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Is Lucid The Next Tesla?

Is it worth it to invest in the “next Tesla” or is it way too optimistic there could even be a next Tesla?

This upstart challenger to Tesla, Lucid (LCID) is more or less what I thought about Tesla a few years ago – buy the car and not the stock.

Like many businesses in the world – it comes down to time and place.

Tesla benefited from generous federal subsidies, first mover advantage and LCID is just a little late to the action.

Why does that matter?

Tesla had its knife and fork at the table by itself when nobody else wanted to join them.

The problem with legacy automakers is that it took them too long to realize that EVs were a tsunami instead of a splash in a pond.

I know with conviction that EV makers like LCID are slogging through because of the numbers that materialize in their earnings reports.

The numbers are a manifestation of the time and place phenomenon that I just mentioned.

LCID continues to face major cash flow issues and will be lucky to exist in a few years.

A high burn rate is a hallmark of smaller EV companies and even Tesla had to be saved at the last second it its early days.

LCID simply doesn’t have the expertise and economies of scale to bring down the unit economics where it delivers a profit.

This achievement is also pushed out far into the future.

We are also seeing a widening gap in its production and deliveries, with approximately 4.76K units undelivered, with a growing inventory value of $1.01B.

LCID's resale value appears to be drastically impacted, with one recently auctioned for $85K, compared to the base model of $110,000.

The intense capital burn has forced LCID management to issue more common stock which dilutes current shareholders and suppresses the stock price.

While LCID may have won the battery competition through its longest driving range and market-leading design, the management's choice to go premium has clearly undermined the mass market.

This is a segment that fellow automakers such as Tesla (TSLA) and BYD (OTCPK:BYDDF) have invested great efforts while improving their supply chain and pricing strategies.

This alone suggests LCID's highly niche market segment based on the hefty price tag of $150K per unit, compared to TSLA at $40K and BYD between $20K to $30K (in China), effectively will stoke higher cash burn levels.

For now, LCID has not achieved break-even, selling every EV at a loss.

This signals weak consumer demand for LCID.

This automaker's expanded annualized production capacity of up to 90K vehicles in the AMP-1 facility and up to 155K in the Saudi Arabia facility.

Production is still miles behind Tesla at a time when supply chains and material costs are squeezing EV makers even more.

When we consider that the stock was trading at $20 per share just 1 year ago, the stock languishing at $7.50 today represents quite a pitiful performance.

I do acknowledge they make quite a nice EV.

However, it’s still highly debatable whether its business model is sustainable.

I do believe that around $4 per share is a good entry point for this EV maker.

Any pop from $4 should be sold.

There is no reason to overpay for LCID right now in a market that values accelerating and positive free cash flow.

Better the stock come to you than to go fishing for it.

lcid

July 17, 2023/by Mad Hedge Fund Trader

July 14, 2023

Tech Letter

Mad Hedge Technology Letter
July 14, 2023
Fiat Lux

Featured Trade:

(BAD TECH EARNINGS ARE PRICED IN)
(AAPL), (TSLA), (AMZN), (FB)

July 14, 2023/by Mad Hedge Fund Trader

Bad Tech Earnings Are Priced In

Tech Letter

There are many so-called “experts” and “economists” dumping on the upcoming tech earnings season.

I got it – they won’t be the best ever.

No need to beat a dead horse when it’s down.

They say that the optimism of a soft landing for the economy is dissipating as stubbornly high inflation keeps central banks hawkish.

It’s hard to believe that tech stocks have been on a tear in 2023 during a period of hawkishness.

Higher for longer luckily has not affected tech stocks yet, yet many are saying this earnings season could be the straw that breaks the camel’s back.

I must admit, at the intro level such as venture capitalism and start-ups, the rate environment has been nothing short of catastrophic.

Investors aren't giving money for just ideas anymore.

The good news is that at the incubator level, nobody cares because these paltry numbers don’t move the stock market and are decades away from going public.

It doesn’t matter to the tech market that the next Amazon or Facebook has a tough time borrowing with these sky-high rates.

Nobody cares because most people hold Apple and Tesla stock.

I am also willing to call B.S. on the negativity for the upcoming tech earnings season and will say it should be just fine.

I am not diminishing the belt-tightening going on inside the offices, it certainly is happening.

Tech companies are hunkering down, which is true because the low-lying fruit has been plucked off the branch.

42% of respondents from a recent survey said the biggest negative for the earnings season will be the impact of further tightening of financial conditions.

