Mad Hedge Technology Letter
March 20, 2019
Fiat Lux
Featured Trade:
(LYFT), (UBER), (GRUB), (POSTMATES), (DOORDASH), (GOOGL)
Posts
The imminent launch of the Lyft IPO is telling investors that the next era of technology is upon us.
Does that mean that you should go out and buy Lyft shares as soon as they hit the market?
Yes and no.
30 million shares are up for grabs and the price of the IPO appears to be pinpointed between $62 and $68.
Even though this company is a huge cash burning enterprise, the fact is that they have been catching up to industry leader Uber and snatching away market share from the incumbent.
It was only in January 2017 that Lyft had accumulated 27% of the domestic market share, and in the recent filing for the IPO, that number had exploded to 39%.
If Lyft can start to gnaw into Uber's lead even more, shares will be prime to rise beyond the likely $62 to $68 level.
Let's remember that one of the main reasons for Uber giving up ground in this 2-way race is because of the toxic work environment embroiling many of the upper management and the subsequent damage to its broad-based public image.
If you wanted the definition of a public relations disaster, Uber was the poster boy.
Story after story leaked detailing payment problems to Uber drivers, a huge data leak revealing millions of lost personal information, and even a crude video of the founder berating a driver went viral.
There might be no Cinderella ending for this ride-hailing operation as litigious time bombs stemming from an aggressive high-risk, high-reward strategy skirting local taxi laws have flaunted the feeling of corporate invincibility in the face of government.
Being the first of its kind to hit the market, I do believe the demand will outstrip the supply.
There is a scarcity value at play here that cannot be quantified.
And an initial pop from the low-to-mid $60 range to about $80 is a real possibility in the short-term.
However, expect any robust price action to be met with rip-roaring volatility, meaning there is a legitimate chance that shares will consolidate back to $50 before they head up to $100.
Some of my favorite picks have echoed this same price action with fintech juggernaut Square (SQ) and streaming platform Roku (ROKU) mimicking heart-stopping price action with 10% moves up or down on any given day.
This doesn't mean that these are bad companies, but they do become harder to trade when entry points and exit points become harder to navigate around because of the extreme beta attached to the package.
The big winner of this IPO is ultimately self-driving technology.
Let's not skirt around the issue - Lyft loses a lot of money and so does Uber and that needs to stop.
It has been customary for tech companies to go public in order for the initial venture capitalists to cash out so they can rotate capital into different appreciating assets.
When companies are on the verge of ex-growth, maintaining the same growth trajectory becomes almost impossible without even more incremental cash burn relative to sales.
This leads to an even more arduous pursuit of revenue acceleration with stopgap solutions calling for riskier strategies.
What this means for Lyft is that they will need to double down on their self-driving technology because they are incentivized to do so, otherwise face an existential crisis down the road.
The most exorbitant cost for Uber and Lyft is by far employing, servicing, and paying out the drivers that shuttle around passengers.
I cannot envision these companies becoming profitable unless they find a way to eliminate the human driver and automate the driving function.
I will say that Uber benefitting from the Uber Eats business has been a high margin bump to the top line.
Yet, food delivery is not the main engine that will spur on these IPO darlings.
This part of the business is getting more saturated with margins getting chopped down every day.
What food delivery mainstays like Doordash and GrubHub don't have, is the proprietary self-driving technology that at some point will be present in every vehicle in the United States and the world.
What we are seeing now is a race to perfect, optimize, and implement this technology in order to further license it out to food delivery operations and other logistic heavy business that focus on the last mile.
The licensing portion out of self-driving technology will become a massive revenue driver eclipsing anything that the actual ride-hailing revenue from passengers can inject.
Well, that is at least the hope.
And because Lyft going public might force the company to remove the subsidies provided to the lift operators, this could translate into higher costs per unit.
The pathway is a no-brainer – Lyft needs self-driving technology more than the technology needs them.
And even though Google is head and shoulders the industry leader with Waymo, Lyft and Uber don't have a world-famous search engine that they can fall back on if the sushi hits the fan.
I believe Lyft passengers will have to pay more for rides in the future because of the demand for meeting short-term targets incentivizing management to raise fares.
Going public first will allow them to set the industry standards before Uber can participate in the discussion gifting a tactical advantage to Lyft.
That is why Uber is attempting to go public as fast as possible because every day that Lyft is a public company is every day that they can push their unique narrative and standardize what is a nascent industry that never existed 20 years ago with their new capital.
If high risk is your cup of tea, then buy shares when you get the first crack at it, otherwise, take a backseat with a bag of popcorn and watch history unfold.
This trade is not for the faint of heart and until we can get some more color on the business model and the ability or not of management to meet quarterly or annual expectations, there will be many moving parts with cumbersome guesswork involved.
To read up on Lyft’s IPO filing on the SEC website, please click here.
LYFT’S ARRAY OF SERVICES
Mad Hedge Technology Letter
August 22, 2018
Fiat Lux
Featured Trade:
(WHAT’S IN STORE FOR TECH IN THE SECOND HALF OF 2018?),
(GOOGL), (AMZN), (FB), (UTX), (UBER), (LYFT), (MSFT), (MU), (NVDA), (AAPL), (SMH)
Tech margins could be under pressure the second half of the year as headwinds from a multitude of sides could crimp profitability.
It has truly been a year to remember for the tech sector with companies enjoying all-time high probability and revenue.
The tech industries’ best of breed are surpassing and approaching the trillion-dollar valuation mark highlighting the potency of these unstoppable businesses.
