Tech Letter Archives - Mad Hedge Fund Trader

Hang On To The A.I Story With Meta

One of the reasons I believe this AI narrative will continue in the short-term is because cash cow tech firms like Meta (META) are pouring cash into AI infrastructure.

There is a lot we still don’t know about the direction of AI – the future is uncertain.

However, the one takeaway is that the AI infrastructure spend continues right now unabated, and we know that because Meta raised capital expenditures guidance for the 2024 fiscal year to between $38 billion and $40 billion, up from $37 billion to $40 billion previously.

They also expect capital expenditures to continue to grow significantly in 2025 due to an acceleration in infrastructure expenses.

Founder Mark Zuckerberg is desperate to not miss out on the “next big thing.” Remember, he whiffed big time at the smartphone, and he will never stop blaming himself for it. Apple has been a constant pain in the ass for his company because Meta still needs to go through Apple management and their app store to get their platform to users. They also changed the privacy settings, which were directly targeted at Meta.

Zuckerberg is also on record for saying that Meta would be twice as profitable if he could remove the costs of going through Apple.

Meta is still growing at 19% year over year, and that is quite impressive for a company this big.

The company reported 3.29 billion daily active people for the third quarter. That was up 5% year over year, and we can expect that percentage point to stick in the single digits.

Zuckerberg has been pointing to the company’s massive investments in artificial intelligence, which includes spending billions of dollars on Nvidia’s popular graphics processing units, as helping improve the company’s core online ad business in the aftermath of Apple’s 2021 iOS privacy update. The company has been improving upon and building more data centers to help provide the technology infrastructure needed for its AI strategy.

The company’s Reality Labs hardware unit posted an operating loss of $4.4 billion in the third quarter, which was less than analysts’ expectations of $4.68 billion.

Facebook Reality Labs is a research and business unit of Meta Platform that develops virtual reality (VR) and augmented reality (AR) products and technologies.

I do believe the jury is still out on the Facebook Google story. It is not a given that consumers will just adopt some ridiculously looking VR headset and venture off into daily life with that thing on. The over $4 billion of losses points to a challenging time to turn the VR business into something legitimate.

Apple has also had some issues with its VR headset as well.

In the short term, Meta is still highly profitable, and they roll these profits into trying out new businesses.

It only takes one new killer business for the stock to explode again, much like what happened when Zuckerberg doubled down in social media through the acquisition of Instagram.

Investors need to be patient and keep a hold of META stock as it grinds higher.

In the event the stock does experience a mild sell-off, I am certain dip buyers will come to the rescue because of the nature of the stock being high quality.

Although digital ads aren’t the growth engine it once was, they are giving time and money for META to find the next path forward. 99% of tech companies don’t have that luxury.

November 11, 2024

Tech Letter

Mad Hedge Technology Letter
November 11, 2024
Fiat Lux

Featured Trade:

(SHORT TERM MOMENTUM BREATHES LIFE INTO TECH STOCKS)
($COMPQ), (TSLA)

Short Term Momentum Breathes Life Into Tech Stocks

Tech Letter

The post-election trade is absolute fire now, and readers need to pay attention.

Silicon Valley has delivered what could amount to the mother of tech rallies into the end of 2024.

Look at the examples that have turned heads.

Electric vehicle (EV) company Tesla stock has gone absolutely parabolic with Elon Musk securing deep influence in the U.S. government for the next 4 years.

Part of the rally is also due to the increase in scarcity value from his social media platform X, which body-slammed traditional media avenues and convinced 75 million U.S. citizens to vote.

Musk could be tasked with “making recommendations for drastic reforms” aimed at the efficiency and performance of “the entire federal government”, Trump has said. This could grant Musk huge power over the agencies that regulate his and other tech companies.

Musk could be in charge with regulating – Apple, Google, Meta, Microsoft, and Amazon – which wield the data and processing power that shapes the social and economic lives of billions of people.

It was under Trump’s first presidency that the Justice Department began an investigation into Google, resulting in a case against the firm for suppressing competition.

Trump will probably take office with cases under way challenging the market power of several big tech firms, spearheaded by the anti-monopoly chair of the Federal Trade Commission, Lina Khan.

Many expect she will be fired. Yet Trump’s vice-president pick, JD Vance, has voiced support for aspects of her monopoly-busting approach.

Trump also thinks the tech giants give the US global clout at a time when AI is becoming a matter of national security.

“China is afraid of Google,” Trump said last month when he questioned whether a corporate split of Google could “destroy the company”.

Trump said he would “save TikTok” after a ruling that its Chinese owners must sell it if it is to continue in the US, but the trade-offs are everywhere.

In other areas, any Trump plan to cut incentives for EV manufacturers would be “an overall negative for the EV industry.

This would probably help Musk’s Tesla because its existing competitive advantage would be exaggerated if its rivals were hobbled. There are reports Trump may only tweak the subsidies rather than scrap them. If Trump’s trade tariffs limit imports of cheaper Chinese EVs, that would further help Musk.

