Mad Hedge Technology Letter
November 5, 2021
Fiat Lux
Featured Trade:
(LET THE DUST SETTLE FOR THIS CHIP STOCK)
(QRVO)
This is not an uncertainty at the end of the tunnel turning out to be a train-like situation with chip company Qorvo, Inc. (QRVO).
Hardly so.
The 17% sequential decline QRVO is guiding for their mobile business in December isn’t something investors will dance in the streets about.
The chip sector is an anomaly because of the boom-bust nature of the semiconductor cycle.
Here at the Mad Hedge Technology Letter, we find it more conducive to trade in annuity-like software revenue where CFOs have a better handle on predicted cash flow and state of the balance sheet.
Qorvo, Inc. (QRVO) decreased its December revenue forecast by about $150 million, and about $135 million of that was in mobile chips.
The balance of the decrease was also in Infrastructure and Defense Products (IDP).
Of the $135 million roughly in mobile, QRVO has been wrought by supply constraints, specifically meaning their suppliers not delivering supply for them.
Sucks, right?
The result is QRVOs customers not receiving their allotment of chipsets, thus not able to build their product and use QRVOs products, a type of vicious cycle of being empty pocketed for everyone.
The earnings’ quarter for Qorvo epitomizes the 2021 economy and that’s not only for semiconductor chips — the master word being supply constraints.
The demand part of the equation has also been affected particularly in parts of Asia but is secondary to the supply headwinds.
I am disappointed with the December guide, but it’s not the death of QRVO as I see it.
They need to reinforce a commitment to keep the product channel healthy and give a guide that most accurately describes the supply/demand fronts.
It’s never just cut and dry, but admittedly, visibility is cloudy now and that must be reflected in the management rhetoric and prognosis.
Generally speaking, Qorvo has a great business with best-of-breed products, and we shouldn’t lose sight of that.
Regarding the supply environment, it’s been tough sledding for 1.5 years, almost two years now so it’s not just a 1-day hangover.
The supply environment deteriorated, but inventories are still healthy.
Trying to sort out the internal calculus, I have full faith in QRVO to get their shop in order and meaningfully cast a better light in the March quarter.
I feel that is right around the corner.
The silver lining is that QRVO’s gross margin outlook is intact around 52%.
Opex is in control, and they’re investing in the future of the business.
These investments entail both the traditional parts of the business and newer parts of the business.
And in the end, EPS continuity is hardly affected so we can still count on the same type of elevated profitability which is a hallmark of a good company.
Most chip companies aren’t like crappy loss-making Uber and firms of that ilk.
Absorbing a bit of a correction is nothing to freak out about, but I would say it's the right thing for them to do and will curry investment trust over the long haul.
I can confidently say that I feel great about QRVO’s strategic position as we creep closer to 2022.
They wield premium technology and products, serving attractive end markets growing double-digits, and I fully expect them to outperform next year.
Operations are like a well-oiled machine with sustained margins over 52%, expanding operating margins, and the underlying strength of the company is nothing to diminish.
Considering the concrete evidence, this will be a great semiconductor firm to buy on the dip once the stock settles down from its cringeworthy sell-off.
Granted, the 22% drop from its peak is precipitous, but these smaller chip companies have heightened embedded volatility because of their diminutive size.
That’s not to say they are bad.
The stock has still more than doubled since early 2020 and once the stock levels off, there will be a massive tranche of buyers bidding this chip company back up which should see the stock blast past $200 and beyond.
This could happen by the back half of 2022 and by that time you’ll be glad you bought at discount levels.
“The American dream, what we were taught was, grow up, own a car, own a house. I think that dream's completely changing. We were taught to keep up with the Joneses. Now we're sharing with the Joneses.” – Said CEO of Airbnb Brian Chesky
Mad Hedge Technology Letter
November 3, 2021
Fiat Lux
Featured Trade:
(AVOID THIS TECH STOCK)
(Z)
Zillow iBuying division, Zillow Offers, registered a meager average gross loss per home sold of $80,771.
This division did so bad that they are closing it down translating into a culling of 25% of the workforce.
Zillow's co-founder and CEO Rich Barton is to blame for this disastrous attempt at going from a digital ad company on a real estate platform to a full-blown house flipping company.
This idea probably looked good on paper at first (though I'm not sure how) but executing it was hell.
