Mad Hedge Technology Letter
May 15, 2020
Fiat Lux
Featured Trade:
(WHY UBER IS BUYING GRUBHUB),
(GRUB), (UBER)
To understand the unintended consequences of the Fed’s helicopter money to U.S. capitalism, we can put a magnifying glass over Uber’s (UBER) recent takeover attempt of Grubhub (GRUB) as what’s in store for not only the tech sector but the wider public markets.
Zombie companies parade around Europe and Japan because of an era of low interest rates and cozy bank relationships that keep these companies from dying out.
To read more about Allianz Economic Advisor Mohamed El-Erian’s take on zombie companies – click here.
It’s not a surprise that Japan and Europe are highly unproductive, and innovation ceases to exist when capital is being tied up in marginal companies with management happy to let capital slosh about without adding extra added value.
I get it that the Fed is trying to “save” the wider U.S. economy by bringing out the bazookas and even by buying junk-graded debt which was once seen as heresy.
But what we have now are inferior companies that will never turn a profit masquerading as real companies that would be on life support if not for cheap capital.
In almost every instance, the only winners are the executive management who pillage the system and cash out when they are allowed to sell their stock.
U.S. Representative for Rhode Island David Cicilline hit the nail on the head when he described the fluid situation by focusing on two of the bad apples, saying “Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub — which has a history of exploiting local restaurants through deceptive tactics and extortionate fees — marks a new low in pandemic profiteering.”
Uber is a taxi service that undercompensates its highest expense - the driver, and Grubhub delivers restaurant food but rips off the restaurants in doing it.
I defined exorbitant delivery fees as up to 40% which Grubhub is infamous for charging.
Yes, even with predatory practices, they cannot turn a profit.
Now, in this new normal of coronavirus, it would be a miracle to make any operational headway.
Uber’s attempted market grab is a giant red flag.
My guess is that they are doing this in order to jazz up the balance sheet and concoct some ridiculous new metric showing a pathway to growth.
By adding growth to revenue, Uber would be able to preach “growth” even if it’s of bad quality.
I thought the tech market was done looking through to grow by essentially killing off the “WeWork model.”
However, Uber is going for a model that is one notch above that model and repurposing it as something actually meaningful, which of course, it’s not.
They are already in litigious hell regarding driver’s remuneration, and that will not die down and could even destroy Uber.
Uber has in fact ignored California state orders to reclassify its drivers as employees and have appealed the court’s decision.
The New York state government has validated my theory of these fly-by-night delivery outfits being a net negative for business and society.
The New York City Council compared food ordering apps Grubhub and UberEats to blood-sucking parasites this week before passing emergency legislation aimed at helping struggling restaurants lower delivery costs during a precarious time.
During the state of emergency, a new vote passed capping food ordering and delivery app fees at 15% in delivery fees and 5% “other” takeout order fees.
To read more about this decision by the New York City Council – click here.
This was done to give some power back to the restaurants that have been getting fleeced.
The balance sheet shows the whole story with Uber's net loss totaling more than $8.5 billion in 2019 and in February, they reported a net loss of $1.1 billion in the fourth quarter.
Let me remind readers that Grubhub posted a net income loss of $27.7 million for the last reported quarter as well.
As it turned out, Grubhub rejected Uber’s offer believing it didn’t meet their valuation of the company.
It would appear natural that a predatory company with no competitive advantage would set a market premium that would align with their borderline extortionate ways.
Do not own either one of these companies – there are far better ones out there in tech and no need to scrounge at the bottom of the barrel.
Monthly Grubhub bill for Chicago Pizza Boss During the Epidemic
“My goal was never to make Facebook cool. I am not a cool person.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
May 13, 2020
Fiat Lux
Featured Trade:
(CHEGG IS ANOTHER WINNING “STAY AT HOME” STOCK),
(CHGG)
There certainly will be crippling longer-term implications for the airline industry, hotel chains, and of course hospitality – but I can’t say the same for online learning platform Chegg (CHGG), which is now a great option if you're looking for tech stocks to invest in.
Chegg, is a U.S. education technology company based in Santa Clara, California who has hit pay dirt with this coronavirus epidemic.
Chegg provides digital textbook rentals, online tutoring, and other digital student services.
Schools around the U.S. and the world closed in an effort to slow the spread of the coronavirus as well as protecting our future leaders.
Despite the domestic economy on the verge of reopening, it is unclear when schools will.
Naturally, parents are also afraid to allow their children in a school environment where bacteria and germs act as a giant petri dish.
To read more about how schools are having a heck of a time reopening, click here.
Digital learning was already becoming part of the playbook, as college costs continued to soar unabated.
A rule of thumb in every industry is that a crisis often accelerates the inevitable and that is what I see happening in higher education.
Chegg is a portmanteau of the words chicken and egg and references the founders’ unenviable experience of being unable to obtain a job without experience while being unable to acquire experience without a job like many young graduates complain about.
