“Every kid coming out of Harvard, every kid coming out of school now thinks he can be the next Mark Zuckerberg, and with these new technologies like cloud computing, he actually has a shot.” – Said Venture Capitalist Marc Andreessen
Mad Hedge Technology Letter
October 12, 2022
Fiat Lux
Featured Trade:
(THE RIDE SHARE DILEMMA)
(UBER), (LYFT), (DASH)
The US Federal government must have its way.
This one move blows up the business models of Uber (UBER), Lyft (LYFT), DoorDash (DASH), and any other tech platforms reliant on self-employed drivers.
Whether it’s denying the expansion of domestic energy capacity or meddling in self-employed worker status, the government is hell-bent on putting its stamp on the economy.
And boy they do.
It’s been rough lately for the ride share firms.
Uber fares have not been trending down lately as the combination of higher insurance costs, higher fuel prices, and higher costs to car ownership have meant passengers pay more to get from point A to point B.
I don’t need to chronicle how the cost of doing business is inching up because it’s happening everywhere and that just means the goalpost is narrowing in order to get costs below revenue.
That is the new normal whether we like it or not.
However, for Uber, their business model just might be untenable if they are forced to sign up drivers as full-time workers who receive full benefits including a 401K, health insurance, overtime pay, and paid time off.
This is expensive.
Under the US Labor Department's proposal, workers would be more likely to be classified as employees instead of independent contractors.
Tens of millions of people work in the global gig economy across services like food delivery and transport.
US Labor Secretary Marty Walsh said the rule would aim to stop companies from misclassifying workers as independent contractors.
For those that use ride share, there is no workaround to higher compensation in signing up full-time workers and costs will be passed down to the end user causing ridership to fall.
Gig economy firms have come under increased scrutiny as the industry grows in size.
Payments firm MasterCard has estimated that 78 million people will be employed in the gig economy by next year.
Gig workers are paid for individual tasks, such as food delivery or a car journey, rather than getting a regular wage.
In the first half of 2022, Uber lost almost $7 billion and the only reason why they can still exist is because of investors pouring money down a black hole to fund Uber’s existence.
I still don’t see how they make the unit economics work and their stock price reflects my analysis.
The stock trades around half of $51 which was achieved during the height of the reopening from the arbitrary lockdowns in 2021.
Reality has come back to bite as the same issues persist and every rally in this stock has been a great selling opportunity.
This ride share company has no chance of ever becoming profitable and they have done nothing to signal they are on the right track.
Just because they “do better than Lyft” doesn’t mean it’s a great long-term buy-and-hold stock or even a good company.
On top of poor unit economics, Uber’s ability to tap the debt markets to borrow money has been severely crimped.
Borrowing at extortionate rates makes it impossible to spin profits which means going back to the debt markets once again in a vicious negative feedback loop.
At some point, they will be shut out because of creditworthy issues even if not yet.
Who would want to invest in a company like that?
If a reader wants to put money to work in this stock, sell short after every bear market rally or buy outright puts after every rally.
Don’t reward tech firms that behave poorly or ones that can’t make money.
“Restaurants get you in with food to sell you liquor; religions get you in with belief to sell you rules.” – Said Lebanese-American Risk Analyst Nassim Nicholas Taleb
Mad Hedge Technology Letter
October 10, 2022
Fiat Lux
Featured Trade:
(SOFTWARE THAT DRIVES YOU)
(SELF-DRIVING TECH)
Isn’t it interesting that self-driving cars and the software that launched this phenomenon are not required to pass a driving test, yet humans are?
I am here today to challenge the basic premise that software backed by artificial intelligence can drive a car better than a human.
Take left turns without a traffic light.
Artificial intelligence has consistently failed to successfully complete this standard objective.
This somewhat riskier driving maneuver must take into account drivers on the other side of the road which humans can do, but the back-tested data in the self-driving software cannot predict external variables that could come into play.
This is why the software malfunctions on a left turn when a bird defecates on the windshield believing it’s an accident worthy of a full stop and yes a full stop right in the middle of oncoming traffic.
These types of poor decisions occur more often than you think with this “cutting-edge” technology.
The truth is that self-driving car technology is coming close to the point where I will be comfortable calling it a $200 billion tech scam.
This scam is right up there with the Madoffs.
Twenty years on, no real product to show for except many unintended road deaths and rich Silicon Valley software engineers that peddle this false theory that software is better at driving than humans.
What’s the current situation today?