It seemed that nobody even considered the carrying costs, such as HOA fees, local property taxes, utilities, home insurance, appraisal costs that added up to most of the gross loss per house.
And the fact that competition to buy housing lately has resulted in buyers offering well above the listed price should have sent a warning signal to stay out of this.
It is hard to understand how they would ever make a profit while employing 2,000 full-time iBuying employees to carry this out.
Even if profit could be possible, it would be minimal at best.
Zillow partially blamed the algorithms for the lack of success, but I would lean towards saying this was a hopeless endeavor from the start.
The failure has led to a total write-down of more than $540 million and the company said it was halting new purchases of homes, so at least they got that right.
In the earnings report, Zillow Offers purchased homes during the last quarter for prices higher than it believes it can sell them.
It also could be a sign for a short-term post-pandemic market top in housing.
Flipping houses doesn’t work when buying at the market peak and Zillow, who possesses the most real estate data out of anyone, should have known that.
Yes, housing prices are unpredictable, but this is not a type of business that can scale.
Flipping houses also has to do with finding anomalies, bargains, or renovating fixer-uppers which are hard to do now because supply chain disruptions and the labor shortage are causing a backlog in home repairment services.
Instead of going so far off the path from their core business, they should have just bought Bitcoin in 2018 or even big tech and sat on the couch and watched it appreciate.
We all try to minimize our cost of doing business and Zillow chose to shoulder outsized risk in an unscalable business.
Zillow Offers tried to offer homeowners a fair market cash offer; or at least that was the plan.
The idea was to grow that service and offer it to a wider audience. But because of the price forecasting volatility, the company had to reconsider and management probably realized they needed a lot more capital which would create massive problems in the quarter-to-quarter balance sheet.
Remember selling ads is a remarkably predictable revenue stream for these platforms.
Much of their revenue are annuity-like.
The competition in the market amid other iBuyers meant that most proposals Zillow Offers made to homeowners were rejected.
Only 10% of offers from Zillow were accepted because the housing market has largely been irrational the past 18 months.
I commend Zillow for cutting their losses, and they still need to work through their backlog of already purchased homes which will surely result in a higher than $80,000 per unit loss.
Zillow ended the quarter with 9,790 homes in inventory and 8,172 homes under contract that it will still purchase, which it will sell over the next six months or at least try to.
The company should do what it does best — sell ads.
Consequently, Zillow’s stock has been battered peaking at $200 this February and now at $70.
I personally wouldn’t touch Zillow stock with a 10-foot pole, and would be suspicious of management if they announce some grand plan to regain momentum.
Management needs wholesale changes to get back to its core competencies.
It’s a crime that it took 3 years for Zillow to figure out this was a cruddy direction.
"Life is not fair; get used to it." said the Co-Founder of Microsoft Bill Gates.
Mad Hedge Technology Letter
November 1, 2021
Fiat Lux
Featured Trade:
(A FINE-TUNED MACHINE)
(MSFT)
What this health crisis did was force us to understand how critical Microsoft (MSFT) and its products, especially Windows, are to the world.
The clamoring for its products whether it be software, hardware, or gaming, spoke volumes to Microsoft’s strategic footprint in the Silicon Valley ecosystem.
That’s part and parcel of why it’s been my go-to, iron-clad tech recommendation for as long as I can remember.
This Redmond, Washington company is an all-weather type of stock and even in an inflationary environment, the first place any business should lean on is Microsoft in order to understand how to ensure that they are able to carve out productivity gains.
And even dealing with constraints, for example, if you have supply chain constraints, one of the goals you want to achieve is run factories or even if that’s your work desk, at the leading edge of the efficient frontier.
That means tools like Microsoft’s cloud products, simulating success is going to make sure that every production run has the least amount of slippage.
So, I think any which way you look, whether it's in the knowledge department, first-line worker, or the cloud products and simulation, utilizing all the stallions in the stable are going to be the best way for any company to deal with inflationary pressures so that they can in fact accelerate productivity the fastest way possible and thereby calculate the fastest way to meet aggregate demand out there.
Microsoft is essentially the best at doing and it’s not even a toss-up.
In a strong inflationary environment, the case for digital transformation strengthens with Microsoft helping others, and this plan is hatched by deploying MSFT’s top-line services to spur digitization as a deflationary force that massages the bottom line.
The signs are everywhere that companies from all walks of life are doing this with Microsoft Cloud quarterly revenue surpassing $20 billion for the first time, up 36% year over year.
