Tech Letter Archives

Separating Wheat From the Chaff

Part of the excesses that became ubiquitous with Silicon Valley is starting to get reigned back and that’s a good sign for the tech sector ($COMPQ).

It also means the boom years for the tech sector are over.

I am not talking about the full set of perks tech employees receive at their fingertips in order to entice them to spend most of their time at the office.

I am more referring to ideas that were hyped up as grand but never made a material dent in the tech ecosystem.

Not all tech ideas hit it big and some are complete busts.

Ideas like the Uber of battery-powered scooters are now getting the thumbs down and capital is getting pulled by from these marginal business concepts.

From the get-go, these companies presided over poor unit economics and they could only sustain operations in a world of cheap capital that doesn’t exist anymore.

Rates ($TNX) are high and could shoot higher.

Legally, cities have a say in whether they want their beautiful promenades and piazzas littered with ugly scooters.

In France, Parisians voted to ban battery-powered scooters, confirming that many regarded them as absolutely infuriating.

Banned from the French capital by popular vote, self-service electric scooters are enjoying their last day in Paris on Thursday, marking the end of five tumultuous years of controversial use, much to the dismay of their users.

From 1 September, Paris will become the first European capital to completely ban these self-service two-wheelers.

Many Parisians have become fed up with seeing them as not only an eye sore but also a safety hazard.

Since August, the 15,000 scooters have gradually been taken off the streets.

Of the 5,000 scooters going out to pasture produced by the German company Tier, a third will remain in the Paris region, in 80 communes around Marne-la-Vallée or Saint-Germain-en-Laye. The rest will go mainly to Germany.

In Paris, some 400,000 people chose a scooter to get around in 2022, according to operators.

The operators are banking on their customers switching to bicycles, which are already offered by everyone, which should enable them to avoid redundancies, at least for the time being.

There most likely will never be another boom of battery-powered scooter platforms dressed up as technology companies.

These types of low-quality tech firms are feeling the heat and examples are plentiful such as Peloton (PTON) which has also hit rock bottom.

The next big idea down the pipeline is generative artificial intelligence, but even that has been dialed back somewhat after stocks were priced in for parabolic growth rates.

As the expectation for better technology ideas results in the need to improve business models, there seems to be no room for bottom-of-the-barrel tech like the Uber of battery-powered scooters.

It seemed like a bad idea from the start so it’s surprising it took this long for them to get exposed.

Moving forward, expect tried-and-tested brand names in tech to outperform these mediocre businesses. It’s never been more difficult to grow tech companies with these high interest rates and the death of bad tech ideas will go into overdrive as interest rates continue to surge.

This will help our trading because knowing the pulse of the tech sector is half the battle.

September 6, 2023 - Quote of the Day

Tech Letter

Quote of the Day

“It is easier to find men who will volunteer to die, than to find those who are willing to endure pain with patience.” – Said Roman Leader Julius Caesar

September 1, 2023

Tech Letter

Mad Hedge Technology Letter
September 1, 2023
Fiat Lux

Featured Trade:

(BEST BUY PUTS IN A SHIFT FOR TECH)
(BBY), ($COMPQ)

Best Buy Puts in a Shift for Tech

Tech Letter

When interest rates go from zero to 5%, fundamentals tell investors that tech stocks are the most likely to drop.

This was an ironclad rule of the market for centuries until it wasn’t.

In 2023, tech stocks ($COMPQ) continue to climb a wall of worry with this fantasy deriving from the Fed is about to “pivot” narrative.

Traders still believe that the Fed is going to turn around and slam the breaks on this quantitative tightening cycle to breathe life into the economy.

Tech stocks and bond yields going up in tandem is highly rare and the Mad Hedge Technology Letter was able to catch the wave of excitement in the first half of the year.

The Fed pivot is based on people with money believing the Fed will just bail out the whole stock market once things go sour.

Hence, the good news is the bad news paradigm we keenly observe in tech stock price action.

Another data point dropped in the tech market with retailer Best Buy delivered its earnings report.

