Mad Hedge Technology Letter
August 28, 2024
Fiat Lux
Featured Trade:
(NOT SUPER BY SUPER MICRO)
(SMCI), (NVDA)
This is the first blip in quite a while for the chip sector.
It has almost been perfect in the latest leg up in the tech market carried by heavy hitter Nvidia (NVDA).
I don’t think this will have a significant knock-on effect on the prospects of NVDA.
NVDA is an animal of its own and I do believe we will see great earnings and positive forward guidance that could mean the next gasp up in tech stocks.
Today represents the first black eye for the AI generative movement when short seller Hindenburg research accused Super Micro Computer (SMCI) of “account manipulation.”
There was a three-month investigation and many former insiders were contacted.
Hindenburg research has a pretty good track record calling out tech frauds.
Most of their calls focus on public stocks helmed by predominately Chinese nationals.
SMCI stock crashed 25% on the day, and it is an ominous setup going into Nvidia earnings later today.
Hindenburg said it reviewed various instances that suggested there were ongoing bookkeeping issues within the $35 billion tech firm even after the SEC charged it with "widespread accounting violations" in 2020.
Workers within the company said they faced pressure to meet high sales quotas, even after the company was charged by regulators.
The high quotas incentivized some workers to ship defective products.
Some of Super Micro's partners appeared to do little business outside their relationship with Super Micro. Ablecom, one such partner, exported 99.8% of its product in the US to Super Micro, while Compuware, another partner, exported 99.7% of its product to Super Micro.
Hindenburg also said Super Micro also ramped up exports to Russia after Moscow invaded Ukraine, which violated US sanctions.
Hindenburg highlighted quality concerns among Super Micro's customers, some of whom have turned to alternative suppliers. Tesla and CoreWeave, two of Super Micro's major customers, have inked high-profile deals with Dell over the past year because they found SMCIs products inferior.
The tsunami of bad news for SMCI means it is time to avoid the stock.
The company faces a torrent of accounting, governance, and compliance issues and offers an inferior product and service now being eroded away by more impactful competition.
The accusations are quite structural and investors won’t be able to just turn a blind eye to all of this.
SMCI delayed reporting their earnings at the last second which tells an investor audience that much of the accusation has some truth to it.
There is a lot to solve internally and I don’t think investors should swoop in and buy the dip just yet.
If there is a bounce, it most likely will be a dead cat bounce.
Although not an existential problem, this short seller report will set back SMCI 5 years and that is a long time in the world of tech.
Readers should avoid this chip stock and head to higher ground.
There is a possibility that this is just the tip of the iceberg and the core could find out to be a lot more rotten than first thought.
Readers will be better off sticking with the likes of Nvidia, Broadcom, AMD, and Micron.
“If you can't tolerate critics, don't do anything new or interesting.” – Said Amazon Co-Founder Jeff Bezos
Mad Hedge Technology Letter
August 26, 2024
Fiat Lux
Featured Trade:
(LET IT SNOW)
(SNOW), (NVDA)
Some might believe that there are no more growth companies out there in the tech sector.
Innovation has been dragging its heels for quite some time.
Shouldn’t we have put someone on Jupiter yet?
Tech is still very much in the software revolution.
Screens and iPads have been the devices that have allowed software companies to print money.
Then came the monopolistic stranglehold of big tech like Google and Amazon that has really crushed the small guy.
However, there is still room to flourish for smaller companies that are punching above its weight like Snowflake (SNOW), a software company, renowned for its data cloud platform which houses a global network designed to maximize its cloud potential.
This platform allows thousands of organizations to manage their data concurrently, providing both scale and performance.
Snowflake’s unique platform allows thousands of organizations to manage their data with extensive storage and computing power.
Key features of the platform include data storage, processing, and analytic solutions that run faster than traditional systems.
SNOW disappointed in its sales outlook which is why the stock cratered in the short-term, but I do believe this is a buy-the-dip opportunity for the objective investor.
It assured investors that results weren't affected by AT&T's recent data breach or the Crowdstrike outage.
Deceleration is never a term shareholders want to hear from a public company.
The reason for the slowdown is that other companies are beginning to pull back their budgets.
Snowflake’s data warehouse also competes with platforms operated by larger technology giants such as Amazon’s (AMZN) Redshift and Alphabet’s (GOOGL) BigQuery.
These companies could challenge Snowflake’s unique usage-based pricing model as compared to traditional subscription-based pricing.
