Big Tech reality bites – is this the Judder moment the market fears?

Blain’s Morning Porridge Oct 28th 2022 –  Big Tech reality bites – is this the Judder moment the market fears?

“When the levee breaks, mama, you got to move…”

This Morning: Big Tech “growth” stocks suffered a price-check this week as economic reality bit, but they face much more pressure than just short-term cost and sales problems. Long-Term, new businesses and opportunities are evolving to eat their lunch, and leave them behind.

I had one of these judder moments last night while thinking about the Big Tech stock reversal. What we once called FAANG have suddenly seen their outlook expectations pulled! MAMAAN stocks: Microsoft, Apple, Meta, Amazon, Alphabet and Netflix (which is surprising to the upside), suddenly find themselves in transition from unassailable to wobbly.

We all knew the murky global economic outlook meant a pullback in corporate earnings was likely, but the Big Tech stocks? Surely not? It rather feels a rug has been pulled from under our feet – even though, with hindsight, it was a blindingly obvious likelihood. The potential for contagion damage across markets and asset classes is significant…

I’m wondering if the sudden Big Teck stock price-check this week is going to prove the moment this still inflated global stock market capitulates? All big crashes need a defining moment – and even though the whole of 2022 has been one long stumble lower, this wobble feels like a defining moment is now upon us.

This week:

• Microsoft Down 4%
• Apple Down 5%
• Meta Down 29%
• Amazon Down 8%
• Alphabet Down 12%
• Netflix Up 12%

In the Short Term you can put a positive spin on anything.

You can argue these declines aren’t so bad – a series of misses in what was widely expected to be a weaker earnings season. They may actually be a buying opportunity – say some Tech analysts (who are paid by the amount of stock their recommendations sell!)

Each price move can be rationalised as a reaction to bad Q3 numbers on the back of what we knew to be coming; the global slowdown cutting demand, inflation reducing discretionary spending, or, in Meta’s case that its losing money today to develop an unassailable position in the future Metaverse and AI (if you do, I want to meet your dealer..) A common thread is the whole Big Tech sector has been free-spending – costs and headcount now need to be slashed. Cutting staff, cost control, focus on the bottom line.. these all sounds the actions of terribly mature companies… If I was a supplier of executive toys and beanbags to Bay-Area Tech firms – I’d be worried.

Or you can look at the economic reality out there and conclude the symbols and portents have turned against them:

• Meta’s social media platforms are being pushed into irrelevance by Tiktok and shortform videos, while the costs of its unlikely looking metaverse effort have gone through the roof in terms of headcount. If failed to communicate its problems to the market clearly, and is now being spanked.
• Alphabet/Google struggling to rein in headcount spending after its Covid expansion and a slowdown in ad revenue.
• Apple’s new iPhone encountering sales buffers – its core business. And being exposed as having nothing really new or innovative in the Apple eco-system to replace it as the core earner.
• Amazon is struggling post Covid with consumers returning to real stores, economic headwinds cutting spending and rising interest rates crippling suppliers. Welcome to the real world.
• Netflix is the outlier – raising subscription numbers and making money despite the increasingly crowded streaming space. Netflix has a plan. The others…. not so much.
• Microsoft see slowing customer spend, slower growth and a miss on cloud computing.

Medium Term (which may well be next week..)

What triggers the really big, significant market moments of pain isn’t a sudden unexpected explosion of a single stock correcting. The real big crashes usually start small.. maybe a couple of smaller tech stocks fail on the back of rising interest rates, their inability to cover costs and meeting the “growth stock” expectations investors have put upon them. A few pebbles crashing down the mountainside are rationalised away by the 95% of sell-side analysts who say these are all still “BUY” stocks.

But, as conditions in the real world continue to change, it’s no longer pebbles bouncing down the mountain – but larger rocks tumbling down the scree slope. And then its suddenly clear how unstable the whole edifice is as the underlying problems become increasingly obvious and apparent. Suddenly, even the largest boulders are in motion, hurtling down the slope, smashing sentiment and dragging even the more stable names down with them.

The BIg Tech MAMAAN Stocks were the ones we thought were the new, new future of stable high earning stocks. We expected them to dominate the lists of the most valuable companies for ever. Nothing lasts for ever.

Long-Term (probably by mid-November)

I’ve discussed many times in the Porridge how few companies historically remain in the 10 most valuable companies for more than a decade or two. In the 1870s it was railway firms that headed the list. 10-years later they were all gone. Oil companies are the ones with the highest longevity. Names like GECC, Boeing, have their day and then fade. The life-cycle of businesses is getting shorter and shorter – we are seeing the pace of corporate evolution speed up. New ideas and innovations of old ones are coming to market faster and faster. The competition has increased. Corporate evolve fast and consume the older, less nimble names.

Time for a fundamental reality check on Big Tech – they are not what you think are.

Business is the business of selling stuff to people. You succeed by maximising the price of the stuff people need, and maximising sales of the stuff they think they need. Advertising is the business of persuading people to pay more for the stuff they need and to buy stuff they don’t at the highest price. Understand and win a Marketing Degree plus MBA from Genius Academy. Hold that thought.

In this week’s Shard Capital Podcast – Advertising is Evolving (which you can also find under podcasts on the Morning Porridge site), I discuss global advertising revenues with two of my colleagues, Julian Wheeler and Ernst Knack. It may surprise you. Please give it a listen – I’d like to know what you think.

Global digital marketing/advertising is a $600 bln plus business, dominated by the biggest of the big tech firms. But business sectors evolve. Apple started the rot when it gave users the right to block trackers that allowed Facebook and Google to target you with ads.

Because advertising is at the core of all business, it evolves rapidly. Although social media, global internet search engines, and instant internet shopping gratification are only a few decades old, these firms are already effectively dinosaurs. Younger snappier businesses are literally eating their lunch, and their breakfasts and dinners too!

Google never was about being a search engine. Facebook was never about social media. Amazon has very little to do with fulfilment centres turning forests into carboard boxes and delivering tons of crap to our homes every day. All of them, including Microsoft, were about big data… learning every single aspect of our existence and monetising that knowledge to make the world a better place sell us more crap.

This week has seen much more serious fracture lines than just the economic outlook and costs emerge within Big Tech. I warned on the crisis at Meta (Facebook) and it happened as I predicted last week, see: What does the Metaverse hold in terms of Known Losers and Unknown Winners.

One of the key moment this week was Netflix announcing its already pre-sold all the advertising space on its new Ad-driven Netflix service. That’s great news for advertisers, targeting their ads at the exact markets they want to address. What’s next in terms of ads and product placement driving shows? The possibilities are endless.

But what is clear is reality. Amazon is not a gazillion dollar business if it’s just a delivery company. Google is worthless as a search engine. As I wrote last week, 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 Apple? Well.. it had a good innings..

Five Things to wreck your weekend:

FT        No “adults in the room”: Xi Jinpin catches global investors off-guard

FT        London’s hold on global currency market weakens, BIS Survey Shows

BBerg  Musk Fires Top Twitter Executives After Closing $44 Billion Deal

WSJ – Russia Says It Could Target US Commercial Satellites in Ukraine War

Economist – The end of Apple’s affair with China

Out of time, off to catch a train to do my day job, and have a great weekend!

Bill Blain

Strategist – Shard Capital