“If you can't make it good, at least make it look good.” – Said Co-Founder of Microsoft Bill Gates
Mad Hedge Technology Letter
March 23, 2020
Fiat Lux
Featured Trade: (THE CORONA DRAG ON 5G)
(VZ), (T), (AAPL), (NFLX), (NVDA), (XLNX), (QRVO), (QCOM)
It will be inevitable – the 5G shift in 2020 will be delayed.
Last year, 5G was available on only about 1% of phones sold in 2019 and demand has cratered this year because of exogenous variables.
Up to just recently, Apple (AAPL) was the bellwether of the success of tech with wildly appreciating shares due to the expected ramp-up to a new 5G phone later this year.
Well, things are more complicated now.
I will be the first one to say it - the new Apple 5G iPhone will be delayed until 2021 – the project has been thrown into doubt because of a demand drop off and headaches with the supply chain in China.
The phenomenon of 5G cannot blossom until consumers can upgrade to 5G devices.
Concerning all the media print of China Inc. going back to work, don’t believe a word of it.
People of the Middle Kingdom are sitting at home just like you and me by navigating around top-down government edicts.
Instead of the perilous commute in a country of 1.4 billion people, Chinese workers are fabricating attendance figures per my sources.
Overall data is grim - global smartphone shipments dropped 38% year-over-year during February from 99.2 million devices to 61.8 million - the largest fall ever in the history of the smartphone market and that is just the tip of the iceberg.
The new data point underscores the magnitude of how the coronavirus is sucking the vitality out of the tech ecosystem in China and thus the end market for global consumer electronics.
The statistic also foreshadows imminent trouble in the smartphone market as other regions have now shut down not only in China but the manufacturing hubs of South East Asia.
The outbreak squeezes both supply and demand.
Factories in Asia are unable to manufacture phones as usual because of obligatory government shutdowns and complexities securing critical components from the supply chain.
5G has been hyped up as the great leap forward for wireless technology that will usher in unprecedented new use cases supercharging global GDP — from driverless transport to robotic automation to smart football stadiums.
And coronavirus is just that Godzilla destroying 5G momentum down.
Mass quarantines, social distancing, remote work, and schooling have been instituted in American cities, meaning that the current network carriers are swamped and overloaded with a surge in data usage.
The Verizon’s (VZ) and the AT&T (T) Broadbands of America are currently focused on maintaining their current core customers, adding extra broadband to handle the increased load, and making sure the health of the network stays intact.
This is a poor climate to upsell products to beleaguered Americans who have just lost income and possibly their house because they cannot pay mortgages.
Services such as YouTube and Netflix (NFLX) have even decreased the quality of streaming on their platforms to handle the dramatic spike in extra usage in Europe with the whole continent locked down.
The Chinese consumer was the Darkhorse catalyst to ramp up the global economic expansion during the last economic crisis, picking up world spending in 2009.
On the contrary, this group of super spenders is less inclined to save the global economy this time around because they are saddled with domestic debt.
Just as unhelpful to Silicon Valley revenues, the technology relationship at the top of the governments are poised to worsen because of the health scare.
The U.S. administration has already banned the use of Chinese components in the U.S. 5G network amid suspicions the devices would be used for espionage.
Back stateside, I believe the U.S. telecoms will explicitly detail a sudden slowdown in the 5G network rollout during their next earnings report.
The telecom companies have been able to successfully handle the extra incremental load, but it has had to allocate resources to service the extra volume.
In the meantime, companies will shift to doing infrastructure and site preparation in anticipation of the re-build up to 5G, but that could be next to be put on ice if crisis management moves to the forefront.
Considering every 5G base station is being manufactured in Asia, one must be naïve in believing all is well and they will probably need to do what the 2020 Tokyo Olympics will shortly do – postpone it.
It’s not business as usual anymore.
This time it’s different.
The world just isn’t ready to digest such a shift in global business as 5G until the fallout of the coronavirus is in the rear-view mirror.
The 5G phenomenon underlying effect is to supercharge globalization into smaller networks of interconnectivity and that is not possible during a black swan event like the coronavirus which is the antithesis of globalization and interconnected business.
Just take the situation across the Atlantic Ocean in Europe, UBS Group AG, and Credit Suisse Group AG required clients to post additional collateral, and money managers in New York are preparing term sheets for ultra-rich Americans to urgently meet margin calls.
Many people are scurrying back to their doomsday’s shelter and that does not scream global business.
If you thought gold was the safe haven – wrong again – it experienced back-to-back weekly losses as margin pressures force fire sales of gold to raise cash.
Another glaring example are the assets of Eldorado Resorts Inc., controlled by the founding Carano family, which burned $28.7 million of stock in the casino entity to meet a margin call to satisfy a bank loan.
Things are that bad now!