Businesses small and large can improve productivity and the affordability of their products and services by building tech in density.
The Microsoft Cloud delivers the end-to-end platforms and tools organizations need to navigate this time of transition and change.
Every organization will need a distributed computing fabric across the cloud and the edge to rapidly build, manage, and deploy applications anywhere.
MSFT is building Azure as the world's computer, with more data center regions than any other provider, delivering fast access to cloud services while addressing critical data residency requirements.
They are partnering with mobile operators from AT&T and Verizon in the United States to Telefonica and BT in Europe, Telstra and Singtel in Asia Pacific, as they embrace new business models and bring ultra-low latency, compute power, and storage to the network and the enterprise edge.
The numbers back up their achievements with 78% of the Fortune 500 using MSFT’s hybrid offerings.
LinkedIn now has nearly 800 million members. Confirmed hires on the platform increased more than 160% year over year. And this quarter, MSFT launched new ways to help job seekers discover roles that align with how they want to work. In a rapidly evolving labor market, companies are increasingly turning to LinkedIn Learning to upskill and reskill their employees.
The totality of MSFT’s dominance translated into MSFT notching first-quarter revenue of $45.3 billion, up 22%.
MSFT will surpass $200 billion of total revenue this year and they will easily surpass $300 billion annually in the next 18 months.
I am highly bullish MSFT — buy on every and all dips.
Mad Hedge Technology Letter
October 29, 2021
Fiat Lux
Featured Trade:
(APPLE HIT BY LOGISTIC CHAOS)
(AAPL)
The numbers tell the story for Apple (AAPL) — 745 million paid subs.
It’s not at Facebook levels yet, but Apple’s 745 million almost entirely can claim to buying multiple Apple devices.
Then step back and admire the increase of 160 million paid subs versus just 12 months ago and understand this minor dip in today’s shares is just another buying opportunity.
Being able to add 160 million paying subs in 12 months stems from the ability to continue to launch new services and new offerings within the services that they already have, new features that are game-changers.
In short, that’s how you grow a large business that does $68 billion in the last 12 months with levers that are diversified as any.
At a granular level, The Apple App Store notched a September quarter record.
This highlights the trend that consumers are paying on the platform and are happy to do it, which is why the services keep growing to double digits.
I applaud Apple for taking a stand against ad technology and giving privacy back to the user.
It’s a luxury they can afford, but I believe it will turn into a tailwind.
The feedback from customers is overwhelmingly positive.
Customers appreciate having the option of whether they want to be tracked or not.
It’s just another feature that goes into making Apple one of the best tech firms in the world.
Some more accomplishments this past quarter was setting an all-time record for Mac sales and quarterly records for iPhone, iPad, wearables, home, and accessories, representing 30 percent year-over-year growth in products.
This level of sales performance, combined with the unmatched loyalty of Apple’s customers and the ecosystem strength drove services to an all-time revenue record of $18.3 billion, up 26 on services.
Some people in the industry and some people outside the industry thought that the pandemic would reduce demand, they pulled their orders down, things reset. And what really happened was demand went up and went up even more than a straight trend would predict. And so, the industry is working through that now.
When everything is working, it’s hard to pick the bad out. However there was one black eye, and I would say nothing structural, but a consequence of the external variables Apple can’t always control, i.e. supply.
“Constraints” reared its ugly head to the tune of a $6 billion revenue dollar impact, driven primarily by industrywide silicon shortages and COVID-related manufacturing disruptions.
Supply constraints cost Apple $6 billion and it affected the iPhone the iPad and the Mac.
Chips are becoming harder to secure, especially the legacy variation.
Next, was the pandemic-related manufacturing disruptions in Southeast Asia which produce many of Apple’s products.
However, the situation has eased in Southeast Asia, and fewer disruptions in October bode well for next quarter’s earnings.
But from a demand point of view — demand is very robust.
Apple supply simply can’t meet the global demand for its own products, which has grown over the pandemic.
Long term, I look at this as a good problem, because the supply chain will get sorted, and bottlenecks will fix themselves.
CEO Tim Cook likes to say that Apple’s operational team is “world-class” and him being an operational guy himself originally, I can give him the benefit of the doubt.
There is nothing to worry about with Apple.
They remain incredibly profitable and efficient, and any short-term weakness is an appetizing buying opportunity for investors.
