Tech Letter Archives

Tech Earnings Become Biggest Risk to Tech

In prior iterations of the CPI report, a set of data reflecting the current inflation trends in the US, a positive report would have sent the tech index, known as the Nasdaq (COMPQ), soaring.

Today, we got none of that.

Volatility has taken a nap for the time being – even to the downside.

Why is that?

This time around the tech market is already looking around the corner to earnings that are assumed to be terrible.

Most of the profit margin gains were accrued last year and in the first quarter of this year. The rest of the year, tech companies won’t be able to raise the price of services.

Last year, Apple pushed that extra level pricing of iPhone, and Airbnb charged that extra level for that vacation rental. Now – no more.

Tech consumers are at the extreme upper limit of what they can afford and in fact, have been going deeper into debt to pay for software, hardware, and streaming.

The credit card debt levels have been soaring, showing that consumers are paying more for each item but getting less for every tech product.

What does this mean?

Management will offer bleak tech forecasts.

Silicon Valley might use this underwhelming period as a great platform to throw out the kitchen sink with the bath water.

That’s what today’s price action is telling us.

The easy gains in tech share appreciation were secured in January and March.

Conditions for the same melt up have soured quickly, and not bouncing hard off a great inflation report is an ominous sign in the short term for tech shares.

Now is a time when the easiest path of movement is south in shares as many investors could be taking profits heading into the earnings season.

There are no catalysts for a short-term bounce.

One bright note is that the US dollar has continued its awful performance this year which is highly positive for global growth which tech companies more than participate in.

Hollowing out the tech consumers isn’t the greatest strategy, but until now, it has worked. However, at what point will they stop taking on debt to fund their latest purchase? We could be coming to an inflection point, and that is not good for tech stocks.

As it stands, U.S. inflation is at its lowest level in nearly two years, but underlying price pressures will be sticky for a while.

Inflation rose 5% last month from a year earlier, down from February’s 6% increase and the smallest gain since May 2021, the Labor Department said Wednesday.

The labor market cooled some in March, with hiring gains moderating and wage growth easing. Weekly jobless claims, a proxy for layoffs, are up from historic lows. Also, job openings have dropped—a signal that demand for workers is softening.

Even if the job market has cooled, it hasn’t cooled enough for inflation to crash.

Yes, many tech jobs have been cut, and I see that as a much needed solution to the excesses of Silicon Valley, but today is more of a story of the number one risk to the market shifting from inflation to bad individual performance.

Get ready for many tech companies to tell us why they won’t be doing great later this year.

Remember the market always looks forward, and at the end of last month I predicted a slow April; that forecast has been nothing short of perfect so far.

Quote of the Day - April 12, 2023

Tech Letter

“My goal wasn't to make a ton of money. It was to build good computers.” – Said Co-Founder of Apple Steve Wozniak

April 10, 2023

Tech Letter

Mad Hedge Technology Letter
April 10, 2023
Fiat Lux

Featured Trade:

(UNIGNORABLE SIGNALS)
(AAPL), (HPQ), (NASDAQ)

Unforgivable Signals

Tech Letter

This could be the canary in the coal mine for tech that faces a precarious rest of the year.

Personal computers are facing a drop in sales in 2023, and after banging the drum for the last year about an upcoming recession, it might actually be on the way, finally.

When exactly is hard to predict, but it is looking more likely around the third to fourth quarter, unless there are some black and gray swans that explode from nowhere.

Much of the weakness has been pre-empted by mass firings in tech and so the signs have been there.

The hollowing out of Silicon Valley has been due for quite some time now, so just don’t expect your freshly graduated children to ever get a full-time gig at a big name tech company anymore.

That will be reserved for just a few, just like getting a top management job at an NFL football team. These jobs are prized by all, but only begotten by a few.

The new iteration of tech companies will be comprised of an army full of algorithms and human sub-contractors. You might as well extrapolate that theme to the wider economy as well. This is basically the Japanification of the economy.

