Mad Hedge Technology Letter
June 4, 2018
Fiat Lux
Featured Trade:
(THE INNOVATOR'S DILEMMA),
(UBER), (WMT), (SNAP), (MSFT), (GOOGL), (AAPL), (GM), (IBM)
Posts
I must confess, innovation can't be taught.
You are innovative, or you aren't. Don't pretend otherwise.
Innovation drives companies to outperform.
The economic environment becomes more cutthroat by the day rendering complacent companies obsolete.
Top-quality innovation leading to outstanding entrepreneurship is a well-traversed theme transcending industries across the American economic landscape.
The reservoir of innovation in 2018 is primarily flowing from one narrow source - the tech sector.
This is the primary motive for many adjacent industries to incorporate tech expertise into existing and commonly ancient legacy systems.
Tech promises laggards a ride atop the gravy chain.
In many instances, these companies are grappling with existential threats from all directions.
The best example is Walmart (WMT), which effectively mutated into the next FANG with its majority stake in Indian e-commerce juggernaut Flipkart. This deal followed its purchase of Jet.com in 2016, which was its first foothold in the e-commerce world.
Traditional companies are becoming tech companies because of the ability to innovate all leads through the fingertips of talented coders.
When all roads lead to Rome, you will have to go through Rome.
The hunger for innovation has had major implications to the financial side of technology.
The story picks up from a recent report disclosing the 2017 remuneration of co-founder and CEO of Instagram competitor Snapchat (SNAP) Evan Spiegel.
The $637.8 million he received in 2017 was the third-highest annual compensation ever to be collected by a CEO.
Snapchat has tanked following its 2017 IPO and the main reason is Facebook is stealing its lunch and leaving Snap the crumbs on which to nibble.
Instagram, using a cunning strategy of cloning Snap's best features, single-handedly bludgeoned Snap's share price cutting it by half after the successfully launched IPO.
Snap has been an unequivocal sell on the rallies stock since the inception of the Mad Hedge Technology Letter and the disastrous redesign did no favors either.
My first risk off recommendation was Snapchat and at the time it was trading at $19. To revisit the story, please click here.
Microsoft (MSFT) is a great stock because it posts accelerated revenue and earnings, while Snapchat is a terrible company because it produces accelerated losses and lousy user growth.
A company almost 100 times smaller than Microsoft should not be struggling to grow.
It's a failure of epic proportions.
Small companies expand briskly because the law of numbers is leveraged in their favor and the tiniest bump of additional business has a larger effect on the bottom line.
As it stands, Snapchat lost $373 million in 2015, and followed that up with a disastrous $514 million loss in 2016, and a gigantic $3.45 billion loss in 2017.
Losses accelerated by 800% but annual revenue only doubled last year.
It was no shocker that the poor relative performance resulted in the sacking of 100 Snapchat developers.
Smart people would assume an annual salary of this magnitude (Spiegel's) would be the result of excellent performance.
Why else would a CEO get a lavish payout?
I'll explain.
The demand for tech knows no bounds.
In this environment, venture capitalists will pay up for brilliant ideas.
The problem is that brilliant ideas don't grow on trees.
The few cutting-edge ideas have stacks of money thrown at them.
In this sellers' market, founders can cherry-pick the best financing deal that will enrich them the quickest and empower them the most.
Multiple offers have become the norm just as with the Silicon Valley housing market.
The consequences are the premium for these brilliant ideas keeps rising and investors keep paying higher prices without a second thought.
Therefore, founders and CEOs are opting for the financial packages that offer them bulletproof voting shares, allowing the innovators to control operations to the very last detail.
The founders are responsible for leading innovation, and investors are offering glorious pay terms for this innovation because it can't be substituted. Low-quality tech has less of a premium because the technology can easily be rebranded and substituted.
Technology from the ground up is slowly being automated away leaving runaway valuations the norm.
Giving the keys to the Ferrari makes sense as tech companies formulate long-term strategies based on scale. And securing job security without the threat of an activist takeover offers peace of mind for CEOs who are focused on the daily grind.
Knowing their baby won't get stolen from the carriage goes a long way in tech land.
Venture capitalists are reticent about following through with proper governance because they do not want to alienate the innovators who could choose to stop innovating.
These investors also know that tech is the least regulated industry in the world, so it's better to turn a blind eye to cunning growth strategies that push the border of regulation.
The competition to fund these emerging tech companies is borderline criminal.
Uber declined a $3 billion investment by no other than the Oracle of Omaha Warren Buffett.
