Mad Hedge Technology Letter
July 28, 2023
Fiat Lux
Featured Trade:
(ANOTHER IMPLOSION BEGGING TO HAPPEN)
(RAPPI), (SOFTBANK)
Posts
There’s a reason why Softbank lost $32 billion in technology investments last quarter, and it stems mostly from terrible investment decisions.
Most of Masayoshi Son’s Softbank targets are at the small time level where a few hundred million of revenue per year is something they are interested in.
The thinking behind this is to hit those 10 baggers, and to his credit, he did pocket some of those like Alibaba and Uber in the days of yore.
A broken clock is right twice a day.
Do Son’s actions signal a turning of the corner from his hefty losses?
I would strongly suggest he is doubling down on his losing strategy based on what he’s green-lighted in South America.
Take for instance the recent news of his investment in Rappi, a food delivery app that has grown into one of Latin America’s most-valuable startups.
They just announced they will offer loans to restaurants in Mexico and Colombia.
The plan is to offer loans to restaurants that have been selling via the app for at least three months.
The foray into commercial lending shows how Rappi has adapted its business model to add more revenue streams in the eight years since it started as a grocery delivery business.
Facing stiff competition from the likes of Naspers Ltd’s iFood and UberEats, Rappi has increasingly embraced financial technology as it expands in the region.
In its latest push, Rappi is targeting $60 million in loans across the two countries.
Rappi didn’t disclose the terms of the loans it will offer. The credits will be repaid through the restaurants’ sales via the app.
The company could expand the loan business to some of the other nine countries where it has operations as soon as this year.
This strategy screams desperation and low-quality decision-making.
Restaurant revenue isn’t stable enough to base a loan on a highly changeable industry.
There are no fixed contracts as to how many tacos per month are sold and the hilarious concept of offering loans based on 3-months of operating the app is irresponsible.
The company wouldn’t comment on what type of terms they would offer because they most likely will be highly predatory because this maneuver is highly risky.
Don’t expect Japanese bond levels of 0% and think of something more like 18% similar to Russian mortgage rates.
My understanding here is that management is trying to pump up revenue in the short term just to shine up the business metrics for the IPO.
After the IPO, the management will be able to cash out, and then management can throw the business to the wolves for all they care.
The great news here is that Softbank funding this type of weak tech business model is good for the entire tech ecosystem because tech needs that sucker that juices up the purses.
If other parts of tech didn’t get any investment, then there wouldn’t be the top 7 big tech stocks that boss the S&P.
Much of the reason tech shares have reached Himalayan highs is because a stream of short-sellers must cover their shorts with every explosion to the upside.
Son subsidizing the bottom feeders of global tech apps is in fact positive for Silicon Valley as a whole.
Tech needs guys like him to get stuck with the bill so people like us cash out at the top.
It’s a dog-eat-dog world.
Unfortunately for Rappi, the restaurant loan business is ripe to implode betting on a financially unproven population to power this app to the public market.
Rappi’s management better hope they can unload vested shares before the whole game is up.
Mad Hedge Technology Letter
December 16, 2022
Fiat Lux
Featured Trade:
(AMERICAN SUPER APP)
(APPL), (WECHAT), (META), (GRAB), (RAPPI)
America will never achieve a “super app,” and what does that mean for Silicon Valley?
These “killer apps” thrive in other places but not in America.
WeChat is the super app in China, while there is Careem in the Middle East, Rappi in Latin America, and Grab in Southeast Asia.
Any attempt to move in on that territory has been stymied by Washington.
A Super app is roughly a place where ecommerce, daily and monthly payments, financial management, social chats, social media, and daily services like ride-hailing co-exist in harmony on one app.
American tech companies are getting blocked from incorporating new payments into their apps while legacy payment systems remain.
Facebook’s attempts to build out standalone payment capabilities through the Libra/Diem blockchain project failed, but other apps in its family such as Instagram and WhatsApp are bolting on payment and e-commerce functionality.
As Zuckerberg and his team seem to have noticed, payments are critical to any would-be super app.
Half of US smartphone users are expected to adopt mobile payments as late as 2025, according to eMarketer research.
By contrast, 64% of China's population had made a payment on their phone by the end of 2021, according to a report from China UnionPay, the state-owned financial services firm.
Companies will struggle to generate the volume needed to make a super app work the way WeChat does, which has accumulated more than 1 billion users thanks to its mix of services and payments that ensure people don't have to look elsewhere.
In emerging market countries, payments skipped cards altogether because the infrastructure was weak.
Instead of bank cards, citizens went from cash to paying by phones using their local super app.
This could never happen in America because card payment options are diverse and trustworthy.
America has a reliable network of fragmented services and regulators have become so emboldened that they would never allow a financial payment system on a super app to ever develop.
There's another clear reason why the most successful super app has emerged in China.
Beijing has shut out foreign competitors from offering Chinese consumers any alternative.
Under Lina Khan, the FTC is becoming more sharply focused on competition and user privacy. Creating super apps would almost certainly require aggressive consolidation through acquisitions — a surefire way of attracting scrutiny.
As it stands, American regulators are now hawkish against American tech.
There's also the issue of Apple.
With the iOS system, Apple doesn’t allow the type of access needed to be able to build a super app on an iPhone.
Even if Apple wants to build a super app, there are still plentiful Android users in America that wouldn’t be captured either.
