Mad Hedge Technology Letter
November 30, 2022
Fiat Lux
Featured Trade:
(WEAK SALES FOR 2023)
(CRWD), (APPL), (SNAP), (DASH)
Tech growth needs a timeout.
The recent earnings report from cyber security software firm CrowdStrike (CRWD) illustrates the difficulty for firms to project strength in forward guidance.
2023 isn’t looking so rosy for selling security software.
CRWD management offered us weak guidance citing a weakening macroeconomic picture and specifically telling us that small businesses are reluctant to sign new contracts for 2023.
The macroeconomic picture at best isn’t getting better, therefore, some of the forward guidance is coming in tepid.
The natural reaction is for tech stocks to sell off.
In 2022, it’s never been more difficult being a tech CEO and some of the best tech growth companies are getting haircuts that we used to never see before.
Even more worrisome is that tech companies like Apple and Twitter are starting to cannibalize each other because tech is now perceived as a zero sum game more than at any other time I can remember it.
Firms simply don’t think the pie is big enough to share.
This is why ecosystems like Apple and others are executing policies that directly hinder competition.
Unfortunately, cyber security is another add-on that is being sacrificed as tech companies become leaner and meaner.
Many tech companies can still function by skimping on the security defenses.
Shaving the fat to the bone is what we are currently seeing and that doesn’t bode well in the short term for tech stocks that are used to thriving in the excesses.
Another example is Snapchat (SNAP), which ordered back staff to a 4-day in-office work week starting February.
And it’s not just Snapchat or CrowdStrike.
The belt tightening has been broad-based in technology with DoorDash cutting another 1,250 jobs today.
Many of these growth companies over-hired during the government-mandated lockdowns and now are regressing back to the mean.
Since there are no more lockdowns in non-Chinese countries, there is no need for the giant number of DoorDash food deliverers.
Yet the US consumer is still spending even if they get less for each incremental $1 spent.
CrowdStrike reported annual recurring revenue (ARR) of $2.34 billion, up 54% year over year. The company also added 1,460 net new subscription customers for the quarter.
In high times, CrowdStrike and the tech growth with superior business models are unique and stand out.
However, in overwhelming macroeconomic weakness, CRWD gets lumped in with the rest.
I don’t recommend buying CRWD on the dip even if it feels cheap.
The peak CRWD share price almost reached $300 meaning the current stock price is only around 35% of what it once was.
Tech growth will overshoot to the upside when it finds it mojo again, which won’t come back until sometime in 2023.
The lockdowns brought forward a tsunami of demand, revenue, and momentum.
Now we are experiencing the reversing of those tailwinds which is why the stock price has suffered.
Avoid tech growth for now, they will have their time in the sun once again once the headwinds have been digested and CRWD should be on your list for a tech growth stock to purchase on the way up.
“I've done a lot of things I'm not proud of, such as getting my girlfriend pregnant when I was 23 and the way I handled that.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
November 28, 2022
Fiat Lux
Featured Trade:
(US ECOMMERCE HOLDING UP)
(CPI), (TWTR), (BNPL)
Black Friday and the ecommerce season hit us with a bang and we are embracing it.
How has it gone so far?
We’ve broken numerous records offering positive news for the US economy and the corresponding tech sector.
Ecommerce sales grew 2.3% year-over-year on Black Friday.
The US economy continues to be the cleanest shirt in the laundry hamper.
There’s been some doubt whether the US consumer can hold up during the holiday season amid unrelenting price increases on just about anything and everything throughout 2022.
It’s looking good so far.
The numbers vindicate the amazing US online economy with consumers spending a record $9.12 billion online shopping during Black Friday this year.
Another nice bullet point to add to the success of the ecommerce holiday season is the particular items that were purchased which drastically favored tech items.
Popular items included gaming consoles, drones, Apple MacBooks, Dyson products and toys like Fortnite, Roblox, and Bluey.
Thanksgiving was also a major success this year with sales expanding by 2.9%.
The strength of the US consumer is exactly why I believe the biggest upside surprise to next year’s tech story is the economy not succumbing to a painful recession as early as we first thought.
Consumer sentiment has decreased somewhat because of the associated headwinds that have caused discretionary budgets to tighten like higher shelter prices and energy costs.
Yet, the US consumer stays resilient.
This year, Cyber Monday is expected to drive $11.2 billion in spending, up 5.1% year-over-year.
The cons to the latest news are that the US consumer is going deeper into debt to make these holiday purchases.
Buy Now Pay Later payments increased by 78% compared with the past week, and Buy Now Pay Later revenue is up 81% year-over-year.
The runway will eventually run out for the BNPL model because consumers won’t be able to make payments if they overextend themselves.
Another issue that could crop up is if BNPL makes it costlier to borrow money to finance purchases instead of a 0% interest borrowing plan.
