“Google is all about information. So the notion of using and presenting information in the right point at the right time to users is what, in essence, describes Google.” – Said Current CEO of Google Sundar Pichai
Mad Hedge Technology Letter
July 1, 2019
Fiat Lux
Featured Trade:
(THE DEATH OF HARDWARE)
(AAPL), (CRM), (NFLX), (HUAWEI)
Apple’s Chief Design Officer Jony Ive, the British industrial designer who made Apple (AAPL) products beautiful, is on his way out.
What else could the man do?
Jonathan Paul Ive was born in Chingford, London in 2967 to a silversmith who lectured at Middlesex Polytechnic.
He pursed automotive design at Newcastle Polytechnic, now named University of Northumbria at Newcastle, and graduated with a BA in industrial design in 1989.
His student successes harvested him the RSA Student Design Award which gifted him a stipend for an exploratory trip to the United States.
Palo Alto, California was his ultimate destination where he befriended various design experts including Robert Brunner—a designer who ran a small consultancy firm that would later join Apple Computers.
Ive signed onto product design agency Roberts Weaver Group following his studies demonstrating his typical attention to detail that he became renowned for.
London startup design agency called Tangerine came calling and Ive used his talents to design microwave ovens, toilets, drills and toothbrushes.
Ive slammed into confict with management at Tangerine who believed his ideas were too modern and exorbitant.
Apple later decided to partner with Tangerine on the basis of some of Ive’s former Silicon Valley friends like Robert Brunner delivering Ive to the forefront of Apple design products where he started hatching his plan to be the ultimate designer at Apple.
The rest is history as Ive went on to produce memorable consumer product designs such as the iMac, iPod, iPhone, and iPad.
His last burst of creativity was applied to produce the Apple Watch which was an overwhelming success.
He will now take his show independent but still collaborate with Apple as his main client.
The new design firm will be called LoveFrom.
This announcement isn’t a shocker and certainly, he really had one foot out of the door ever since the passing of Former Co-Founder Steve Jobs in 2011 put him on less solid footing.
If you remember, Apple had a secret corridor constructed between Jobs' and Ive’s office epitomizing how closely they collaborated on product development as well as how good of friends they were.
Current CEO of Apple Tim Cook is the exact opposite of what Steve Jobs represented and part of the reason why Apple has lacked that game-changing new product resulting in a reduced share price.
Steve Jobs was a visionary and the person to transform his ideas into physical form was Jony Ive.
You could argue that part of Jony Ive succumbed with Steve Jobs as well as his parabolic career trajectory.
That’s what all those lines of people camping overnight in front of Apple stores was about.
The cult of Apple was at its peak around 2012 where Apple sold the most iPhones and was miles ahead of competition.
Fast forward 7 years and Tim Cook has allowed the relative competition to catch up and even overtake Apple in numerous metrics.
I would argue that Tim Cook was a dependent stop gap to Steve Jobs but the lack of vision in a position where visionaries are rewarded has been Apple’s Achilles heel.
Surely, Apple could have hired an Elon Musk after Tim Cook steadied the rutter.
The results have been monetary success, milking the famed iPhone business for what it’s worth plus more, but missing the boat on premium content.
They could have bought Netflix (NFLX) while it was less potent with the glut of cash in reserve, or they could have penetrated the enterprise business with acquiring Salesforce (CRM) at an earlier stage.
And during this period, Chinese phone makers caught up big time with Huawei now offering a better and cheaper iPhone alternative.
What Jony Ive was leaving the headquarters of Apple represents is the death of hardware.
Out with the old and in the new, and the new is software and the direction Apple is doubling down on.
Apple's services of iTunes, the App Store, the Mac App Store, Apple Music, Apple Pay, and AppleCare, has become Apple’s “new” business.
Apple's services segment did sales of $11.5 billion in revenue, up from the $9.9 billion services earned in the second quarter of 2018.
A new all-time record was set for services revenue this quarter.
Apple Pay is available in 30 markets and expect to go live in 40 markets by the end of 2019.
