Mad Hedge Technology Letter
April 12, 2024
Fiat Lux
Featured Trade:
(THE NEW COMPETITION IN EVS)
(XIAOMI)
It’s a little weird seeing Janet Yellen road-tripping to China to ask the Chinese to stop making such cheap products.
I’ll give her a hint - they won’t stop making cheap products to supply the world.
The U.S. could use cheaper products, especially at the dinner table, but that is another story.
Let’s talk about China and how they are reaching up the value-added tech food chain to fiercely compete with expensive tech products.
Dumping or the non-dumping of “clean energy” products is not something a U.S. Secretary of the Treasury should fly halfway across the world to Asia to lecture a government about what the costs of their products, but that is what Janet did.
It really is the antithesis of a free market economy.
I would argue that lower-cost Chinese products have been rocket fuel for many small American businesses over the past 30 years.
Competition is largely a good phenomenon in the technology sector and brings out the best in terms of quality and price for the end consumer.
Who wants to pay $1 million for a Tesla?
It appears that Janet Yellen wouldn’t mind.
Yellen was not only referencing EVs, but her speech also dived into the cheap pricing of solar power and lithium-ion batteries.
China has been pouring billions into clean energy for years, outpacing the rest of the world including the US in the energy transition and the results are there for the agnostic consumer to see.
Not only are Chinese cell phones just as good as Apple iPhones for half the price, but the new bombshell to rock the menu of tech products is the new EV made by Chinese cell phone company Xiaomi.
Buyers have been told they may have to wait up to 8 months for the car to be delivered.
Xiamo is the third-largest seller of smartphones in the world with a market share of about 12%.
The standard Xiaomi SU7 model is priced at $30,000.
The SU7, which has drawn comparisons with Porsche's Taycan and Panamera models, has a minimum range of 435 miles, beating the Tesla Model 3's 567km.
Xiaomi and its new car, the SU7, will share an operating system with its in-house phones, and other smart devices.
Xiaomi's EVs are made by a unit of state-owned car manufacturer BAIC Group at a plant in Beijing that can produce as many as 200,000 vehicles a year.
Xiaomi has said it will invest $10 billion in its vehicles business over the next 10 years.
Here is the quick hot take from all this geopolitical and economic activity.
EVs are about to get a whole lot cheaper without sacrificing the quality thanks to China. The days of $100,000 EVs are about to be swept into the tech dustbin of history.
The trend mirrors closely the trajectory of Chinese smartphone evolution so much so that consumers will have a chance at real cost savings.
Any non-Chinese automotive company will need to come to the realization that if they don’t compete at the brand-new Chinese price points, demand will evaporate.
It’s a massive dose of reality to stomach for many German car makers, and imagine all those jobs that would be cut in one fell swoop.
The Chinese just know how to make stuff cheaper and nothing will get in the way of that. I urge other companies to embrace this fact and not fight it.
Get ready for a smattering of luxury EV vehicles for $30,000 a pop made from China.
This is no joke.
China has made it their mission to reach up the value-added product chain, and if this isn’t it then I don’t know what is.
“An investment in knowledge pays the best interest.” – Said Benjamin Franklin
Mad Hedge Technology Letter
April 10, 2024
Fiat Lux
Featured Trade:
(PODCASTS A NEW EXPERIMENT FOR SPOTIFY)
(SPOT)
The dominant music streaming platform Spotify is trying harder these days.
When I say trying harder, I mean trying harder to become profitable because after almost a generation of when burning cash was ok, investors suddenly demand a business that doesn’t run a minus every year.
Zero rates have had an oversized effect on the balance of business in 2023 and 2024.
Failure isn’t rewarded with gaudy executive compensation and more vested shares.
Belt tightening by cutting staff and streamlining operations is the paradigm we are finding ourselves in.
Spotify was the prototypical loss maker in tech that was given a pass because it grew users fast.
Now that interest rates are high, tech companies are penalized by going to the debt markets too much and the effect is magnified if a company needs a high amount of debt.
Logically, SPOT has made diversifying revenue a top bullet point in their strategic future and that is exactly what they are doing.
SPOT has also discovered it can generate additional money from the most diehard music fans. Currently, all listeners pay the same rate for access to a musician’s catalog. But there are fans willing to pay far more to support an artist they love, as evidenced by the rising price of concert tickets, merchandise, and even vinyl for Korean artists.
SPOT plans to raise the price of its popular audio service in several key markets for the second time in a year, a crucial step toward reaching long-term profitability.
The streaming giant will increase prices by about $1 to $2 a month in five markets by the end of April, including the UK, Australia, and Pakistan, according to people familiar with the matter.
It will raise prices in the US, its largest territory, later this year, said the people, who asked not to be identified discussing confidential plans.
The higher prices will help cover the cost of audiobooks, a popular service introduced late last year.
Spotify offers customers up to 15 hours of audiobook listening a month as part of their paid plan. While the company pays publishers for books, it has so far only collected additional revenue from listeners who exceed the limit.
Spotify paid record labels, artists, and others more than $9 billion last year – from $13.2 billion in revenue.
Last year, SPOT posted its best year of user growth ever, with 113 million new sign-ups to its free and paid services.
Spotify had 602 million users at the end of 2023, including 236 million paying customers.
The success of the price increase has given management confidence to seek even more. Under the new pricing, individual plans will go up by about $1 a month, while family plans and so-called duo plans for couples will rise by $2.
In the last 365 days, the stock has catapulted from $134 to over $300 per share.
The stock is absolutely resonating with investors and moves by management have been aggressive to branch out from the music royalty business.
