Tech Letter Archives

BYD is Here to Stay

Tesla’s (TSLA) recent underperformance is a canary in the coal mine of what could become of the global EV industry.

EV makers better watch out because the race to zero is coming for all of them.

It could be yet another tech industry captured by the Chinese. The Chinese are quickly rising up the food chain of technological capabilities and these new developments are sure to rattle the White House.

I remember years ago when the Chinese tried their best at smartphones, they were terrible, but fast forward to today, and now they compare close to the iPhone with much better pricing.

Now, the Chinese are coming after electric cars and I also remember touring EVs in China in 2007 and they again were pretty terrible.

However, fast forward to today, and yet again they have achieved major inroads in terms of quality and reach. BYD Company Limited (BYDDY) even produces something comparable to Tesla which is no small feat.

Tesla’s disappointing third-quarter deliveries highlight the panic state side where the first mover advantage has served CEO Elon Musk well but eroded lately.

Tesla sold 435,000 electric cars last quarter, while BYD sold 431,000 battery-powered electric cars over the same period.

Expect BYD to surge past Tesla in delivered electric cars soon because they have access to a vastly bigger market while the Chinese communist party is doing everything to ruin American corporate business in the Middle Kingdom.

BYD is already far ahead when it comes to total sales. Including hybrids, BYD sold over 800,000 cars last quarter, almost twice as much as Tesla.

The Chinese company sold 1.8 million cars last year, over 911,000 of which were BEVs. Tesla, which only sells BEVs, sold 1.3 million cars.

Musk had previously warned that planned upgrades to manufacturing plants around the world may lead to lower deliveries for the rest of the year.

Tesla is also facing sluggish demand, forcing it to launch aggressive price wars in both China and the U.S.

BYD has surged ahead of its competitors in China by selling more affordable electric vehicles, unlike the premium models sold by Tesla and other EV companies like Nio and XPeng. BYD recently unseated Volkswagen as China’s top-selling car brand.

The company is expanding outside of China and is now the top-selling EV brand in markets like Thailand, Israel, and Singapore. It’s even expanding into more developed markets like Japan and Europe.

Watch out for China’s BYD to hijack Western markets moving forward including Europe, Canada, the United States, and the UK.

It’s finally time to stop ignoring that China does a good job producing EVs and other hard-to-manufacture technology.

My guess is that China will also surpass the United States in semiconductor chip technology, although that will take longer to achieve.

The Pentagon has sounded the alarm bells after noticing huge improvements in chip know-how by the Chinese.

Competition is finally here for Musk after so many years of taking a free ride in the US and it’s about time. Now the rubber finally meets the road.

Readers with a high threshold of risk tolerance should look at BYD’s ADR (BYD) if shares experience a big dip then allocating a small portion of a portfolio to this equity makes sense.

Don’t forget there is now a high probability of Tesla losing its Shanghai factory in China once China seizes American businesses on the mainland. It doesn’t matter how much Musk kowtows to the communist party because this issue is far bigger than him or the EV business.

That threat has gone from almost 0 just recently to becoming somewhat plausible although still quite low. The tech world is accelerating at warp speed in 2023.

October 30, 2023

Tech Letter

Mad Hedge Technology Letter
October 30, 2023
Fiat Lux

Featured Trade:

(WHY MEGACAP TECH IS THE ONLY SHOW IN TOWN)
(BIG TECH), (ETF), (COMPQ)

Why Megacap Tech Is The Only Show In Town

Tech Letter

Megacap stocks continue to make hay when the sun shines in 2023.

The question is, why?

After all, many other great companies have arguably much better valuations, fundamentals, and affordable PE ratios.

Big tech stocks are expensive, yet buyers keep maneuvering to bid up the stock.

What gives?

The surge in the most hated sectors last year has been the main driver of this year’s stellar equity performance.

If we strip out tech, performance is actually negative if you can believe it.

The question is, why are professional managers seemingly chasing big tech like no other stocks exist?

The answer is more simplistic than you may think.

For investment managers, generating “alpha” is necessary to limit “career risk.”

If a manager underperforms their relative benchmark index for a time that is noticeable, they start to get in the firing line.

