Tech Letter Archives - Mad Hedge Fund Trader

The Hyper-Acceleration of 5G

I will explain to everyone why a wonky side effect of coronavirus is supercharging the 5G revolution.

Market valuations reflect the state of expected future cash flows in a company.

Under this assumption, some could argue that most tech companies with staying power are almost a good buy at any price.

No brainers would include a list of Microsoft, Amazon, Apple, and Netflix.

The health scare and the carnage associated with it have brought forward the tech industry as a whole to the forefront of the global economy.

When you mix that with the Fed hellbent on saving everything that has a heartbeat, it sets up conditions for heavy buying in an industry that is going to be king of the global economy anyway.

It is not a question of if, but when and the health phenomenon has accelerated the dramatic migration to tech by showing how business will be conducted in about 15 years.

The change took place in a blistering 4 weeks.

The clearest signal of who is really calling the shots in the equity market is looking at which companies are dragging it up.

Technology is shouldering the responsibility of the equity market by outperforming the broader market with many software companies’ share price higher than before the crisis.

For every Amazon or Microsoft, there is also a Macy’s or JC Pennys showing that this is really a stock pickers market.

We have not only learned that tech companies are critical to our functioning as a society, but that large tech companies will be even more central than before even if they are currently losing gross revenue.

The relative gains to tech stemming from the coronavirus is equal or greater than an innovation of a game-changing product and will double the effect of 5G.

We are setting up for the Golden Age of 5G with tech poised to invade even more of the broader equity market.

One rough estimate notes that the 5G industry is expected to add about $40bn in incremental revenue to the semiconductor industry, add 5X growth in mobile data monthly traffic by 2024, and a $4.2tn boost to global economies from revenue streams connected to 5G in the next ten years.

I do agree that currently, the network effect is working in reverse order, but the positive force multiplier, when the economy is riding high again, cannot be emphasized enough.

Digital revenue streams will effectively be pumped into every nook and crevice of the digital economy because of current modifications to the business environment.

When business does come back online, investors of physical assets will sell what they can at discounted prices to get into the digital ecosystem causing asset prices to explode as investors chase prices to the sky.

Do you remember commercial real estate guru and Colony Capital’s CEO Tom Barrack?

The company hoped to sell as much as 90% of its $20 billion property portfolio of hotels, warehouses, and other commercial real estate by the end of 2021.

They are also another big investor in nursing homes.

A real-estate pioneer who founded Colony in the early 1990s and is the firm’s chief executive and executive chairman, Barrack said he wanted to go “all digital.”

Rejigging the 29-year-old investment company represented an extreme response to the way technologies have been dismantling cash flow for most every type of commercial real estate, and Barrack was met with fierce backlash from entrenched stakeholders regarding the new direction.

Commercial real estate and hotel operators have had to fight against the triple whammy of office sharing WeWork, short-term hotel platform Airbnb, and the coronavirus - a lethal three-part cocktail of malicious forces to the “traditional” model.

The coronavirus has proven Barrack was spot-on with his synopsis, but he wasn’t able to get rid of Colony’s inventory of commercial real estate in the expeditious way he desired.

Other companies have taken a direct hit like 24-Hour Fitness who are pondering filing for bankruptcy, but I could say the same for a slew of companies like Colony Capital.

Another key manifestation of the current economic malaise is that regulators, antitrust, tax, foreign and all of the above are less likely to disrupt big tech companies moving forward considering they may be the only ones able to get us out of a similar crisis in the future.

Government officials will be under rapid pressure to boost GDP levels and crimping big tech is counterintuitive to this overall goal.

I don’t agree with the glass half empty crowd who believes Amazon needs to be clamped down because of dominating retail during the time of the virus - if Amazon didn’t exist, the panic could have accelerated to an uncontrollable level creating anarchy in the streets.

The big boys have pushed soft power as a legitimate policy tool with Apple sourcing over 20 million face masks and is now building and shipping face shields.

Big tech is becoming like a mini-government in its own right.

