Tech Letter Archives

Artisanal Tech Feels The Heat

Bumble (BMBL) is a dating app in which women initiate communication first and their CEO Whitney Wolfe Herd deciding to quit offers deep insight into the state of tech firms.

Remember that Wolfe Herd is the person who established this app and presided over an 83% decline in share price since an initial public offering over two years ago.

Clearly, the writing was on the wall for Wolfe Herd, but she shouldn’t receive all the blame.

There is an industry-wide malaise occurring in some sub-sectors of technology and smartphone dating apps are one of them.

Some investors have started to gain a sense that these apps don’t have enough bang for the buck and these business models are gaining in popularity.

In the past few weeks, the popular dating app Tinder announced a new feature rolling out a new subscription tier for $500 per month boasting it would unlock premium profiles at that price point.

Asking for $6,000 per year is a serious overreach for a dating app and I believe that type of ask will alienate some of the core users.

These apps are supposed to scale but not at $6,000 per year.

What else is the big challenge for Bumble?

How to get consumers to commit money to a dating app when the economy is so uncertain?

That’s the conundrum.

In the months after the pandemic, online dating apps became the hottest ticket in town as the only way to not sacrifice a dating life.

Bumble, which currently has 40 million active monthly users across its portfolio of apps, is now fiercely fighting for users with its competitor Match (MTCH).

As with some of these niche tech businesses, opening up the economy from the lockdowns has been a tough pill to swallow as it relates to the knock-on effect on future sales.

In terms of pure market sentiment, investors have determined a strong likelihood that the lockdowns were the high water mark for these artisanal apps.

Unfortunately, these sub-sector stocks are labeled as a time and place stock and not one that is worth holding in times of chaos and upheaval.

We are far from the start-up frenzy peak where entrepreneurs could make hopes based on fantasies into an app and concoct a targeted addressable market.

It’s not going to cut it anymore, because the bar is so much higher.

In the era of cheap money, funding niche sub-sectors of technology was still quite fashionable and mainstream.

I would even say it caught fire.

Then there is the issue of artificial intelligence concerning how this type of technology delivers poison to the innards of the business model.

How?

Dating apps could easily turn into bots chatting to bots to monetize users with no real value. This would constitute a fake business. Ad sponsors could be paying for this to happen. AI integrates into online dating apps quite poorly because it strips away the authenticity of the end user which undermines communication and the underlying asset.

A fake business would mean a crash in the underlying equity value. Of course, we are not even close to that possibility right now, but keep in mind that force-feeding management to one-up AI capabilities could unearth some bizarre unintended consequences.

Ultimately, the end of 2023 is a dynamic time in technology because the trajectory of companies has never been so uncertain, fluid, and challenging at the same time.

Expect quite a few of these artisanal apps to get swept into the dustbin of history.

Readers need to stay away from sub-sector technology stocks like Peloton (PTON) and instead go for stocks that have broader exposure to more wallets where artificial intelligence will act as a tailwind.

Plus, many people use Instagram, X, or Facebook for dating anyway. No need to overcomplicate life.

November 10, 2023 - Quote of the Day

Tech Letter

“Move fast and break things.” – Said Meta CEO Mark Zuckerberg

November 8, 2023

Tech Letter

Mad Hedge Technology Letter
November 8, 2023
Fiat Lux

Featured Trade:

(SETTING UP FOR THE NEXT BULL MARKET)
(WEWKQ)

Setting Up For The Next Bull Market

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Taking out long-term leases and turning around to rent short-term i.e. Airbnb style for corporate offices ended with a thud as office sharing tech company WeWork filed for bankruptcy.

The idea never made sense and felt more like a gimmick.

Surprisingly, this bankruptcy didn’t happen much earlier as the “work from home” pivot during 2020-2022 made this business model go from bad to worse.

It’s safe to say that we are far passed the peak “sharing economy” and investors are licking their wounds on this one.

WeWork filed for bankruptcy, capping a dramatic period that saw the once high-flying startup navigate a failed initial public offering, forced government lockdowns, a blank-check merger, and a stubborn avoidance of return-to-office trends.

The company at its 2019 peak commanded a $47 billion valuation with the likes of SoftBank losing more than $14 billion on just this one investment.

The firm’s death spiral arguably started in 2019. In a matter of months, the company went from planning an IPO to firing thousands and procuring a multi-billion-dollar bailout.

WeWork was almost a scam from the beginning with its main business mission explained as to “elevate the world’s consciousness.”

The former CEO of WeWork Adam Neuman operated the business almost as a cult.

The company eventually went public in 2021 through a special purpose acquisition company, two years after its initially planned IPO. But that didn’t stop WeWork from hemorrhaging cash.

While WeWork reached a sweeping debt restructuring deal in early 2023, it quickly signaled desperation soon after.

High-interest rates are starting to knock out the low-quality business ideas that never should have gotten off the ground in the first place.

These developments are a godsend for the tech economy that needs a complete flushing out of the bad ideas that were fueled by 0% interest rates.

Cheap money attracts larger-than-life ideas and personalities that can’t really back up the chutzpah.

Raising the bar for quality in tech has also caused the unintended consequence of raising the top tech companies or magnificent seven even higher up than before.

This trend can easily be seen in the EV sector where incumbent Tesla is putting their foot on the scruff of smaller EV company’s necks that simply can’t keep up with the higher material costs and headache of developing a global manufacturing presence amid deglobalization.

In simple terms, it is substantially harder to build an above-average tech company, or any tech company for that matter in 2023.

The former is an issue with the lofty competition that wields powerful balance sheets and the latter is an issue with draconian funding terms.

Waving goodbye to lemons like WeWork is only healthy for the tech sector in the long term and shortly we should see other junk-status companies be thrown by the wayside as well.

