Mad Hedge Technology Letter
August 9, 2021
Fiat Lux
Featured Trade:
(WHAT’S HOT IN MEME MANIA)
(MVST), (DAN), (OSK)
Culturally and in Washington, there’s massive momentum to electrify America’s car fleet, offering a thesis for readers to back emerging battery makers.
With the flood of liquidity out there, it’s almost a "when" and not "if" situation to when investors are going to support the next nascent tech trend.
This environment of chasing higher yields has largely diminished the attractiveness of bonds to institutional investors forcing them to resort elsewhere to get their returns.
I don’t want to demean smaller start-up technologies but many out there are rated as pump and dump opportunities that recently have given way to you-only-live-once (YOLO) behavior that distorts the trading market even more.
This is what gave rise to meme stocks which could be described as a forum-based community that often would post ideas of stocks that haven’t done anything in years, only for a group to communally throw money at a dead business to engineer a short squeeze.
Many can imagine that if timed late, 90% losses on trades became common.
Granted, this can’t be done to mammoth companies like the FANGs simply because the trading volume is too gargantuan for any army of trolls to be able to move the needle.
But smaller stocks are fair game and that is exactly what we have seen.
Another of these meme ideas that have flooded internet chatter the past week is Microvast Holdings (MVST) which makes batteries.
It’s a vertically integrated battery manufacturer, producing its own cathode, anode, electrolyte, and separator.
Microvast’s Lithium Titanate Oxide (LTO) cells are currently Microvast’s star product. Crucially, these cells can be fully charged in 10 minutes and provide an energy density of 180 Wh/l or 95 Wh/kg. These LTO batteries retain over 90% of capacity even after 10,300 full charge/discharge cycles.
Microvast is working on solid-state batteries where the aim is to manufacture cells with energy densities of over 1000 Wh/l. They also boast a clear manufacturing advantage, with plans to increase its annual battery manufacturing capacity to 11 GWh by 2025.
The electric battery industry is about to make a killing and U.S. President Joe Biden was lately promoting a goal to have 50% of all cars sold in America emission-free by 2030.
The President is adamant the future is electric.
Batteries will need to be part of this equation.
Microvast is not on the radar of most investors. That’s fine. The company is puny. It is also a special purpose acquisition company.
MVST’s market cap is $4 billion and they had a quarterly EPS growth rate of -120%. They only do about $100 million of revenue per year so I am definitely not vouching for this company as a convincing buy and hold long term.
There still needs a lot of convincing to happen first with better earnings reports in the future.
The SPAC came public in February via a blank check merger with Tuscan Holdings Corp. That deal valued the business at $3 billion. Shares ran up to $25.20 in early February only to later collapse to $7.83.
The stock is compelling now because the narrative is improving dramatically.
Electric vehicles are here to stay, and the prospect of future revenues is what usually forces stock prices higher.
Biden will do everything in his power to get more EVs on America’s roadways.
Most of the batteries Microvast currently makes end up in commercial vehicles like buses, mining trucks, and taxis.
The company is vertically integrated with proprietary technology across all of the key battery components.
It also has full high-volume production facilities in China, and longstanding commercial and research relationships with businesses like Porsche Motorsport, Dana (DAN), and Oshkosh (OSK).
The reason for the big drop in Microvast was when an analyst put out a $6 stock price target based on the company’s “enhanced execution, competitive, and in-sourcing risks."
The stock cratered to lower than $8 but has since been picked up by the meme stock army ready to make their mark in this name and the last few trading days the stock has had continually produced daily return of over 10%.
The stock is now over $12 and if any reader wants to take a flier on an incredibly volatile, speculative electric battery company, the momentum is now at your back for a trade.
As we have seen with meme stocks AMC and GameStop, don’t count out a meme short squeeze and its potency because although highly speculative, profits are to be had if you buy the pump before the dump.
“If you're offered a seat on a rocket ship, don't ask what seat.”- Said Chief Operating Officer of Facebook Sheryl Sandberg
Mad Hedge Technology Letter
August 6, 2021
Fiat Lux
Featured Trade:
(IS IT TIME TO GET BACK INTO UBER?)
(UBER)
I dig it that Uber has larger data sets than anyone else in a world where bigger is better in terms of data.
What they have is ultimately uber valuable in the modern day of data being the new oil.
This advantage is precisely why Uber is able to train an in-house algorithm better than the next guy.
Global reference points are what every company these days lust for.
Matching and routing an incentives marketing engine that is highly personalized is an existential issue for ride-sharing giant Uber.
When you parlay their data edge with possessing op teams on the ground in every single market and understanding of the regulatory marketplace as well, it means per unit, Uber’s overheads are way lighter than competitors.
