“Technology is the key weapon in the fight for control of the industries of the future and in combating pandemics.” – Said American Economist Nouriel Roubini
Mad Hedge Technology Letter
November 6, 2020
Fiat Lux
Featured Trade:
(IN THE KNOW ABOUT ENPHASE ENERGY)
(ENPH)
Tech has been trending downwards for the past 2 months apart from this relief rally celebrating potential gridlock in the senate.
There is a high probability that tech will be dormant in the short-term offering me a great opening to focus on alternative industries adjacent to tech that is also forward-looking.
Despite the global pandemic destroying large segments of the U.S. economy, the solar sector has been a revelation.
This is not much of a surprise for long-time solar industry nerds since a similar decoupling occurred in 2009 when many economics were hard hit by the Financial Crisis of 2008.
Under normal seasonality, the solar industry typically strengthens each quarter with the first quarter being the weakest boding well for the last 2 months of 2020
Enphase Energy, Inc. (ENPH) is the company I would like to fill you in on today and they design, develop, manufacture, and sell home energy solutions for the solar photovoltaic industry in the United States.
Looking forward, Enphase expects third quarter revenues to range between $160 to $175 million.
One of Enphase's critical competitive advantages is that the company operates more as a technology company than a commodity manufacturer.
While other companies do produce its main power inverter product, Enphase has market dominance in the micro-inverter segment.
For residential solar applications, micro-inverters do offer an advantageous alternative. Enphase's shipment growth over the past couple of years is the empirical evidence.
Even more salient, the company avoids ruinous capital expenditures by deploying contract manufacturing similar to peers with proprietary technology.
By leveraging these variables, Enphase has accelerated its high gross margins above 30%.
The company's lower margins last year were in part due to higher expedited shipping costs to satisfy demand but has solved that bottleneck and boosted gross margins to over 40% this year.
Enphase's stable high gross margin is the x-factor.
Most solar module producers have high fixed costs which deteriorate margins and drag down utilization rates.
As a result, not only do shipment gyrate between industry cycles but also gross margin. While Enphase is also exposed to industry fiscal cliffs, high gross margins should be highly constructive even in down years.
During up cycles, Enphase's high gross margins and lower operating structure give it abnormally advantageous earnings leverage.
Enphase's earnings leverage will be even more dramatic once revenue growth reaccelerates after the pandemic filters through the U.S. economy.
Up until now, Enphase has been pigeonholed as an inverter company within the solar industry.
The company did offer a battery storage option, but it was not an overwhelming segment of total revenues.
This may change moving forward after the company's next generation Encharge storage option released lately has shown glimpses of stardom among its competition.
As the election grinds down to a bitter finish, Presidential candidate Biden has already announced a $2 trillion climate plan which obviously would include expanding solar installations and be on the table if Biden eventually claims victory.
While a Democratic blue wave could have opened up an opportunity for sweeping change for US solar companies such as Enphase, flipping the US Senate to Democratic control is not a prerequisite for the solar industry to be successful.
It’s already trending in that direction as a mega growth industry like technology.
Also, the Democrats will try to crowbar in any climate-related infrastructure spending with any potential stimulus bill which could add more dollars behind the solar industry.
If annual residential solar installations double with a slightly higher per home average, about one million homes would be converted to solar annually.
With over 139 million homes in the US, only a small fraction would be converted to produce solar electricity over the next decade or two, even if the US residential solar market doubled.
The main takeaway is that the solar market in the US still has a huge upside under the right policies.
Enphase has a current micro-inverter capacity of 10 million units annually and based on its per-unit assumption of 325 watts, can supply 3.25 GW annually.
Based on comments in the company's second quarter earnings conference call, capacity could potentially be raised to 16 million annually with the expansion of its Mexico-based facility and a new India-based contract manufacturer.
Given the lead time required to ramp, actual shipment capacity next year may only be equivalent to 4 GW. If the company's geographic mix remains steady with last year's 83.9% US exposure, about 3.36 GW would be allocated to the US market. This would represent about 68.6% of the total US residential and commercial market during 2019.
Should the US solar market double due to beneficial policies, Enphase's potential market share will rise above 34%.
This would represent about a 10% increase in US market share from Q4 2019.
Ultimately, Enphase's high margins and fixed cost structure should not be underestimated especially under a systemic industry shift such as a Biden-led US economy laser-focused on green infrastructure.
Enphase is one of a few cost-effective US solar companies with attractive products that could get a boost from favorable governmental policies.
Expanded US market share due to favorable policies could push annual earnings well above any expected scenario.
The secret recipe of high gross margin and low-cost structure make Enphase incredibly leveraged to top-line growth.
Lately, a new storage revenue stream and continued shipment growth in a rapidly expanding solar market should result in overperforming earnings growth.
New storage products will meaningfully add to earnings next year without diluting gross margin and Enphase's high US exposure could benefit under a Democratic administration more biased to renewable energy.
Enphase is an unequivocal buy and hold stock and it’s no surprise that shares are up 400% in 2020 at the time of the writing.
