Mad Hedge Technology Letter
April 17, 2024
Fiat Lux
Featured Trade:
(AI AND LOWER EMPLOYEE WAGES)
(TSLA)
Students hoping to become bankers shouldn’t study finance, they should dive into programming.
This is the big takeaway from how investment banks are run these days.
Gone are the moments when finance degrees were the hottest commodity, now it is all about generative AI.
Artificial intelligence (AI) could replace the equivalent of 300 million full-time jobs, a report by investment bank Goldman Sachs says.
It could replace a quarter of work tasks in the US and Europe but may also mean new jobs and a productivity boom.
And it could eventually increase the total annual value of goods and services produced globally by 7%.
Generative AI, able to create content indistinguishable from human work, is "a major advancement", the report says.
Silicon Valley is keen to promote investment in AI in not only the United States but in a way that will ultimately drive productivity gains across the global economy.
The report notes AI's impact will vary across different sectors - 46% of tasks in administrative and 44% in legal professions could be automated but only 6% in construction and 4% in maintenance, it says.
Journalists will therefore face more competition, which would drive down wages unless we see a very significant increase in the demand for such work.
Consider the introduction of GPS technology and platforms like Uber (UBER). Suddenly, knowing all the streets in London had much less value - and so incumbent drivers experienced large wage cuts in response, of around 10% according to our research.
The result was lower wages, not fewer drivers.
Over the next few years, generative AI is likely to have similar effects on a broader set of creative tasks.
According to research cited by the report, 60% of workers are in occupations that did not exist in 1940.
However, other research suggests technological change since the 1980s has displaced workers faster than it has created jobs.
Nobody understands how the technology will evolve or how firms will integrate it into how they work.
Lower wages and higher output are a perfect recipe for higher technology share prices and that is exactly what we will get.
Currently, we are experiencing a mild pullback from the AI mania, but that is simply because it got too far ahead of its skis.
I am quite disappointed in the price action in a stock like Tesla (TSLA) which announced a major cut to its global workforce to trim costs.
The staff cut of 10% could result in exactly what I mentioned more output for less pay, but in terms of hiring more workers, they have decided to force fewer workers to do more.
This type of management behavior doesn’t usually pan out well, because it usually leads to an employee rebellion and cratering employee satisfaction.
They will certainly be a major investor in AI chips to outfit their EV cars, but they have signaled to investors that they are experiencing trouble reaching that “2nd wave” of incremental buyers for their car.
Tech as a whole is not in trouble, but individual companies will find an imbalance treatment to their stock.
The AI pixie dust might have leveled off in the short term, and the broader tech market is being dragged down by a confluence of headwinds like spiking interest rates, geopolitical strive, beaten-up consumers, and diminishing addressable market revenue.
I do believe in the AI hype, but these trends don’t go up in a straight line and need time to digest which often results in short-term pullbacks.
Mad Hedge Technology Letter
April 15, 2024
Fiat Lux
Featured Trade:
(APPLE RUNNING OUT OF TIME)
(AAPL)
At some point, Apple (AAPL) might realize that they won’t be able to find that “next big thing.”
That would be a death sentence.
I’ve been warning Apple shareholders for years that they are headed into a growth winter if they can’t find the next big thing to replace the iPhone.
The consensus was that Apple had time to figure it out.
When I say time, Apple management was quite relaxed about it because the iPhone had been making so much money for years.
Management didn’t think they had much to worry about for 5 to 7 years.
But that was then and things have changed.
Tech has advanced with lightning speed and has left Apple in the dust.
The iPhone numbers keep getting worse and Apple is still scratching their head.
The insurmountable lead they had in smartphones should have been used as a springboard into something even grander and more impressive.
Yet here we are over a decade later with Apple barely moving the needle such as changing the color of the lock screen and trying to pass over other minuscule changes as real upgrades.
Other tech behemoths migrating into artificial intelligence have made Apple look even more outdated in 2024.
Reports show Apple has been exploring a mobile robot that can follow users around their homes.
The iPhone company also has developed an advanced tabletop home device that uses robotics to move a display around.
It shelved an electric vehicle project in February, and a push into mixed-reality goggles is expected to take years to become a major moneymaker.
With robotics, Apple could gain a bigger foothold in consumers’ homes and capitalize on advances in artificial intelligence. But it’s not yet clear what approach it might take. Though the robotic smart display is much further along than the mobile bot, it has been added and removed from the company’s product roadmap over the years.
The iPhone accounted for 52% of the company’s $383.3 billion in sales last year leading to many calling the company the iPhone company.
A car had the potential to add hundreds of billions of dollars to Apple’s revenue.
If the work advances, Apple wouldn’t be the first tech giant to develop a home robot. Amazon.com Inc. introduced a model called Astro in 2021 that currently costs $1,600.
A silver lining to Apple’s failed car endeavor is that it provided the underpinnings for other initiatives. The neural engine — the company’s AI chip inside of iPhones and Macs — was originally developed for the car. The project also laid the groundwork for the Vision Pro because Apple investigated the use of virtual reality while driving.
Apple stock is slightly down from the end of 2021.
That’s disheartening news for many shareholders because this stock was the perennial gem that overdelivered on every metric including the share price which is what matters most.
Apple was once the cornerstone of the stock market, and that title has disappeared unceremoniously with its smartphone lead.
With earnings fast approaching, I expect a lackluster report from Apple at best.
Any rallying will be done on less bad news than first expected and many companies already know that is a game you cannot win.
Even worse, the price to find the “next big thing” has multiplied significantly from 10 years ago with the cost of labor, supply parts, and the regulatory mood has soured.
The longer this goes on, the more Apple will be forced to deliver a royal flush when least expected.
The probability of Apple taking back the mantle as the forerunner of tech is dissipating by the day, and I would avoid the stock in the short term.
There is a reason why the stock has slightly down over the past 365 days.
If the stock pops on the earnings, I would be inclined to sell the rally.
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)