It all translates into cost of customer acquisition being lower and a higher lifetime value because of the higher frequency accounts that they have with customers.
You could almost say that in this particular industry, it’s a game of who can outdo one another in customer acquisition unit cost.
Beating on cost is a must because Uber has all these unprofitable businesses and when it comes down to it, they are a glorified delivery driving service.
They must acquire to scale out because that’s the only hope they have to become profitable by wielding the economies of scale advantage.
Uber’s Grocery division is off to a great start internationally and at home in the U.S., Instacart is a strong competitor.
So I do believe they face a steep uphill climb to get anywhere near Instacart who has had skin in the game forever.
But when we get into the weeds, Uber’s short-term direction will clearly be driven by the supply of drivers or the lack of them for a reasonable price.
In July, new driver additions on Uber in the U.S. grew 30% month-over-month. That's right, 30% month-over-month even as they pulled back on incentives and improved margins. As investments taper, Uber expect mobility to show strong leverage in the back half.
Management tried to gloss up results but Uber had spent a massive $250m in driver incentive investment in the second quarter, which increased losses at its ride-hail business.
I mentioned at the top that Uber’s model is about low-quality tech married with scale, thus, there’s no way to justify spending $250m in one quarter to find drivers.
The dearth of drivers came about because of incremental government stimulus, lack of child care services, unemployment subsidies, even preventative virus concerns, or simply some drivers just died of corona.
Not only is data the oil for Uber, but in that oil, one massively important input is the cost of acquiring drivers.
For management to be so behind the curve on this one shows a degree of unpreparedness.
Granted, it’s been quite difficult for any tech management to get a hold of the new tech trends post-pandemic, but that’s what they are paid to do.
Shares of Uber have tanked around 30% since mid-February this year speaking volumes to management lack of execution in supplying the volume of drivers.
I know it’s not a simple one-day smash and grab to get drivers.
We are talking about marketing, onboard costs, background checks, vaccinations, promotions, registration process and education.
This isn’t all free.
I would hope that as we approach 2022, those costs become less of a burden.
But it does go to show that for Uber, the honeymoon period is long gone and even the low-hanging fruit area doesn’t exist anymore.
We seem to have entered a phase of chronic underperformance met with a finite period of overperformance the only to shift backwards again and repeat the same cycle over again.
As we look at the rest of 2021, the driver acquisition marketplace is unhealthy and wait times are up big causing surge pricing to make Uber a pricy service.
I don’t see that moving significantly down by end of 2021, but this specific headwind will moderate which is good for the stock.
A little bit more regionally, a bunch of cities, southern cities are actually back to normal and it’s about putting dollars in front of drivers and the top 20 cities, drivers for mobility are making over $40 an active hour, including just earnings and tips as well.
I will tell you - this company has no chance to become profitable if they are doling out a median wage of $40 per hour.
It’s a fool’s game.
Even if you want to get “leaner”, I don’t see where the cost savings will come from unless they want to gut the corporate staff or cut back on the technology.
That’s not to say they will even be able to retain drivers who might get better offers in different industries and never consider driving an Uber again.
I mean honestly, being an Uber driver isn’t exactly a desirable job for most people unless you have no skills or no better options.
Everyone wants to work at home from a desk and computer where they can brew their own coffee and not commute. Being a driver is a job where you are in perpetual commute!
And if less skilled workers are being paid to stay home with an eviction moratorium so they don’t have to pay rent or a mortgage forbearance, so they don’t need to leave home, then it’s gotten so bad that Uber is paying $40 per hour to move the needle.
Regional cities have recovered but driver supply problem is acute in major cities like New York, San Francisco and L.A. with demand continuing to outplay supply and prices and wait times remain above comfort levels.
When this happens, customers stop using your service and for a company that relies on high volume, it couldn’t be more than terrible.
It means Uber doesn’t get paid when people are clamoring for their service.
I just don’t see Uber going into other markets and burning more cash to stay relevant because they are too mature of a company.
They are running out of gunpowder in 2021 and will expect to pump out the profits soon.
To profit means outperformance and Uber hasn’t delivered more than the dead cat bounce of the economy reopening which is a little pitiful.
I made a bullish call earlier this year which was correct at the time but then Uber hit a wall at $65 and has come back down with vengeance.
I can say that at $43 today, the stock will rise if Uber’s management can trim the $40 per hour they are paying drivers today while increasing driver headcount by 30% quarter over quarter.
I believe Uber’s management will be successful at bringing down driver costs.
It’s easy to see how they go down from here, and I do believe that the bad news is priced into Uber shares, and that many of these headwinds were transitory and the outlook will improve moving into 2022.
