“Failure can teach you something, and as long as you're moving very, very quickly, you're going to start piling up the wins. Speed gives you the luxury to be able to fail.” – Said Current CEO of Uber Dara Khosrowshahi
Mad Hedge Technology Letter
October 28, 2022
Fiat Lux
Featured Trade:
(ENTRY POINT INTO AMAZON)
(AMZN)
The bonanza is over for now at Amazon (AMZN).
“Tightening our belt” are 3 words that I never thought I would hear from a Silicon Valley tech behemoth.
Yet, that is the shocking phrase that Amazon CFO Brian Olsavsky uttered as the man behind Amazon’s numbers spoke about the firm’s immediate future.
His less-than-sanguine outlook dovetails accurately with my prognosis for this earnings season that big tech will show weakness, but far short of the earnings apocalypse many were predicting.
That is why I am executing bullish trades on the dips for the best of class in tech.
Many investors are writing off 2022 as a year to forget, and tech companies are trying to make it over the line so they can pick a new play in the huddle.
The conditions and backdrop in Silicon Valley couldn’t have been worse in 2022.
2023 is poised to be a rebound year as liquidity loosens and supply chain bottlenecks ease.
Amazon used to glide through earnings with 5 stars.
Now they are stuck with quite a few mediocre businesses.
Amazon said it expects to post fourth-quarter revenue between $140 billion and $148 billion, representing year-over-year growth of 2% to 8%. Analysts were expecting sales to come in at $155.15 billion.
Amazon growing at 2%!
Yes, you heard it here first, and how the mighty and powerful have declined.
Under current CEO, Andy Jassy, who took the helm from founder Jeff Bezos in July 2021, Amazon has responded to hyperinflationary costs by aggressively cutting expenses across large segments of the company in recent months.
It shed warehouse resources, froze many experimental projects, shelved its telehealth service, and froze hiring for corporate roles in its retail business.
Amazon CFO Brian Olsavsky said the company cut its capital expenditures budget for this year by a third after it spent heavily over the last two years on things like ramping up its fulfillment and logistics network to deal with a lockdown economy.
When Founder Jeff Bezos resigned as CEO and took a back seat, Bezos knew that Amazon was peaking in the short term. He even sold some stock at the peak to cash in.
Jassy simply has a hard task on his hands to prove that he can reignite the tech company, but to give him the benefit of the doubt, he entered into a company dipping from its peak.
One bright spot that I didn’t mention was the strength of the digital ad business – it should arrive at a $10 billion per year business in a year or 2.
In totality, there is no way I can just throw AMZN onto the scrap heap.
The 10% selloff this morning, although warranted, is a great buy-the-dip entry point in the short term or long term.
That is why I executed a bullish call spread with strike prices of $87-$92 speculating that AMZN will stay above $92 by November 18.
This trade is even more soothing when the probability of the Fed slowing down rate hikes has dramatically improved in the short-term.
Any type of behavior that is perceived as pausing the tightening of liquidity is now equivalent to a “pivot.”
“Over the next 10 years, we’ll reach a point where nearly everything has become digitized.” – Said Current CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
October 26, 2022
Fiat Lux
Featured Trade:
(THE SHINE HAS BEEN WIPED OFF FOR NOW)
(GOOGL)
Google – it’s not what it used to be.
The sacred Silicon Valley behemoth of technology is finally showing weakness.
Crazier things have happened.
In fact, Google recorded the lowest growth since 2013 and that goes well back when the US economy was picking up steam after the Great Recession.
Revenue growth slowed to 6% from 41% a year earlier as the company suffers from a continued downdraft in online ad spending.
The ramifications are quite large as it essentially means that in the short-term, the digital ad industry is impotent as we head straight for a 2023 recession.
I would say the most surprising part of the whole report was to see Google’s “growth” asset, YouTube, floundering at just 2% growth.
It’s still a $7 billion standalone business but to see that much of a decline was somewhat surprising.
Philipp Schindler, chief business officer for Google, said the company saw a pullback in spend on search ads from certain areas such as insurance, loans, mortgage, and cryptocurrencies.
The underperformance in numbers is yet another bad omen for ad tech companies and Snap was the canary of the coal mine when the stock dropped 28%.
Considering the disappointing tone of the industry now, it’s not shocking to see the CEO of Meta Mark Zuckerberg just ignore his entire Facebook business for the metaverse.
It’s that bad selling digital ads now.
Google’s earnings per share (EPS) dropped by 24% year over year highlighting the challenges of running a large tech company during times of high interest rates and high inflation.
It’s a recipe for underperformance and we are seeing it in every part of Google’s business.
Maybe one of the only bright spots was the Google Cloud surging by 38%.
