“Don't chase a girl, let the girl chase you.” – Said Founder of Softbank Masayoshi Son
Mad Hedge Technology Letter
February 26, 2020
Fiat Lux
Featured Trade:
(WHAT’S BEHIND THE TECH MELTDOWN)
(COMPQ)
Tech shares are on a knife’s edge.
The world finally cared about the coronavirus and this meant the spreading of it from Chinese soil to other regions of the world with meaningful foreign death tolls.
Tech shares, for a time, became the de facto safe haven for coronavirus investors to hide out until Iran and South Korea reported an explosion of cases on the same day.
Tech shares bore the brunt of the carnage in the markets and have experienced one of the worst 2-day performances in the history of the technology-dominated Nasdaq index.
Global supply chains are in a state of paralysis as the Middle Kingdom has turned into 1.4 billion homesitters.
Even worse, the rapid spread of the virus hits home the fact that other parts of the world could enter an imminent lockdown on business.
This is bearish for not only the standard tech multinational, but all global operations and economy.
Many tech traders were wiped out unable to sell in the frantic sell-off.
We will get the lowdown on how some tech-based hedge funds went bust shortly because more than a few bet on a quick coronavirus solution.
Well, this is not a 1-day fix and Mr. Market is always correct.
The truth is that this virus is sowing economic uncertainty across the globe and there are really 2 ways from here, will it get worse or better?
If further meaningful contagion is prevented in the next few days, there could be a massive rally in many of the best in show that tech has to offer.
However, that seems implausible.
If new cases vanish from the headlines for a few days, a relief rally will be on our hands, but there are reports as we speak from Austria, Spain, and Romania.
Investors are waiting for bullish crumbs like a Central Bank announcement or vaccine development to help, but that likely won’t stem the negative momentum or come in time.
The virus also destroys any potential tech IPOs this year such as Airbnb, and they will most likely shelve their IPO and wait for the virus and its fallout to dissipate.
The debt market will also be hesitant to give the benefit of the doubt to major loss-makers like Lyft and Uber who have poor unit economics.
Apple, Facebook, Amazon, Microsoft and Google-parent Alphabet comprise over 20% of the S&P and lost a combined $250 billion in one trading day then backed that up with an even worse loss.
Then there is the pending situation of if the Chinese economy isn’t up and running soon, “millions” of local businesses could go bust in the second biggest economy.
So even if a consensus thesis of stock markets usually powering through pandemics is still valid, the economic damage could be too hideous to ignore sending markets even lower.
One of the ironic winners of this horrid virus has been Bitcoin which has seen a price rise 15% in the last one month.
A global pandemic strengthens the use case for this “digital gold” almost signaling that the current governing status quo and monetary system are unfit for operation.
Now is not the time to dive in and bet the ranch.
The likelihood of the coronavirus halting tech’s ability to operate grows higher by the hour.
Risks are currently skewed to the downside with the market pricing into tech shares that the coronavirus will spread inside the U.S. and affect tech firms’ profitability for the rest of 2020 and even perhaps bring forward a global tech recession.
A tech recession is not yet off the table, and the policy response will be vital if the contagion spirals out of control.
The Mad Hedge Technology Letter is 100% in cash and readers should wait for the dip to bottom out.
“A.I. is probably the most important thing humanity has ever worked on.” – Said Alphabet CEO Sundar Pichai
Mad Hedge Technology Letter
February 24, 2020
Fiat Lux
Featured Trade:
()
(DBX), (ZS)
I have been adamant that 2020 is a time to be cherry-picking the best of the 2nd tier tech stocks like Twitter, eBay, Adobe, and Fortinet.
But investors must be aware that in the 2nd and 3rd tiers of the tech landscape, nothing is guaranteed, and the downside price action and the inflection points can be hard to swallow.
One stock that has been on both sides of the fence is cloud computing company Dropbox (DBX).
Dropbox shares exploded Friday morning up over 23% trending towards their best single-day performance.
Believers think this stock has finally shaken off the cobwebs.
Dropbox has it hard as it competes with the behemoths of Amazon, Google, and Microsoft for the same pie in the Cloud game.
To keep its head above water, they must tread harder than the bigger guns and the lack of traction in the past year doomed them to a -26% share return for investors.
Well, investors have gotten back their losses in one day and could close above its initial-public-offering price of $21 for the first time since September.
My underlying thesis of second-tier tech stocks either sinking or swimming partly has to do with the manner in which they are able to navigate against bigger companies who are in catch-and-kill mode via buyouts.
A highly bullish signal was when management at Dropbox decided to raise its operating-margin and free-cash outlook for 2020 and over the long term.
Superior operating margin was one of the hyped-up metrics that management tried to sell investors post-IPO but they never followed through and the stock cratered.
Dropbox has also revealed that higher margins will not be at the expense of cost cuts affecting the top line and has more to do with superior growth drivers which are always positive.
The new operating margin forecast for Dropbox is between 28% to 30% compared with a prior range of 20% to 22%, and that is a big deal.
There is a nuanced relationship between growth and profitability and Dropbox cannot lose sight of either because if top line misses badly, the operating margin beat is less meaningful.
