Mad Hedge Technology Letter
August 23, 2023
Fiat Lux
Featured Trade:
(LOSING THE EDGE)
(PTON), (NVDA), (MSFT)
It’s looking like mission impossible for Peloton (PTON) who, if some might remember, was the darling of the lockdowns a few years ago.
This is really a story of making hay while the sun is shining because the sun has decided to tuck itself behind clouds indefinitely to the chagrin of PTON.
I have posted a few negative critiques of PTON because it’s accurate to distill the company down to an iPad on a stationary bike which charges for an expensive subscription.
The fact is once the world opened up, people stopped using PTON products and happily decided to go back to their old routines like visiting fully serviced gyms or exercising outside.
Even the consumers who decided to quit working out altogether are most likely traveling the world spending their PTON subscription money at a pizza joint in Italy.
The downdraft all came to a head today when PTON dropped yet another disastrous earnings report and their stock is down 23% at the time of this writing.
They whined about the decline in paying subscribers and said the cost of an equipment recall was denting its profit.
The fitness-equipment company cautioned that it expected to have negative cash flow in each of the next two quarters as it keeps fighting high inventory levels, and another sequential drop in subscribers.
Chief Executive Barry McCarthy played down the crashing stock price by explaining that the stock market isn’t in sync with the actual business and doubled down by emphasizing the company has its best days ahead of itself.
The New York company also said it is back to purchasing more bike and tread inventory, as it is in a more normalized inventory position than a year ago.
Peloton has struggled with its pricing strategy and recently further lowered the prices for its treadmill and rower by about 14% and 6%, respectively.
Peloton had told investors that it was looking to stem losses and start generating cash flow from its operations after slashing jobs and restructuring its business.
In the latest quarter, the company reported a negative cash flow of $74 million, weighed down by a legal settlement.
Peloton expects to end the September quarter with paying connected fitness subscribers of 2.95 million to 2.96 million, down from three million as of the end of the June quarter.
It has already received about 750,000 requests for replacement seat posts, ahead of internal expectations, and has been able to fulfill 340,000 of them.
Revenue for the fiscal fourth quarter ended June 30 fell 5% to $642.1 million.
Peloton’s average monthly connected fitness churn was 1.4% in the quarter, increasing from a 1.1% churn in the prior quarter, as a result of the company’s bike-seat-post recall.
This cautionary tale dovetails accurately with my wider thesis of smaller brand-named tech companies losing the war against the tech behemoths.
One little misstep and the inner problems are magnified and PTON has numerous issues under the hood of the car.
The CEO hyping up the company is a fool’s game because the writing is on the wall for this product.
There is no competitive advantage in their product and I believe subscriptions and hardware will continue to fall off a cliff.
Investors should head to higher water and look at premium names like Nvidia or Microsoft.
These types of companies possess strategic footholds in the leading technologies in the world and I can’t say the same for PTON.
PTON will continue to trend into the dustbin of history and don’t get fooled into this stock reversing any time soon.
Avoid this stock like the plague.
"The rich invest in time, the poor invest in money." – Said American Investor Warren Buffett
Mad Hedge Technology Letter
August 21, 2023
Fiat Lux
Featured Trade:
(ANOTHER RED FLAG FROM DIGITAL GOLD)
($BTC), ($COMPQ), (TLT)
When good times roll then the digital gold does too.
More often than not, these good times occur when liquidity gates widen.
Simply put, there’s more cash for alternative assets like Bitcoin ($BTC) to speculate on and that’s what people do.
Bitcoin as a standalone asset possesses no intrinsic value and delivers investors zero cash flow which are serious drawbacks in times of pain.
I wouldn’t go so far as to say this is a time of pain right now, but we are inching closer to it as the US 10-year treasury (TLT) hits 4.35%.
Sometimes, investors need that extra little bit of cash flow from that 50-year-old studio tucked away deep inside their portfolio to survive.
Call it a rainy day fund if you will.
The drawdown in Bitcoin is an ominous sign for tech shares ($COMPQ) because the logic goes that if Bitcoin goes up, so does tech.
