Mad Hedge Technology Letter
December 18, 2024
Fiat Lux
Featured Trade:
(UNLOCKING THE FUTURE OF TECH)
(TSLA), (NVDA), (AMZN)
Unshackling the restraints on human labor – that is where tech is headed.
I’m talking about AI.
Robots aren’t able to perform complicated tasks, and that is the holy grail of AI.
If headway is made just on this one issue, then the sky is the limit.
Profits are then unlimited, and the world will change into something we could have never imagined.
If stakes weren’t high enough, the next explosive leg up in tech shares is now centered on this concept.
There is only so much balance sheet maneuvering can add to the bottom line.
Magnificent 7 stocks who are experts are juicing up the balance sheet will gradually run out of levers to pull.
Technology stocks demand that management move the needle along because the alternative is that the company will get left behind.
When the Department of Defense commenced its robotics challenge in 2015, the stated goal was to develop ground robots that can aid in disaster recovery with the help of human operators.
Nearly a decade later, generative AI is accelerating that learning curve, pushing human-like machines to pick up new tasks in real-time.
And in June, Tesla (TSLA) presented an updated version of its Optimus robot at Tesla’s Investor Day and showed it roaming a factory floor. CEO Elon Musk touted the robot’s potential, saying it had the ability to push the company’s market cap to $25 trillion.
Humanoids that can adapt to existing environments have long been seen as the ultimate test if they can work alongside humans in spaces built for them.
Nvidia (NVDA) is driving rapid development through an ecosystem built specifically for humanoids. It combines high-powered chips that process data at high speeds with a digital world that allows users to train robots on skills applied in the real world.
Nvidia has already unveiled “NIM Microservices,” a visual training ground that allows generative AI models to visually interpret their surroundings in 3D.
Nvidia’s ecosystem now enables robots to train using text and speech input in addition to live demonstrations.
Humanoids have already begun taking their first steps into reality. Musk has said two Optimus robots are working at Tesla’s Fremont factory, and he expects a few thousand to be deployed by next year. Amazon (AMZN) has partnered with Oregon-based Agility to utilize its Digit robot at a test facility. Apptronik is working with Mercedes-Benz to integrate Apollo into its manufacturing line.
The goal is to adapt humanoid for the future, which will allow them to operate beyond industrial use. They could become as ubiquitous if companies are able to scale and bring costs down to $10,000 per machine.
Technology is still in the stage of calculating how they bring the expenses under control.
It is not very cost-effective if a company needs to spend 5 times the actual cost of running the AI division on retrofitting the environment for a humanoid and resetting the language models for different tasks.
Much of these technical aspects are being worked out, and these companies are inching their way closer to a day when companies might be able to work fully without a human worker or alongside a minimum amount of workers.
Tesla is a company long-term that needs to be looked at, and this assumption is solely based on their robotics and humanoid business. It is highly plausible that Elon Musk is at peace with sacrificing his EV business in the medium time as long as moving up the value chain to become the leader of what is next, which is looking more like robotics using AI.
Musk is skating to where the puck is next, and that is where the future will be.
Mad Hedge Technology Letter
December 16, 2024
Fiat Lux
Featured Trade:
(OVERCOMING UNCERTAINTY IN 2025)
($COMPQ), (SOFTBANK)
There have been many prognosticators concerned that next year is trouble for tech stocks, but I am here to dispel that notion.
The uncertainty has permeated into global investment fund management with some even calling for a mild pullback in tech valuations ($COMPQ).
Concerns are concerns and that doesn’t mean we will get a wild selloff or a crash.
There are still too many drivers that tech can pull to bail itself out of any hole they or others might dig for them.
I do agree with the notion that the era of super growth for the current tech business model is over and we are really trying hard to eke over the bar every quarter now.
One trend that could go into overdrive next year is the acceleration of AI investment from funds waiting on the sidelines.
I’ve mentioned to people off the record the staggering amount of capital that has poured into the US after the election.
The surprising part of this is that a meaningful amount of these funds are foreign.
Remember that in places like China and Europe, economics are going in the wrong direction and investment funds have nowhere to place their capital.
Europe has overregulated itself to death more interested in protecting the old money and destroying anything closely relating a start-up.
I argue to clients that Europe is the last place on earth I would ever start a tech company.
China has reached the end of its current growth phase and now has a system that won’t change just to protect the incumbents.
Inherently, Chinese tech could turn into the next Japan.
The end results are a terrible foreign tech scene in most places not named the United States.
Japan, for a matter of fact, has produced people like Softbank CEO Masayoshi Son who try to scrape as many billions together to throw into US tech.
Part of the foreign capital I talk about comes from him, but also other massive funds such as Norway’s sovereign fund valued at over $2 trillion now.
More than 40% of that portfolio is in US tech stocks giving them ammunition for an even bigger step up next year.
President-elect Donald Trump, with SoftBank Group CEO Masayoshi Son at his side, announced that SoftBank would invest $100 billion in the U.S. over the next four years in what would be a boost to the U.S. economy.
Trump said in his joint appearance with Son that the investment would create 100,000 jobs focused on artificial intelligence (AI) and related infrastructure, with the money to be deployed before the end of Trump's term.
Son has been a strong proponent of the potential for AI and has been pushing to expand SoftBank's exposure to the sector, taking a stake in OpenAI and acquiring chip startup Graphcore.
The uncertainty is warranted, because we will replace a U.S. administration with a vastly different view of the economy and tech scene.
I do believe we missed a bullet. If Harris won, she would of choked off the vitality of Silicon Valley and placed power and control in the hands of a few.
I say that even though tech stocks performed greatly the past 4 years.
I don’t believe that tech stocks are about to lose steam and the case for the new administration turbo charging the economy is definitely realistic.