Buffett described himself as a "great admirer" of Uber CEO Dara Khosrowshahi.
Uber is one of the most unlikely Warren Buffett investments because it doesn't create anything and burns cash faster than a Kardashian.
Buffett's faith in Uber underscores the reliance on tech to fuel the stock market to new heights.
Buffett also admitted mistakes on missing out on Alphabet (GOOGL) and Apple (AAPL).
Rightly so.
Then add in the mix of SoftBank's $100 billion vision fund that just announced an upcoming sequel with another $100 billion vision fund.
Where is all this money flowing into?
Of the tech companies that went through an IPO last year backed by venture capitalist money, 67% relinquished superior voting rights to key founders, a rise of 54% since 2010.
Compare that to non-tech companies that only allow 10% to 15% of CEOs to institute a voting structure that will put them in charge indefinitely.
In many instances, the persona of these ultra-famous tech CEOs has taken on a life of its own.
Elon Musk, CEO of Tesla, is the most prominent example of a celebrity tech innovator milking every possible penny from his shareholders and is not shy about flaunting it.
News has it that Musk needs to go back to the well for another stage of financing later this year.
Don't worry, the money will be there in this climate.
Buffett's rejection was due to losing out to SoftBank, which beat out Buffett to invest in Uber.
SoftBank just announced a $3.35 billion investment into GM's (GM) autonomous driving unit called Cruise enhancing the best big data portfolio in the world.
At this pace, CEO of SoftBank Masayoshi Son will have a piece of every major big data company in the world.
This all bodes well for tech equities as the insatiable hunt for emerging, innovative tech spills over into daily equity market driving up the prices for all the top innovating public companies such as Salesforce, Amazon, Microsoft and Netflix.
Buffett, down on his luck after being shafted by Uber, picked up more Apple shares.
He sold all his IBM (IBM) shares after reading the Mad Hedge Technology Letter advising him to stay away from legacy companies.
Smart move, Warren. You can pick up the tab for our next lunch date.
If you have a few billion to throw around, expect multiple offers over the asking price for any high-grade tech innovation.
The going rate is shooting through the roof and you might NEVER be able to sack the founder.
Caveat emptor.
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Quote of the Day
"We knew that Lyft was going to raise a ton of money. And we went (to their investors): 'Just so you know, we're going to be fund-raising after this, so before you decide whether you want to invest in them, just make sure you know that we are going to be fund-raising immediately after.' " - said former CEO and founder of Uber Travis Kalanick when asked how he copes with competition.
Mad Hedge Technology Letter
May 15, 2018
Fiat Lux
Featured Trade:
(HARD TIMES AT UBER)
(UBER), (NFLX), (GOOGL), (AMZN), (GRUB)
Uber has seen a ferocious challenge to its business model of late. It seems everything it touches turns into fool's gold.
It is easy to assign blame to the current CEO, but Dara Khosrowshahi was shoehorned into a difficult situation after previous CEO Travis Kalanick defiantly departed leaving the company in tatters in his wake.
What could go wrong went wrong.
The company was purged of its license to operate in London, which was one of its highest transactional cities.
Uber boasted a ridership of 3.5 million and sub-contracted 40,000 drivers in London that singlehandedly wiped out the Cockney black cab industry.
The land of fish and chips has not exactly been kind to Uber with the British seaside resort city Brighton the next location to excommunicate Uber from its sandy shores.
Uber's massive data breach of 2016, which took Uber a full year to publicly disclose, of 25.6 million names, 22.1 million mobile phone numbers, and 607,000 driver's license numbers was cited as one of the reasons Uber's license in Brighton was discontinued.
Is there a way back for CEO Dara Khosrowshahi?
The future looks turbulent at best.
Khosrowshahi has left no stone unturned carrying out his search for a new CFO. Uber has not had a CFO since 2015, and a CFO is required to shepherd the company through the IPO process.
Prospective candidates will not touch this position with a 10-foot pole.
Several high-profile hopefuls have already rebuffed offers.
It was painfully obvious to onlookers last week at Uber's Elevate conference in Los Angles that Alphabet (GOOGL) is dominating every potential business that Uber desires to penetrate.
Waymo, Alphabet's autonomous driving technology arm, is miles ahead of Uber after developing in secret for many years.
Waymo's self-driving testing began in 2009 while Uber's first test was carried out in September 2016 in Pittsburgh, conceding a seven-year head start to bitter rivals.
Even worse, Uber's trials have been sidelined as of late because of a casualty in the Phoenix program. Arizona is on the verge of removing Uber from possible future tests along with California making Pittsburgh the last place left to consolidate operations.