“Technology is a useful servant but a dangerous master.” - Said Norwegian Historian Christian Lous Lange
Mad Hedge Technology Letter
November 4, 2020
Fiat Lux
Featured Trade:
(WHICH JOBS ARE ON THE LINE NEXT?)
(CVX), (CRM), (ALL), (SCHW), (XOM), (RTN)
For every job created by Amazon during the pandemic, there are 10 jobs losses in the brick and mortar retail sector.
That is happening as we speak.
The next phase of job losses will move up the value chain and hit those precious $100,000 per year jobs precisely because the advancement of technology will allow management to seamlessly substitute these highly paid workers with a digital or automated solution.
The evidence is starting to follow through.
In the last few days, ExxonMobil, Chevron (CVX), Charles Schwab, and Raytheon have announced plans to cut thousands of white-collar jobs.
Wells Fargo, Goldman Sachs, Salesforce (CRM), Allstate (ALL) and CNN owner WarnerMedia have already announced a massive wave of firings too.
Corporate America's belt-tightening provides more evidence of the fragile and unforgiving nature of this pandemic.
Global consultant McKinsey & Company forecasts over 800 million global workers could be replaced by robots by 2030.
The most exposed jobs on the cutting block consist of artificial intelligence (AI), a subset of automation where machines learn to use judgment and logic to complete tasks.
Stanford University doctoral candidate Michael Webb analyzed the data for 16,000 AI-related patents and more than 800 job descriptions and found that highly educated, well-paid workers will become more impacted by the spread of AI.
Bachelor’s degree holders would be exposed to AI over five times more than those with only a high school degree.
That’s because AI is especially superior at completing tasks that require planning, learning, reasoning, problem-solving, and predicting — most of which are skills required for white-collar jobs.
Other closely related jobs are in robotics and software and are likely to impact the physical and routine work of traditional blue-collar jobs.
This will sap the demand from everything from home buying and shopping to credit card defaults if a large swath of the U.S. population earns no income.
The rolling wave of white-collar layoffs is very impactful because this is the group that possesses the most purchasing power in the U.S. economy which is a consumption-driven economy.
Evidence is starting to pop up all over the board.
For instance, Charles Schwab (SCHW) said it would cut about 1,000 jobs following its takeover of TD Ameritrade.
Efficiencies, or the lack of it, have never been more magnified where companies are slashing redundant jobs upon mergers.
In the short term, white-collar workers have fared far better during the pandemic than blue-collar workers, who tend to be younger and have less education.
This is because white-collar workers have been able to operate from a home office where the bulk of blue-collar workers do not have that option.
But in the long term, technology through automation is also going to swallow up these higher-paid workers.
That is not to play down the trend of mass furloughs and layoffs in various industries, but technology and artificial intelligence will be deployed to cut high-paying jobs when it improves.
I believe that in 10 years or less, the technology will improve by leaps and bounds to the point where companies are able to install and scale it globally in an instant.
Those jobs will then go poof!
Nearly 40% of low-income workers lost their jobs in March and it is likely that the U.S. economy will never see that level of peak employment again.
Many people were rehired or found jobs elsewhere as the US economy reopened. After peaking at nearly 15% this spring, the unemployment rate has descended steadily, falling to 7.9% in September.
The mounting signs of white-collar job cuts cannot be ignored.
In another example, Allstate announced in late September that it would lay off 3,800 employees.
The insurance giant blamed the job cuts on the lack of driving during the pandemic and the refunds given to customers.
The pandemic resulted in fewer accidents, thus needing fewer claims people.
ExxonMobil (XOM) announced it will cut 1,900 jobs in the United States, mostly at its headquarters in Houston.
A broader reorganization by Exxon will slash 14,000 jobs by the end of 2022.
Energy companies have been disproportionately impacted because the demand shock has halved oil revenues.
This list goes on and on as Raytheon (RTN) disclosed it will lay off 4,000 contractors, mostly engineers, as well as 1,000 corporate employees.
And that's on top of Raytheon previously announcing plans to lay off 15,000 employees because of the downturn in the aviation industry.
Government, local and federal, has to confront a massive loss of revenues which will affect its ability to hire and maintain government workers.
Layoffs could rise among government workers because the pandemic has set off an epic budget crunch at states and local municipalities.
Eventually, whether it's 5 or 10 years down the line, the next set of solutions will inherently lead to the A word which every employee dreads – Automation.
Going 100% remote means face to face communication has slowed down to a crawl and management is less inclined to reward employees who “put on a good face” and for the sake of their own survival have turned to employees that perform well.
There will be an ultimate race to the bottom with spiraling wages and human workers unable to justify their place when competing with machines.
This inevitably leads into the world of analytics to management part of the staff for better or worse and many companies have gone from all to nothing in an instant.
I know this is a lot of information to process, but the ones getting on board with the new normal will thrive and the ones late to implement the necessary measures will flounder.
2020 has been a strange year, and get ready for new twists and turns in the last two months.
Each ensuing year will most likely get weirder because of the heavy introduction of automation into human lives.
