Tech Letter Archives

Block Gets Blocked

Hindenburg research has done some great work unearthing fraudulent companies and I believe there isn’t a great chance that their research about fintech Square (SQ) gets debunked.

Square shares cratered by 15% yesterday which piles on the pressure as we are right smack dab in the middle of a global banking crisis.

Europe is now on the ropes.

Hindenburg’s main argument is that Block allowed criminal activity to operate with sparse controls and “highly” inflates Cash App’s transacting user base, a key metric of performance.

It’s common for tech companies to skirt the rules.

Just look at companies like Uber and Facebook.

It’s largely believed that not playing fair is the way to get ahead in Silicon Valley and Block is no different.

It seems that it’s only a problem if one is caught.

The aggressive managing style of tech can backfire big time.

A 2-year investigation has shown major gaps in the business model and the company essentially facilitated dodgy behavior on the Cash App via “unbanked” customers.

The report alleges those unbanked customers were involved in criminal or illicit activity.

The firm’s extensive report includes screenshots of internal systems and employee messages. It also highlighted alleged financial misreporting.

Up to 35% of Cash App’s revenue is derived from interchange fees, Hindenburg alleged. That’s around $892 million in revenue that the short seller said should be capped by law.

But Block, formerly known as Square, avoids that regulatory cap imposed on large financial institutions by routing the revenue through a small bank, Hindenburg alleged.

The report notes that “this appeared to be an effort to grow Cash App’s user base by strategically disregarding Anti Money Laundering (AML) rules.”

Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.

Block has misled investors on key metrics and embraced predatory offerings and compliance worst practices in order to fuel growth and profit from the facilitation of fraud against consumers and the government.

Although I understand that some tech firms operate on the margins, there is a limit to some of these shenanigans.

Fake accounts are something right out of the page of Wells Fargo playbook and it does nothing in the long term to grow trust between investors, shareholders, or the end user.

Time and time again, there has been a long laundry list of tech management that has failed to meet a higher standard, and gone are the times when we glamorized tech management like they are some type of savior.

The truth is that they are mediocre people at best and for every great executive there are many underwhelming ones as well.

I would stay away from Block’s stock until they can prove they are clean and I would buy the dip in other names that breed more trust in what they are doing.

block

March 22, 2023

Tech Letter

Mad Hedge Technology Letter
March 22, 2023
Fiat Lux

Featured Trade:

(IF BITCOIN THEN GROWTH TECH TOO)
(COIN), (MSTR), (BTC), (DOCU), (TDOC)

If Bitcoin Then Growth Tech Too

Tech Letter

We are closing in on $27,000 and that’s quite the performance for the digital gold Bitcoin (BTC).

It just was last year when Bitcoin was down in the dumps.

I am not here flogging crypto but tech investors should take heed of what is happening in the riskier parts of the asset markets.

Yes, tech growth is quite volatile, but bitcoin even more so.

The price of Bitcoin is already up 72% this year and that will beat most tech growth stocks including the Teledocs and DocuSigns of the world.

This last strong surge is correlated with global banking contagion with even very liberal-based CNBC stating that Switzerland has become a financial “banana republic.”

Bitcoin is often advertised as the alternative asset class to fiat banking precisely because fiat banking has a history of going to zero.

The blowups at Silicon Valley Bank, First Republic, and Credit Suisse offer credible evidence that the strength of the fiat money banking system is trending down rather than up.

Hence the monster rally and this will just make banking more expensive for the unbanked and give the big banks more power and more “too big to fail” status.

Narratives are more powerful in crypto in generating real price movements than any other asset class and no matter what your thoughts on how powerful that narrative is, people actually believe this.

Cryptocurrency initially attracted interest from a niche group of investors following bank failures and government rescues.

While its popularity has grown among speculative investors in the roughly decade-and-a-half since, it has retained a status among some as being an asset more removed from the banking system than stocks and government bonds.

If the Fed decides to slow down the pace of interest rate hikes this is highly bullish for the crypto and tech growth sector.

Crypto investors have been particularly sensitive to regulatory and interest-rate developments.

They tend to pull money from long-bitcoin funds while adding to short-bitcoin products after the Federal Reserve announces interest-rate increases and regulators take action against crypto companies.

Since regulators started to crack down on some of the biggest crypto players, investors have pulled about $424 million from global exchange-traded products.

It’s been a terrible year to short bitcoin as that trade was last year’s rich uncle.

An important part of investing is to avoid searching for that boat that has left the dock.

Investors betting against crypto exchange, Coinbase (COIN), and bitcoin-buying software intelligence firm, MicroStrategy (MSTR), were down 76% and 62%, respectively, this year.

Some investors remain cautiously optimistic about the trajectory of bitcoin’s price, especially as it has surged against the backdrop of a banking crisis.

Although there could be a vicious pullback from the epic surge so far this year, Bitcoin will likely do well along with tech growth stocks in a paused or lower rate interest environment.

Throw in the bank contagion as a supercharger and 2023 is shaping up to be a great year to buy bitcoin and growth tech on the dips.

March 20, 2023

Tech Letter

Mad Hedge Technology Letter
March 20, 2023
Fiat Lux

Featured Trade:

(AIRBNB POISED FOR A GREAT FOLLOW-UP YEAR)
(ABNB)

Airbnb Poised For A Great Follow-Up Year

Tech Letter

One tech firm that should get the benefit of the doubt from investors and traders moving forward is travel-sharing firm Airbnb (ABNB).

I’m not only recommending them because I use their product, but I do believe in their business model moving into the summer months of 2023.

