Mad Hedge Technology Letter
March 15, 2023
Fiat Lux
Featured Trade:
(THE UNKNOWN IN THE DIGITAL AD SPACE)
(NFLX), (WBD), (DIS), (CMCSA), (ROKU)
The uncertain digital advertising environment has been a thorn in the side of legacy media giants for quite some time.
Companies from Comcast (CMCSA) to Warner Bros. Discovery (WBD) are feeling the pressure as profitability struggles pile up.
Unfavorable macroeconomic headwinds coupled with decreased ad budgets amid a decline in linear TV and digital search trends put the ad market through the wringer in 2022.
Recent ad market softness comes as media giants like Disney (DIS) and Netflix (NFLX) have embraced ad-supported streaming alternatives as the race for eyeballs escalate.
Disney's direct-to-consumer division lost an eye-popping $4 billion-plus in 2022.
Warner Bros Discovery is now targeting $4 billion in cost savings over the next two years.
Advertising revenue within NBCUniversal's media division increased by 4% in Q4 because of a boost from the incremental revenue from the FIFA World Cup.
Looking ahead, the lack of brand name events in 2023 such as the World Cup, Olympics, or U.S. midterm elections, will likely be a drag on ad spend in 2023.
Those events greatly aided the battered industry with the domestic ad market totaling $318 billion last year — an increase of 8% compared to 2021.
Similarly, Spotify (SPOT) CFO Paul Vogel told investors during the latest earnings call: "Advertising in Q4, overall, it's definitely continued to be very up and down."
Spotify's Q4 ad-supported revenue, boosted by podcasting, grew 14% on a year-over-year basis to €449 million — accounting for 14% of total revenue.
Disney and Netflix rolled out their ad tier products at a time when the ad market is in flux, but the move seems to have been a lucrative one.
At the time of the debut, the company said over 100 advertisers bought inventory for the launch — bucking the trend of a global ad spend slowdown.
Similar to Disney, Netflix is playing the long game when it comes to its recently launched ad-supported tier, which officially debuted in November.
In its latest shareholder letter, Netflix said engagement for ad-supported subscribers "is consistent with members on comparable ad-free plans, is better than what we had expected, and we believe the lower price point is driving incremental membership growth."
Investors should run to higher grounds to avoid the upcoming slaughter in legacy media.
The cord cutter phenomenon is real and the pivot to work-from-home culture has really stuck the fork in many traditional services that used to be part of American culture.
Legacy media is one of the big losers – nobody watches analog television anymore.
Investors will need to seek attractive properties such as NFLX to buy the dip.
They benefit from the first mover advantage, but Disney is also finding their way after firing former CEO Bob Chapek and replacing him with the guy before him - Bob Iger. It’s not a pure streaming play which is also an issue for the likes of Amazon and I do think Roku is a little too growth based at this point in the business cycle.
The overall message is to avoid unproven tech assets for the time being with bank turmoil and interest rate tumult.
The only exceptions are active traders who use volatility in their favor and play from the long and short side. Traders usually don’t discriminate and can jump in and out of these sharp movements.
If traders want to get into streaming or social media stocks, that is fine, but stick with the brand names and shun the exotic names for now.
Mad Hedge Technology Letter
March 13, 2023
Fiat Lux
Featured Trade:
(METAVERSE FLAMES OUT WITH SILICON VALLEY BANK)
(SIVB), (META)
The word “metaverse” is a popular word recently and it has to do with a world almost from science fiction.
It refers to a future version of the internet accessed through immersive technologies such as virtual reality and augmented reality headsets.
Metaverse could supposedly be a $13 trillion market by 2030 according to a prominent research firm.
The internet built around decentralized technologies and virtual worlds is a novel idea.
The definition of the metaverse goes beyond sticking to virtual worlds, like gaming and applications in virtual reality.
A comprehensive vision of the metaverse includes smart manufacturing technology, virtual advertising, online events like concerts, as well as digital forms of money such as cryptocurrencies like bitcoin.
The metaverse could see 5 billion unique internet visitors by the end of the decade, funneling trillions of dollars in revenue in this next-generation of the internet.
This isn’t the only source labeling the metaverse and web3 a trillion-dollar opportunity. In research published in December, Goldman Sachs put a $12.5 trillion number on the space, in a bullish outlook that assumed one-third of the digital economy shifts into virtual worlds and then expands by 25%.