At the Elevate conference, Khosrowshahi elucidated Uber's roadmap to industry professionals, and his synopsis was largely underwhelming.
Khosrowshahi broke down the future into three easy-to-understand stages.
In the next two to three years, stage one consists of focusing on improving existing algorithms, enhancing ride share transactions, and expanding to different locations widening the companies ride-share footprint.
Stage 1.5 detailed refining its Uber Eats segment seizing further market share from Grubhub (GRUB) and Amazon (AMZN), the two biggest rivals.
In two to five years from now, stage two entails ramping up the e-bike segment through recently acquired e-bike firm Jump.
Lastly, stage three was proposed to happen in five to 10 years and encompass growing a newly minted air-taxi division called Elevate.
Up until today, Uber's core business has been an unmitigated failure of massive proportions.
In the fourth quarter of 2016, Uber hemorrhaged $2.8 billion then followed up the fourth quarter in 2017 with a $4.5 billion loss, a stark reminder that profits are hard to come by in the tech world.
If losses are what investors want, Uber gives it to you in spades.
If it cannot successfully monetize the core business using cars, the e-biking future is dead on arrival.
Stage 1.5 is all designer chocolates and fancy roses now because growth and margins remain healthy. However, this industry is fraught with booby traps that I chronicled in the recently published story about Grubhub (GRUB).
Stage three was a division that Khosrowshahi reviewed several times after he took the top job and it made the cut after deep contemplation.
Uber plans to start conducting trials in 2020 in Dallas or Los Angeles with the hope of commercial operations starting in 2023.
This timeline is wishful thinking because regulators would never grant operational authority to Uber in a mere five years when it cannot even succeed on asphalt with its self-driving technology.
Lamentably, Alphabet's co-founder Larry Page has an ace up his sleeve.
Since last October, stealth flight trials have been carried out in New Zealand by firm Kitty Hawk led by Sebastian Thrun one of the creators of Waymo, which is developing autonomous flying taxis.
Kitty Hawk was developed for years in secret and personally backed by Larry Page's personal wealth.
He has already poured more than $100 million of his own money into this venture.
To further develop its business, Kitty Hawk was forced to decamp to New Zealand as the Federal Aviation Administration (FAA) in America lacks a path to certification and commercialization.
New Zealand has embraced the revolutionary start-up, and New Zealand is the first country poised to develop a functional robo air-taxi network.
Kitty Hawk's hopes and dreams rely on the aircraft Cora. Please click here to visit its website for more information.
Cora is an all-electric affair powered by batteries with a 36-foot wingspan.
This meshes perfectly with New Zealand's hope to be carbon free by 2050.
Cora has been manufactured with capabilities of flying at heights up to 2,950 feet and a range of 62 miles.
New Zealand has bet the ranch on aerospace technology allowing even marginal start-ups within its borders such as Martin Jetpack, the first commercially sold jetpack, operating with a flight ceiling of 2,500 feet and sold at a starting price of $150,000.
It is ironic that Uber chose to host an aerial-taxi conference considering it is not the company building the flying taxis.
This is the crux of the problem in which Uber finds itself.
It does not produce anything unique.
The biggest winners that take home the lion's share of the spoils are the firms that create a proprietary product that cannot be replicated easily such as Netflix's original content or Google's advanced search engine.
The heavy lifters gain control and can dictate the path toward monetization.
Page's Kitty Hawk is in the driver's seat with the best technology and Uber's Khosrowshahi recently met with Thrun pitching his idea of partnering up.
Expectedly, Kitty Hawk declined to become buddies because nothing can be gained by collaborating with Uber.
Kitty Hawk stated that it plans to develop an app for its own robo-flights, which could crush Uber's dream of being the end all be all of transportation apps.
At the end of the day, Uber is just an app matching drivers and passengers, and creating this app is highly replicable.
It takes billions upon billions of dollars to build an autonomous aerial taxi from scratch. Uber's inability to produce aircraft gives it little negotiating power down the line.
On that note, Uber announced a partnership with NASA to build an air traffic control system, which would logically be used to construct landing ports similar to a helipad for aircraft to land.
By carving out a sliver of the industry mastering port construction, it gives Uber a narrow entranceway into the future of aero-taxi industry albeit a weaker strategic position than Page's Kitty Hawk.
Another day and another loss to Alphabet. Wave the white flag.
Each loss leads to the need for more funding.
More funding has brought on more losses for Uber in a vicious cycle that has seen Uber's valuation slip at the last round of financing.