Sadly, it can’t go on forever and periods of rest are needed to consolidate before shares relaunch to higher highs.
This could shift the narrative from the global trade war, which is perceived as the biggest risk to the current tech market to a domestic growth issue.
Healthy revenue beats and margin growth have been essential pillars in an era of easy money, non-existent tech regulation, and insatiable demand for everything tech.
Tech has enjoyed this nine-year bull market dominating other industries and taking over the S&P on a relative basis.
The lion’s share of growth in the overall market, by and large, has been derived from the tech sector, namely the most powerful names in Silicon Valley.
Late-stage bull markets are fraught with canaries in the coal mine offering clues for the short-term future.
Therefore, it is a good time to reassess the market risks going forward as we stampede into the tail end of the financial year.
The shortage of Silicon Valley workers is not a new phenomenon, but the dearth of talent is going from bad to worse.
Proof can be found in the controversial H-1B visa program used to hire foreign tech workers mainly to Silicon Valley.
A few examples are Alphabet (GOOGL), which was granted 1,213 H-1B approvals in 2017, a 31% YOY rise.
Alphabet’s competitor Facebook (FB) based in Menlo Park, Calif., was granted 720 H-1B approvals in 2017, a 53% YOY jump from 2016.
This lottery-based visa for highly skilled foreign workers underscores the difficulty in finding local American talent suitable for a role at one of these tech stalwarts.
Amazon (AMZN) made one of the biggest jumps in H-1B approvals with 2,515 in 2017, a 78% YOY surge.
The vote of non-confidence in hiring Americans shines an ugly light on American youth who are not applying themselves to the domestic higher education system as are foreigners.
For the lucky ones that do make it into the hallways of Silicon Valley, a great salary is waiting for them as they walk through the front door.
Reportedly, the average salary at Facebook is about $250,000 and Alphabet workers take home around $200,000 now.
Pay packages will continue to rise in Silicon Valley as tech companies vie for the same talent pool and have boatloads of capital to wield to hire them.
This is terrible for margins as wages are the costliest input to operate tech companies.
United Technologies Corp. (UTX) chief executive Gregory Hayes chimed in citing a horrid “labor shortage in the U.S. and in Europe.”
He followed that up by saying the company will have to grapple with this additional cost pressure.
Certain commodity prices are spiraling out of control and will dampen profits for some tech companies.
Uber and Lyft, ridesharing app companies, are sensitive to the price of oil, and a spike could hurt the attractiveness to recruit potential drivers.
The perpetually volatile oil market has been trending higher since January, from $47 per barrel and another spike could damage Uber’s path to its IPO next year.
Will Uber be able to lure drivers into its ecosystem if $100 per barrel becomes the new normal?
Probably not unless every potential driver rolls around in a Toyota Prius.
If oil slides because of a global recession instigated by the current administration aim to rein in trade partners, then Uber will be hard hit abroad because it boasts major operations in many foreign megacities.
A recession means less spending on Uber.
Either result will be negative for Uber and ridesharing companies won’t be the only companies to be hit.
Other victims will be tech companies incorporating transport as part of their business model, such as Amazon which will have to pass on more delivery costs to the customer or absorb the blows themselves.
Logistics is a massive expense for them transporting goods to and from fulfillment centers. And they have a freshly integrated Whole Foods business offering two-hour free delivery.
Higher transport costs will bite into the bottom line, which is always a contentious issue for Amazon shareholders.
Another red flag is the deceleration of the global smartphone market evident in the lackluster Samsung earnings reflecting a massive loss of market share to Chinese foes who will tear apart profit margins.
Even though Samsung has a stranglehold on the chip market, mobile shipments have fell off a cliff.
Damaging market share loss to Chinese smartphone makers Xiaomi and Huawei are undercutting Samsung products. Chinese companies offer better value for money and are scoring big in the emerging world where incomes are lower making Chinese phones more viable.
The same trend is happening to Samsung’s screen business and there could be no way back competing against cheaper, lower quality but good enough Chinese imitations.
Pouring gasoline on the fire is the Chinese investigation charging Micron (MU), SK Hynix, and Samsung for colluding together to prop up chip prices.
These three companies control more than 90% of the global DRAM chip market and China is its biggest customer.
The golden days are over for smartphone growth as customers are not flooding into stores to buy incremental improvements on new models.
Customers are staying away.
The smartphone market is turning into the American used car market with people holding on to their models longer and only upgrading if it makes practical sense.
Chinese smartphone makers will continue to grab global smartphone market share with their cheaper premium versions that western companies rather avoid.
Battling against Chinese companies almost always means slashing margins to the bone and highlights the importance of companies such as Apple (AAPL), which are great innovators and produce the best of the best justifying lofty pricing.
The stagnating smartphone market will hurt chip and component company revenues that have already been hit by the protectionist measures from the trade war.
They could turn into political bargaining chips and short-term pressures will slam these stocks.
This quarter’s earnings season has seen a slew of weak guidance from Facebook, Nvidia (NVDA) mixed in with great numbers from Alphabet and Amazon.
Beating these soaring estimates is not a guarantee anymore as we move into the latter part of the year.
Migrating into the highest quality names such as Amazon and Microsoft (MSFT) with bulletproof revenue drivers would be the sensible strategy if tech’s lofty valuations do not scare you off.
Tech has had its own cake and ate it too for years. But on the near horizon, overdelivering on earnings results will be an arduous chore if outside pressures do not relent.
It’s been fashionable in the past for market insiders to call the top of the tech market, but precisely calling the top is impossible.
The long-term tech story is still intact but be prepared for short-term turbulence.
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