Currently, there are two drivers for the mega-capitalization stock chase. First, these stocks are highly liquid, and managers can quickly move money into and out without significant price movements.

The second is the passive indexing effect.

As investors change their investing habits from buying individual stocks to the ease of buying a broad index, the inflows of capital unequally shift into the largest capitalization stocks in the index.

Over the last decade, the inflows into exchange-traded funds (ETFs) have exploded.

That ETF issuance surge and the assets’ growth under management fuel the performance of the top 10 stocks. As we discussed previously:

Therefore, as investors buy shares of a passive ETF, the shares of all the underlying companies must be purchased.

Given the massive inflows into ETFs over the last year and subsequent inflows into the top-10 stocks, the mirage of market stability is not surprising.

Given stick high interest rates, inflation, and reversal of monetary liquidity post-pandemic, the risk of recession is higher than normal.

Higher interest rates, in particular, currently pose the largest threat to small and medium-sized companies.

The largest 10% of companies represent 62% of the overall non-financial market cap of the S&P 1500.

Smaller firms do not have the massive cash balances the megacap companies hold which puts them at a disadvantage.

As that debt wall of term loans hits over the next few years, higher borrowing costs are going to raise the risk of defaults and bankruptcies.

Tightening financial conditions have seen corporate bankruptcies rise by 71% since last year. If financial conditions are still elevated over the next few years, that bankruptcy risk increases markedly.

They weren’t able to lock into long-term loans at almost zero interest rates and pile it high in the money markets at variable rates.

Ultimately the pain for US small- and mid-cap companies will trigger the recession.

Portfolio managers must chase the market higher or potentially suffer career risk. Therefore, the easiest place to allocate cash is the mega-capitalization companies with low risk of bankruptcy or default and extremely high liquidity.

With the concentration of risk in a handful of stocks, the markets are set for a rather vicious cycle.

The concentration at the top keeps getting worse and I do believe we are one cycle away from the top 7 tech stocks comprising 35% of the total equity market.

It’s quite bizarre that something even remote could materialize, but that is where we stand where investors are looking for safety.

Throw in that most investors with a high net worth aren’t young, the tendency to go with a more conservative approach will shine through.

Funnily enough, tech investments in the big 7 constitute as conservative and it’s really true when I say that big tech has aged with its investor base.

October 30, 2023 - Quote of the Day

Tech Letter

“Any new technology tends to go through a 25-year adoption cycle.” – Said Venture Capitalist Marc Andreessen

October 27, 2023

Tech Letter

Mad Hedge Technology Letter
October 27, 2023
Fiat Lux

Featured Trade:

(CRYPTO IS BACK AT IT AGAIN)
(MSTR), (BTC)

Crypto Is Back At It Again

Tech Letter

Cryptocurrency prices have been on a tear lately as bitcoin continues to rally on hopes a spot bitcoin exchange-traded fund will launch soon.

Last week Bitcoin had a 24-hour time period where it exploded 13% to the upside as the digital gold wakes up from its slumber.

Lately, it certainly is odd to see US treasury yield surpassing any type of volatility that crypto can offer proving that volatility is more about a time and place dynamic rather than a certain asset class.

The volatility meant that Bitcoin passed $35,000 for the first time since May 2022 even though it has pulled back a little today.

The rally could be fueled in part by investors who were betting against the crypto asset scrambling to cover short positions as well.

Bitcoin led cryptocurrency prices higher over the past two weeks after the SEC declined to challenge its court loss against Grayscale Investments (GBTC) and its effort to convert its Grayscale Bitcoin Trust into a spot bitcoin ETF on Oct. 13.

A U.S. appeals court ordered the SEC to review Grayscale's ETF application. The regulator could still reject the spot bitcoin application, but it would need a new justification to do so.

Institutional demand for a spot bitcoin ETF is stronger than ever before. For many institutions, it is a matter of when — not if — the SEC will approve a spot bitcoin ETF.

A spot bitcoin ETF would provide a regulated and accessible vehicle for bitcoin exposure, and also mark a major vote of institutional confidence.

MicroStrategy (MSTR) added 21% and the computer software company holds 158,245 bitcoin with an average purchase price of $29,582.

