Mad Hedge Technology Letter
October 3, 2022
Fiat Lux
Featured Trade:
(ZUCK LOSING HIS MIDAS TOUCH)
(META), (RBLX)
Posts
It’s gotten so bad at Facebook’s Menlo Park headquarters that to attract high-level talent, they have to overpay by almost 5 times.
That’s how unattractive it is to work for Facebook now – almost a permanent stain on one’s resume.
It was just only a few years ago when Facebook or Meta (META) was the go-to growth story in upcoming technology, and its business model, which is still quite profitable, launched them into a trillion-dollar company.
Every Stanford MBA student was clamoring to get into the company at almost any cost. It was a blue chip tech company.
That was then and this is now.
Poor management has started to spiral out of control and that starts from the top down where co-founder and current CEO Mark Zuckerberg is notorious for being a difficult boss to work for.
He is also unfirable because he owns 51% of voting rights and rules with an iron fist like a Russian tsar.
Pouring sand on the fresh wound, Facebook has announced future job cuts for the first time in its history as a company. Might as well go out in style.
The trillion-dollar company that was once unstoppable is now shrinking its headcount to cut costs, an almost unimaginable situation just a few months ago.
This management move is essentially a mea culpa signaling that business decisions have been atrocious.
The flagship product Facebook is pretty much unusable now which is part of the multi-pronged problem.
It’s filled with so much chaos because every high-priced software engineer has attempted to put their stamp on the product by installing additional “improvements.”
The interface is now as convoluted as ever and things just get in the way.
Much like Microsoft word, it’s a software product that transcends time which is why I use Microsoft Word 2010. It also doesn’t force me to upload and save my Word document to Microsoft’s Cloud like the new iteration.
Facebook is the same, better as a slimmed-down simplified version, but that doesn’t boost short-term revenue.
Even if short-term capitalism gets in the way, it doesn’t deny the fact that competition has reared its ugly head and Zuckerberg and Facebook are flat-out losing.
The Chinese communist party-sponsored TikTok is the competitor and is hot with the young crowd with its short-form videos.
TikTok is securing market share from Facebook and Instagram while Zuckerberg pivots to virtual reality in the form of the metaverse.
Zuckerberg’s expensive shift to the metaverse also appears to be a failure which could turn out to be Zuckerberg digging his own Facebook grave.
The most successful metaverse platforms already exist in 2D, with Roblox Corp. (RBLX) and Epic Games Inc.’s Fortnight.
Success has been achieved in the form of regular users with incentives around building and sharing experiences.
Meta has instead focused on the immersive sensation of its virtual reality products, which isn’t all that appealing.
Overpaying software developers because the platform has fallen out of favor is a red flag.
Now, Meta has more red flags than a Chinese communist parade.
Meta now has a $360 billion valuation and the US economy, its biggest revenue driver, is facing a 2023 recession.
The upcoming recession is what first prompted the job cuts, but I believe this will trigger something more cynical in the form of gross underperformance of Meta’s business model and another leg down in its story.
We are inching to the point where Meta will need to perform backflips to turn around the titanic because nothing on the horizon suggests they have anything figured out.
The metaverse – not a solution.
Sell all rallies during the period of high-interest rates.
Meta clearly cannot solve the current challenges that are deteriorating by the day.
Mad Hedge Technology Letter
May 11, 2022
Fiat Lux
Featured Trade:
TECH DESERVES WHAT IT DESERVES)
(RBLX), (ARKK), (ROKU), (TDOC), (ZM), (TSLA), (GM)
A bear market rally in tech would be an overwhelmingly healthy signal that the financial system is working in an orderly fashion.
Yet, as I say that, a looming recession inches closer.
How do I know that?
That was my first reaction when my eyes were stung by the headline of 8.3% inflation.
Sure, not a 10, but it is emblematic of the ongoing inflation concerns with items such as airplane tickets up 18% year over year in price.
Remember the consensus was that inflation pressures are trending towards peaking, potentially setting up for a nice bear market rally.
That narrative hit another catch-22, not as bad as it could have been, but clearly not great and prices biting at the backs of consumers.
The hope that inflation will be crammed back into the genie bottle is not going to happen until later this year and not for the right reasons.
Simply because comparables become easier to beat year over year.
Like I have mentioned in past tech letters, high-growth tech stocks are most sensitive to the fluctuation in rates and investors should be nowhere near growth funds like Cathy Wood’s ARK Innovation ETF (ARKK).
Another head-scratching move was ARK’s Cathy Wood selling Tesla (TSLA) shares and rolling them into GM (GM).
