Tech Letter Archives

Is BABA Worth A Trade?

Remember when Chinese tech was supposed to topple Silicon Valley?

That was just a few years ago and it is mind-boggling how the situation has had a sudden about-face.

Chinese tech has been left twisting in the wind of mediocrity while American tech has forged through and seized the opportunity to become the best tech industry on the planet.

Some of the weaknesses are quite glaring and the most obvious one comes in the form of Chinese e-commerce company Alibaba’s 75% nosedive from a 2020 record high.

The crash has flattened its valuation to an all-time low and put its market capitalization on a par with upstart rival PDD Holdings (PDD).

Alibaba’s revenue for the three months through December only rose 5.6% from a year ago, the slowest growth in three quarters amid difficult economic conditions and steep discounting.

Forward earnings estimates for the company have fallen about 4% over the past month.

China’s online retail market is saturated and the backdrop is getting worse.

Alibaba and JD.com are the old men in the nightclub club while fresh faces like Douyin Mall, run by TikTok owner ByteDance are chomping at the bit.

At the same time, persistent deflationary pressure and declining wages have driven a price war that is being won by discounters like Pinduoduo, the local equivalent of PDD’s Temu.

Alibaba is forecasted to cede market share as they face fierce competition from rivals like Douyin and PDD.

Another focus would be whether they are able to import new drivers to maintain their overall growth.

Alibaba spent $9.5 billion on share buybacks last year, a record high.

Revamp efforts led by the company’s new management include scaling down non-core business while stepping up investment in global expansion and artificial intelligence.

It’s focusing on improving core operations, including moving resources from its Tmall site to Taobao in order to better meet demand for cheaper products, though it may take time to see results.

This focus on lower prices will lead to weaker revenue growth, which is certainly negative to near-term sentiment and share price. The company’s core business growth will likely “remain lackluster in the next four quarters.

With many things in China, this is a race to the bottom and BABA is getting a proper taste of that Chinese medicine.

Lower prices are met with even lower prices and it becomes a war of attrition.

Investors don’t like to hear that.

In the most recent earnings report, net profit declined by 77%.

Overall sales growth last quarter rose by just 3%.

This company used to be a supercharged growth company and in just a few years, they have almost been swept into the dustbin of history.

BABA stock is down today over 5% from the poor earnings report as the stage is set for BABA to hardly grow at all in the foreseeable future.

Many from Gen Z have remarked how discount e-tailers like PDD’s Temu have flooded American social media platforms with ads.

This trend has resulted in negative impacts to BABA’s staying power in e-commerce and the profit margins are in the firing line as we speak.

At $73 per share, the stock might be in for a dead cat bounce for a trade.

Long term, the stock has lost its luster and lost its mojo.

BABA shouldn’t be touched with a 10-foot pole as the entire Chinese economy goes through the motion of a slowly forming zombie corporate structure.

February 5, 2024

Tech Letter

Mad Hedge Technology Letter
February 5, 2024
Fiat Lux

Featured Trade:

(THE NEW TECH DARLING META)
(META), (GOOGL)

The New Tech Darling Meta

Tech Letter

Meta (META) is no joke.

They put any sense of concern to bed with its brilliant performance this past quarter.

They are the new poster child of tech as they blew away every meaningful metric that so-called analysts grade tech on.

They are even the newest dividend stock which might be the most absurd part of their performance.

Growth is their new forte and the $200 billion rise in market valuation in one day is the stuff of legends.

How did they make this happen?

Revenue jumped 25% in the quarter from $32.2 billion a year earlier, as the online ad market continued to rebound.

Meanwhile, the company’s expenses decreased 8% year over year to $23.73 billion, and its operating margin more than doubled to 41%, a clear sign that cost-cutting measures are bolstering profitability.

Net income more than tripled to $14 billion, or $5.33 per share, from $4.65 billion, or $1.76 per share, a year earlier.

Meta said it will pay investors a dividend of 50 cents a share on March 26. That comes after cash and equivalents swelled to $65.4 billion at the end of 2023 from $40.7 billion a year earlier. The company also announced a $50 billion share buyback.

Sales in Meta’s Reality Labs unit passed $1 billion in the quarter, though the virtual reality unit recorded $4.65 billion in losses.

I found it highly positive that Meta took getting lean very seriously as they really gutted staff numbers to the delight of the balance sheet.

Talking to many people in the know, META has been overstaffed for quite some time so much so that many at Meta had nothing to do all day.

The 22% year-over-year decrease in staff levels is a sign of things to come and this is just the start.

In the next few years, I do believe that Meta will shave down staff levels to what would amount to 85% less than COVID levels.

Part of Meta’s financial recovery over the past year was driven by Chinese retailers, which have increased spending to reach users across the globe.

