Mad Hedge Technology Letter
August 19, 2019
Fiat Lux
Featured Trade:
(ZILLOW’S BAD MOVE)
(Z),
If you think Zillow posting lower guidance for the third quarter was a one-off event then open your eyes a little bigger – real estate conditions for selling homes will most likely worsen even though interest rates have dropped in a rapid fashion of late.
In fact, the velocity of the recent interest rate drop is a harbinger for an upcoming recession or the best we can hope for is a mild slowdown even if not recessionary.
Who is that company that leveraged up to make big bets at the top of the economic cycle?
Zillow.
There are smart times to do risky business and times to sit on your hands and wait.
Timing couldn’t have been more abysmal.
Zillow also confided to investors that their business that facilitates agents to connect with potential home buyers for a fee will burn $80 million in the third quarter before EBITDA.
But Zillow didn’t stop there.
They have mobilized a good chunk of their chips betting that house flipping is a good idea when the global economy is decelerating at warp speed and price appreciation in property value is slowing meaningfully.
They even broke off around 41.5% of its revenue from selling homes in the three months ending June 30 which could be the high watermark.
Precisely $248.9 million of $599.6 million in revenue came from Homes segment which is described as buying up property and selling them on for a profit.
Investors must calculate whether Zillow will get stuck with thousands of properties and the cost of carry.
Zillow could enter a situation where nobody will buy their properties and must sell them for deep discounts.
That is the end game and Zillow and its audacious management is barreling right ahead.
This worse case scenario would put heavy pressure on their ability to service debt.
Other signs have gone unnoticed like the recent canary in the coal mine of recessionary data from manufacturing in the U.S.
The slowdown in the volume of housing sales has been pronounced too.
In the current market, many buyers and particularly homebuyers are priced out of the market supported by the lack of buyers even with historically lower rates.
Refinancers took advantage of these rates to cut their debt load but there has been a lukewarm response and no flurry of new homebuying that economist had predicted.
As the global slowdown veers closer and closer to the American economy, Zillow could be in for a hard landing and whoever is caught out with too many properties in the wrong markets is doomed too.
Then there are other risks such as climate change and a wildfire season that is about to grow fiercer by the year.
Can Zillow absorb another hurricane in Houston or New Orleans?
Zillow has not only levered up on the type of business but as well as dipping into the M&A sphere by gobbling up StreetEasy for $50 million in 2013 and Trulia for $3.5 billion the following year.
The company has been caught asleep at the wheel by a stagnating digital ads business which was once the bread and butter.
Management’s response of electing to go for a riskier business instead of the lower hanging fruit of ramping up the digital ad business is a head-scratcher.
Digital ads can be scaled easier than buying physical homes, and 2020 could be a year to forget for Zillow and it is too late to sell on these assets without a deep discount.
Any tech company scaling their tech know-how has been an outsized winner.
Everybody and their mother are preparing for a global slowdown and American recession except Zillow.
I am bearish Zillow for the rest of the year and 2020.
“Being the richest man in the cemetery doesn't matter to me. Going to bed at night saying we've done something wonderful, that's what matters to me.” – Said Co-Founder and Former CEO of Apple Steve Jobs
Mad Hedge Technology Letter
August 16, 2019
Fiat Lux
Featured Trade:
(CISCO’S CHINA HIT)
(WEWORK), (CSCO), (FXI)
If you believe that the trade war developments have had a negligible effect on the tech companies that operate in mainland China, then you are dead wrong.
Cisco is a cautionary tale highlighting that things aren’t running smoothly with its decrease of 25% in annualized revenue from operations in mainland China.
Many of the profit models in China have been swallowed up by the friction between the two governments at the highest level.
The Cisco employee count was sacrificed stateside with the San Jose, California branch implementing a second round of layoffs that will sweep aside 500 more Cisco engineers.
The most damming set of words that epitomized the dire situation that Cisco face is when management said, “we’re being uninvited to bid …We’re not being allowed to even participate anymore.”
The Chinese government has disengaged Cisco from competing in China and that means a whole channel of revenue will be effectively offline for the foreseeable future unless there is substantial rapprochement from the two governments.
Perusing the files of venture capitalist heartthrob WeWork that plans to go public proved that relations with China and doing business is a financial high-wire act.
I will explain.
WeWork’s 350-plus-page IPO prospectus offered insight into the treacherous nature of business exposure in the Middle Kingdom.
Any investor who rummaged through the prospectus has to be dreading the worse because the boobytraps are plentiful.
