Mad Hedge Technology Letter
January 22, 2021
Fiat Lux
Featured Trade:
(THE ADDITIVE MANUFACTURING BOOM)
(DM), (DDD), (SSYS), (GE)
Desktop Metal (DM) produces metal and carbon fiber 3D printing accessible to all engineers, designers, and manufacturers.
I’ve dipped my toe in this industry before by recommending Stratasys Ltd. (SSYS) whose stock has tripled from October 2020.
Since its inception, the company has been a happy recipient of generous funding channels and attracted total funding of $438M, always a good start.
Desktop Metal is truly well-capitalized after its SPAC transaction and strategically positioned to reap the rewards from a "dramatic increase" in the use of 3D printing for end-use part production over the next decade.
The company's outsourcing of manufacturing processes should generate strong free cash flow which should turn positive by 2023.
Sales are expected to explode 286% this year alone, passing $71 million by the end of 2021 as this technology becomes more mainstream.
This is the only publicly traded, pure-play additive manufacturing 2.0 company, and DM has the fastest metal 3D printing technology in the market.
DM is 20 times cheaper than existing laser-based metal 3D printing technologies while allowing the use of a much wider range of alloys.
Not only are they expanding at a rapid clip, but they are also in the perfect market to grow with revenue runway of 11x to $146B this decade, propelled by a shift from prototyping to mass production.
Unlike many other tech startups, the first-mover advantage is buttressed by a diverse blue-chip customer base in the automotive industry.
The automotive industry is a key vertical for volume additive manufacturing and they have started shipping a new, intermediate version of its P-50 Production System, the new P-1 printer, to Ford Motor Company (F).
Buying growth has been a go-to strategy for frothy tech companies as deploying extra capital to take advantage of new efficiencies by owning new assets has been a winning strategy.
M&A is a solid route as a “value creation” strategy and the systems subsector would appear to present a viable strategic acquisition candidate going forward.
Desktop Metal recently bought competitor 3D printing firm EnvisionTEC.
Founded in Germany in 2002, EnvisionTEC specializes in photopolymer additive manufacturing, putting its technology in more direct competition with the likes of 3D printing darling Carbon than Desktop Metal’s own existing competencies.
It’s pouring $300 million to acquire EnvisionTEC through a combination of cash and stock.
There is a great chance for Desktop Metal to grow here.
EnvisionTEC has the underlying technology with the ability to print in more than 190 materials, and Desktop Metal has the resources to help scale that tech.
Today, EnvisionTEC has over 5,000 customers across a broad spectrum of industries, including medical devices, jewelry, automotive, aerospace, and biofabrication.
They are major players in the dental market, more than tripling the number of Envision One dental shipments from 2019 to 2020 and with over 1,000 dental customers now using its AM machines for end-use parts.
Key customers include Cartier, Celgene, Ford, Hasbro, Oral Arts, Stuller, and Smile Direct Club.
In addition to extensive customer adoption, EnvisionTEC has a broad library of over 190 materials, featuring photopolymer resins with material properties in-line with or exceeding those of thermoplastics and multiple FDA-listed and 510(K)-cleared resins for the manufacturing of medical devices.
The company augments its robust proprietary material development efforts with a selectively open business model, leveraging relationships with major chemical companies such as Henkel Loctite, DSM Somos, Detax, Keystone, and Arkema to sell third-party, industry-validated resins for use with its additive manufacturing platforms.
This is most likely the beginning of many purchases as they are flush with new capital from the IPO and other outside investors.
Investors need to know there are a few risks to take note of.
The rapid prototyping to mass production timetable appears quite ambitious, especially since DM has had significant issues with deploying its technology in the field.
Also, the attractive branding of “additive manufacturing 2.0” perhaps could turn into an overhyped industry.
Even though they have solid technology to become successful, there are industry veterans that won’t just lie down including 3D Systems Corporation (DDD), General Electric (GE), (GE Additives), and SSYS.
These recipients are also beneficiaries of all the hot money pouring into the sector the past year.
China could also bring down the 3D printing sector with a race to zero type of domino effect.
