Mad Hedge Technology Letter
February 16, 2024
Fiat Lux
Featured Trade:
(THE RIDE SHARING KING OF TECH)
(UBER), (LYFT)
It’s hard to believe that Uber (UBER), the ride-sharing company, is where it’s at now and by that, I mean delivering profits.
It was just only a few years ago when burning money was something they were known for and beginning the next lender to fund them was a common request.
That was the era of cheap money where 0% interest rates created companies like Uber and this capital was the oxygen they needed to keep trying until they could make it work.
Much of the early years were characterized by a fierce competition with competitor Lyft (LYFT) offering subsidies to drivers.
Fast forward to today and they also have a sparkling food delivery business and are projected to continue to grow in the first quarter of 2024.
The company carved out a profit of $1.43 billion in the final three months of 2023, which included a $1 billion benefit from its equity investments as well as income from its operations.
The company has turned an annual profit once before, in 2018 on the back of its investments, but it wasn’t earning money from its operations until now.
The company’s performance in the last three months of 2023 suggests that demand for its ride-sharing and food-delivery services remains robust.
From 2016 through the first quarter of 2023, Uber bled cash close to $30 billion in operating losses.
The company posted its first quarterly operating profit in the second quarter of 2023. The company was founded in 2009.
It was also better than Lyft at responding to a sudden driver shortage after the economy reopened from lockdowns. That helped Uber gain market share.
Lyft is still twisting in the wind of mediocrity and has yet to post its first operating profit.
Uber expanded advertising on its app over the past year. It says it has continued to become more disciplined about spending on discounts to consumers and incentives to drivers. It says it has also become better at combining deliveries and reducing errors, which has improved its operational efficiency.
In the last three months of 2023, the company’s mobility revenue grew 34% and its delivery revenue expanded 6%, while its revenue from freight declined 17%.
After bottoming around $19 per share in the middle of 2022, the stock has been on a rampage and now sits nicely at over $81 per share.
No doubt the stock benefited from last year's slew of capital betting on the Fed to drop interest rates.
I even anointed Uber as my number 1 stock of 2023 and their performance delivered in spades.
What we are witnessing is the maturity of the company and I am not saying they are going to deliver profit back to the shareholder like a FANG, but the conversation will start and that should carry momentum.
The US economy is still going strong growing a few percentage points per quarter and that means US consumers are still spending and that is good for ride-sharing and food delivery.
Uber is sitting nicely as they are a monopoly in this area of technology services.
I am bullish Uber.
Mad Hedge Technology Letter
February 14, 2024
Fiat Lux
Featured Trade:
(A BIG RISK WITH AI)
($COMPQ)
What makes AI mesmerizing and, at the same time, weird is the fact that the technology is accessible to everyone.
Remember when computers were so expensive only a handful of people like Bill Gates had one.
This time it’s different.
AI isn’t like that since it’s a piece of software used on a laptop and the cost of computers has trended lower over the generations.
From simple text or image-generating bots to highly sophisticated machine learning algorithms, people now have the power to create large volumes of realistic content at their fingertips which is one manifestation of AI.
The problem with this is that it underpins illegal activities and encourages scams.
With the help of natural language generation tools, fraudsters can put out vast quantities of texts containing false information quickly and efficiently.
This AI-generated content with false or inaccurate data manages to find its way into places that matter.
In fact, it's possible to create entire websites populated by fake news that drive massive organic traffic and, thus, generate massive ad revenue.
One notch down from straight-up scams is a public feeding frenzy over artificial intelligence companies and stocks that encourage some companies to make hyped-up claims.
I would be extremely reticent of overseas companies that have a history of not protecting tech companies from IP theft like China.
China and digital media don’t go too well together, because much of the content is “borrowed” and from now on it will be AI-produced.
It could be the case that many of these scams will originate from the East.
That’s one part of the world that will use AI to take corporate shortcuts and when they can take an inch, they usually take a million miles.
If a company is raising money from the public, though, it needs to be truthful about its use of AI and associated risks.
They also shouldn’t lie about whether they use an AI model or how they use AI in specific applications.
The media has consistently been highlighting AI as an existential threat and that means at the business level too.
As nefarious actors deploy AI in ways that create reckless or knowing disregard for the risks to investors, this could increase the cost of doing business
It also could have a knock-on effect where people just don’t trust what is on the internet at all anymore and will simply remove themselves from it.
By that time, this might turn out to mean removing themselves from their VR headsets in 2030, but the impact is the same.
Tech firms ($COMPQ) can only spin profits if the consumer spends half their time on a device and if that goes away, these companies go away too.
Ultimately, tech companies need to be careful how they deploy AI and how the spread of AI affects them at the business level, but also at an existential level.
There’s still a chance that AI could destroy a lot of what has made American corporations so strong after the 2nd world War.
In fact, it could end up like a virus gutting the spirit in which tech firms can do business and obviously, the most to lose are the biggest and most successful tech firms.
On the flip side, AI could become a force of good and boost profits 100-fold if used in the right way, but there is still a real chance AI will ruin Silicon Valley.
“Startups on the inside are always badly broken.” – Said CEO of ChatGPT Sam Altman
Mad Hedge Technology Letter
February 12, 2024
Fiat Lux
Featured Trade:
(THE AI WAR STOCK)
(PLTR), (SMCI), (NVDA)
Palantir’s (PLTR) performance in the US is nothing short of extraordinary, and some would even say scintillating.
I’ll tell you why.
