“If humanity doesn't land on Mars in my lifetime, I would be very disappointed.” – Said CEO of Tesla Elon Musk
Mad Hedge Technology Letter
December 7, 2022
Fiat Lux
Featured Trade:
(MEDIOCRE TECH FURNITURE)
(W)
As we gather up to steam to the December 13th CPI report, it is important to keep mindful of avoiding the tech traps out there.
Many tech companies are still worth their weight in gold but some aren’t.
The ones to ignore are specifically the zombie companies.
Low rates almost gave them a great excuse not to profit because back then, with low rates, they could just roll over debt and kick the can down the road.
Suddenly, in 2022, the unthinkable happened, and now profitability matters.
Zombie firms tapping debt markets can be a good thing, but doing so at elevated rates could topple their business model.
One company to stay vigilant about is digital furniture dealer Wayfair (W) whose business model and share price have been disproportionately damaged over the past year and a half.
Just take a look at W’s share price if you don’t believe me.
Shares of W were trading at $315 per share around June 2021 and fast forward to today and the same stock is $36.
I personally believe that it will be a tough slog moving forward for W and it is highly unlikely the easy conditions of 2021 will ever come back to anything similar.
W will inherently struggle to produce real cash flows which means that they are at risk of filing for bankruptcy.
Getting third parties to sell furniture for you and offering a website for that isn’t the greatest business model and they have been exposed.
In the current environment, investors are searching for real cash flows, strong balance sheets, shareholder returns, and sustainable profits.
W doesn’t check one box.
After the arbitrary lockdowns ceased, W’s business resumed burning cash.
W has burned through $4.1 billion in Free Cash Flow, excluding acquisitions, since 2013.
The burn rate is getting worse by the day because of the poor unit economics.
W burned through $1.3 billion in FCF excluding acquisitions over the trailing-twelve-months through the third quarter of 2022, compared to $214 million in the trailing 12 months through the third quarter of 2021.
In August, Wayfair announced plans to lay off about 870 employees, or about 5% of its global workforce.
However, the cost saving is more of a one-time boost to cash flow than anything long-term.
In general, since the last quarter of 2021, earnings per share losses have accelerated to the point where last quarter they delivered -$2.15 of earnings growth.
That was the worst profitability in the last 4 quarters.
Then there is the issue of inflation tearing apart American budgets.
When the cost of furniture was in demand during the government-mandated lockdowns, there was outsized demand for bespoke furniture because Americans spent all day at home.
Now, the cost of food and shelter has become so exorbitant that they are exerting maximum strain on middle class American budgets.
Amid this backdrop, there will be a longer lag until the beginning of a new furniture upgrade cycle.
Consumers were furniture-splurging during the arbitrary lockdowns and now they are splurging on food.
Food now trumps furniture.
I don’t believe this problem has a solution in the near term and any bounce in W shares will be a dead cat bounce.
If the cost of living crisis goes from bad to worse in 2023, then expect even less furniture bought from W.
“It's OK to have your eggs in one basket as long as you control what happens to that basket.” – Said Tesla CEO Elon Musk
Mad Hedge Technology Letter
December 5, 2022
Fiat Lux
Featured Trade:
(A DIGITAL AD COMPANY TO LOOK AT FOR 2023)
(TTD)
We are headed to one of our worst years in tech stocks, but that doesn’t mean it is all bad.
It’s time to look at a digital ad company that could make your portfolio next year.
Many subsectors of tech have not been left unscathed, but I do see pockets of strength and there is one particular company that has done admirably this year even if its stock price has gotten hammered.
Robust tech stock next year will be the ones that had great business models and healthy profitable profiles this year.
Numbers will only improve.
The company I’m thinking about is digital ad company The Trade Desk (TTD).
The massive global advertising industry is not yet done, and it really is the present and future.
Don’t put a fork in it.
Television ads are quite a dinosaur at this point and TTD is in the business of selling digital ad inventory.
However, a number of headwinds this year slowed the stock. Amidst heightened economic uncertainty, many brands are halting marketing budgets.
Another problem that has been extensively chronicled is the collateral damage from Apple's privacy updates.
This allows users to opt out of app activity tracking lowering the value of digital ads on the lucrative iOS operating system.
In general, digital advertising technology will continue to expand and The Trade Desk (TTD) will be a growth element of that expansion.
The Trade Desk has been a best-in-class player in the advertising ecosystem for years.