Crypto-linked stocks in Coinbase, MicroStrategy, Riot Platforms, and MARA Holdings have jumped between 11% and 21%, participating in what is known as the post-election Trump trade.

I certainly expect a follow-through on the post-election trade, with money from the sidelines opting into the rally.

Not only that, retail traders have signaled they are participating in this broad rally as well.

The paradigm shift cannot be understated, and many changes will start to be visible as the new administration comes closer to taking over.

The high inflation of the last few years was painful for the bottom segment of the American population, and it will be interesting to see if the new government will discount them or start to redirect policy to them.

Either way, the more important policy decisions as it relates to big tech are regulation, corporate tax policy, tariffs, and the ease of doing business in the U.S.

Clearly, Trump has made it known he does value strong American tech companies, but I don’t believe they will be left untouched to do whatever they want.

In the short term, ride the rally to higher highs. Since the summer dip, I had a hunch that we would reverse to all-time high’s, and that is exactly where we find ourselves in the Nasdaq index.

November 8, 2024

Tech Letter

Mad Hedge Technology Letter
November 8, 2024
Fiat Lux

Featured Trade:

(AIRBNB IS IN THE DOG HOUSE)
(ABNB)

Airbnb Is In The Dog House

Tech Letter

Revenue increased 10% from $3.4 billion a year earlier, and that is where the problem lies for Airbnb (ABNB).

Growth rates of 10% are a problem in technology.

The mantra of scaling out and monetizing is all but expected for growing tech companies.

Something in the ballpark of 30% and higher is something that shareholders would prefer to see.

Just look at the top tech company right now, Nvidia and the breathtaking 126% revenue growth year over year is an example of what I am talking about.

A measly 10% won’t cut it, and it explains the hard sell-off in shares in the travel platform this morning.

It’s true that the company isn’t a cash burner, and the company noted a $2.8 billion tax benefit during the third quarter of 2023, but to really fetch that premium on the stock market, investors will need to see demonstrably higher growth rates and better profitability.

Average daily rates increased 1% from a year ago to $164 in the third quarter, signaling a cooling down of revenue opportunity.

If per-night revenue isn’t growing fast, then Airbnb will need to make that up on the volume.

This is starting to look and feel like a company that won’t be able to scale their product.

Remember that acquiring a listing on Airbnb is an intensive process for the property owner, and the 12% in commission Airbnb requires is probably at the upper limit of what they can ask.

Airbnb said adjusted EBITDA for the third quarter was $2 billion, up 7% year over year.

Gross booking value, used by Airbnb to track host earnings, service fees, cleaning fees, and taxes, totaled $20.1 billion in the third quarter. The company reported 123 million nights and experiences booked, up 8% from a year ago.

Airbnb said it saw hosting growth across all regions and market types during the third quarter. The company said in its shareholder letter that it has more than 8 million active listings and has worked to improve listing quality. Airbnb has removed more than 300,000 listings since last year.

In 2021, the stock was priced at over $200, and fast forward to today, it is languishing at $135 after another 8% selloff.

Even more prevalent, the stock has also been punished as non-AI stocks and AI stocks have bifurcated into two separate paths.

Airbnb has been talking up getting into other businesses like experiences, and I don’t believe that will move the needle in terms of revenue growth.

Property management is another sub-sector they are talking about to expand, but again, I don’t see that as a solution, and that type of work is incredibly labor intensive, which tech companies should stay away from.

At a time when tech companies are looking to automate to look to go on auto-pilot, Airbnb is going the other way and will need more human labor.

Labor costs have been trending higher, and property management will never be an industry where a tech company can just substitute with an algorithm.

Many of times, when tech and real estate intertwine, the Frankenstein company loses its way and doesn’t succeed.

Airbnb will just need to settle for a lower premium than most other tech stocks. I would stay away from this stock for now and head to higher ground to ride the bandwagon of AI.

November 6, 2024

Tech Letter

Mad Hedge Technology Letter
November 6, 2024
Fiat Lux

Featured Trade:

(TECH STOCKS POISED TO MOVE UP)
($COMPQ), (PLTR), (MSFT), (AMZN), (GOOGL), (INTC)

Tech Stock Poised To Move Up

Tech Letter

Now that the U.S. election has come and gone with nothing more than a whimper, we are full speed ahead with the last upmove in tech stocks ($COMPQ) for the year 2024.

The beginning of the rally is here, and readers shouldn’t miss it.

A lot of money was waiting on the sidelines, and now we will start seeing institutional money pouring in.

The equity market ripping higher up on the news of a new administration coming to town is a highly bullish signal for the rest of the year for the Nasdaq index.

Chip stocks did quite remarkable today, with the likes of Micron up around 6% at the time of this writing.

I believe that fund managers will hop on and try to achieve the extra alpha now that the biggest risk of an incomplete election is off the table.

The move down in gold by around 3% suggests that fear over the election being inconclusive is off the table.

I don’t envision the new administration starting a witch hunt against tech stocks. Tech stocks still represent a massive motor in the United States economy, which the administration will respect.

Much of the same trends that were occurring before the election continued along the same path, such as a stronger dollar, higher yields, and a weak Japanese yen.