DM is a 3D printing company stock to put on their watchlist and buying growth isn’t always a guarantee to buy the “right” growth, but let’s see how they execute it.
Either case, the secular tailwinds can’t be ignored and if this technology goes viral, then watch out.
“I don't want to fight old battles. I want to fight new ones” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
January 20, 2021
Fiat Lux
Featured Trade:
(THE CONTRARIAN PLAY)
(ADT), (GOOGL)
How about a tech contrarian play focused on one of the more primitive areas of technology?
And did I say it’s cheap?
Among the discounted tech equities out there is security specialist, ADT (ADT), that is increasingly using technology as solutions for its customers.
This time, I am talking about normal folks just wanting to live their lives, the collective desires certainly trend towards investors buying security home solutions ADT stock that use technology to protect your home.
Yes, this isn’t a sexy tech stock, but not all are.
And contrary to initial thought, crime has gone down nationally during the pandemic because more people working from home meant less opportunity for trouble to come about the home.
The US set records for decreases in residential burglaries last year, but we all know that it will be different when the freedom of autonomy picks up and we are out of our houses on Friday and Saturday night.
Even in the Great Recession of 2008, crime increased presumably to financial desperation and need.
This sets the stage for ADT to experience more buying as we press into 2021.
What is the bull case as we dig into the weeds?
The ability to get on-premise security solutions today is markedly better than what it was a year ago or the ability three or four months ago.
The strength in execution resulted in ADT finishing Q3 with strong backlogs, the highest of the year.
They had solid sales in install in October as well.
So it's broadly diversified, much of it tied with getting access to the premises.
I’m optimistic about the commercial business with total revenue up sequentially in Q3.
The business includes a largely recurring revenue base of 35%.
It's buoyant and durable, highly diversified stuff. ADT is just shy of 250,000 customers in the commercial business.
There is upside in new and growing verticals, healthcare, education, government, critical infrastructure.
ADT also boasts the best service in the space, and that's the most critical source of differentiation.
Even though the total reported revenue in the quarter was essentially flat year-over-year, 2021 should translate into a “growth” year.
Installation and other revenue increased by $46 million, driven mainly by higher reported residential outright sales revenue resulting from the Defenders acquisition.
This increase was partially offset by lower installation revenue to commercial customers resulting from pandemic-induced economic challenges.
Monitoring and services revenue was up slightly year-over-year.
ADT generated $127 million of adjusted free cash flow during the third quarter. And through the first nine months of 2020, their adjusted free cash flow of $532 million is up more than 15% from the $459 million during the same period in 2019.
The strong year-to-date cash performance comes from a myriad of factors that more than offset the higher cash interest, including subscriber acquisition cost efficiency and the benefits from some favorable cost base trends in the current operating environment, along with some timing items.
First, the new direction with Alarm.com includes the launch of a first-generation ADT + Google offering developed through the commitment by Alarm.com that will result in several tailwinds.
First, it leverages the foundation and extends Command and Control until the end of 2022, and then beyond that, allows that platform to support end customers for the long haul.
I believe customers with integrated Google Nest product and services will perform well on an attrition basis because the product will be one of the superior ones.
The second benefit, integrated Google Nest services and Google Video services will be available and accelerate go-to-market with a co-branded offering in the second half of 2021 instead of mid-'22.
At a high level, ADT will capture efficiencies as a result while navigating a unique product road map to create differentiation.
Leveraging Google's prowess in machine learning and Artificial intelligence to fuel what Google calls ambient computing is the next-gen of home security solutions.
In computing, ambient intelligence (AmI) refers to electronic environments that are sensitive and responsive to the presence of people. Ambient intelligence was a projection on the future of consumer electronics, telecommunications, and computing that was originally developed in the late 1990s by Eli Zelkha and his team at Palo Alto Ventures for the time frame 2010–2020.
And if you can imagine for a moment, in today's world, to leverage this machine learning supported system in different ways with rules and automation, this will only increase the prestige and revenue drivers of ADT’s brand.
Another positive data point was the attrition rate, a record low 12.9% that was widespread across geographies, all categories, across all business areas. SMB was flat but residential and core commercial improved.
