Mad Hedge Technology Letter
March 8, 2021
Fiat Lux
Featured Trade:
(A SPECULATIVE EV NAME TO CONSIDER)
(FSR), (TSLA), (NIO)
The 700% gain by Tesla (TSLA) in the past 365 days has meant that this is a Tesla world and everyone else is living in it.
Not to mention they produce a magnificent car that everyone wishes they could drive.
Just look at the unusual options activity of last Friday, and the top 10 most voluminous call activity was in TSLA and Chinese electric vehicle (EV) maker NIO.
Heavy call option buying signals that derivative traders believe the underlying stock will go up in the short-term.
EVs have leaped ahead of the cloud as a derivate of the cloud that contains ultra-growth price growth in the underlying stocks.
Fortunes are being made on speculative EV bets as we speak.
The success has spawned lookalikes, charlatans, and copycat imposters that hope to mimic the same type of trajectory and business.
Infinite attempts will be made to make a crack at the Tesla narrative and to join them as the number two or three in a group of one.
One speculative bet that has a distant shot of making headway in the short to medium term is EV manufacturer Fisker (FSR).
Fisker recently made ingenious inroads to Apple’s subcontracting partner, EV Taiwanese manufacturing specialist Foxconn Technology Group.
They agreed to develop a smartphone maker Foxconn’s hoping the manufacturer’s efforts will boost its automotive capabilities at a time when technology companies including its main customer, Apple Inc., are looking to expand in vehicles.
It’s not coincidental that Foxconn’s first try to sort out the teething pains coalesces around an unknown brand like Fisker.
If plans to fortify their skills in this relatively new industry go awry, they’ll just write this one off.
The know-how and knowledge developed on the ground could also reroute Fisker’s prospects and attach it to the back of Apple’s potential 5G car.
A three-way partnership with each entity providing expertise would certainly mean a 10-fold increase in Fisker’s underlying stock or provide the ammo needed to claim itself as number 2 to Tesla.
Of course, the road is windy and long and there is no certainty that Fisker will knock the socks out of this agreement, but the parameters have been initially set for them to do well in the short-term.
The car will be built by Foxconn, targeted at multiple markets including North America, Europe, China, and India, and sold under the Fisker brand.
Production is set to start in the fourth quarter of 2023.
There is outsized risk in producing this car because Foxconn specializes in making smartphones and not cars.
They are new to the auto business and relying on collaboration and innovative manufacturing that will either go well or unravel quickly.
Fisker founder Henrik Fisker has criticized the car industry for being outdated and said, “We still talk about adopting the Toyota manufacturing system,” referring to a production and logistics concept that was developed decades ago.
Fisker plans to design and market the vehicle while Foxconn will supply the skateboard chassis and manage supply chain and assembly.
Provided they can use their smartphone know-how and flip it into car-making mode, however, in reality, it’s a tall order for the Taiwanese giant.
“Outside the box” solutions are needed to compete with Tesla and taking a speculative bet on Fisker also means believing this Foxconn partnership will work.
Shares of Fisker rose 39% on the announcement showing there is a cohort believing the risk is worth a bet because the upside is savory.
Foxconn will build more than 250,000 vehicles annually for the Fisker partnership and Founder Fisker hatched the plan when he was reading about Apple’s plans for a car. He said he began sketching what he thought a tech company would build if one went into the car business.
“It will be like nothing you’ve seen before,” Fisker said.
With still much development yet to come, Apple will take 5-7 years to launch their car and that’s if they can get their act together while caring for their main iPhone business.
Certainly, many things need to align for Fisker to score a long-term contract designing Apple smart cars, but at least they can claim to be in the same universe as Apple, even if it is a distant planet.
“Technology is the knack of so arranging the world that we do not experience it.” – Said American existential psychologist Rollo May
Mad Hedge Technology Letter
March 5, 2021
Fiat Lux
Featured Trade:
(THE NEXT BIG TECH GROWTH NAME)
(PLTR)
They are the tech company that beat out Lockheed Martin, BAE Systems, and 14 other unique systems to snatch an NSA contract to provide data analytics to the Five Eyes Alliance in 2011. Palantir has never looked back.
