Tech Letter Archives - Mad Hedge Fund Trader

Another Implosion Begging To Happen

There’s a reason why Softbank lost $32 billion in technology investments last quarter, and it stems mostly from terrible investment decisions.

Most of Masayoshi Son’s Softbank targets are at the small time level where a few hundred million of revenue per year is something they are interested in.

The thinking behind this is to hit those 10 baggers, and to his credit, he did pocket some of those like Alibaba and Uber in the days of yore.

A broken clock is right twice a day.

Do Son’s actions signal a turning of the corner from his hefty losses?

I would strongly suggest he is doubling down on his losing strategy based on what he’s green-lighted in South America.

Take for instance the recent news of his investment in Rappi, a food delivery app that has grown into one of Latin America’s most-valuable startups.

They just announced they will offer loans to restaurants in Mexico and Colombia.

The plan is to offer loans to restaurants that have been selling via the app for at least three months.

The foray into commercial lending shows how Rappi has adapted its business model to add more revenue streams in the eight years since it started as a grocery delivery business.

Facing stiff competition from the likes of Naspers Ltd’s iFood and UberEats, Rappi has increasingly embraced financial technology as it expands in the region.

In its latest push, Rappi is targeting $60 million in loans across the two countries.

Rappi didn’t disclose the terms of the loans it will offer. The credits will be repaid through the restaurants’ sales via the app.

The company could expand the loan business to some of the other nine countries where it has operations as soon as this year.

This strategy screams desperation and low-quality decision-making.

Restaurant revenue isn’t stable enough to base a loan on a highly changeable industry.

There are no fixed contracts as to how many tacos per month are sold and the hilarious concept of offering loans based on 3-months of operating the app is irresponsible.

The company wouldn’t comment on what type of terms they would offer because they most likely will be highly predatory because this maneuver is highly risky.

Don’t expect Japanese bond levels of 0% and think of something more like 18% similar to Russian mortgage rates.

My understanding here is that management is trying to pump up revenue in the short term just to shine up the business metrics for the IPO.

After the IPO, the management will be able to cash out, and then management can throw the business to the wolves for all they care.

The great news here is that Softbank funding this type of weak tech business model is good for the entire tech ecosystem because tech needs that sucker that juices up the purses.

If other parts of tech didn’t get any investment, then there wouldn’t be the top 7 big tech stocks that boss the S&P.

Much of the reason tech shares have reached Himalayan highs is because a stream of short-sellers must cover their shorts with every explosion to the upside.

Son subsidizing the bottom feeders of global tech apps is in fact positive for Silicon Valley as a whole.

Tech needs guys like him to get stuck with the bill so people like us cash out at the top.

It’s a dog-eat-dog world.

Unfortunately for Rappi, the restaurant loan business is ripe to implode betting on a financially unproven population to power this app to the public market.

Rappi’s management better hope they can unload vested shares before the whole game is up.

rappi

Quote of the Day - July 28, 2023

Tech Letter

“Once a new technology rolls over you, if you're not part of the steamroller, you're part of the road.” – Said Writer Stewart Brand

July 26, 2023

Tech Letter

Mad Hedge Technology Letter
July 26, 2023
Fiat Lux

Featured Trade:

(GOOD SIGNS FOR TECH)
(GOOGL), (APPL), (CHATGPT)

Good Signs for Tech

Tech Letter

It’s incredible that a 7% increase year-over-year in revenue means an extra $5 billion in just one quarter.

That’s what happens when a company is a behemoth, and the company I am talking about is Alphabet, or better known as Google (GOOGL).

Some of these tech companies are so large that growth rates don’t mean much unless they are negative.

Whether it is 3% or 6%, the nominal amount of revenue increase is gargantuan.

The law of large numbers is certainly valid in these situations so don’t expect multi-trillion dollar tech firms to grow 30% or 40% like they used to.

As I correctly predicted, Google and similar companies are doing just fine this earnings season, and I believe they could have gotten away with even 3% growth.

The 7% growth translated into a 7% bump in GOOGL shares this morning showing that investors care more about the additional $5 billion in revenue rather than the low growth rate.

