Mad Hedge Technology Letter
October 14, 2019
Fiat Lux
Featured Trade:
(WHAT IS AUTONOMOUS DRIVING REALLY WORTH?)
(WAYMO), (UBER)
Is Waymo the real deal?
Apparently not.
That is my takeaway from an analyst cutting the valuation estimate by 40% for Alphabet’s autonomous car subsidiary Waymo from $175 billion to $105 billion.
At $175 billion, investors were giving Waymo the benefit of the doubt plus a generous serving of hyperbole when this unproven technology has never in the history of mankind been monetized successfully before.
Well, $105 billion is a stretch in current times and that valuation might need to be revisited a few months down the line as well.
In a stock market that has frowned upon the waterfall of cheap money of late to fuel its absurd risk/reward strategies, Waymo’s haircut falls in line echoes the same parallels.
This current market climate is more about bulletproof balance sheets and the Waymos, Ubers and Lyfts of the world are getting a nice bench seat in the penalty box.
Today marked an even lower nadir with Uber Technologies Inc. announcing that it is on the verge of acquiring a majority stake in online grocer Cornershop, a deal designed to both extend its geographic reach and boost profits by commingling food delivery with rides.
Cornershop is a digital grocer in Santiago, Chile.
Yes, Chile, the country in South America.
It’s hard to believe that Uber must reach that far down the olive branch to grow.
Prepare yourself for anything like pig farms in Zimbabwe or plumbing businesses in Baku, Azerbaijan.
Who really knows anymore!
These types of exotic purchases are exactly what Mr. Market despises in a climate of negative tech earnings growth.
But I do believe Uber is at the point where CEO Dara Khosrowshahi must become the unlikely savior as the alarm bells are ringing with current Uber investors presiding over a calamitous decline in shares since the IPO.
It’s a rough one and tough sledding for tech executives in 2019.
And it’s no surprise why the number of fired tech CEOs has mushroomed from the CEO of eBay Devin Wenig to the fake tech CEO of office-sharing company WeWork Adam Neuman who spectacularly lost $3.5 billion of personal wealth in less than 30 days.
He is still left with $600 million but his story epitomizes the tech climate right now and there are no free lunches.
So is Waymo ready to deliver or is it a charade?
Waymo pinged an email to customers of its ride-hailing app that their next trip might not have a human safety driver behind the wheel.
The email, entitled “Completely driverless Waymo cars are on the way,” was sent to riders in Phoenix.
A geofenced area that covers several suburbs, including Chandler and Tempe, have a human safety driver behind the wheel and the grid-like setup makes it easy for self-driving technology to perform well.
Waymo has dabbled in Chandler, Ariz. in 2016 and has slowly built this program toward commercial deployment.
Recently, Waymo opened its second technical service center in the Phoenix area to serve a doubling of the fleet.
The general public has never gotten a taste of this technology and I bet it will be years before Waymo is ready and not the late 2019 and early 2020 projection they promised us a few years ago.
There are too many known unknowns that have yet to be solved such as what limitations Waymo will place on these rides.
Waymo is effective in controlled environments but thrown in the natural elements, nighttime, and unforeseen circumstances and the effectiveness deteriorates by orders of a magnitude.
I believe the hurdles relating to the commercialization and advancement of autonomous driving technology will keep slowing Waymo’s march towards success.
Analysts have underestimated how long safety drivers will accompany cars with the most likely outcome a broad-based delay of the rollout of autonomous ridesharing services.
Profitability has been vastly miscalculated as well.
Each driverless car unit is more expensive than first thought and will stay operationally loss-making for years longer.
The technology isn’t advancing at the rate it was when this technology was incubated, Waymo has clearly plateaued and there is a bottleneck in terms of meaningful solutions.
Alphabet has already invested deeply into driverless cars.
Not only them, but Uber already had spent over $1 billion on autonomous cars at the time they went public.
