Mad Hedge Technology Letter
February 26, 2025
Fiat Lux
Featured Trade:
(NVIDIA EARNINGS TO SWAY THE NASDAQ)
(NVDA), (META), (BTCUSD)
It’s been a steep drop for tech stocks the last few days and there is a lot to piece through here.
It was due at some point.
Look, we are at Himalayan highs in the Nasdaq and that doesn’t mean it will be smooth sailing from here.
To find that incremental dollar to push up tech stocks is not as easy as it once was.
We aren’t in the golden years of technology anymore.
The big question is why someone should input that extra dollar when there is a flattening of momentum in the entire tech establishment.
A.I. is the big two-letter acronym that everyone is focused on so it is not a surprise that profits are being taken leading up to Nvidia’s earnings.
Nvidia isn’t as ironclad as it used to be and that worries me.
Nvidia is carrying the market on its back like it has been doing for the past year and market breadth has remarkably narrowed.
If there was no Nvidia, we would be looking at a demonstrably lower stock market than this expensive stock market we are trading right now.
Remember that I urged readers to pile into tech stocks after that mid-January Deepseek selloff and that was the perfect elixir to profits.
Now, where do we find that indicator or signal to go green?
It’s a tough one and we must be patient.
All I have left in the portfolio is a bull call spread in Meta that has been taken out to the woodshed and beaten like the proverbial red-headed stepchild.
Then we look at other signs of liquidity and alternative barometers and Bitcoin has to scare you.
The quicksand drop to $85,000 per coin questions whether the bull market in tech stocks is still alive or kicking.
At the very minimum, the kicking is getting weaker and weaker each following earnings season.
But investors can hold on to hope for a few more hours. After the bell today, the world turns to fourth-quarter earnings for the linchpin of AI euphoria, Nvidia (NVDA).
This two-plus-year bull market has weathered several multi-month periods when Nvidia's stock price sputtered. But the company's stock hasn't contributed to the bull market since last June, as its share price has effectively gone nowhere in that time.
Over the last 10 years (40 reports), buying Nvidia stock just before the earnings announcement has yielded a median return of 3% to 4% on the one-day, one-week, and one-month time frames. Holding for three months has yielded nearly 18%.
The disparity highlights the volatile earnings reactions that might net bullish results but can also cause significant discomfort in the near term.
But for the entire Nvidia obsession, investors are right to question how much AI is still a picks-and-shovels or even an energy trade (as it morphed into in 2024).
If I had to nail down a date, investors expect the 2nd half of 2025 to calculate what exactly future cash flow will look like and if the infrastructure investment in AI is really worth the hassle.
A great deal of capital was asked to front AI and we are creeping towards that day where AI will need to sink or swim.
As it stands, the AI overlords like OpenAI helmed by Sam Altman, still puts on a happy face like nothing will fail to surpass expectation. It is easier to put on a good face when someone is worth billions upon billions.
In the short, we are preparing for a buying opportunity in the best and brightest.
“In order to have your voice be heard in Washington, you have to make some little contribution.” – Said Elon Musk
Mad Hedge Technology Letter
February 24, 2025
Fiat Lux
Featured Trade:
(AI IS IN QUESTION)
(ELON MUSK AND OPEN AI)
Elon Musk wants to buy OpenAI and that partly has to do with the vendetta he has against OpenAI CEO Sam Altman.
This fiery feud isn’t going away anytime soon.
My bet is that it will burst into the open and OpenAI is actively attempting to put the governance in place to block Musk from seizing the company.
The issue Musk has with OpenAI is that it was founded as a non-profit from capital Musk gave.
It was responsible for doing what is right for humanity, but Altman’s attitude to the industry shows the inverse of that.
It appears to the outsiders that Altman is hellbent on driving the price of AI up for the consumer and delivering profits to big tech that have invested into his “non-profit.”
Musk’s recent attempt at an unsolicited takeover was rejected by CEO Sam Altman and OpenAI's nonprofit board.
Now the creator of ChatGPT reportedly wants to make sure that there are indirect poison pills associated with any outsider takeovers.
All of that will take some maneuvering by OpenAI’s board members and Altman, all of whom are defendants in a lawsuit from Musk that seeks to block OpenAI from converting to a for-profit business.