The cloud is one of the few growth drivers still left at Google.
The problem I have with Google is one that I have with many other big Silicon Valley tech firms.
They have become stagnated and too corporate.
They aren’t the leaders of innovation they once were and have pretty much juiced out the cash cow business they possess whether it be Apple’s iPhone or Google’s search engine or Meta’s Facebook.
The Silicon Valley bros aren’t immune from the rough times.
Long term, it’s hard to see Google becoming the growth engine they once were – a firm that consistently expanded 30% each quarter.
In fact, what I see clearer now than before is the cannibalization of Silicon Valley.
These big firms are starting to behave in a way an investor can understand as a scarcity mindset.
When the pie is perceived as shrinking, companies will step on their toes to get that extra piece of the pie.
Many of these moves illustrate this new entrenched mentality whether it be Apple’s sensitivity to others using the Apple store or the inability to offer stock-based compensation to new employees.
And that’s if a company is still hiring, last time I checked, many tech firms have either frozen hiring or are deleting big swaths of employees.
The new acquirer of Twitter also plans to fire 75% of Twitter’s staff on Day 1 removing the Chief Diversity Officer and many of the frothy positions that don’t add much value.
Big tech needs a reset and this is just more confirmation that restructuring is needed badly.
Mad Hedge Technology Letter
October 24, 2022
Fiat Lux
Featured Trade:
(GET WITH THE TIMES)
(META)
Brad Gerstner is the Founder and CEO of Altimeter Capital, a tech investment firm based in Silicon Valley and a big shareholder of Meta or Facebook.
On Monday morning, Gerstner wrote an “open letter” to the CEO of Meta Mark Zuckerberg essentially telling him that he has no idea what he’s doing and to get with the program.
Of course, the letter used a polite and courteous tone, but the content was damaging to say the least.
Some of his thoughts also back up exactly what I’ve been preaching.
Innovation in Silicon Valley has come to a screeching halt, and many of these incremental projects aren’t looking too attractive, like Metaverse.
Zuckerberg is also wildly out of step with the current times as bond yields have exploded, and tech stocks have been crushed. Yet the CEO has ramped up spending and getting very little bang for his buck.
He seems oblivious to all of it.
Gerstner wants juicing up of free cash flow through the existing platforms which focus mainly on digital ads, because they are still highly profitable.
He also criticized the amount of money used to develop the Metaverse and called for an imminent reduction in costs.
He later complains that META has increased its headcount from 25,000 to 75,000 heads in the past three years, but META is not squeezing out more productivity by this.
Gerstner recommends cutting the staff budget by 20% which would bring down staff costs to last year’s levels.
He didn’t say that the extra $40 billion in savings would go to shareholder returns, but one might conclude that he is lobbying for that decision that would benefit his wallet.
Essentially, “recommending” to invest $1-$2 billion is a direct show across the bow to Facebook management signaling not good enough at the top level.
Investors believe this technology is not only akin to a pet project, but also a failure of long-term strategic significance.
Remember that Zuckerberg is investing $30 billion in the metaverse in 2022 and wants to ramp up in 2023,.
My guess is that Zuckerberg adopts a defiant stance since he believes he’s the smartest guy in the room at all times.
He hates to be doubted and has an impulse to prove people wrong.
Even if the metaverse is the future, Zuckerberg is wildly early and investors want him to milk profits now from the ad business before he goes full steam into monetizing the metaverse.
Zuckerberg has super voting rights and is unable to get fired from the company he co-founded and investors gave him a pass for this situation for quite some time.
Now, moving forward, it appears as if Zuckerberg doesn’t care about Meta’s stock price anymore and will do anything to make this metaverse project work even if it doesn’t mesh with the balance sheet or the current cost of capital.
He doesn’t care because he views his legacy as intertwined with the prospects of the metaverse which is a dangerous path to choose.
It’s irresponsible for a CEO to crowbar a public company into a binary decision on a speculative technology when there’s no need for it.
Volunteering for high risk is a sign of bad leadership.
A CEO that cannot get fired is dangerous and it is coming back to haunt investors.
My guess is that Zuckerberg will double hiring, double investments and capital spending, double artificial intelligence engineers and triple down on this metaverse project because he views it as an existential proposition.
From an individual investor's point of view, reckless leadership means avoiding the stock.
I believe META’s stock is due for a terrible earnings report, poor forward guidance and I would sell any rally in META stock.
“The best entrepreneurs know this: every great business is built around a secret that's hidden from the outside.” – Said Venture Capital Peter Thiel
Mad Hedge Technology Letter
October 21, 2022
Fiat Lux
Featured Trade:
(A SMART WAY OUT)
(TWTR), (TSLA), (SNAP)