Many travel agencies were waiting for a major pullback in travel for 2023 after revenge travel 2022 meant that consumers aggressively spent in 2022 after waiting in draconian lockdowns for the past 2 years.

Well, the cliff drop in travel revenue following 2022 will not come to pass as consumers are materially aware of higher inflation, but still not willing to sacrifice travel.

One of the epiphanies that many people had during the government lockdowns was that it is essential to get a change of scenery once in a while to refresh.

It’s one of the few new non-negotiable items on people’s lists now.

What are people doing to combat inflation?

Looking at more budget-friendly options and downgrading on accommodation, transport, entertainment, and even going to more affordable destinations.

Instead of Monaco, people are going to Marseille, instead of London, people are heading to Birmingham, and so on.

Its 2022 fourth-quarter revenue of $1.9 billion and earnings per share (EPS) of $0.48 were up 24% and 500%, respectively, on a year-over-year basis.

The full-year numbers were fantastic, too. 2022 was the first time that Airbnb was profitable for an entire fiscal year.

The strong financial performance was bolstered by some key trends highlighted by the management team. Nights and experiences booked increased 20% year over year in Q4. Cross-border, urban, and long-term stays also showed outstanding growth.

Airbnb's platform continues to add headcount as it now has 16% more active listings (or 900,000 more) than a year ago.

A near-term catalyst for Airbnb is the ongoing recovery of the Asia-Pacific region, which saw nights and experiences booked increase by 40% versus bookings in Q4 2021.

Chinese tourists are heading to Thailand and Malaysia in droves, packing the jumbo jets with rice crackers on the way there.

With its heavy reliance on cross-border travel, Asia-Pacific was decimated because of the health crisis. The easing of travel restrictions and the reopening of China will help provide a boost.

Airbnb's rapid rise to prominence has resulted in its name being used as a verb, which all but solidifies its place in consumers' minds. This is a powerful position to be in, especially in an economy that favors major internet-based brands. This situation bodes well for Airbnb's long-term relevance.

This year’s projections appear rosy with forecasts of year-over-year revenue and EPS growth of 14.3% and 22%, respectively, in 2023.

Although 2022 was quite the travel season, the follow-up year is shaping up to not be too shabby.

Definitely don’t expect a flop like a Spanish soccer player.

Shares in the first few months of the year got ahead itself and now after a deep pullback from February highs, I do believe this stock is a great "buy the dip" for the rest of 2023.

Rinse and repeat for the rest of 2023.

travel

Quote of the Day - March 20, 2023

Tech Letter

“You only have to do a very few things right in your life so long as you don't do too many things wrong.” – Said American Investor Warren Buffett

March 17, 2023

Tech Letter

Mad Hedge Technology Letter
March 17, 2023
Fiat Lux

Featured Trade:

(HIGHLY BULLISH FOR TECH STOCKS)
(AAPL), (GOOGL), (ARKK)

Highly Bullish for Tech Stocks

Tech Letter

Up to $2 trillion in liquidity into the banking system should do the job in the financial sector.

This is highly bullish tech shares and the growth-based tech stocks will experience the best windfalls from this psychological and fiscal reset of the American banking system.

It’s true tech stocks did need a little help as 2022 was really a struggle for them, but 2023 has been brighter with the “buy the dip” mentality back with vengeance.

After the gangbuster January, we’ve been waiting for some direction as to what will happen to tech stocks and now we have gotten the signals.

In short, tech stocks will go higher.

Now, I truly believe that the buy-the-dip mentality will become firmly entrenched and investors should dig deep to execute bullish positions as I expect tech stocks to roar ahead.

Many know about the FDIC, SPIC insured deposits of up to $250,000, but the Fed has rolled out the red carpet for the banking system and lent money to the banks that even don’t need it.

Banks borrowed up to $350 billion in cheap loans from the Fed.

Nearly $143 billion went to holding companies for two major banks that failed over the past week, Silicon Valley Bank and Signature Bank, triggering widespread alarm in financial markets.

Ironically, public tech stocks benefited the most from the government helping the financial industry and it was a crypto-biased bank that bled itself to edge of catastrophe.

Although this creates a moral hazard, I am not really in the business to tell someone what is right or what is wrong in terms of systemic risk.

But knowing that the Fed has the backs of the banks and stock market no matter what is highly bullish for tech stocks in the short-term.

This opens up liquidity like a reservoir opening up its water channels.

Expect a lot more capital sloshing around the financial system that will naturally fall into tech stocks from the boring behemoths to the cash-burning peons.

The tide will lift most boats in this situation.

The bank term financing program should be able to inject enough reserves into the banking system to reduce the reserve deficit and reverse the tightening that took place last year.

I anticipate that the new program will be attractive to a wide range of institutions, apart from those currently facing liquidity problems.

The longer this program sustains itself the better for tech stocks.

Say goodbye to quantitative tightening.

The era of balance sheet reduction is now dead as the Fed is too worried to rock the boat.

Going from QT to printing money which is what this discount window effectively was has stunned the market to the upside.

Moving forward, expect rate hike expectations to dissipate and lower bond yields which will contribute to another tech market rally and in turn a lower dollar.

Most of everything will have a high chance to deliver decent tech gains from ARK Innovation ETF (ARKK) to the Apple’s (AAPL) and Google’s (GOOGL) of the world.

When the Fed wants to widen the goalposts this wide, you don’t need Ronaldo to score a goal.

Buy the dip in tech until we truly see a systemic credit risk or if inflation comes back shooting past the first pandemic peak to form a double top.