Mad Hedge Technology Letter
December 16, 2022
Fiat Lux
Featured Trade:
(AMERICAN SUPER APP)
(APPL), (WECHAT), (META), (GRAB), (RAPPI)
America will never achieve a “super app,” and what does that mean for Silicon Valley?
These “killer apps” thrive in other places but not in America.
WeChat is the super app in China, while there is Careem in the Middle East, Rappi in Latin America, and Grab in Southeast Asia.
Any attempt to move in on that territory has been stymied by Washington.
A Super app is roughly a place where ecommerce, daily and monthly payments, financial management, social chats, social media, and daily services like ride-hailing co-exist in harmony on one app.
American tech companies are getting blocked from incorporating new payments into their apps while legacy payment systems remain.
Facebook’s attempts to build out standalone payment capabilities through the Libra/Diem blockchain project failed, but other apps in its family such as Instagram and WhatsApp are bolting on payment and e-commerce functionality.
As Zuckerberg and his team seem to have noticed, payments are critical to any would-be super app.
Half of US smartphone users are expected to adopt mobile payments as late as 2025, according to eMarketer research.
By contrast, 64% of China's population had made a payment on their phone by the end of 2021, according to a report from China UnionPay, the state-owned financial services firm.
Companies will struggle to generate the volume needed to make a super app work the way WeChat does, which has accumulated more than 1 billion users thanks to its mix of services and payments that ensure people don't have to look elsewhere.
In emerging market countries, payments skipped cards altogether because the infrastructure was weak.
Instead of bank cards, citizens went from cash to paying by phones using their local super app.
This could never happen in America because card payment options are diverse and trustworthy.
America has a reliable network of fragmented services and regulators have become so emboldened that they would never allow a financial payment system on a super app to ever develop.
There's another clear reason why the most successful super app has emerged in China.
Beijing has shut out foreign competitors from offering Chinese consumers any alternative.
Under Lina Khan, the FTC is becoming more sharply focused on competition and user privacy. Creating super apps would almost certainly require aggressive consolidation through acquisitions — a surefire way of attracting scrutiny.
As it stands, American regulators are now hawkish against American tech.
There's also the issue of Apple.
With the iOS system, Apple doesn’t allow the type of access needed to be able to build a super app on an iPhone.
Even if Apple wants to build a super app, there are still plentiful Android users in America that wouldn’t be captured either.
Apple would also need to backtrack on its pledge to safeguard personal data which is very unlikely to happen.
The best bet is probably Elon Musk’s Tesla, Twitter, and Space X combo.
He has two strong elements needed for a super app, but he doesn’t have a payment system and there is almost no chance in this regulatory climate of getting that approved.
The best way forward is tech firms with strong balance sheet picking up the best of breed in tech sub-sectors and eventually, they will all merge together.
However, that’s proved difficult as well with Microsoft’s blocked acquisition of video game firm Activision.
In a high interest rate world, profitable tech firms with strong balance sheets will be rewarded the most if they buy smaller tech companies which will be additive to their profit model.
The cash burners have a tough time competing in a high rate world and zero chance of achieving that super app status.
“You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new.” – Said Apple Co-Founder Steve Jobs
Mad Hedge Technology Letter
December 14, 2022
Fiat Lux
Featured Trade:
(TESLA IN TROUBLE)
(TSLA)
Tesla (TSLA) stock is now toxic.
Many are surprised.
TSLA stock was once the darling of tech that could do no wrong.
The stock fetched a high premium punching above its weight.
That was then and this is now.
Then CEO of Tesla Elon Musk bought Twitter and everything changed.
He took a financial hit from the acquisition and investors are still not sure this purchase will weigh down his other companies.
Even more concerning is Musk’s entrance into American cultural wars and political punditry where he has tweeted fiercely about controversial topics lately.
This area is a black hole for tech entrepreneurs.
Losing half of a customer base is not a good business strategy and Musk is finding this out the hard way.
He has tweeted that the reason for his behavior is to “save mankind” or “nothing else matters.”
Try telling that to owners of Tesla shares.
They have been losing money hand over fist lately as Tesla shares have cratered while other tech stocks experience a mild renaissance.
Tesla has deflated by half a billion dollars in market cap lately.
Tech shares lurched upwards yesterday fueling a strong rally after weak inflation data.
However, there was one stock that was noticeably lagging big time.
Tesla was down 4% as investors used it as a good reason to dump the stock. Tesla shares are down again today – it’s almost like Groundhog Day.
There has also been a massive uptick in Democrats dumping Tesla shares and posting their actions on Instagram while claiming to have sold their Tesla car.
Musk alienating Tesla owners’ way of thinking and way of life spells lower future revenue.
Musk is simply shutting off the path for more Joe Biden-loving investors, and that’s bad news for the stock short-term since most owners of Tesla shares are Democrats.