Apple would also need to backtrack on its pledge to safeguard personal data which is very unlikely to happen.
The best bet is probably Elon Musk’s Tesla, Twitter, and Space X combo.
He has two strong elements needed for a super app, but he doesn’t have a payment system and there is almost no chance in this regulatory climate of getting that approved.
The best way forward is tech firms with strong balance sheet picking up the best of breed in tech sub-sectors and eventually, they will all merge together.
However, that’s proved difficult as well with Microsoft’s blocked acquisition of video game firm Activision.
In a high interest rate world, profitable tech firms with strong balance sheets will be rewarded the most if they buy smaller tech companies which will be additive to their profit model.
The cash burners have a tough time competing in a high rate world and zero chance of achieving that super app status.
Mad Hedge Technology Letter
January 13, 2020
Fiat Lux
Featured Trade:
(THE DEATH OF THE GIG ECONOMY)
(GRUB), (OYO), (LYFT), (UBER), (RAPPI)
The demise of the gig economy is upon us.
That is the latest takeaway from a slew of negative news overflowing the news wires lately.
As many of you know, I hate this niche of tech with a passion, and it has been discovered as nothing more than a marginal fly-by-night sub-sector passing off the cost of employees and their wages to the investor.
They also contribute no meaningful technology that moves the needle.
When the hammer fell on Adam Neumann’s WeWork, the hammer fell equally as hard on the gig economy business model that brought public markets the likes of Uber and Lyft.
The path to venture capitalist’s cashing in abruptly closed off was the end development to all this mayhem.
So I was not surprised when online food deliverer Grubhub (GRUB) had a dead cat bounce after rumors of them looking for a sale to their badly run company.
Then last Friday was the day the chickens came home to roost with Grubhub shares cratering over 8%.
If there is a sale, at what heavily discounted price will it go for?
We could see a marked down shell of its former self.
Grubhub naturally came out and rejected the notion that they are about to be sold off.
Where there is smoke – there is fire.
They did, however, admit they are in the process of “consulting” about certain acquisitions which could mean purchasing inorganic growth to juice up their numbers ahead of a sale.
There are four market leaders who control roughly 80% of the food delivery service business.
But the food war is far from over as competitors undercut each other time after time.
Competition in the food delivery market is driving down the unit economics of online food delivery to a nadir at a time when they can least afford it.
The other three involved are Uber Eats division of Uber (UBER) as well as Postmates and DoorDash.
Grubhub mentioned that there will likely be opportunities to acquire market share, but at what cost?
Acquiring inorganic revenue is at peak cost in 2020.
Cost per unit matters more now than any other time in the past 10 years boding ill for Grubhub and its competition.
And until they adequately address the unit economics in detail, readers must assume that Grubhub is on a suicide mission and you won’t know how close they are to the end until there is a dramatic announcement describing it.
The big takeaway here is that conditions are ripe for consolidation in the online delivery business.
As we go further out on the risk curve, private unicorns are in dire straits too.
Taking a barometer of this subsector allows investors to digest the level of risk premium in the overall markets that can be applied to safer parts of the tech ecosphere through extrapolation techniques.
Venture capitalist Masayoshi Son is infamous for overpaying a slew of tech growth firms and in 2020, so far, it has not been kind to him.
Oyo allows customers to book hotel rooms in more than 80 countries through its app.
It even converts struggling local hotels into Oyo franchises, puts up some money to remodel the interior, and takes commission on every booking.
The startup is dumping 5% of its staff in China and another 12% of employees in India, as part of a reorganization.
Oyo is the third company in SoftBank's portfolio to shed jobs in a week, following the layoffs at robotic pizza startup Zume and car rental company Getaround.
Oyo has sucked in more than $3 billion in capital and the last insane tranche of investment values the company at more than $10 billion.
SoftBank has been throwing money at the company since 2015.
The firm is otherwise known as the "SoftBank's jewel in India" for being one of the country's most valuable private companies.
However, there has been a recent barrage of sub-optimal reports suggesting they have accelerated sales by underhanded business practices.
A peek into the firm showed explicit evidence that Oyo rented thousands of rooms at unlicensed hotels and guesthouses then allowing police and other officials use the service for free to avoid trouble with the authorities.
The pain for Softbank doesn’t just stop at Oyo, Rappi has been dragged down as well.
The Latin American delivery startup is laying off 6% of its workforce, less than a year after Japan’s SoftBank Group pumped in nearly $1 billion in the company.
Softbank is putting pressure on local management to trim the fat off their models and forcing them to become profitable now.
Rappi has expanded to nine countries since its founding in 2015.
It plans to be the swiss army knife of online deliveries by getting into groceries, restaurant meals, medication, furniture, and has even foolishly branched out into scooter rental, travel, and basic banking services.
Softbank plans to pour another $4 billion into South American startups but one must beg to ask, are they throwing good money on top of bad money?
Certainly seems so.
When asked how soon Rappi would turn in a profit, co-founder Sebastian Mejia was adamant that his sole priority was to grow fast, and that investors were on board with the plan.
This is code name for NEVER!
Softbank and its vision fund are set for more death by a thousand cuts in 2020, and being in the wrong place at the wrong time aggravates the mess they find themselves in.
Short all companies reliant on gig economy workers in the public markets and prepare for a gloomy IPO pipeline that will last through the end of 2020.