Right now, investors like Microsoft are not equity holders in OpenAI but instead hold limited profit interests in OpenAI's for-profit subsidiary. Once OpenAI is profitable, Microsoft is entitled to 75% of profits until it recoups its $13 billion principal investment. The other 25% of profits go to employees and early investors, up to specified profit caps.
Once Microsoft’s principal is repaid, it is entitled to 50% of its profits until it reaches a profit cap of $92 billion.
OpenAI said it wants to convert its nonprofit parent to a Delaware public benefit corporation (PBC) that would issue ordinary shares of stock.
Charitable organizations aren’t typically targets for hostile takeovers, especially not the type that Musk had in mind — an unsolicited $97.4 billion bid for OpenAI’s estimated $157 billion in intellectual property and other assets.
Musk's lawsuit seeking to prevent OpenAI's conversion to a for-profit enterprise centers around Musk's initial $45 million donation to fund the startup, which he claims was contingent on OpenAI remaining a nonprofit organization.
If Musk ever acquires OpenAI, I believe he will put on his DOGE hat and cut the costs of doing AI.
The genie is now out of the bottle and the Chinese have proved that AI doesn’t need the bloat.
AI can run on cheaper and older chips while not needing the same amount of data centers.
My belief is that Musk wants to democratize AI and make it cheap for everyone and that would be bad for tech shares specifically Nvidia and Microsoft.
Big tech has the incentive to make the price of AI high just like the supermarkets have an incentive to place higher prices in the supermarkets.
Don’t believe in this mumbo jumbo of supermarkets operating on thin margins when they do produce a lot of their own house brands.
Musk wants to take a samurai sword to AI and make it applicable to the average American.
He doesn’t want to see a situation in which AI is used by executives at corporations to fire everyone, and the readers should know that we are barreling right down the path of replacing workers with robots right now.
If Musk ever gets into the position of neutralizing OpenAI, sell your tech stocks right away, because there will be less peaks and more valleys in tech share prices after that.
Mad Hedge Technology Letter
February 21, 2025
Fiat Lux
Featured Trade:
(THE AFFORDABLE IPHONE FROM APPLE)
(AAPL)
A $599 cheaper iPhone with worse features is clearly a sign that Apple (AAPL) is on its way down from peak innovation.
This new cheap phone won’t save the company, but the company doesn’t really need saving.
The company is on auto-pilot mode. Let me explain.
At this point, CEO Tim Cook has done the calculations and he has decided that the company doesn’t need to innovate.
Apple needs to milk its subscriber base whom are famously loyal to its ecosystem.
Apple users are the least likely to just jump ship and switch to the Android ecosystem.
Cook knows that which is why he can push through annual increases in service charges.
Apple’s balance sheet is also another key part of the story and Cook will wield it with extreme efficacy through shareholder returns.
It could be true that we are past the stage of Apple delivering big growth numbers.
That looks to be a thing of the past.
Now, competing with China on cheaper phones is a massive step back and it won’t flow through to the bottom line.
It’s easier to argue that this phone will cannibalize sales of Apple’s more expensive phones.
We have arrived at this point and it is sad for most technologists.
Apple AAPL expanded the iPhone 16 family with the launch of a cheaper iPhone 16e version powered by the latest A18 chip and supporting Apple Intelligence.
iPhone 16e is available in a 6.1-inch display size and has the best battery life ever on this display size offered by Apple. The iPhone 16e, available from Feb. 28, will cost $599 compared with $799 for iPhone 16 and $999 for iPhone 16 Pro.
Although iPhone sales decreased 0.8% year over year to $69.14 billion in the first quarter of fiscal 2025, Apple saw better iPhone 16 sales in those regions where Apple Intelligence was available. iPhone’s active installed base grew to an all-time high and saw a record level of upgrades in the reported quarter. The iPhone was a top-selling model in the United States, Urban China, India, the U.K., France, Australia and Japan.
AAPL maintained its lead over Samsung for the second consecutive year, with a market share of 23% compared with the latter’s 16%. Xiaomi trailed both Apple and Samsung with 13% market share. Global smartphone shipments increased 7% year over year to $1.22 billion units in 2024.
