Mad Hedge Technology Letter
December 15, 2021
Fiat Lux
Featured Trade:
(BUY THE DIP IS BEING CHALLENGED)
(PTON), (ROKU), (TSLA), (GOOGL), (FB), (DOCU), (TDOC)
Posts
Ominous signals have started to emerge in the short-term patterns of tech stocks over the past few weeks.
We have essentially traded a Santa Claus rally to sell the spiked peaks as inflation numbers have come in way too hot for anyone to handle.
The poor inflation numbers have triggered a cascade of algorithmic selling.
Why is this important?
These stock patterns will offer us clues to how tech stocks will react in a quickly changing backdrop where the Fed is backing away from the cheap money cauldron as fast as it can.
For over ten years now, as tech stocks have bulldozed their way to higher highs and as Apple inches closer to $2.9 trillion in market cap and on its way to $3 trillion, investors have been systematically conditioned to buy the dip.
The Fed is doing its best to recreate a new type of conditioning where the dip is not bought and that is awful for tech stock prognosticators.
This effectively means a large layer of buyers on down days will be stripped away from the tech markets.
Any idiot would understand this means that tech stocks will not go as high as they could if dip buying is conditioned.
The tech market is trying to figure out the new rules of the game and that is resulting in choppy patterns almost in whipsawing fashion.
March 2022 is the new consensus for an interest rate rise which is bad news for tech stocks because pulling forward interest rate rises coincides with higher volatility in the short term.
The Fed could make another interest rate move in the second half of 2022.
This means that anyone dallying in the speculative area of the tech market needs to pull the reigns in immediately.
Stocks like Peloton (PTON), essentially a stationary bike with a tablet pasted on the dashboard, will historically underperform in the new environment.
Another tech stock I love to bully is Pinterest (PINS), by far the worst social media platform I have ever seen, will need to face reality without the Fed punchbowl that was most likely their biggest tailwind.
Tech stocks must now stand on their two feet and that’s scary news for all tech stocks not named Tesla, Facebook, Apple, Amazon, Microsoft, and Google.
After these top 5, the quality dwindles fast and expect a slew of rapid downgrades that will throttle the non-elite software stocks.
Adobe’s stock had its second-worst day of the year on Tuesday, as analysts jumped on the higher rates bandwagon and cited high valuations.
Valuations are now “high” even if these business models are the same as they were a few days ago.
Expect poor guidance from management with earnings growth, free cash flow, and annual revenue downgrades in the pipeline.
Other notable sell-offs this week include shares of cybersecurity companies Zscaler and Cloudflare, which crumbled 7.8% and 9%, respectively.
Zscaler had been up 55% for the year, prior to Tuesday, and has an enterprise value to revenue multiple for 2022 of 39. Cloudflare was up 91% and trades at a multiple of 61.
Tech growth works both ways in which they get the benefit of the doubt in a low-rate environment and vice versa in a tightening environment.
Case in point is a company I really like Roku (ROKU) whose shares are down a hideous 230% since mid-July.
The weakness in the secondary names has been biggest secret untold in tech for quite a while and the confirmation of a tough 2022 was what happened in the first two weeks of December.
And it gets worse when looking at the shelter-at-home darlings of 2020 Teledoc (TDOC) and DocuSign (DOCU) who have been totally neglected this year.
This goes to show that every year is different and as the stock market is levered to the skies, the slightest nudge by the Fed does a lot to wobble the trajectory of tech.
Luckily, tech still has the 6 big tech stocks to rally around and even if the best of the rest must go into hibernation in 2022, we still got guys like Mark Zuckerberg, Tim Cook, Elon Musk powering us through the sludge.
Mad Hedge Technology Letter
December 10, 2021
Fiat Lux
Featured Trade:
(AN EXPLOSIVE CHIP STOCK)
(MRVL), (FB)
One of the best semiconductor growth companies out there must be Marvell Technology, Inc. (MRVL).
Lately, performance has been clicking with revenue of 61% year over year.
And similar to the third quarter, MRVL is expecting another strong performance led by cloud customers across a broad range of products.
They expect data center revenue to more than double from a year ago, and project sequential growth in the double-digits on a percentage basis in the fourth quarter.
I am pleased with the strength of the cloud end market, which I expect will remain a strong driver of sustained growth for Marvell.
Looking out further in time, I believe there is immense potential for another phase of growth as large-scale virtual environments, such as Facebook (FB) is doing with their metaverse, start to gain traction.
In short, I expect many different implementations of virtual environments enabled by a broad set of companies and ecosystems that MRVL will be involved in.
Regardless of the form these environments take, the data sets will be exponentially larger compared to the current internet, which is largely two-dimensional, and latency will need to be extremely low to realistically simulate a real-world environment.
As a result, I expect the metaverse will significantly accelerate a number of key trends, which are already developing in the cloud today, including the need to store huge amounts of data in a secure environment, connected by high-speed electro-optic links to custom compute engines.
This next level of massive scaling makes the metaverse an even stronger candidate for cloud-optimized silicon solutions that Marvell is currently enabling.
