Blain’s Morning Porridge – July 14th 2023: Big Tech Stocks – I may be right, but the market wins every time…
“It is infinitely preferable to be attacked by strangers on Twitter, than indulge in the false happiness of hide-the-pain Instagram.”
For years I’ve found reasons to avoid certain big tech stocks – but the market has largely been right. I might be clever, but the market is smarter. What’s the future likely to look like?
This morning I have a favour to ask all readers – can you please follow me on Twitter, Threads and Linked-in. I’m got a theory about social media I’m keen to test… more on that below.
Twitter is @Bill_Blain
LinkedIn is www.linkedin.com/in/bill-blain-05411932
Threads is bill_blain
Tech Stocks – bah, humbug…
Regular readers will know I am mired in personal portfolio underperformance by my belief we tend to over value the value of new, new things. My thesis is very simple – common sense and experience tells me much of the new tech we pour dollars into is hopelessly overvalued and the benefits are massively over-exaggerated. I’ve called a number of firms – notably We-Work and Greensill as bad-uns – from the get-go.
However, my suspicious investment perspective towards Big Tech has proved “value sub-optimal” (ahem) when the market absolutely believes something diametrically different. The runaway stock upside of the big tech firms is evidence of just how much the market believes in the worth of big tech. Their extreme valuations might be because stock markets became overly speculative during the period of ultra-low rates, or it might just be because stock pickers tend to be more optimistic than naturally pessimistic old bond dogs like myself.
Whatever the rights and wrongs of tech pricing vs their long-term profits, they are a clear example of why trading the crowd rather than uncommon sense is the smart play, and why great traders always outperform “intellectuals” in markets.
Let’s just recall the gains Big Tech has made since the market’s nadir in the winter of 2022:
- Apple – up 64%, 32x PE
- Amazon – up 60%, 317x PE
- Nvidia – up 320%, 228x PE
- Telsa – up 162%, 80x PE
- Meta – up 219%, 40x PE
- Alphabet – up 35%, PE 27x
- Microsoft – up 122%, PE 67x
And just for the f of it..
- ARC Innovation ETF – up 17%
These are exciting companies and the crowd has spoken, but I just can’t get enthused about these valuations. There are some great companies, some good firms and some charlatans listed above. You decide which. My views are below:
Apple, the first $3 trillion company, makes good stuff. Good stuff that sells at very high margins. As a result, it is insanely profitable even though its good stuff does exactly what other stuff does much cheaper. They have a massive cash pile and can keep propping up the stock price with buybacks… and people will keep buying. The only real questions around Apple are about longevity and how long… nothing lasts forever. Or does it….? Mercedes Benz et al?
Some of Tech firms, like Alphabet, Microsoft and Nvidia have benefitted from association with the AI effect – the froth that believes everything AI will be worth trillions (if it doesn’t wipe us out first). That may ultimately prove to be the case – but, at the moment, the market is in a more reflective phase re AI after the bubble. There is value in how AI will refine industry and solutions – but these will be selective. Everyone wants to be associated with AI so everyone is doing it.
Funnily enough for a man recently warning us how AI was set to eat humanity, Elon Musk’s new AI venture, xAI Corp – which he once referred to as “TruthGPT” raising shades of Donald Trump – aims to “understand the true nature of the universe”, which I guess is Musk-speak for extracting maximum value of out of users while pretending his AI is worth much, much more than it is to investors because his dials go all the way up to 11.. (I suppose I better explain the all the way up to 11. Check out this Spinal Tap link.)
Today Telsa makes very fine cars. Tomorrow it might be making the same cars – but someone else will inevitably be making better ones. That is how competition works. Therefore, it does not justify a 80x PE.
Tesla faces growing competitive threats. Musk’s success is showmanship driven – he has been repeatedly able to convince markets he’s the sole source of enormous future capacitance value. First it was “inventing” BEVs, then it was convincing the market BEVs were the only future for Autos. After innovating his own whole new sector and leading it, Musk then convinced us autonomous driving was a multi-trillion driverless taxi opportunity, then it was batteries, while always arguing Tesla’s data equilibrated to tremendous value. Now its market value is fuelled by the expectation Tesla will solve the BEV charging conundrum by putting Tesla chargers across the globe.
But, what if autonomous driving monetisation isn’t ever a real thing? What happens as the other Auto makers catch up and make BEVs and hybrid EVs as good as and better than Tesla? And what if advances in battery tech makes Tesla’s model obsolete – even doing away with the need for so many charging stations?
Current battery tech – which Tesla’s are engineered around – mean EVs are too heavy for many roads, bridges and conventional high-rise parking while their massive weight limits their range. Last week Toyota gave notice it has developed longer range, fast charging and significantly lighter battery tech that will revolutionise EVs.