Sure, telecom players might argue that a sudden influx of workers from home necessitates more investment in 5G, but if they have no income, all bets are off.
The capacity of 4G home broadband has proved it is good enough for today’s demands and it means the last stage of 4G will be a high data consumption longer phase before business lethargically pivots to 5G in 2021.
Verizon’s CEO Hans Vestberg said last year that half the U.S. will have access to 5G by the end of 2020, and I will say that is now impossible.
This sets up a generational buy in the Silicon Valley chip names involved in 5G after coronavirus troubles peak such as Nvdia (NVDA), Xilinx (XLNX), Qorvo (QRVO), and QUALCOMM Incorporated (QCOM).
“Once things start moving, Uber will, too.” – Said Current CEO of Uber Dara Khosrowshahi when asked about the fallout from the coronavirus
Mad Hedge Technology Letter
March 20, 2020
Fiat Lux
Featured Trade:
()
(AMZN), (W)
Social distancing signals the death of business in March and April 2020. Enter online shopping and E-commerce.
E-commerce’s greatest strength is pulling ahead of its competition while Millennials have also been the catalyst in turning the general shopping experience into a seamless digital affair.
And now that the world is at the mercy of an invisible virus, the use case for e-commerce business models has never been brighter, more appealing, and contactless.
That’s not to say that there are still net negatives from worker’s losing their jobs and being unable to buy goods, whether online or not. The overall damage to tech companies as a result of the pandemic cannot be ameliorated with a simple panacea.
The pain is just starting as the tech market searches for a bottom.
Covid-19 cases have mushroomed to over 11,200, and investors need to digest that continued underperformance lies ahead in the short-term.
But, the long-term migration towards digital models is looking better by the second.
Essentially, the e-commerce method is being supercharged by the coronavirus and the positive unintended consequences harvested by the e-commerce business models are directly correlated to increasing fatalities.
The health scare is ushering in a giant wave of new long-term customers who are just starting their digital experiences, making investing and e-commerce a topic worth discussing.
Astonishingly, the work environment has truly metamorphosized the past two weeks - any worker who can work at home is now working at home.
No longer do we have the hesitant boss who thinks working at home is all fantasy and no production.
Local policies have been so drastic in some cities that lockdowns of schools and restaurants have become commonplace.
People in those cities have also begun shunning public, crowded places in the name of health and survival.
How bad is it out there on the streets, and how poorly are U.S. tech firms doing?
The economic pain caused by the escalating coronavirus pandemic will be worse than the Great Financial Crisis of 2008.
The Chinese economy is contracting at a 15% annual rate, while the European economy is already in severe recession because of the drop off of China revenue.
In the U.S., they are shutting down restaurants, schools and major events; people are going to be without a paycheck, and this doesn’t set up nicely for consumers to pay for tech services that aren’t utilities.
Unless there are major policy moves soon, a downward spiral will usher in something akin to a global tech recession, and U.S. Secretary of the Treasury Steve Mnuchin is already ringing the alarm bells by saying unemployment could spike to 20%.
Tech won’t avoid the carnage in this drastic scenario, and it's still not “buy the dip” time.
Many industries are already queued up at Washington’s front door for a bailout and even though tech firms are better positioned than say, the oil industry, the overall slide in demand from consumers will hit come next earnings report which is just around the corner.
The bill Washington will need to foot appears upwards of $3 trillion and it’s easy to understand why when, according to a March 2020 YouGov survey, over a quarter (27%) of those in the US and 14% in the UK said they avoided public places and that number has to be closer to 80% now.
What's important to note when it comes to investing in e-commerce, is that some tech firms are a little bit luckier than others, such as Amazon, who can’t find enough workers and is raising wages and opening 100,000 new positions across the US to ensure its delivery network can service the coronavirus pandemic.
Not only do they need full-time positions but also part-time positions will be made available to meet historical seasonal labor demand in its fulfillment centers.
Management promised to inject $350 million to raising wages by $2 per hour in the US throughout April.
Amazon announced it would limit its warehouses to critical items such as medicine and household staples to ensure they meet demand.
Right now, investing in e-commerce means the companies that provide currently popular goods, such groceries, pet supplies, beauty and personal care products, health and household items, baby products, and industrial items.
Other e-commerce companies haven’t fared as well as Amazon, such as furniture e-company Wayfair who reportedly relies on mainland China for half of its merchandise and sell only one type of product - furniture.
Wayfair’s supply chain disruptions are hurting the company’s ability to deliver furniture, but it also coincides with a massive drop off in demand as consumers shun furniture for household items and groceries.
Shares of Wayfair have dropped over 400% since January partly because the company has never been profitable and is now entering into a worsening climate to sell furniture which equated to an optimal signal for investors to dump the stock in bucketloads.
