“I'd rather Apple cannibalize Apple than somebody else cannibalize Apple.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
October 31, 2022
Fiat Lux
Featured Trade:
(MAYBE NEXT GENERATION)
(JD), (BABA), (HUAWEI), (GOOGL), (TENCENT)
For all the China lovers out there who think buying Chinese tech after the dip is a good idea – I have bad news for you – it’s just a dead cat bounce.
Don’t be fooled into thinking just because Chinese tech stocks became cheap, it’s a good entry point into corporate China.
It’s not.
The truth is that this isn’t your father’s China.
The situation has dramatically changed in the last 10 days so much so that I will say with conviction to stay away from Chinese technology stocks perhaps forever, almost, like it’s the black plague.
The place is totally done after China’s Chairman Xi Jing Ping was “re-elected” for his 3rd successive five-year term as the authoritarian leader of the East Asian nation.
Investors have also listened to my advice as Chinese tech shares have been thrown out with the bath water from Hong Kong to mainland China.
Many investors want no more part of China Inc. which is ironic since this was the place they couldn’t get enough of just a few years ago.
Why have investors been so jittery anyway?
Essentially, Chairman Xi packed the Politburo standing committee, the core circle of power in the ruling Communist Party of China, with his friends, poker buddies, and allies.
It was only just recently when China was tightening the tech environment before with examples littered around the country such as putting the shackles on the founder of ecommerce firm Alibaba (BABA) Jack Ma.
The Chinese communist party blocked his IPO of Alibaba’s finance arm Ant Group resulting in mass shareholder losses.
The backdrop has only soured significantly since then.
Under Xi’s leadership, China has implemented a raft of policies that have tightened regulation on the tech sector in areas from data protection to governing the way in which algorithms can be used.
JD.com (JD), Alibaba, and Tencent laid off thousands of employees in April due to tightened regulations and a slowing economy.
What are the rest of the unintended consequences?
A stronger dollar and weaker Chinese yuan just for starters.
It’s no secret that China hoovers up as many dollars as it can find, but in the meantime, the Chinese yuan is under relentless pressure from its underperforming economy, poor government policies, and gargantuan federal debt load.
Tech innovation will drop off a cliff.
Before, Chinese tech innovation meant stealing ideas and IP from Americans, but it will be harder now that this is a bipartisan issue in the US Congress.
China will also slow down the rollout of new tech products simply because they can’t acquire the advanced chips they need to build their products.
Just look at Huawei that was once counted as one of the most popular smartphones in Europe. Nobody buys their phones anymore because Google-based apps are banned on Huawei phones.
Most chilling of all, Chinese tech workers won’t be incentivized to take any risk in an environment that will penalize them by who knows what at this point.
That means many of these firms will be playing it safe yet be pushed by boss, CEO, and the communist party to beat America in the tech race for global hegemony.
In short, America has won and China faces a stark future of mediocrity in the tech space. They churn out a high volume of tech employees but industry can only develop so far by copying. It’s impossible to out-copy oneself or others into the lead.
It’s getting so bad in China that even investor Ray Dalio has stopped cheerleading for the Mandarins.
“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)