But so far, the metaverse has been a cash guzzler with not much to show for it.
With a huge amount of money already flowing into companies addressing the space and not much revenue, companies face years of poor revenue showing.
Unit economics wasn’t about to turn the corner at all with all signs showing that the Metaverse has stalled, but the bank contagion at Silicon Valley Bank (SIVB) means that many employees from metaverse projects simply won’t get paid their salary.
That’s how the momentum has been demonstrably pushed back lately.
Call the Metaverse dead in the short term.
What are the Metaverse risks?
Besides funding drying up like the Sahara desert in the short term - it doesn’t stick because it’s only tolerable for a few minutes.
There’s definitely a real risk that the metaverse never goes from the “fake it until you make it” to the real killer app that every consumer is clamoring for.
Just take for instance the art of a business meeting.
One might argue that using VR for meetings is less enticing than familiar technologies such as Zoom.
Would you rather see a real version of someone on a video or a fake avatar of someone up close?
The metaverse could turn out to be just hype and nothing more because the leaders of these companies building it are surrounded by yes-men who tell them it’s a great idea.
Many analysts have mentioned that Meta’s version of the virtual now is “terrible.”
Many also chime in saying “it’s been tried many, many times over the past four decades and it's never worked."
Even if Meta does improve on the technology and it does become more advanced, it still could be turn out to be mediocre.
If many can remember, we were already supposed to have self-driving cars 3 years ago and that never happened.
A lot of this failed technology has a tendency to just fall by the wayside never to be talked about again or regurgitated with a new headline.
I am not a believer of the Metaverse and you can bet your hard-earned bacon that these bank blowups means that metaverse and crypto employees will be more focused in the short term of how to pay rent and put food on the table than figuring out how to trap the rest of us in a virtual world.
Even if the salary is issued for employees of crypto firms, web3 firms, and metaverse firms by another third party saving their bacon, I can guarantee that no cash burn company will be funded to lose money in the short term.
“I think a lot of my progressive friends have a little bit of an inferiority complex – if you’re right, why do you care that you’re having a dialogue with someone that’s wrong?” – Said CEO of Palantir Alex Karp
Mad Hedge Technology Letter
March 10, 2023
Fiat Lux
Featured Trade:
(TECH FUNDING TAKES A HIT)
(SIBV), (SI)
The famous bank for tech startups, Silicon Valley Bank, is creating a bit of chaos, triggering a large selloff in banking shares on Thursday.
Friday has been up and down, and the volatility has overflowed into today’s trading.
It won’t trigger a larger credit event, but shows investors the perils of mismanagement at an institution that was hailed as the lifeblood of small tech firms in California.
My bet is that boutique banks like Silicon Valley Bank (SIBV), exposed to startups that don’t make money, could get dragged into this risk-off move.
The big banks should be just fine, which is why this could present a nice buy-the-dip moment.
Silicon Valley Bank was founded in 1983 and over the decades became the habitual financial institution for startups.
Today, it’s a household name in Bay Area finance, deeply entrenched in tech companies’ networks and infrastructure.
The commotion about the company is more or less about a routine bank run as many cash burn heavy tech investors started to pull funds from SIBV to cover the losses of other tech companies.
The bank was too leveraged with other capital tied up in longer duration bonds and at the worst possible time, they had an insurmountable liquidity requirement which they are having trouble meeting.
Of course, tech investors don’t want to be the last investors withdrawing funds.
The bank is now looking at selling its carcass to bigger hitters that can easily save this bank.
The bank only needs $2 billion in capital to stay solvent, which is a drop in the bucket to the likes of bigger banks like JP Morgan or Bank of America.
SIVB disclosed a $1.8 billion loss showing the treacherous nature of being the famous lender to tech startups in Silicon Valley at a time when this type of business is doing poorly.
Rising interest rates have left banks laden with low-interest bonds that can’t be sold in a hurry without losses. So if too many customers tap their deposits at once, it risks a vicious cycle.
A key takeaway from growth tech stocks is to avoid buying and holding for the time being because in the light of possible contagion to the subsector, the weakest of the names get hit the hardest. Any position should be a quick in and out, taking profits before positions sway violently the other way.
This also highlights the ongoing problems in the start-up scene, with tech ideas not getting funded because the debt markets aren’t offering the same type of incentive they used to.
Leverage can be good or bad and in this case, when assets aren’t matched on par with liabilities, these types of credit events or liquidation occurrences happen especially amid the negative backdrop we find ourselves in.