In the next five years, onlookers can expect much of the same from Uber - underperformance in the form of accelerated losses from its core ride-sharing business.
Capital is disappearing into a black hole and the monetization of Uber Eats and Jump is nothing about which to boast.
These are side businesses at best.
The road map is wishy-washy at best. Uber's Elevate division could turn out to be lipstick on a pig hyping up the company for its 2019 IPO to attract more dollars - the same reason it needs to recruit a new CFO.
The IPO road show will give Uber a platform to explain how it plans to curtail losses. A miracle is required for Uber to finally turn into a profitable business by the time it goes public.
To visit Uber's Elevate division to watch a video of its version of the future of aerial taxis, please click here.
Kitty Hawk's Cora in New Zealand
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Quote of the Day
"A computer once beat me at chess, but it was no match for me at kickboxing." - said American comedian Emo Philips.
Mad Hedge Technology Letter
May 14, 2018
Fiat Lux
Featured Trade:
(MEET THE NEW FANG),
(AMZN), (WMT), (FB), (NFLX), (GOOGL), (UBER)
Yes, it's Wal-Mart (WMT).
No, I'm not making this recommendation because they let you park your RV in their parking lots at night for free.
And no, I'm not smoking California's biggest cash crop either (it's not grapes).
I predicted as much in my recent research piece, "Who Will Be the Next FANG?" by clicking here.
It is the dawn of a new era with the world absorbing yet another FANG to add to the list of Facebook (FB), Alphabet (GOOGL), Amazon (AMZN), and Netflix (NFLX).
As the tech world powers on to new heights, nothing can slow down these juggernauts.
Let's face it - companies are more lucrative when technical expertise is ramped up and infused into the business model.
Ground zero of the tech movement - Silicon Valley - has helped supercharge the economy and prodigious earnings' results support this thesis.
New innovations will fuel the next level up in the tech arm's race but more crucially, so will new geographical locations.
Instead of throwing a dart at a world map, the locations are a no-brainer because tech scavenger hunts orbit around one idiosyncrasy and that is scale.
Scalability is a sacred word in the tech world.
If a start-up cannot scale up, investors can't imagine future profits, entrepreneurs can't imagine growth, and funding dries up.
End of story.
For instance, Amazon's business model does not mesh kindly with pint-sized Iceland.
Not because Amazon discriminates against Iceland's culinary delicacy of sheep testicles but because the population is only around 330,000 people.
Scale equals success.
Indisputably, every country with an Amazon-esque business is being bid up because big tech firms know how to digitally monetize, effectively out-sourcing an incredibly profitable business model that has worked unabated for the developed world for the past decade or two.
The heightened awareness of existential survival is pitting foreign money against each other in far-flung places jostling for the same digital assets after a decade of cheap financing enriching tech companies.
Remember that first mover advantage leads to dominance in the datasphere because the volume of data is directly correlated to the bottom line.
Examples are rife around the world, for instance Amazon's $580 million purchase of Souq.com, described as the Amazon of the Middle East headquartered in Dubai and the biggest e-commerce site in the Arab world.
E-commerce commands a paltry 2% of sales in the region. That number is poised to explode as digital-savvy, tech Millennials reach peak consuming age and the migration to mobile erupts.
A preemptive strike is usually the most compelling strategy for large cap tech as it pushes out the smaller players, which lack the resources to compete.
Even the corporate offices of Walmart (WMT) in Bentonville, Arkansas, would wholeheartedly agree with me after doling out for its new toy.
Yes, Walmart acquired a 77% share in the Amazon of India, Flipkart, for $16 billion after the real Amazon failed to cut a deal with the most famous e-commerce unicorn in India.
This new development is a game changer.
India is a country that tech executives pinpoint as the future because of its massive population, economic growth, and economic potential foreign investors hope to tap up.
The International Monetary Fund (IMF) has anointed India as the fastest growing economy in 2018, and the 7.4% growth this year will follow with an even sturdier 7.8% in 2019.
Amazon has been well aware of India's ascent. Its CEO Jeff Bezos pledged to invest more than $5 billion in India and Amazon began its e-commerce operation in 2013.
Amazon's early entrance into the Indian e-commerce industry has paid off grabbing 31% of market share putting it in second place behind Flipkart's 40%, according to big data firms.
The Indian e-commerce space was $20 billion in 2017, and by 2019, expect that number to grow to $35 billion.
Walmart CEO Doug McMillon noted that by 2026, the Indian e-commerce industry will surpass $200 billion. When it comes to clothing and fashion, Flipkart has a 70% share in India.
