Mad Hedge Technology Letter
February 22, 2023
Fiat Lux
Featured Trade:
(PART 1: A SIMPLE GUIDE TO QUANTUM COMPUTING)
(RGTI), (IONQ)
According to IBM, Quantum computing is a rapidly-emerging technology that harnesses the laws of quantum mechanics to solve problems too complex for classical computers.
Used correctly, quantum computers are incredibly fast and effective. They can perform calculations in a few seconds for which today's supercomputers would need decades or even millennia. This fact is also referred to by experts as quantum superiority.
Why Buy Quantum Computing Stocks?
Quantum computing isn’t as crazy as you think and it’s inching closer to reality.
These types of transcendent technologies are what investors need to key in on to help make their tech stock portfolio better than ever.
This will enable researchers to break new ground in areas such as pharmaceutical drug discovery, weather forecasting, cybersecurity, and computational chemistry.
It will also result in unprecedented gains for owners of quantum computing stocks.
The Best Quantum Computing Stocks
Will quantum computing be successful? That's the multi-trillion dollar question.
We're in the first innings of a long ball game, if the game has even started.
Still, there are already some pioneers that are re-imagining the field.
Here are two quantum computing stocks to put on your radar:
Rigetti Computing, Inc. (RGTI)
Rigetti Computing builds and deploys integrated quantum computing systems leveraging superconducting qubit technology.
CEO Chad Rigetti has a simple and clear thesis on this space: “In the next decade, a single Rigetti quantum computer could be more powerful than the entire global cloud industry today.”
Rigetti will need the capital infusion from going public because the firm doesn’t have any positive revenue to talk about. The IPO delivered a much needed financial lifeline and the additional $458 million in funding came after an initial $200 million was raised previously. That could also be a big con about the sub-sector, in might be years until an actual profitable income stream is built.
Whoever said that Rome was built in one day.
Quantum computing is only at the beginning of its development. It is difficult to estimate how large the market demand for this product will be. It's also uncertain how quickly Rigetti or competitors like IonQ will be able to expand their technical capabilities. This is an entirely new technological territory, so there are zero guarantees here in this tech sub-sector.
Needless to say, Rigetti is a concept stock for now. One has to believe in the underlying vision of quantum computing to place a bet here. Otherwise, it would be wise to switch to other stocks without a quantum computing business plan or corporate strategy.
IonQ (IONQ)
IonQ produces quantum hardware and software.
IonQ was faster to market than Rigetti, making it the first publicly traded quantum computer stock. Also, the company is backed by a number of influential investors including Bill Gates, Silver Lake, and Fidelity.
Unfortunately, like many SPACs these days, IonQ only exists on paper. That means there is still very little operational business. IonQ only did a few million in revenue last year and had no revenue in 2019 or 2020. In fact, free cash flow is projected to remain negative through at least 2026. Also, it will take multiple technological leaps - such as machine learning - to reach a point where quantum computing could reach mass markets and make IonQ successful.
RGTI’s market cap is only $125 million and IonQ’s is $927 million and they are cheap for a reason.
Investors aren’t willing to pay up for the time it's willing to take for quantum computing to go mainstream yet.
However, if a reader is willing to invest with a 35-year view, then it would make sense to invest 1% of one’s portfolio into these names and also at a time when interest rates are trending lower.
These types of loss-makers and far in the future bets work better when the cost of capital is lower.
Mad Hedge Technology Letter
February 17, 2023
Fiat Lux
Featured Trade:
(MAKE FACEBOOK GREAT AGAIN)
(META), (APPL)
Well, it doesn’t have to be the 2008 version, but Meta (META) CEO Mark Zuckerberg needs to go back to his roots, because this metaverse thing isn’t going to work out.
And if it does, it will be miles into the future.
For quite a few years now, Zuckerberg has focused on his pet project as if it's his real business.
That’s when the trouble started.
He even renamed his company after his new pet project - the Metaverse.
It's a vague concept that can describe a number of things, but broadly it's the idea of people connecting through virtual worlds rather than a traditional social network.
Meta's big move into the Metaverse was a catastrophe, resulting in a mediocre experience, increasingly expensive headsets, and a stock plunge of over 60% in 2022.