Battery tech is evolving at speed. New tech including Lithium-Ion, Lithium-sulphur and Lithium-metal solid state batteries will leave Tesla looking like 1920s Biplanes as new EV designs perform like sleek modern jets. Will we need millions of charging stations if EVs have ranges of 1000 miles in a few years? (If anyone wants to invest in the future evolution of battery tech – get in touch.)
Alphabet and Meta – for all that we think they are tech making our lives better as search engines or social media have always just been ways of extracting value out of users by monetising them to advertisers. The current twist is that Meta must be enormously valuable because its new counter-Twitter; Threads has established itself as the fastest ever social media app download rates in recorded history (which basically, for Facebook purposes, began just over 19-years ago.)
Yet the regulatory trend is against them. Which is why, earlier this week I found myself setting up an Instagram account and then setting myself up on Threads – Meta’s attempt to take down Twitter. I do Tweet the Porridge each day, and post it on Linked in, but thus far the Porridge has amassed a grand total of zero hits, likes, or reposts on Threads.
Which isn’t surprising.
I blocked Meta from collecting any of my smart-phone data, would not let it connect to my Facebook friends (to be frank I haven’t looked at Facebook in months), nor was I going to let it ransack my multiple professional and personal emails to find out who I relate with. Meta will tell you it wants the data to maximise the number of places my Threads will be seen… but we all know it’s so Facebook/Meta/Threads can target me and my contacts with specific advertising because it knows everything about me from pillaging my data.
My response is to simply build connections without giving Meta or anyone else access. Hence my request to connect on these sites… Let’s see what happens…
What’s my conclusion on Tech? There is enormous value out there – but it should be in the detail, in the new firms, the new innovations and inventions that will change the world.. Not in milking mature old ideas. There are areas where the world is genuinely advancing. In the next few years we will see enormous gains in real things from AI – like health care, cracking fusion, improved services, from battery tech – potentially even an electric plane and solving the multiple BEV inconsistencies, and in whole new sectors we haven’t yet spotted…
Social Media? Not so sure. It’s now packed and disinteresting. Linked-in is the only one I follow with genuine interest. That’s got serious implications on how Meta continues to monetise itself – all it really is a collector of multiple individual points to advertise to. The more easy it is to avoid becoming an advertising point, the less relevance it has.
I also reckon the market is overly rosy on the future of tech – accentuating the positive and eliminating the negative has taken hold these last 15 years – fuelled by a belief only tech can move us forward. But that’s the point: the reality is new tech moves us forward… not old stuff that’s generally past its sell by date
Five Things to Read This Morning
Businessweek What if the next Big Social Media App is…. Nothing?
BBerg Bank of America Is Using AI and Metaverse to Train New Hires
WSJ Is the Banking Crisis Over? We Are About to Find Out
FT Has the global trade recession already started?
Torygraph Limitless “white” hydrogen under our feet may shatter energy assumptions
I’m off on holiday next week – will get the lap top out if anything exciting happens..
Out of time, back to the day job, and have a great weekend.
Bill Blain
Strategist – Shard Capital
While you look to the future…
I have been away for a couple of days so I’ve only just caught up with Thursday’s edition. I noted your “sales pitch“ for the UK. And was reminded of the last lines to Alan Bennett’s first play –40 YEARS ON.
“TO LET
A valuable site at the crossroads of the world. At present on offer to European clients. Outlying portions of the estate already disposed of to sitting tenants
Some alterations and improvements necessary.”
Written in 1968 .
Valuation Question – Today’s Porridge.
Our initial, and very sensible, instinct is that we ought to use an achievement frame—and emphasize the deals done, the sales achieved the costs cut.
But in a fascinating and wide-ranging 2012 paper, Zakary Tormala and Jayson Jia of Stanford University and Michael Norton of the Harvard Business School suggest a different approach. What we really should do, they say, is emphasize our potential. For example, these researchers put participants in the role of a National Basketball Association general manager tasked with awarding contracts to players. Some participants had to offer a contract to a player with five years of experience who had produced some impressive stats. Others had to offer a contract to a rookie who was projected to produce those same statistics during his first five seasons of play. Participants, on average, gave the veteran player with solid numbers a salary of over four million dollars for his sixth year. But they said that for the rookie’s sixth season, they’d expect to pay him more than five million dollars. Likewise, the researchers tested two different Facebook ads for the same comedian. Half the ads said the comedian, Kevin Shea, “could be the next big thing.” The other half said, “He is the next big thing.” The first ad generated far more click-throughs and likes than the second. The somewhat peculiar upshot of the research, the scholars write, is that “the potential to be good at something can be preferred over actually being good at that very same thing.”
People often find potential more interesting than accomplishment because it’s more uncertain, the researchers argue. That uncertainty can lead people to think more deeply about the person they’re evaluating—and the more intensive processing that requires can lead to generating more and better reasons why the person is a good choice.
Source – “To Sell is Human” by Dan Pink