Stock picking success enabled by govt failure to regulate digital economy

[J Boogie]

We're all quite familiar with the precedent that stock pickers rarely beat the S&P.

We're also familiar with the warning that past results do not guarantee future performance.

We're also familiar with the titans of the past decades rarely being able to hold on to their dominant market strongholds.

Of the nifty fifty, there aren't many on that list that would have outperformed the broader market since 1950. There might not even be one.

Today, we don't have fifty. We have 5. The tech megacaps. MSFT, AAPL, AMZN, GOOGL, FB.

I believe these companies have and will continue to deliver alpha predictably. They have left legislators scratching their heads at how to effectively regulate them. If they can't reverse engineer their upstart competitors' offerings in-house, they will reluctantly acquire them with their massive cash piles. The US govt seems either unwilling or unable to figure out how to regulate the digital economy. The EU has levied some large fines against some of the big 5, but certainly nothing that will get in the way of their continued dominance.

We've seen competitors grow, like Slack, Atlassian, CRM. But they haven't slowed down MSFT's growth. Same for the other 4. The network effects they've built seem to be the deepest moats imaginable, and their stiffest competition seems to come only from each other. (AWS vs Azure, Android vs Iphone, etc).

What could cause these companies to blow their leads and lose market share to new companies, who they could simply acquire if they fail to replicate their unique offering?

I guess you can point to MSFT's decade of stagnation. But they eventually got back on track.

I currently don't hold much big 5 but will be rotating significantly into them today/tomorrow and potentially next week if they drop further.

[MustacheAndaHalf]

There's a risk that France and Germany figure out workable legislation to tax big tech, and the EU signs up for it.  Currently, France seems to have acted by itself, in the hope others will join later.
https://thenextweb.com/eu/2018/12/06/france-will-tax-tech-giants-in-2019-if-eu-doesnt-step-up/
Maybe that just dampens profits, which continue well into the future.

But anti-trust hearings are a more serious matter, and hint at the possibility of breaking tech companies up into pieces.  Doesn't this delayed hearing pose a risk to investing too much in big tech?
https://www.engadget.com/house-antitrust-hearing-delayed-202642094.html

[hodedofome]

I have some big tech, they aren’t going away anytime soon and I’m gonna ride this train right into the bubble that’s going to form. I’ll sell into the bubble so that I’m not another bag holder.

[ender]

We've seen competitors grow, like Slack, Atlassian, CRM. But they haven't slowed down MSFT's growth. Same for the other 4. The network effects they've built seem to be the deepest moats imaginable, and their stiffest competition seems to come only from each other. (AWS vs Azure, Android vs Iphone, etc).

What could cause these companies to blow their leads and lose market share to new companies, who they could simply acquire if they fail to replicate their unique offering?

FWIW, one of your examples answers your next question here. Android phones are nearly completely made by non-big-5 tech companies ;-)

When it comes to blowing leads, I basically look at infrastructure requirements for the core revenue streams. It is considerably easier for someone to create a new ad provider or social media platform than it is to say, build a 1 billion dollar manufacturing facility for new phones/computers. Same reason Microsoft is so entrenched in businesses - switching away is a huuuge undertaking for their customers of office/windows.

This is why what Tesla is doing is so remarkable to me. They are forcing their way into an industry that has a huge capital cost required for manufacturing/facilities/etc and doing so quickly.

[Travis]

Looking at the list of the "nifty fifty," most of them became either "meh" or went out of business. The latter because the underlying reason for their existence faded away. Kodak was replaced by digital photography. Sears and other big-box stores have been getting whittled down by online retailers. Others met their match by startups in their industry that stayed nimble and found a profitable niche that made the dominating company less relevant.  A healthy dose of hubris and mismanagement usually helps these scenarios as well.

Apple nearly went out of business with a similar "resting on its laurels" approach and now is the biggest/second biggest company in the world.  For a while it seemed like Microsoft went from that company that basically owned your personal computer to "that company that still makes Windows." I haven't been following it very closely lately, but it doesn't seem to be the headline grabber that it was in the late 90s.  Amazon and Google branched out and found several other industries not related to their original purposes that seem to be doing very well.  I see these companies sticking around in their top spots for many more years, but I can also see them reaching a point where they overstep their bounds and are forced to spin off some of these side projects into separately listed companies.  Amazon took a small hit recently with regards to state sales taxes.  It wasn't catastrophic, but the unique and dominating position it is in didn't go unnoticed by regulators.