I would say that if that is the biggest risk out there to respondents, then tech shares will certainly end the year higher from today.

There’s also a widespread belief that earnings per share (EPS) will fall off a cliff and then rebound to growth in the final three months of the year, according to data by Bloomberg Intelligence.

This seems like the perfect setup for tech executives to lower the bar.

While the tech rally was boosted by the hype around artificial intelligence, over 70% of survey participants say the impact of AI on tech earnings is overblown.

Amid the gloom, the biggest positive drivers for equities will be any signs of easing inflation and cost cutting, according to the majority of those surveyed.

Ultimately, it has already been baked into the pie that margins will come under pressure as companies lose the ability to keep raising prices when inflation cools and as growth slows.

That doesn’t mean there will be anything more than a technical and orderly pullback which I have been championing for.

A result like that would be healthy for tech stocks.

Tech shares simply cannot go up in a straight line forever, but they keep defying gravity in the first 7 months of the year.

Even if the big 7 tech stocks signal some downshifting revenue trajectories, it won’t be more than a few days' drop in shares signifying a marvelous opportunity to finally get into some of these premium names that rarely offer optimal entry points.

Expect nothing special from this earnings season and buy any garden variety dip from premium tech stocks.

July 14, 2023/by Mad Hedge Fund Trader

July 12, 2023

Diary, Newsletter, Summary

Global Market Comments
July 12, 2023
Fiat Lux

Featured Trades:

(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)

CLICK HERE to download today's position sheet.

July 12, 2023/by Mad Hedge Fund Trader

December 9, 2022

Diary, Newsletter, Summary

Global Market Comments
December 9, 2022
Fiat Lux

Featured Trade:

(WHY TECHNICAL ANALYSIS NEVER WORKS)
(FB), (AAPL), (AMZN), (GOOG), (MSFT), (VIX)

December 9, 2022/by Mad Hedge Fund Trader

Why Technical Analysis Never Works

Diary, Newsletter, Research

Welcome to the year from hell.

We have now collapsed 16% from the January high. Buyers are few and far between, with one day, 5% crashes becoming common.

By comparison, the Mad Hedge Fund Trader is up a nosebleed 88.48% during the same period.

The Harder I work, the luckier I get.

Go figure.

It makes you want to throw up your hands in despair and throw your empty beer can at the TV set.

Let me point out a few harsh lessons learned from this most recent meltdown and the rip-your-face-off rally that followed.

Remember all those market gurus claiming stocks would rise every day for the rest of the 2022?

They were wrong.

This is why almost every Trade Alert I shot out this year have been from the “RISK OFF” side.

“Quantitative Tightening”, or “QT” is definitely not a stock market-friendly environment.

We went into this with big tech leaders, including Apple (AAPL), Amazon (AMZN), Google (GOOG), and Microsoft (MSFT), all at or close to all-time highs.

The other lesson learned this year was the utter uselessness of technical analyses. Usually, these guys are right only 50% of the time. This year, they missed the boat entirely. After perfectly buying the last top, they begged you to dump shares at the bottom.

In 2020, when the S&P 500 (SPY) was meandering in a narrow nine-point range, and the Volatility Index (VIX) hugged the $11-$15 neighborhood, they said this would continue for the rest of the year.

It didn’t.

When the market finally broke down in January, cutting through imaginary support levels like a hot knife through butter ($35,000?, $34,000? $33,000?), they said the market would plunge to $30,000, and possibly as low as $20,000.

It didn’t do that either.

If you believed their hogwash, you lost your shirt.

This is why technical analysis is utterly useless as an investment strategy. How many hedge funds use a pure technical strategy? Absolutely none, as it doesn’t make any money on a stand-alone basis.

At best, it is just one of 100 tools you need to trade the market effectively. The shorter the time frame, the more accurate it becomes.

On an intraday basis, technical analysis is actually quite useful. But I doubt few of you engage in this hopeless persuasion.

This is why I advise portfolio managers and financial advisors to use technical analysis as a means of timing order executions, and nothing more.

Most professionals agree with me.

Technical analysis derives from humans’ preference for looking at pictures instead of engaging in abstract mental processes. A picture is worth 1,000 words, and probably a lot more.

This is why technical analysis appeals to so many young people entering the market for the first time. Buy a book for $5 on Amazon and you can become a Master of the Universe.

Who can resist that?

The problem is that high-frequency traders also bought that same book from Amazon a long time ago and have designed algorithms to frustrate every move of the technical analyst.

