Mad Hedge Technology Letter
August 28, 2020
Fiat Lux
Featured Trade:
(THE MISHAP OF THE CENTURY)
(AIRBNB)
The dumbest feeling person in tech right now has to be CEO and Co-Founder of Airbnb Brian Chesky.
The short-term accommodation platform was valued at $31 billion in its last funding round in 2017 and this year was the year that Chesky and Co. had earmarked to go public.
The company was the beneficiary of a secular tech tailwind aided by missteps from a dinosaur hotel industry and carved out a unique product linking hosts and travelers for the purpose of filling in short-term accommodation.
Skirting regulation was the cherry on top.
Airbnb pockets a commission of 6% of the total booking amount, meaning they are overwhelmingly reliant on volume to build sales.
There are more than 7 million homes in 220 countries and regions that have earned over $80 billion since the company started.
Like many things in life – a window of time is all you get.
Last year was that window of time when a smorgasbord of private tech unicorns delivered public markets new tradable assets such as Uber, Peloton, Pinterest, and Lyft.
Even though these stock shares performed worse than expected, it offered long time employees and shareholders a chance to finally cash in.
After going public, any loss from underperforming shares would be absorbed by the public.
Airbnb’s management even had enough time to observe ex-CEO of Uber Travis Kalanick sell off $1.7 billion in stock following the end of the company’s IPO lockup period highlighting the ample period of time Airbnb had to come to the public markets if they wanted to in 2019.
The 2019 loss of $322 million in the first nine months was no big deal and mainly attributed to ramping up marketing.
Then the coronavirus suddenly took the world by storm and everything changed.
Brian Chesky’s arrogance has cost his shareholders $20 billion.
What about the future?
The next “disruptor” of Airbnb could appear in 24 months as well – who knows?
Operations will cost more in 24 months and not less, and a healthy supply of units is not guaranteed to be the same if hosts mass foreclose on properties or a mirror image competitor who attempts to undercut Airbnb appears.
It is rumored that close to 1 out of 3 Airbnb hosts are reliant on their monthly Airbnb income to pay mortgages, which would suggest a poor formula in this type of souring economic climate.
This entire short-term rental industry buttressed by tech platforms could be due for a wholesale washout.
How bad is the situation now?
Airbnb took a hit to the tune of over $50 million in booking revenues over the past several weeks in strategic cities that are close to coronavirus hot zones.
The home-sharing startup’s booking revenues cratered across 17 key international cities over a span of five weeks starting at the beginning of February, and the pain isn’t over yet as cities and countries go into full-blown lockdowns and crisis mode.
At first, it was just China, whose Airbnb’s booking revenues dropped 25%, losing $17.6 million, but that was just the canary in the coalmine.
And that poor number comes in the context of expected growth of roughly plus $30 million if booking revenues had continued growing at the same pace of nearly 35% the firm saw in those markets over the same period last year.
In total, the China business registered a negative swing of nearly $48 million because of the virus.
Even though the virus originated in Wuhan, the contagion quickly spread to Shanghai, Beijing, Seoul, Singapore, Hong Kong and Tokyo wreaking havoc on Airbnb listings.
Western cities are going through the same barrage of Airbnb cancellations and non-bookings in the tourist meccas of Paris, London, Prague, Barcelona, Milan, Rome, and New York.
Airbnb has now enacted an extenuating circumstances policy allowing guests to cancel eligible reservations without charge, and the host is required to refund the reservation, irrespective of the previously contracted cancellation policy.
I unquestionably blame Chesky for the bleak situation Airbnb is grappling with in terms of bringing the company to public markets.
They secretly filed for an IPO in 2020 at only half the valuation Airbnb fetched pre-virus.
He failed to do what many unicorn leaders accomplished, which was, by hell or high water, transfer risk to the public market during the late innings of the economic cycle (or before) which we can almost convincingly say ended in January 2020.
Was it worth eking out the extra year or two of growth for another 10% “growth” of incremental value?
The greediness has been exposed and now briskly punished.
Now the company has no room for error while going into full-on damage control for the foreseeable future.
The economic mayhem has put a premium on tech companies with positive cash flow, high margins, competitive advantage, and profits.
A company like Microsoft perfectly illustrates this character set while Airbnb just clung onto its start-up growth model for too long when it easily had the chance to become profitable two years ago.
