Mad Hedge Technology Letter
February 7, 2022
Fiat Lux
Featured Trade:
(A MIXED BAG FOR AMAZON)
(FB), (AMZN), (GOOGL)
Posts
Ecommerce had to cool off, didn’t it?
After 2 years of breakneck growth, Amazon (AMZN) came crashing back down to life reporting its slowest revenue growth in 4 years.
Amazon’s online stores reported $206 million in losses for the U.S. revealing that American online shopping has plateaued for the short-term.
Much of this was baked into the equation as Amazon shares have really done nothing for the past 6 months.
The sugar high it received from the pandemic is starting to wear off.
AMZN experienced more than $4 billion in costs from inflationary pressures, lost productivity, and disruptions. The inflation primarily relates to wage increases and incentives in the operations, as well as higher pricing from third-party carriers supporting AMZNs fulfillment network. Lost productivity and network disruptions were driven primarily by labor capacity constraints due to challenges in staffing up AMZN facilities.
Then when the omicron variant reared its ugly head, there was a certain conflict with retaining staff as many workers called out sick, making an already tight labor force less efficient.
If the earnings report stopped just there, no doubt AMZN would have braced for a Facebook-like 25% selloff, but the silver linings in the AMZN report were more like a gold lining.
Three positive data points that couldn’t be downplayed were in the Amazon Web Services (AWS) business, the advertising business, and pricing for Amazon Prime membership.
AWS delivered a strong quarter of growth, as enterprises and developers continued to look to AWS for critical, innovative cloud solutions.
A vivid example of AWS is with Amazon’s relationship with parent company of Chrysler, Dodge, Fiat, Jeep, and Ram.
They selected AWS as its preferred global cloud provider for vehicle platforms to accelerate new digital products and upskill its global workforce.
There’s a whole list of the world's largest companies that now use AWS like Adidas, Goldman Sachs, Pfizer, Rivian.
AWS revenue expanded to 40% from a year ago to $17.8 billion, and represents the anchor for the financial health of Amazon.
It allows AMZN to pursue other growth levers like advertising.
What happens is that there is an intense feedback loop with customers, to keep building and making that better.
The end result is building more relevancy and better engaging experiences.
Interaction promotes an understanding that AMZN can build better analytic tools, provide better measurement, give them better insight to performance.
Amazon’s focus on serving brands has really differentiated themselves from the likes of Facebook (FB) and Google (GOOGL).
The sponsored ad space with regards to video advertising is certainly a great opportunity.
And again, this is about delivering good recommendations to customers and helpful when they're making their purchase decisions and giving them information around that.
In the end, advertising grew 32% year over year and is a $10 billion business.
The most aggressive move that Amazon told us about is their price rise for Prime Membership.
Amazon will increase the price of a Prime membership in the United States, with the monthly price going from $12.99 to $14.99 and the annual membership going from $119 to $139.
The 15% increase is the first price increase since 2018 which should be a boon to the bottom line.
Ultimately, I believe the Amazon Prime Membership price hike was the reason for the investor response of bidding up AMZN shares.
Although the ecommerce numbers were a little disappointing, they should rebound nicely in 2022.
The bar was set extremely low coming into the earnings and AMZN gave us enough juice for shares to surge.
When combining the positives of AWS and advertising strength, this ecommerce behemoth’s momentum is just too hard to ignore.
If inflation starts to moderate, expect AMZN’s stock to be 25% higher by the end of the year and I do believe investors will sell out of Facebook and buy into a quality stock like AMZN.
Mad Hedge Technology Letter
February 4, 2022
Fiat Lux
Featured Trade:
(FACEBOOK IS BROKEN)
(FB), (AMZN), (MSFT), (AAPL)
Facebook (FB) is broken.
As a stock, management team, product, and as a business model – it is broken.
This portends poorly for the company that Mark Zuckerberg built.
Funnily enough, Zuckerberg decided to opt for a new company name, "Meta," to signal to his investors that the company is barreling straight into a new chapter of its existence.
The problem I have with Meta is that they face 10 years of losses before they can potentially spin a profit from a Metaverse-based product.
Reading the tea leaves, the name change appears to mask the internal destruction of the legacy Facebook model, and the warning signs are more than a few.
They are in the digital ad business at a time when e-commerce company Amazon (AMZN) is rapidly encroaching on their turf.
I would argue that it was Facebook who completely missed out on e-commerce, almost like how Microsoft (MSFT) missed out on the cell phone business that Apple were able to figure out.
The final kick below the belt was Facebook admitting that Apple’s (AAPL) privacy changes have materially affected Facebook’s ability to collect large swaths of data.