Management said advances in artificial intelligence have helped reinvigorate the ad business, which is growing faster than rival Google’s. In Alphabet

’s earnings report Tuesday, the company said Google ad revenue increased 11% from a year earlier, a slower expansion than analysts were expecting.

Meta will continue to invest in AI and in building up its computing infrastructure.

This is the new META and they finally got all their ducks in a row.

Emphasizing what matters is what the stock wanted and they delivered in droves.

They get a green check mark for cutting costs, reducing headcount, spiking operating leverage, tripling profits, improving ad business, moving along the AI business, and delivering a new dividend.

That was just one quarter and if they can keep hammering away on these selective items, then META stock will be one of the best buy-the-dip stocks in the entire equity market.

Meta has been a stock I have wanted to get into for a while and entry points are few and far between.

The individual performance suggests that tech is stronger than first believed and might I say even cheap with all this untapped growth on the horizon.

February 5, 2024 - Quote of the Day

Tech Letter

“You get a reputation for stability if you are stable for years.” – Said CEO of Meta Mark Zuckerberg

February 2, 2024

Tech Letter

Mad Hedge Technology Letter
February 2, 2024
Fiat Lux

Featured Trade:

(THE TECH LENDER)
(SOFI)

The Tech Lender

Tech Letter

SoFi Technologies stock exploded higher earlier this week after the financial technology company posted its first quarterly profit.

That’s a mighty feat for a small tech firm - they usually burn through cash fast and cry for help from lenders.

The stock was up over 20% and that moment is another reminder about the absolute ferocity of the January move in short-term tech.

Few big tech stocks have posted positive earnings, and sure, there have been modest selloffs only for the broader tech market to rocket higher.

Each pullback has been met by a rip-your-face-off bullish reversal move.

Try to short tech at your peril.

What does that mean for Sofi?

SOFI retraced its bullishness by 10% and is trading back in the $8 range.

Heightened volatility is a hallmark of small tech stocks like Sofi and the firm won’t be able to shake this label until they grow larger and display stable earnings.

They posted fourth-quarter earnings of 2 cents a share, and in the year-ago quarter, it posted a loss of 5 cents a share.

Adjusted net revenue of $594.25 million in the fourth quarter beat the $572 million analysts had forecast. A year ago, revenue was $443.42 million.

SoFi began as a lender focused on refinancing debt but now operates through three segments: lending, which includes student, personal, and home loans; financial services; and a technology platform.

Record revenue at the company level was driven by record revenue across all three of the business segments, with a record contribution of 40% of adjusted net revenue generated by non-Lending segments (Technology Platform and Financial Services segments).

Deposits increased by $2.9 billion to $18.6 billion in the quarter, and customers grew by nearly 585,000 to more than 7.5 million.

Because personal loans take up the biggest share of the portfolio, analysts tend to pay attention to those numbers. At the end of 2023, the company said, personal loans were marked at 104.9%—up from 104% at the end of the third quarter.

Beyond 2024, the company forecasts 20% to 25% compound revenue growth from 2023 to 2026, with per-share earnings from 55 cents to 80 cents a share in 2026.

Sofi continues to be the high-risk, high-reward name that intrigues investors on big drops.

Every spike in shares has also offered a short window of opportunity to short the stock.

Conversely, each drop of 10% or 20% has been a great entry point into shares.

As we advance further into 2024, the narrative will soon change into the Fed pivot and even though the Fed has said they won’t cut rates yet, the market is anticipating it later this year.

For any tech stock that is interest rate sensitive like Sofi, I don’t see how it is smart to bet against them for the rest of 2024.

Tech often overshoots to each side and Sofi shares will be higher in one year from now after the Fed finally does follow through with 1.5% of interest rate cuts which equals to 6 quarter point cuts.

Sofi’s projected 25% revenue growth certainly will add more firepower to share price action if they can pull it off.

However, these types of early-stage companies are notorious for overpromising and underdelivering.

January 31, 2024

Tech Letter

Mad Hedge Technology Letter
January 31, 2024
Fiat Lux

Featured Trade:

(FOLLOW THE CELL TOWERS IN TECH)
(CCI)

Follow The Cell Towers In Tech

Tech Letter

I will explain to everyone why the digital revolution is becoming supercharged in a blink of an eye.

Market valuations reflect the state of expected future cash flows in a company.

Under this assumption, some could argue that most big tech companies with staying power are almost a good buy at any price.

No brainers would include a list of Microsoft, Amazon, Apple, and Netflix.

The global health scare and the carnage associated with it have brought forward revenue and expertise from the tech industry and infused the global economy with more cash.

When you mix that with the Fed playing nice, it sets up conditions for heavy buying in an industry that is going to be king of the global economy anyway.

Tech has been rampant in the first month of 2024 and the brief selloffs we get are only because we are running too hot too fast.

Doing business as we know it has been fast forwarded by 15 years.

The change took place in a blistering 4 weeks.

