California.
Under the hood, most of the material is Chinese-made, and the minerals that power the batteries are largely refined and mined by Chinese companies.
As the world adopts EVs, companies are desperate to secure and strengthen their positions in the battery supply chain, from mineral extraction and processing to battery and EV manufacturing.
Vertical integration is more fashionable than ever, where one company controls a number of steps along the supply chain to guarantee supply.
This is not surprising since the supply chain breakdown has forced many companies to stop production for lack of parts.
This battery arms race is being won by China.
China is the world’s biggest market for EVs with global sales of 1.3m vehicles in 2020, more than 40% of sales worldwide.
Chinese battery-maker CATL has cornered about 35% of the world’s EV battery market.
Chinese refineries supplied 85% of the world’s battery-ready cobalt last year; a mineral that helps the stability of lithium-ion batteries.
Democratic Republic of the Congo (DRC) is where most of the cobalt is found, where almost 70% of the mining sector is dominated by Chinese companies.
Meander around DRC’s southern copper and cobalt mining belt, and it looks as if you are in China.
In August, China Molybdenum Company (CMOC), a giant Chinese mining firm, announced an investment of $2.5bn to triple copper and cobalt production at its Tenke Fungurume Mine, already one of the largest in DRC.
That followed its purchase of a 95% stake in nearby Kisanfu copper and cobalt mine for $550m.
Fellow Chinese corporate giant, Huayou Cobalt has a stake in at least three copper-cobalt mines in DRC and dominates at every step of the cobalt supply chain, from mines to refineries to battery precursor and cathode production.
Some car and battery manufacturers are beginning to reduce the amount of cobalt in their batteries to de-risk themselves from China.
Nickel-rich batteries could be a solution, but the same Chinese companies that dominate cobalt mining in DRC, Huayou Cobalt and CMOC, are also cornering nickel extraction and processing in Indonesia, which has the world’s largest nickel reserves at 72m tons.
This means China is now the largest global market producer of nickel, far surpassing the efforts of Europe and the US.
In Europe too, companies are beginning to gain on China’s lead. By the end of the decade, the continent is expected to have 28 factories producing lithium-ion cells, with production capacity due to increase by 1440% from 2020 levels.
That growth is being driven by companies such as Britishvolt in Northumberland and Sweden’s Northvolt, as well as Asian firms expanding production into Europe.
European investment in mining and the production of battery and cathode materials is not keeping pace.
China is creating the equivalent of one battery Gigafactory a week compared with one every four months in the US.
A new global lithium-ion economy is being developed, and the United States lagging Europe and China means they will need to pay a premium for the raw materials in the future.
It’s almost as if the U.S. is going through a round 2 of outsourcing their rust belt manufacturing, but this time it’s Internet 3.0 manufacturing.
The U.S. has fallen asleep at the wheel and allowed China to coax itself into relevancy by undercutting global competitors, the same is happening in the raw material industry that is fundamental to the survival of the United States tech and EV prowess.
The quickness and potency of a mercantilist one-party state can be felt here as many broader issues are bogged down in the U.S. in Congress and get stuck there in perpetuity.
When allowed to flourish, US capitalism is the most mesmerizing force in global economics, but it is also prone to stumbling over itself.
Policymakers need to reroute their energies to the raw material precious metal sector to make pricing competitive for the American consumers, or the share prices of US tech companies will be hurt.
Like the supply bottlenecks caused pain for many American companies, companies like Apple (AAPL) or Dell might not be able to build smartphones and laptops without the right raw materials.
Tesla might not be able to build a car anymore without bowing down to the Chinese forces.
Don’t be surprised in a few years if tech companies need to halt production due to China not selling certain parts to certain countries, this could be the next battleground between the United States and China.
“Inadvertent creation of a micro black hole, or some as-yet-unknown technology could spell the end of us.” – Said Founder and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
December 1, 2021
Fiat Lux
Featured Trade:
(TAKE A REST FROM FINTECH)
(PYPL), (SQ), (BNPL), (AMZN), (TWTR), (AAPL)
The fintech trade is tiring — that is what the underperformance of stocks like PayPal (PYPL) and Square (SQ) is telling us.
Jack Dorsey’s Square has retraced around 25% from its peak and is bang on even from where it was 365 days ago.