For the fourth straight quarter, Google reported growth in the single digits as it reckons with a pullback in digital ad spending that reflects concerns about the economy.

Across the industry, investors will be looking for updates on cost-cutting measures implemented earlier in the year and the impact of artificial intelligence investments on profitability.

Revenue in Google’s cloud unit, which includes infrastructure and productivity apps, increased 28%.

Google’s ad revenue rose 3.3% to $58.14 billion, up from $56.29 billion last year. YouTube ads came in above analyst expectations at $7.67 billion marginally up from $7.34 billion the year before.

Google’s “search and other” revenue rose to $42.63 billion, up slightly from last year.

The only “growth” part of the business has been the cloud and even that is starting to taper off.

Up until recently, they were expanding that business around 35% year-over-year and now they are down to 28%. In a few years, they will be down to the teens.

Google is slowing down but that doesn’t mean they aren’t profitable.

The cash cow of the ad business keeps churning out the revenue and Microsoft hasn’t turned out to be the threat to Google search that investors first thought when ChatGPT came out.

Investors reacting to 7% growth by pouring money into the stock are a good omen for the rest of big tech.

It means that these other companies, like Apple, only need to marginally outperform to get rocket fuel in their stock and I will take that for all its worth.

Any worst-case scenario will not come to fruition.

Any tech analyst who is bearish this year can be described in one way – unemployed.

The fake narrative of an “earnings recession” and higher interest rates hasn’t even put a dent in the strength of tech.

It’s like throwing pebbles at the Titanic.

Even scarier for the bears, this was supposed to finally be the entry point when a dip could present itself so the bears could get into tech to try and salvage a terrible year.

Well, now, they need to chase another 7% because Google’s ship has sailed and I have conviction that Apple will jump over the low bar for its shares to have a similar effect.

As for GOOGL, I am a buyer on the next mini-dip.

Quote of the Day - July 26, 2023

Tech Letter

“By giving people the power to share, we're making the world more transparent.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg

July 24, 2023

Tech Letter

Mad Hedge Technology Letter
July 24, 2023
Fiat Lux

Featured Trade:

(REBALANCING BEFORE THE NEXT MOVE)
(NFLX), (QQQ)

Rebalancing Before the Next Move

Tech Letter

In quite an unprecedented maneuver; the people who run the Nasdaq have chosen to water down the biggest tech components because a few companies are exerting too much power over the index.

In other words, the big fish have gotten so big that the index is adjusting their formula.

This speaks volumes about how great the top 7 tech stocks have performed in 2023.

They have taken off like a runaway train and haven’t looked back.

If this turns out to be a less-than-blockbuster earnings season and the market offers a pullback, it may be the last opportunity of the year to get into high quality tech stocks at a discount.

Selloffs from blue chip tech firms like Netflix (NFLX) signal that a short-term technical cooldown could be in the cards for tech stocks.

NFLX came back to earth, but I want to reiterate that it is more than healthy price action for this stock which started out the year at $300 per share.

The stock exploded to $480 per share and the post-earnings cooldown has found the stock in the $420 per share range.

There are a handful of blue chip tech stocks that I would regard this sort of price action as a mind-blowing opportunity.

Another reason for a short-term cooldown is the aforementioned reformulation of the Nasdaq index.

The tech-based index - Nasdaq 100 gets tracked by a slew of funds.

They include the Invesco QQQ Trust (QQQ), the world’s fifth-largest exchange-traded fund (ETF), according to Morningstar.

Nasdaq announced that the Nasdaq 100 index will undergo a "special rebalance" that will come into effect today.

The index is typically rebalanced each quarter, but outside of that, it can employ a special rebalance to address overconcentration in the index by redistributing the weights.

While the organizers have been mum on the technical about the rebalancing, the index's methodology says that it can be adjusted if companies with weightings that exceed 4.5% of the index together make up more than 48% of the index.

This technical maneuver underscores the attractiveness of these tech businesses and compelling investment opportunities relative to other areas.

The result has been increased investor attention and enthusiasm for tech stocks now — at the expense of other sectors, he says.