This could become the next 10-bagger.
It’s been that type of overperformance for Palantir since its inception in 2003.
By 2009, they had already amassed over $1.2 billion worth of government contracts and Palantir has already gone through 18 years of product development and spent more than $3 billion on R&D.
Palantir has an unswerving mandate to serve the U.S. government and its allies which has been an effective way to market its services.
This narrow message has effectively knocked out competition from Microsoft, Google, Facebook, Amazon, and Apple who have taken a “friends with everyone but friends with no one” approach to their business empires.
Their companies’ employees have protested against any type of government work with the U.S. army, withering at the thought that they would be responsible for blood on their hands.
Palantir makes sure that prospective employees understand where revenue is procured from and make no apologies for it.
Summing up Palantir is hard to do, but they really are the swiss army knife of data analytics that provide a platform in order to carry out executive decisions that put together trillions of data points from public, private, and secret sources into an easy to use, integrated, one-stop shop system.
This has worked wonders for the U.S. defense agencies and why CEO Alex Carp doubled down with Palantir’s five-year outlook of greater than $4 billion in revenue in 2025.
Starting in 2021, Palantir expects greater than 30% annual revenue growth each year for the next five years.
And in Q1 of this year, Palantir expects revenue growth of 45% or $332 million.
The strong outlook fuses with a sensational full-year 2020 performance of $1.93 billion in revenue, up 47% year over year. Fourth-quarter revenue was $322 million, up 40% year over year, and roughly $21 million above a prior guidance range.
Government revenue accelerated in the fourth quarter growing 85% year over year to $190 million.
Palantir signed several large deals in the quarter including a three-year $44 million expansion with the U.S. Food and Drug Administration and a two-year $31 million agreement with the NHS.
Some of the other deals signed were a multi-year contract with Pacific Gas and Electric to help it streamline operations across the company.
PG&E will now be able to perform root cause analysis and upgrade monitoring.
This should improve PG&Es electric operations and asset management, resulting in enhanced safety and grid reliability.
Palantir has deepened a partnership with BP. And in the fourth quarter, they signed a five-year nine-figure enterprise renewal and have an ongoing relationship with BP since 2014.
The largest part of Palantir’s annual revenue comes from the U.S. military with full-year government revenue rising 77% to $610 million, led by ongoing momentum in the U.S., which grew 91%.
Its Army operation continues to expand.
Palantir recently won a pair of new contracts with the Army to accelerate its modernization efforts.
Palantir was also the beneficiary of the U.S. Army executing its first option year with approximately $114 million as part of a partnership on the Army Vantage program.
Under the $8.5 million Phase 1 contract, Palantir will collaborate with the Army to demonstrate a solution that integrates space, high altitude, aerial, and terrestrial sensors for use in intelligence command and control.
In November 2020, Palantir was selected to provide a prototype for the Army's common data fabric and data security solutions.
Palantir provides an integrated solution that will ultimately improve access to critical data for commanders and soldiers, deliver efficient use of networks and denied integrated environments, and increase the collaboration with joint and allied partners.
The strength isn’t just relegating to U.S. government contracts, Palantir is experiencing intensive growth of existing customers with average revenue per customer growing 41% to $7.9 million.
They grew the number of accounts with $10 million of annual revenue or more by 50%.
For the full year 2020, 43% of Palantir’s revenue was generated from new customers in 2018 or later symbolizing their improving ability to rapidly onboard customers.
Palantir is also just scratching the surface of their commercial business heading into 2021 that saw a revenue rise of 107% year over year in fiscal 2020.
Growth tech firms typically preside over a margin problem at this early stage but Palantir exhibits some of the best margins around with full-year adjusted gross margin of 81%, up 1,000 basis points, compared with full-year 2019.
The year-over-year improvement in gross margin was driven by increased automation and efficiency in the delivery of our software.
Palantir is at the cutting edge of data analytics and whether it’s helping Fortune 500 companies navigate climate change headwinds, implementing Brexit policies for British companies, or modernizing U.S. military operations, they have seized the highest quality revenue possible.