Avoid Airbnb shares when they hit the public markets – no need to care for damaged goods.
My bet is that ultimately, Google will use this crisis to steal Airbnb’s business and there is nothing they can do about it. They are in the process of developing a property rental platform eerily similar to Airbnb.
“The American dream, what we were taught was, grow up, own a car, own a house. I think that dream's completely changing. We were taught to keep up with the Joneses. Now we're sharing with the Joneses.” – Said CEO of Airbnb Brian Chesky
Mad Hedge Technology Letter
August 26, 2020
Fiat Lux
Featured Trade:
(THE EMPTY PIPELINE OF TECH INNOVATION)
(AAPL), (FB), (AMZN), (GOOGL), (NFLX), (TSLA), (SNAP), (MSFT), (ORCL), (TWTR)
The oligarchical regime of Northern Californian tech companies stopped innovating because they don’t have to.
When you have a monopoly – you have one objective – to crush anything that remotely resembles competition.
That has been happening for years now by the Silicon Valley oligarchs and the government still hasn’t taken their finger out to do much about it.
Honestly, my bet is that most of U.S. Congress own stock portfolios and these portfolios are spearheaded by the likes of Apple (AAPL), Facebook (FB), Amazon (AMZN), Google (GOOGL), Netflix (NFLX), and possibly even Tesla (TSLA), if they want a little growth.
It’s a direct conflict of interest, but that's not surprising for politics in 2020, is it?
The government likes to jawbone to the public saying they will make competition a level playing field, but actions show they are doing the opposite.
The Silicon Valley oligarchs are whispering in the ear of Congress and they listen.
Who would want Congress to lose money in their retirement portfolios, right?
Well, what now?
Fast forward to the future - mid-September, TikTok — the Chinese-owned, video-sharing phenomenon — MUST sell its U.S. operations.
Given the app’s 100 million U.S. users, this forced divestment by President Trump has triggered a delirious auction now pitting tech giants Microsoft (MSFT), Oracle (ORCL), and Twitter (TWTR) against one another.
The White House and Big Tech are boiling the free for all down to a combined story of national security and opportunistic capitalism amid unfortunate geopolitical tension between the U.S. and China.
But the ultimatum to ByteDance, TikTok’s owner, is more accurately understood as a dark window into Silicon Valley’s utter failure to innovate, and a warning signal of its transformation into a mere protector of long-established turf.
Silicon Valley has long adhered to the motto, “Move fast and break things” – but that was long ago when Steve Jobs was busy making the first iPhone.
The truth is Silicon Valley couldn’t be more corporate than it is now, and they use the corporate machine to serve the ends they desire.
Big Tech is just in love with buybacks like the rest of corporate America and the only reason they avoid it now is to appear as if they are in tune with public discourse and not tone deaf.
Huawei, another punching bag of the Trump administration’s tech war with China, best foreshadowed the optics.
In remarks to reporters in March 2019, Chinese politician Guo Ping said, “The U.S. government has a loser’s attitude. They want to smear Huawei because they can’t compete with us.”
ByteDance produced the hottest new social media platform on a global scale, and Facebook, in typical fashion, responded by brazenly copying TikTok, adding a feature called Reels to Instagram.
Don’t forget that Mark Zuckerberg has been attempting to destroy Snapchat (SNAP) for years after CEO Evan Spiegel refused to sell it to Zuckerberg.
The rest of the tech ecosphere has turned a blind eye to the anti-trust violations because they don’t want to be the next takeout target.
Make no bones about it, Silicon Valley, with the help of the Trump administration, is about to do a smash and grab job on China’s best tech growth asset.
This cunning maneuver alone has the knock-on effect of not only extending the tech rally in U.S. public markets but increasing the scarcity value and emboldening the Silicon Valley oligarchs.
I’m all about good deals and robbing Chinese tech in broad daylight is overwhelmingly bullish for the U.S. tech sector.
Imagine adding another Instagram to the appendage of an already mammoth tech company.
So why innovate? Why deploy capital into research and development when you can just nick a foreign company's crown jewel?
Even if you hate Silicon Valley at a personal level, it is literally impossible to short them, and now they are resorting to stealing companies, what other passes will government, society, and corporate America give American tech?