Granted that thousands of bankruptcies from restaurants, nail salons, and yoga studio will be swept into the dust bin of economic history, but once the next iteration of the economic cycle turns up, tech is about to go gangbusters in a way many never thought imaginable.

Then if you bake a little 5G into the pecan pie, investors are justified to be salivating about the tech industry’s prospects.

Any deep-pocketed investors should be cherry-picking every quality 5G tech play possible because they will be the most supercharged sub-sector of tech once the economy is reset.

Any long-term investor with a pulse should buy Crown Castle International Corp. (REIT) (CCI) on any and all dips.

They are the largest owner of cell towers owning over 40,000 in the U.S.

April 17, 2020

Tech Letter

Mad Hedge Technology Letter
April 17, 2020
Fiat Lux

Featured Trade:

(WHY YOU SHOULD SELL THE UBER RALLY)
(UBER), (LYFT)

Why You Should Sell the Uber Rally

Tech Letter

Nimble tech firms like online taxi company Lyft will be penalized in the coronavirus economy as it de-globalizes for a period of time.

If you read the Mad Hedge Technology Letter, you already know that I believe rideshare business models will never become profitable.

Fast forward to today and ask yourself how can these companies make profitability headway when the state mandates shelter in place policies?

The answer is they cannot.

It is not exactly the type of foundational policy that promotes more ride-sharing volume, so bad news for Uber and Lyft.

Uber CEO Dara Khosrowshahi told investors that ride volume has gone down by as much as 60%-70% in ground zero cities like Seattle, and that’s before you consider the pauses in some of its secondary services and the dubious distinction of becoming one of the earliest proof-of-concepts of just how fluid this virus really is.

But Khosrowshahi also told investors that Uber is “well-positioned” to ride the troubles out even in the worst-case scenario of rides down by 80% for the year. And even as ride volume crashes, it is also considering leveraging its network for delivering other things, such as medicine or basic goods.

Basically, Uber specializes in losing money and lots of it.

Then imagine how demoralizing it is for the inferior version of Uber, it’s little brother Lyft.

Lyft has no “other” businesses such as food delivery service Uber Eats, leading me to conclude that this massive retracement in shares must be a bear market rally that will run out of steam.

Finding entry points to short growth stocks is an imprecise endeavor but I do believe that poor revenue reports in the upcoming earnings season is going to cap this bear market rally in Lyft’s shares.

What do we know already?

A global and tech recession will be sharp and it will be worse than the global financial crisis possibly by a factor of 4.

Investors still cannot wrap their head around whether this contagion will spill over into being a depression.

Tech investors will need to respect the “new, new normal” following the pandemic, in which corporates make aggressive cuts to their spending side-- again, bad news for Uber and Lyft.

This type of scenario is especially problematic for Lyft who must spend illogically just to stay in business.

Lyft burned $463.5 million in the third quarter of 2019, which was almost twice the amount that the company lost over the same period of time the previous year.

The fourth quarter net loss includes $246.1 million of stock-based compensation and related payroll tax expenses as well as $86.6 million related to changes to the liabilities for insurance.

That translates into an adjusted net loss of $121.6 million, which is better than the adjusted loss of $245.3 million over the same period last year.

Considering the elevated amount of cash burn to Lyft’s model pre-virus and aware that nobody knows how long the cash burn will accelerate beyond Lyft’s earnings – investors are staring into a black hole of infinite losses moving forward as Lyft’s business model looks worse every day.

I must conclude that the post-coronavirus economy is highly likely to not be kind to marginal companies like Lyft who is a glorified taxi service.

Uber controls about 60% of the ride-sharing market in the US and managed to accomplish this by losing $5.2 billion in the Q2 2019.

Lyft has already slashed its R&D budget by deleting the autonomous vehicle development program.

Yes, the very program that was supposed to be the x-factor in its quest for real profits.

Laughably, Lyft’s executives emphasized that they believed the company will turn a profit in the fourth quarter of 2021, a year earlier than they had previously projected, but that forecasts looks foolish in hindsight.

The one miniscule silver lining for Lyft - fewer discounted rides than it did a year ago.

Lyft is also trying to boost the number of more-profitable rides, which are premium trips such as “airport” or “business” trips.