The result is less accurate and voluminous data because they can’t steal as much reducing the amount they can charge digital advertisers for the data.
Facebook’s underperformance is the most complete anecdotal evidence so far on the impact to the advertising industry of Apple’s App Tracking Transparency feature, which minimizes targeting capabilities by limiting advertisers from accessing an iPhone user identifier.
Even with the terrible report, I don’t believe a 26% haircut in Meta shares was warranted, but this represents the sign of the times where companies aren’t given a free pass anymore.
If something like this were to happen in a period of easy money, I believe Meta would have only sold off 4%-6%.
So how about that Metaverse business?
Chief Executive Officer Mark Zuckerberg announced Wednesday that Meta had a net loss of $10 billion in 2021 attributable to its investment in the Meeetaverse.
I believe this is a risky stance to take considering it’s not fully guaranteed that the Metaverse will be what all the experts think it might turn into.
It could still only pull through in a diluted way like many things in life.
Amazon has really broken away from the pack, from an advertising minnow into an ad revenue juggernaut with annual sales of $31 billion for 2021, which is more than the $28.8 billion in ad revenue that YouTube posted for the year.
At that pace, Amazon’s ad business is also larger than several other entities in online advertising, including cloud rival Microsoft, whose CEO, Satya Nadella, disclosed last week the company’s 2021 advertising revenue exceeded $10 billion.
Amazon has also decided to increase the price of Prime by nearly 17% all while Facebook lacks pricing power to charge digital ad manufacturers more.
It’s time to retire the acronym starting with F – FANG, which once represented the equity market profile of Facebook, Apple, Netflix, and Google.
Is this the end of Facebook?
No, they still have a sterling balance sheet and are awfully profitable in what they do.
But looking forward, growth rates will contract down to single digits and user growth has turned negative.
These are both ominous signs with no solutions in sight.
Have we seen the high-water mark for Facebook?
Fixing its stock trajectory to the backs of the metaverse is a fool’s game because of the large losses it will incur in the short to mid-term.
Zuckerberg largely understands the Metaverse as an existential crisis of epic proportions, which is why he’s throwing the kitchen sink at it.
Broadly speaking, the stock market might have a Facebook problem because the company is so valuable and part of so many indices that a dip in shares will hurt the wider market.
In any case, the bombshell report means that this bodes poorly for the 3-year trajectory of Meta’s stock; and to give Meta the benefit of the doubt, at least they have the cash to make a legitimate run at the Metaverse business.
Don’t expect high octane price action in Meta until they signal that the Metaverse business is legitimate and just around the corner, which might be a while!
My recommendation is to put this one on the backburner until prospects brighten up.
Mad Hedge Technology Letter
January 28, 2022
Fiat Lux
Featured Trade:
(APPLE PUSHES THE ENVELOPE)
(MSFT), (AAPL), (GOOGL), (FB)
We can flip through the thesaurus to look for superlatives that would describe how Apple (AAPL) is performing versus the rest of the market or tech sector, yet it really doesn’t matter who we compare them to, because no matter what we do, somebody would need to be clinically insane to bet against this well-oiled machine.
To give credit where credit is due, Apple CEO Tim Cook parlayed his friendship with co-founder Steve Jobs into the top job at Apple precisely because he was and still very much is an operational specialist.
In times of pandemic, climate change, supply chain problems, hyperinflation, and geopolitical volatility, this is the man you want at the helm to make those operational decisions that benefit shareholders.
Cook even pulled off China and is the only person in Silicon Valley that can claim that level of tech success in the Middle Kingdom.
Not many US tech companies can outdo the Chinese in China, but that is what Cook has managed to achieve and that sometimes gets overlooked.
I have undeniably been a major skeptic about China, but he has managed to penetrate so deeply into Chinese culture that the Chinese can’t root him and his products out without massive disruption and possible social unrest.
Cook, being the operations guy that he is, told the media that he expects supply bottlenecks to ease, which is a major bullish signal to the rest of tech and the semiconductor industry.
That comment alone will mean that the Nasdaq will finish the year at least 7-10% higher than if he didn’t make that comment and to nobody’s surprise, Apple is trending higher by over 6% today and rightly so.
The market trusts Tim Cook and what he says, and I can’t say the same for Tesla’s Elon Musk who loves to overpromise and underdeliver.
This is also good news for the EV sector such as Lucid (LCID) and Rivian (RIVN) which I highlight as two stocks with massive potential even if they can’t ramp up to Tesla levels right away.
Optimizing the supply chain has never been more important today because of the de-globalized elements that have filtered through to corporate America.
Part of streamlining the operations helps when you are Apple and you are Tim Cook and you can negotiate contracts down to the fractional cent.
