Tech Letter Archives

Should You Buy Carvana?

The biggest takeaway I took from the used car platform Carvana’s (CVNA) latest earnings report is: who is dumb enough to buy an old car and get fleeced for $6k?

Apparently, $6k is what CVNA earns per unit in gross terms now.

But hey, if paying a broker $6k is what it takes to buy a used car then so be it.

The problem I have with the $6k gross per unit is how much further can that number go?

My bet is not much.

How much higher broker fees can Americans absorb?

My bet is not much more.

Just doing simple math means that for a $20,000 used car purchase, adding on the Carvana service would mean it costs $26,000 to the end buyer.

Sure, for some people like me and you it’s not a big deal, but I don’t believe this can scale well or efficiently as a tech platform.

That being said, it’s quite a corporate achievement for such gaudy margins and one that meant CVNA’s share exploded to the upside rising 44% on the news.

The stock is down 18% today highlighting the volatile nature of the stock.

Revenue fell 25% to $2.6 billion, but total gross profit rose 14% to $341 million.

The update helped reassure investors that the stock would be able to avoid bankruptcy after plunging as much as 99% from its peak in 2021 on slowing growth and mounting losses, especially as interest rates rise and used car prices fell for much of last year.

Carvana didn’t give guidance for net income but said adjusted earnings before interest, taxes, depreciation and amortization would be $50 million in the current quarter — way above the consensus analyst estimate of a $3.6 million loss — and gross profit per unit would be a record of more than $6,000.

Carvana’s $8.7 billion debt load as of March 31 has been a big problem for the company, which recently scrapped a debt exchange offer that would have reduced its burden because creditors held out for a better deal.

The interest on Carvana’s debt cost the company more than $2,000 per car in the first quarter, which is one reason it reported a loss of $286 million despite gross profit per vehicle sold of more than $4,000.

From peak to trough, Carvana lost 99% of its value as used car prices fell, the company made an ill-timed acquisition of the ADESA auction business, and creditors began preparing for a bankruptcy.

Although in the short term the stock is having a nice bounce, that doesn’t mean the stock’s appreciation is sustainable in the long run.

I do believe the bounce is just the proverbial dead cat bounce and ok for a quick trade and quick profit.

In a world where big tech is really crushing it, small tech needs that extra little bit of juice or special sauce to navigate the iron clad balance sheets of Silicon Valley.

Selling used cars is hard to digitize and I believe this platform will continue to burn cash on the road to a never ending feedback of explaining why it can’t be profitable.

Sell this one on the bounce.

June 7, 2023

Tech Letter

Mad Hedge Technology Letter
June 7, 2023
Fiat Lux

Featured Trade:

(BRINGING UP THE TECH REAR)
(COIN)

Bringing Up The Tech Rear

Tech Letter

I’ll never forget when Mad Money’s Jim Cramer boasted that he “liked Coinbase (COIN) to $475” and to keep “doubling down” as the stock went lower.

Funny how things you say come back to haunt you.

COIN is the American crypto exchange that just got charged with operating as an unregistered broker, operating an unregistered exchange, and operating as an unregistered clearing agency.

Not only that, the SEC specifically scolded them for selling digital tokens with no value such as offering the sale of unregistered securities (SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO).

COIN was at the right place at the right time when crypto blew up to $65,000 and now it is certainly the inverse of that situation.

COIN is now languishing at $51 per share after a 12% selloff and a far cry from the $475 price that Jim Cramer lusted over and gushed to viewers about how much value there was at almost 500 per pop.

The crackdown is certainly not over and SEC commissioner Gary Genseler appears to be on a mission to make digital tokens and the industry supporting it a living hell.

Gensler warned banks to steer clear of crypto because of potential risks to the financial system, making it harder for US citizens to invest.

Paul Grewal, the company’s top lawyer, has previously said that those tokens aren’t securities.

A federal regulator also alleged that Coinbase acted as an exchange, broker-dealer, and clearinghouse all without registering with the SEC for any of those roles.

A virtual currency may fall under the SEC’s remit if investors buy it to fund a company or project with the intention of profiting from those efforts. That determination is based on a 1946 US Supreme Court decision defining investment contracts.

The big takeaway here is the extent to which the SEC thinks crypto is just an utter fraud.

The future appears dim if the SEC keeps bashing this nascent industry.

Digital tokens offer no intrinsic value and deliver no cash flow to shareholders simply because there is nothing to cash flow from.

How can an investor cash flow from a piece of stored code that doesn’t offer actionable software like a photo viewer or music editor?

It’s software that doesn’t do anything but then packages itself as a store of value because we should trust it for no apparent reason--and it’s not even backed by any government.

The SEC goes into the specific coins which they think aren’t securities; and the list is long, which is highly detrimental to COIN’s business.

The tech sector has been roaring in 2023 and the biggest and strongest companies have seen their valuations shoot to the sky.

The knock-on effect is that the bar has been set extremely low for tech companies, but COIN has failed to jump over the low bar.

Tech firms can’t do IPOs easily at 5% interest rates hence even smaller companies like Roblox (RBLX) and Uber (UBER) performing admirably this year in the Nasdaq.

I am still highly bullish on technology stocks, but COIN and Robinhood or anyone else getting investigated by the SEC or Federal government is a hard pass for me.

coin

Quote of the Day - June 7, 2023

Tech Letter

“You don't have to start from scratch to do something interesting.” – Said Co-Founder and CEO of Twitter Jack Dorsey

June 5, 2023

Tech Letter

Mad Hedge Technology Letter
June 5, 2023
Fiat Lux

Featured Trade:

(THE BEST CYBERSECURITY STOCK IN 2023)
(AI), (PANW)

The Best Cybersecurity Stock in 2023

Tech Letter

The best Silicon Valley cyber security company right now is Palo Alto Networks (PANW).