I won’t say this is a black hole of investment capital, but the losses will keep mounting for the next few years and there is no inflection point in sight.
Waymo will continue to be a drag on Alphabet’s earnings after there were such high hopes for the rapid deployment of self-driving cars.
There is a light at the end of a dark tunnel, but that light seems further away than ever.
“I have a secret project which adds four hours every day to the 24 hours we have. There's a bit of time travel involved.” – Said CEO of Google Sundar Pichai
Mad Hedge Technology Letter
October 11, 2019
Fiat Lux
Featured Trade:
(CISCO’S DOWNWARD SPIRAL)
(CSCO)
The technology infrastructure company Cisco sold off over 2% after Goldman Sachs analyst Rod Hall downgraded the stock to neutral from buy.
His downgrade was based on a guess that enterprise spending will weaken further, and that telecom spending will continue to remain unimpressive.
This shows you how far the bank of the elite has fallen and the quality of their research considering Cisco’s earnings report was in August and this call should have gone out far earlier.
Goldman Sachs (GS) has trimmed headcount fiercely as their traditional businesses from IPOs to trading have been squeezed to suffocating levels forcing the bank to go into the subprime segment with the Apple (AAPL) credit card.
In Silicon Valley, Cisco’s shares will be subdued for the foreseeable future because the telecom segment is softening up as we motor into 2020 nicely, noted by Goldman.
The headwinds stem from the slow adoption of 5G and requisite carrier network automation implementation.
If you thought 5G would happen with a mere snap of the fingers, you are wrong. It will be implemented in agonizingly slow stages with lots of trial and error along the way.
Enterprise spending has also tapered off boding ill for the company that supplies the foundational technology to the software startups.
Adding fuel to the fire, waning business confidence at large enterprise driven by trade volatility as opposed to a broader macro slowdown is somewhat disconcerting and Cisco will most likely trade sideways in a stupor until external catalysts either pick up the stock or the bizarre world of geopolitics slams it down.
The floor of the stock is solid and deeply rooted in the profitability of the stock.
This is a great company and is one of the premier brands that slide in nicely in most offices in Silicon Valley.
The company isn’t a growth company, yet not written off into the legacy dustbin, and the sudden paradigm shift to value has made this stock even more attractive.
The 7% revenue YOY growth last quarter is not a problem as risk appetites are reigned back as the economic cycle ends.
EPS grew to $3.10 highlighting the ultra-profitable nature of the company.
Many of the recent tech selloffs in individual names have been induced by sour forward-looking outlooks and Cisco followed suit calling for 0-2% revenue growth, and GAAP EPS growth of -14% year-over-year.
The company has turned to the exciting revenue stream of subscriptions accounting for around 70% of the company's software sales.
This has created inflated net margins with Cisco improving from 16.7% five years ago to 25.8% today.
Cisco is a cash cow generating $15.8 billion of cash flows from operations, up 16% year-over-year.
The bump up in cash flow has made it easier to justify M&A which Cisco has routinely turned to in an effort to shore up different areas of the business.
A dividend was initiated in 2011 providing shareholders with strong annual double-digit percentage increases.
Financial engineering doesn’t stop there with Cisco's buyback approach resulting in reducing its outstanding share count by roughly 16.3% over the past 5 years adding to the profitability narrative.
Macro-risks have gone up the wazoo in the external market and Cisco is a legitimate candidate for a short-term trade to safety at these levels and a long-term investment.
Considering that their Chinese business is only in the single digits and revenue growth is in the high single digits, value-added management should make this company even more compelling.
And as the next wave of 5G adoption hits, this stock will experience a tidal wave of asset appreciation.
I can guarantee that the best is yet to come, and the status quo isn’t all that bad too.
