Mad Hedge Technology Letter
November 8, 2023
Fiat Lux
Featured Trade:
(SETTING UP FOR THE NEXT BULL MARKET)
(WEWKQ)
Posts
Taking out long-term leases and turning around to rent short-term i.e. Airbnb style for corporate offices ended with a thud as office sharing tech company WeWork filed for bankruptcy.
The idea never made sense and felt more like a gimmick.
Surprisingly, this bankruptcy didn’t happen much earlier as the “work from home” pivot during 2020-2022 made this business model go from bad to worse.
It’s safe to say that we are far passed the peak “sharing economy” and investors are licking their wounds on this one.
WeWork filed for bankruptcy, capping a dramatic period that saw the once high-flying startup navigate a failed initial public offering, forced government lockdowns, a blank-check merger, and a stubborn avoidance of return-to-office trends.
The company at its 2019 peak commanded a $47 billion valuation with the likes of SoftBank losing more than $14 billion on just this one investment.
The firm’s death spiral arguably started in 2019. In a matter of months, the company went from planning an IPO to firing thousands and procuring a multi-billion-dollar bailout.
WeWork was almost a scam from the beginning with its main business mission explained as to “elevate the world’s consciousness.”
The former CEO of WeWork Adam Neuman operated the business almost as a cult.
The company eventually went public in 2021 through a special purpose acquisition company, two years after its initially planned IPO. But that didn’t stop WeWork from hemorrhaging cash.
While WeWork reached a sweeping debt restructuring deal in early 2023, it quickly signaled desperation soon after.
High-interest rates are starting to knock out the low-quality business ideas that never should have gotten off the ground in the first place.
These developments are a godsend for the tech economy that needs a complete flushing out of the bad ideas that were fueled by 0% interest rates.
Cheap money attracts larger-than-life ideas and personalities that can’t really back up the chutzpah.
Raising the bar for quality in tech has also caused the unintended consequence of raising the top tech companies or magnificent seven even higher up than before.
This trend can easily be seen in the EV sector where incumbent Tesla is putting their foot on the scruff of smaller EV company’s necks that simply can’t keep up with the higher material costs and headache of developing a global manufacturing presence amid deglobalization.
In simple terms, it is substantially harder to build an above-average tech company, or any tech company for that matter in 2023.
The former is an issue with the lofty competition that wields powerful balance sheets and the latter is an issue with draconian funding terms.
Waving goodbye to lemons like WeWork is only healthy for the tech sector in the long term and shortly we should see other junk-status companies be thrown by the wayside as well.
Cryptocurrency mogul Sam Bankman Fried’s fall from grace with a guilty verdict of fraud is another signal that the tech’s excesses are quickly normalizing.
We are in the middle of setting ourselves up for the new bull market in technology stocks which will be kicked into gear if interest rates sniff out the next recession.
Mad Hedge Technology Letter
August 16, 2019
Fiat Lux
Featured Trade:
(CISCO’S CHINA HIT)
(WEWORK), (CSCO), (FXI)
If you believe that the trade war developments have had a negligible effect on the tech companies that operate in mainland China, then you are dead wrong.
Cisco is a cautionary tale highlighting that things aren’t running smoothly with its decrease of 25% in annualized revenue from operations in mainland China.
Many of the profit models in China have been swallowed up by the friction between the two governments at the highest level.
The Cisco employee count was sacrificed stateside with the San Jose, California branch implementing a second round of layoffs that will sweep aside 500 more Cisco engineers.
The most damming set of words that epitomized the dire situation that Cisco face is when management said, “we’re being uninvited to bid …We’re not being allowed to even participate anymore.”
The Chinese government has disengaged Cisco from competing in China and that means a whole channel of revenue will be effectively offline for the foreseeable future unless there is substantial rapprochement from the two governments.
Perusing the files of venture capitalist heartthrob WeWork that plans to go public proved that relations with China and doing business is a financial high-wire act.
I will explain.
WeWork’s 350-plus-page IPO prospectus offered insight into the treacherous nature of business exposure in the Middle Kingdom.
Any investor who rummaged through the prospectus has to be dreading the worse because the boobytraps are plentiful.
A cynical take of WeWork’s business tells me they are doomed in China.
Property is in control of a huge swath of Chinese wealth vehicles and commercial property is part of that equation.
According to the filing, WeWork is contracted to 115 buildings across 12 cities in Greater China, about 15% of its total number of facilities.
I envision property law skirmishes of the foreign WeWork against local property landlords and by historical standards, the court system has not been kind to non-Chinese who seek justice in the Chinese court system against Chinese national interests.
WeWork’s management references “higher tariffs, capital controls, new adverse trade policies or other barriers to entry” as possible counterpunches to an already delicate working environment.
The pressure cooker could explode at any point with the higher-ups making heads roll at the corporate level to prove a point at a macrolevel.
Foreign companies are easy targets and WeWork is an American company – a double whammy that could make it a convenient target for the Chinese communist party.
Summing it up, this is not an advantageous time to lever up on the Chinese economy.
Risk control is needed and this smells like a ticking time bomb.
It really shows how the tech landscape has disintegrated for American companies in China.
They were once welcomed with grandeur and hospitality plus the forced technology transfers.
CEOs bit their tongue because the revenue growth surpassed the cons of cyberespionage and outright theft.
With the accumulation of generations of free knowhow, China is now locked and loaded with a tech industry that rivals anyone in the world.
The last item left on the menu are high-grade semi chips which the Chinese have not mastered yet and that might be the last stand for the Americans if they hope to salvage a stunning comeback victory.
If WeWork does manage to go public without the equity market raining down on its parade, it’s an outright sell and stay away.
It’s nothing but a glorified property manager and its interests in China could open up pandora box.