Cryptocurrency mogul Sam Bankman Fried’s fall from grace with a guilty verdict of fraud is another signal that the tech’s excesses are quickly normalizing.

We are in the middle of setting ourselves up for the new bull market in technology stocks which will be kicked into gear if interest rates sniff out the next recession.

November 6, 2023

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Mad Hedge Technology Letter
November 6, 2023
Fiat Lux

Featured Trade:

(HIGHER FOR LONGER IS NOT OFF THE TABLE)
(BIG TECH), (QQQ), (AAPL), (GOOGL), (META), (TSLA)

Higher For Longer Is Not Off The Table

Tech Letter

Tech (QQQ) earnings turned out to produce some positive performances.

Dominant companies can produce dominant earnings even in troubled times.

So what is the problem?

The sales outlook underwhelmed as the American consumer and business keep getting stretched to the limit.

I believe that traders shouldn’t expect a quick turnaround of sales projections for 2024 unless there are some material structural improvements in the business and consumer environment.

No savior is coming for 2024.

All signs point to more uncertainty and not less and rightly so as high inflation has only been replaced by a decrease in the rate of inflation.

Things are still expensive and that means less opportunity for tech to build a growth story.

Apple, Alphabet, Meta, and Tesla all gave investors reason to rub smiles off faces.

From Apple’s unimpressive holiday outlook to Alphabet’s tepid cloud computing sales results, a recurring theme for the group was weakness.

Meta warned that the year ahead is looking less predictable, while Tesla raised concerns that demand for electric cars is starting to weaken.

Despite Tesla's missing earnings, the group is poised to surpass the 36% increase estimates called for before earnings season began.

The tech sector in the S&P 500 still carries a nearly 36% premium to the index on a forward price-to-earnings basis, per data compiled by Bloomberg Intelligence.

There’s a lot of AI hype, but not every company is market-ready.

Everything can change in a heartbeat if there is economic or geopolitical upheaval, which would directly impact stocks.

The market is still pricing in no spreading of military activity as it looks through it as a self-contained area.

Therefore, the pendulum has swung the completely opposite direction as the U.S. 10-year treasury yield has dropped from 5% to 4.6%.

The strength in treasuries could be short-lived, because several have told me that traders are jumping back into the short-term trade which would signal higher for longer.

The Fed Futures show that the first 25 basis rate is forecasted for May 2024 with 2 more consecutive .25% rate cuts following the first.

The American consumer just might have enough juice for one more splurge that would then push back rate cuts from May to somewhere closer to July or August.

Therefore, it’s easy for me to see how this 6.5% surge has a little longer follow through only to soon clash with a “higher for longer” narrative.

The true tailwind for tech stocks here is that much of the bad news has been priced in and any violent surge in treasury yields seems like a low probability for the last 7 weeks of the year, unless another global conflict breaks out.

Seasonal buying could mean that November is more positive than negative for tech stocks and any big draw down should be bought in a quality tech name. December could be a harder slog for tech.

November 3, 2023

Tech Letter

Mad Hedge Technology Letter
November 3, 2023
Fiat Lux

Featured Trade:

(THE CATCH UP PLAN)
(GOOGL), (MSFT), (CHATGPT)

The Catch Up Plan

Tech Letter

The tech industry is quickly morphing into a generative artificial intelligence success story or bust outcome for many involved.

This came pretty much out of nowhere.

December 2022 was the big announcement that ChatGPT went live and everybody in tech has basically been freaking out since then.

Big ideas like the internet and software also had the same type of effect on tech stocks back in the heyday.

What would have Microsoft (MSFT) been without the computer or Windows?

Even more urgent, once perceived growth tech companies like Tesla are starting to cut prices of products because the consumer is tapped out these days.

That means tech corporations can’t sell the current product by adding incremental iterations and passing it off as something “groundbreaking.”

Consumers need something more.

Consumers will spend on the next big thing and generative artificial intelligence still has a long way to go, but stocks participating in generative AI are starting to get those premium multiples that were only reserved for tech royalty.

Everyone is hoping to get in on the action as well as Alphabet.

They are racing to build a new search engine and add artificial intelligence features to its existing products in the face of rapid growth in the field by rivals such as Microsoft Bing.

Google is testing new features called "Magi," with more than 160 people working full-time on the project.

Google's new products will try to predict users' needs, with features such as helping users write software code and display ads in search results, and Google is also exploring mapping technology that allows users to use Google Earth with the help of AI and search music through conversations with chatbots.

Samsung Electronics is reportedly considering replacing Google with Bing, the main search engine on its phones, because of Bing's artificial intelligence capabilities. The Samsung contract is expected to generate $3 billion in annual revenue for Google, a revenue stream that is now in jeopardy. In addition, Google has a $20 billion contract with Apple for a similar default search engine, which is up for renewal this year.

Google’s search engine could be swept into the dustbin of history if they don’t get a move on it pronto.

The ecosystems like Apple and Samsung can easily opt for a better engine if Google falls behind and that is exactly what we are seeing from Samsung.

I would probably say that Google got a little too cocky when they decided to stop developing itself.

They thought that nobody could topple them.

The panoramic views from the ivory tower can look nice from the terrace for a while until somebody builds a bigger ivory tower that obstructs the view.

It’s been quite fascinating to see Google’s sense of urgency lately because it was always assumed they were part of a stable duopoly with Facebook.

Google’s panic indicates that Microsoft’s Bing is a real threat to their revenue stream and at the very minimum, bits and pieces of the new technology will be incorporated into a new version of a search engine that will behave as a supercharged version of the likes we have never seen before.

If Google can catch up then its stock price will go a lot higher from here.