Mad Hedge Technology Letter
April 5, 2023
Fiat Lux
Featured Trade:
(REVERTING BACK TO NORMAL STAFFING LEVELS)
(AMZN), (GOOGL), (META)
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Now, as life returns to normal, many of the perks they signed up for are being rescinded and the cost-of-living crisis is dumping fuel on the bonfire.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.
Mad Hedge Technology Letter
April 3, 2023
Fiat Lux
Featured Trade:
(BULL CASE FOR NVIDIA)
(NVDA), (AI), (GPU)
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.
“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
Mad Hedge Technology Letter
March 31, 2023
Fiat Lux
Featured Trade:
(BUY NOW PAY WHENEVER)
(AAPL), (AFRM), (MSFT)
Apple is stepping into the "buy now, pay later" industry and these lateral moves epitomize the state of the tech sector today.
For a company known for its dazzling innovation, this doesn’t do much to move the needle, but honestly, it doesn’t really need to recreate the wheel at this point either.
"Buy now, pay later" focuses on the bottom feeder consumer who can’t afford to pay full price for something and must elongate the payment cycle.
These are the people who are high-risk consumers that otherwise wouldn’t be able to buy an iPhone without the subsidy.
The good news is that Apple doesn’t need to innovate to stay on top because many other companies aren’t innovating either. The bar is quite low these days.
I would say that Microsoft is probably the one that takes the lead with its artificial intelligence investments, but the jury is also out on that as well with Italy banning its new service.
Without much innovation going on, Apple is moving onto others' turf and leveraging their whole ecosystem against weaker competition like Affirm Holdings, Inc. (AFRM).
Launching Apple Pay Later, which allows Apple Pay users to split purchases into four interest-free payments paid over six weeks without an additional fee.
Apple conducts a soft credit check, which reviews credit scores to understand one’s current credit.
If approved, the Pay Later option is shown when you use Apple Pay online or make in-app purchases on iPhones and iPads. Purchases using the new service will be authenticated using Face ID, Touch ID, or a passcode.
Aside from Affirm, other competitors include Afterpay, Klarna, and PayPal’s “Pay in 4” option. Here’s how Apple Pay Later compares.
I do believe this is a net positive for Apple even if it does increase the risk of non-performing loans.
Apple would easily be able to absorb these losses if they delivered material harm to the company simply because the balance sheet is so healthy.
Apple has been the recipient of the flight to safety trade along with Microsoft during this technology stock melt up.
The expectation of no more interest rates has been the trigger for new capital allocation into Apple stock.
I fully expect Apple’s stock to perform well during a time when liquidity has been poured into the system by the Fed.
They are doing this because the Fed is prioritizing global systemic banking risk as the number one risk to the market.
This has caused the Fed to rid themselves of quantitative tightening meaning the goalposts have suddenly widened for the tech behemoths and Apple is merely obliging to the easier conditions.
Remember, it is more about conditions in the short term than anything else which is why liquidity is so important to share prices.
Therefore, Apple rolling out a “meh” business like "buy now, pay later," which could possibly turn into a "buy now, pay never" business, is not really a big deal.
Rolling out with essentially the same phone over and over again with different colors also doesn’t matter either.
Conversely, this will do material damage to companies like Affirm, Klarna, Afterpay, and PayPal.
Buy the dip in the best and brightest in tech. Apple is obviously one of those candidates.
“Those who rule chips will rule the entire world.” – Said Founder of Softbank Masayoshi Son
Mad Hedge Technology Letter
March 29, 2023
Fiat Lux
Featured Trade:
(THE FORCE MULTIPLIER)
(MSFT), (TSLA), (CHATGPT)
Is artificial intelligence already on the ropes?
Tesla CEO Elon Musk and a group of artificial intelligence experts have called for a six-month freeze of developing systems that are more powerful versions than the just-released OpenAI GPT-4 system.
GPT-4 quickly impressed early users and has achieved remarkable gains in the short term.
With its ability to simplify coding, rapidly create a website from a simple sketch, and pass exams with high marks takes fractions of a second.
In an open letter, Musk and the experts point to potential risks for society and humanity as a whole.
This would be significantly detrimental to Microsoft’s stock if the development of AI is halted.
No doubt that part of this is Elon Musk not satisfied that his $100 million donation to this “nonprofit” has been parlayed into a Microsoft for-profit smash-and-grab takeover of the asset.
Malfunctioning AI is something that would be a horror story for everyone on the planet.
The creator of OpenAI Sam Altman has also expressed concern about the societal backlash and volume of misinformation that could become one of those nasty unintended side effects.
Some other disruptions include both economic and political disruptions, and researchers are asking developers to work with regulators to create standards for AI development and integration.
Among the names behind the letter are those of Stability AI CEO Emad Mostake and researchers at Alphabet-owned DeepMind.
The letter comes two days after Europol joined organizations that share ethical and legal concerns about the widespread use of advanced artificial intelligence such as ChatGPT and warn of possible misuse of the system in phishing attempts, disinformation, and cybercrime.
Since its launch last year, ChatGPT has taken the world by storm and has accelerated the development of large-scale language models and companies to integrate generative AI models into their products.
This logically caused a wave of negative comments in addition to positive comments, as a significant part of the scientific community believes that this technology is not yet ready for such widespread use.
Artificial intelligence can cause serious damage, and the big players are increasingly more secretive about what they're doing. That makes it harder to protect the public from any harm that may ever manifest itself.
This news is on the heels of investment bank Goldman Sachs forecasting that as many as 300 million full-time jobs around the world could be automated in some way by the newest wave of artificial intelligence.
They predicted in a recent report that 18% of work globally could be computerized, with the effects felt more deeply in advanced economies than emerging markets.
Fighting the richest man in the world has its drawbacks.
ChatGPT has already destroyed the meaning of going to university for most of the students out there.
Generative AI is the force multiplier that tech has waited for and delaying it with the potential of stopping it would hurt tech shares and put a cap on future returns.
This battle could be the one that defines humanity and is definitely the fight that will define tech market valuations 5 or 10 years from now.
If this technology gets stopped, there is no other force multiplier in the works that could replace something as powerful as this generative artificial intelligence.
