Mad Hedge Technology Letter
May 24, 2023
Fiat Lux
Featured Trade:
(START-UP EV INDUSTRY WISHES FOR A MIRACLE)
(RIDE), (TSLA)
Not all of the current tech companies have that cushy position at the top of the ivory tower.
The likes of Google, Microsoft, and Apple are just a few of a handful of privileged companies that are too big to fail and have a direct line to Congress if anything starts to go haywire.
Not every tech firm has that luxury and, to be more precise, they are usually start-ups and lesser-known, which makes sense.
In the case of the tech sector, the grass truly is greener on the other side between the haves and have-nots.
Just look at the EV sub-sector that is emblematic of this larger trend.
Lordstown Motors (RIDE) is barely keeping its head above water after the company announced a 1-for-15 reverse stock split.
Investors holding Lordstown stock should see fewer shares at a higher price in their brokerage accounts.
Lordstown has about 243 million shares outstanding. Following the reverse split, the number will be roughly 16 million.
Investors typically like conventional stock splits that reduce the price of shares while increasing the number of shares outstanding. Stock splits can make shares more affordable to retail investors and can signal that management is optimistic about the future. No one would split a stock they expect to go down.
Reverse splits typically happen after a period of hardship. Coming into Tuesday trading, Lordstown stock is down 90% over the past 12 months.
The company has struggled to produce trucks and needs more cash. Lordstown has produced 56 pickup trucks since the start of production.
RIDE is also running out of money fast and the company will need more than $200 million for the remainder of 2023 if the company is to ramp up production.
Lordstown has received a delisting notice from the exchange. It has until mid-October to remedy the situation. The threat of delisting was also a concern to partner Foxconn.
Foxconn owns the factory that produces RIDE’s EVs.
RIDE may be forced to cease operations and file for bankruptcy after manufacturing giant Foxconn told the electric-vehicle company that it’s prepared to pull out of a production partnership.
The deal with Foxconn Technology Group could unravel after the Taiwanese company threatened to withhold funding.
This quickly souring situation could rapidly destabilize the other start-ups in the EV market.
Just about eight months ago, Foxconn agreed to invest as much as $170 million in Lordstown and take two board seats. The deal gave the EV maker much-needed capital while offering Foxconn, the Taiwanese manufacturer best known as the maker of Apple Inc.’s iPhone, a firmer foothold in automotive production.
In January, Lordstown asked Foxconn to suspend production because the cost of making the Endurance battery-powered pickup exceeded the targeted sale price of $65,000 — and said it would need another partner beyond Foxconn's share costs.
RIDE finds itself in quite a pickle. Unlike many of the big tech behemoths, they can’t just make a call to the higher-ups to sort it out and they don’t have the balance sheet nor the clout to get things their way.
Essentially, fighting upstream is not an advantageous proposition and when Tesla started heavily discounting new Teslas, what consumer would opt for an untested brand for the same price?
If readers want to get into EV stocks, buy Tesla on the dip or nothing at all.
“I know that you must be passionate, unreasonable, and a little bit crazy to follow your own ideas and do things differently.” – Said CEO and Founder of Salesforce Marc Benioff
Mad Hedge Technology Letter
May 22, 2023
Fiat Lux
Featured Trade:
(BUY EMERGING CHIP COMPANIES ON BIG DIPS)
(SWKS), (CRUS), (QRVO)
So what about these small chip companies that attach themselves to Apple’s future?
The ones like Qorvo (QRVO), Skyworks Solutions (SWKS), and Cirrus Logic (CRUS).
Many refuse to invest in them because they are too reliant on Apple.
I would argue the exact opposite.
It’s exactly because they have strong relationships with Apple that readers need to invest in these stocks.
The issue is that they are highly volatile and missing the optimal entry point can mean the difference between a profit and a loss.
Apple can’t develop everything internally.
It’s just too much to do.
I don’t believe the tech giant could gradually replace most of its third-party components with first-party ones.
Furthermore, I do not see Apple abruptly swapping suppliers or canceling an existing supplier's orders with its competitors to secure lower prices.