With that in mind, the founders of Chegg, Aayush Phumbhra, Osman Rashid, and Josh Carlson, aspired to disrupt the textbook industry.
Business grew fast in the early stages – the company adjusted its business model to reflect that of Netflix's then rental-based model, concentrating on renting textbooks to students in 2007.
Eventually, the growth led into a textbook rental partnership with education mainstay Pearson Education.
Fast forward to today and Chegg’s stock chart looks like a hockey stick with shares going from $30 to $64 in 2 months.
Chegg’s first quarter revenue jumped 35%, with its services sales up 33% to account for 76% of its total revenue.
The firm also saw the number of Chegg Services subscribers surge 35% to over 3 million for the first time.
And the company forecasted that the momentum it experienced at the end of the first quarter will carry over into Q2, with it calling for its “Q2 subscriber growth to be greater than 45%.”
The substantial increase in engagement from existing subscribers is following through into a meaningful increase in the take rate of the new Chegg Study Pack, much earlier than expected.
Chegg Study Pack is a three-in-one package that bundles together Chegg Study, Chegg Math Solver, and EasyBib Plus. To understand more about the Chegg Study Pack and Chegg’s other online learning products, click here.
Chegg did not provide guidance for the second half of 2020 due to many unknowns such as school start dates, enrollment trends, and whether schools will be taught on-campus, online, or both.
The pain doesn’t stop with the toddler, what about the young adults?
The Graduating Class of 2020 is confronted with the worst hiring climate in history that has seen rescinded internships and evaporating job offers.
These students might back out of the job market completely before they get a sniff and elect to attend graduate school, meaning more online learning in the short-term.
To read about the hardships for fresh graduates, click here.
I am encouraged by Chegg's strong trends 1Q into 2Q and the broader shift of higher education in Chegg's wheelhouse, whether done on or off-campus.
Investors are focused on firms that can grow during semi-apocalyptic conditions, especially ones that seem poised for longer-term expansion within a future-looking industry like Chegg.
Meanwhile, Chegg’s adjusted second quarter earnings are expected to explode to 48% and EPS at $0.34 a share. Overall, the company’s adjusted fiscal year EPS figures are projected to surge to 33% and 22%, respectively.
Shares are overheated for the time being and readers should wait for a significant dip in shares as we approach the summer.
Buy that dip because remote learning is here to stay and first movers like Chegg will have staying power with their sticky products.
With the gains concentrated in biggest names in the Nasdaq, there is a sprinkling of uber growth names of the likes of Chegg, Docusign, Datadog, and Teladoc that are outperforming by an order of magnitude.
The issue I have with smaller cap tech stocks right now is that large cap tech stocks have durability because of balance sheet strength.
If there is a sell-off, investors will migrate further up the food chain, meaning FANGs.
As the FANGs make new highs, they continue to reward long-term investors paying a high premium of a future increase in cash flow.
Lastly, FANGs are the biggest beneficiary of the rerating of the tech market after the unprecedented surge of Fed helicopter money.
Sadly, the smaller caps do not get the lions’ share of the Fed funding funneled into its shares.
The bottom line is that the dreaded coronavirus is mutating from its original version, and this iteration has been reported to affect children.
To read about the virus mutation, please click here.
The reopening of schools is going to be staggered, expensive, unfair, and controversial in the best-case scenario.
It’s impossible to envision that students won’t be given a huge dose of Chegg’s digital learning products and even though not a FANG, the secular tailwinds in Chegg are too powerful to ignore, making it again, one of the good tech stocks to invest in.
I am bullish Chegg (CHGG).
“If you can't make it good, at least make it look good.” – Said Co-Founder of Microsoft Bill Gates
Mad Hedge Technology Letter
May 11, 2020
Fiat Lux
Featured Trade:
(HOW ALGORITHMS ARE TAKING OVER THE WORLD)
($COMPQ), (TSLA)
Let me explain how China has created a sudden U.S. tech ($COMPQ) renaissance that will most likely change the face of business and society in the U.S. to a degree we cannot even fathom yet.
To decompress the catalysts and the mechanisms at play in this confusing time in history, it is important to understand how the Middle Kingdom has supercharged American tech being one of the main protagonists.
Part of it is healthcare's role in the events, and part of it is tech’s strategic position waiting for a broad-based pivot in how humans internalize and execute business.
The supercharger has been the algorithms.
To explain in the best way I can, I will reference the Founder and CEO of Tesla (TSLA) and Space X Elon Musk who had a wide-ranging and insightful interview with popular podcast personality Joe Rogan.
The much-viewed interview preceded Musk’s threats to leave Fremont, California for greener pastures and transfer operations to the Gigafactory near Reno, Nevada and Texas.
To check out an article about Musk’s dare this weekend to migrate Tesla’s operations to the “Battle Born State” of Nevada, please click here.
