Big Tech and evolutionary dead-ends. Too Big to Survive.

Blain’s Morning Porridge – 2nd December 2022: Big Tech and evolutionary dead-ends. Too Big to Survive.

“Intellects vast and cool and unsympathetic regarded this earth with envious eyes…”

This Morning: Big Tech is so yesterday. Prices peaked last year, but there are limited reasons to expect they will ever become so dominant again. They are too big, under the regulatory cosh, and increasingly under competitive pressure. They are heading the same way as the dinosaurs.

As we wend our weary way to the close of the week, its only 3 weeks till Christmas! Yay! I don’t get the sense markets will take much of a breather this year – there is simply too much to be nervous about as we approach year end – like how strong will the US employment data be later today, how deadly will be the Chinese economic reopening (some estimates of upto 1.5mm Omicron/Covid casualties), how reopening could stimulate global supply chains, alongside the usual issues of rates, inflation, dollar strength and the prospects for growth.

At this time of year, its traditional to present outlooks and expectations for the year ahead – and we will do so shortly (once we’ve read what everyone else is guessing so we can represent them as sage considered conceptual guidelines…) The problem is not really so much what may happen in 2023, but trying to figure out where we are now!

There are two sides to trying to understand investment markets:

• The conceptual and foggy aspects of trying to figure how do the nebulous Macro issues around rates, inflation, economies, currencies, debt, productivity, and politics interreact to drive market direction and expectations, and
• The real fundamentals of how companies are likely to perform in terms of their markets, profitability, resilience, and “sustainability”.

Both are equally fascinating, but I think, since it is Friday, I shall delve into a facet of business fundamentals… what’s happened to Big Tech. It’s been a torrid year for big tech. The former FAANGs have well and truly had their teeth pulled.

Meta:              Market Cap $319 bln. Top $378 Sep 2012, now $120 – down 68%

Apple:              Market Cap $2.3 trillion. Top $180, Dec 2021, now $148 – down 17%

Amazon:          Market Cap $975 bln. Top $186, Jul 2021, now $95.5 – down 49%

Netflix:            Market Cap $141 bln. Top $690, Oct 2021, now $317 – down 54%

Alphabet:        Market Cap $1.3 trillion. Top $149, Nov 2021, now $101 – down 32%

Microsoft:       Market Cap $1.9 trillion. Top $343, Dec 2021, now $255 – down 26%

It’s a pretty dire picture, but you would still have posted massive gains had your investment time frame been 5years since 2017, rather than since last summer. Does that mean we’re likely to see these behemoths of the global economy recover their lustre and make similar stunning games in the years ahead?

Nope. I sincerely doubt it.

Yesterday, my colleague and stock-picking superman Julian Wheeler and I were supposed to be chatting about the importance of due diligence, referencing the enormous amounts some very clever funds have lost on FTX and Crypto, but we got distracted.. as so often happens. Julian launched into multiple reasons why Big Tech no longer dominates the stock market – you can listen to him when the Podcast is released later today. (I will tweet and post it on Linked-in.) Julian and I don’t agree on everything, but in this case he was spot on.

The brutal reality for the Big Tech names is their time at the top is over. The history of markets is littered with companies that were once massive and now are decayed husks. The advantages Big Tech once reaped from being first entrants, innovating new stuff, limited competition and high entry barriers, the power and myth of disruption, to becoming large caps benefiting from index buying, and the ultra-low interest rate environment that allowed them to boost their stock prices by using debt to replace equity via stock buyback programmes – are so over.

Now we have to re-focus on their future business fundamentals – and even where these are positive, they are outweighed by a simple evolutionary truth: Big Tech, like the dinosaurs, evolved into particular evolutionary niches. They became big and massive, to maximise their success.

Now the world has changed, and size and power have become a distinct handicap. Bluntly put, they are so big and wield so much power they can’t evolve any further without triggering multiple regulatory crises – as we are seeing happen. And, Big Tech is no longer monolithic – its evolving into smaller, more focused, more nimble and multiple competitors each wanting to eat specific parts of Big Tech’s lunch.

The big issue for them is competition and regulation – sheer size makes them vulnerable. Free market capitalists regards regulation as the curse of the modern world.. Elon Musk and other rapacious tech barons like to equate regulation as a disease… Extra points if you know this quote and where its from: “Directly these invaders arrived, directly they drank and fed, our microscopic allies began to work their overthrow. Already when I watched them they were irrevocably doomed, dying and rotting even as they went to and fro. It was inevitable.”

To be fair to the regulators…. they have a point! Protecting us from big tech and big data is critical.

Some time ago I wrote about how all the big techs are really about their advertising and marketing data. That all changed this year when Apple pressed the privacy button on the data their operating system collects. At a stroke, Facebook saw a major slice of its data evaporate, closely followed by its advertising revenue! Now, no one will touch Meta while Zuck squanders dosh on this Metaverse haverings – investors want him to cut costs.. just a normal company that just saw its market secret sauce evaporate!

Back then I wrote how business was the business of selling stuff. Hence advertising is a $600 bln per annum business for big tech – and now its all in flux. I wrote then: “Amazon is not a gazillion dollar business if it’s just a delivery company. Google is worthless as a search engine. The metaverse is not a thing, and when it becomes one it will look nothing like old-man Zuckerberg imagined it to be, and m-commerce will be completely new and subject to competition.” Amazon is losing billions on its Alexa and delivery business, but at least has AWS cloud to fall back on.

The two outliers are Netflix and Apple. Netflix is poised to reap returns from its new streaming with advertising, and the other streamers will be forced follow suit. Apple has established itself as the premium luxury brand – just this week a new Apple Ultra watch joined the ranks all the massively overpriced Apple Tat I’m addicted to. I know a HP Laptop will do more and cost 1/10^th the price of the new MaxPro I’m looking at.. but I am an marketable idiot.

This week we think Apple cut a deal with Elon Musk to keep Twitter on the App Store – Musk is right: by skinning 30% fees on digital transactions over IOS, Apple are taxing digital commerce. Eventually they will be forced to change – but for the meantime Apple is the most expensively lawyered up company on the planet, and will fight to retain whatever revenue streams as it can for as long as it can – and pull every political chain it can to ensure it does.

But long term….? I reckon our descendants will be digging MacBooks out the ruins in a 1000 years time and wondering what all the fuss was about…

Five Things to Read This Morning

Businessweek             Inside SBF’s Bahamian Penthouse After FTX Fall

FT                                Inside the Covid revolt at the Zhengzhou “iPhone City” plant

The Atlantic                 Just Wait Until You Get to Know Ron DeSantis

WSJ                             Blackstone Limits Redemptions From Real Estate Fund, Stock Sinks

Guardian                     UK House prices fall at fastest pace amid fall-out from mini-budget

Out of time, back to the day job, and have a great weekend…

Bill Blain

Strategist – Shard Capital