I have been bearish on Wayfair since last year and envisioned an imminent wealth-destroying effect for their business model, but I am shocked that shares dropped this rapidly.
Three weeks ago, the Boston-based company fired 500 people to help “lower costs,” validating my hypothesis.
The exorbitant cost of acquiring each additional customer was the reason I hated this company in the first place.
Uncertainty is the message of the day, and certain e-commerce companies will enjoy the turbocharging or discharging of their models.
Tech shares hate uncertainty and investors must brace themselves with regards to investing and e-commerce.
“We've arranged a civilization in which most crucial elements profoundly depend on science and technology.” – Said American astronomer and cosmologist Carl Sagan
Mad Hedge Technology Letter
March 18, 2020
Fiat Lux
Featured Trade:
(LOOK FOR A “V” WITH TECH EARNINGS)
(BABA), (BKNG), (EXPE), (TRIP), (NFLX), (SPOT)
(AMZN), (GOOGL), (TWTR), (SNAP), (PINS)
Expect poor earnings results for almost every tech company as a result of the coronavirus.
The base case for the tech industry is that we are already in the middle of a recession.
The main reason for this is the expected demand/supply disruptions in the wake of Covid-19 that will dramatically drive a wedge in the profit potential which could last through mid-summer.
The silver lining is that the recovery will be robust; but we most likely won’t experience that until the 3rd quarter.
In the short-term, the path of least resistance is more weakness in tech shares, as the U.S. has failed to find enough test kits for possible coronavirus positive patients.
This means that the number of patients infected with coronavirus will be backloaded and as the test kits finally find their way to the masses, the number of sick patients will mushroom.
The Norwegian University of Science and Technology has urged all Norwegians to return home citing a “poorly developed healthcare and infrastructure” as the specific reason to vacate U.S. soil.
It is not possible for tech shares to bottom until there is a strong surge of coronavirus, which is almost a given because of the lax preparation and policy missteps beforehand.
The U.S. is now registering over 1,000 cases per day and growing.
My negative assessment was validated by the U.S. Central Bank, who chose to cut interest rates by 100 basis point and the market opened down 12% following the announcement.
The tech market is now pricing in a slew of bankruptcies and the realization of more pain is forcing sellers to take risk off the table at almost any price.
To hammer my point home, in the time of writing this article, the global number infected by coronavirus jumped from 180,000 to 196,000.
From that quick bump up, the coronavirus cases in the U.S. jumped from 4,538 to 5,853.
The revenue softness will bleed into earnings season and some tech stocks will experience a 20% decline in quarterly revenue and others will fare better with a 2% decline.
A broader problem is the disorderly market malfunctioning pervading through market trading.
Desperate rate cuts and multiple circuit breakers halting the flow of trading are ravaging investor confidence in an American economy that is known for its interconnectedness and integration.
The health solution must have a strong element of isolation and disconnection, meaning the U.S. economy will be sacrificed in the short-term.
Just as baffling, the Central Bank is out of ammunition and will not be able to cure future crises.
The U.S. has no choice but to throw financial stimulus after stimulus to keep companies afloat.
The tech firms facing a larger drop off will be Alibaba Group Holding (BABA), the giant China-based e-tailer, and online travel agency stocks Booking.com (BKNG), Expedia Group (EXPE) and TripAdvisor (TRIP).
Online travel companies face dramatic demand reduction and are the first tech product that gets hacked off in a global and fast-spreading pandemic.
Borders are closed, airlines are practically shuttered, and there is no use case for online travel apps when people are “hunkered down” and advised not to leave their homes.
Alibaba bears the brunt of the COVID-19 crisis, given its entrenched operations in the epicenter of the virus’ initial outbreak, they simply won’t be able to access supplies when factories are locked down and logistics are delayed.
Even Amazon noted that their Prime 1-day delivery was in bad shape because of the same reasons, but they have done well selling out of most household products so don't quite face the same trials of poor tech earnings.
Online ad platforms face a reckoning as well, such as Pinterest (PINS), Twitter (TWTR), and Snap (SNAP) who are dependent on brand advertising and will likely face pullbacks.
These second-tier online ad companies face a slide of around 10% year over year.
The heavy hitters will experience their own type of weakness, with Alphabet (GOOGL) and Facebook facing a 5% revenue drop.
Google’s brand advertising business will face pressure and its travel advertising segment (10-15% of total revenue) will endure significant downside.
Amazon.com (AMZN) will only endure low single-digit number weakness in revenue because many consumers turn to e-commerce ordering at home instead of going out.
Netflix (NFLX) and Spotify Technology (SPOT) are likely to experience immaterial disruptions as well as any top of the line premium digital content that can be devoured at home.
“Artists work best alone.” – Said Co-Founder of Apple Steve Wozniak