Apple now boasts 390 million paid subscriptions across all of its services, an increase of 30 million sequentially and by 2020, Apple will pass half a million paid subscriptions.
Apple hopes to penetrate further into the magazine business with Apple News+, a $9.99 per month service that offers unlimited access to more than 200 magazines.
Apple plans to surpass $14 billion in services revenue per quarter by 2020.
This is what Apple is doing now and the sad fact is that Ive and his special skills do not fit seamlessly into the main growth drivers of the company anymore.
Software engineers are being cherrypicked left, right, and center as Apple avoids making any big capital investments aside from leasing new buildings to install an army of fresh programmers.
Apple reported $11.45 billion in services revenue topped analysts’ expectations of $11.37 billion.
Apple also reported services margins of 63.8% for the quarter.
Services now accounts for about 20% of Apple’s revenue, up from 16% a year earlier and 13% in the first quarter.
I will give Tim Cook credit for recovering from the 20% drop in Apple’s shares, better late than never.
Now Apple is in the process of shifting up to 30% of their supply chain from China to South East Asia to de-risk from the Middle Kingdom.
“I love museums but I don't want to live in one.” – Said current CEO of Apple Tim Cook
Mad Hedge Technology Letter
June 28, 2019
Fiat Lux
Featured Trade:
(THE PATH TO THE HOLY GRAIL)
(UBER), (LYFT)
The pieces are starting to fall together.
This is what Lyft and Uber were hellbent on and they will finally get their cake and eat it too.
At least one of them will.
The holy grail of Lyft and Uber is eliminating the human element to the business.
Phoenix, Arizona is the first site for Lyft’s app collaborating with Waymo’s technology to offer autonomous rides via Lyft’s platform.
This could be the beginning of the end for Uber if Lyft meaningfully pulls ahead.
Why is the human element a roadblock?
Humans complain, get sick, file lawsuits for a lack of benefits, and humans post exposes on companies running amok.
Doing away with that will not only rid Lyft and Uber of high-risk liabilities, but it will boost profitability to the point where these companies will be healthily in the green.
Uber riders were only on the hook for 41% of the actual cost of transportation in 2016, the rest was comprised of generous subsidies making up part of the payments to the driver on top of the driver’s wage.
Let me put this in perspective. Lyft made $2.2 billion in revenue last year according to the filing for their IPO, and they lost $900 million from servicing this revenue.
Everybody knows that the gig economy is just a stop-gap measure until tech companies can go full on autonomous and direct operations with one click of a button buttressed by an all-terrain algorithm.
If you thought Uber was a tad better, then you were wrong. Operating losses of $3 billion on $11.8 billion in revenue and a total debt on $8 billion is tough to stomach.
If Lyft were finally able to remove the subsidies because of cost associated with human drivers and then kick the driver to the curb, margins would explode by around 50%.
Being a public company now, the competition will rise to a fever pitch.
The first to remove the driver is effectively an existential dilemma for both companies and I believe Lyft partnering with best in class Waymo will give them the upper hand.
Giving the keys to a vaunted FANG to supercharge your business isn’t a bad idea.
And remember, if you short Lyft, you are betting against Alphabet engineers who have made Waymo into the best in show.
You could do a lot worse.
And it could so happen that Lyft might even tap more Alphabet expertise to hypercharge its business.
It’s definitely not in the realm of fantasy and I already know that Lyft is receiving substantial help from Google ad.
Pre-IPO days were all about jockeying for market share to see who could grab the most volume and now the battle stands with Lyft holding 34% of the market with Uber pocketing with the rest.
Uber has relinquished much of their dominance after bleeding users stemming from bad management decisions.
Now the pendulum is swinging towards the big question of how soon will these companies be profitable?
Luckily for Uber and Lyft, future trends are quite favorable, with data showing that by 2040, 33 million of the vehicles sold annually will be fully autonomous.
Nearly every automaker is developing self-driving systems right now, and semi-autonomous features such as automatic braking, lane-keep assist, adaptive cruise control already are complementary in new vehicles.