The narrative for some time has been that Bitcoin is akin to something like crappy tech so if crappy tech shares deliver, then the good tech companies that offer cash flow and software products will do even better.
Bitcoin has just been jolted by some negative price action as we find ourselves lower than last week, at around $26,000 per BTC.
Longer-term US Treasury yields are around multi-year highs, part of a global bond selloff that reflects the risk of a prolonged period of restrictive monetary settings to bring down inflation.
Such a backdrop portends constrained liquidity that would pose a challenge for riskier assets like tech stocks and crypto.
Higher interest rates mean that assets like Bitcoin don’t look so attractive on a relative basis.
Some of the technical signals followed by chart analysts paint a mixed picture. A gauge of momentum known as the 14-day relative strength index suggests Bitcoin is close to the most oversold level since mid-2022.
Other metrics point to a reluctance among retail and institutional investors to engage with crypto following last year’s rout, blowups like FTX, and an ever-shifting regulatory landscape.
For instance, average daily spot volumes on centralized digital-asset exchanges over the past four months were the lowest since October 2020 — when Bitcoin was at about $10,000.
The last 30 days have been brutal for the Nasdaq index and narrowing the goalposts means that BTC will be one of the first casualties to get heaved into the dumpster.
The price action for tech stocks has been highly disappointing lately and there is a strong chance that we could revert to sell the rallies in the short term.
Numerous times the Nasdaq has started the morning hot out of the gate only to suffer sharp sell-offs as the afternoons rolled around.
Shares trending lower to end the trading day have epitomized tech shares lately.
Momentum is lackluster.
The reason I believe that tech shares will endure a harsher period of consolidation is because the added kick in the nuts is China weakness.
Growth forecasts are starting to get ratcheted back as it appears that China has entered the Japan-style lost decade type of slowdown that is a symbol of economic stagnation.
The Nasdaq is really searching hard under each stone to find some type of tailwind to propel us into year-end, but the window is closing quickly. Let’s hope we find that rocket fuel to get us over the line.
“As a rule, men worry more about what they can't see than about what they can.” – Said Roman Leader Julius Caesar
Mad Hedge Technology Letter
August 18, 2023
Fiat Lux
Featured Trade:
(A POOR OMEN)
($TNX), ($COMPQ)
The U.S. 10-year Treasury bond ($TNX) has surged past the October 2022 high so what does that mean for tech stocks ($COMPQ)?
In short term, tech shares will be held back.
Tech stocks are the most exposed to collateral damage from surging interest rates because of the growth nature of the sector.
Funnily enough, much of this 2023 rally has been fueled by the notion of a Fed “pivot” coming down the pipeline.
It still hasn’t come, but now the pendulum has swung the other way and tech shares, even the biggest and best, and getting brutalized.
The people short tech stocks in 2023 couldn’t have been more wrong even if betting against the Fed doesn’t usually work.
Now, the inverse of the Fed pivot is taking place as the U.S. 10-year Treasury bond has hit highs of 4.32% demolishing last years’ peak.
Technically, once recent highs shatter, it is common for set algorithms to motion another wave of money to continue the trend.
The trend for yields is now higher.
It’s highly plausible that this bull market in bond yields picks up and pushes to 5%.
Why is this happening?
The surprisingly resilient US economy has meant the job market is on fire. Tech companies have become leaner, but have abstained from mass firings.
Also, Americans are spending like there is no tomorrow which has kept stocks going up for most of the year and the latest earnings season reinforces this trend.
The result will mean that inflation could remain stubbornly above the Fed’s target, leaving room for long-term yields to push even higher.
There is a remarkable repricing higher in longer-term rates and many traders have been caught off guard.
The market is coming more to the view that there is going to be long-term inflation pressures despite recent progress.
Macro uncertainty is going to remain the story for the next few years, and that requires greater compensation to own long-dated bonds.
But many now expect a soft landing that would leave inflation the dominant risk.
For much of the year, the market worked its way towards a hard landing/Fed pivot scenario which factors in lower inflation. Now the opposite is happening.