The data analytic company is certainly a play on cyber espionage that is poised to explode on the sovereign and economic level as adversaries have bold plans to weaponize 5G.
One pain point is the overreliance of government contracts; however, I would argue that they are scratching the surface with the commercial operations and the path of least resistance for commercial revenue is up.
The pathway to grow from today’s $38 billion to $200 billion is wide open and if Palantir deploys their best of breed management to grow revenue 30% for the next 5 years, this is easily a $100 stock in the next 2 years.
“I'd rather Apple cannibalize Apple than somebody else cannibalize Apple.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
March 3, 2021
Fiat Lux
Featured Trade:
(U.S. CHIP SHORTAGE IS REAL)
(WDC), (AMD), (MU)
Yes, the price is going up. And no, I am not talking about monthly grocery bills, but the price of semiconductor chips that help operate iPhones and will power autonomous driving vehicles.
The situation is so dire that US President Joe Biden signed an executive order calling for a supply chain review of semiconductors and IT technologies.
Yes, it’s that bad.
The drastic and imminent chip shortage is impacting a wide swath of tech firms we cover here at the Mad Hedge Technology Letter.
The order will also “facilitate needed investments to maintain America’s competitive edge and strengthen U.S. national security.”
Biden’s proactive decision to sign the executive order comes on the heels of several top U.S. semiconductor executives persuading US President Joe Biden earlier this month to resuscitate domestic chip manufacturing with “substantial funding” as part of the White House’s economic recovery and infrastructure plan.
In the fact sheet for the executive order, the White House said supply chains for semiconductors and advanced chip packaging technologies will be among four key areas where federal agencies will be directed to commence a 100-day review.
The White House acknowledged a massive underinvestment in semiconductor production that has caused manufacturing to shift abroad.
The critical issue was emphasized by U.S. semiconductor executives in a recent joint letter to Biden.
The US has leaned on foreign manufacturing for many products in the past 50 years, but semiconductor chips are the ones that could force US tech companies into a losing position and offer a pathway for Chinese tech firms to seize their chance as top dog.
The 100-day supply chain review will also look at critical minerals, including rare earths that are used for a variety of products, as well as large-capacity batteries and active pharmaceutical ingredients.
The shortages of chips and other components are a very real issue that can have a material impact on several adjacent industries, including bioinformatics companies and mechanical parts manufacturers that rely on simulation and modeling applications.
How does this affect chip companies?
Let’s take a look at one, Western Digital (WDC).
Shares are trading higher on signs of improving pricing in the flash-memory market.
I am short-term bullish on Western shares because a meaningful memory-chip price rise is in the cards for both flash NAND and DRAM.
A blast from the past Silicon Valley dinosaur that began as a disk-drive manufacturer, Western diversified into flash-memory products via its 2016 acquisition of SanDisk.
Encouraging NAND pricing also benefits Micron Technology (MU), which makes both NAND and DRAM chips.
The most important takeaway from my channel checks is that despite increased attempts by cloud and enterprise customers to lock in prices for second-half delivery, end contract numbers aren’t reflecting any good deals for the end buyer.
Manufacturers are convinced with their newfound pricing power and will wield it to full effect.
Expect significant price increases until the shortage is cured, and this could result in many end projects being shelved because of funding issues.
For semi chip firms, a bountiful harvest will make 2021 earnings report glisten in the form of meaningful expansion in margins, which have been under pressure since 2018.
My initial prediction is that prices will rise 5% to 10% from the fourth quarter—and that pricing for the second quarter is tracking up another 10% or more sequentially making it a 20% rise in less than half a year.
Memory manufacturers like Micron (MU), AMD (AMD), Samsung, and Western Digital (WDC) are in line to overperform in 2021.
“My goal wasn't to make a ton of money. It was to build good computers.” – Said Co-Founder of Apple Steve Wozniak
Mad Hedge Technology Letter
March 1, 2021
Fiat Lux
Featured Trade:
(HOUSING GOES DIGITAL)
(Z), (RDFN)