Now the game is to continue the subsidies in order to tighten market share but integrate autonomous cars into the business model as fast as possible.
This is all about execution and the management behind the reigns.
By doing this, Lyft and Uber will reduce its expenses and finally become profitable, it would almost be akin to if Spotify stopped paying for music royalties.
Lyft has set the first cone on the floor and I found it interesting that it was Lyft and not Uber.
When we peel back the layers, investors must understand that Alphabet made bets on both Uber and Lyft.
Six years after making what at the time was its largest venture investment ever, Google's $258 million bet on Uber has multiplied by about 20-fold to be worth more than $5 billion.
But it’s not about the appreciating assets that matter the most.
Alphabet knows that one of these platforms will dominate in the end and want to benefit from it either way.
CapitalG, the late stage investing arm of Alphabet, has almost tripled the value of its investment in Lyft at today’s prices after investing $500 million in Lyft in October 2017.
Alphabet has its fingerprints all over Uber and Lyft at this point with not only supplying the map that is displayed on these platforms through Google maps but also leading the marketing operation infusing its best of breed ad tech into these platforms.
It’s obvious that Alphabet has covered its bases with the autonomous transport services and whether its Lyft or Uber that wins out, Waymo taking the initiative to partner with these platforms will make Alphabet the clear winner.
Lyft has all its eggs in one basket with a domestic transportation app while Uber has different interests which could be dragging them away from the autonomous driving opportunity.
Uber did have major setbacks after their technology was the fault of several fatalities.
The first-mover advantage is the key to seizing the bulk of the market.
I am interested to see when Uber will partner with autonomous technology, but for the moment they aren’t because they are developing their own self-driving tech.
This is a risky strategy because Lyft has understood its shortcomings and paid heed to the more sophisticated technology being Waymo and is now actively partnering with them.
They probably understood that they would never be able to beat Waymo.
This unit started off shrouded in secrecy in 2008, a full 5-years before anyone moved a finger of autonomous driving.
Uber is developing its own autonomous fleet which in theory could become a larger business than Waymo and Lyft, but they are battling a company who had a 7-year start and the result of that is Uber trying to shortcut to the top resulting in its technology getting sidelined.
Uber’s self-driving unit is in the bad graces of safety regulators and I would only give Uber a 15% chance of usurping the leader Waymo.
To this point, I believe Lyft will be the main transport app for Waymo in the future, and Waymo having the highest chance to be rolled out nationally.
This is incredibly bullish for Lyft and Alphabet.
Uber still isn’t on the radar with its self-driving technology and being a frenemy in this sense with Alphabet will hurt Uber.
If Alphabet cashes out on its Uber shares, not only could they earn a hefty profit, but it would signal that Lyft will be their main transport app for autonomous driving and Uber has lost out on self-driving technology.
I am now bullish on Lyft and neutral on Uber but waiting on how Uber responds to this massive leg up by Lyft.
“Millennials aren't buying cars anymore. They don't want to drive. They don't want to own these cars. They don't want that inconvenience.” – Said Founder of Uber Travis Kalanick
Mad Hedge Technology Letter
June 26, 2019
Fiat Lux
Featured Trade:
(CRYPTO'S RAISON D'ÊTRE)
(BITCOIN)
In one sense, there is a relative risk premium present in the price of cryptocurrency assets because of the nature of it being an alternative from the grubby hands of sovereign governments.
If you remember correctly, the crypto diehards, on one side, labeled government and the fiat monetary system that practically controls the world we live in, an unmitigated disaster.
Ironically, the sovereign nations, in turn, pointed the finger at crypto assets attaching derogatory labels to them such as fraudulent devices or Ponzi schemes.
Over the course of the tech boom, crypto assets have transformed into an indirect store of wealth precisely because of the poor governance happening in large swaths of the world.
I believe more chaos erected by splinter or extreme groups that topple government will herd new adopters into crypto assets, and these aren’t just criminal entities looking to conceal capital.
Your average joe has a legitimate use case for this type of currency.
For example, imagine a category of countries similar to North Korea and Venezuela or even Iran.
