Tech Letter Archives

America's New Social Credit System is Here

Several external events have prompted Silicon Valley giants to unveil a predecessor to what effectively could become a de facto social credit system by the end of this decade.

I would argue that it is already here, and we are just blind to it.

Take short-term housing agent Airbnb (ABNB) and their business model.

Try searching for a specific listing in any city with a certain date, number of guests.

If you ask other friends and family around the world to input the same data into the same listing, prices will vary greatly.

This is intentionally done because pricing depends on the profile of a certain customer.

If it is $80 per night for me, it could be $100 for the next person.

Why?

Airbnb has an embedded algorithm that conjures up a de facto social credit score, applies it to the situation, and bam — you get your price.

Through my rough research, I have found that males tend to get charged less and especially males wielding a financial profile from a rich country.

I honestly am not sure what data Airbnb is privy to, whether it is only based on a customer’s prior internal Airbnb history, or if it is pieced together from other “sources.”

I am not sure, but if they somehow have access to alternative sources to understand their client better, they might already know that this 47-year-old John Doe booking a 3-night stay in Chicago, Illinois earns $300,000 per year, 1 out of his 5 credit cards is American Express among others, he reported $300,000 of Bitcoin profits in 2020 to the IRS and he owns 3 mansions in Miami, Florida.

It would almost be safe to say that this John Doe would get a better daily rate on the same Airbnb listing than if a 19-year-old student from Albania with no credit card, no assets, and no income tried to book the same listing.

Of course, this also goes for a hardworking single mother trying to take her kids on vacation. So, in the end wealthy men get benefited by a system with discounts that other customers could probably use. But, I guess that's just business in corporate America.

This is just the beginning of the race to pad a soft social credit system so tech companies and others can charge different prices to different people, or maybe not sell some customers services at all.

Relying on an indirect boost from D.C., corporate America will attempt to force the most profound changes our society has seen during the internet era.

Last week, PayPal (PYPL) announced they would start to crack down on users that did not use their platform responsibly.

This group could potentially lose access to PayPal’s services.

PayPal says the collected information will be shared with other financial firms and politicians.

Facebook (FB) is adopting similar practices, recently introducing messages that ask users to snitch on their potentially “extremist” friends.

At the same time, Facebook and Microsoft are working with several other web giants and the United Nations on a database to block potential extremist content.

Some banking platforms already have announced a ban on certain legal purchases, such as firearms.

The growth of such restrictions will accelerate to every part of the business world.

The potential scope of the soft social credit system under construction is enormous and the data exchange practices could have all tech companies swapping customer info in some type of private network that is only accessible to them.

A creation of a “Digital Dollar” would put the tools in place to make sure customer data and flow of money are followed to the very kilobyte.

Working in conjunction with major tech companies, citizens convicted of a crime could lose their ability to transact any business as well.

On a business level, this is great for all the big Silicon Valley companies involved because they would be more efficient at deploying the business intelligence at hand to make money.

I won’t go through the Rolodex of tech companies that are in the data business, but anything involving the cloud and anything in the cloud making great margins, will go gangbusters if this is allowed to happen, which it's looking like it will.

Imagine how conversion rates at Facebook, Google (GOOGL), and Amazon (AMZN) will skyrocket because they already know how to sell stuff to the end guy.

Imagine how Airbnb could ban guests before they even had a chance to destroy somebody’s residence or give generous rates to big spenders that would encourage even more big spending.

This is essentially the dream of Silicon Valley, not for only ad tech like Roku, The Trade Desk, Snapchat, and so on, but the software companies too.

Accurate and voluminous data means better decisions and a super-charged business model.

Quote of the Day - October 13, 2021

Tech Letter

"Software is like Lego. You can make anything with it, but it may not be appropriate." - CEO of IMC Worldwide Stuart Sherman

The Cost of Your Tesla is Going Up

Tech Letter

Inflation is everywhere — at your grocer, coffee shop and the bad news is — it’s likely to stay transitory for quite a while as it transits into even higher prices.

This isn’t the Mad Hedge Agricultural Letter so I will stay in my lane — this letter is about one of the building blocks of technology and specifically Electric Vehicles (EVs) — Lithium Batteries.

Lithium-ion batteries are the most popular type of batteries used in electric cars.

This kind of battery may sound familiar — these batteries are also used in most portable electronics, including cell phones and computers. Lithium-ion batteries have a high power-to-weight ratio, high energy efficiency and good high-temperature performance.

In practice, this means that the batteries hold a lot of energy for their weight, which is vital for electric cars — less weight means the car can travel further on a single charge.

The cost of Lithium-ion batteries is critical to EVs because it comprises about 50% of the total cost of producing an EV.

So what’s the deal with Lithium-ion batteries?

Prices have more than doubled in the past year because demand for the materials used in electric cars and renewable-energy storage has gone bonkers.

Miners cannot issue the supply to satisfy the current demand.

Instead of getting more into the weeds — I will tell you that your new Tesla (TSLA) you’re about to buy will become more expensive, so start budgeting wisely!