Remember that crypto bank Silvergate (SI) just liquidated after a roaring contagion in the crypto sector.
SI customers pulled their money in the panic that followed the 2022 collapse of the cryptocurrency exchange FTX. Silvergate said in January that it had realized losses of $886 million from selling securities as deposits fell.
This also validates my thesis that we are squarely in a trader's market with volatility working for and against traders and their trades.
The time of buy and hold with a vanilla tech ETF with the traditional tech titans is long gone, and if this isn’t a wake-up call then I don’t know what is.
Right now counting on my expertise as a trader is a must if you plan to survive these hostile and unpredictable markets.
On the bright side, this could offer a timely entry point into some other more solid tech names as I don’t believe this contagion will spread to the heavyweight tech stocks.
“When I was in college, I wanted to be involved in things that would change the world. Now I am.” – Said Founder of Tesla Elon Musk
Mad Hedge Technology Letter
March 8, 2023
Fiat Lux
Featured Trade:
(WHAT'S UP WITH RIVIAN)
(TSLA), (RIVN)
With the US 10-year Treasury yield sitting today at around 4%, there simply isn’t a rapacious appetite to invest in unproven EV stocks.
This is how the cookie crumbles when lending terms are tight.
The 4% yield today is about 8X higher than it was in July 2020 when the 10-year yielded half of a percentage point.
Funding and borrowing billions for tech startups is part and parcel of developing a new tech company.
However, the incremental interest payments from the extra 8X yield are exorbitant enough for investors to refrain from pulling out their wallets.
A lot of investor roadshow presentations are now getting shelved permanently.
It has to be a slam dunk otherwise venture capitalists are pouring their capital down a black hole which is essentially why the venture capitalist movement is frozen.
So we must turn a suspicious eye when unproven EV company Rivian announces a plan to sell $1.3 billion in bonds to shore up capital.
It couldn’t have come at a worse time as debt markets are expensive to tap with rates surging.
I suspect the yield on this debt to be anywhere from 11-15%.
Even more laughable, they labeled this return to the capital markets as the “green” debt offering.
Rivian says it intends to sell $1.3 billion worth of “green” convertible senior notes due in 2029, with the option to grant an additional $200 million worth of convertible notes to the original purchasers.
Rivian explained to us that it intends to use the capital it raises for “green” or environmental purposes. I believe these statements are a sign that upper management is becoming too woke.
RIVN just needs to stay in their lane and make damn good EVs, and by that, I mean better than Tesla, and not tell everyone how “green” they are. Nobody cares about their greenwashing.
EV makers are also big polluters and many studies show that they accrue a bigger carbon footprint than the production of combustible engine cars.
Of course, the EV makers sponsored research that says the complete opposite and I believe the truth lies somewhere in the middle.
Lithium mining is a source of pollution and can have negative environmental impacts. Used of damaged Lithium Ion batteries pollute as well.
Rivian said these projects could include activities tied to clean transportation, renewable energy, circular economy (i.e., recycling batteries/metals), energy efficiency, and pollution prevention.
Is this just a ruse to mask investors from its adjusted EBITDA loss of $5.22 billion in 2022?
Hard to say, yet I do know it is convenient to leverage its “green” image to wash the losses from their backs to get more time to figure out how to make the numbers work.
The company is forecasting another adjusted EBITDA loss of $4.3 billion for 2023 and that’s the real reason they need to tap the debt markets.
This EV maker is a cash-burn machine, and looking for someone to be the sugar daddy.
This is all happening while Rivian is developing its next factory in Georgia, where its next-generation R2 vehicles will be built. Rivian says production of that vehicle will start in 2026.
Ultimately, this company does make a good product, and reviews of the EV have been positive, but the management is doing a poor job with the financials.
They might run out of money before the Georgian factory is finished and I believe desperately seeking funding at the worst time in history has to do more with shoddy management and botched accounting.
In short, the stock has gone from $130 to $15 today and much of the negative news has been discounted into the price.
It’s been a constant sell-the-rally stock for quite some time, but I think that will finally reverse itself when RIVN gets into single digits and from that point, it has a good chance to bounce to $20 per share.
Long term, I would stay away for now until we get some confirmation of their balance sheet improving. Tech companies with woefully mismanaged balance sheets aren’t the place to hide right now because tech stocks are too volatile.