At the bare minimum, the tone of the earnings report has investors chomping at the bit inciting a massive rally in shares and turning around the narrative for this once beleaguered company.
Many times the negativity can become a self-fulfilling prophecy.
It is difficult to break momentum in software stocks in either direction and now the onus is on Dropbox’s management to prove they can surpass margin forecasts or there could be a reverse 20% drop in the stock.
There are still bears out there who believe this wasn’t enough to convince them to change their mind.
Bears have cited a lack of sustained growth and a tendency to miss on subscriber numbers as the Achilles heel.
Because of the small nature of these companies, volatility goes hand in hand with their price action.
The Mad Hedge Technology Letter prefers to bundle itself with stocks that have more reliable price action.
A perfect example of volatility disturbing a stock would be a cybersecurity company that I have been quite bullish on named Zscaler (ZS).
The cloud security company delivered lighter-than-expected profit guidance for the third quarter and fiscal year and the stock slipped down 15%.
That would never happen to Google or Facebook shares in the same scenario.
Zscaler’s second-quarter report was robust and even had a billings’ beats of 15% year-over-year.
Meanwhile, hints of revenue deceleration and margin contraction in the second half were enough to kill shares in trading.
Traders who can filter through the bluster must time entry points in small-cap tech perfectly otherwise one mistimed word on an earnings report can sink a trade with no chance to exit.
Separating the wheat from the chaff is what we do here at the Mad Hedge Technology Letter.
“Our philosophy is that we care about people first.” – Said Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
February 21, 2020
Fiat Lux
Featured Trade:
(WHY THE GOVERNMENT IS GUNNING FOR GOOGLE AND FACEBOOK)
(FB), (GOOGL), (TWTR), (ADBE), (FTNT), (EBAY)
Google (GOOGL) and Facebook (FB) are dominant to the extent that the U.S. administration is hoping to dismantle them.
The two companies enjoy a flourishing duopoly and guzzle up digital ad dollars.
Governments around the world are scratching their heads attempting to figure out how to put a dent in these fortresses and so far, have been unsuccessful.
Big tech has made governments look bad, to say the least, and their response has been even more shambolic.
Alphabet installed Google CEO Sundar Pichai as the top decision-maker for all Alphabet assets preparing for the onslaught of digital privacy headwinds and regulation that the E.U., U.S., and everyone else will throw at them.
Luckily, they do not need to deal with the Chinese communist party as big tech minus Apple was effectively banned years ago.
What’s on Google and Facebook’s plate right now?
Attorney General William Barr has pointed the finger at these two platforms for hiding behind a clause that gives them immunity from lawsuits while their platforms carry material promoting illicit and immoral conduct and suppressing opinions.
Barr is currently looking into potential changes to Section 230 of the Communications Decency Act, which was passed in 1996 and has been also referred to as the supercharger to tech riches.
What could eventually come of this?
Barr could decide for the Justice Department to explore ways to limit the provision, which protects internet companies from liability for user-generated content.
This could open up Google and Facebook to higher costs of managing content on their platforms and lawsuits related to malcontent in which they fail to remove.
Even though platforms love to market that they actively thwart bad actors, at the end of the day, they aren’t on the hook for what happens.
Massive alterations could fundamentally weaken their business models and force them to review each word and photo that is thrown upon their platform.
They have already hired an army of hourly paid contractors, but at their massive scale, content is simply impossible to smother.
Content generators understand how to sidestep machine learning algorithms which are based on backdated data, meaning they would not be able to catch a new iteration of past content.
Absolving themselves of any responsibility for policing their platforms has been an important catalyst in the outperformance in shares for both Facebook and Google.
The social side of this has cringeworthy unintended consequences.
The Computer & Communications Industry Association, a tech trade group that counts Google and Facebook as members want the government to stay out of it as they believe they are overreaching.
Government has been slowly making inroads in combatting the strength of these digital platforms, and the first successful foray was when Congress eliminated the liability protection for companies that knowingly facilitate online sex trafficking.
Big tech won’t go with a whimper and they will propose a range of changes to avoid direct damage to their business model such as raising the bar a smidgeon on which companies can have the shield, to carving out other laws negating attempt to weaken their platforms, to delaying the repealing of Section 230.
There is too much shareholder value on the line and as the coronavirus rears its ugly head, it’s ironic that investors perceive safety in not only the U.S. dollar but in the vaunted FANG tech group.
Ultimately, the math wins out and these companies with gargantuan earnings can weather any storm with a moat as wide as ever.
It’s to the point that a $10 billion fine is a massive victory, and what other group of companies can boast about that?
We can only trade the market we have in front of us and not the one we want.
I pulled the trigger on a Google call spread and I believe this narrow group of power tech players and their partners in crime cloud stocks of the likes of Twitter (TWTR), eBay (EBAY), Fortinet (FTNT), Adobe (ADBE), and a few others will hoist the market on its back like I predicted it would at the beginning of the trading year.
Mad Hedge Technology Letter
February 19, 2020
Fiat Lux
Featured Trade:
(BUY THE CORONA DIP),
(VZ), (T), (TMUS), (S), (AAPL), (BABA), (CSCO), (EXPE)