The industry still amounts to little more than a bunch of glorified tech demos.
It’s basically a performance and that’s it.
In demos, you see what the creators want you to see, and they control for things that they'd rather you didn't.
To an AI, a slight change could be catastrophic. After all, how is it supposed to know what an appropriate response to a slight or sudden change is when it doesn’t understand everything it’s looking at?
How will it handle when the weather goes from sunny to hail, or when there’s deer in the headlights at the edge of the road?
It is unequivocally wrong to believe that software is better at real-time driving than a human, and therefore this industry will never mushroom into what investors think it might.
This will never be a multi-trillion dollar industry where tech companies can license out self-driving technologies to bidders around the world.
Self-driving cars are a 2-ton weapon ready to kill pedestrians, cyclists, and little kids.
The interesting thing to look for is whether these venture capitalists and investors double down on failed technology and pull strings to get this circus on public roads with the rest of us.
It’s entirely possible that this could happen in limited areas like the states Arizona and California.
At the very minimum, I don’t believe that all 50 states would ever green-light such rotten technology.
I would advise anyone to move away from those states and find a state where human driving is mandatory.
As for tech, the write-downs for this botched job won’t hurt much to big firms like Google.
However, add this to the dustbin of failed tech.
The metaverse is a project that appears to be headed for that same dustbin too.
Outdoing the smartphone is proving to be almost impossible and this is just another symptom of it.
Tech is still utterly reliant on smartphone revenue until someone can supplant it.
The search goes on with another grave in the rearview mirror.
PROBABLY NOT GONNA HAPPEN
“Virtual reality, all the A.I. work we do, all the robotics work we do - we're as close to realizing science fiction as it gets.” – Said CEO of Nvidia Jensen Huang
Mad Hedge Technology Letter
October 7, 2022
Fiat Lux
Featured Trade:
(TECH GROWTH NOT GROWING)
(PTON)
Peloton (PTON), the glamorous fitness-bike-with-a-tablet company, is going through a gut-churning 4th round of job cut this year.
I call this bad management, because it is.
If a company is going to cut jobs, get it over with one sharp cut of the sword, otherwise, the wounds don’t start to heal.
I can’t imagine how low company morale is in the virtual offices of Peloton as the tech firm lurches from one round of job cut to the next.
It’s hard to understand how anybody gets anything done at Peloton because they are too busy going under company review.
The extra cherry on top for this 4th job cut is the CEO has told us the company has 6 months to prove it can survive as a standalone company.
This is again poor management as it essentially signals to workers to find an imminent backup plan before the rate hikes destroy all job openings.
Yes, there is a name that goes with this dark face and that is CEO Barry McCarthy.
The genius management is one of the big reasons why the stock is down 75% so far this calendar year.
Peloton’s recent strategic changes have sparked speculation that it could be looking to sell itself, but at this point, it’s only worth pennies on the dollar from what it once was at the height of late 2020 and early 2021.
That was when Peloton was strutting around like it could no wrong.
They had the hot product but unfortunately failed to capitalize on their head start.
Head starts don’t last long for marginal firms or in the tech world for that matter.
It only takes months for other tech firms to iterate mediocre products into their lineup and PTON let the short-term success get to their head.
Even more surprising was the overconfident nature of the management when they were still a massively loss-making operation.
My recommendation would have been to roll into a more stable cash flow business during the arbitrary lockdowns, but no, PTON is still an analog company when others have gone digital.
They are still selling the same Podunk stationary bike when the smart consumer figured it out by purchasing a stationary bike themselves and installing a tablet stand.
If you want to argue that the PTON exercise classes were worth the subscription then I would also say a smart consumer can just exercise themselves with a timer and self-selected music.
Small backwater firms only get 15 minutes of fame once in a lifetime, yet management did little to launch them into a more stable operational situation and they lost $1.2 billion just last quarter.
Taking a step back, growth tech has been crushed by these interest rate hikes and only the holy grail of tech products is surviving at this point.
Before, zombie firms used to be able to go back to the debt markets to kick the can down the road, but not anymore as loan costs have soared.
No more excesses fueled by cheap capital – it's sink or swim time.
Clearly, management didn’t get the memo and I don’t see growth tech reversing until we are further through the rate rise cycle and debt servicing costs become lower.
Mad Hedge Technology Letter
October 5, 2022
Fiat Lux
Featured Trade:
(THE DEAL GOES THROUGH)
(TWTR), (TSLA)