Emerging nations where currencies have crashed like Turkey’s as well attached with populaces who have lost all sense of conviction behind their government and the economic platform they serve.
According to a survey, 81% of the global population has never bought cryptocurrencies, while only 10% of respondents said they “fully understand how cryptocurrencies work.”
The addressable market is unimaginably large but still uninformed.
This can slowly change if the external forces exist, driving the adoption of digital assets perpetuates.
Look at most emerging currencies around the world and the charts are hideous.
Take the fringes of Europe next to the Caspian Sea, an oil rich nation of Azerbaijan that has mismanaged its economy on a grand scale.
Fueled by the flames of corruption and the misallocation of resources, the currency has imploded from 0.8 Manat to 1 USD to over 1.7 Manat to 1 USD, representing depreciation of over 100%.
There are worse examples out there.
Not only is Azerbaijan going through the gauntlet, there are scores of nations in the same exact position whose populace do not trust their economic system nor their national currency and would rather build a stash of digital assets they know they can access.
The global super nations are in the midst of a giant trade war specifically about trade and technology, the chaos and dispersion companies are going through legitimizes digital currencies even more than the Obama days when everything related to geopolitics was pacifistic.
Now when you turn on the tube, news wires of the U.S. flirting with a strike on Iran, along with the trade fights against China, India, Canada, Mexico, and Japan all scream that governments have gone off their rocker and the currencies pegged to their prospects.
This all means buy crypto currency if this climate persists.
The early stages of cryptocurrency adoption have been somewhat painful.
Security is one disclaimer as many crypto markets have been hijacked and gutted by hackers.
However, as the currency and the markets they trade in become more mature, I do believe the security will ameliorate and some of these critical questions will be addressed.
Bitcoin is up around 200% this year and effectively a vote of no confidence on the terrible state of governance at not only the highest level but also the central banks of the world.
If U.S. President Donald Trump wins a second term as the commander and chief, then I would expect bitcoin and other assets that benefit from a scarcity of digital supply to inflate substantially.
Now, that was the non-sovereign bull case for digital currency.
Let’s take this a step further with official assets under the umbrella of sovereign nations migrating towards the world of digital currencies.
Enter Facebook.
Legitimizing digital payments was one of the unintended consequences of Facebook’s Libra.
When a mammoth company that is actively traded on the public markets in New York, which is supported by sovereign governments, plans to create a giant digital wallet propping up the business as a cryptocurrency, it undercuts the government’s argument that crypto assets are nothing more than a digital heist.
However, I do not buy the argument that Libra users will be more prone to double dipping with Bitcoin or Ethereum along with their dollar equivalent Libra coins.
There is no way I can envision a trader holding a fund of 100% Ethereum and converting it over to Libra to buy a pizza on a Friday night.
The bull case that correlates the creation of Libra with more bitcoin and Ethereum volume and adoption is false.
I still believe there is only a 30% chance that Facebook can get this off the ground because they are one of the least trusted tech companies in the country.
In fact, people only use Facebook because there is a lack of an alternative, and employees in corporate America feel like their hands are tied because of the need to stay in touch with former colleagues and usually the only method is by Facebook.
If the government offers a superior option to Facebook, then I believe users would quit the platform in droves.
But I do believe Facebook taking the initiative to launch Libra means that crypto assets will arrive in some shape and form in the near future but not from Facebook.
It effectively hastens the mainstream adoption and integration of the idea of mainstream crypto assets along with the many other catalysts that I mentioned.
And if the Fed craters to the administration and doubles down on its rate cuts, we could eventually find ourselves in a world with zero or close to zero rates.
In a mad world with the insatiable search for yield, cryptocurrencies would benefit from these types of low rates because the prices of everything from real estate, equities, and bonds would skyrocket forcing investors to consider options with elevated risk.
The next risk level out are digital assets and I can envision a world where creditworthy investors are borrowing capital at 0% and funneling it into a crypto portfolio to find that extra beta.
Could this be the new normal for private equity?
“Bitcoin is the currency of resistance.” – Said American Broadcaster Max Keiser