As 2021 plays out, I believe a combination of positive macroeconomic and macro-environmental factors will stick with ADT helping to continue to drive improvements in the business through the uncertainty of the end of the health crisis and beyond.
Although I wouldn’t put my life savings into ADT, it is worth a flier at $9 today.
"It has become appallingly obvious that our technology has exceeded our humanity." - Said Albert Einstein.
Mad Hedge Technology Letter
January 15, 2021
Fiat Lux
Featured Trade:
(THE CHIP BONANZA)
(MU), (QCOM), (TSM)
Cutting edge smartphones and uncontrollable demand for more data-center processing power means equipment manufacturers will need to include significantly more dynamic random access memory (DRAM).
One of the most influential DRAM manufacturers is Micron (MU) and they are poised for a breakout, which is why I executed a call spread with a February expiration.
Micron just so happens to be the best of breed for DRAM which should elevate the stock to higher highs.
Micron’s DRAM is a must-have input into fueling artificial-intelligence and machine-learning applications, next-generation videogame consoles, and in 5G phones, which typically contain more storage and memory than the prior generations of handsets.
The sudden surge for DRAM and other semiconductor products is setting up a year in which capacity is failing to keep up with demand.
End manufacturers are piling on heaps up pressure on the chip companies to procure the chips they need to produce everything from cars to consumer electronics.
The uptick in demand means that prices for semiconductor products are skyrocketing and this could start to turn into a bottleneck for chip companies that cannot fulfill orders.
There is no panacea to the situation.
There is no switch to turn on to add new chip-making machinery.
It’s an expensive and time-draining exercise that includes ordering half a year out, and even longer now.
There has been a deal-making bonanza lately with Qualcomm (QCOM) acquiring NUVIA for $1.4bn and other deep pockets investors looking to pick off the next chip company to flip.
Taiwan Semiconductor Manufacturing Co. (TSM), the world’s largest contract chipmaker, said it was working with the car industry to address critical shortages.
This will mean a wave of capital investment into new factories that can produce chips.
The boom – bust cycle is starting up again.
The pandemic has had a helping hand in the supply crunch with the demand for laptops because of remote work exploding.
There is simply a heightened appetite for cloud-computing services and the data centers behind them.
U.S. restrictions on Chinese telecom giant Huawei Technologies Co. led competitors to hoard chips and charge excessively for highly sought for parts.
With a severe lack of chips, automakers and consumer-electronics manufacturers are competing for every bit of limited manufacturing capacity.
Corporations are starting to feel the domino effect with Ford Motor Co. announcing it would temporarily furlough a factory in Kentucky this week because of chip shortages that has also led some competitors to change production plans.
The situation is getting so bad that companies are now asking for as much as they can get demanding two years’ supply of chips; and General Motors Co. last month asked suppliers to stockpile a year’s worth of chips.
Bulk orders are normal, but companies are asking for a larger delivery as the availability of chips disappears.
It has literally become a free-for-all triggered by desperation.
Lead times across the industry have risen to six months, from eight to 10 weeks before the pandemic,
For some niche chips, the lead time is up to 20 or more weeks.
Chip sales are expected to grow 6% this year, reaching a record high.
Don’t forget also that the application of chips in automobiles is still a relatively new industry.
Cars didn’t need chips before, but as Tesla has shown you, cars are now iPads on wheels, tricked out with the latest gadgets.
Powerful entertainment systems and driver-assistance functions like rear cameras can’t function without chips.
This all means more demand in a world where companies are fiercely on the prowl for more chips.
Production cycles are long, the development cycles are even longer and there are reliability requirements that increase the cycle times.
Companies can’t just slot in older, weaker chips to power these high-octane systems without reducing the quality significantly.
Chip companies have rung the alarm bells and admitted this dearth of supply won’t be fixed this year.
The demand is so high that the shortage could last until 2023.
Of course, some companies are nimbler than others but in general, this capital-intensive process is like a monolith and moves incredibly slowly.
The bottom line is that these confluences of external and internal forces mean that chip stocks will go higher in 2021.