“There are two equalizers in life: the Internet and education.” – Said Former CEO of Cisco John Chambers
Mad Hedge Technology Letter
October 9, 2019
Fiat Lux
Featured Trade:
(WHAT’S BEHIND THE CHINESE TECH BLACKLIST)
(FTNT), (PANW), (CRWD), (CYBR)
The administration banning 8 Chinese tech companies screams one thing – American cybersecurity will become more important than ever before.
Interestingly enough, most of the entry list included Chinese own version of cybersecurity companies which usually participate in heavy-handed censorship including facial recognition startups Sensetime, Megvii and Yitu, video surveillance specialists Hikvision and Dahua Technology, iFlyTek, Xiamen Meiya Pico Information Co and Yixin Science and Technology Co.
All of these companies have “borrowed” American source code while applying American designed semiconductors to create a business aiding the interests and model of the Chinese Communist Party.
As the stakes become higher, American companies too will have to grow cybersecurity budgets, and instead of budgeting for mass authoritarian censorship, American companies will need to spend to protect the technology and networks they develop from getting pillaged from totalitarian regimes.
If American tech companies renege on the Faustian bargain of doing business in China for their technology, then it will force the Chinese to acquire this sensitive technology by any means possible and that doesn’t involve sitting on the emperor’s chair in Beijing.
What does this mean for the broader trade war?
Even if we get a mini deal, it won’t address that the main guts of the trade conflict entails killing off Chinese tech in the way we know it now.
Being able to agree on some sort of enforceable mechanism is a pipe dream, even if an enforceable mechanism is agreed on, who will enforce the enforceable mechanism?
That’s how tricky it is for corporates doing business in China and now the NBA (National Basketball Association) has received a small sampling of the trade war with one innocuous quote by Houston Rockets General Manager Daryl Morey who tweeted then deleted his democratic support for the Hong Kong freedom movement.
The ban of these 8 Chinese companies means they will no longer be able to purchase U.S.-made technology parts to use as inputs of a censorship business model that goes against democratic values.
The trigger for the blacklist was the way these technologies were used to imprison ethnic Muslim minorities in Chinese Xinjiang province paving the way for China to lash out again against the U.S for the ban.
Not only has China applied the technology to Chinese nationals, they have exported this technology to African states and are allowed access to the data which could theoretically be exploited for additional economic and political gain about which they essentially have no qualms.
Chinese foreign ministry spokesman Geng Shuang has characterized this move as “interfering in China’s internal affairs” and as you probably believe, he expressed great unsatisfaction with this move as Chinese and American delegations plan to meet shortly to hash out their differences.
The 8 banned companies will need to source alternative tech in the same way that Huawei Technologies has done.
Huawei was banned this past April under national security premises blocking access to US-made software for its handsets and devices, such as Google’s Android operating system and Microsoft’s Windows.
This will hurt certain semiconductor manufacturers like Nvidia who sell artificial intelligence chips for video surveillance to Hikvision and semiconductor stocks have sold off hard on this news.
Washington’s move has laid bare the fierce struggle for technology supremacy and America’s refusal to allow Chinese technology companies to reign supreme off of ill-gotten intellectual property and American semiconductor chips.
It could be the final straw in corporate America funding China to take down itself or at least another step to disengaging with the Sino cash cow.
And this new episode is almost guaranteed to usher in a flight of capital to American cybersecurity companies as Chinese hackers open up a new frontier to hack the best of America’s intellectual property.
I envision the likes of Palo Alto Networks, Inc. (PANW), Fortinet, Inc. (FTNT), CrowdStrike Holdings, Inc. (CRWD), and CyberArk Software Ltd. (CYBR) as good long term buy and holds that offer quality exposure to the cybersecurity story and the future growth of it.
“Some people don't like change, but you need to embrace change if the alternative is disaster.” – Said Founder and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
October 7, 2019
Fiat Lux
Featured Trade:
(NEVER CONFUSE A GREAT SERVICE WITH A GREAT STOCK)
(SPOT), (APPLE), (GOOG), (NFLX)