In either case, it’s not for me to judge, and as a technology analyst - I am bullish U.S. tech.
“China is a great manufacturing center, but it's actually mostly an assembly plant. It assembles parts and components, high technology that comes from the surrounding industrial - more advanced industrial centers - Japan, Taiwan, South Korea, Singapore, the United States, Europe - and it basically assemble them.” – Said American philosopher Avram Noam Chomsky
Mad Hedge Technology Letter
August 24, 2020
Fiat Lux
Featured Trade:
(RING IN THE PROFITS)
(RNG)
RingCentral is strategically positioned to meet exploding demand with an enterprise program, global and trusted unified Message Video Phone, or MVP, platform.
The results speak for themselves and investors should look at deploying capital in this company.
The pandemic has created unprecedented global challenges and is having a transformative impact that we all need to reckon with.
Cloud transformation of business communications platform has become a priority as companies adjust to a work-from-anywhere environment.
Businesses of all sizes now require communication solutions where employees can work productively with clients, partners, and peers from anywhere on any device and in any model.
This complexities of enabling cloud migration of business communications started over a decade ago and could never be more important today.
Ring delivered a strong second quarter as they continue to take advantage of strong contributions from mid-market, enterprise, and mid-channel partners.
First, Ring announced an expansion of strategic partnership with Atos.
Second, together with Avaya, Ring announced a further global rollout of Avaya Cloud Office by RingCentral.
Several of these large wins were in targeted verticals of healthcare, financial services, and education.
Total revenue grew to $278 million. This is a 29% increase year over year and is above the high end of the guidance range.
Approximately 60% of their on-premise installed base of 40 million users is in Europe, with a strong presence in Germany.
Other locations of strategic importance include France, Spain, Italy, Netherlands, Austria, Belgium, Ireland, U.S., U.K., and Australia.
There is a robust pipeline building and several critical large deals already on the books. An example of a large joint win was the selection of Ring’s platform by a large organization that supports the U.K. government's virus tracing program to control the spread of the virus.
In this highly urgent and critical use case, the solution-leveraged RingCentral's open API platform and was rolled out to multiple thousands of users in approximately six weeks.
To add to the growing hype, Ring saw double-digit growth in messaging and triple-digit growth in video and mobile voice minutes on Ring’s MVP platform quarter over quarter.
Speaking of video, RingCentral Video, or RCV platform, has been quickly proving itself since the April launch.
As part of the agreement, Alcatel-Lucent channel partners and customers will have full access to RNG’s mobile-voice-phone (MVP) platform capabilities, with it also including a $100 million cash payment from RingCentral and providing exclusive access, minimum seat commitment and future commissions to Alcatel-Lucent.
Both companies will also be on the hook for operating expenses related to product development.
This deal will serve as another opportunity for RingCentral to expand sales more quickly globally, especially given Alcatel-Lucent's 40 million-plus unified communications (UC) customer base.
Following this new partnership, RNG now has roughly 45% of the estimated global UCaaS market accounted for via strategic partnerships (180 million seats of a total of 400 million seats).
RingCentral will consistently grow its seat count above an expected industry growth rate of 15% - 20% over the next five years.
The partnerships mean and added $1 billion of incremental revenue opportunity.
In all, this extrapolates into potentially a 40% compounded top-line growth longer term.
With a tech company such as Ring that is locked and loaded in the middle of its sweet spot growth trajectory, it’s hard not to see the underlying stock higher in the next 1 to 2 years.
Then, when investors consider that the Federal Reserve has artificially propped up markets, with traditional valuation metrics no longer telling the whole story, one must conclude that tech growth companies targeting the cloud are prime for a doubling or tripling from current valuations.
The virus has cut off the start-up culture with a round of layoffs from unprofitable companies in Silicon Valley.
The last tech growth companies “in the door” will benefit most since the scarcity value of these firms will filter down to the bottom line.
I am very bullish on RingCentral’s prospects.
Mad Hedge Technology Letter
August 21, 2020
Fiat Lux
Featured Trade:
(THE THINKING BEHIND RAY DALIO)
(ZLAB), (TME)
Every time I watch an interview with the Bridgewater hedge fund manager Ray Dalio, what he doesn’t say really paints the picture of who he really is.
Yes, it’s undeniable that he is incredibly wealthy, successful, and has returned shareholder profits continuously, but his support for the Chinese communist party has to be called out.