Even more valuable than the economic growth is the new pipeline of tech talent that will help Walmart compete with Amazon.
The Trump administration's crackdown on H-1B visas that Silicon Valley utilizes to bring developers to American shores has forced American tech companies to implement a work-around.
Essentially, the only difference now will be that the past recipients of H-1B visas will be sitting in an air-conditioned office in Bengaluru, India, until the visa documents come through.
Flipkart has a deep pipeline into the best engineering schools in India and the staff of more than 30,000 employees work on Indian wage levels.
This deal is one of the biggest talent grabs of tech developers the world has ever seen. And this group has the know-how of building an Amazon-style digital marketplace platform from zero.
The Flipkart investment comes after Walmart's purchase of Jet.com, an e-commerce company based in Hoboken, New Jersey.
The $3.3 billion purchase of Jet.com in 2016 was the beginning of Walmart's digital strategy, and it has come a long way in a very short time.
Walmart is now a vaunted member of the FANG group and has a new army of developers to back up this claim.
Glancing at the opportunities to scale, Indonesia is clearly the runner-up behind India.
Indonesia has been tagged as a tech new battleground with a population of 260 million in 2016 and growing.
The country has a medium age of 28, meaning this young population could turn into a reliable source of new tech developers who traditionally are young and digital natives.
Economic prosperity has been welcomed with open arms to this tropical island nation. It is poised to become the seventh largest economy by 2030, up from its rank of No. 16 today, creating a burgeoning middle class with newfangled discretionary spending.
The rural migration to urban environments will add another 90 million people living in Indonesian cities by 2030, while Internet access is growing by 20% each year in Indonesia.
Goldman Sachs recently issued a note to investors citing Indonesia's unbridled potential.
Capital is pouring into Indonesia at a breakneck speed with Alibaba investing $1.1 billion into Tokopedia, the Amazon of Indonesia.
Companies are coming to the stark realization that the domestic low hanging fruits have been picked, and aging developed countries are turning to undeveloped regions of growth to advance business objectives.
This is why South East Asia has been bombarded with an onslaught of Japanese, Korean, and Chinese investments and not only in the tech sector.
The Far East powerhouse countries are battling each other in Southeast Asia for consumer goods, infrastructure, high speed trains, and of course technology.
Uber just sold its Southeast Asian ride-sharing asset Grab to China's DiDi Chuxing and SoftBank for $2 billion.
The Southeast Asian region is one of the hottest places to make a deal because of a lack of FANG occupancy.
Walmart sold off on the Flipkart news because of the potential impairment to margins, but this move is a long-term positive for Walmart shareholders.
Flipkart does not turn a profit and Walmart is still solely judged by earnings. Unfortunately, it does not receive the same license to focus on growth like Tesla, Amazon, and Netflix.
However, I have a hunch that down the road, investors will agree this move by Walmart's McMillon was as shrewd as can be.
Like the colonial powers of yore, India and Southeast Asia are likely to be divvied up.
American companies already own more than 70% of market share in India e-commerce.
India is the biggest democracy in Asia and a staunch ally of the United States.
India's frosty relationship with China due to border spats and communist origins will stunt China's ability to take over and expand in India.
However, Southeast Asian countries are more likely to go the way of Cambodia, which is reliant on Chinese money to fund new initiatives, hamstrung by Chinese debt up to its eyeballs, and acquiesced political capital to the Mandarins.
Chinese investment's path of least resistance is Southeast Asia. This progression will be facilitated by the sizable Chinese expat population that resides in Indonesia, Vietnam, Thailand, Philippines, Myanmar, Laos and Cambodia.
Long-term shareholders of Amazon and Walmart will be rewarded. However, expect a few more Indians walking around Bentonville, Seattle, and Hoboken.
_________________________________________________________________________________________________
Quote of the Day
"My life is now a constant assessment of whether what's happening in real life is more entertaining than what's happening on my phone." - said television host Damien Fahey.
Mad Hedge Technology Letter
April 9, 2018
Fiat Lux
Featured Trade:
(HOW TO LOSE MONEY IN TECHNOLOGY STOCKS),
(AAPL), (MSFT), (OFO), (UBER), (MOBIKE), (OneCoin), (BABA)
Every new bull market in technology brings its excesses, and this time is more different.
Today, I'll outline some of the more egregious cases, which you and your money should avoid like the plague.
Spoiler alert: You are better off just parking your money in Apple (AAPL) or Microsoft (MSFT) and then forgetting about it.