A demand-side platform that helps marketers purchase ads from publishers, the company champions the "open internet."
It doesn't compete with its customers in the way that Alphabet's Google and other internet and media giants.
In addition, many of its ad marketplace and software solutions are open source allowing marketing agencies and the brands they represent to build their own proprietary systems atop The Trade Desk's platform.
Revenue in the 3rd quarter was up 31% year over year, compounding the 39% year-over-year increase in the same period of 2021.
Another problem tech firms face while their stock price is low is the high cost of stock-based compensation.
Stock-based comp was a drag on earnings per share last quarter as it totaled $121 million compared to $34.5 million last year.
Nevertheless, The Trade Desk remains highly profitable.
The balance sheet remains in pristine condition as well, with $1.32 billion in cash and short-term investments and zero debt as of the end of September.
Although the stock price has halved from the November 2021 peak, the stock is well placed for a positive 2023.
Revenue is growing around a 30% clip during down times and once the Fed starts lowering rates, TTD will be off to the races and you want to be on board.
The weakness in tech shares has been painful for everybody as literally, every force went against tech in 2022.
Growth tech will outperform traditional tech stocks as the liquidity gates start to open and there’s a strong chance the Fed will start to pivot before 2023 is done.
Mad Hedge Technology Letter
December 2, 2022
Fiat Lux
Featured Trade:
(ACCOMMODATING TECH CORPORATIONS)
(APPL), (AMZN)
Wage growth is too strong to even think about pivoting – that was the takeaway from the latest jobs report.
Granted, tech firms have been firing employees left and right, but that can be contextually misleading.
Essentially, tech firms overhired during the government lockdowns and in most cases are only now cutting back to a headcount that reflects the same number as around a year or 2 ago.
The sensationalist headlines are riveting, but going two steps forward and one step back isn’t really a big deal.
The overarching theme of wage growth in white collar jobs means that the leftover tech workers are handsomely paid and possess a lot of leverage.
Since 2020, many tech workers jumped ship or were poached for a 50% pay rise.
Those gaudy wages have tapered off somewhat in technology as the sector slows down, but in many cases, workers don’t care if their 2023 salary is “frozen” after a 50% increase the prior year.
In fact, many of the recent tech firings were either the weakest of a specific team or the "last in, first out" type of hire and fire.
Employers added 263,000 jobs in November and the unemployment rate held steady at 3.7%.
For the three months through November, average hourly earnings rose at a 5.8% annualized rate, the Labor Department said Friday.
Strong demand for labor and high inflation is triggering the formation of a wage-price spiral.
To be honest I am not surprised by the most recent data.
A 3.75% Fed Funds rate is still ultra-accommodative.
How do I know that?
Tech firms are still borrowing massive amounts of borrowed funds at cheap rates.
Amazon (AMZN) sold investment-grade bonds for general corporate purposes, its second offering this year.
The bond deal is $8 billion of senior unsecured bonds in as many as five parts.
The longest portion of the offering, a 10-year security, yields 1.15% over US Treasuries.
Big tech is still tapping the debt markets for its operations and it’s the smart thing to do with a Fed Funds rate at 3.75%.
Amazon isn’t the only one.
Essentially, any big tech corporate stalwart with a strong balance sheet would be an idiot not to take out debt at these levels.
The iPhone company Apple also tapped the debt markets just in August.
Apple sold $6.5 billion in four parts as the tech giant increasingly looks to return cash to shareholders.
The longest portion of the offering, a 40-year security yields 0.92% above US Treasuries.
Proceeds from the sale are earmarked for general corporate purposes, including share repurchases, dividend payments, funding for capital expenditures, and acquisitions.
Although I am not privy to discussions at an operations level at Apple and Amazon, I do believe some of these billions will be used to pay staff higher wages which in turn will fuel higher inflation.
It takes money to stay on top and instead of allowing the best talent at Apple and Amazon to walk for bigger raises, firms have been stumping up the cash.
I expect wage growth to continue to exhibit strong numbers in 2023.
Without crushing the jobs market, inflation will regress somewhat but then take off again in the back half of 2023.
It all means we are range bound as we juxtapose slower rate hikes with deteriorating earnings forecasts.
“There are a lot of politicians who are just obstructionists.” – Said CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
November 30, 2022
Fiat Lux
Featured Trade:
(WEAK SALES FOR 2023)
(CRWD), (APPL), (SNAP), (DASH)