Sooner or later, unless regulation totally wipes out Bitcoin, crypto is likely to find itself finagling its way into 401K’s.

The longer it lingers around, institutional pockets, which are deep, will find a way to onboard it into its business model.

For many years, institutional money has stayed away from crypto primarily because it is built on nothing and most conservative investors want to see cash flow.

At least an asset like gold bullion, there is a physical nature of what one buys.

Yet, as the world becomes more digitized and globalized, institutional money is starting to take the bait.

To Bitcoin’s credit, the absolute collapse of volatility in the past few years has been an interesting talking point because too much volatility used to be the problem for this asset class.

There is a chance that as we begin to start a new economic cycle because of a Fed pivot, that $16,000 per Bitcoin at the end of December 2022 could register the low of the next cycle.

Bitcoin is more appealing as a risk-reward proposition now than it was exactly a year ago as the Fed embarked on an epic tightening cycle.

Throw into the mix that the quality of global government has cratered to a generational low and it makes sense for institutional backers from Blackrock to front-run the next bull market in crypto as capital looks to de-risk from fiat currencies.

This could finally end up being the run-up to $100,000 per bitcoin that everyone expected during the last bitcoin spike.

Readers can play this in the equity market by buying MSTR.

October 25, 2023

Tech Letter

Mad Hedge Technology Letter
October 25, 2023
Fiat Lux

Featured Trade:

(AMERICA SHINES WHILE EUROPE SLUMBERS)
(TSLA), (NVDA), (AAPL), (ABNB), (UBER)

America Shines While Europe Slumbers

Tech Letter

Europe’s fintech companies are exploding.

The weakness in stock prices is emblematic of the broader malaise in the Eurozone economy.

The positive here is that the US economy keeps chugging along and on a relative basis, is leaps and bounds stronger than its counterpart.

Why does that matter?

The less money invested into European tech can be diverted into the likes of Tesla (TSLA), Nvidia (NVDA), Apple (APPL), and the rest of the American tech companies.

I absolutely see this as a zero sum game in a world where all the low-hanging fruit has been plucked.

In a globalized world, investors can really just dabble in whatever national market they seek to profit from with ease.

It’s really just a few taps of the screen.

Silicon Valley is already heavily entrenched in Europe with sprawling workforces in many of the 27 countries in which they arbitrage lower wages to their benefit.

If one ever hoped a local rival would root out American variants, it’s a hard slog ahead.

France’s worldline shares plummeted a record 59%, erasing €3.8 billion ($4 billion) of market value, after the French payments company slashed future forecasts.

The stock’s plunge echoes August’s huge fall in peer Adyen NV and follows Tuesday’s 72% drop in fintech CAB Payments Plc. Shares in Adyen declined 7.5% on Wednesday, while another peer, Nexi SpA, slid 18%.

Since then, worries over lofty valuations and a broader slowdown in consumer spending have brought the high-flying stocks back to earth. Adyen, Nexi, and Worldline have lost more than $33 billion in market value combined in the year to date.

Worldline said it now sees full-year organic revenue growth of 6% to 7%, down from a previous forecast of 8% to 10%. The company’s third-quarter sales also missed estimates.

Small fintech companies growing in the single digits is one of the biggest fopaux an up-and-coming fintech company can commit.

Management also complained that European consumers are tapped out.

They don’t have the money to allocate to “non-discretionary” items.

Europeans are basically paying for shelter, energy, and food.

If there is anything else left over, it’s not much. That’s what happens when the cost of living rises between two and three times.

Management also emphasized an acute slowdown in German consumer spending which hurts since these consumers are some of Europe fintechs biggest customers.

I do believe that many investors aren’t going to stay invested in Europe’s fintech space and it is ripe for consolidation which ironically could come from America’s magnificent 7 who have the deep pockets.

It’s a fragmented sub-sector of tech with some operators pigeonholed into one microscopic area of Europe like Andorra or Slovenia.

Technology scales but Europe is hard in the sense it must cut through a vast language, sprawling bureaucracy, high tax regimes, and cultural barriers not to mention different laws. Throw into the mix that multinationals have stopped supporting work visas for non-EU citizens and it is easy to understand why Europe is not ideal for starting tech firms.