Not what you want to hear if you’re a fintech trader.
The pullback from PYPL is even more precipitous declining around 40% from its peak.
Certainly, it would be cliché for me to say that the low-hanging fruit is gone from the fintech trade, but that’s exactly what is happening here.
Not only that, but I would also like to point out that most companies without a home-field advantage ecosystem are getting penalized for exactly that — not having an ecosystem.
Wasn’t it weird how the whole tech sector literally gave us a rip-your-face-off selloff the other day yet, Apple was one of the only tech stocks that reacted positively?
As we move into the late stages of the economic cycle, the goalposts are certainly narrowing for the tech companies, and that’s bad news for SQ and PYPL.
Another way to get penalized is to let that moat narrow which is effectively what has happened to PYPL and SQ.
And that’s the thing with PYPL, it’s just a way to pay, and not an ecosystem.
It plays second fiddle to that of wall gardens and the user trapped in it who is spending and can’t find a way out.
Another point I would like to make is that Twitter (TWTR) at these levels is an ideal buy-the-dip candidate precisely because it’s a great walled garden whose potential has yet to be untapped.
And readers shouldn’t let the mismanagement of the company by former CEO Jack Dorsey turn you off from a great long-term investment.
PYPL would kill for a platform like Twitter and instead needs to grovel to other strategic platforms to allow them to use PYPL’s technology.
PYPL is finally exposed, and I guess more accurate would be to say they are getting undercut by stickier technology that is more convenient to the consumer.
And what does that get you in late 2021?
Downgrades and slews of them which cut blocks the stock at its knees.
We just got one from Bernstein the other day and then it almost becomes a self-fulfilling prophecy with other analyst outlets doing the same thing in a copycat league.
Instead of catching a falling knife in SQ and PYPL, traders need to let these stocks breathe and find support where we know buyers will come in to breed confidence in an upward trajectory.
Easier said than done.
What has been all the rage so far denting PYPL and SQ’s model?
Enter Buy Now Pay Later (BNPL).
Naturally, the differentiated mechanism around which this technology revolves around is the delay in paying, which is never a good concept for a fintech player who rather gets paid ASAP.
Delayed payment is one headache, but then the downward force on fees is another monumental concern, if not downright scary.
This will no doubt trounce margin expansion moving forward and evidence of slowed growth in the latest quarter does not portend well for the company, especially as pandemic tailwinds continue to fade.
Another talking point is BNPL’s lack of credit checks meaning the quality of purchasers will naturally decline, may I even say attract fraudsters as well, and the companies will need to build up loss reserves to compensate for a riskier purchaser profile.
Klarna is another major BNPL company, and they were part of this new industry that took in around 20% of all sales on Cyber Monday.
That rather high number bodes poorly for PYPL in the short term.
Reinforcing the strategic hole of a lack of walled garden is that PYPL is desperate to cultivate partnerships like PYPL’s Venmo joining forces with Amazon (AMZN) — Starting next year, you'll be able to use the money anybody Venmo’s you to buy products directly from Amazon — so long as you live in the US.
But again, Amazon is infamous for replacing outside technology with its own in-house solution over time.
PYPL’s counter solution for BNPL is to enter the BNPL lovefest as well which will effectively trigger a race to zero.
Stopgap solutions will inevitably cannibalize its own business model.
Then let’s point to another walled garden — Tim Cook’s Apple with its Apple wallet.
It’s getting better and with the Apple Card, do they ever really need to spend one second considering a partnership with PYPL or SQ.
There is an inquisition going on in the fintech industry and big body blows will need to be landed for some clear-cut solutions that will ultimately lead to consolidation.
In this precarious environment, don’t get too fancy while fintech is getting elbowed out the way, head to higher ground where balance sheets can absorb just about anything.
“Our goal was never to create a better taxi.” – Said CEO of Lyft Logan Green
Mad Hedge Technology Letter
November 29, 2021
Fiat Lux
Featured Trade:
(THE FUTURE LOOKS BRIGHT FOR THIS AD TECH STOCK)
(TWTR), (FB)
Founder Jack Dorsey's stepping down as CEO of Twitter (TWTR) is great news for the stock.
Let’s not beat around the bush — it’s been brewing for some time.
It was only just before the pandemic that he announced his intentions to work remotely from Africa for 6 months.