Even though Meta’s stock has experienced a dead cat bounce in 2023, it doesn’t make up for the stagnation of the business model.
What should Zuck do?
He should slow down and focus on strengthening his company's core apps, Facebook, Instagram, and WhatsApp.
While Meta poured $15 billion into its Metaverse project, the other apps were noticeably neglected.
Meta should boost engagement and revenue from these apps, which have billions of users worldwide. Meanwhile, Horizon Worlds, Meta's flagship Metaverse app, only has a pitiful 200,000 monthly active users.
Even though Instagram has faced headwinds of late, it's still Meta's crown jewel. Keeping users happy with the app and laying out a plan for the years to come should be the company's top priority.
Meta should spend its time and energy monetizing that usage as much as possible without alienating users.
The company should do the same with WhatsApp, the world's most popular communication app.
The platform does not contain advertising to preserve its identity as a user-friendly service.
However, Meta has promised to use its popularity in other ways to increase revenue, including with paid features.
But instead of focusing on its proven uses, Meta is investing billions of dollars in an idea that may not pay off for five or 10 years.
Left unaddressed, a bet of this magnitude risks alienating investors and employees while they face economic challenges.
Apple (APPL) was one of the main reasons for the swan dive in ad revenue. Last year, the tech giant rolled out a privacy change for iOS, asking users if they didn't want to be tracked on other companies' apps as well. Meta responded at the time by saying that advertisers "may see an overall decline in ad performance and personalization and an increase in cost per action."
To stave off competition, Zuckerberg is attempting to invent the next future platform.
The issue I take with this pivot is that Zuck thinks it’s a lay-up, but I believe it’s something closer to a Hail Mary.
It’s rarely the incumbents who invent the next big platform, which is why Zuckerberg's metaverse vision is more suited to a VC-funded startup than a company-wide rallying cry.
Apple has also been exploring future platforms, albeit far more quietly than Meta (its own VR headset is rumored to roll out in June 2023).
Apple’s stock price has ground sideways while Meta has borne the full brunt of investor skepticism.
That hasn't stopped Zuckerberg from making his Metaverse foray into a contest between Meta and Apple, which of course takes up a lot of space.
Ultimately, the smart move here would be for Zuckerberg to take a page out of Apple's book by prioritizing the tried and tested cash cows to keep investors happy and relegate the Metaverse stuff to the dustbin of history.
The stock has doubled since October 2022 and Meta should improve on its self-labeled “year of efficiency.”
I do believe Meta shares will rise from here if they keep firing staff and simplify the platform.
They still employ over 86,000 people and I believe they can streamline down to 25,000 employees.
“I don't really think anything Microsoft does puts pressure on Apple.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
February 15, 2023
Fiat Lux
Featured Trade:
(NOT ALL AD TECH FIRMS ARE IN THE DOGHOUSE)
(TTD), (GOOGL), (META)
Some of the digital ad tech stocks have had a rough go of it lately.
There was Google (GOOGL), whose stock has been threatened because of the new artificial intelligence chat box technology that was debuted by OpenAI called ChatGPT.
Meta (META) has rebounded but the initial sell-off last year was cringe-worthy.
As we see the light at the end of the tunnel, it’s time to explore where to deploy funds to invest in tech, and one option is The Trade Desk (TTD).
The advertising-technology company issued a stronger-than-expected outlook and unveiled a $700 million stock buyback program.
The Trade Desk outpaced nearly all areas of digital advertising in 2022, with 32% revenue growth year over year, and a record $491 million of revenue in the fourth quarter alone.
In addition, management at The Trade Desk made significant operational progress during the first quarter.
For example, Adobe was won as a partner that carries out real-time integration. But a first certified service partner has also been won with the Goodway Group. Growth in the area of programmatic advertising therefore continues.
I can confidently say that they delivered great earnings results once again and that’s a good habit to have in the public markets.
The company's top line didn't beat expectations, but was still impressive, especially considering a macroeconomic environment that weighed on the broader advertising industry.
Analyzing their company, I am confident that they are gaining market share and that their platform continues to gain traction with advertisers.
The numbers strongly back me up.
While the company's sales grew by 24% in the fourth quarter, some of The Trade Desk's biggest competitors were seeing their sales decline.