It’s not really debatable at this point.

It’s not surprising to find out that it is also the largest artificial intelligence (AI)-based cybersecurity company.

AI is all the rage now with grand promises of huge profits in the future.

To get into the nitty-gritty of it – PANW operates across three core segments.

These divisions are cloud security, network security, and security operations and the task in hand right now is working to integrate AI-powered capabilities across them all.

When it comes to network security, PANW is the gold standard in multiple categories. Its VM firewall, designed to add an extra layer of protection to private and public clouds, is ranked No. 1 in the industry for market share.

Since the company is one of the largest providers of cybersecurity in the world, it collects a treasure trove of data, which means it's well-positioned to train AI models to help protect its customers.

It analyzes 750 million new data points per day, leading its AI and machine learning models to detect 1.5 million unique, never-before-seen attacks daily. The end result: Palo Alto's AI blocks 8.6 billion attacks on behalf of customers every 24 hours.

Some of the largest organizations in the world trust Palo Alto as their primary cybersecurity provider. In the last quarter, they took bookings from customers spending a minimum of $10 million annually soaring by 136% year over year.

Bookings from customers spending at least $1 million and at least $5 million grew by 29% and 62%, respectively. Overall, these numbers highlight the surge in demand for advanced cybersecurity tools even during this difficult economic period.

Market research firm IDC estimates that global cybersecurity spending could increase 12% in 2023 to $219 billion as compared to last year. IDC also expects that global cybersecurity spending could cross $300 billion by 2026.

So, Palo Alto is growing faster than its competition and once they harness the power of AI, the stock could take off like a scalded chimp.

According to market research firm BlueWeave Consulting, the application of AI in cybersecurity is expected to grow at an annual pace of 21% through 2029 and generate $79 billion in annual revenue. That would be 3.5 times the size of the AI-enabled cybersecurity market last year.

Tech really can’t do much wrong these days.

It’s a terrible time for unproven companies and the share price proves that of stocks such as Coinbase Global (COIN) or Robinhood (HOOD).

However, established firms like PANW are lapping it up

The stock hit a rough patch and sunk to $135 per share and is now accelerating to $230 per share.

For a tech stock that aggressively raised profitability estimates and has turned the corner from going from loss maker, every 3-5% dip is a great buying opportunity for this stock.

The tech sector is up 9% in the past 30 days and that type of overperformance is due to accelerating business models like PANW.

Quote of the Day - June 5, 2023

Tech Letter

“I discovered Buddha but did not set out to unearth a world religion.” – Said CEO of Microsoft Satya Nadella

June 2, 2023

Tech Letter

Mad Hedge Technology Letter
June 2, 2023
Fiat Lux

Featured Trade:

(SEPARATE THE WHEAT FROM THE CHAFF)
(AI), (NVDA)

Separate the Wheat from the Chaff

Tech Letter

Readers should be careful about being the last ones getting into this generative AI craze.

I’m not saying it is over, but the last ones in can sometimes be the first one’s out.

The data shows that retail traders are pouring into AI stocks in droves without the inside knowledge they really need to succeed.

The truth is that not every AI stock is worth investing in and as time goes by, we will see this play out.

The market is always right.

Some AI stocks will just be a flash in the pan, riding on the coattails of the real AI stocks in a fake-it-to-make-it fashion.

Others could get bought out and shut down which was an infamous Facebook strategy called “catch and kill.”

C3.ai could be one of those stocks that I am talking about.

The stock spiked on the pandemonium almost quadrupling in price from around $12 per share to over $45 in the first half of the year, but the stock has come back to reality trading around $31 per share at the time of this writing.

The recent underperformance is due a good quarterly earnings result, but they offered underwhelming guidance to investors. This could become a recurrent problem for these smaller AI stocks that must promise heaven and earth to entice the incremental investor.

C3.ai said it expects total revenue of up to $72.5 million in its upcoming quarter, compared to analyst estimates of $71.3 million.

The management is on record for saying that while it will be a bumpy road, they believe C3 is currently participating in an $800 billion AI transformational opportunity over the next decade.

C3.ai has struggled to sign new major customers and recently shifted to consumption pricing — paying for software based on use rather than in a flat subscription — to court companies that are hesitant to commit to big contracts. The company said it inked 43 agreements in the quarter, including 19 pilots, and touted that the average sales cycle shortens to 3.7 months from 5 months in the same period a year ago.

Still, many are searching for a scalp from C3.ai.

The short side is stacked with traders looking to profit off a big dive in the price of shares.

Short interest amounted to about 29% of shares available to the public as of May 24.

Activist investors have accused the company of chasing trends and employing poor accounting practices.

Former employees said C3.ai has routinely overstated the readiness of its technology in the past, and this issue has not been put to bed yet.

It could be that C3.ai isn’t ready for showtime.

Maybe they are a few years away, but overstating their capabilities to get in on the action could be the best way for management to get rich quickly.

As sometimes in corporate America, it is better to cash out and strike while the iron is hot while they can before they are exposed as an inferior version of what they claim to be.

Quote of the Day - June 2, 2023

Tech Letter

“Almost everything is like a machine.” – Said Hedge fund Manager Ray Dalio