Trump wants to cut U.S. corporate tax to 15% and that 6% drop for U.S. tech firm would represent a gargantuan windfall to the bottom line.
If Silicon Valley is the beneficiary pro-corporate legislation, the sky is the limit for tech stocks next year even if they don’t create anything game changing.
Playing with house money is fun and we could be in a situation next year where U.S. tech firms can shoot for the stars.
Mad Hedge Technology Letter
December 13, 2024
Fiat Lux
Featured Trade:
(THE AI TRAIN KEEPS CHUGGING)
(DELL), (AAPL), (NVDA)
If anyone needs another AI data point, the tech market just delivered us a juicy one with an outstanding earnings call with Broadcom (AVGO) and its CEO Hock Tan.
The AI enterprise build-out has been developing in full-force and investors are pouring money into the foundation of the AI future.
That is currently where the AI profits currently lie.
The software companies have missed out on that profit in the short-term, but since many are also involved in the AI infrastructure spend, they can turn to their investors and ask for a mark-up in owned shares.
This won’t always be the case, and I do believe we are fast reaching an inflection point where shareholders will demand more from their capital and not just more AI data centers and more modern AI semiconductor chips.
I am talking about meaningful revenue growth directly tied to AI spend – we don’t have that yet.
At some point, there needs to be an application from all of this money spent and return on capital.
In the meantime, Mr. Market is cheering the success of AVGO and the stock is up 25% today at the time of this writing signaling investors will continue to back this AI infrastructure spend into 2025 and possibly beyond.
Broadcom CEO Hock Tan said the company expects its custom AI chips will generate between $60 billion and $90 billion in revenue over the next three years from its three existing hyperscaler customers, whom the company did not name. Tan reiterated his belief that each of the three hyperscalers will deploy 1 million clusters of its custom AI chips called XPUs by 2025.
Apple is reportedly working with Broadcom to develop an AI server chip. The move by tech giants to make their own server chips is meant to cut costs and scale back their reliance on Nvidia’s (NVDA) GPUs (graphics processing units).
That trend is reflected in the industry at large. The AI chip market is set to grow 74% in 2025, while the semiconductor market overall is projected to grow just 12% next year.
We are seeing this type of binary divergence in tech firms like Dell and Oracle.
Many of these legacy tech companies are attempting to wean themselves from a legacy business that is expanding in the low single digits.
From a technical perspective, any dip to the $200 level will be a strong buy for AVGO.
I believe they continue to pivot into the AI infrastructure build while partnering with companies that can aid this type of success.
They will continue to invest in products related to AI, mainly chips, which will be installed in a wide array of businesses like data centers, consumer electronics like smartphones and laptops, and electric vehicles.
AVGO has been a hot company for quite a while, and even though not quite an Nvidia, I do believe AVGO stock is a solid backup option for tech investors looking for some diversification.
Mad Hedge Technology Letter
December 11, 2024
Fiat Lux
Featured Trade:
(OPTIMISTIC FUTURE FOR GOOGLE)
(GOOGL), (AAPL)
It isn’t a surprise that the Department of Justice is going after Google (GOOGL) to divest its Chrome browser following a ruling in August that the company holds a monopoly in the search market.
I don’t believe this will tank the cash cow business of Google Search, and let’s not forget the most likely outcome is that Chrome is retained as a division of Google.
At worst, if it does get divested, the appeal process takes many years.
Although I do believe it will become harder for Google Search to track and monitor user behavior without Google Chrome, this is by no means a deal breaker.
Plenty of traffic comes from completely different operating systems like Apple (AAPL) iOS that don’t employ the Chrome browser.
In fact, spinning out its browser would result in a massive windfall because the current setup hides the aggregate value and synergies within a larger corporation.
Once Google Chrome is spun out, animal spirits could take hold, and the value could skyrocket.
Google will naturally profit from this as well.
Chrome, which Google launched in 2008, provides the search giant with data it then uses for targeting ads. The DOJ said in a filing that forcing the company to get rid of Chrome would create a more equal playing field for search.
The DOJ said that Google will be prevented from entering into exclusionary agreements with third parties like Apple and Samsung. The department also said that Google be prohibited from giving its search service preference within its other products.
Search advertising accounted for $49.4 billion in revenue, representing three-quarters of total ad sales in the most recent period.
The DOJ’s request represents the agency’s most aggressive attempt to break up a tech company since its antitrust case against Microsoft, which reached a settlement in 2001.
In August, a federal judge ruled that Google holds a monopoly in the search market.
Also, the DOJ suggested limiting or prohibiting default agreements and “other revenue-sharing arrangements related to search and search-related products.”
The most likely outcome is that Google will be legally forced to do away with certain exclusive agreements, like its deal with Apple. I also don’t believe that Google will be forced to divest from the Android operating system, and the chances of that happening are almost zero.
Even without an exclusivity agreement, most Apple users use Google Chrome because it is still the most useful search engine.
Will that be the case in the future?
With AI changing business models left and right, it is hard to say, but in the interim, it is hard to believe that a lack of exclusivity agreement will cause any meaningful change to the bottom or top line in the next few years.
Breaking up parts of Google would result in a massive windfall for shareholders, strengthen the tech ecosystem, and make Google and its spinoff entities more competitive.
However, high-up executives are wary about voluntarily dumping revenue from the mothership because it hurts negotiating leverage when agreeing on future compensation, and that is what usually standalone corporate executives care about.
I believe spinning out some of these businesses, like Waymo, Google devices, Google Maps, and YouTube, would be great for America and give an opportunity for investors to jump into great tech companies before they skyrocket.
“You want to be the pebble in the pond that creates the ripple for change.” – Said CEO of Apple Tim Cook