Another highlight from the quarter is The Trade Desk keeping its customer retention rate above 95%, which it has done for nine consecutive quarters.
The company also said that its Unified ID 2.0 - an online identifier that gives users more privacy than online trackers - continues to be accepted by more companies, including the addition of Paramount Advertising in the quarter.
Management expects Unified ID 2.0 to continue growing as online trackers (called cookies) "become less important" in the ad industry.
I can’t say it has been the golden year for digital ad tech.
The beating it took last year was quite horrendous, but as all rate hikes have mostly been priced into shares, we can expect a positive trajectory to the upside.
It’s quite positive that in the last two days, we received a hot CPI number and hot retail sales, but tech stocks have held up nicely.
I fully expect many growth tech stocks including TTD to become buy-the-dip candidates moving through the bulk of the year.
Sure, higher inflation remains the biggest risk to shares and after the latest numbers, we could go up to 5.25% on the Fed Funds rate but that has largely been quantified and sanitized by the market by now.
"Complete independence means independence and freedom in every field such as politics, economics, judiciary, military, culture… Insufficiency in one of those fields means the total loss of independence of the nation." – Former President of Türkiye Mustafa Kemal Atatürk
Mad Hedge Technology Letter
February 13, 2023
Fiat Lux
Featured Trade:
(ECOMMERCE TAKES A BACK SEAT)
(CPNG), (AMZN)
American ecommerce companies are certainly feeling the pinch of high inflation as many US consumers tighten up their purse strings.
Ecommerce was one of the few growth engines for tech before 2020, now it’s harder to move the needle for many subsectors.
Just take a look at the giant ecommerce company Amazon (AMZN) whose stock price was higher in August 2018 compared to today.
Between now and 2018, Amazon experienced a pulsating melt-up due to a business boom, low interest rates, and positive global growth.
On the way down, the reverse has taken place.
We, as investors, just cannot assume tech will go from the bottom left to the top right anymore.
So if ecommerce companies of Amazon’s ilk are struggling to navigate tighter conditions, imagine how bad it is for ecommerce flagship companies in an Asian third-world backwater like South Korea.
The ecommerce company I am talking about is Coupang (CPNG), which I’ve been highly negative of since public inception, and rightly so.
CPNG's share price has done nothing but drop since its IPO from its $50 peak and now stands at $15 after bottoming out at $9.
What next for CPNG?
CPNG the South Korean e-commerce pioneer has lost billions of dollars since its inception but is rolling out an army of robots at fulfillment centers in the hope of achieving profitability.
They burned cash by building distribution centers throughout South Korea that could help it push the boundaries of speedy delivery with a broad selection.
Now the company is almost breaking even, with analysts projecting it will turn a profit for the second straight quarter and then report its first annual operating profit in 2023.
Coupang has used private venture capital to fund this expansion combined with a 2021 initial public offering to build logistics domestically.
Coupang is also pushing to expand new markets in Taiwan and Japan. I see that as a hard endeavor because legacy ecommerce like Rakuten is quite entrenched there.
I think they will be unable to outmaneuver local competition.
Strategies like cash burning to seize market share don’t work anymore because of the high cost of capital.
CPNG needs to optimize what it can in South Korea even if the country presides over one of the worst demographics in the world, with the average age of customers approaching the age of nursing home residents.
CPNG has more than 100 fulfillment and logistics centers in South Korea, but no footprint overseas.
Barreling into mature markets is a marginal strategy for CPNG today because they are 10 years too late.
Yet, I do really like what they are doing on the automation front domestically integrating automated robots into their operation.
The lack of workers and consumers in South Korea is another headwind due to poor demographics.
Externally, they also face various headwinds from the global backdrop souring.
I do believe in the short term as tech equities benefit from the disinflation narrative, there is a narrow path to a higher market share for CPNG to around $25 per share in 2023.
Anything higher I would avoid because it’s not worth paying a premium for this ecommerce company.
Relying on a “tide lift all boats” strategy is not ideal in today’s tech world, because that isn’t for sure anymore.
Long term, my assessment of CPNG is less rosy. This could be a good buyout ticket for a bigger fish because, at some point, they will realize that they were late to the party and might as well sell it off for whatever it's worth.
