Mad Hedge Technology Letter
February 24, 2023
Fiat Lux
Featured Trade:
(PART 2: THE BEST OF THE REST IN QUANTUM COMPUTING)
(GOOGL), (QUBT), (IBM), (MSFT), (AMAT)
Mad Hedge Technology Letter
February 24, 2023
Fiat Lux
Featured Trade:
(PART 2: THE BEST OF THE REST IN QUANTUM COMPUTING)
(GOOGL), (QUBT), (IBM), (MSFT), (AMAT)
Alphabet (GOOGL)
In 2019, Google claimed that it had achieved what it called quantum supremacy. The company claimed to have built a computer with capabilities far beyond those of traditional computers.
In a report published in Nature, Google said its quantum computer managed to calculate something that would take a normal machine 10,000 years.
What practical applications Google's performance will have in the real world is still unclear. The initial computation was a demonstration of capability rather than a product that will have a significant commercial impact any time soon.
Having a horse in the race will also mean they can turn it up a notch once they receive more direction on where this might lead.
Like so many of its other companies, Alphabet invests heavily in the latest computer technology.
Many of these ventures probably won't bring in much money; others, on the other hand, will likely recoup the company's entire research budget and then some. And the good thing about Alphabet is that it's so busy that a single project, such as B. quantum computing, will not decide on the entire investment.
I am not going to sit here and say that Google is a quantum computing company because it’s not, but they are ready to pounce if the opportunity presents itself.
Quantum Computing (QUBT)
Quantum Computing is an innovative company focused on its namesake. It sees a market opportunity in the ability to create a service that coordinates computing needs.
There are providers of quantum computers, such as IonQ or Rigetti. Then there are customers in large companies, universities, or research laboratories. Quantum Computing sits in the middle, making software to help customers manage their quantum computing needs.
Currently, quantum computing has almost no revenue. Management acknowledges that the company is still in the early stages of market development and understanding customer use cases.
QUBT stock is highly speculative, as are most other companies in the sector. However, as the market for quantum computing vendors and customers grows, a brokerage service that connects the two could represent a fairly profitable niche.
IBM (IBM)
Tech analysts like to compare IBM to companies like Radio Shack and Eastman Kodak (KODK) as a dinosaur inevitably heading towards the dustbin of history.
However, the truth is much more nuanced.
IBM still achieves $60 billion a year in total revenue, and that number is actually on the rise again. They also have a PE ratio of 21 as its ongoing operations in consulting, services, and cloud, among others, are very profitable. And IBM continues to invest heavily in research and development, including quantum computing.
IBM's quantum computing division promises to unlock information beyond the reach of even the world's fastest supercomputers. The IBM partnership for quantum computing already involves 160 Fortune 500 companies as well as national laboratories and academic institutions. These partners work in areas such as finance, chemistry, and logistics.
Microsoft (MSFT)
Like IBM, Microsoft wants to take the lead in the emerging field of quantum computing. Microsoft has an inbuilt advantage, as its Azure cloud platform already has a massive installed base with a variety of Fortune 500 customers.
Now Microsoft is building its quantum computing capabilities directly into Azure. Microsoft describes this as “the world’s first full-featured, open cloud ecosystem for quantum computing.”
It makes a lot of sense that this would be offered as part of a cloud package. After all, most customers probably don't need their own supercomputer. Rather, they want the ability to buy that computing power only when they need it.
If Microsoft can seamlessly integrate this experience into its native Azure platform, it could be a major win, both for this product and for securing greater market share in cloud computing.
Applied Materials (AMAT)
Another approach to betting on quantum computing stocks is to be long on suppliers. Given that the technology is still very new, it can be difficult to determine which companies will ultimately be among the winners in this space. What is certain, however, is that if quantum computing catches on, we will need faster and more powerful semiconductors.
Applied Materials is one of the industry leaders in terms of patents and industry know-how when it comes to manufacturing chips that will be used in quantum computing hardware. During a gold rush, you want to be the one selling the shovels. Applied Materials should be the shovel dealer for the quantum computing industry.
In the meantime, Applied Materials' existing business is extremely profitable.
Mad Hedge Technology Letter
February 13, 2023
Fiat Lux
Featured Trade:
(ECOMMERCE TAKES A BACK SEAT)
(CPNG), (AMZN)
Mad Hedge Technology Letter
October 28, 2022
Fiat Lux
Featured Trade:
(ENTRY POINT INTO AMAZON)
(AMZN)
There is definitely jet fuel left in Apple’s (AAPL) tank.
I guarantee it.
