“Any product that needs a manual to work is broken.” – Said CEO of Twitter Elon Musk
Mad Hedge Technology Letter
November 2, 2022
Fiat Lux
Featured Trade:
(POOR OUTLOOK FOR TRAVEL TECH)
(ABNB), (BKNG), (EXPE)
The big sell-off in Airbnb (ABNB) this morning was not about the great quarter it just had, but what investors have guessed the company faces in 2023.
Prospects look weak next year.
The re-opening and revenge travel surge came through in such a way that growth was brought forward at a blistering rate.
The number's back up my thesis, with ABNBs revenue expanding by 29% or $2.9 billion, ahead of expectations at $2.84 billion.
On the bottom line, earnings per share jumped 47% to $1.79, breezing past the consensus at $1.47.
Yet the stock is down 9% in this morning’s trading, with a textbook “buy the rumor and sell the news” type of price action.
The US is barreling towards a recession in 2023, although the job numbers have stayed extremely resilient in the face of rate hikes.
If jobs can muscle through these next rate rises, then I do believe that a recession can be put off until 2024.
However, it will take time for the market to reflect the new realities and until then, ABNB is poised for a slowdown.
What do I mean by a slowdown?
The company forecasts around a 17% increase in sales which severely underperforms the 29% they registered last quarter.
While the forecast is not something to freak out about, investors are taking profits today and rotating capital elsewhere that isn’t growth.
Unless there is another forced lockdown, I don’t see ABNB beating the 29% expansion in revenue in the near future.
While sales won’t drop off a cliff next year, I don’t see how they get back to the 30% sales growth until we get to the other side of the recession which could be somewhere around 2024.
The downgrade in forecast in the travel industry was consensus.
At the individual level, the astronomical price rises for travel and leisure will have to abate somewhat to attract the incremental customer from now.
Most people have budgets, and they saved for 2 years to blow it all on a summer to remember (or forget).
Competitors such as Booking Holdings (BKNG) and Expedia (EXPE) have yet to report third-quarter earnings, and their guidance should be informative for overall travel trends. The two leading online travel agencies are likely to forecast a similar deceleration into the fourth quarter.
As the travel market evolves, Airbnb will continue to outperform because it’s a monopoly in the home-sharing business and other firms like booking.com don’t come close.
I would definitely classify ABNB as a solid long-term investment and to add on big down days.
Unfortunately, ABNB's core business is being overshadowed by the macro picture these days, which is highly negative for technology stocks.
The silver linings are there, as the business model has also turned from a net loss-making model to a nice profit machine this year.
Even if profits are under $1 billion per year, they were bleeding money just a few years ago as they worked to improve the unit economics in this unique industry.
The 17% increase next year will turn out to be a blip on the radar long term and I believe that once we get over the hump and interest rates start trending down, ABNB will be one stock that will shoot from the bottom left to the upper right.
“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