Increased costs will be passed onto electric vehicle (EV) manufacturers and not necessarily battery cell manufacturers, thereby potentially leading to a cost increase in EVs in the near future.

The price inflation from lithium is actually derailing a decades-long trend of a fall in lithium-ion battery prices.

Then coupled with a persisting semiconductor shortage (impacting microchip availability) — supply shortages could lead to EV demand destruction as EVs simply fail to come to market in significant quantities or do so at higher prices in limited availability.

Demand destruction is highly likely to accelerate if new lithium projects do not come to market relatively quickly, or miners might simply choose to collude together to keep prices high.

On the supply side, it’s just not guaranteed that miners can keep their costs of exploration, mining, engineering, and executing as low as they did before.

Hiring the proper talent to execute a new mine is facing headwinds like many other businesses in terms of spiking salary costs and lack of engineering talent.

For the EV industry, price points are a sore point because many consumers are on the fence about whether to buy an EV or not.

Simply put, if EVs are too expensive, consumers will just go with a gas guzzler because that’s what they know and they don’t need to deal with waiting hours at a charging station to charge their EV with a gas station across the street.

It’s true that the quality of EVs from Tesla to Mercedes has improved leaps and bounds in the past few years so the quality issue is a non-issue today.

To have a circular and sustainable bull market, EV uptake would need to surpass 50%. Until then, it’s a war of price points.

There’s also a strong possibility that not enough lithium can be mined, and this will keep EV prices high.

Battery makers are also facing higher prices for other key inputs like cobalt and copper.

Instead of doing risky things like short Tesla, which is a dangerous strategy, I would buy a lithium ETF.

The one I recommend is Global X Lithium & Battery Tech ETF (LIT).

The stock is up over 300% in the last 2 years and if this lithium inflation narrative persists, which I highly believe it will, then any substantial drawdowns should be bought.

October 8, 2021

Tech Letter

Mad Hedge Technology Letter
October 8, 2021
Fiat Lux

Featured Trade:

(THE EASY WAY TO PLAY THE CLOUD)
(WCLD), (EMCLOUD), (QQQ)

The Easy Way to Play the Cloud

Tech Letter

Overperformance is mainly about the art of taking complicated data and finding perfect solutions for it. Trading in technology stocks is no different.

Investing in software-based cloud stocks has been one of the seminal themes I have promulgated since the launch of the Mad Hedge Technology Letter way back in February 2018.

I hit the nail on the head and many of you have prospered from my early calls on AMD, Micron to growth stocks like Square, PayPal, and Roku. I’ve hit on many of the cutting-edge themes.

Well, if you STILL thought every tech letter until now has been useless, this is the one that should whet your appetite.

Instead of racking your brain to find the optimal cloud stock to invest in, I have a quick fix for you and your friends.

Invest in The WisdomTree Cloud Computing Fund (WCLD) which aims to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index (EMCLOUD).

What Is Cloud Computing?

The “cloud” refers to the aggregation of information online that can be accessed from anywhere, on any device remotely.

Yes, something like this does exist and we have been chronicling the development of the cloud since this tech letter’s launch.

The cloud was the concept powering the “shelter-at-home” trade.

Cloud companies provide on-demand services to a centralized pool of information technology (IT) resources via a network connection.

Even though cloud computing already touches a significant portion of our everyday lives, the adoption is on the verge of overwhelming the rest of the business world due to advancements in artificial intelligence and the Internet of Things (IoT) hyper-improving efficiencies.

The Cloud Software Advantage

Cloud computing has particularly transformed the software industry.

Over the last decade, cloud Software-as-a-Service (SaaS) businesses have dominated traditional software companies as the new industry standard for deploying and updating software. Cloud-based SaaS companies provide software applications and services via a network connection from a remote location, whereas traditional software is delivered and supported on-premise and often manually. I will give you a list of differences to several distinct fundamental advantages for cloud versus traditional software.

Product Advantages

Speed, Ease, and Low Cost of Implementation – cloud software is installed via a network connection; it doesn’t require the higher cost of on-premise infrastructure setup maintenance, and installation.

Efficient Software Updates – upgrades and support are deployed via a network connection, which shifts the burden of software maintenance from the client to the software provider.

Easily Scalable – deployment via a network connection allows cloud SaaS businesses to grow as their units increase, with the ability to expand services to more users or add product enhancements with ease. Client acquisition can happen 24/7 and cloud SaaS companies can easily expand into international markets.

Business Model Advantages

High Recurring Revenue – cloud SaaS companies enjoy a subscription-based revenue model with smaller and more frequent transactions, while traditional software businesses rely on a single, large, upfront transaction. This model can result in a more predictable, annuity-like revenue stream making it easy for CFOs to solve long-term financial solutions.

High Client Retention with Longer Revenue Periods – cloud software becomes embedded in client workflow, resulting in higher switching costs and client retention. Importantly, many clients prefer the pay-as-you-go transaction model, which can lead to longer periods of recurring revenue as upselling product enhancements does not require an additional sales cycle.

Lower Expenses – cloud SaaS companies can have lower R&D costs because they don’t need to support various types of networking infrastructure at each client location.