Sorry to be the buzzkill, but that is my take on technical analysis.

Hope you enjoyed your cruise.

December 9, 2022/by Mad Hedge Fund Trader

An Insider’s Guide to the Next Decade of Tech Investment

Diary, Newsletter

Last weekend, I had dinner with one of the oldest and best-performing technology managers in Silicon Valley. We met at a small out-of-the-way restaurant in Oakland near Jack London Square so no one would recognize us. It was blessed with a very wide sidewalk out front and plenty of patio tables.

The service was poor and the food indifferent, as are most dining experiences these days. I ordered via a QR code menu and paid with a touchless Square swipe.

I wanted to glean from my friend the names of the best tech stocks to own for the long term right now, the kind you can pick up and forget about for a decade or more, a “lose behind the radiator” portfolio.

To get this information, I had to promise the utmost confidentiality. If I mentioned his name, you would say “oh my gosh!”

Amazon (AMZN) is now his largest holding, the current leader in cloud computing. Only 5% of the world’s workload is on the cloud presently so we are still in the early innings of a hyper-growth phase there.

By the time you price in all the transportation, labor, and warehousing costs, Amazon breaks even with its online retail business at best. The mistake people make is only focusing on this lowest of margin businesses.

It’s everything else that’s so interesting. While its profitability is quite low compared to the other FANG stocks, Amazon has the best growth outlook. For a start, third-party products hosted on the Amazon site, most of what Amazon sells, offer hefty 30% margins.

Amazon Web Services (AWS) has grown from a money loser to a huge earner in just four years. It’s a productivity improvement machine for the world’s cloud infrastructure where they pass all cost increases on to the customer who, once in, buy more services.

Apple (AAPL) is his second holding. The company is in transition now justifying a massive increase in earnings multiples, from 9X to 25X. The iPhone has become an indispensable device for people around the world, and it is the services sold through the phone that are key.

The iPhone is really not a communications device but a selling device, be it for apps, storage, music, or third-party services. The cream on top is that Apple is at the very beginning of an enormous replacement cycle for its installed base of over one billion phones. Moving from upfront sales to a lifetime subscription model will also give it a boost.

Half of these are more than four years old, and positively geriatric in the tech world. More than half of these are outside the US. 5G has added a turbocharger.

Netflix (NFLX) is another favorite. The world is moving to “over the top” content delivery and Netflix is already spending twice as much on content as any other company in this area. This is why the company won an amazing 44 Emmys last year. This will become a much more profitable company as it grows its subscriber base and amortizes its content costs. Their cash flow is growing by leaps and bounds, which they can use to buy back stock or pay a dividend.

Generally speaking, there is no doubt that the pandemic has pulled forward some future technology demand with the stay-at-home trend. But these companies have delivered normal growth in a hard world.

5G has enabled better Internet coverage for everyone and increased the competitiveness of the telecom companies. Factory automation has been another big area for 5G, as it is reliable and secure, and can be integrated with artificial intelligence.

Transportation will benefit greatly. Connected self-driving cars will be a big deal, improving safety and the quality of life.

My friend is not as worried about government-threatened break-ups as regulation. There will be more restraints on what these companies can do going forward. Europe, which has no big tech companies of its own, views big American tech companies simply as a source of revenue through fines. Driving companies out of business through cutthroat competition is simply not something Europeans believe in.

Google (GOOG) is probably more subject to antitrust proceedings both in Europe and the US. The founders have both retired to pursue philanthropic activities, so you no longer have the old passion (“don’t be evil”).

Both Google and Meta (META) control 70% of the advertising market between them, which is inherently a slow-growing market, expanding at 5% a year at best. (META)’s growth has slowed dramatically, while it has reversed at (GOOG).

He is a big fan of (AMD), one of his biggest positions, which is undervalued relative to the other chip companies. They out-executed Intel (INTC) over the last five years and should pass it over the next five years.

He has raised value tech stocks from 15% to 30% of his portfolio. Apple used to be one of these. Semiconductor companies today also fall into this category. Samsung with 40% margins in its memory business is a good example. Selling for 10X earnings is ridiculously cheap. It is just a matter of time before semiconductors get rerated too.

He was an early owner of Tesla (TSLA) back in the nail-biting days when it was constantly running out of cash. Now they have the opposite problem, using their easy access to cash through new share issues as a weapon to fight off the other EV startups. Tesla is doing to Detroit what Apple did to the cell phone companies, redefining the car.