As a result, most of Apple's suppliers can negotiate favorable terms.
For 2023, iPhone shipments appear stable as the market continues to recover from weak demand and ongoing macroeconomic challenges, but I believe this is just a short-term blip.
Cirrus Logic mainly sells audio converters and chips, but it also develops other mixed-signal processing chips for wireless headsets, wearables, augmented reality/virtual reality (AR/VR) headsets, notebook computers, and mobile devices. Apple installs Cirrus' audio chips and IC controllers in its iPhones, iPads, and Macs.
Skyworks produces a wide range of wireless chips for the mobile, automotive, home automation, wireless infrastructure, and industrial markets. Apple installs Skyworks' wireless chips in its iPhones, iPads, Macs, Apple Watches, and other devices.
Lumentum is a diversified supplier of optical chips for service providers, 3D-sensing chips which are used in mobile devices, cars, 3D printers, and other industrial machines, as well as commercial lasers for manufacturing various products. Apple uses Lumentum's 3D-sensing chips and lasers to power its Face ID features.
These companies bask in the glory of being connected to Apple when many other chip companies wish they were in the same position.
Cirrus relied on Apple for 79% of its revenue in 2022 and the gains from this contract are precisely why it is great to hold this company's stock.
Skyworks generated 58% of its revenue from Apple in fiscal 2022, while Lumentum generated 29% of its revenue from Apple in 2022.
The semiconductor industry has been prone to cycles. Periods of soaring demand are followed by periods of drought, causing some wild swings in many chip stocks. But some news reports predict that because of the demand for chips throughout the economy, these boom-bust cycles might be over.
Semiconductors are now going into various devices between 5G, cloud datacenters, phones, PCs, laptops, cars are using more and more semiconductors that the demand is becoming so diversified and that supply is becoming so expensive to bring on. It's going to be much more of a steadier business going forward, more like a steady growth business rather than a cyclical business with booms and busts.
Don’t believe the naysayers who urge investors to stay out of chip stocks because of overreliance. That is like saying Warren Buffet is too reliant on Apple which is false.
Wait for a big dip of 15% or 20% to invest in these small chip stocks.
“The AI technology will keep you out of harm's way. That is why we believe in an AI car that drives for you.” – Said CEO of Nvidia Jensen Huang
Mad Hedge Technology Letter
May 19, 2023
Fiat Lux
Featured Trade:
(DON’T COUNT OUT THE TECH SECTOR)
(GOOGL), (MSFT), (AMZN), ($COMPQ)
It’s no surprise that the technology industry led other sectors to the number of job cuts in 2022.
It found more than 150,000 tech workers received pink slips in the year, a 900% increase from 2021.
In 2023, tech layoffs continue throughout various firms, and let’s go through some of the prominent ones.
Microsoft (MSFT) announced cuts to 10,000 workers, representing approximately 5% of the company's workforce.
Amazon (AMZN) announced 18,000 layoffs across many of the company's business areas, including Amazon Web Services, its healthcare businesses, the robotics unit, and many others.
Google announced 12,000 job cuts in January.
Tech hiring took off during the pandemic as the societal shift toward digital services meant technology firms needed to iterate and boost efficiency.
Many companies became too bold in hiring and in some cases, didn’t have enough work for the new workers.
Growth cratered as the pandemic eased, interest rates rose, and inflation cut into personal spending and increased many business expenses. Tech companies also need capital to invest in artificial intelligence (AI) or other innovations, and reducing staffing is one way to generate cash.
Amid these private company layoffs are reports of current and recently laid off employees dumping private shares, as they need capital in the face of falling valuations.
Another driver for private share selling is the low number of initial public offerings (IPOs), which reached the lowest point in 20 years in 2022.
The lack of potential windfalls from an IPO pushed more employees to sell some of their private shares, which then drops their companies' valuations. Lower valuations impact a company's ability to raise additional capital and strain the available venture capital funds.
The broad-based decimation of high-paying Silicon Valley jobs might be the trigger that plants the seeds for the new era of technology.