Apple has more than 1 billion paid subscribers in its ecosystem and the focus is entirely on them. There are only 8 billion people on this planet and Apple has decided it is not worth going after the other 7 billion.
If they haven’t adopted an Apple phone or tablet then this last cheap phone is the last chance. Even then, the reason they most likely haven’t adopted an Apple device is because they cannot afford it.
Apple shares are down 1% this year at the time of this writing and I still believe this is a buy-the-dip stock even with a weakening business model.
Apple knows they can withstand earnings whenever they want by just increasing their dividend.
Another headwind is that Apple is not one of the leaders in AI and shareholders will wait to see how that plays out.
Buy the dip in Apple, but don’t hold it long-term.
Mad Hedge Technology Letter
February 19, 2025
Fiat Lux
Featured Trade:
(THE EYEWEAR PIVOT NOBODY SAW COMING)
(META), (ESSILORLUXOTTICA)
Meta (META) migration into the eyewear business is a little bit of a head-scratcher until peeling back the layers and really understanding what is going on.
EssilorLuxottica’s agreement to prolong its long-term collaboration with Meta Platforms for the development of smart eyewear over the upcoming 10 years is a massive victory for Meta CEO Mark Zuckerberg.
This milestone offers meaningful insight into the direction of where the business model is heading.
Many have expected that Meta would start to branch out into other venues once their core businesses start to stagnate.
The digital ad game and social media platforms only go so far in terms of growth these days, and shareholders are waiting on the next big thing.
Short-term prospects are what drives the stock movement, and Meta is looking for that pixie dust.
EssilorLuxottica is the largest maker of eyewear in the world and the owner of many eyewear brands and retailers, including Ray-Ban, LensCrafters, and Pearle Vision in the U.S.
EssilorLuxottica also acquired Heidelberg Engineering, maker of imaging and healthcare machinery and technology, largely for the ophthalmic and eyecare markets worldwide.
Prescription glasses are not cheap, ranging into the thousands of dollars for designer frames and lenses.
If Meta can figure out how to do this all online without going to the optician, imagine the juicy margins they could extract from this sort of venture.
Meta and EssilorLuxottica have a relationship for the production of the Ray-Ban smart glasses. The glasses’ latest version gives consumers video, camera, and Bluetooth headset capability in a stylish eyewear frame with a cool brand on it.
Heidelberg Engineering makes complex, sophisticated, expensive equipment that you may be exposed to if you’re examined in an ophthalmologist’s office. Buying Heidelberg makes EssilorLuxottica more entrenched in the industry where it is the established leader.
The tie-up with EssilorLuxottica is the perfect onboarding situation to understand how to perfect the optimal glasses and lenses and then to transfer it into an online experience.
Remember, even if this investment is for VR purposes, the application revolves around virtual eyewear as well.
Meta now understands they need to secure a monopoly on eyewear, and it is a conscious decision to make that a launching point into more of their products.
In the future, Meta wants consumers to access Instagram, Whatsapp, and Facebook through EssilorLuxottica eyewear products.
Meta also hopes to secure the first mover advantage while other big tech firms lack the deep knowledge of eyewear. There have already been numerous failed attempts at smart glasses, and so Meta founder Mark Zuckerberg is doubling down with a relationship with Europe’s most deeply entrenched premium eyewear firm.
Although the boost to the bottom and top line won’t happen quickly with a possible relationship with EssilorLuxottica, this could anoint Meta as the gatekeeper to the new virtual world through this new eyewear tech.
It’s becoming clear that Meta is running up to certain upper limits in regards to the growth of their 3 platforms, and they are looking for another super booster to prop up profits.
I don’t believe that Meta will be allowed to acquire this eyewear company because of anti-competitive laws, but adopting its best products and practices and hiring their best talent seems a lot more on brand from Meta.
Meta has never been shy at poaching outside talent and rewarding them handsomely.
On the flip side, EssilorLuxottica would be smart to adopt some tech now by hiring the right people and trying to digitize the experience further otherwise, Meta will get what they are coming for.
Meta pushing the envelope is one of the big reasons why they have stayed ahead of other big tech companies and why the stock has done so well the past few years.
Meta stock is a great short-term and long-term proposition for patient and impatient investors.
“If you can't make it good, at least make it look good.” – Said American Bill Gates