Lastly, the company still has not turned profitable, leading investors to question the sustainability of the company’s business model.
The company is actively expanding its capabilities in new ways.
Snowflake has developed its own Large Language Model (LLM) called Arctic, which has outperformed other LLM models in various benchmarks, such as Meta Platforms’s (META) Llama.
Furthermore, the company is also enhancing its capabilities through a strategic partnership with Nvidia (NVDA) which aims to provide its customers with a platform designed to boost AI productivity, thereby enhancing business performance.
These 10 new features will provide new revenue streams and more users, re-accelerating Snowflake’s year-on-year revenue growth.
Snowflake’s focus on ramping up its AI offerings displays its commitment to maintaining its leadership in the data warehousing sector.
I do believe that SNOW is worth a look.
It’s true that competition will be a rough ride with the likes of big tech looking to outmuscle SNOW.
That is a serious risk to the long-term viability of the business model and I am not downplaying this risk.
At a $40 billion market cap, the stock definitely screams small company.
However, I do believe there is more room to run to the upside, but the growth is definitely limited.
I think at $115 per share, it is worth a trade and the next pop would be a great time to take profits.
Much of the rate hikes have been discounted into the price of shares so I do believe they will need to show us more than just give them the benefit of the doubt.
“Price is what you pay, value is what you get.” – Said Investor Warren Buffett
Mad Hedge Technology Letter
August 23, 2024
Fiat Lux
Featured Trade:
(TECH STOCKS LAUNCHED INTO ORBIT BY JEROME)
($COMPQ), ($TNX)
The job is done – The Fed won against inflation.
When is the parade?
That was largely the message that was delivered to us this morning by U.S. Federal Reserve Chairman Jerome Powell.
Migrating into rate-cutting mode means that tech stocks ($COMPQ) are about to explode into orbit.
We will only know how much higher tech stocks will go when we can understand how much Powell’s Fed will cut.
If he cuts the Fed Funds rate from 5.25% to 2% then tech stocks will be up at least another 50% from these levels.
What is bizarre is that Powell is cutting rates ($TNX) with housing prices, grocery costs, stock market, and a price for one ounce of gold at all-time highs.
Things are about to get more expensive – that is guaranteed.
Ironically, the Fed is planting the seeds for the next rip-roaring wave of inflation, because 3% inflation levels will be the new floor and not the ceiling.
Once the CPI hit 2.9% just a few days ago, the Fed went into the “the job is done” mode which is extremely dangerous.
Either way, tech stocks are in for a spectacular monster rally heading into the year's close and we just added a big position in chip stock Micron (MU).
There should be two to three .25% cuts by the end of the year which is highly bullish for equities.
"The direction of travel is clear," Powell added.
Powell acknowledged recent softness in the labor market in his speech and said the Fed does not "seek or welcome further cooling in labor market conditions."
The July jobs report rattled markets earlier this month, revealing that there were just 114,000 jobs added to the economy last month while the unemployment rate rose to 4.3%, the highest since October 2021.
Data earlier this week also showed that 818,000 fewer people were employed in the US economy as of March, suggesting reports have been overstating the strength of the job market over the last year.
Powell's remarks on Friday were reminiscent of those he delivered at Jackson Hole in 2022, in which the Fed chair offered a direct assessment of the economic outlook and, at the time, the need for additional rate increases.
The similar part of the speech was his call to action to change the direction of policy and he did just that.
We are about short-term trading and trade alerts here in what moves the market with tech trades.
I do believe long-term, what Fed chair Jerome Powell did, will turn out to be a policy mistake that will result in a lot higher bond yields.
The Fed's slow walking the rate hikes on the way up and then now slow walking the rate cuts on the way down is a recipe for disaster and the wrong way to approach this problem.
The ironic thing here is that tech stocks are the only equities, apart from energy and supermarket stocks, to do well in a higher inflation backdrop and part of that has to do with their monopolistic power which continues unabated.
Not that tech needed any help, but help is arriving in terms of lower rates and I do believe tech stocks will do well as we move closer to year-end.
Buckle up, put on your cowboy hat, and enjoy the tech rally!
“A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well.” – Said CEO and Founder of Amazon Jeff Bezos
Mad Hedge Technology Letter
August 21, 2024
Fiat Lux
Featured Trade:
(SPEND UNTIL REVENUE COMES)
(NVDA), (SMCI), (AVGO)