There are also other issues percolating under the hood.
Slumping demand in China is forcing the electric-vehicle maker to slow production and delay hiring at its Shanghai factory.
Activist Tesla investor, Ross Gerber, is calling for the board to add a director who would represent retail shareholders.
This is after news reports of Musk sleeping at San Francisco’s Twitter headquarters.
Investors also feel that part of the reason Tesla shares have sold off is because the CEO isn’t paying attention to Tesla while he works on Twitter.
Musk reiterated that he “continues to oversee both Tesla & SpaceX, but the teams there are so good that often little is needed from me.”
“Tesla Team has done incredibly well, despite extremely difficult times,” he said earlier in the day, citing the European energy crisis, real estate downturn in China, and US interest rates as macroeconomic challenges.
The volatile recent stretch muddies the close of a year in which Tesla is still expected to achieve record sales and retain its crown as the world’s largest EV maker.
It hasn’t been immune, however, from the slowdown in China’s car market and recessionary conditions in Europe.
Tesla expects to come up just short of the 50% growth in vehicle deliveries that the company has repeatedly said it’s expecting over several years.
Tesla’s plant in Austin, Texas is scaling slower than expected, with a new form of lithium-ion battery cells not yet ready for volume production.
In China, Tesla plans to cut production on the Model Y and Model 3 production lines in Shanghai by about 20%.
There are some silver linings.
The company recently started delivering its long-awaited Semi truck several years late and plans to finally start producing its first pickup, the Cybertruck.
Tech investors need to be careful about TSLA for the time being and understand that it doesn’t command a hefty premium like it once did.
I believe that there are plenty of other tech companies to focus on when tech stocks start to buck the negativity of 2022.
Profitable software stocks with a strong balance sheet should be at the top of your list.
“We’re here to put a dent in the universe. Otherwise why else even be here?” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
December 12, 2022
Fiat Lux
Featured Trade:
(A DIFFERENT PLAYBOOK)
(META), (AAPL), (CSCO), (INTC)
It is almost guaranteed that the 2023 tech playbook will be quite different from 2022.
That’s not to say it will be easy.
But backward-facing data shows us that market leaders of a certain time period in history almost never recreate the same kind of success moving forward.
Domination emerges from elsewhere and is usually a place we would have never imagined.
Looking at some of the biggest tech companies in 2022, many were wrong-footed.
Micro examples are plentiful such as Apple’s reliance on Chinese factories for iPhone manufacturing.
Also, there is the failure of Meta (META) to have pivoted to the metaverse, and look at Netflix suddenly thinking it was a genius idea to enter the American culture wars with their content.
There were early signs that a shift is already underway.
Even more concerning is that these big companies are out of ideas for the moment.
Will Apple (AAPL) keep making the iPhone with no material improvement?
Probably yes since they can get away with it for the moment.
I believe that a company will come along and finally knock the stuffing out of these big tech giants.
Some of them have gotten too comfortable and instead of investing deeply into their creative divisions, they have chosen to increase share buybacks and bolster dividends.
The percentage of capital spent on research and development keeps dwindling as a percentage of total revenue.
Next year’s tech consensus is 8% revenue growth which is hardly what you would expect for this traditional growth sector.
While it is true that it is hard to move the needle much for a $2 trillion company, I still feel they aren’t doing enough to rewrite the rules of the game while they still have the clout and resources.
The example of past stock market greats is a reminder that things can change quickly. Cisco (CSCO) and Intel (INTC) were leaders in the dot-com boom of the late 1990s, but have never climbed back to the highs they reached in 2000, while it took the Nasdaq 100 Index 15 years to surpass its 2000 peak.
Not only is revenue growth projected to shrink next year, but profitability is supposed to slow by 2%.
Faced with higher cost of borrowing and rising inflation, investors are becoming choosier in terms of which companies they are willing to back.
The last few weeks have been incredibly slow in not only the volume of tech trading but the velocity of price movement in tech stocks.
The Santa Claus rally was effectively extinguished when China’s protest smothered the loosening of interest rate momentum.
Since then, we have received mixed reports in China which have been difficult to decode because the country is like a black box.
Tomorrow we will finally get more direction to tech stocks with the CPI report that everybody has been waiting for.
Expectations are for a 7.3% increase year over year in the face of rising producers purchasing data.
Either way, a big move is expected tomorrow upon the news of the inflation data.
It will either confirm that inflation is headed lower, which is bullish for tech stocks, or a high data point will trigger a sharp selloff.
Expect some new tech trade alerts short following the CPI report tomorrow.
“Innovation distinguishes between a leader and a follower.” – Said Steve Jobs
Mad Hedge Technology Letter
December 9, 2022
Fiat Lux
Featured Trade:
(THE GOOD AND BAD ABOUT TECH)
(MSFT), (ATVI)