A cynical take of WeWork’s business tells me they are doomed in China.
Property is in control of a huge swath of Chinese wealth vehicles and commercial property is part of that equation.
According to the filing, WeWork is contracted to 115 buildings across 12 cities in Greater China, about 15% of its total number of facilities.
I envision property law skirmishes of the foreign WeWork against local property landlords and by historical standards, the court system has not been kind to non-Chinese who seek justice in the Chinese court system against Chinese national interests.
WeWork’s management references “higher tariffs, capital controls, new adverse trade policies or other barriers to entry” as possible counterpunches to an already delicate working environment.
The pressure cooker could explode at any point with the higher-ups making heads roll at the corporate level to prove a point at a macrolevel.
Foreign companies are easy targets and WeWork is an American company – a double whammy that could make it a convenient target for the Chinese communist party.
Summing it up, this is not an advantageous time to lever up on the Chinese economy.
Risk control is needed and this smells like a ticking time bomb.
It really shows how the tech landscape has disintegrated for American companies in China.
They were once welcomed with grandeur and hospitality plus the forced technology transfers.
CEOs bit their tongue because the revenue growth surpassed the cons of cyberespionage and outright theft.
With the accumulation of generations of free knowhow, China is now locked and loaded with a tech industry that rivals anyone in the world.
The last item left on the menu are high-grade semi chips which the Chinese have not mastered yet and that might be the last stand for the Americans if they hope to salvage a stunning comeback victory.
If WeWork does manage to go public without the equity market raining down on its parade, it’s an outright sell and stay away.
It’s nothing but a glorified property manager and its interests in China could open up pandora box.
“We are the first species capable of self-annihilation.” – Said CEO of Tesla Elon Musk
Mad Hedge Technology Letter
August 14, 2019
Fiat Lux
Featured Trade:
(WHY UBER BOMBED)
(LYFT), (UBER)
I told you to stay away from the Uber IPO!
The technology industry is just one piece of the pie and is now being utterly eclipsed by geopolitics left, right, and center.
At times like this, fundamentals and growth rates go out the window.
It’s a shame because growth rates for the best of breed in technology are still nothing short of spectacular.
The elevated risk here is that frontier companies such as Uber (UBER) become marginalized and their narrative starts to turn into a version of technology that is too expensive and unable to pin down expenses.
The easy money in tech is no more as we are barreling towards a global slowdown with China and America doing their best to move forward the global recession into the beginning of 2020.
So when Uber prints $5.2 billion in losses from the prior quarter which is a sequential increase of 30%, the vicious sell off in shares epitomizes the souring of sentiment that is pervading through the equity landscape.
The Uber’s earnings call was summed up when CEO of Uber Dara Khosrowshahi chimed in saying, “No doubt in my mind that the business will eventually be a break even and profitable business.”
These vague statements that offends time-sensitive hawks is a recipe for disaster in August 2019.
The purse strings of tech are not nearly as loose as they once were even 6 months ago.
Investors want profit making enterprises mixed with accelerating revenue growth – put your money where your mouth is type of ventures.
This has reduced the appealing side of tech down to outperforming software companies and even they are battling in the trenches as the wave of geopolitical risk-off sentiment crushes shares.
I would sell every Uber dead cat bounce because there is no way that Uber shares will surpass its all-time high of $46.38 this year.
The surge in bond prices show that risk appetite has dried up and Uber is unfortunately at the opposite end of the risk appetite spectrum.
I would also put its brother in arms Lyft (LYFT) in the same boat.
Lyft loses less money but are a speculative bet to “eventually” make money, and that is exactly what people don’t want to hear right now.
It will be a slippery slope for any tech company further out on the risk curve to invest in a business model that doesn’t turn a profit.
As it stands, Uber and Lyft were lucky to go public when they did, barely getting the IPOs over the line.
If they waited a few more months, they would have had to postpone it.
Expect meager M&A movement moving forward as the global slowdown will test the business models of every tech company and that means the weakest will need to restructure, go under, or even sell themselves at garage sale prices.
It is time to hunker down in tech shares and not bet the ranch.
The positions I have are short-dated deep in the money call spreads in software stocks that are bets that shares won’t go lower in a straight line.
I have fused that with positions in semiconductor stocks from the short side as a tech global slowdown means less demand in consumer electronics which hoover up semiconductor chips.
“Our industry does not respect tradition – it only respects innovation.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
August 12, 2019
Fiat Lux
Featured Trade:
(UNSTOPPABLE ROKU)
(ROKU)
