Betting against the cryptocurrency bubble via AMD

The cryptocurrency craze has infected the real world economy, driving up the prices of GPUs (graphics chips used for playing 3-D computer games that are also really good at crypto calculations).  Mining Ethereum with GPUs has become an increasingly profitable endeavour largely because the price of Ethereum went up about 170 times from $8.24 at the beginning of 2017 to a peak of around $1400.  Mid and high-end GPUs are selling out everywhere, retailing for 2 to 3 times their suggested retail price.  PC Part Picker has some good data on market pricing of GPUs such as the Radeon RX 570.

Note that computer hardware normally depreciates over time, roughly halving in price every 1.5 to 2 years due to Moore’s Law.  Instead of depreciating, most GPUs have appreciated wildly thanks to rising Ethereum prices.

If the crypto mining market collapses (due to a broad collapse in cryptocurrency prices), I am willing to speculate that AMD’s valuation would better reflects its difficulties in generating profits.  Historically AMD has never been a particularly profitable company, losing $7.82B of the $8.34B in capital raised.  In YE2017 AMD earned $62M before taxes, buoyed by aggressive accounting (perhaps $40M-97M+?) and unusually high GPU demand (perhaps a few hundred million?).  If AMD returns to its money-losing ways, its shares ought to trade closer to its $0.611B book value (plus the value of its x86 license) rather than its current $10.83B market cap.

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Some ways to short Bitcoin

The price of Bitcoin has fallen significantly from its peak… perhaps foreshadowing a quick collapse.  Perhaps short positions in Bitcoin will work out quickly.  But who knows… short positions may turn out to be extremely dangerous as Bitcoin may skyrocket even more.  Here are some quick notes…

For the image above, the columns are:

  1. Ticker
  2. Green = shortable, dark green = no borrow, red = Interactive Brokers won’t let you short it.
  3. Borrow rate (retail rates).

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CNIT’s market cap jumped to $81M

For those of you interested in Chinese reverse mergers… CNIT’s share price jumped by around two-thirds today.

Back in 2013 and 2015, I wrote about the company.  In 2015, CNIT bought a company called Biznest.  Apparently they did not own Biznest already… despite CNIT email addresses showing up on Biznest’s domain registration and despite having the CNIT logo on Biznest’s website.

*Disclosure:  I am short CNIT.

Defense contractors- a world full of politics, corruption, and incompetence

Arms manufacturers are capable of making weapons that help win wars- but surprisingly enough, their customers don’t care about that.  The root of the problem is with political leaders- their interests tend to lie in buying votes.  As well, the skillset of getting elected does not overlap with the skillset of choosing competent military leaders.

As a result, the world’s richest nations often purchase weapons without any realistic testing and later discover that they do not work.  The Patriot missile defence system likely did not shoot down any Scud missiles from Iraq.  Worse still, they likely increased overall casualties as stray Patriot interceptor missiles hit civilian apartments (see page 9 of “Evaluating Weapons: Sorting the Good from the Bad“).

From an investing perspective, the history of corruption is interesting as it stretches back for decades.  During the Vietnam war, the US Army’s ordinance bureau intentionally sabotaged the M16 rifle with ammunition that would cause the rifle to jam more frequently (see page 3).  Since then, abuses have continued despite exposure in mainstream media.  Chuck Spinney was on the cover of a 1983 TIME magazine; the 1998 TV movie Pentagon Wars explained issues with the Bradley Fighting Vehicle (clip).  This suggests to me that the corruption in the US is fairly resilient, entrenched, and will likely continue to grow at a slow pace.

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Equifax: a quick accounting note on capitalizing expenses

It’s possible that Equifax is pulling on accounting levers to juice its earnings and the Adjusted EBITDA that it reports.  Capitalizing expenses (e.g. software development costs) creates profits now and losses later- it changes the timing of when expenses are recognized.

  1. On the balance sheets, capitalized internal-use software grew from 212.5M to 307.0M (an increase of 44% per year, or 94.5M).  This area of accounting is subjective- should software development costs be amortized over 3 years, 10 years, or somewhere in between?  What expenses should be considered capex?  Should these expenses even be capitalized?- some software companies don’t capitalize software development costs at all.  The answers are not clearcut.  However, accounting distortions can occur if a company were to suddenly aggressively capitalize expenses that it previously expensed.
  2. While capitalized internal-use software grew 94.5M, consolidated income before income taxes grew 91.6M in the same timeframe.  So it’s possible that Equifax’s growth is not as fast as it seems.

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Aren’t cars supposed to be flying by now?

jetsons-60s

Flying cars as depicted in this cartoon series from the 60s.

Predicting the future is hard.  Yet many people talk about self-driving cars as if they will become reality in a few years.  Unfortunately, the current reality is that we are far away from commercialization of fully self-driving cars.  Google is the closest, yet its self-driving car technology has some serious limitations:

  • It requires an attentive human driver to drive safely.  This largely defeats the point of a self-driving car.
  • It doesn’t work if there is heavy snow or rain.
  • The car only works in areas with special 3-D maps, which are currently expensive to create.
  • The system can’t handle construction zones.
  • Because they drive in a non-human manner, the cars get rear-ended more often than human drivers.
  • There are other situations where the cars may have problems – left turns without a light and heavy traffic, potholes, pulling aside for emergency vehicles, obeying directions from a police officer, ice on the road surface, cyclists doing a track stand, etc. etc.

I find it interesting that so many people have been sucked into the idea that self-driving cars will be an imminent revolution that will disrupt our lives.  Mostly, there are many people who want to believe that technology will disrupt our lives in a positive way.  There is no differentiation between technologies with major technical obstacles (e.g. artificial intelligence, machine learning) and technologies with few obstacles (e.g. cloud computing, social media, smartphone apps, over-the-top video, etc.).

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Amazon: the high-margin online retailer

(This is not an actionable idea.)

From researching dollar stores, one of the things that struck me was that you can purchase a pregnancy test for a dollar.  Amazon’s #1 best seller pregnancy test costs $12.33– a magnitude more expensive than dollar stores.  Amazon is clearly not competing on price!!

amazon-pregnancy-test

By comparison, a more discounting-oriented online retailer like Newegg has razor-thin gross margins of between 8 to 11% (before overhead).  Newegg sells computer parts online.  Its financials are available via the  S-1 filing on EDGAR due to Newegg’s aborted IPO.

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