In the interview, he delves into the U.S. healthcare system’s conflicting incentive to label anything remotely close to Covid-19 as symptoms associated with Covid-19 (which there is a long list of) that doesn’t differentiate between deaths attributed to Covid-19.
This line of thought is to widen the Covid-19 healthcare footprint to the point where each hospital can request more government funding based on the high volume of Covid-19 activity and required help to fight it.
We all love extra funding, right?
Musk also disagreed on every procedure not related to Covid-19 labeled as “elective” because it equates a pulled hamstring to a triple bypass heart surgery which can truly be life-threatening.
The point that I would like to expand on is that the attempts at widening the net of Covid-19 cases in order to curry favor for more government aid are effectively widening the digital footprint of Covid-19 internet content that is feeding back into the algorithms that are responsible for the majority of stock trades.
What we have here are vicious feedback loops that can’t be broken out of because of the misallocated tagging of Covid-19 that filters into algorithmic trading.
That is why we open up the newspaper, social media platforms, and any content provider and we are swamped by Covid-19 content and everything “associated” with Covid-19 content meaning all content has become Covid-19 content!
The net has been cast wide with homelessness caused by Covid-19, tax revenue shortfalls associated to Covid-19, professional sports seasons cancelled by Covid-19, and even a story about the King of Thailand King Maha Vajiralongkorn holed up in Switzerland with his wife and a harem of 20 other women to “quarantine” because of, yes – Covid-19. To read this story, click here.
Basically, all content is Covid-19 content until it isn’t.
This indelible influence on global governance has been deep with every politician feeling the pressure of continuing the lockdown because of a massive dislocation between the real footprint of Covid-19 and the digital footprint of Covid-19.
Healthcare pros as well have been duped by the wrong data and supporting lockdown policies because of the risk of looking bad due to perceived optics not meshing well with the current digital content being published.
The truth is that the real data is probably 1.5 standard deviations from what is believed to be consensus – a far cry from the gross data politicians and healthcare experts are using to make important decisions with.
Naturally, protecting a tenure as a politician is human nature and the unintended consequences to guarding one’s political career are causing longer lockdown periods.
Nobody wants to put their neck out and appear out of line.
Musk argued the case that the virus’s fatality rate is in fact “5-10X” lower than it actually is because of the concept of too many deaths being falsely attributed to Covid-19 symptoms and the lack of tests meaning many people are living with it but have not been accounted for in the data.
The tech market has taken wind of the discrepancy and the fierce rally calling the data’s bluff working with another set of data.
Then add to the casserole that tech companies successfully missed the “big one.”
The “big one” is defined by a virus that actually kills healthy bodies between 20 and 30 years old with no pre-existing conditions at a high rate.
And in economic terms, the “big one” means not being a hospitality, retail, or transport business.
The strength of the tech V-shaped recovery stems from the notion that this pandemic is not nearly as bad as we think it is.
There is definitely a level of truth in this.
Another unavoidable unintended consequence is the hastening of decoupling between the Chinese and U.S. economy as the blame game accelerates.
As a result, corporate manufacturing will be shipped back to the U.S. and this isn’t your father’s manufacturing either.
We are talking about manufacturing in the vein of Tesla, that will sprout up across the U.S. as artificial intelligence is finally good enough to make manufacturing profitable stateside as more automation takes hold.
Many of these new industrial A.I. manufacturing headquarters, factories, and complexes will be set up in tax-friendly states like Nevada and Texas taking a cue from Tesla.
There have been many analysts in the China camp prophesizing that the Chinese Communist Party (CCP) will apply the virus as a vehicle to push their narrow agenda.
However, Liu Chenjie, chief economist at fund manager Upright Asset has estimated job losses in China resulting from the pandemic of up to 205 million workers.
Click here to read about the devastating job losses in China.
The CCP is more worried about cleaning up the mess at home.
I would argue that the post-virus tech economy is setting up for a quicker than expected recovery.
As fast as the virus hit, the algorithms pushing this pandemic into the arteries of all digital channels will disappear in days, almost as if Covid-19 never happened.
Covid-19 has been the direct catalyst to a myriad of firings at digital newspapers all over the U.S., for example, Vice Media cut 10% of company’s employees — resulting in the elimination of 250 jobs.
As one door shuts - another one opens.
As tech companies have withstood semi-apocalyptical conditions, imagine how well they will do on the other side when consumers finally get their incomes flowing again.
U.S. tech is a shining example of the future being limitless, and complicit or not – China, algorithms, and healthcare experts gave a great assist.
“Artificial Intelligence is a fundamental risk to the existence of human civilization.” – Said Founder and CEO of Tesla and Space X Elon Musk
Mad Hedge Technology Letter
May 8, 2020
Fiat Lux
Featured Trade:
(WHY TECH IS THE BIG BAILOUT WINNER)
(EA), (ATVI), (TWLO), (UBER), (LYFT)
