Tech Letter Archives

The Largest Risk to Tech Growth Shares

The U.S. Central Bank has chosen to be as accommodative as possible in order to put a floor under the stock market with near-zero interest rates and large-scale asset purchases.

This will have an inordinate effect on tech stocks moving forward because the rhetoric from the Fed is as close as one can get to admitting that tech stocks should be bought in droves.

Fed policy won’t kill the rally and talk up higher interest rates until “substantial further progress (to unemployment numbers) has been made,” and “is likely to take some time” to achieve said Fed Governor Jerome Powell.

Yes, it’s possible to attribute some of the bullishness to the “reopening” trade and the massive migration to digital, but the loose monetary policy is overwhelmingly the predominant catalyst to higher tech shares.

As Powell spoke, the Nasdaq did a wicked U-turn in real-time after being in the red almost 4% and sprinted higher to finish up the trading day only ½ of a percent down on the day.

What does this mean for the broader tech market and Nasdaq index?

We started seeing all sorts of wonky moves like Tesla (TSLA) making a $1.5 billion bitcoin (BTC) investment earlier this month.

Fintech player Square (SQ) bought Bitcoin on the dip pouring $170 million into it.

Yes, this isn’t a joke.

Corporations are becoming the dip buyers in bitcoin which would have never been fathomable a year ago from today.

The risk-taking has literally gone into hyper-acceleration in the tech world and is transforming into a fantasy world of corporations swimming knee-deep in capital trying to outdo one another with fresh bitcoin orders of millions upon billions.

That’s where we are at right now in the tech markets.

Treasury Secretary Janet Yellen has also gotten into the bitcoin story condemning the digital gold by saying that bitcoin is an “extremely inefficient” way to conduct monetary transactions.

But because of the extreme low-rate nature of debt, this just gives investors another entry point into the digital gold.

This sets the stage for a correction in tech stocks and the likely reason for it would possibly be higher interest rates or even negative lockdown news or some combination of both.

On the technical side of things, a result of this magnitude would be set off by first, cascading sell orders at one time, eerily similar to what got us the March 2020 low.

This could happen in either biotechnology stocks or Tesla shares and cause performance to deteriorate which could trigger net outflow and that would trigger a violent feedback loop.

Catherine D. Wood is the Founder, CEO, and CIO of ARK Invest and has been hyping up the super-growth tech assets like she was betting her life on it.

The only way she can get away with this chutzpah is in an anemic rate environment that pushes investors to search for yield.

Her reaction to yesterday’s market action wasn’t to buy bitcoin on the dip but go into a safer asset that actually produces something, and she bought another big chunk of Tesla.

Risk-taking and leverage in tech shares have gone up the wazoo which means that any incremental rising of rates is harder for the overall tech market to absorb.

Bitcoin is now being viewed as just one risk point higher on the risk curve than Tesla and that is a dangerous concept.

Technology often promises investors that they are paying for future cash flows of tomorrow and that story doesn’t work if the margins are turning against the management.

The low rates offer the impetus for characters like Wood to boast that she was surprised by how fast companies are adopting bitcoin and that her “confidence in Tesla has grown.”

It is just a sign of the times and even more money has been injected into zombie companies that have no hope of improving margins ala the retail sector.

Awash in liquidity has the ultimate effect of making tech growth stocks even more attractive than the rest of the crowd which is why we have been seeing sharp upward moves in second derivative plays to bitcoin like PayPal (PYPL), Square while the FANGs, aside from Google (GOOGL), have treaded sideways.

Markets tend to overshoot on the upside and downside and as the sell-off was met with shares that came roaring back in a speculative frenzy, we are now in a situation with many markets, even the foreign ones, hitting fresh records, even as the nations they were based in suffered their sharpest recessions since at least the Great Depression.

The overshooting tends to come from the fear of missing out (FOMO) amongst other reasons.

Ultimately, as the corporate list of characters and billionaire hedge fund community load up on tech growth stocks, just a small movement to higher yield could cause a Jenga-like toppling of their strategy and profits.

This could snowball into a massive unwind of positions to meet margin calls after margin calls.