Other companies simply don’t have that negotiating leverage.
They have curried together that type of goodwill that Apple has with their brand name and footprint.
Moving forward, the best way to decode the content of Apple’s earnings report is by viewing it as an equivalent to an implicit guarantee that margins and operations will be running smoothly for the rest of the year.
That in itself carries more weight than the Fed supplying capital for zombie companies.
I keep mentioning that this is the era in which the balance sheet matters; and wow, Apple has a crystal clean sheet that almost doesn’t need balancing.
Apple’s optionality is just mind-boggling from unlimited buybacks, to possibly raising their dividend from 22 cents, to hiring and expanding their workforce, adding more data centers, and so on.
They literally have any tool in the tool kit to respond to any possible headwind.
That is a luxury that most tech companies cannot claim to possess aside from a handful.
As Microsoft reported stellar earnings, this is just another feather in the cap for big tech.
Big tech is protected from the carnage that smaller tech companies must face, and who have less options to remediate possible devastating internal or external threats.
Not only is Apple riding high on their horse at the vanguard, but they possess products and software that simply can’t be substituted out, which easily creates an overwhelming strong hand when it comes to pricing power.
Next in the queue with earnings is Alphabet (GOOGL), where I fully expect them to reveal record earnings. Facebook (FB) too should do well, but not as good as GOOGL.
Don’t bet against Goliath.
Mad Hedge Technology Letter
January 24, 2022
Fiat Lux
Featured Trade:
(BEST OF THE REST GETS SLAUGHTERED)
(MSFT), (SNAP), (GOOGL), (AAPL), (AMZN), (FB), (TIKTOK)
Popular nostrum has it that earnings will save the stock market.
The strength of corporate America time and time again is on display to show investors how high short-term growth follows through.
Anytime the Nasdaq enters a little rut, earnings bail us out and the next move is usually higher for tech shares.
Well, wait a second, things are different this time.
The bad news now is that confirmation of solid fundamentals during the upcoming earnings season, won’t make the Nasdaq index go higher.
The market is pricing in business as usually for the largest 5 tech stocks which are really the only ones that matter.
Internally, the rest of tech has been deeply damaged by this January sell-off and we are talking about 8-9% one-day sell-offs for the small cap tech growth and I haven’t even mentioned the peak to trough underperformance which is much worse.
Larger cap Enterprise and Cyber Security stocks still boast solid foundations and are going down less than the meme stocks, shelter-at-home stocks, and the best of the rest tech stocks.
Basically, we need to get through earnings because there is minimal upside for tech stocks as investors peruse through a lack of short-term catalysts.
We are stuck in a ditch where monetary and fiscal policy has been set dead straight against an environment of potentially appreciating tech stocks.
Until that changes, I don’t envision a snappy reversal apart from a dead cat bounce to sell into.
Chasing growth in a low-interest rate environment gave us an overshoot to the upside and now that is all working in reverse.
And for the big FANG stocks outperforming small cap, it just means shares are performing better than tech growth because they command lower volatility due to stronger balance sheets.
Resilience to indiscriminate selling is currency in today’s trading world.
Nothing wrong with growth, but they are what they are, so much so that if you cannot generate profitability now, sell-offs are indicative of their poor strategic position among bigger tech.
The carnage under the hood is stark today with Snap stock cratering after the social media company’s shares were downgraded amid risks to revenue growth and tough competition from rival TikTok.
Snap’s headwinds result from a weakening business profile stemming from IDFA headwinds, difficult [year-over-year comparisons] from stellar growth in 2020-21, and increasing competition from TikTok.
IDFA is a serious thorn in the side for the android-based systems of Google as well as for Facebook.
IDFA is Apple minimizing the reach of data harvesting platforms by turning off their data reach and these modifications by Apple (AAPL) to rules for advertising on mobile apps have forced companies like Snap to lower guidance.
When it reported quarterly earnings last October, Snap revealed that the impact on its advertising business could be long lasting and now we are experiencing that.
The IDFA issues could cut growth rates by half as these social media firms have been unable to remedy its loss of reach in digital advertising.
Snap has the unenviable position to not only be behind Google and Facebook, but they are also the next company to be upended by TikTok that has really come on the last few years.
TikTok has supplanted Snap as the go-to social media platform for teens and young adults.
In a rising interest rate environment, the best of the rest like Snap gets punished for not being the best of class.
Snap shares are down over 200% from its peak and threatening to close in on 300% in the red.
Snap represents the fortunes for the marginal tech stocks that rely on growth and that is not working in 2022.
Although not as loss-making as other tech growth, SNAP has been fairly pigeonholed as the tech you don’t want to own now.