It’s a shame these premium trips have gone to zero.

The narrative has quickly pivoted to “grow at all costs” to “survive at all costs” and it’s not surprising to see Lyft grossly underperform the Nasdaq index in relative terms and most quality cloud stocks are in the midst of a v-shaped recovery.

Lyft is a sell on a rally type of stock.

April 17, 2020 - Quote of the Day

Tech Letter

“It has become appallingly obvious that our technology has exceeded our humanity.” – Said Scientist Albert Einstein

April 15, 2020

Tech Letter

Mad Hedge Technology Letter
April 15, 2020
Fiat Lux

Featured Trade:

(SOFTBANK’S CRASH AND BURN)
(SOFTBANK VISION FUND)

SoftBank's Crash and Burn

Tech Letter

The bizarre case of Softbank’s emperor has no clothes – its enigmatic CEO Masayoshi Son was heralded as a tech genius who planned to validate his intelligence by throwing money at budding tech companies that were supposed to deliver his investors billions in shareholder value.

It’s now Mr. Market who has the last laugh, as the infamous tech venture fund, smartly named the Vision Fund, bankrolled by Son and Middle Eastern wealth funds, took a turn for the worst with a $16.6 billion loss in the fiscal year that just ended.

Apparently, the vision fund is blind.

How bad is the situation at the “vision” fund?

A fraudulent tech company that sells shared office space owned by Softbank is now suing itself, creating a scenario where WeWork is reliant on Softbank to fund it, yet attacking the hand that is feeding it.

Presiding over a cesspool of conflict of interests, unremarkable business models, inflated egos, and botched management, the vision fund’s greatest success is overpaying for massive loss-making tech companies that sometimes weren’t even tech companies.

WeWork is the most high-profile casualty of Son’s excesses, but Oyo, the hotel sharing company, also epitomizes the state of Son’s crumbling empire.

Less than a year ago, Son publicly anointed Founder and CEO of Oyo Ritesh Agarwal one of the new up-and-coming tech innovators.

Oyo is the Uber of hotels that, through a reservation website, matches hotel units with paying customers.

Agarwal began working with small hoteliers on service, design and standardized accouterments like bedding and toiletries to draw more travelers. He took a 25% cut of sales.

The online hotel platform expanded ambitiously by recruiting hotel owners and guaranteeing a minimum amount of revenue, essentially doubling down that its online booking system and brand name would attract enough extra cash flow to sustain sales.

In the event that revenue goes to zero because of a pandemic, Oyo would incur abnormally high risk by still being on the hook for the revenue to the hotel operators.

Oyo has since gone back on its guarantee to pay guaranteed revenue streams to hotel operators alienating any potential relationships with hotels in the future.

Agarwal’s brainchild was supposedly poised to become the biggest hotel operator in the world.

Fast forward to today and the situation is nothing short of a disaster.

Oyo has called for a major restructuring, furloughing thousands of employees as it clings on for dear life.

Oyo is just another disastrous instance of the Vision Fund’s toxic array of underperforming assets.

The hotel startup was valued at $10 billion just recently and even though not a zero yet, the company has lost around 70% of its value in one month.

Complicating the pitiful situation, Agarwal borrowed $2 billion to buy back shares in his own creation speculating that Oyo would be able to offload the asset to avid investors.

Agarwal could face an imminent margin call from the banks he borrowed from, setting the stage for Son to bail out another ridiculous sideshow or let it rot like WeWork who is effectively suing Son for not following through with a $3 billion bailout that he is walking away from.

Son promised after WeWork that he wouldn’t bail out any more startups, but the issue now is that the list of eroding companies grows longer and Son’s ability to fund these decrepit companies weakens by the day as business is shut around the world and his balance sheet sours.

Just look around at the lifeless companies that have been put out of their misery such as Brandless Inc., Zume Pizza Inc., and OneWeb just filed for bankruptcy.

I double down that no tech firm will be able to go public in 2020, and the rotten apples under Son’s leadership are now being inspected for exactly how rotten each apple is.