Investors of funds tracking the Nasdaq 100 Index woke up today with a different portfolio.

Most investors in U.S. stocks will be at least indirectly affected by the rebalance.

That's because "billions of dollars of stock" will be traded as funds tracking the Nasdaq 100 buy and sell in response to the rebalancing.

During this short-term rebalancing phase, I can easily visualize a convenient time for investors to reload their ammunition. Load up the bullets before we are off to the races again.

Heading into the last 4 months of the year, the US consumer is strong as steel and I would beg any black swan to show their ugly face and try to topple this kryptonite tech market.

An orderly dip in tech stocks this earnings season would represent nothing more than a massive victory and if it’s sideways then watch up to the upside.

I would even say there is a higher risk that dip buyers get a little impatient and pull the trigger a little early just to make sure they get some skin in the game for the next elevator up.

That’s how hot tech has been.

July 21, 2023

Tech Letter

Mad Hedge Technology Letter
July 21, 2023
Fiat Lux

Featured Trade:

(WHAT TO DO ABOUT NETFLIX SHARES?)
(NFLX), (APPL), (MSFT)

What To Do About Netflix Shares?

Tech Letter

It’s quite the irony that Netflix’s earnings report came smack dab in the middle of Hollywood’s meltdown as the contract standoff between writers and studios threaten to implode a Southern Californian industry that has been on life support for quite some time.

One’s famine is another’s fortune.

NFLX had a mixed earnings report so it’s not like it has been gangbusters for streaming platforms either.

They used to be a perennial tech growth company and now they are down to just 3% revenue growth which won’t cut it.

NFLX has been saved by the macro picture as traders scurried into tech stocks from early 2023 while investors bet on a Fed pivot and a reversion to the mean after a horrible 2022.

The business itself isn’t doing anything special like it used to, and they are also way too woke, but when they don’t have to be spectacular, it’s easier for the stock to elevate.

The brightest number of all was the addition of 5.9 million subs.

Netflix, which now boasts 238 million global subscribers, will keep benefiting from this password-sharing clampdown.

Some expected it to backfire, but viewers have flashed their wallets and signed up for the service.

The streamer boasted that “sign-ups are already exceeding cancellations” and that it is implementing the password policy across the world now.

Profitability is starting to become an issue for NFLX as they missed on revenue.

Streaming has become a worse business lately because the world is too saturated with content.

Another positive is that NFLX upped its free cash flow from $1.5 billion to approximately $5 billion for the year.

This is what mature tech companies are supposed to do.

Eventually, they will increase deliverables back to the shareholder in the form of buybacks and dividends like Apple (AAPL) and Microsoft (MSFT).

The company cited “lower cash content spend” amid the writers’ and actors’ strikes that have brought content production to an absolute standstill.

No more $9.99 ad-free plan.

Netflix axed its cheapest ad-free option in the US and the UK. The plan, offered at $9.99, is no longer available to new customers.

The decision to cut the skeleton plan appears aimed at pushing subscribers in that price tier toward the ad-supported model, which is priced at $6.99. The company has previously said the ad-supported model performed better on the “economics” than the $9.99 ad-free model.

NFLX shares have had a great year so far with shares up 44%.

The 44% upswing is also after an 8% drop yesterday on this earnings report.

Clearly, traders used this opportunity to take profits.

NFLX’s performance is part of my wider thesis that earnings won’t be anything special, but good enough to deliver a better entry point into these stocks.

Buy the dip strategy will perpetuate for most brand-name tech companies.

It’s not exactly simple to get into a stock that has gone up 44% in 7 months because most of the time the stock needs to be chased.

Chasing tech stocks is an underlying theme of 2023 with fear of missing out (FOMO) engulfing most fund manager’s plans of attack.

So yes, I do believe many investors will use these tepid earnings reports to take profits and these dips are incredibly healthy for the tech sector.

Thus, traders should reload because tech stocks like NFLX will be on discount before the next leg higher.

Quote of the Day - July 21, 2023

Tech Letter

“Life is too short for long-term grudges.” – Said Owner of Twitter Elon Musk