If we can avoid this indiscriminate fire sale, then, like Bank of America recently just said, it’s hard to make a different analysis aside from being overly bullish as the treasury, Fed, and macroeconomic factors have made a major sell-off less likely.

I am bullish technology and would advise readers to go back into growth names as volatility subsides, but keep an eye out for rates creeping higher because, at the end of the day, it’s clearly the biggest risk to the tech sector.

February 24, 2021 - Quote of the Day

Tech Letter

“Our goal was never to create a better taxi.” – Said CEO of Lyft Logan Green

February 22, 2021

Tech Letter

Mad Hedge Technology Letter
February 22, 2021
Fiat Lux

Featured Trade:

(AN ATTRACTIVE REAL ESTATE TECH PLAY)
(SPAC), (GHVI)

An Attractive Real Estate Tech Play

Tech Letter

Special purpose acquisition company (SPAC) mania continues to bring a plethora of new tech names to the public market increasing the range of assets the Mad Hedge Technology Letter can look at.

The latest is the VC-backed real estate tech company Matterport (GHVI).

Matterport has built the world’s most advanced platform for quickly and easily creating, modifying, and distributing 3D models of real-world spaces.

The company has amassed the largest repository of 3D space data in the world for industries including real estate, architecture, construction, insurance, hospitality, and more.

Matterport leverages this data to drive its AI and deep learning algorithms to create unparalleled digital reconstruction of physical spaces, with an understanding of the spaces themselves and the objects within them.

This firm went public with Gores Holding VI, a special-purpose acquisition company founded late last year by investment firm The Gores Group.

Virtual walkthroughs of properties have mushroomed during the pandemic, especially in regions of the U.S. where in-person showings were prohibited.

Matterport’s 3D technology is used in more than 130 countries by clients, which include Redfin and Marriott International.

Some prominent investors include DCM Ventures and the venture arms of Advanced Micro Devices and Qualcomm.

The SPAC popularity has now migrated to real estate, with several companies — including Opendoor and Porch.com — going public in 2020 via blank-check firms.

Matterport keeps improving its software with a major update this week, specifically for iPhone 12 Pro and iPad Pro 2020.

This update injects improved dimensional accuracy with LiDAR for those two devices.

This means that the 3D sensor at the back of the device will be deployed to capture and recreate a more life-like iteration than ever before.

Matterport has been around for a while and this app and the company behind it have been capturing 3D models.

But now the new application of LiDAR on these most advanced devices gives this software a better dimension.

This is really the first step to the real estate industry becoming more integrated with technology.

Matterport is also an expert in the handling and display of 3D-captured content from a variety of cameras, both standard flat and 3D / spherical.

Other fusion real estate technology companies are also getting in on the act hoping to go public via their own SPAC.

Recently, Compass, a New York-based real estate brokerage startup that heavily markets its technological prowess, filed paperwork to do an IPO of its own.

Alternative notables to keep an eye out for are Chattanooga, Tennessee-based tech-enabled moving company Bellhop and San Francisco-based residential real estate marketplace Sundae plan to raise more private capital before pursuing public listings.

Co-founder Gregor Watson said Oakland-based home rental marketplace RoofStock could eventually go public or sell a large strategic stake.

Carmel, Indiana-based Realync could also be an acquisition target after raising capital in 2020, according to co-founder and CEO Matt Weirich, who named RealPage and Santa Barbara, California-based Yardi Systems as logical buyers for its virtual leasing and engagement platform for multi-family residences.

I also have a good feeling about Matterport’s management.

Matterport’s CEO RJ Pittman also has a strong track record at his previous companies like having most recently served as Chief Product Officer for eBay following leadership positions at Google, Apple, and Groxis.

Pittman’s appointment coincides with a period of significant growth for Matterport, which has built a library of 1.4 million 3D models, with 600 million model views since the company’s inception.

We are barreling towards a tipping point in market adoption of 3D models to transform how building environments are designed, developed, experienced, and managed.

The commercial applications are quickly unfolding, and Matterport’s industry-leading technology is well-positioned to drive rapid market expansion.