The clearest signal of who is really calling the shots in the equity market is looking at which companies are dragging it up.

Technology is shouldering the responsibility of the equity market by outperforming the broader market with many software companies’ share price higher than before the crisis.

For every Amazon or Microsoft, there is also a Macy’s or JC Pennys showing that this is really a stock pickers market.

We have not only learned that tech companies are critical to our functioning as a society, but that large tech companies will be even more central than ever before.

We are setting up for the Golden Age of tech who are earmarked to capture even more of the broader equity market.

I do agree that currently, the network effect is working in overdrive like a positive force multiplier. The US economy is riding high again, and this cannot be emphasized enough with the US economy printing growth quarter after quarter.

Digital revenue streams will effectively be pumped into every nook and crevice of the digital economy because of current modifications to the business environment.

Tech is destroying literally every sub-sector as we speak.

Take a look at commercial real estate and hotel operators; they have had to fight against the triple whammy of office sharing WeWork, short-term hotel platform Airbnb, and the coronavirus - a lethal three-part cocktail of malicious forces to the “traditional” model.

Any deep-pocketed investors should be cherry-picking every quality cell tower play possible because they are one of various supercharged sub-sectors of tech.

Obviously, there are other no brainers like semiconductor chips and certain software companies.

Any long-term investor with a pulse should buy Crown Castle International Corp. (REIT) (CCI) on any and all dips.

They are the largest owner of cell towers owning over 40,000 in the U.S. and the data will flow through these towers juicing the wider economy.

January 29, 2024

Tech Letter

Mad Hedge Technology Letter
January 29, 2024
Fiat Lux

Featured Trade:

(THE DATA CENTER STOCK READERS SHOULD LOOK AT)
(EQIX)

The Data Center Stock Readers Should Look At

Tech Letter

Equinix (EQIX) is a tech company from Redwood City, California that specializes in building data centers.

That corner of technology is definitely where the growth is.

Everybody and anybody has heard a few things about this ongoing AI boom and remembers this secular trend hinges on the explosion of data and its incredible volume of it.

The processing of data requires data centers much like the processing of driver's licenses requires the Department of Motor Vehicles (DMV).

It’s not a surprise that the intense demand for data has meant a monumental need to supply new data centers and EQIX exists to deliver that new supply.

EQIX has performed admirably recently with solid revenue growth, a strong forward pipeline, and continued optimism about a differentiated ability to deliver compelling value to shareholders.

In the last quarter, they consummated 4,200 deals across more than 3,100 customers, including record numbers from high-value targeted customers.

EQIX was also able to upsell these companies on data center services, and digital services offerings, all coming together to address the evolving demands.

On the AI front, EQIX continues to cultivate and win significant opportunities across its existing customer base and with AI-specific prospects.

A recent Gartner poll found that 55% of organizations are in pilot or production mode with generative AI.

This is manifesting in accelerated interest from both enterprise customers and from emerging service providers looking to service this demand.

I am witnessing strong similarities between the evolving AI demand and the multi-tiered architectures that have characterized cloud build-out for the past eight years.

I think EQIX is perfectly positioned to capture high-value opportunities across the AI value chain along various key vectors.

First, in the retail business, EQIX will aggressively pursue magnetic AI service provider deployments to support on-ramps and smaller-scale training needs.

EQIX is well positioned here with nearly 40% market share of the on-ramps to the major cloud service providers, key players in the AI ecosystem.

Second, EQIX will meaningfully augment its advanced portfolio of specific data centers, including in North America to pursue strategic large-scale AI training deployments with the top hyperscalers and other key AI ecosystem players, including the potential to serve highly targeted enterprise demand.

I expect a build-out of data centers in retail campuses like the newly announced Silicon Valley 12x asset while other builds will be larger-scale campuses in locations with access to significant power capacity.

I also anticipate a dramatic acceleration in workloads and see Equinix as well positioned to deliver performance and economic benefits derived from network density and cloud adjacency.

While still early, I am seeing broad-based demand for private AI from digital leaders with specific wins in the transportation, education, public sector, and healthcare verticals, including Harrison.ai, a clinician-led healthcare artificial intelligence company that is dedicated to addressing the inequality and capacity limitations in the US healthcare system, by developing AI-powered tools in radiology and pathology.

Recurring revenues from customers deployed in more than one region stepped up 1% quarter over quarter to 77% as customers continued to move to more distributed architectures.

The brilliance of EQIX is that revenue is not a one-off event and companies will return with new data center needs.

If a company is not incorporating the processing of additional data, it most likely means they are not growing revenue.

This gives EQIX the chance to partner with high-quality companies that are at the heart of the digital transformation.

EQIX’s stock speaks volumes about where the company is as the stock has doubled in the past 5 years. They also deliver a 2.10% dividend to shareholders. I believe readers need to buy big dips and hold long-term in EQIX.