Mad Hedge Technology Letter
April 19, 2023
Fiat Lux
Featured Trade:
(NETFLIX WORTH A TRADE)
(NFLX), (YOUTUBE)
Netflix (NFLX) missed expected subscribership by 24% and that used to never happen with the old NFLX.
NFLX was that one company among a handful like Microsoft, Google, and Apple that always beat whatever gaudy estimate that was thrown at them.
Times are different.
Tech has essentially been told to eat some humble pie.
Gone are the days of yore when a big tech firm could hire tech workers and give them a fake job just to keep “talent” away from other big tech firms.
Those were the golden years of 0% interest rate policies from the Fed and now the Fed has stopped subsidizing NFLX subscriber numbers.
The truth is that the company and its content aren’t that great especially nothing better than what is on Google’s YouTube which is free with ads.
No surprise that NFLX has rolled out an ad-tier version of its service which is another underwhelming strategy for a firm that used to be the torchbearer of digital content.
Netflix, which broadened its crackdown to include countries like Canada, New Zealand, Portugal, and Spain, in addition to the test countries of Chile, Costa Rica, and Peru, revealed it's planning "a broad rollout" of the policy this quarter that will include the US.
The ad plan, dubbed "Basic with Ads," comes at a cost of $6.99 a month in the US and serves as a complement to Netflix's existing ad-free tiers — the Standard plan ($15.49 a month) and the Basic plan ($9.99 a month.)
The company, which revealed the ad tier now has about 95% of the same content as ad-free plans due to new licensing deals.
It’s funny to see NFLX hype up its own password crackdown strategy.
When they had the mentality of abundance, they didn’t really care if whole villages were using the same password.
Now they suddenly care because growth is harder and harder to come by because the product has heaps more competition than ever before and its content doesn’t stick out as it used to.
Even Walmart and Target absorb write-downs for all the theft it experiences annually and theft still happens at a high rate.
Netflix going after password sharing as if it is some type of growth strategy underscores that its business model is more like in the 8th inning of a 9-inning game.
Where are the great ideas?
Management needs to answer to that instead of talking about their core businesses like it’s the fringes.
The stock dropped from $700 to $170 in late 2021 until mid-2022 and alarm bells were ringing inside of NFLX’s offices.
The rebound back to $320 was just a reversion to the mean because of an oversold position.
The next question is if NFLX really has a lot of juice left and I feel we are at another inflection point when the business model is weakening.
However, with interest rate cuts forecasted for later in 2023, I do believe the path to $400 per share exists along as we avoid global financial contagion or an invasion of Taiwan.
The stock is still too beaten down and I can easily visualize traders pumping up the stock to $420 only for investors to realize that a password-sharing ban is not a growth strategy and the quality of content not better than free YouTube isn’t improving by 30% every year.
This would be a good buy-the-dip candidate in the very short term.
“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
April 17, 2023
Fiat Lux
Featured Trade:
(SIDEWAYS CORRECTION IN THE SHORT TERM)
(AAPL), (NVDA), (TSLA), (AMD)
Not all is lost.
We’ve held up quite well in April largely experiencing a sideways correction.
That - after a great January and March.
I quietly predicted that April would be an underwhelming month for tech shares and it appears that I am spot on with that call.
It’s true with poor earnings looming, the path of easiest resistance is to the downside, but like we saw with last week’s sideways correction, bad earnings are already priced into the Nasdaq.
Margin compression is widely consensus at this point.
But the real thing going in the markets is that banks have delivered pretty strong earnings debunking the narrative that a recession is coming sooner than first thought.
That means it will take a longer time to reach that rate-cut cycle that all investors are clamoring for.
Then at today’s open we had Alphabet (GOOGL) in the red by 3.5% and growth metaverse stock Roblox (RBLX) down over 12%.
Even if one might surmise that blue chip tech stocks can muscle through the short-term headwinds, the growth stocks are likely to get whacked as investors avoid stocks that have bad balance sheets in times of stress and are most reliant on a rate-easing pivot.
Then if one might believe that the retail trader might bail out the pros, then think again.
Retail traders are usually the ones to pile in at the end delivering that one last magical surge at the end of the bull market.
Well, they won’t be rescuing the Nasdaq anytime soon as retail traders are currently underwater.
The average retail investor portfolio is down by about 27% since November 2021.
Since then, stocks have staged four double-digit bear market rallies. Tech stocks in particular rallied more than 20% — twice.