Apple’s personal computer shipment volume declined by 40.5% in the first quarter which I believe to many is quite surprising, considering the popularity and quality of the product.

Shipments by all PC makers combined slumped 29% to 56.9 million units — and fell below the levels of early 2019 — as the demand surge driven by the work-from-home movement has dissipated.

Among the market leaders, Lenovo Group and Dell Technologies registered drops of more than 30%, while HP was down 24.2%. No major brand was spared from the slowdown, with Asustek Computer Inc. rounding out the top 5 with a 30.3% fall.

Samsung Electronics Co., which provides memory for portable devices as well as desktop and laptop PCs, last week said it’s cutting memory production after reporting its slimmest profit since the 2009 financial crisis.

Apple is gearing up to launch its next slate of laptops and desktops later this year, including a new iMac.

It's also gradually diversifying the geography of its manufacturing base deciding to bet bigger on India and Vietnam.

Looking toward 2024, I foresee a potential rebound for PC makers, driven by a combination of aging hardware that will need to be replaced, and an improving global economy.

Tech shares bounced hard in March as expectations of interest rate hikes were triggered by a slew of bank failures in Europe and America.

That temporary bump in shares delivered a nice 8% return in March and the Mad Hedge Tech Portfolio performed well.

I can say that I am surprised that the Nasdaq only returned 8%, as it should have been more like 12-15% based on the massive re-pricing of rates to now 3 quarter point cuts by the end of 2023.

The market is now betting big that the Fed will pivot and I believe they won’t agree to such fast cuts, which is why, with an April short-term view, I expect bearish price action in tech stocks.

tech

Quote of the Day - April 10, 2023

Tech Letter

“The sidelines are not where you want to live your life.” – Said CEO of Netflix Reed Hastings

April 5, 2023

Tech Letter

Mad Hedge Technology Letter
April 5, 2023
Fiat Lux

Featured Trade:

(REVERTING BACK TO NORMAL STAFFING LEVELS)
(AMZN), (GOOGL), (META)

Reverting Back to Normal Staffing Levels

Tech Letter

Tech workers are slowly losing their leverage in the job market that has largely been unforgiving to the average tech worker.

Part of that is due to inching closer to the much-awaited recession that everyone has been waiting for so investors can finally take advantage of 0% interest rates again.

The number breakdown shows that around 330,000 tech workers have been fired by 1,600 tech firms.

In the first month of 2023, 167,000 of those cuts occurred representing an acceleration of tech firings lately.

Some of the noteworthy cuts have been 27,000 jobs at Amazon, 12,000 at Google, and 10,000 at Meta.

Sure, the top 10% are untouchable and can work from a nuclear submarine if desired, but the average joe schmoe is living on borrowed time in the tech sector.

News of Google removing free snacks and artisanal brewed coffee from the offices in Mountain View, California struck fear into the hearts of the ultra-pampered tech worker that has never known a staff reduction in their career.

Now many tech workers who gave the middle finger to their middle manager before the lockdowns are now romanticizing how good things were before 2020.

Many tech workers now regret moving on to van life or moving to the beach of Cancun to sell donkey rides to digital nomads.

They want their old job back and specifically, they want their old pay level back.

Empirical evidence suggests that the so-called Great Resignation is now morphing into the Great Regret.

Thousands of workers began quitting their jobs in early 2021 because they didn’t “feel” empowered or appreciated by their boss. Feelings were hurt. Tears were shed.

These workers who felt jilted jumped at the chance to increase their salary during the arbitrary lockdowns because of a tight labor market.

Now, as life returns to normal, many of the perks they signed up for are being rescinded and the cost-of-living crisis is dumping fuel on the bonfire.

A third of office workers said the cost-of-living crisis had changed how they feel about their current job.

Just under a quarter said they were tired of hybrid working, mostly because they have minimal access to the higher ups they need to connect with for specific promotions.