[J Boogie]

We've seen competitors grow, like Slack, Atlassian, CRM. But they haven't slowed down MSFT's growth. Same for the other 4. The network effects they've built seem to be the deepest moats imaginable, and their stiffest competition seems to come only from each other. (AWS vs Azure, Android vs Iphone, etc).

What could cause these companies to blow their leads and lose market share to new companies, who they could simply acquire if they fail to replicate their unique offering?

FWIW, one of your examples answers your next question here. Android phones are nearly completely made by non-big-5 tech companies ;-)

When it comes to blowing leads, I basically look at infrastructure requirements for the core revenue streams. It is considerably easier for someone to create a new ad provider or social media platform than it is to say, build a 1 billion dollar manufacturing facility for new phones/computers. Same reason Microsoft is so entrenched in businesses - switching away is a huuuge undertaking for their customers of office/windows.

This is why what Tesla is doing is so remarkable to me. They are forcing their way into an industry that has a huge capital cost required for manufacturing/facilities/etc and doing so quickly.

Well, I'd rather own a platform/ecosystem/ saas business than a widget producing business whose profits have relatively limited update given the variable costs associated with producing each unit. So I'd rather own Google making great margins on 30 billion on Android play store revenue than the manufactures of mostly budget phones grinding it out for every cent.

Thanks for the new thought though, regarding moats as being stronger if they exist in the world of atoms rather than the world of bits.

I'm not sure I agree, as your Microsoft example relies not on manufacturing capability but rather on software. And while new platforms can indeed be built, there is no guarantee they will be popular, and if they are, they can be reverse engineered quickly by msft or Facebook. I think the ecosystem is the ultimate moat and the manufacturing moat can become a prison as consumer desires evolve.

[ChpBstrd]

My concern would be how much the tech sector’s profits are tied to consumer discretionaries at a basic level.

I.e. If the future looks like most people struggling to afford housing and food, 1930’s style, or ever-expanding income variance, 1990-2020 style, how much will Google and Facebook earn on ads from people selling overpriced fashion and unnecessary gadgets to the middle class? Would Netflix be able to raise prices in that environment? How will Amazon do selling mostly consumer discretionary stuff, and how many iPhones will Apple sell for over $1k. Also in a more austere world, how much will businesses be willing to pay for the AWS or Azure commodities, when both they and their consumers are in a race to cut expenses instead of cramming more video into their ad platforms? How many unemployed people will keep Amazon Prime or iTunes, and for how long? Etc.

Dig deep enough and you’ll find at some level all these “Tech” companies obtain a large portion of their revenues from a business ecosystem that sells unnecessary shite to people with too much money. Facebook does not sell technology, they use their brand to sell ads. Google’s self-driving cars will be neat when they become available, but they will be a Segway-like or Sharper Image like, gizmo if the middle class cannot afford the luxury. Amazon or Microsoft’s cloud businesses might be world class, but how many of their clients would still need their services? Teslas are luxury transportation, period.

Tech crashed for years after the 2000 recession, which was an economic fart compared to the 15% unemployment and mass illness being experienced today. Granted, in a bad economy most stocks do poorly, but consumer discretionary growth stock PEs contract more than most.

[J Boogie]

My concern would be how much the tech sector’s profits are tied to consumer discretionaries at a basic level.

I.e. If the future looks like most people struggling to afford housing and food, 1930’s style, or ever-expanding income variance, 1990-2020 style, how much will Google and Facebook earn on ads from people selling overpriced fashion and unnecessary gadgets to the middle class? Would Netflix be able to raise prices in that environment? How will Amazon do selling mostly consumer discretionary stuff, and how many iPhones will Apple sell for over $1k. Also in a more austere world, how much will businesses be willing to pay for the AWS or Azure commodities, when both they and their consumers are in a race to cut expenses instead of cramming more video into their ad platforms? How many unemployed people will keep Amazon Prime or iTunes, and for how long? Etc.

Dig deep enough and you’ll find at some level all these “Tech” companies obtain a large portion of their revenues from a business ecosystem that sells unnecessary shite to people with too much money. Facebook does not sell technology, they use their brand to sell ads. Google’s self-driving cars will be neat when they become available, but they will be a Segway-like or Sharper Image like, gizmo if the middle class cannot afford the luxury. Amazon or Microsoft’s cloud businesses might be world class, but how many of their clients would still need their services? Teslas are luxury transportation, period.

Tech crashed for years after the 2000 recession, which was an economic fart compared to the 15% unemployment and mass illness being experienced today. Granted, in a bad economy most stocks do poorly, but consumer discretionary growth stock PEs contract more than most.

That's a good point.

I think the big 5 (I left netflix and tesla out intentionally, as I share your view on them) have solid recession-proof cores but I might be underestimating the degree to which they are benefiting from a strong consumer economy.