It’s a dangerous position to fill in times of the VIX spiking to 30.
The problems don’t stop there with TikTok really threatening Snap’s position and the momentum signaling that Snap is prepared for a deeper slowdown than initially expected.
Snap’s foothold is strongest in the 13-34-year-old range in the U.S., Canada, the U.K., France, Australia, and the Netherlands, but TikTok’s audience is the most similar to Snap’s which means it puts both Snap’s user face time spent and ad dollars at risk.
From a monetary standpoint, digital advertisers will start to play off ad competition between TikTok and Snap, resulting in discounted ad revenue per unit which will narrow margins moving forward.
Not being able to command the prior ad premium is a stinging blow to Snap who thought they were in the driving seat to the third position behind Google and Facebook, but it shows that being a tech minnow is a harrowing experience and fending off toxicity is part of the playbook just to survive.
Head to higher waters in this volatile environment.
Mad Hedge Technology Letter
December 17, 2021
Fiat Lux
Featured Trade:
(LOOKING FORWARD TO TECH IN 2022)
(FB), (NVDA), (AAPL), (MSFT), (AR), (VR)
Another pandemic year is on the verge of being in the books and we need to look yonder to 2022 and what it can offer.
Now that billions are being poured into the project, it’s not weird to say that advanced technology and the arteries and ventricles surrounding it, will all lead to developing this new world called the Metaverse.
The metaverse is a hypothesized iteration of the Internet, supporting persistent online 3-D virtual environments through conventional personal computing, as well as virtual and augmented reality headsets.
And I am not saying this is a new thing just to be cool, analyzing thousands of earnings reports, it’s clear that companies are deploying human capital around gaining a slice of this future Metaverse.
This idea is so prominent that Facebook (FB) changed its name to Meta to signal its commitment to this new technology.
Next year will be the year that we get closer to the real deal — a fully functioning Metaverse even if it might just be a beta version.
And it’s not just Facebook, Apple (AAPL), and Microsoft (MSFT) and the rest are in it too with Nvidia’s (NVDA) chips serving as a building block of the Metaverse.
Naturally, related technologies will be of great importance, and I can easily see a greater surge in augmented reality (AR) interest.
People should also keep a close eye on the introduction of Meta's internet-of-VR.
The idea of the metaverse and an advanced VR world must be seen through the prism of the pandemic which has forced us to become digital first even if many of us aren’t native digital users.
Many of us have had to learn on the go, for instance, download that Zoom video conferencing software or upgrade our home office.
This torrent of internet usage has its pitfalls like explosive growth in cyberattacks, making cybersecurity more important than ever.
Cybersecurity will no longer be seen as an “added extra” by organizations and will be built into the DNA of any and every IT system, from supply chains to infrastructure and devices.
Our reliance on internet leads nicely into 2022 becoming the year when 5G became mainstream.
We are edging towards that point where we need that extra speed to harness our work devices and to wield them in the most efficient and optimal way.
Many of you have had to upgrade data packages, build robust infrastructure into your home office and I don’t mean just buying a better office chair.
This could see the rise of “digital cities” along with new smart mobility services such as autonomous vehicles and 5G connected bicycles. We could also see a rise in private 5G networks for businesses in manufacturing and logistic sectors.
A new era of private connection for businesses will be launched, enabling greater data-driven insights and real-time business decisions.
2022 will see businesses continue to neglect the traditional office and many companies will be at best — hybrid.
We might start seeing companies go bankrupt because they can’t convince any workers to show up in physical form.
It’s already happening to the workers I talk to where limited remote working opportunities when interviewing for new jobs is a deal-breaker.
Next year is also when we finally see artificial intelligence on steroids.
The explosion of AI-powered gadgets, apps, websites, and tools is here for 2022.
It'll become harder to differentiate chatbots from human customer support agents. Other products such as future content recommendations on social media and streaming websites are likely to come from an AI rather than traditional data analysis.
The Internet of Things, AI, and automation will aid businesses to fill gaps created by the labor shortage while optimizing staff. In retail and hospitality, this will take the form of self-serve kiosks, autonomous order fulfillment, and AI-enabled drive-thrus, all freeing people up for higher-skilled roles.
Ultimately, an explosion of data requirements will offer complex challenges to firms that must manage large amounts of data.
This goes triple for many companies still struggling to fully digitize.
Although it’s hard to visualize, our reliance on technology will keep growing and the winners will be the ones who can harness these new technologies to supercharge their financial profiles.
It’s not that I am boring, but the companies leading the new stage of digital technologies are the biggest and richest of Silicon Valley, and I would rather ride the bandwagon with them than try the sexy contrarian play, especially with higher interest rates hurting start-up culture.