The thirst to own a little sliver of technology in the greatest bull market of all time has reached a fever pitch with capital allocating to marginal assets.
Serious investors need to avoid the madness.
The excess was bred from the realization of how valuable data extraction and generation is to profitability.
The investment climate is reminiscent of the dot-com bubble during the 1990s that spawned companies with no intention of ever turning a profit.
This time, loss-making is blatant.
Ride-share vehicle services such as Uber and Lyft are great at losing money, and passengers would stand aside if prices became exorbitant.
Paying a derisory sum to ride in someone else's car while being chauffeured around is part of the allure of this business model.
The result is an artificially low price for the benefit of consumers amid a vicious price war with competitors.
The biggest problem with these ride-share services is they create nothing.
They are not building a proprietary operating system or creating technology that did not exist before.
Hence, these types of companies execute risky strategies that backfire.
Any technology company that expects to be in the game long term must create something unique and organic that other companies value and cannot copy.
These ride-hailing companies simply use an app on a smartphone, and this smartphone app can be created by any half decent high school app programmer.
Uber lost $4.5 billion in 2017, and that was great news for CEO Dara Khosrowshahi because Uber is losing less than before.
If you thought a tech company glorifying an annual loss of $4.5 billion was strange, then analyzing the state of the ride-share business model for the industry one degree further out on the risk curve will leave you scratching your head.
And by the way, Uber will try to soak your wallet when it launches its initial public offering next year.
Enter dockless ride-sharing bicycles.
Dockless bike-sharing has mushroomed around the world, spreading like wildfire fueled by grotesquely large injections of venture capital.
Ofo, a Chinese firm, initially raised more $1.2 billion and another $866 million from Alibaba (BABA) from a recent round of fundraising. CEO Dai Wei has stated that his company is worth north of $2 billion.
Mobike lured in more than $900 million in venture capital.
China is the epicenter of the bicycle ride-sharing experiment. More than 40 firms have sprouted up creating a bizarre scenario in major Chinese cities because of these companies dumping bicycles on every public street corner.
According to Xinhua News Agency, more than 2.5 million bikes are littered throughout the city by 15 companies in Beijing alone.
Local American firms have jumped on the bandwagon, too, with examples such as LimeBike, based in San Mateo, CA, that raised $12 million from Andreessen Horowitz in 2017, and topped up another $50 million from Coatue Management.
Meanwhile, Spin, the first stationless bikeshare company in the US, raised $8 million led by Grishin Robotics.
More than 40 bike-sharing companies have beat down the price of renting a bicycle to the paltry rate of 1 RMB (renminbi) ($0.15 USD) per 30-minute trip.
The intentional dumping at absurd price levels is not sustainable. The business model is predicated on collecting an initial deposit of $15 before a customer can hop on a bike.
The deposit has proved high risk as some companies have disappeared or gone bust.
Bluegogo, the third leading company in this space, emptied out its headquarters office, locked the doors, and failed to notify employees who claimed their wages had been garnished.
By last count, Bluegogo had distributed roughly 700,000 bicycles, and was estimated to have 20 million users, each paying $15 deposits to use the service.
Bluegogo was considered a legitimate competitor in the space along with Mobike and Ofo.
The $300 million dollars in Bluegogo deposits floated up to money heaven, and the deposits will never be repaid to customers.
Didi Chuxing, China's version of Uber and subsidiary of Tencent and Alibaba (BABA), purchased the bankrupt bike-sharing company, paid the work staff, and slipped them inside its portfolio of emerging tech firms in January 2018.
Mingbike, which failed in Shanghai and Beijing, migrated to emptier pastures in third and fourth tier Chinese cities and sacked 99% of its staff.
All told, $3 billion to $4 billion has been funneled into these bicycle-share monstrosities in the past 18 months.
It gets a lot worse in terms of high risk.
Another frontier of interest that has gone absolutely bananas is the ICO (Initial Coin Offering). ICOs are an unregulated new cryptocurrency venture raising funds by crowdfunding. A certain percentage of coins is sold to early investors in exchange for legal tender or Bitcoin.
This controversial means of raising money is a hotbed for scams galore. Of 1,000 that now exist, maybe 10 are legit.
These criminals are taking advantage of the headline effect of cryptocurrencies, promising every Joe and Jane early retirements and an easy way to provide college funds for children.
It's true that a founder of a cryptocurrency demonstrably benefits financially from leading this new form of payment.
Simply put, these ICOs function as Ponzi schemes with the last one to buy holding the bag when the sushi hits the fan after the founders run for the exits.