I like some of their recent moves, like today when they announced that they are in talks with Vietnam for the Apple Watch and MacBook to be produced in the country.
Cutting the China risk is a big deal.
The lockdown-obsessed country is a terrible place to headquarter manufacturing operations.
Apple has deadlines to meet and shareholder value to accrue, and that’s not going to cut it when the government doesn’t allow workers to work.
Vietnam’s government and Apple most likely have a wink, wink – nod, nod agreement to chill on the overbearing lockdowns, otherwise, I cannot fathom why they would move from one lockdown-prone country to another one.
Maybe Apple management just like the Vietnamese spring rolls over the Chinese, but I bet most unlikely.
Oh yeh, almost forgot about the tax breaks, Vietnam most likely will load those up to the eyeballs to convince Apple to put factories there.
Brand name companies don’t put their resources in Podunk places for free.
Another bright spot in Apple is the massive stock buyback and large dividend.
Must love a tech company that rewards shareholders and that’s why Warren Buffet loves this gravy train.
Next, the biggest fish in the largest body of water is still churning out its prized iPhone.
Now we are onto number 14 coming to you later this winter!
Demand for the iPhone remains strong. During Apple's third quarter, revenue from this segment rose 2.8% to $40.7 billion.
Selling more iPhones isn't just a matter of generating revenue for Apple. It also helps the company grow its installed base, provided a customer not previously part of Apple's network purchases a new device. That seems to be at least part of the story, as Apple reported that its installed base reached all-time highs across all its products during its latest quarter.
The long-run implications of these developments are significant. The more people are plugged into Apple's services network, the more it can monetize these users, and the more it can grow its services revenue. During Apple's third quarter, the tech giant's services segment grew faster than the rest of its business, recording total sales of $19.6 billion, 12.1% higher than the year-ago period.
This segues nicely to more eyeballs viewing Apple ads. The annual $4 billion ad business will get upgraded as Apple plans to post more ads around its ecosystem. Ad buyers will be chomping at the bit to flood Apple’s network with ads galore. I see this as a great move to add strength to the balance sheet.
The consumer is still consuming. The top 39% of US income earners who are exposed to the stock market are responsible for 65% of consumption so it is a chicken and egg thing…they will feel like they have the license to spend because they feel wealthier.
That’s what I like because the people who cannot even afford iPhones, won’t buy the iPhone 14 and never had a chance to buy an iPhone when they are shopping at the Dollar store.
There will be zero churn here in iPhone usage and I would argue that the attrition rate becomes healthier.
True, I saw that report from Walmart about higher-income families more concerned about rising prices, but this doesn’t mean their budget will exclude the iPhone 14.
Many of these higher-income families need the iPhone 14 for work purposes and many of them have work-from-home jobs where they need an Apple device always glued to their face.
The Apple monster should keep chugging along, and out of all tech companies, this is the one to ride to profits.
Samsung, Korea’s stalwart chaebol, is toast.
Remember the past two years when lockdowns were in vogue?
Digital products were the hottest item in the world as everybody was stuck in their homes.
Growth brought forward is never a bad thing for a company, especially tech companies.
However, it sets the stage for hard comps to topple and a reversion back to the mean which can look messy.
The world needed chips and phones back then, the world is now traveling, getting on planes, and taking cruise ships to the Caribbean.
This is why video game growth is quite subdued this year.
Samsung internally has also been taking a machete to its forward-looking estimates multiple times in order to front-run collapsing demand.
The boom bust nature of chips and devices is an inherent beast in the industry that is hard to tame.
Samsung was able to hit watered-down targets in the second quarter, but that was mainly due to a 7% currency tailwind of the Korean won sliding fast just like many Asian currencies.
Take a look at the Japanese yen, it’s gone off a cliff all the way to 136 per $1.
I remember when I took a vacation to Tokyo in 2011, Japan felt awfully expensive at 77 yen to $1.
The currency tailwinds are a transitory elixir yet under the hood, these economies are weakening fast.
The aging population and cost of living crisis are also crushing sales.
Internal data reveals deeper damage than initially thought.
Operating profit missed by a wider margin than revenue beat and prices for its premium products isn’t fetching the prices they once did.
For example, Samsung markets its Exynos 2200 chips as on-par rivals to the Snapdragon 8 Gen 1 and Apple’s (AAPL) A15 Bionic chip found in smartphones.
However, the Exynos fails to compete with its supposed flagship chip comps, performing at levels lagging almost a generation behind in speed and functionality.