Buy SPOT on the dip.
Mad Hedge Technology Letter
April 8, 2024
Fiat Lux
Featured Trade:
(BRANCHING OUT)
(INTC), (MSFT)
Intel (INTC) is an intriguing chip company that has been around for a long time but has seldom been at the vanguard of the tech movement.
Until now…
Remember the US government is pouring dollars at the tune of billions upon billions into the domestic semiconductor industry to maintain a competitive advantage that is quickly being challenged by China.
Intel could solidify itself as a real tech player if it can figure out the foundry business which has been largely ineffective as of late.
Even if the foundry business is a big-time loss maker right now, Intel is laying the groundwork to become a strategically important company to the US government and US tech industry in 5 years.
Government dollars are usually viewed as a more stable stream of revenue.
It’s true that Intel is better known for designing its own chips, but that type of barrier to entry isn’t as high as foundry production.
Many chip companies aren’t interested in the production of what they design, because of the capital-intensive nature of the process.
It’s easier to outsource designs and just collect the product after.
Intel shares fell 4% last Tuesday after the company revealed long-awaited financials for its semiconductor manufacturing business or foundry business.
Intel said its foundry business recorded an operating loss of $7 billion in 2023 on sales of $18.9 billion. That’s a wider loss than the $5.2 billion Intel reported in its foundry business in 2022 on $27.5 billion in sales.
It has been pitching investors to double down on an external foundry business to make chips for other companies.
In theory, it sounds promising.
Intel’s role as one of the only U.S. companies doing cutting-edge semiconductor manufacturing on American soil was a big reason it secured nearly $20 billion in CHIPS and Science Act funding last month.
Its management said that it expected its foundry’s losses to peak in 2024 and eventually break even “midway” between this quarter and the end of 2030.
The company previously said that Microsoft (MSFT) would use its foundry services and that it has $15 billion of revenue for the foundry already booked.
The foundry business at Intel will ostensibly drive larger revenue momentum each approaching year to 2030.
Granted, it doesn’t take one day for chip production to come online, but the contract signed with Microsoft is a positive signal that will likely lead to other behemoths inking deals.
Intel even admitted that the lack of profitability in the foundry business from the past was correctable through better focus and execution.
I do believe Intel morphing into a multi-dimensional chip company is highly supportive of a higher share price only if they can get a handle on expense control.
Many times companies go too big with the government subsidies and need even more subsidies to dig themselves out of a hole.
I don’t believe that will be the case with Intel’s foundry business and installing a concrete plan has gone a long way to soothe investor fear.
The stock was crushed in 2020 and hit a nadir of $25 per share in 2023.
Intel shares then reversed and doubled to around $50 per share.
They have now settled in the high $30 range and I do believe any dips should be bought and held long-term.
Mad Hedge Technology Letter
April 5, 2024
Fiat Lux
Featured Trade:
(DELL IS NOT A DINOSAUR ANYMORE)
(DELL), (AMD), (NVDA)
Investors are looking through any bad part of Dell’s business because they have faith in the AI narrative.
Dell is one of those legacy companies that produce a great deal of enterprise products.
The stock went nowhere for a long time but now it is different.
Mixed into their earnings story was a torrent of negative numbers like the company's net revenue was down 14% year over year in 2024 and down 11% in Q4.
A weak PC market isn't helping its numbers. And the drop in revenue led to a 10% drop in full-year operating income.
Dell stock nevertheless has crushed in the short term to churn out all-time highs.
Investors are solely focused on Dell’s potential with artificial intelligence (AI).
Peeling back the numbers, Dell suddenly has a massive backlog of orders for its AI-optimized servers.
They are finally relevant after so many years out to pasture.
Dell is driven in particular by strong demand for AI servers powered by Nvidia H100 chips.
The company said at the time that its backlog of orders for AI servers at quarter end had reached $2.9 billion, up from $1.6 billion in the previous quarter and $800 million two quarters earlier.
Dell also said that it has a pipeline of interest in AI servers that is “multiples” of its current backlog.
And the company said at the time that there is additional demand for servers powered by AMD’s (AMD) pending MI300 GPU and for the next generation of Nvidia (NVDA) chips.
One still on the horizon is the emergence of AI PCs, which should start shipping later this year from Dell and other PC makers.
Management revealed that by the end of January 2025, one of every five PCs Dell sells will be capable of running AI workloads. They also estimate that the total could double by the end of 2026.
Another business that could see an AI-driven improvement is enterprise storage, which accounted for about 20% of overall revenue in the latest quarter. That business was down 10% in the most recent quarter from the year-earlier period.
Dell's management said that it had $800 million in shipments for AI-optimized servers in Q4 alone which is greater than the $500 million they did last quarter.
There will be many winners and losers in this Game of Thrones tech sub-industry of AI.
Tech firms will go from boom to bust with some even going boom based on pure potential.
That’s how much money is flowing into this segment of tech right now.
Many companies are counting on cloud computing platforms to provide AI expertise and power, but Dell's business is betting on AI-equipped on-premise servers.
These servers make sense for big entities that need on-site installation.
I am not talking about the single guy working from home in his little studio apartment.
I do believe there is a use case for multiple types of set-ups and Dell spearheading the enterprise-style large on-premise servers will be suitable for large corporations that need high amounts of storage capacity.
AI on-site data servers aren’t for everyone, but it has the stock raring to go for the rest of 2024.
Buy the Dell story on big dips until the AI bubble pops.
“We want to make money when people use our devices, not when they buy our devices.” – Said Founder of Amazon Jeff Bezos