The numbers on the screen make you giggle like the 70% year-on-year growth in Q4.
It’s almost inconceivable to do what they did and I am referring to signing that many contracts given the way the product is.
We are witnessing a convergence of Palantir’s software products becoming easier to use which is leading to an augmentation of its capabilities, both driven by developments in AI, and large language models.
The heightened demand and ability to meet that demand is something Palantir’s management calls “with a pilot.”
This new piloting approach is what they call boot camp.
They did over 500 boot camps last year.
Palantir’s management travels around the country now convincing CEOs, CTOs, CFOs, and really, whoever has $1 million to buy the software and transform their enterprise by harnessing everything achieved in AI since inception and putting the best people on it.
Palantir then coaches these best employees on how to run data at a boot camp for 10 hours per day until they know it like the back of their hand.
One unique part of Palantir’s business model is their principle of making it known that they are proud of their work on the war front. They are proud to support the US.
Specifically, they are proud to support the US military.
However, this has rubbed some the wrong way like the Europeans who refuse to do much business with PLTR.
PLTR has been unable to make inroads across the Atlantic.
Yet PLTR is proud to have carved out a pivotally crucial role not only in Ukraine, but management is proud that after October 7, within weeks, Palantir is on the ground, and is involved in operationally crucial roles on the software side in Israel.
I know of no other software company in the world that is at the focal point of Ukraine and Israel and it is important for investors to know this before they decide to invest in the company.
This tech company boards the most talented, interesting, and performance-based people in the world.
Some of the numbers that can’t just be ignored are the 55% growth in customer count year-over-year.
This is the early days of generative AI in software products and for Palantir to describe the rocket fuel growth they are experiencing backs up the AI narrative.
For better or worse, the sector is relying on the AI pixie dust to carry the rest of the tech market.
As soon as the market gets wind that AI-based growth isn’t supercharging balance sheets, the tech sector will pull back.
Therefore, it’s highly positive for technology momentum to see stocks like PLTR and chip stocks like Super Micro Computer (SMCI) hit a home run in earnings.
Sadly, Nvidia (NVDA) can’t just carry the load for the entire sector and there needs to be some alternative leadership from other tech stocks connected to the AI story.
PLTR has tripled in the past 365 days and I don’t believe that type of stock performance can continue in the short-term.
The last earnings beat was met with yet another impressive 20% rise in the stock price.
Investors will need to be patient and wait for the stock to pull back otherwise chasing usually ends in tears.
I would advise readers to not chase and wait for big drops in individuals' names to put money to work.
“Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but the reality is distorted by a misconception.” – Said George Soros
Mad Hedge Technology Letter
February 9, 2024
Fiat Lux
Featured Trade:
(THE NEW HOT A.I. STOCK)
(SMCI), (NVDA)
Super Micro Computers (SMCI) could be a legitimate dark horse in this race to AI supremacy.
They are the meat of the whole operation.
This is an upstart company from California who really knows their stuff about computer infrastructure.
Although they are no Nvidia, they do pack a punch and its share price has exploded higher as the company has been buoyed by both excellent quarterly results and an even better forecast for the full year.
Institutional interest is also gaining steam as the stock continues to be bid up to higher highs.
It’s proving itself, along with Nvidia, to be one of the cleanest stock plays on the AI theme.
Shares of SMCI were languishing lower than $20 per share in 2019.
Fast forward to today and underlying shares are sitting pretty at $750 per share.
Nvidia and Supermicro are somewhat correlated.
Nvidia’s high-performance chips are essential for the AI revolution, they need cutting-edge data infrastructure and that’s how Supermicro’s slots in nicely.
SMCI takes an innovative, customized, and flexible approach to meet customers’ computing needs – which has made it the choice of heavyweight clients like Meta and Amazon. SMCI supplies in rapid time, and the uber-complicated tech behind these centers, which needs servers, networks, and cloud storage solutions to function.
The company also uses a liquid cooling technique to manage the temperature of its multi-rack servers in a more energy-efficient way.
By the end of September, research firm IDC estimated that Supermicro had become the fourth-biggest server provider in the world, ahead of Lenovo.
And, sure, Dell and Hewlett Packard Enterprise are the leaders, but their revenue growth has been falling while Supermicro’s is muscling up at a double-digit pace, making it a leader in the higher-priced and higher-margin AI server market.
In its latest earnings report, SMCI announced revenues of $3.66 billion, a 133% increase from the year-earlier period, and predicted sales of at least $14.3 billion in 2024.
Supermicro’s leadership will not stay inert.
They are partnering with Nvidia, AMD, and Intel – the three biggest AI chip suppliers – on next-generation AI designs. So its customers will likely include all the big AI spenders like Meta, Amazon, Apple, and Tesla.
SMCI is forecasted to bust out an EPS growth rate of 31% moving forward.
The key risk ahead is that Dell and maybe even Hewlett Packard Enterprise might compete again with Supermicro’s capability in data centers and put its operating margins under pressure.
That could undermine the company’s profit outlook, especially if overall demand growth for data centers wavers.
The stock is expensive even to the point where short-term technical indicators have shown the stock to be overbought for the past 3 weeks.
In fact, the stock was sitting at $300 per share on January 18th and the parabolic trajectory has meant that the stock has more than doubled in the past few weeks.
Readers need to let this stock drop and any medium-sized pullback just be bought with two hands.
These types of premium AI stocks are hard to find optimal entry points which could mean a long wait time.