It’s clear that devices made with Exynos chips simply won’t be able to sell for as much as flagship Android phones with Snapdragon 8 Gen 1 or Apple iPhones with A15 Bionic chips.
I fully expect the operation profit to go from 6% to 3% for Samsung.
US rival Micron (MU) has already rung the alarm. While the world’s third-largest maker of DRAM posted revenue and operating profit for the quarter in line with estimates, its forecast for the coming three months was 20% lower than expectations.
It now sees the PC and smartphone markets much weaker than previously thought.
Tech has experienced a massive downgrade in terms of sentiment and sales while massive pressure on the supply side costs.
Cloud computing and streaming services which all need chips have been the poster boys of underperformance.
Growth stocks have also gotten killed.
I do believe this is more a signal of deeper individual malaise at Samsung and an indication they are getting trounced by Chinese firms who just do it better for cheaper.
Margins won’t ever come back up for Samsung as they lack the nimbleness of the Chinese and brute power of the American tech.
They are essentially stuck between a rock and a hard place where products will become less competitive, face rapidly shrinking margins, and participate in a Korean economy that lacks vibrancy.
Once chip stocks bottom, avoid Samsung, and get into Qualcomm (QCOM) and Micron (MU).
Airbnb’s (ABNB) stock has about halved from $206 at the tech market peak of 2021 to around $100 today.
The strength in the first half of 2021 resulted from the optimism coalescing in travel circles about the reverse of shelter-at-home lifestyle to unfettered international travel.
Remember back then, increasingly more countries were allowing Americans into their land with proof of 2 Pfizer shots.
The $130 to $206 rise was simple an overshoot.
Sentiment was at a generational low during 2020 and the upside was merely a result of the extreme reverse of great pessimism to ultra-optimism.
At a micro level, Airbnb’s business model mirrored the same sentiment of the 2020 tsunami of travel cancellations.
Bad optics has been a staple for CEO Brian Chesky.
Then the onslaught of arbitrary refunds to customers alienated the Airbnb host.
They slowly changed their policy to remove “extenuating circumstances” as a reason to get a full refund.
It wasn’t that I had a problem with Airbnb going to $206.
Like many tech growth stocks, they tend to go parabolic during good times.
Tech firms with better balance sheets haven’t halved in value like Airbnb.
That being said, Airbnb is not worth the current $60 billion and a 74 P/E ratio is too expensive at a fundamental level.
After halving, I still think the valuation is a tad bit too generous.
I believe the company is worth $60 billion only if interest rates are close to zero and not the 3.1% we have today on the 10-year US treasury.
The company is worth significantly less in its current form in 2022 and as rates accelerate from 3.1% to 3.5 or 4%, I expect the company to be worth $45 billion.
On the demand side, travel is a lot more expensive now than ever.
I am not only talking about airfare, but also airport car transfers, price for baggage, entertainment, food, and accommodation which are all trending above 40%-80% depending on the item in tourist areas.
However, Americans are making summer of 2022 the “revenge” trip of a lifetime.
The pre-pandemic overtones of fear of missing out (FOMO) and you only live once (YOLO) are back stronger than ever on short-form video platforms like TikTok and Instagram.
One might believe Airbnb stock should be cruising on auto pilot, right?
Well, the revenge travel of summer 2022 is already baked into the price of the stock since this behavior was largely understood 6-8 months before.
The drop in shares has to do more with the lack of incremental demand that will follow the summer of 2022 as the US barrels towards a recession.
Yes, travel will decelerate fast after summer 2022 as Americans blow their load while failing to reload for the 2nd half of 2022.
This is awful news for Airbnb stock.
Another element is gas prices.
The cost of gas and groceries is about to explode as Americans need to fill up their tank and buy groceries for Independence Day celebrations all in unison.
The pitiful energy infrastructure that has been gutted by the current administration won’t be able to handle the elevated demand.
This will 100% limit the budget of Airbnb for Americans.
Airbnb posted an average daily rate (ADR) of $168.46 in Q1, up 5.3% YoY.
However, its growth has decelerated from previous quarters and I expect it to fall even more later this year.
Until we capitulate, the downtrend likely won’t reverse because the business model isn’t that bad and they do boast a monopoly.
“Life is too short for long-term grudges.” – Said CEO and Founder of Tesla Elon Musk
Mad Hedge Technology Letter
March 18, 2022
Fiat Lux
Featured Trade:
(THE FUTURE IS HERE)
(NO CODE)
Mad Hedge Technology Letter
January 10, 2022
Fiat Lux
Featured Trade:
(THE EV DARKHORSE)
(LCID), (TSLA), (NKLA)
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