That being said recessions often benefit the biggest players by leveling their competition, though I acknowledge this is not necessarily true across the board.

[dougules]

Even if you're right, do you have reason to believe that it's not already priced in?

[ChpBstrd]

I think the big 5 (I left netflix and tesla out intentionally, as I share your view on them) have solid recession-proof cores but I might be underestimating the degree to which they are benefiting from a strong consumer economy.

That being said recessions often benefit the biggest players by leveling their competition, though I acknowledge this is not necessarily true across the board.

True, but in the meantime bets on the growth of consumer discretionary spending can take a severe beating when recessions occur and the whole ecosystem is drained of money.

Microsoft lost half its value in the tech bubble and then again in 2008-2009.
Apple went from about $4.50 to about $1.06 in the tech bubble.
Amazon lost 94% between Dec '99 and Sept '01. AMZN also lost 56% between Oct '03 and Aug '06.

And those are the breakout success story outliers from a very crowded field.

[theoverlook]

But anti-trust hearings are a more serious matter, and hint at the possibility of breaking tech companies up into pieces.  Doesn't this delayed hearing pose a risk to investing too much in big tech?
https://www.engadget.com/house-antitrust-hearing-delayed-202642094.html

I'm curious about the anti-trust angle. I know that an AT&T investor that owner prior to the 1982 break-up still did quite well just on the AT&T stock alone, but I assume they would have received shares in the spun-off companies right? If so, they probably raked it in with an unbelievable return. I have no idea how to calculate that, though. What other companies have been broken up and can we look into what returns were like for investors that owned prior to the break-up?

[ctuser1]

I think treatment of big tech like utilities is more likely than a breakup.

It does not seem practical to break up extremely tightly coupled ecosystems.

If they are treated as utilities, the high PE multiples would no longer be justified. Even Apple has a 30PE now (used to be in the 10-15 range).

That, I think, is the biggest risk.

[TomTX]

What you have missed on the self-driving cars is the "robotaxi" concept. Middle and lower class will access their services, just not purchase them.

[crimp]

But anti-trust hearings are a more serious matter, and hint at the possibility of breaking tech companies up into pieces.  Doesn't this delayed hearing pose a risk to investing too much in big tech?
https://www.engadget.com/house-antitrust-hearing-delayed-202642094.html

I'm curious about the anti-trust angle. I know that an AT&T investor that owner prior to the 1982 break-up still did quite well just on the AT&T stock alone, but I assume they would have received shares in the spun-off companies right? If so, they probably raked it in with an unbelievable return. I have no idea how to calculate that, though. What other companies have been broken up and can we look into what returns were like for investors that owned prior to the break-up?

There's some evidence that investors do quite well in a breakup (the specific case you mention is one example). You might imagine that if Google is broken up, it actually drives innovation in those products that aren't their core business at present.

I read this blog on the topic of monopolies and antitrust. You should note that Stoller is an active lobbyist with pretty clear bias towards antitrust regulation as a rule, so keep that in mind when you read anything he writes: https://mattstoller.substack.com/p/break-ups-and-stock-prices

Relevant snippet:
"Years ago, I used to use an RSS reader called Bloglines. Google bought the product, and ultimately shut it down. This isn’t because it was a bad business, but because it didn’t move the revenue needle for a company as big as Google. Bloglines could have been a great mid-size business for someone, but it was a distraction for Google executives. How many technologies like that are locked in Google, Amazon, or Facebook? How many business people and engineers are waiting to be liberated?

I suspect, many. Liberating business from monopoly would help our society, it would help the marketplace, it would help consumers, and it would probably help investors. After all, if you break up Google, a shareholder of Google would also become shareholders of YouTube, DoubleClick, Android, Maps and all of the component parts. And each of those businesses would be able to innovate and develop new industries. I mean, mapping is amazing. How much are we not getting because Google uses its monopolistic mapping subsidiary to mostly benefit its targeted ad business?"

[J Boogie]

Even if you're right, do you have reason to believe that it's not already priced in?

Well, I think they'll continue to trade at the same multiple or higher. And I think their earnings will continue to grow YoY.

The big 5 are in many ways overvalued companies that will continue to be overvalued. Even when these companies mess up, badly, they still somehow trade at insane multiples.

Boeing is a great example of a company that was overvalued and completely blew it. And yet BA still trades at far higher multiples than tons of companies that in my opinion don't face anywhere near the headwinds, to use an apt phrase, that BA does after its faulty software and Covid woes.

Too many bulls waiting in the wings to snatch up these titans on the slightest dip.