I am convinced that management at Matterport will unlock the full potential of the breakthrough technology and unparalleled 3D media and data.

This company is on the verge of driving transformation and creating high-performance teams that will then attract world-class industry talent and accelerate the next phase of growth.

Matterport’s underlying shares have been the recipient of unbridled optimism in the accruing of future revenue and shares have already appreciated by around 100% since going public around a month ago.

February 22, 2021 - Quote of the Day

Tech Letter

“Culture eats strategy for breakfast.” – Said CEO of Microsoft Satya Nadella

February 19, 2021

Tech Letter

Mad Hedge Technology Letter
February 19, 2021
Fiat Lux

Featured Trade:

(ARE TECH STOCKS IRRATIONAL?)
(TSLA), (PYPL), (BIG TECH)

Are Big Tech Stocks Irrational?

Tech Letter

It’s no joke – we are in the nosebleed section with tech stocks here.

But that doesn’t mean there is no more room to run.

Euphoria can continue until it doesn’t, and that’s where we are right now in the Nasdaq as we close in on 14,000 points.

If we take a minute to understand the different opinions out there, overall, people think tech isn’t cheap right now and rightly so.

Out of all assets, bitcoin and U.S. tech stocks are considered in bubble territory right now.

A survey contributed by market professionals in late January found that 89% of professionals believe we are in a bubble.

In the bubble, bitcoin is the posterchild of bubble activity.

The next so-called bubble poster child is big cap U.S. tech stocks.

Hard not to say no when the likes of fintech giants PayPal (PYPL) are up 25% YTD.

Another name that has seen insatiable appreciation in underlying shares is electric vehicle (EV) maker Tesla (TSLA) peaking at $880 and consolidating back to $790 today.

Tesla, meanwhile, also saw a massive climb in its share price in 2020 and that has extended into the new year.

CEO Elon Musk was crowned the world’s richest person.

The stock is up more than 700% year over year.

It is not exactly certain what might take down these robust names.

The number of tailwinds is still plentiful.

Loose monetary situations supportive of bubbles will stick around with the public health situation lingering for longer than first anticipated.

The health dilemma is highly likely to spill over into 2022 at this point.

More investors say the rollout of vaccines deployment is failing (41%) than those who said it’s been better than expected (22%).

Only half of those surveyed see normality returning by December.

Then checking in with the latest from a big American investment bank validated these survey numbers with massive in-flow of equity capital.

Brokers have been busy and rightly so as equities have been frontpage news lately with speculative mania reaching fever pitch.

A record net 25% of investors surveyed by the American investment bank this month are taking higher-than-normal risks.

Cash levels slumped to the lowest since 2013, while optimism on cyclical risk assets rose to the highest since 2011.

The yields out there have never been lower and bearing more risk is required to produce the same number of gains.

Unrivaled optimism has been percolating with 84% of fund managers expecting global corporate profits to improve over the next 12 months.

For the first time in a year, investors say companies should focus on spending rather than improving their balance sheets.

We are in the midst of going from balance sheet protection to really letting it loose with capital spending and the synergies that surround it.

Easy money and upcoming health solutions are fueling tech investors into reflation trades of all stripes but mostly trading that is hypertargeting towards the best of tech.

Even if a mini correction presented itself, the mentality of “buy the dip” has strengthened since last March and it will really take a mega black swan event to topple this momentum.

In short, the tech narrative is strengthening with not only the gold standard of tech monopolizing even more revenue, but the second tier is gaining ground in terms of percentage appreciation as well.

The secular trends that buttress tech have also fortified over the pandemic and no government, big or small, has proven a match for proper regulating big tech.

February 19, 2021 - Quote of the Day

Tech Letter

“The bulk of the story will be what happens next.” – Said Co-Founder of Microsoft Bill Gates when talking about the pandemic

February 17, 2021

Tech Letter

Mad Hedge Technology Letter
February 17, 2021
Fiat Lux

Featured Trade:

(THE TECH COMPANY COZYING UP WITH THE WHITE HOUSE)
(PLTR)

The Tech Company Cozying Up with the White House

Tech Letter

I hate to be a cheerleader but that is what I am about to do for the secretive big-data firm Palantir, co-founded by billionaire venture capitalist Peter Thiel.