This is for the lady who likes to tell us that we aren’t “doing the research.”
Betting against Elon Musk is a fool’s game.
When it comes to EVs, I would put money on Musk to defy any odds.
Tesla will outperform GM, especially amid a backdrop of lithium prices spiking and supply chain issues going haywire.
Musk is simply the anointed guy that knows how to work miracles.
He only developed the EV industry as he saw fit, invented reusable space rockets, cut the price of space exploration by 10, and reimagined tunneling construction technology.
And by the way, his Neuralink brain interface company is working on implanting chips in human brains so we don’t need to use our fingers on keyboard anymore.
I wouldn’t want to compete with this man and to believe that GM will be able to nimbly outmaneuver Musk who has the audacity to aggressively solve anything no matter how many people he pisses off is not an incremental bet on “innovation” that Wood likes to tout she is participating in.
Neither is the purchase of Roku (ROKU), Zoom (ZM), or Roblox (RBLX) which have all tanked since she put new money to work in them in late April.
Inflation at 8.3% means that the real rate of inflation is still -7.55% and until that’s addressed, any bear market rally will be viciously sold breaching further levels down below.
The carnage in the tech world is indicative at the dregs of the barrel.
Tech IPOs are toxic.
Market for new issues has been bereft throughout the first four-plus months of this year, and nothing that would move the needle is on the tech IPO radar for the duration of the second quarter.
Companies that were aiming to go out in the first half of 2022 have no appetite to continue down that path because there simply won’t be a bid.
Going public today would require a complete revaluation of their business and leave many late-stage investors and employees with out-of-money stock.
Grocery deliverer Instacart is the only company in that class that’s been forthright with its slowing valuation. In March, the company said it cut its valuation by about 40% to $24 billion.
That’s how bad it is out there at the bush league end of the tech sector and many of these stocks that are public such as Teladoc are down 80%.
I do believe that many of these loss-making growth techs are rightfully down 80%.
They had time to show a profit and they failed in the allotted amount of time they were given.
Every window closes and the market moves forward with or without them.
In the near term, I am bearish on the market but I do believe we are oversold which could feed into a dead cat bounce to sell on.
Mad Hedge Technology Letter
April 6, 2022
Fiat Lux
Featured Trade:
(THE RISKS THAT COME WITH THE METAVERSE)
(FB), (RBLX)
The word “metaverse” is a popular word recently and it has to do with a world from science fiction.
It refers to a future version of the internet accessed through immersive technologies such as virtual-reality and augmented-reality headsets.
Metaverse could be a $13 trillion market by 2030 according to a prominent research firm.
The internet built around decentralized technologies and virtual worlds is a novel idea.
The definition of the metaverse need to go beyond sticking to virtual worlds, like gaming and applications in virtual reality.
A comprehensive vision of the metaverse includes smart manufacturing technology, virtual advertising, online events like concerts, as well as digital forms of money such as cryptocurrencies like bitcoin.
The metaverse could see 5 billion unique internet visitors by the end of the decade, funneling trillions of dollars in revenue in this next-generation of the internet.
This isn’t the only source labelling the metaverse and web3 a trillion-dollar opportunity. In research published in December, Goldman Sachs put a $12.5 trillion number on the space, in a bullish outlook that assumed one-third of the digital economy shifts into virtual worlds and then expands by 25%.
So far, the metaverse has been a cash guzzler with not much to show for it.
With a huge amount of money already flowing into companies addressing the space and not much revenue, companies face years of poor revenue showing.
This money has been used to create the infrastructure of the metaverse and there hasn’t been the same type of return one would expect from Google’s ad business.
Profits are supposedly years away which could lead to many investors waiting for it on the sidelines while the engineers get their act together.
For example, leading metaverse plays have performed poorly with Roblox (RBLX), a video game company that is a platform for building and experiencing virtual worlds tanking by 30% this year.
What are the Metaverse risks?
That it doesn’t stick because it’s only tolerable for a few minutes.
There’s definitely a real risk that the metaverse never goes from the “fake it until you make it” to the real killer app that every consumer is clamoring for.
Just take for instance the art of a business meeting.
One might argue that using VR for meetings is less enticing than familiar technologies such as Zoom.
Would you rather see a real version of someone on a video or a fake avatar of someone up close?
In its fourth-quarter earnings report Meta said its new metaverse business lost $10 billion and its user base shrank for the first time in its history.
The metaverse could turn out to be just hype and nothing more because the leaders of these companies building it are surrounded by yes men who tell them it’s a great idea.