Even though I forecast the stock going up in the short to midterm, I still believe at some point, the company will need to come to terms with having no cutting-edge technology and no moat around its business model.
That issue has been lying dormant but that doesn’t mean it has gone away.
Just think about it, if Amazon or Google wanted to do what Uber does, they could figure it out in months, but they don’t see any value in this profit model.
Uber is definitely on the clock and that’s not a good thing for their management.
“Desperation sometimes drives innovation.” – Said CEO of Uber Dara Khosrowshahi
Mad Hedge Technology Letter
August 4, 2021
Fiat Lux
Featured Trade:
(FINTECH CONTINUES THE MOMENTUM)
(SQ), (AFTPY)
This guy leading Square, Jack Dorsey, has accomplished some phenomenal things during his tenure in San Francisco.
But with the fast-moving tech sector, he’s venturing into uncharted territory as his outfit purchased Australian buy now, pay later provider Afterpay (AFTPY) for $29 billion in stock.
This is the largest buy-out done by Dorsey signaling a large wager on Square’s ability to catch up with more established retail banks.
Afterpay offers its 16 million users a way to get their purchases right away and pay for it in four regular, interest-free installments.
What a great deal for the poorer Millennial generation!
This is just another tool that Square will be able to integrate on its interface as another way to pull in more users and capital.
It’s almost a credit card proxy.
If payments are missed, Afterpay levies a fee and locks their accounts.
These late-payment penalties, along with fees paid by merchants, form the main sources of revenue for Afterpay. The system is popular among young shoppers who make up the bulk of bad credit scores.
Square’s popular Cash app gets another notch in its belt as it competes with Affirm and Klarna.
A secret meeting in Hawaii consummated the deal with executives reasoning that speed is paramount - banks and new entrants are aiming for a bigger piece of the buy now, and pay later services.
These offerings have boomed in the past year, as homebound consumers used them to borrow and spend online during the coronavirus pandemic.
There are reports that Apple is in the process of building a buy now, pay later feature in coordination with Goldman Sachs.
These services usually mean up to a few thousand dollars, which can be paid off interest-free.
That means such providers are not required to run background checks on new accounts, unlike credit card companies, and normally request just an applicant's name, address, and birth date. Critics say that makes the system an easier fraud target.
Executives at Square and Afterpay shared a desire to expand access to customers globally and saw combining forces as the best way to take on competitors.
Ultimately, Square has been slowly morphing into a bank, and this acquisition accelerates the process.
Square’s banking ambitions were already becoming very clear on the merchant-facing side of its business.
The company first applied for a banking license in 2017, and last year, it received conditional approval from the Federal Deposit Insurance Corporation (FDIC).
The new bank, called Square Financial Services and based in Utah, was structured as a subsidiary of Square and started offering small business loans this past March.
Even before Square Financial Services went into operation in March, Square had been giving merchants small loans, using its detailed knowledge of transaction volumes to help approve applications quickly.
These loans, though, were disbursed through a partnership with another existing bank in a 10-K filing, Square revealed it collected on these loans by automatically deducting a fixed percentage of every card payment a merchant accepted.
In this way, Square had disbursed nearly $9 billion in loans before its small business loan and banking functions came online.
Square is diligently using its vast technology infrastructure build-out to maneuver into financial services.
They have been ahead of the curve in rolling out cutting-edge services such as its crypto offerings.
Retail banks will have a hard time competing with Square since they aren’t technology companies that think of challenges in terms of the technicalities of delivering a digital experience.
The problem with retail banking now is that the people who lead them are still bankers and not digitalists in a technology-first world.
Unsurprisingly, Square’s stock cheered the news and was up 10% on the news.
This move also continues the momentum of Square massively overperforming as a stock, management team, and business model in the past 18 months.
I have been highly bullish Square ever since the inception of the Mad Hedge Technology letter and the company has only validated my calls for outperformance.
The stock is somewhat volatile and prone to 5-7% pullbacks and I do believe those are precious opportunities to wade into Square with dollar cost averaging.
After pulling back to $200 in May, the strong lurch up to $270 needs time to digest, and readers just need to wait for the next consolidation.
“An asteroid or a supervolcano could certainly destroy us, but we also face risks the dinosaurs never saw: An engineered virus, nuclear war, inadvertent creation of a micro black hole, or some as-yet-unknown technology could spell the end of us.” – Said Founder of Tesla Elon Musk
Mad Hedge Technology Letter
August 2, 2021
Fiat Lux
Featured Trade:
(ENPHASE IS WORTH A LOOK)
(ENPH)