I believe the product and business model advantages of cloud SaaS companies have historically led to higher margins, growth, higher free cash flow, and efficiency characteristics as compared to non-cloud software companies.

How does the WCLD ETF select its indexed cloud companies?

Each company must satisfy critical criteria such as they must derive the majority of revenue from business-oriented software products, as determined by the following checklist.

+ Provided to customers through a cloud delivery model – e.g., hosted on remote and multi-tenant server architecture, accessed through a web browser or mobile device, or consumed as an application programming interface (API).

+ Provided to customers through a cloud economic model – e.g., as a subscription-based, volume-based, or transaction-based offering Annual revenue growth, of at least:

+ 15% in each of the last two years for new additions

+ 7% for current securities in at least one of the last two years

With ETF funds like WCLD, you're going to see a portfolio that's going to have a little bit more sort of explosive nature to it, names with a little more mojo, a little bit more chutzpah, because you're focusing on smaller names that have the possibility to go parabolic and gift you a 10-bagger precisely because they take advantage of the law of small numbers.

Quote of the Day - October 8, 2021

Tech Letter

“When we launch a product, we're already working on the next one. And possibly even the next, next one.” – Said Current CEO of Apple Tim Cook

October 6, 2021

Tech Letter

Mad Hedge Technology Letter
October 6, 2021
Fiat Lux

Featured Trade:

(GEMS TO SCOOP UP ON THE CHEAP)
(ADBE)

A Gem to Scoop Up on the Cheap

Tech Letter

I know everyone's gotten into a tizzy because of tech stocks falling off the proverbial cliff.

It won’t always be like this.

Tech stocks won’t plunge this dramatically simply because their growth stories are mainly intact.

External events sometimes do this to our sector, and we must brace for the impact, but readers should look forward to a rosier future.

That is why readers must start to plan for which stocks to scoop up on the cheap after the selling subsides.

One ironclad name that readers must dip into is software company Adobe (ADBE).

This stock has been historically hard to find entry points and we are on the way to getting an optimal one.

Creativity has always played a central role in the human experience.

Over the last year, we have all witnessed the way creativity has sustained us.

We've shared photographs with loved ones on different continents, taught art classes to students at their kitchen tables, and launched entirely new businesses online.

Building on decades of leadership, Adobe continues to pave the way in core creative categories, including digital photography and design, while pushing the boundaries across a wide range of emerging categories such as AR and 3D.

Whether it's the latest binge-worthy streaming plus series, a social media video that sparks a movement, or a corporate video, creation and consumption of video is experiencing explosive growth while Adobe is core to these businesses.

In August, they announced an agreement to acquire Frame.io, a leading cloud-based video collaboration platform. Video editing is rarely a solo activity and it's traditionally been highly inefficient. Frame.io streamlines the video production process by enabling editors and key project stakeholders to seamlessly collaborate using cloud-first workflows.

In the digital economy, companies are relying on digital presence and commerce as the dominant channels to drive business growth.

According to the Adobe Digital Economy Index, U.S. consumers spent over $541 billion in e-commerce from January through August, 58% more than what we saw two years ago.

As a result, in Q3, Adobe achieved record revenue of $3.94 billion, which represents 22% year-over-year growth.

The company isn’t just performing in terms of raw revenue, but the 3-Year EPS Growth Rate has stayed in the mid-20% and snowballing in terms of dollars accumulated.

Just to validate what I just said, in 2017, annual earnings were $1.7 billion and fast forward to 2020 and earnings surged to $5.26 billion.

Adobe’s consistency is also the talk of the town with their 3-year revenue growth rate in the mid-20%.

Adobe is really at the sweet spot of their earnings profile, and I can easily see this company growing from a $270 billion market cap today into half a trillion-dollar stock within 4 years with earnings of $8 billion per year.

Naturally, the bread and butter to Adobe is the small and medium-sized businesses (SMB).

The SMB’s scoop-up products like imaging and video continue to do well — the Acrobat business, which is reflected both in the Creative Cloud and the Document Cloud, is doing well.

Net-net, I would say that the growth prospects for these particular businesses are running smoothly as can be and this is how positive the feedback is from these creative products.

At the end of the day, I think the macro trend that everybody is finding is that a digital presence in commerce, data and insights, and analytics is an x-factor now for anybody doing business.

The behavioral data that Adobe collects in real-time for the productivity division correlates with the marketing message associated with telling creators that they really need to focus on getting their first-party data to be an asset.

Then you add that to the creative products and wow — what a stellar company.

These are seminal trends Adobe is flying on the coattails of, and the robustness of Adobe’s tools significantly differentiates itself relative to competition.

I am bullish Adobe in the long term.

Quote of the Day - October 6, 2021

Tech Letter

“Microsoft isn't evil, they just make really crappy operating systems.” – Said Finnish-American software engineer Linus Benedict Torvalds who is the creator of Linux, Android, and Chrome OS

October 4, 2021

Tech Letter

Mad Hedge Technology Letter
October 4, 2021
Fiat Lux

Featured Trade:

(IT WILL JUST TAKE LONGER)
(ROKU), (TSLA), (FB), (AMZN), (AAPL)