Tech investors should take this cue to find higher ground in the form of iron-clad balance sheets, positive cash flow, and unmistakable intellectual property.

If you can slip in a recurring subscription model in the equation, then that is the cherry on top of the chocolate sundae.

Park money in the corona tech stocks of DocuSign (DOCU), Zoom Video Communications, Inc. (ZM), Amazon (AMZN), Netflix (NFLX) and Microsoft (MSFT), then grab some popcorn to watch how Son’s portfolio blows up in dramatic fashion.

April 15, 2020 - Quote of the Day

Tech Letter

“It's better to be a pirate than to join the Navy.” – Said Co-Founder and Former CEO of Apple Steve Jobs

April 13, 2020

Tech Letter

Mad Hedge Technology Letter
April 13, 2020
Fiat Lux

Featured Trade:

(THE BEST SHORT PLAYS IN TECH)
(EHTH), (IQ)

The Best Short Plays in Tech

Tech Letter

Fed’s Neel Kashkari described the path of the U.S. economy as a “long, hard road” boding ill for the tech sector. During economically unpredictable times, avoiding tech stocks that could be sinkholes is crucial to protecting a portfolio, which is why it's useful to consider the best short plays in tech.

One person I drop everything to listen to is Muddy Waters Research Founder and CEO Carson Block.

Block is best described as a short-seller, and his calls on allegedly fraudulent accounting practices in publicly traded Chinese companies are typically spot on.

Block has found another potential gem and he is willing to bet on it by acquiring a short position in eHealth, Inc. (EHTH) which owns a digital health insurance exchange.

His gripes revolve around shoddy management who hoped to “pump the stock,” and shares reacted by dropping more than 17% at last Wednesday’s open after Block’s premarket disclosure.

The second part of Block’s argument centered around artificial growth caused by higher TV marketing spend resulting in high churn rates.

His evidence derives from management manipulating its presentation of churn to be misleadingly low and booking multi-year 'tail' revenue at the end of each cohort's estimated life, which is extremely aggressive in light of the significantly elevated churn.

Block didn’t stop there, turning his attention to another Chinese tech company that is billed as the Netflix of China called iQIYI, Inc. (IQ).

Activist firm Wolfpack Research alleges that iQiyi “was committing fraud well before its IPO in 2018” on the Nasdaq, and it’s “continued to do so ever since.”

The Netflix of China has been fudging its numbers for quite a while and is the most egregious example of accounting fraud.

How do they do it?

The inflation of its barter transaction revenue. Barter sublicensing revenues are determined by IQ’s internal estimates of the value of the content it traded.

In other words, IQ’s management can effectively assign any value they want to these transactions, providing an easy opportunity to inflate revenues.

Based on the highest-end estimated value per non-exclusive episode provided by a former IQ employee involved in content acquisition, IQ would have needed to barter the licenses for ~3.9x and ~3.2x the total number of TV series episodes produced by all Chinese production companies to legitimately reach its reported barter revenues in 2018 and 2019, respectively.

IQ is a mature company and will turn 10 years old this month - yet has burned money for 10 consecutive years.

Even worse, losses are rapidly accelerating, unlike its growth and the company is doing more to mask their rotten core.

IQ lost around $1.5B in 2019, $170 million more than 2018.

Meanwhile, paying subscriber growth in 4Q19 hit a nadir at only 0.7%. IQ’s advertising revenue was also crashed -15% in 2019 and it still has a negative gross margin.

The Chinese consumer mindset is to never pay for digital content because they can just find it on the web for free, meaning digital streamers like IQ must go to extreme lengths to create “growth.”

The reverberation from the coronavirus is that tech investors are more risk adverse than ever and any whiff of illegality will scare them off.

Even though the Fed has basically swallowed every asset class we have with its latest move, that will not save the marginal tech companies with dishonest business models.

iQIYI, Inc. (IQ) and eHealth, Inc. (EHTH) are high-risk tech companies that readers should avoid like the plague.

April 13, 2020 - Quote of the Day

Tech Letter

“I’m skeptical of any mission that has advertisers at its centerpiece.” – Said Jeff Bezos