“The development of full artificial intelligence could spell the end of the human race.” – Said British Physicist Stephen Hawking
Mad Hedge Technology Letter
November 2, 2020
Fiat Lux
Featured Trade:
(IS CHINA CATCHING UP?)
(HUAWEI)
Heading into a fresh Presidential term, the tech war against China must be addressed or the U.S. faces the prospect of falling behind China by the next U.S. Presidential election.
By that time, the U.S. might not be able to recover.
China’s political leaders have endorsed a five-year growth plan focused on reducing the economy’s reliance on foreign investment and technology.
And this squarely means the U.S.
Following a Communist Party’s Central Committee Meeting, the Chinese have hatched a grand “vision” for the economy as far off as 2035.
“It is the first time ever in the history of our party’s five-year plans…that China is placing the plans on science, technology, and innovation before all other sectors,” Said Wang Zhigang, China’s minister of science and technology.
This specifically means that China is done being “factory of the world” and is gunning for Silicon Valley’s milk and honey.
Chinese tech giants such as Huawei Technologies, the nation’s largest telecommunications equipment manufacturer, and Semiconductor Manufacturing International Corp., China’s largest semiconductor maker are two central figures that will execute the plans for Chinese Communist’s pivot to technology.
But according to a Financial Times report, Huawei has run out of supply of chips and is looking into manufacturing their own without any experience doing so.
This situation is brutal for the Chinese simply because they don’t have the wherewithal to achieve this great task.
Total self-reliance may remain elusive because China’s communist apparatus is not conducive to producing top-class engineers.
Remember that much of their technology is “borrowed” and they will have to drive forward that same strategy if they want to surpass the U.S. in technological prowess.
I just don’t believe China can organically outgun the U.S. in technology, they simply aren’t built to deliver that result.
Chips aren’t as easy to make as a pair of running shoes or a plastic rubber ducky - these are tough technologies to master.
Part of the blame must be shared with the pitiful Chinese education system that is a pay-to-play type of structure.
The coronavirus has translated into foreign government being extra careful in the technologies they harness and now allowing China to raid these precious secrets.
China is now officially classified as a strategic adversary and it will be a tough slog for China moving forward because the low-hanging fruit has already been harvested.
There also exists the possibility that Democratic Presidential hopeful Joe Biden will be even more staunch against the economic and technological onslaughts of the Chinese Communist Party.
The green shoots have already started to show up as legislation for tech investment takes root.
This summer, a bipartisan group of legislators led by the Democratic senator Chuck Schumer and the Republican Todd Young introduced the Endless Frontier Act. It calls for investing $100 billion over five years to expand the NSF and to fund research in key fields, such as AI, quantum computing, biotech, advanced energy, and materials science.
Biden has proposed spending even more—$300 billion over four years—on federal investments in R&D. His plan calls for major increases in technologies such as AI, 5G, and advanced materials.
The Trump administration has increased investment in five key “industries of the future”—AI, quantum computing, 5G, advanced manufacturing, and biotechnology—albeit not on the scale Biden is calling for.
Made in China 2025 was launched in 2015, and in that year alone, the Chinese government created about $220 billion of state-backed investment funds to support it.
The U.S. would likely dip into their debt instruments to release unlimited capital to deal with developing emerging technologies.
I wholeheartedly believe that China’s encroachment will inspire a technological revolution in the U.S. that is first fueled by government institutions and the peripheries supported by the venture capitalists.
On a microeconomic level, the U.S. has far too large of an edge in semi chip engineers than the Chinese, although China has closed the gap.
The attractiveness of the U.S. from the fiscal side is evident as Chinese tech companies still dream of going public in New York and not Hong Kong or Shenzhen.
Much of the hype around Chinese technology is still hype and that’s all.
Just take for instance the newest Huawei premium smartphone that was billed to be better than the iPhone.
The truth is that it’s a poorly operating smartphone and performs as a mid-level phone.
The Chinese Communist Party has been great at controlling the media narrative around their economical and technological rise, but I am here to call it out to the point where I believe they are still a “paper tiger.”
Many people “in the know” tell me that China’s economy hasn’t been growing for the past 7 years and their “superior” technology is repurposed technology borrowed from western countries that is already outdated in the West.
Just because media suppression is insane in Beijing and any negative journalistic take will be squashed in seconds, it doesn’t mean they have the best technology in the world.
I heard that Chinese tech is “ahead” in 5G, artificial intelligence, and autonomous driving but I have seen nothing that would verify this claim.
Peel back the layers and I do believe the Chinese tech scene is closer to a Potemkin’s Village than Moscow’s Red Square.
In the next four years, the U.S. will visibly surge in front of China as the real tech dominator.
This means that investors should be long technology stocks after this short-term consolidation.
DOES THIS VIRTUAL REALITY SET REALLY WORK?
“The next 30 years are going to be critical for the world. Make the technology inclusive, make the world change. Pay attention to those people who are 30 years old. Those are the internet generation. They will change the world.” – Said Founder of Alibaba Jack Ma