Many analysts have mentioned that Meta’s version of the virtual now is “terrible.”
Many also chime in saying “it’s been tried many, many times over the past four decades and it's never worked."
Even if Meta does improve on the technology and it does become more advanced, it still could be mediocre.
Clearly, the internet in the form we have now is running out of juice for public trading companies.
The metaverse would give many companies a new chance to rejuvenate their revenue engines.
But I am not entirely convinced that it is a good idea.
If many can remember, we were already supposed to have self-driving cars 3 years ago and that never happened.
A lot of this failed technology has a tendency to just fall by the wayside never to be talked about again.
There is still a risk that metaverse is an utter failure and Meta is forced to look at something different to save their failing company.
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
September 10, 2021
Fiat Lux
Featured Trade:
(YOUR GUIDE TO THE METAVERSE)
(RBLX), (FB), (MSFT), (APPL), (AMZN), (EPIC GAMES)
People have no idea what the Metaverse is, so I will be the one to fill you in.
What is the Metaverse? Simply put, the Metaverse is the next mega-phase of the internet, a merging of the physical world with XR, AR, and VR that is just beginning to revolutionize.
It is an extensive online world transcending individual tech platforms, where people exist in immersive, shared virtual spaces. Through avatars, people would be able to try on items available in stores or attend concerts with friends, just as they would offline.
On a recent earnings call, Facebook (FB) CEO Mark Zuckerberg detailed the Metaverse: “It's a virtual environment where you can be present with people in digital spaces,” he said. “You can kind of think about this as an embodied internet that you're inside of rather than just looking at. We believe that this is going to be the successor to the mobile internet.”
Does the Metaverse exist anywhere yet? The answer is yes, early versions of it. The closest approximations of it right now include the likes of digital game platforms Roblox (RBLX) and Fortnite.
The internet era was defined by the computer being in the living room and the connection to the internet being occasional.
The shift to mobile computing is defined by moving the computer from the living room to the office and into your pocket and changing access to the internet from occasional to continuous and persistent.
Metaverse is the idea of computing everywhere, ubiquitous, ambient. In a simplified sense, think about the Metaverse as a series of interconnected and persistent simulations.
One could almost describe it as the next internet, web 3.0.
And crypto, or some sort of crypto offspring or cousin of it, will be the coin of this new realm which is why crypto in its form now is so important.
Consider the internet and mobile internet. Over time it disrupted nearly every industry in nearly every geography.
It changed how consumers patronized, business models, products, behaviors. This produces an extraordinary economic opportunity overall.
The same will happen via the Metaverse.
In the future, instead of just doing calls over a phone call, you’ll be able to sit as a hologram on a couch, or I’ll be able to sit as a hologram on your couch, and it’ll actually feel like we’re in the same place even though it is remote.
Sharing space is what humans perceive as closer to something real.
There’s spatial audio in which distance can change the meaning of a sentence.
This has been in the works for years, ever since Zuckerberg bought Oculus in 2014 and Oculus is effectively the gateway to the Metaverse that Zuckerberg wants to spawn.
Other power Silicon Valley elite are also moving forward into the Metaverse for their own objectives. Microsoft (MSFT) CEO Satya Nadella commented at his earnings call, “As the digital and physical worlds converge, we are leading in a new layer of the infrastructure stack, the enterprise Metaverse."
Many Metaverse believers say the economy of the Metaverse will be larger than that of the physical world.
Personally, I believe it will be 100X larger than the physical world’s economies and much more dynamic.
One of the biggest winners of this Metaverse race will be Epic Games —owner of Fortnite —founded by CEO Tim Sweeney.
Epic released "Fortnite" just five years ago. The game now has 350 million registered players, with anywhere from six to 12 million people playing at any given time.
The Metaverse is a great example of a technology that will likely bring huge benefits to people but there will be unintended, unanticipated costs and harms.
Right now, the Metaverse operates with zero regulations, while its previous iteration, the internet, operates with the least number of regulations out of any major industry in 2021.
The bottom line is that every power Silicon Valley has skin in the game such as Facebook, Apple, Amazon, Microsoft, and Netflix after Epic Games, and they will receive another supercharger to accelerating revenue growth.
The revenue growth in the Metaverse for these companies will make what they earn in the physical world look like a pittance.
We are driving to that point in tech development through hell or high water, and like how every company became a tech company to survive, when the Metaverse and an operable iteration of it become good enough for people to transact smoothly, every company will have to become a Metaverse company or die.
This is the future and it’s creeping closer by the day.