Dalio necessarily isn’t anti-American, but he loves to trot out propaganda that America is a “weakening” power confronting a “rising” power.
I would argue this isn’t true and that China is just a paper Tiger with infinite more problems than the U.S. and has been hit infinite times harder economically because of this pandemic.
China is hoping to solve the issue from going from the world’s growth engine to 250 million unemployed Chinese on the streets, thanks to the city of Wuhan.
His response is almost automatic at this point in regard to China as he skirts around specifics and issues general statements to avoid criticizing the land of Chairman Xi Jinping.
Why does Ray Dalio give a free pass to China?
The easiest way to understand is to look where he deploys his money.
It’s well known that criticizing the Chinese government is a red line for the communist party and they will sabotage, swindle, destroy anyone that steps over this line, and even more so for a foreigner.
Ray Dalio doesn’t want his capital nicked in China where he would have zero chance of navigating through the corrupt judicial system successfully in a land that has zero rule of law.
As long as Dalio has meaningful investments in Chinese tech companies, he will never say anything bad about China. He is part of the problem that has spread through the U.S. system of self-censored Americans who have a financial interest in China.
What does he own?
Tencent Music Entertainment (TME).
Offering one-stop music services and solutions designed to create a complete music entertainment ecosystem, Tencent Music Entertainment has solidified its status as the biggest online music company in China by monthly active users (MAUs).
Dalio has upped his holdings by a staggering 858% in TME, Bridgewater has pulled the trigger on 620,000 shares in Q2. At 692,262 shares, the total position is valued at $9,318,000.
TME added 4.4 million subscribers in the quarter versus 2.8 million in Q1, and subscriber average revenue per user also grew 8% year-over-year.
What about the direction of the company?
The company renewed the Universal Music Group (UMG) licensing deal.
Additionally, it organized nine TME Live performances in Q2 and long-form audio licensed titles increased 300% year-over-year, with penetration of 9.4% compared to 4.6% last year.
What other Chinese investments does Dalio own? You would think an American billionaire would help the U.S. health industry find solutions against a global health crisis, but no, Dalio is investing in Chinese health companies.
What does he own?
Zai Lab Ltd. (ZLAB)
Zai Lab offers transformative medicines for cancer, autoimmune, and infectious diseases to patients in China.
Dalio's Bridgewater made a splash with a new position buying 63,837 shares. The value of this holding? It lands at $5,243,000.
The firm has performed well driven by Zejula's second-line ovarian cancer (OC) launch in China. Total sales from China, Hong Kong, and Macau reached $13.8 million.
The Chinese government is already requesting applications for the National Drug Reimbursement List (NDRL) for this year. ZLAB is expected to apply for Zejula's second line OC indication, with the results potentially coming in November 2020 and driving upside.
As for its other launch, Optune became commercially available at the end of June. Optune is priced like a premium therapeutic and would be with a list price of $19,000 and a net price around $11,000. This is at a modest discount price of that of the U.S. list price of around $20,000. Most patients in China are self-paying for this innovative device.
Why invest in Chinese tech firms when the U.S. has a perfectly operating tech industry that has seized even more market share from the broader economy?
Growth.
Watching Dalio’s interview, it’s clear to me that he is a numbers guy. The genesis of his logic originates from the debt cycle and how investments and payments function derive from this concept.
It’s hard for Wall Streetists to ignore the growth numbers in China and Chinese tech firms have the best growth numbers in any industry in an otherwise faltering Chinese economy.
Chinese tech firms have the best growth numbers out of any tech industry in the world, that is, if you believe them.
Dalio has put his money where his mouth is and clearly believes in Chinese tech and makes sure his toes are set squarely behind the Chinese communist line.
I just would remind Ray Dalio that he is one investigative report away from losing his money because industry experts agree that no number out of China is even close to accurate.
I again strongly urge readers to never deploy capital in any mainland Chinese tech firm, simply because there are too many great tech firms in the U.S., and also from the risk control perspective.
Do not follow Dalio down this path where you need to drink the same Kool Aid as him.
We are entering into the golden age of U.S. tech and there will be vast amounts of opportunity moving forward.
We are just scratching the surface here as technology will become a bigger part of our lives, it’s up to you if you want to be a participant or not.