Retail investors will remain hesitant to raise their risk exposure as they got burned multiple times last year.
Timing is everything with traders and retail traders usually time it wrong without the help of John Thomas.
Wall Street had a turbulent 2022, clocking in its worst year since the 2008 financial crisis while ending a three-year streak of gains. Inflation, rate hikes, and authoritarian lockdowns in China plagued all financial assets last year.
As earnings season gets underway the S&P 500 is projected to post about a 7% decline in first-quarter earnings from a year ago.
Tech forecasts are also predicting lower revenue and growth.
Still, the outperformance coalesces around the usual suspects such as high-profile stocks like Apple (APPL), and Tesla (TSLA), which account for about 30% of the average retail investor’s portfolio while Nvidia (NVDA), and Advanced Micro Devices, Inc. (AMD) account for 10% of their portfolio.
From these stock picks, NVDA has had a gangbuster rally, up 84% this year given the excitement around ChatGPT and AI engulfing the market.
The Nasdaq pricing in a generative artificial intelligence revolution does not have legs and some of this hot money is bound to escape, setting the stage for some reversion to the mean.
In whole, I’m quite impressed with a sideways correction substituting a selloff and that type of price action is only positive moving forward.
Ultimately, conditions in tech are setting up for yet another possible short-squeeze in the following months.
“I love museums but I don't want to live in one.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
April 14, 2023
Fiat Lux
Featured Trade:
(GLOBAL TECH GRINDS TO A HALT)
(BABA), (CCP), (SOFTBANK)
Hard to believe that Softbank is throwing in the towel on its stake in Alibaba (BABA), but that is what is happening.
If you can remember, Alibaba was that can’t miss e-commerce company that ran into the wall that is the Chinese Communist Party (CCP).
They were then regulated into oblivion.
Even through arbitrary lockdowns, Softbank didn’t sell its stake so I find it peculiar that they would finally decide to divest out of China because maybe they know something that I don’t.
The golden years of Chinese ecommerce development is far in the rear view mirror.
However, there was a reason Softbank held onto its BABA stake for all this time, and BABA being a monopoly is a great reason.
This relationship epitomized the freewheeling globalization which many of us grew to love in the early 2000s and the decades after that.
That type of globalization has been replaced by something a lot more insidious that looks something more similar to balkanization.
It could be a simple as getting money out of China.
Many investors have recently said withdrawing money abroad has become almost impossible these days as the CCP has really tightened up capital outflow.
This is not only bad news for Chinese tech companies, but bad for all international tech deals in general at a time when venture capital money in tech has dried up.
SoftBank has sold more than $7 billion in Alibaba shares this year through prepaid forward contracts, after selling $29 billion last year.
The contracts give SoftBank the option to buy the shares back from Alibaba, but the group has settled previous deals by handing over the stock.
The sales will reduce the Japanese conglomerate’s ownership of Alibaba to less than 4% which is a far cry from the 14.6% stake the company said it was slated to hold as of end-September.
Softbank once owned about a third of the company spanning from an early $20 million investment in one of venture capital’s most famous bets.
Last month, the online commerce leader said it plans to split its $240 billion empire into six units that will individually raise funds and explore initial public offerings.
SoftBank, once one of Silicon Valley’s largest investors, has been crippled by billions of dollars of losses.
SoftBank’s billionaire founder Masayoshi Son has said he wants to focus on a planned listing of its chip design unit Arm Ltd. later this year and make the debut “the biggest” in the history of the semiconductor industry.
The re-listing of Arm, which had traded on the London exchange prior to SoftBank’s $32 billion acquisition in 2016, is expected to be a big windfall for the world’s biggest technology investor.
However, the Arm deal could be one of the last in the door for tech as many economies have become nationalistic and inward looking.
India is supposed to be the next China, and I believe it will be difficult for Silicon Valley money to get ahead there if defensive barriers are erected in the support of local capital.
The golden years of Silicon Valley are in the record book, and the next chapter appears to be focused on generative artificial intelligence super charging profits.
Tech shares will see a big decoupling of companies that jump on this hot new technology and the ones who are left behind.
Like always in Silicon Valley, iterate or die.
“All of technology, really, is about maximizing free options.” – Said Risk Analyst Writer Nassim Nicholas Taleb
Mad Hedge Technology Letter
April 12, 2023
Fiat Lux
Featured Trade:
(TECH EARNINGS BECOME BIGGEST RISK TO TECH)
(COMPQ), (APPL), (ABNB)