They issued another unspectacular report with a lowered outlook.

For many tech companies, the lockdown sales will never go back to 2021.

I feel like a broken record here because tech earnings are doing just enough to hop over the low bar. Best Buy (BBY) is just another one of emblematic of tech performance today.

Comparable sales, a key metric that includes sales online and at stores open at least 14 months, decreased 6.2% compared with the year-ago period as customers bought fewer appliances, home theaters, and mobile phones. Gaming systems, on the other hand, were sales drivers in the quarter, the company said.

Best Buy is seeing a reversion to pre-lockdown sales levels analogous to Home Depot and Lowe’s, Best Buy profited from lockdowns, fueled by big purchases that people don’t frequently repeat.

Over the past year, consumer electronics retailers have borne the brunt of disastrous Bidenflation and consumers’ shift back to spending on experiences.

Management said the company is on track with its brick-and-mortar plans for the fiscal year. The company plans to close 20 to 30 stores, remodel eight stores to turn them into more experiential shops, and expand outlet stores from 19 to about 25.

The past 2 weeks have reverted back to the tech bulls as they pull us back from the latest weakness in July.

It’s almost getting comical at this point that we are inching back to all-time highs when so many tech companies aren’t doing anything special in terms of not only growth but negative revenue trajectory.

This isn’t the stuff of legends and in a normal world, these aren’t the type of earning reports that fuels bullish price action.

However, since the Fed is perceived as bail-out trigger-happy, investors are juicing up the stock market based on this hope that the Fed will reroute rates back to 0% when the economy needs to be saved. As long as this counter-intuitive narrative persists and tech companies don’t deliver ugly earnings, the pain trade is ostensibly higher. Welcome to the world where Best Buy does -6% sales, iPhone sales sink, yet we go higher and higher.

Quote of the Day - September 1, 2023

Tech Letter

“If you must break the law, do it to seize power: in all other cases observe it.” – Said Roman Leader Gaius Julius Caesar

August 30, 2023

Tech Letter

Mad Hedge Technology Letter
August 30, 2023
Fiat Lux

Featured Trade:

(BULLISH SIGNS FOR 2024)
(AMZN), (GDP), ($COMPQ)

Bullish Signs for 2024

Tech Letter

In a fireside chat with some of Amazon’s (AMZN) key lieutenants, CEO of Amazon Andy Jassy ran out of patience.

It’s the end of the line for many.

Critical members of Amazon are still holding onto the rose-colored fantasies of the lockdown era, where workers made their living wearing pajamas all day and took snoozes whenever they wanted.

Not anymore was the message from Jassy.

Enough is enough.

Employees usually don’t have the 30,000-foot view that executives like Jassy have even if they pretend to sometimes.

The paradigm has shifted to the point where management wields all the bargaining power as tech companies trim the fat off their business model.

This spat epitomizes where we are right now in the tech cycle and the wider US economy as a whole.

Tech ($COMPQ) is in a holding pattern where the biggest and best are utilizing a strong balance sheet, but they aren’t doing something so amazing where we chase the hot money with more hot money.

Ironically enough, the US GDP annualized rate just got revised down from 2.4% to 2.1% as spiking interest rates and high inflation eat into growth.

Although companies like Amazon are still doing ok, it’s not to the point where key members of staff can lounge in their sleeping gowns and work one hour per day.

There is resistance from higher management demanding Amazon workers come back to the office.

The deeper underlying message here is that the US economy is still growing buoyantly enough and that signals strength going into 2024 for tech stocks.

There is a better than 50% chance that the US economy won’t enter a recession next calendar year and the tech sector will benefit as it grinds higher.

An important trend I have noticed is that tech shares can absolutely march higher in lockstep with accelerating bond yields.

Many believed this was counterintuitive and I admit, traditional orthodoxy has taught us to respect this inverse correlation.

However, this time-honored belief has come unstuck this year and fighting the Fed has been the tech trade of the year.

What’s next for Amazon?

This is a stark change from February this year when Jassy said he had "no plan" to force workers back.