These fraudulent ICOs take on some of the characteristics of real Ponzi schemes such as guaranteed profits, promising their blockchain technology will solve all of the world's ills, no detailed roadmap except collecting funds, and lack of an online digital footprint.
Adding to the outsized risk is the confusion of which jurisdiction these companies are in and absence of any proper compliance.
OneCoin was a cryptocurrency promoted by offshore companies OneCoin Ltd (Dubai) and OneLife Network Ltd (Belize), founded by Ruja Ignatova. Many of the shady characters crucial to OneCoin were architects of similar Ponzi schemes, which was a dead giveaway to authorities.
Bulgarian enforcement officials raided and hauled away servers and other sensitive evidence at OneCoin's office in Sofia, Bulgaria, at the request of the prosecutor's office in Bielefeld, Germany.
German police and Europol also busted 14 other companies connected to OneCoin.
OneCoin CEO Ignatova was imprisoned in India for swindling investors after being investigated by Indian authorities in 2017.
The Ministry of Planning and Investment of Vietnam even issued a rebuttal that a forged document OneCoin used as proof to show it was the official licensed cryptocurrency in Vietnam was fake. It stated there was no possibility this document could ever exist.
SEC chairman Jay Clayton recently chimed in after being asked if all ICOs are fraudulent, boldly stating, "Absolutely not."
Uber and Ofo also are not frauds, but that does not mean investors should take a flier on it.
The strength of technology has attracted the marginal character to its doorstep; separating the wheat from the chaff is more important than ever.
These nascent industries can look good in the shop window, and slick advertising campaigns numb our rational decision making, but investors need to stay away at all costs.
The bicycle-sharing industry is a way for cash-rich venture capitalists to hoard data for applications irrespective of operating at a profit. The ICOs are charlatans attracted to the fluid cash flow tech companies command desiring a share in the spoils.
Keep your money in your pockets and wait for my next actionable trade alert.
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Quote of the Day
"Stay away from it. It's a mirage, basically." - said legendary investor Warren Buffett when asked about cryptocurrency.
Mad Hedge Technology Letter
April 3, 2018
Fiat Lux
Featured Trade:
(THE BIG WINNER FROM THE PHOENIX CAR CRASH),
(WAYMO), (TSLA), (GOOGL), (AAPL), (AMZN), (UBER), (GM), (FB)
In 2014, the juicy sound clips recorded by NFL legend Chris Carter at the annual NFL rookie symposium would be enough for those at league headquarters to have nervous breakdowns.
During a keynote speech, Chris Carter recommended that every rookie about to kick-start a sports career should find a "fall guy" just in case they found themselves on the wrong side of the law.
Carter later rescinded his comments and sincerely apologized for insinuating marginal tactics.
Lo and behold, it seems the most attentive listeners at the symposium weren't the players but the swashbuckling chauffeur-share service that has become the "fall guy" of Big Tech, none other than Uber.
The great thing (read: sarcastic here) for Uber about killing a pedestrian with autonomous vehicle technology is that it does not need to change its Silicon Valley mind-set of "move fast and break things."
Everything Uber touches seems to turn to mush. At least lately.
This revelation is extremely bullish for the other big players in the A.I. (Artificial Intelligence) driverless car space, mainly Waymo and General Motors (GM).
Granted, Uber came late to the party, but that cannot be an excuse for the myriad of shortcuts it promotes to build its business.
Waymo, the autonomous subsidiary of Google (GOOGL), has been honing its software, algorithms, and sensors for the past nine years like a sage samurai swordsmith from Kyoto. This type of detailed nurturing has led Waymo to rack up more than 5 million miles of testing on live roads.
The company recently commenced the first niche ride-hailing service in Phoenix, AZ, and just announced that it will purchase up to 20,000 electric cars from Jaguar Land Rover in a $1 billion deal to outfit with its cutting-edge technology.
Every day is a joyous day for Waymo because the first mover advantage is in full effect.
GM, another laggard, though considered in the top three, won't commence its robotic car fleet until late 2019. However, by that time, Waymo could be on the verge of mass rollouts if there are no setbacks.
The cherry on top for Waymo is Uber's knack of making a dog's breakfast of anything it pursues, magnifying an insurmountable lead for Waymo to possess.
Granted, the autonomous vehicle brain trust expected casualties, and the firm that made news for this mishap would be stuck with this label along with suspended operations.
Waymo missed a direct hit thanks to Uber and Tesla.
Tesla also took a direct hit when it announced that Walter Huang, an Apple engineer, sadly was killed in a Model X accident last weekend while his car was on autopilot.