With funding from the CIA’s non-profit venture capital arm In-Q-Tel, Palantir (PLTR) is named after mystical orbs in J.R.R. Tolkien’s “The Lord of the Rings” universe that can see both the past and present and allow users to communicate over vast distances.

To be concise, PLTR is the gold standard of data mining stocks and I urged readers to pile into this stock at $10.

That was then and this is now.

This stock is clearly a 10-bagger and after surging past $44 in January, the stock has consolidated to $28 today.

The fundamentals supporting this narrative is ironclad with the CIA delivering premium opportunity to accrue recurring government revenue.

We aren’t going into the semantics of how PLTR runs its business but in short, it basically provides customized software to clients analyzing large tranches of data for reasons ranging from finding suspected criminals to improving companies’ manufacturing capabilities.

The company acknowledges that government customers use its technology to kill people, so investors not comfortable with the deeper meaning behind the technology and revenue should steer away from this one and go with the softball versions of big tech.

Palantir gets both criticism and praise for the powerful nature of its data analytics software.

For example, critics allege Palantir's profiling tools used by intelligence and immigration agencies sometimes operate under a cloak of secrecy with zero oversight.

Palantir’s tools are not just for killing bad guys, they have also signed up companies from sectors that include healthcare, energy, and manufacturing.

Palantir has two main services that analyze data: Palantir Gotham and Palantir Foundry.

A customized option, Palantir Gotham is used by companies, government agencies, and law enforcement to combine information to decipher previously unseen patterns and identify relationships between sets of data ranging from social media posts and addresses to license plate numbers and personal relationships.

The algorithm then summarizes content together to make broader conclusions from the data.

Meanwhile, Foundry is a ready-made solution focusing on clients ranging from pharmaceutical and automotive businesses to aviation companies like Airbus and is meant to cut down on the costs associated with Gotham, such as the need for multiple on-site engineers.

Who is the CEO?

Alex Karp.

A graduate of Stanford Law School.

Karp has been explicit in his belief in the need for Silicon Valley companies to work with the U.S. government and law enforcement agencies precisely because they are American companies.

Palantir refers to effective applications of its software such as combatting Ponzi scheme conman Bernie Madoff to disaster recovery to thwarting cyberattacks and fighting child exploitation.

Not only that, Palantir’s software was deployed in the aftermath of Hurricane Florence in 2018 alongside Team Rubicon, an organization of military veterans that responds to disaster areas. With Palantir’s Gotham Operations module, the group identified and responded to neighborhoods in the greatest need of assistance.

How does the software directly help real-time U.S. soldiers in the field?

Its software helped the U.S. military track insurgents in Afghanistan planting improvised explosive devices (IEDs) by finding correlations between weather patterns, command wire IED attacks, and biometric information found on explosive devices.

Palantir has also sold its software to the Salt Lake City Police Department, helping officers reduce the time it takes to perform complex investigations by 95%.

Granted, this tech company is not for everyone, which is why many global brands such as Hershey’s, Coca-Cola, Home Depot, and American Express have terminated relationships.

In the short term, PLTR blistering rally will face an expiration of a lockup that allows 80% of total shares to be sold which could unleash a wave of selling from insiders tempted to cash in their shares.

The company’s market valuation at 39 times 2021 sales estimates implies revenue growth well in excess of 40%, at this pricy level, it makes PLTR an easy sell the news victim.

PLTR has tanked for two consecutive weeks and shares are down 18% from a record high late last month.

The overheating of shares has come back to reality with a tepid annual sales growth forecast of at least 30%. That suggests a significant slowdown from last year.

By comparison, sales growth in 2020 reached 47%, even surpassing $1.1 billion.

The silver lining is that government sales jumped 85% reassuring investors that the quality of sales could not be higher.

The company insiders have waited years to unload shares, and if there is a significant dip, I would put money to work in PLTR.

Shares are going to $100 and readers should ride the ladder up with them.

pltr