This meshes perfectly with the core competencies MRVL has already developed across compute, storage, security, networking, high-speed electro-optics, and customization, which are driving their current success.
And these are equally applicable to the variety of virtual environments, which MRVL will develop over time.
The metaverse also has the potential to be a killer app for 5G, another area of strength for Marvell.
Multiple cloud customers have already engaged with MRVL, as they start designing the architecture of their next generation of data infrastructure to enable a significantly richer set of virtual applications and experiences.
Looking at the fourth quarter, I expect a strong ramp in MRVL’s 5G business of approximately 30% sequentially.
It's exciting to see MRVL step up in the 5G business, and I expect significant additional growth over the next several years as 5G adoption continues to grow around the globe, combined with Marvell content gains from designs.
Lastly, the future of technology in cars is all about electrification and intelligence, with embedded security and onboard storage in a fully networked environment.
Similar to the rise of optimized silicon and cloud, automotive OEMs are realizing that to differentiate their products and need unique technology and IP to be embedded in compute silicon optimized to their specific platforms.
In short, MRVL is at the intersection of growth and opportunity of every major technological innovation that carries weight.
From the metaverse, data center, and electric cars, their products are the heartbeat of how these technologies will evolve.
Buying this stock is a bet on technology accelerating which it surely will and long term, I don’t see how this stock isn’t up from today.
Global Market Comments
December 3, 2021
Fiat Lux
Featured Trade:
(DECEMBER 1 BIWEEKLY STRATEGY WEBINAR Q&A),
(PYPL), (MA), (AXP), (SQ), (TLT), (TBT), (TSLA), (AAPL), (FB), (MSFT), (AA), (FCX), (BITO), (COPA.L)
Mad Hedge Technology Letter
November 29, 2021
Fiat Lux
Featured Trade:
(THE FUTURE LOOKS BRIGHT FOR THIS AD TECH STOCK)
(TWTR), (FB)
Founder Jack Dorsey's stepping down as CEO of Twitter (TWTR) is great news for the stock.
Let’s not beat around the bush — it’s been brewing for some time.
It was only just before the pandemic that he announced his intentions to work remotely from Africa for 6 months.
Who does that?
Part of his job as CEO of a major Silicon Valley company is to deduce the pulse of the industry in real-time, and on the ground while rubbing shoulders with the rest of his kind.
Six-month African Safaris are romantic but don’t cut it when you are a top CEO of a Silicon Valley company and when major hedge funds are relying on advanced expertise to guide the company through a labyrinth of strategic and regulatory issues.
Whether he stepped down by his own will or was effectively forced out by activist shareholders, either way, the future stock price appears prime to shake off the years of mediocrity.
Why does Twitter need change at the helm?
Simply put, the stock has grossly underperformed the broader market for not only the last year but also the past 3 and 8 years.
The stock was trading around $70 in December 2013 and fast forward to today and the stock is around $50.
The underperformance comes under a backdrop of a cyclical bull market in which tech has been the leader with growth constantly reaccelerating.
Not only that, but Twitter also has a unique asset in which it has accrued massive scarcity value because no other technology company has anything like it.
Dorsey has mishandled the operation.
The nail in the coffin was certainly the user growth numbers in which Twitter was only able to grow the user base by 3% last quarter in North America.
Twitter announced earlier this year some major long-term goals in which one of them was to have 315 million monetizable daily active users by the end of 2023.
That number stands at 211 million users reported last quarter and is underwhelming.
Another objective was to surpass annual revenue of $7.5 billion by 2023 and as of last quarter, management said they were still on pace to achieve that, but I do not see that.
I agree they are on pace to hit that revenue target, but Twitter announced a highly disappointing forecast expecting $1.5 billion to $1.6 billion in revenue for the fourth quarter, which will be up 24%.
Twitter will need to maintain revenue growth in the mid-30% to achieve the numbers they promised, and Dorsey has proved that he is prone to botching forecasts.
How many fumbles will management let him get away with?
Granted, Dorsey was forced by activist shareholders to state explicit targets, and true, they were ambitious from the start.
However, much of the nudge in the backside stems from Dorsey largely underachieving as a CEO especially during the golden years of ad tech.
Investors saw when Founder and CEO of Facebook (FB) Mark Zuckerberg was able to release animal spirits for his ad technology platform and it’s fair to question why Dorsey can’t do the same for his company.
Even though harsh, comparing your company to Facebook is not everyone’s cup of tea, but Twitter is in the same exact industry as Facebook deploying the same exact products, so they can’t really complain about comparing.
In the last 10 years, Facebook has returned shareholders 17X their investment and Zuckerberg was agile enough to rotate from a stale Facebook platform to a booming Instagram platform.
The last major Twitter forecast called for a long-term target of 40% to 45% adjusted EBITDA margin.
For the fourth quarter, Twitter is looking for operating income in the $130 million to $180 million range. That would be down 29% the prior year.
Profitability per unit is decelerating.
As it stands, I do not envision Dorsey achieving his 2023 targets if he stayed and on top of that, changes to the iOS system have made ad targeting more difficult to extract the necessary monetizable data.