Broader economic shifts are also driving speculation that the low rates — and inflation — of the post-crisis period were an anomaly. Among them: surging wage costs, deglobalization, and corporates padding their net margins.
The U.S. is drowning in its own federal debt but must issue more to service the interest on this debt meaning the purchasing power in the United States is crashing.
The net net of this is very negative for technology stocks and it’s a tough pill to swallow after benefiting from the AI bubble and Fed pivot narrative for the first 7 months of the year.
It’s difficult to see another burst of hot money pouring into tech stocks for the rest of 2023.
If we are stuck with the soft landing and the higher for longer narrative, then markets will bid up higher inflation which will suppress tech stocks.
That is what the 4.33% in the 10-year is telling us and tech stocks in the near term will be negatively correlated with this yield moving into the last 3 months of the year.
Mad Hedge Technology Letter
August 16, 2023
Fiat Lux
Featured Trade:
(CORD CUTTING IS TAKING OVER)
(NFLX), (GOOGL), (AMZN), (CMCSA), (DIS)
Cord-cutting is going into overdrive as linear TV viewership has just fallen below 50% nationally in July for the first time.
Big changes are about to happen.
This has major ramifications for not only the tech sector but for the broader economy, society, and geopolitics.
We are here to talk about the tech and the sinking of linear TV does mean relative gains for online streamers.
Broadcast and cable each hit a new low of 20% and 29.6% of total TV usage, respectively, to combine for a linear television total of 49.6%.
Has the quality of linear TV channels soured in quality or what is the deal?
It could be a functional reason, as Baby Boomers are watching linear tv because they haven’t figured out the streaming thing yet.
The ease of flipping on the tv with a remote cannot be understated.
In the future, the result is that linear tv penetration will be down to 20% level in around 20 years.
The players that will begin advancing further center stage into the national consciousness are YouTube (GOOGL), Netflix (NFLX), and Amazon Prime Video (AMZN).
They saw month-over-month viewership increases of 5.6%, 4.2%, and 5%, respectively, in July.
Don’t expect a rebound, because linear tv is bleeding viewers reflecting how bad TV channels have become.
Ad revenue across our media network coverage fell 13% on average in Q2, down from -8% in 1Q, which included the Super Bowl.
That being said, certain streamers haven’t exactly cracked the code either, as Peacock, Disney+, Hulu, ESPN+, Paramount+, Max and Discovery+ were down by about 500,000 combined.
However, on the whole, subscriber growth was 8.5% year-over-year with highlights like Netflix adding 5.9 million subscribers in the second quarter.
Comcast's Peacock (CMCSA) was able to grow its subscriber base 84% year-over-year to 24 million, up from the prior 13 million, as the streamer works to catch up to its peers amid a significant lag.
Direct-to-consumer advertising (DTC) grew 27% on average across media companies including Disney (DIS), Comcast, Warner Bros. Discovery (WBD), and Paramount (PARA). That's double from the 13% growth posted in the first quarter.
Comcast is the farthest behind, as only 14% of its estimated revenues are expected to come from DTC in 2024 with the other 85% stemming from its linear networks. Disney is the farthest along, with DTC revenue expected to surpass linear network revenue for the first time in 2024.
As linear tv is headed to the dustbin of history, streaming is also getting more expensive.
Personally, that is what I have seen as many platforms are starting to push the $100 plus per month level.
Many might remember when streaming was $20-$40 per month.
Therefore, I am not surprised to see single-digit growth for streaming as high prices crimps demand.
It’s true that mass media is fracturing into different niches and communities and that isn’t so fantastic for big media corporations as it could mean higher costs and a smaller total addressable audience.
I still do believe there is growth in streaming but not at the elevated levels like the 20% or 30% range.
Customer acquisition will also become more difficult and expensive as people really need to be convinced to move platforms or online channels.
The golden age of streaming growth is over and now each inch will be fought tooth and nail by more competition.
In the short term, I believe a dip in CMCSA should be bought, as they are still driving users to the Peacock platform. NFLX is still worth a trade on the dip as well, but I would avoid DIS until they structurally upgrade the company.