Lack of access equates to lower positions and the obvious knock on of lower pay, lower benefits, and lower team morale.

Many are also moonlighting secretly while working full time jobs which have resulted in a big reduction in efficiency.

The once game changing pay rises now pale in comparison to the rising cost of living.

More than four in five workers admitted to keeping in touch with their former managers, with almost a third stating that this was for the primary purpose of keeping the door open for future job opportunities

Painful rounds of deep lay-offs in the tech sector and warnings of a looming recession appear to have smashed the lingering leverage workers still thought they had to crowbar a nice wage increase.

As much as 330,000 tech layoffs jump out on paper, tech firms need to fire over 1 million employees.

The fat hasn’t been trimmed to the bone yet.

The recession will approach in 2023 and this will be the optimal chance to set the record straight for employers to grab back negotiating leverage from the renegade employees while shrinking down to a leaner operation.

Tech is in great position to weather the recession and will be the first industry to over perform after the recession ends.

April 3, 2023

Tech Letter

Mad Hedge Technology Letter
April 3, 2023
Fiat Lux

Featured Trade:

(BULL CASE FOR NVIDIA)
(NVDA), (AI), (GPU)

Bull Case for Nvidia

Tech Letter

Investors looking at taking their investing futures by the scruff of the neck need to look no further than pouring capital into chip stock and a company that will be integral in building generative artificial intelligence technology Nvidia (NVDA).

The stock has muscled itself higher in 2023 doing a double in about 4 months.

Shares were languishing around $140 at the turn of the year, but have gone ballistic on its way to almost $280.

What was the trigger to such a short-term bull run?

Investors have bought into the hype around generative artificial intelligence (AI) applications such as chatbots, which could trigger the need for thousands of graphics processing units (GPUs) - a market that's dominated by the chipmaker.

But the stock's extraordinary rally has made it quite expensive from a valuation perspective.

Sadly, PC shipment forecast is grim as well for 2023. PC shipments this year expect to come in at 260.8 million units, which would be a 10.7% decline over last year.

Nvidia sells graphics cards that go into personal computers and workstations.

The PC market's woeful performance in 2022 - when shipments declined a startling16.5% from 2021 - led to a collapse in Nvidia's gaming and professional visualization segments. Gaming revenue was down 27% in fiscal 2023 to $9 billion as sales of graphics processing units (GPUs) used by gamers dried up. Professional visualization revenue also declined 27% to $1.54 billion.

Nvidia's channel partners were left with excess graphics card inventory on account of weak demand.

Revenue is expected to increase by almost 10% to $29.6 billion, but a gloomy forecast indicates that the restocking of graphics card inventory may not happen soon.

The headwinds in a sizable chunk of Nvidia's businesses, when combined with its rich valuation, strengthen the case against investing in the company.

New catalysts such as generative AI applications could give the data center business a turbocharge effect.

For instance, market research firm TrendForce estimates that ChatGPT may eventually require more than 30,000 GPUs from Nvidia to cater to the huge demand. Given that each Nvidia data center GPU can cost between $10,000 and $15,000, the company could generate substantial revenue from supplying its graphics cards for powering chatbots such as ChatGPT.

Also, as many tech giants are now in a race to develop chatbots, Nvidia could turn out to be the biggest winner related to this industry.

That's because Nvidia leads the data center GPU market, with a share of over 90%. That puts it in pole position to take advantage of the chatbot market, which is expected to register annual growth of 30% over the next five years.

The bottom line is that the AI opportunity could send Nvidia stock higher in the long-term.

They continue to be one of the leading lights of the tech industry intersecting across a number of leading and meaningful sub-sectors.

However, I would wait for a small dip to dollar cost average into shares because the price action has gone a little too fast and too furious in the short-term.

Quote of the Day - April 3, 2023

Tech Letter

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” – Said Harvard economist John Kenneth Galbraith