But now, Jassy reportedly reiterated a rhetoric that has emerged in more recent months: don't comply with return to office, face the consequences.

In July, Amazon employees would be forced into a "voluntary resignation" if they refused to return unless they were one of the rare few who had obtained permission from the company's leadership—internally named the S-team.

Former Twitter CEO Elon Musk was the first tech executives who started this fad by firing 80% of Twitter’s staff when he acquired the company.

That philosophy has really gutted the bottom of the chain in tech companies and shares of tech firms will benefit from this through 2024.

Instead of paying for expensive workers to sit at home, tech management are summoning up shareholder returns in the form of dividends and share buybacks to extend the tech bull market to the end of 2024.

I am still bullish tech stocks moving forward and algos are still programmed to bet on a Fed pivot. Tech goes up until the Fed pivots.

Quote of the Day - August 30, 2023

Tech Letter

"The rich invest in time, the poor invest in money." – Warren Buffett

August 28, 2023

Tech Letter

Mad Hedge Technology Letter
August 28, 2023
Fiat Lux

Featured Trade:

(ALL SYSTEMS GO FOR INSTACART)
(IPO)

All Systems Go For Instacart

Tech Letter

I wasn’t surprised to see grocery tech platform Instacart announce that they are going public soon.

That seems very much the right strategy for them at this point of time in their growth cycle.

I highly doubt that this will kick start the IPO market because high-interest rates are prohibitive to young tech companies growing.

Funnily enough, Instacart is nothing new so it won’t mesmerize the incremental investor with a flashy business model they’ve never seen.

They were founded in 2012 and experienced a pandemic bump in sales as citizens were arbitrarily locked in their apartments.

Naturally, the dynamics behind the living situations meant that online grocers rode a lucky streak to profits and Instacart had some gaudy growth numbers for the a few years.

Fast forward to today, and people aren’t in lockdown again even though with U.S. elections coming up next year…things could get interesting.

Conditions today dictate that Instacart can kiss the massive growth numbers goodbye, and goodbye forever as management basically translated that to potential shareholders during the IPO roadshow.

The San Francisco-based company also revealed it turned a profit in the first half of the year which should be the high water market forever for this digital grocer.

Behind them are dozens of startups whose IPO aspirations have been stymied by the slowest year at this point for new listings since the depths of the financial crisis in 2009.

What kind of bad news am I talking about?

The company cut its internal valuation three times last year to about $13 billion by last October.

A half-dozen acquisitions have contributed to Instacart’s growth. Its largest was the $350 million purchase in 2021 of Caper AI, which offers retailers “smart” shopping carts that eliminate the need for customers to individually scan groceries or to line up at checkout.

The consumer-facing Marketplace is powered by more than 600,000 independent contractors — known as shoppers — who pick up items for consumers at more than 1,400 retailers including Kroger, Publix, and Walmart, across more than 80,000 stores in North America.

But growth in this core part of Instacart’s business has slowed to a snail's pace. Orders remained relatively consistent from 132.3 million for the six months ended June 30 2022 to 132.9 million for the same period in 2023. Gross transaction value increased 4% to $14.9 billion for the first half of this year, according to the filing.

Net income grew as a percent of gross transaction value from a loss of 0.3% in 2021 to a profit of 1.5% in 2022.

In conclusion, this reminds me of a liquidity grab for the Silicon Valley venture capitalists who own this company.

The company’s stock price will most likely grind lower as expenses explode.

The VCs rather liquidate this holding rather than tap the expensive debt markets.

Don’t forget that Instacart sub-contracts people to fetch the groceries and hard to see keeping a lid on those types of expenses.

Going public could result in around $2 billion in liquid cash infusion for the venture capitalists which is a godsend in today’s world.

They could just park the capital in 6% yielding fixed income instead of holding a sinking valuation in a company that likely will never do better than it did in 2021.

Retail traders should wait for any spike in this stock, and then sell this name to moon because I don’t see any sustainable growth on the horizon as their gross transaction volume has already topped out at a paltry 4%.