Its stock is overvalued now but will become much more profitable than people realize. They also are starting to extract services revenues from their cars, like Apple has. Tesla will grow revenues by 30%-50% a year for the next two or three years. They should sell several millions of the new small SUV Model Y. Most other companies bringing EVs will fall on their faces.

EVs are a big factor in climate change, even in China, the world’s biggest polluter. In Europe, they are legislating gasoline cars out of existence. If you can make money building cars in Fremont, CA, you can make a fortune building them in China.

Tech valuations are high, there is no doubt about it. But interest rates are much lower by comparison. The Fed is forcing people to buy stocks, enabling these companies to evolve even faster.

Tech stocks have a lot more things going for them than against them. The customers keep coming back for more.

Needless to say, the above stocks should make up your short list for LEAPS to buy at the coming market bottom.

August 2, 2022/by Mad Hedge Fund Trader

June 6, 2022

Tech Letter

Mad Hedge Technology Letter
June 6, 2022
Fiat Lux

Featured Trade:

(A KEY CLUE TO THE FUTURE OF META)
(FB), (COMPQ)

June 6, 2022/by Mad Hedge Fund Trader

A Key Clue to the Future of Meta

Tech Letter

Chief Operating Officer (COO) of Facebook (FB) Sheryl Sandberg quitting from her post caught many off guard.

It seemed like she was in it to the end, until she wasn’t.

Most thought she wouldn’t stop until the company she worked for completely destroyed democracy, or ruined other countries’ free elections, or until she had more money than most sovereign countries.

Apparently, that wasn’t the finish line!

Did she get tired of all the mass killings that Facebook streamed live to its multi-billion-person audience?

Probably not.

My read into this is that Facebook is heading directly for a cataclysmic revenue iceberg and Sandberg is definitely not on board with the new direction of the company, i.e. the Metaverse.

The Metaverse has already lost 10s of billions of dollars and will continue to do so for the next couple of years for a very untested and unproven technology.

She clearly gives the Metaverse a big thumbs down and we might look back on this to a vital signal or even a missed sign.

Sandberg would most likely stay on board if there was another billion it in for her.

Remember, it was Sandberg who brought the concept of a digital ad model from Google to Facebook which catapulted Facebook into a wildly successful cash cow for its shareholders.

After that, I am not sure what else she did, but most executives never get that far in the first place.

Another takeaway from her resignation is that her digital ad model which essentially stole personal data from the user to sell to digital advertisers is on a downward and irreversible trajectory.

The underlying data supports this notion as Facebook, minus Instagram, bleeds users.

So instead of being in Menlo Park to take the blame for the downfall, might as well rebrand herself as the most powerful female Venture Capitalist in technology and move on to reignite her corporate feminism.

Even though she did pocket well over a billion dollars from her 14-years in mostly vested stock selling, she will be more known for selling out the Facebook user.

Rather than sacrifice a smidgeon of profitability to protect users, she decided to build a colossal army to construct a communications and government affairs squad to deny and deflect criticism of Facebook.

Those teams have been supremely effective at stymieing any momentum to go after Facebook itself.

That’s why the company is never in trouble and executives aren’t in jail.

They run a playbook of delaying tactics that stretch each story beyond the attention span of journalists and policymakers and even paying others to write bad press.

Sandberg was the engineer of that strategy and of the teams that implemented it. This was a deliberate choice. So was the Facebook decision to hire a consultancy to do opposition research about George Soros after the billionaire criticized Facebook in a speech at the World Economic Forum in early 2018.

She is a master of the dark arts and her quitting at Facebook does help cleanse the stench of the tech industry that has built a rotten reputation recently.

The biggest corporate sellout of Silicon Valley quitting epitomizes the deep trenches tech and Facebook find themselves in right now.

The fall from grace in 2022 has forced many hedge funds to liquidate.

Negative wealth effects are something no industry wants to be a part of.

However, it appears there is light at the end of the tunnel.

The 30% correction in the Nasdaq index has been followed by a 6% bear market rally.

The good news is that it's highly likely the Nasdaq index will not experience another 30% correction in the second half of 2022.

However, a recession not yet being priced into Nasdaq shares and a bad earnings setup put a spanner into the works, which is why the bear market rally is legitimately capped to the upside.

This means that it's the year of the short-term trader while long-term ETF holders won’t and haven’t found much success this year.

Sell the big rallies and buy the big dips, then take profits.

At least now is the time we are starting to discover dip buyers after they took the first 6 months off in 2022.