Tech Letter Archives

An Explosive Chip Stock

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.

marvell

Quote of the Day - December 10, 2021

Tech Letter

“I don't think of Apple as a stock. I think of it as our third business.” – Said Legendary U.S. Investor Warren Buffett

December 8, 2021

Tech Letter

Mad Hedge Technology Letter
December 8, 2021
Fiat Lux

Featured Trade:

(A HEAD-SCRATCHER IN SILICON VALLEY)
(SFIX), (AMZN)

A Head-Scratcher in Silicon Valley

Tech Letter

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.

Quote of the Day - December 8, 2021

Tech Letter

“Often you have to rely on intuition.” – Said Founder and Former CEO of Microsoft Bill Gates

December 6, 2021

Tech Letter

Mad Hedge Technology Letter
December 6, 2021
Fiat Lux

Featured Trade:

(THE HAWKS ARE HERE)
(ROKU), (ZM), (TWLO), (SNAP), (SQ), (MSFT), (CRM), (ADBE)

The Hawks Are Here

Tech Letter

Higher inflation is something this tech bull cycle hasn’t dealt with, and it’s starting to rear its ugly head in the form of volatility and spades of it.

The Fed will have to increase interest rates or face runaway inflation that will crash the economy, but increasing interest rates will also make lives harder for tech companies.

As we try to understand the pace of interest hikes, certain tech companies will fare much better in this inflationary environment than others. To deduce the winners from the losers, investors should understand exactly how inflation affects each particular tech company.

Talk has gone from the Fed moving early to raise short-term rates, to the Fed moving even in early spring which in turn is spooking risk markets from cryptocurrencies, the S&P, and the Nasdaq.

Fed Chair Jerome Fed has done a poor job communicating his sudden hawkish tone and the market has had to quickly reprice risk assets because of the surprising nature of the hawkishness.

In the short-term, tech stocks will need some time to digest this new expectation, which I see as quite healthy, but short-term tough to swallow.

Fed Cleveland President Loretta Mester told the media she is “very open” to scaling back the Fed’s asset purchases at a faster pace so it can raise interest rates a couple of times next year if needed so this isn’t just one guy in Powell trying to move the needle.

Clearly, the Fed is moving in unison, and they threaten to become a major force in moving markets which is all we care about.

All that pressure is causing component and labor costs to rise. Companies that don't have enough pricing power to pass those costs on to their customers will likely see their gross and operating margins shrink.

This matters because tech companies offer some of the most generous salaries in the U.S. and substantial increases in pay hurts them the most.

Higher interest rates attract more consumers and businesses to put more money in higher-yield bonds and savings accounts.

There are 3 ways that higher rates are actually a gut punch to tech growth companies.

First, they increase the costs of borrowing incremental capital to expand a business. In more cases than not, tech growth companies rely on borrowed money because their operation is not yet sustainably profitable. That's bad news for high-growth tech companies, which are burning cash with widening losses.

Second, it reduces the long-term estimates for a company's earnings and free cash flow (FCF) growth meaning their underlying stock price is rerated downwards in the anticipation of this new reality.

Loss accruing tech companies commonly suffer an exodus as their underlying shares are repriced to reflect higher costs.

Just this morning we saw Roku (ROKU), Zoom Video Communications (ZM), Snap (SNAP), Twilio (TWLO), Square (SQ) breach 52-week lows.

The breadth of the market has been hollowed and the goalposts have indeed narrowed because of the hawkish tone at the Fed.

Lastly, higher interest rates drive institutional money into fixed income.

They do this largely by taking profits from crypto, tech stocks, or moving their stash on the sidelines then resurfacing the money into “safer” assets that anticipate weakening bond yields at the longer end of the curve.

So I won’t sit here and say sell all and every tech stock, it’s more nuanced than that.

I executed one position in December and that was Microsoft (MSFT) and it got pulled down with the broader market.

More importantly, I didn’t bet the ranch.

Ultimately, we still bask in the ideology that the tech bull market isn’t over yet because it isn’t, but this aggressiveness out of the blue has forced the overall tech market to temporarily rest with growth tech suffering major drawdowns.

In doing that, the ceiling for a Santa Claus rally is somewhat capped to the upside.

The Fed could have waited until January.

Sure, there will still be winners in tech and the odds of these winners are driven firmly behind the biggest and best like Microsoft, Amazon, Google, and Apple.

These are the type of companies that have the pricing power to raise prices and get away with it because consumers will be willing to pay it.

Other potential winners include cloud service giants like Salesforce (CRM) and Adobe (ADBE). These again are top-quality software stocks that can pass up higher enterprise software costs to the firms that can pay for it.

It’s entirely possible that the Fed could end up walking back some of these aggressive stances in the interest-raising process next year.

Don’t fight the Fed and don’t expect tech growth stocks to reverse until we receive more clarity with interest rate policy, if a reverse is triggered, it will play out with Apple, Amazon, Google, and Facebook, and Microsoft leading the way higher.

Quote of the Day - December 6, 2021

Tech Letter

“Your margin is my opportunity.” – Said Founder and CEO of Amazon Jeff Bezos

December 3, 2021

Tech Letter

Mad Hedge Technology Letter
December 3, 2021
Fiat Lux

Featured Trade:

(THE ULTIMATE TECH SUPPLY CHAIN SHOCK)
(TSLA), (CMOC), (AAPL), (DRC)

The Ultimate Tech Supply Chain Shock

Tech Letter

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.

china