That will definitely dent the volume of ecommerce sales.
Then there is the issue of not just the nominal numbers, but the real numbers.
Inflation measured by the CPI index is 7.7% but sales growth was 2.3% for Black Friday.
In real terms, real growth is negative 5.4% year-over-year.
There is a high likelihood that the US consumer is spending an extra 2.3% on products, but receiving significantly less in value for what they pay for.
Many products are being made with less quality and in smaller sizes or are being discontinued altogether.
Effectively, the American consumer is spending an extra 2.3% but getting back -5.4% in relative value, but tech corporations can and will claim victory for growing ecommerce sales.
This type of data offers insight into why American GDP is barely growing with full employment.
Usually, full employment would suggest stronger GDP growth.
To extrapolate more, the data suggest that the efficiency per worker in the US is declining and stark examples can be found at companies such as Twitter.
Twitter runs better as a product, management, staff, and service after firing 75% of staff.
All in all, nominal tech ecommerce numbers performed well enough, but such hidden downsides in the report give a bitter aftertaste.
This could mean we are range bound in the short term for tech shares.
There was nothing in these numbers that would make me want to bid up tech shares going into yearend unless a bullish external macro event suddenly takes place.
“The AI technology will keep you out of harm's way. That is why we believe in an AI car that drives for you.” – Said CEO of Nvidia Jensen Huang
Mad Hedge Technology Letter
November 23, 2022
Fiat Lux
Featured Trade:
(BETWEEN A ROCK AND A HARD PLACE)
(AAPL), (ARKK), (OECD)
I’m not saying all tech “gurus” are that brain-dead and I’m not saying that all tech companies are that bad, but tech is operating in a middle ground right now between good and bad.
That’s really where we are for tech stocks.
Cathy Wood has reiterated her $1 million per Bitcoin price target for 2030. If you don’t remember who Wood is, she is the tech growth evangelist that presides over a popular tech ETF called ARKK, and the only reason she gets these funds to invest is because of the high inflows of retail investors believing her fantasies like buying Coinbase after systemic risk to crypto increasing wildly.
Betting the farm right now on tech is not the right thing to do.
Tech was supposed to outperform easily, heading into the December 13th CPI report that records inflation, precisely because inflation was the number one risk to the tech market and inflation was creeping lower.
However, arbitrary lockdowns in China have accelerated and the recent weakness in technology stocks implies a global growth scare with reports today of Chinese workers violently protesting at Apple’s main iPhone factory run by Foxconn in Henan province, China.
The global growth scare has frightened off tech investors in the short term.
American tech companies benefit disproportionally globally to other domestic American companies and what goes on outside national borders is completely relevant to the sentiment of Silicon Valley tech stocks.
We are in a weird middle ground where a global growth scare has bolted to the fore, but high inflation is still a wrecking ball to many economies and is slightly ticking down.
In this type of gridlock narrative, the US Central Bank cannot start easing because the economy isn’t weak enough to “save.”
Then to cap it off, to lower rates, the US really needs a recession and while tech has suffered 100s of thousands of job losses so far, the broader economy is holding up quite well, even with a stealth tax called inflation on consumers, and incremental growth is expected for not only the United States in 2023 but the whole world.
The latest OECD report foresees U.S. inflation remaining well above the Fed’s 2% annual target next year and into 2024.
The OECD’s forecast for the 19 European countries expects the eurozone to collectively manage just 0.5% growth next year before accelerating slightly to 1.4% in 2024.
The OECD expects the United States, the world’s largest economy, to grow just 1.8% this year (down drastically from 5.9% in 2021), 0.5% in 2023, and 1% in 2024.
This spells out to me that not much will radically change from 2022.
Barely scraping along and avoiding a recession means that the Fed won’t have a license to suddenly pivot.
That means there will be a delay in introducing meaningful easing and by that, I mean half-point or full-point rate cuts perhaps to the end of 2023 and maybe even 2024.
I believe we are range bound with tech stocks rallying on perceived pivot front-running.
However, any rally will come down to earth with tech earnings decelerating and growth scares occurring periodically.
In short, we are losing precious time for the last gangbuster rally into year-end for tech shares, and it is increasingly probable that the “year-end rally” already took place.
We need a capitulation for things to pick up steam and that obviously won’t happen when Cathy Wood is screaming for $1 million per Bitcoin in the tech sector.
We need to flush out the weak hands first and she’s next on the list after the crypto implosion.
“Some people don't like change, but you need to embrace change if the alternative is disaster.” – Said the CEO of Twitter Elon Musk
Mad Hedge Technology Letter
November 21, 2022
Fiat Lux
Featured Trade:
(ROBOTICS-AS-A-SERVICE)
(RaaS)