One of many unintended consequences of the “great resignation” of 2022 that bled into 2023 is that it refuels the pool of talent across the tech sector.
Many of these workers will find employment with other tech firms for a lot higher pay, but others will take the opportunity to launch their own startups.
A survey of 1,000 laid-off tech workers found 63% of the respondents started their own company after their layoff. And tech workers reported they made more money after starting a company.
Obviously, the new talent won’t be able to produce innovative products right away because of the lag involved.
However, put that many great minds in one room, something genius is bound to sprout up.
And I’m not talking about something marginal like buy now, pay later which is just another variation of a payment service.
I do believe we are on the cusp of another technological renaissance that could boost tech revenues 10-fold.
The pandemic reinforced the trend that many of the Silicon Valley headliners were burnt out. Many took the chance to move to Texas or the beaches in Florida.
I do believe that the next innovative wave is on the way and this time it won’t come from California because so much of the talent left.
In the short-term, these big job cuts from established tech royalty will contribute to higher stock prices but it will send the fired on a mission to reimagine themselves in the form of generation-changing innovation and productivity.
Generative A.I. is just one example of that.
Until then, expect big tech shares to grind up. I hear how bearish everyone is, but point me to someone that is actually selling.
Take for instance the supposed activist genius Carl Icahn, who recently reported of gargantuan multi-billion dollar losses over the past few years because he bet on a tech crash.
As long as there are investors, expect tech shares ($COMPQ) to march higher.
Mad Hedge Technology Letter
May 17, 2023
Fiat Lux
Featured Trade:
(THE BEST TECH STOCK FOR SPECTACULAR GROWTH)
(NVDA)
Nvidia (NVDA) is expensive, but it’s expensive for a reason.
Readers need to participate in this epic move going on in Nvidia’s stock.
Anything resembling a dip will be bought because the demand for Nvidia’s products vastly outweighs the supply.
There are signs that Nvidia could deliver better-than-expected results thanks to the importance of the company's artificial intelligence (AI) chips, which carry a massive price tag.
Investors have been buying up the stock by the truckload on the hype around AI applications and how they are going to create terrific demand for Nvidia's chips.
They should deliver us a great forecast moving forward as AI is the hottest trend in town.
At the same time, investors shouldn't forget that a third of Nvidia's revenue comes from PC-centric businesses -- gaming and professional visualization. With PC sales declining at an alarming pace and a recovery still some time away, there is a chance of Nvidia's results and guidance not being up to analysts' expectations.
Nvidia gets nearly 60% of its revenue from selling chips deployed in data centers. The sizable influence of the data center business on Nvidia's top line could help it overcome the PC market's weakness, especially considering that companies involved in the development of AI applications made a beeline for its chips.
Nvidia's H100 graphics processing unit (GPU), which is used for training large language models and powers generative AI applications such as chatbots, sells for as much as $40,000. This robust pricing power is the reason AI is expected to substantially boost Nvidia's growth in the coming years, potentially adding billions of dollars to the company's revenue.
The good part is that investors may witness the impact of AI-related demand on Nvidia's business very soon. DigiTimes reports that the semiconductor bellwether reportedly placed more orders for data center chips at foundry partner Taiwan Semiconductor Manufacturing.
A closer look at how AI-related spending is booming gives us more reasons to believe that demand for Nvidia's expensive AI chips could be high.
Meanwhile, the AI chip market alone is expected to grow to a whopping $227 billion a year by 2032 from just $17 billion last year, according to Precedence Research. Nvidia is the leading player in this market, with an estimated share of 95% of the market for GPUs used for machine learning applications. It’s almost guaranteed to see AI turning out to be a long-term catalyst for the stock.
The company's solid pricing power in AI chips and robust demand for those chips could help Nvidia deliver such impressive growth.
If there is some macro event that jolts the market, that would be a perfect entry point into Nvidia shares.
The violent upswings in Nvidia make it difficult to find entry points; therefore, cherish those down days because they are so seldom.
The strong momentum in AI manifests itself directly in this one chip stock Nvidia.
Don’t miss the roller coaster ride to profits.