Who does that?
Part of his job as CEO of a major Silicon Valley company is to deduce the pulse of the industry in real-time, and on the ground while rubbing shoulders with the rest of his kind.
Six-month African Safaris are romantic but don’t cut it when you are a top CEO of a Silicon Valley company and when major hedge funds are relying on advanced expertise to guide the company through a labyrinth of strategic and regulatory issues.
Whether he stepped down by his own will or was effectively forced out by activist shareholders, either way, the future stock price appears prime to shake off the years of mediocrity.
Why does Twitter need change at the helm?
Simply put, the stock has grossly underperformed the broader market for not only the last year but also the past 3 and 8 years.
The stock was trading around $70 in December 2013 and fast forward to today and the stock is around $50.
The underperformance comes under a backdrop of a cyclical bull market in which tech has been the leader with growth constantly reaccelerating.
Not only that, but Twitter also has a unique asset in which it has accrued massive scarcity value because no other technology company has anything like it.
Dorsey has mishandled the operation.
The nail in the coffin was certainly the user growth numbers in which Twitter was only able to grow the user base by 3% last quarter in North America.
Twitter announced earlier this year some major long-term goals in which one of them was to have 315 million monetizable daily active users by the end of 2023.
That number stands at 211 million users reported last quarter and is underwhelming.
Another objective was to surpass annual revenue of $7.5 billion by 2023 and as of last quarter, management said they were still on pace to achieve that, but I do not see that.
I agree they are on pace to hit that revenue target, but Twitter announced a highly disappointing forecast expecting $1.5 billion to $1.6 billion in revenue for the fourth quarter, which will be up 24%.
Twitter will need to maintain revenue growth in the mid-30% to achieve the numbers they promised, and Dorsey has proved that he is prone to botching forecasts.
How many fumbles will management let him get away with?
Granted, Dorsey was forced by activist shareholders to state explicit targets, and true, they were ambitious from the start.
However, much of the nudge in the backside stems from Dorsey largely underachieving as a CEO especially during the golden years of ad tech.
Investors saw when Founder and CEO of Facebook (FB) Mark Zuckerberg was able to release animal spirits for his ad technology platform and it’s fair to question why Dorsey can’t do the same for his company.
Even though harsh, comparing your company to Facebook is not everyone’s cup of tea, but Twitter is in the same exact industry as Facebook deploying the same exact products, so they can’t really complain about comparing.
In the last 10 years, Facebook has returned shareholders 17X their investment and Zuckerberg was agile enough to rotate from a stale Facebook platform to a booming Instagram platform.
The last major Twitter forecast called for a long-term target of 40% to 45% adjusted EBITDA margin.
For the fourth quarter, Twitter is looking for operating income in the $130 million to $180 million range. That would be down 29% the prior year.
Profitability per unit is decelerating.
As it stands, I do not envision Dorsey achieving his 2023 targets if he stayed and on top of that, changes to the iOS system have made ad targeting more difficult to extract the necessary monetizable data.
In an environment where data visibility is reducing, and other regulatory changes could be coming down the pipeline, the shareholders most likely felt they needed a change at the top.
Dorsey is by and large the legacy of what was left over after Twitter was created, and many investors know, it’s hard to kick out these tech CEOs that usually possess super-voting shares which makes it so they must vote themselves out to leave as CEO.
Dorsey didn’t have that level of moat around his position and eventually, the underperformance caught up to him.
Twitter will insert Parag Agrawal, the company’s chief technology officer, as new CEO in hopes of supercharging revenue, user, and margin growth that shareholders have been patiently waiting for.
If Agrawal can fix Twitter, then Twitter is easily an $80 stock.
Remember that Dorsey is still the CEO of Square and hasn’t been shy in expressing his passion for cryptocurrencies, and it’s likely there that he will finally be unshackled from the annoyance of running Twitter and get to focus on his favorite company.
Honestly, he hasn’t seemed interested in Twitter for a while, so it’s a win–win for both companies.
“Once things start moving, Uber will, too.” – Said Current CEO of Uber Dara Khosrowshahi when asked about the fallout from the coronavirus
Mad Hedge Technology Letter
November 24, 2021
Fiat Lux
Featured Trade:
(ONE OF THE BEST METAVERSE STOCKS)
(RBLX), (FB)