In an environment where data visibility is reducing, and other regulatory changes could be coming down the pipeline, the shareholders most likely felt they needed a change at the top.
Dorsey is by and large the legacy of what was left over after Twitter was created, and many investors know, it’s hard to kick out these tech CEOs that usually possess super-voting shares which makes it so they must vote themselves out to leave as CEO.
Dorsey didn’t have that level of moat around his position and eventually, the underperformance caught up to him.
Twitter will insert Parag Agrawal, the company’s chief technology officer, as new CEO in hopes of supercharging revenue, user, and margin growth that shareholders have been patiently waiting for.
If Agrawal can fix Twitter, then Twitter is easily an $80 stock.
Remember that Dorsey is still the CEO of Square and hasn’t been shy in expressing his passion for cryptocurrencies, and it’s likely there that he will finally be unshackled from the annoyance of running Twitter and get to focus on his favorite company.
Honestly, he hasn’t seemed interested in Twitter for a while, so it’s a win–win for both companies.
Mad Hedge Technology Letter
November 24, 2021
Fiat Lux
Featured Trade:
(ONE OF THE BEST METAVERSE STOCKS)
(RBLX), (FB)
There aren’t that many metaverse stocks out there as of now, but I do feel that is about to change in the next few years.
The same thing happened with cryptocurrencies, and now not only do we have single stocks that offer pure crypto exposure, but we also even have crypto ETFs.
The natural path the metaverse will take is to enter through video gaming because of the ease of transition it will facilitate once the real thing is up and running.
There’s a fit right there because video gaming already possesses the parameters of a world set up for virtual activity; and yes, even though one could call Facebook a “world,” much of that is done through logging onto a webpage.
Populating a webpage is out of date technology and the new internet version 3.0 will be vastly different.
Enter Roblox.
Roblox (RBLX) is what Facebook (FB) would have wanted to already become but spent most of their time developing Instagram — essentially a juiced-up version of Facebook with historical videos and old photos.
That’s old news and old tech.
It won’t cut it as the metaverse guarantees a real-time, on-demand experience in virtual 3D form with humans controlling avatars that guarantees to become a more immersive experience with our 5 senses.
In short, it’s better than opening a web page. A lot better.
Roblox already relies on computer graphics and programmed virtual experiences. And with 49% of users under the age of 13, its demographics are a massive competitive moat because young people embrace new technologies quickly and are more prone to relying on digital tools to facilitate all parts of their lives.
The company is already building on its expertise in creating virtual reality experiences.
Last year, the platform hosted a virtual performance by rapper Lil Nas X that was attended 33 million times.
In November, it announced a collaboration with apparel company Nike to create Nikeland, a virtual space allowing gamers to play Nike-themed games and try on products.
Nike is preparing to hawk its products in the metaverse, which could open up revenue opportunities for platforms like Roblox.
What takes my breath away about Roblox is not the long-term vision of the company, although I have no complaints, but its short-term metrics which are blistering hot as revenue increased 102% over Q3 2020 to $509.3 million.
Find me a company of this type of magnitude expanding by over 100% per quarter and one will soon realize that they are few and far between.
To expound more on their overperformance — Average Daily Active Users (DAUs) were 47.3 million, an increase of 31% year over year
Roblox’s 3Q results highlight its early leadership in the metaverse and continued innovation to capitalize on materially higher long-term monetization opportunities.
Its premium is appropriate given the advertising optionality on top of their existing in-app purchase revenue streams.
Long term, the vision for brands is the exact same as games or play experiences in that I imagine an ecosystem where there are thousands and thousands of these personal hands-on experiences. They are created in concert between brands and possibly creators and developer communities.
It was 16 years ago, games and play experiences were new on Roblox. That has all led us to the beginning stages of the metaverse.
The high-level vision Roblox has is just as print and just as video have been and continue to be interesting ways for brands to interact with their audience.
Let’s look at the example of Vans World, which had over 40 million visits on Roblox, people who visited Vans World were able to wear Vans, go skateboarding, check out the shop, see what new items Vans had for sale.
It’s a deep way for brands to connect with their fans and is essentially the precursor before the metaverse exists but through a video game platform.
The bear case for Roblox until now has involved its primary reliance on a younger demographic, as there have been questions on its post-lockdown growth prospects, in an environment where it could be arduous to match the covid era success. But that is an argument that doesn’t hold water, as the userbase is aging up, with 17-24 year-olds currently the fastest-growing age group.
Strategically, Roblox has positioned itself as the tech firm at the forefront of the metaverse and we all know how first-mover advantage is critical in holding off competition with firms with stronger balance sheets and an army full of agile developers.
Roblox’s inroads with kids spending time in the virtual 3D worlds the gaming platform offers is a firm lock on future cash flow if the company can do its part to develop the metaverse and make sure its revenue becomes sticky.
The stock will grow 10X if the metaverse is a moderate success, and if it is not, investors will only gain about 200% in share appreciation. Not too bad.
Mad Hedge Technology Letter
November 22, 2021
Fiat Lux
Featured Trade:
(RENOMINATION BOOSTS BIG TECH)
(FB), (GOOGL), (AMZN), (MSFT), (AAPL)