The narrow path is why a company like Worldline generates revenue of around $1.2 billion per quarter as opposed to an American PayPal (PYPL) which does $8 billion per quarter.

If we look at the big boys like Google, quarterly revenue goes up to $80 billion per quarter highlighting how far back Europe is from the real upper echelon of American tech.

If Europe is getting trounced by the likes of PayPal, then investors can’t get angry when they get labeled the bush leagues of global technology.

Look at Silicon Valley and especially the tier 2 firms like Uber (UBER) or AirBnb (ABNB) for the real growth instead of Europe’s suffocation of free market technology.

October 23, 2023

Tech Letter

Mad Hedge Technology Letter
October 23, 2023
Fiat Lux

Featured Trade:

(A SIMPLE GUIDE TO QUANTUM COMPUTING)
(RGTI), (IONQ)

A Simple Guide To Quantum Computing

Tech Letter

According to IBM, Quantum computing is a rapidly emerging technology that harnesses the laws of quantum mechanics to solve problems too complex for classical computers.

Used correctly, quantum computers are incredibly fast and effective. They can perform calculations in a few seconds for which today's supercomputers would need decades or even millennia. This fact is also referred to by experts as quantum superiority.

Why Buy Quantum Computing Stocks?

Quantum computing isn’t so crazy as you think and it’s inching closer to reality.

These types of transcendent technologies are what investors need to key in on to help make their tech stock portfolio better than ever.

This will enable researchers to break new ground in areas such as pharmaceutical drug discovery, weather forecasting, cybersecurity, and computational chemistry.

It will also result in unprecedented gains for owners of quantum computing stocks.

The Best Quantum Computing Stocks

Will quantum computing be successful? That's the multi-trillion dollar question.

We're in the first innings of a long ball game if the game has even started.

Still, there are already some pioneers that are re-imagining the field.

Here are two quantum computing stocks to put on your radar:

Rigetti Computing, Inc. (RGTI)

Rigetti Computing builds and deploys integrated quantum computing systems leveraging superconducting qubit technology.

CEO Chad Rigetti has a simple and clear thesis on this space: “In the next decade, a single Rigetti quantum computer could be more powerful than the entire global cloud industry today.”

Rigetti will need the capital infusion from going public because the firm doesn’t have any positive revenue to talk about. The IPO delivered a much-needed financial lifeline and the additional $458 million in funding came after an initial $200 million was raised previously. That could also be a big con about the sub-sector, it might be years until an actual profitable income stream is built.

Whoever said that Rome was built in one day?

Quantum computing is only at the beginning of its development. It is difficult to estimate how large the market demand for this product will be. It's also uncertain how quickly Rigetti or competitors like IonQ will be able to expand their technical capabilities. This is an entirely new technological territory, so there are zero guarantees here in this tech sub-sector.

Needless to say, Rigetti is a concept stock for now. One has to believe in the underlying vision of quantum computing to place a bet here. Otherwise, it would be wise to switch to other stocks without a quantum computing business plan or corporate strategy.

IonQ (IONQ)

IonQ produces quantum hardware and software.

IonQ was faster to market than Rigetti, making it the first publicly traded quantum computer stock. Also, the company is backed by a number of influential investors including Bill Gates, Silver Lake, and Fidelity.

Unfortunately, like many SPACs these days, IonQ only exists on paper. That means there is still very little operational business. IonQ only did a few million in revenue last year and had no revenue in 2019 or 2020. In fact, free cash flow is projected to remain negative through at least 2026. Also, it will take multiple technological leaps - such as machine learning - to reach a point where quantum computing can reach mass markets and make IonQ successful.

RGTI’s market cap is only $125 million and IonQ’s is $927 million and they are cheap for a reason.

Investors aren’t willing to pay for the time it's willing to take for quantum computing to go mainstream yet.

However, if a reader is willing to invest with a 35-year view, then it would make sense to invest 1% of one’s portfolio into these names and also at a time when interest rates are trending lower.

These types of loss-makers and far-in-the-future bets work better when the cost of capital is lower.

Expect some stock appreciation as investors start to bet on the Fed lowering interest rates.