It capped a horrible week by announcing a comprehensive recall of every Model S made before April 2016 for a faulty part. After fighting tooth and nail to maintain the $300 support level, Tesla swiftly sold off down to $250.
The disruption fetish permeating the ranks of the tech industry has its merits. Often the end result manifests through cheaper prices and better consumer services.
However, Uber's over-aggressiveness has placed it at the forefront of the regulation backlash along with Facebook (FB).
Google has certainly been playing its cards right, and having not run over a pedestrian consolidates its leading position
Luckily, the National Transportation Safety Board does not punish every participant using this technology.
No news is good news.
An extensive review of internal processes will hit team morale, and the burden of blame with fall upon the engineers.
The fallout from the tragic incidents will set back Tesla and Uber at least three to six months.
The suspension of their operations is akin to a white flag because Waymo is currently leaps ahead and plans to ramp up the mass rollout in the next two years with technology that is best of breed.
The running joke in the industry is that Uber's autonomous vehicle engineers are comprised of Waymo rejects.
Waymo already has more than 600 for-profit vehicles in operation in Arizona. And as every day without a fatality is considered a success, the Jaguars are next in line to be tricked-out with sensors and software.
Unceremoniously, Waymo has focused on safety as the pillar of its autonomous driving operation. Its conservative attitude toward danger will serve it well in the future. Waymo even spouted that its technology would have avoided the Uber accident.
Waymo has no desire to physically produce cars, but it aspires to sell licenses to the technology that could be installed in trucks and delivery vehicles, too.
The licenses could act as de-facto SaaS (software as a service) reoccurring revenue that has catapulted cloud companies to untold heights.
Google would also be able to integrate Google Maps, Google Docs, and all Google services into the robot-cab experience. The robo-taxi would merely serve as an incubation chamber to use the plethora of Google services while being transported from point A to point B.
And with Uber temporarily wiped off the map, Waymo seems like a great bet to monetize this segment at massive scale.
Google is truly on a roll as of late, even finding the perfect fall guy for the big data leak that has roiled the tech world, inducing a wicked tech sell-off - Facebook.
Instead of extracting data from user-posted content, Google's search builds a profile on users' search tendencies, and it is just as culpable in this ordeal.
Ironically, all the heat is coming down on Facebook's plate, and Mark Zuckerberg's lack of tactical PR noise is cause for investor concern.
The mountains of cash vaulted up over the years has made barriers of entry into new fields simple.
For example, Amazon's desire to lead health care came out of left field, and 10 years ago nobody ever thought the iPod company would make smart watches.
The interesting development in broader tech is the disintegration of unity that once supported the backbone of these firms.
Tim Cook, chief executive officer of Apple, railed on Facebook's business model and trashed Mark Zuckerberg's blatant disregard for privacy in order to profit from people's personal lives.
Large cap tech has never had as much overlap as it does now, and the new normal is throwing others under the bus.
If Google is dragged into the Facebook regulatory orbit, the silver lining is that the world's best autonomous driving technology will soon transform its narrative and put its incredibly profitable search business on the back burner.
Markets are forward looking and reward outstanding growth stories.
Tech is growth.
Morgan Stanley issued a report claiming the repercussions of mass-integrating this technology would be to the tune of about half a trillion dollars. That includes the $18 billion saved in annual health costs to automotive injuries. Also, 42% of police work ignites from a simple traffic stop. This would vanish overnight as well as concrete parking garages that blight cities. Car insurance is another industry that will be swept into the dustbin of ancient history.
Yes, tech has evolved that fast when Google can start claiming its revered search business as the daunted L word - legacy business.
The fog of war is starting to burn off and the visible winner is Waymo.
The shaping of its autonomous vehicle business is starting to take concrete form and although this won't affect earnings in the next few years, it will be a game changer of monumental proportions.
Uber is seriously in the throes of having an existential problem because of Waymo's outperformance. Venture capitalists heavily invested in Uber because of the promises of autonomous vehicle technology.
This is its entire growth story of the future.
Without it, it is a simple taxi company run on an app. There is no competitive advantage.
Waymo is on the verge of creating a scintillating growth business that is effectively Uber without a driver while simultaneously destroying Uber.
Ouch!
It speaks volumes to the ascendancy. And if Waymo miraculously capitulates, Google can always call Chris Carter and find another "fall guy."
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Quote of the Day
Asked what he would do if he was Mark Zuckerberg, Apple CEO Tim Cook said, "I wouldn't be in this situation."