Mad Hedge Technology Letter
January 13, 2021
Fiat Lux
Featured Trade:
(HYDROGEN FUEL CELL TECHNOLOGY FOR DUMMIES)
(PLUG), (RENAULT), (SK), (GS), (TOYOTA)
Hydrogen fuel cell technology goes like this: electricity is generated from an onboard supply of hydrogen.
That electricity powers the electric motor.
When hydrogen gas is converted into electricity, water and heat are released.
A FCEV (Fuel Cell Electric Vehicle) stores the hydrogen in high-pressure tanks.
Non-toxic, compressed hydrogen gas then flows into the tank when refueling.
Did you get all that?
This is an industry that Goldman Sachs’ (GS) says is a $10 trillion industry just waiting to happen and that is one of the plethora of reasons to look at Plug Power (PLUG.)
And when you consider that 20% of European recovery stimulus will be spent on hydrogen fuel cell technology, it seems like a no-brainer.
French automaker Groupe Renault and U.S.-based Plug Power just told us that they signed a memorandum of understanding to establish a joint venture that will develop, build and market electric fuel cell light commercial vehicles (LCVs).
The progress is real, even with German automaker BMW saying it would produce an X5 SUV with its second-generation hydrogen fuel cell powertrain by 2022.
This move pushes the narrative along for technology automakers who once hoped would replace batteries as the power source for electric vehicles, only to be thwarted by a lack of refueling infrastructure and safety surrounding the use of flammable hydrogen.
“Hydrogen fuel cell vehicles are superior driving machines compared to traditional vehicles” said Jackie Birdsall, senior engineer on Toyota's fuel cell team.
Plug Power, headquartered in Latham, N.Y., outside Albany, has emerged as the leader in developing fuel cell systems, the proverbial “best in show” having deployed more than 40,000 such systems, and has built 110 hydrogen refueling stations.
That’s essentially why Renault has made the executive decision to partner with Plug Power as it looks to create fuel cell-powered light commercial vehicles for business-to-business customers in Europe based on its Master and Trafic truck platforms.
The more practical reason to go with hydrogen fuel cells is because in electric vehicles, batteries simply cannot carry payloads of more than four tons with 20 cubic meter volumes.
There is no solution for light commercial trucks because you would need a lot of battery on board, a lot of energy, more than 100 or 120-kilowatt hours and that doesn’t make any sense in terms of cost or in terms of weight.
The attractiveness in this asset consists of perpetual operation, fast charging, fuel cells that can fill up in 5-6 minutes, can get twice the range and you also have greater density for packaging.
The target is to capture more than 30% of the fuel cell-powered European light commercial vehicle market.
The initiative goes a long way to commercializing fuel cell LCVs in Europe with a pilot fleet.
The deal with Renault is a boon for Plug Power and comes a few days after announcing a $1.5 billion investment from SK Group, a South Korean conglomerate.
It all amounts to new energy for fuel cells—not as competitor to batteries, but as an additional and supplementary source of electric power more suitable for certain applications.
The venture will start commercializing fuel-cell light commercial vehicles in Europe starting in 2021 with pilot fleet deployments and the partnership will also create a hydrogen vehicle ecosystem solution company that offers vehicles, hydrogen fueling stations, and hydrogen fuel.
The project will finish by mid-2021.
Indeed, while sentiment has grown fairly sour for using fuel cells in passenger vehicles, Plug Power CEO Andy Marsh says the technology is a perfect fit when it’s not feasible to wait around for a battery to recharge, which is why the B2B market is embracing it.
The commercial market sits entirely adjacent to the private vehicle market and traction has been slow to pick up for that segment.
Hydrogen fuel-cell cars remain low in volume, expensive to produce, and restricted to sales in a few niche regions that have built hydrogen fueling stations.
Passenger cars won’t scale up on this technology unless policies change.
I am not a believer of FCEVs for passenger cars. It costs tens of billions of dollars to set up a hydrogen fueling network that requires industrial-strength compression equipment.
However, Plug Power is the best of breed and its technology is well suited for a specific application and I do believe other countries will be interested in partnering with them to introduce it into their business-to-business segment.
Wait for a pullback to purchase shares.