Tech stocks can move higher with all these trends.

In general, a Republican administration should be good for the tech sector, and the corporate taxes will benefit Silicon Valley the most.

First, there's artificial intelligence. The market should expect significant AI initiatives within the U.S. that would be a benefit for Microsoft (MSFT), Amazon (AMZN), Google (GOOGL), and other tech players. Department of Defense AI initiatives would also benefit the likes of Palantir Technologies (PLTR).

Republicans could make major revisions to President Biden's Inflation Reduction Act, which could negatively impact the act's beneficiaries, such as Intel (INTC).

Tesla and its CEO, Elon Musk, will be the biggest beneficiary of a Trump administration. Trump is likely to stop or reduce the electric vehicle rebates and tax incentives. That would be an overall negative for the EV sector but a big positive for Tesla. As will Trump's proposed selective import tariffs.

Tesla has the scale and scope that are unmatched in the EV industry, and this dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players (BYD, NIO, etc.) from flooding the U.S. market over the coming years.

One of the only few things the Democrats did well was igniting equity prices and, specifically, tech stocks, which is a positive omen moving forward.

Ultimately, a crushing loss by the Democrats revealed another crippling black eye to liberal mainstream media, which should accelerate cord-cutting and the transition to citizen journalism and other independent journalist sources.

Left-wing mainstream media sources wielding radical progressive viewpoints luckily won’t do much collateral damage to tech stocks, and in the backdrop of a strong U.S. economy, I am highly optimistic about tech stocks in the short term.

I believe that the Trump administration will attempt to supercharge tech stocks by cutting red tape and allowing them to flourish.

Reducing taxes will be the bow tie on top to really juice up shareholder returns.

I am bullish on tech stocks going into the end of the year because much of these synergies are still not discounted yet in the price of tech stocks.

November 4, 2024

Tech Letter

Mad Hedge Technology Letter
November 4, 2024
Fiat Lux

Featured Trade:

(A SIDEWAY CORRECTION BEFORE THE MOVE UP)
(AAPL), (BRK-B)

A Sideway Correction Before The Move Up

Tech Letter

Warren Buffett shedding millions of Apple (AAPL) stock, and the stock to subsequently avoid a meaningful dip is an inherent victory for Apple and big tech.

In almost any other stock, the price action would be sharp and damaging to the underlying stock, and Apple had a wave of buyers to pick up all the shares Buffett unloaded.

Buffett and his flagship investment company, Berkshire Hathaway (BRK-B), did really well in their Apple investment, where they loaded the boat with Apple stock.

Taking profits is never a bad thing, but I do believe Buffett had a feeling that Apple started getting too ahead of itself.

The company still has not done enough since creating the iPhone, and Buffett certainly was not impressed by the latest “upgrade” to the flagship device.

Apple shares are flat over the past 4 months after a sharp 22% rise in the summer starting from May.

I believe that the sideways price corrections will start to drag out even longer for many big tech companies as their growth engines start to fizzle out.

AI is also due another sideways correction after gangbuster returns.

It is becoming quite evident that “corrections” in big tech aren’t that damaging, and as long as investors can ride out the sideways move, the next move after that is usually to the upper right-hand corner.

Buffett has sent over 515 million shares of Apple to the chopping block since October 2023

Amid Warren Buffett's selling spree, top-holding Apple has been meaningfully reduced. In a three-quarter period from Oct. 1, 2023 through June 30, 2024, Berkshire's stake in Apple declined by more than 515 million shares, or 56%, to precisely 400 million shares.

During Berkshire Hathaway's annual shareholder meeting in early May, he opined that the corporate tax rate would likely climb in the future. With his company sitting on a mammoth unrealized gain in Apple, he suggested that locking in some gains now at a lower tax rate would, eventually, be viewed favorably by Berkshire Hathaway's shareholders.

Apple has done well to engineer the stock higher with its heavy involvement in shareholder returns, particularly buybacks.

Since initiating share repurchases in 2013, Apple has bought back $700.6 billion worth of its common stock and reduced its outstanding share count by 42.2%. This has had a decisively positive impact on the company's earnings per share (EPS).

Sales of its physical devices, including iPhone, iPad, and Mac, have been weak for much of the last two years. If a growth company's sales stall, it can expose its valuation premium.

The Oracle of Omaha's broad-based selling also alludes to the lack of value on Wall Street. This is one of the priciest stock markets in history, and Berkshire's record cash pile of $276.9 billion plainly suggests that Buffett and his team are struggling to find attractive deals.

Big tech is increasingly finding it hard to move the needle.

Anti-trust has also been a thorn in their sides lately as the Fed close it on them from a litigious angle.

In the short term, even without its next growth engine, I do believe Apple and certain big tech companies have the opportunity to experience a winter rally into yearend.

First, we need to get through the election, but the US economy is still running hot at 3%, and tech will do like it usually does, harvest the majority of the gains from the overall economic expansion in the United States.

November 4, 2024 - Quote of the Day

Tech Letter

“Apple doesn't do hobbies as a general rule.” – Said Apple CEO Tim Cook