Blain’s Morning Porridge Feb 7th 2024: Who are the winners and losers among the Magnificent Seven?

“Like the wind, blowing over the land and passing on….”

In the film of the Magnificent Seven, only three of the gunslingers survive. Which of the Big Tech names will be left in the dust? And which are likely to survive?

Couple of issues to deal with in this morning’s Porridge – including the name of my new Capital Advisory Business, but first let’s talk about The Magnificent Seven.

I had the great pleasure to host yesterday’s Shard’s Litebite Podcast – you can find it here on the Shard website: The Magnificent Seven – Remember how it ended. I got to interview my friend and colleague Julian Wheeler about the 7 leading US tech stocks. Julian really is an extraordinary fellow – briming with enthusiasm on markets, but absolutely focused on value and outcomes in the stocks he follows. His analysis of the Big Seven is a deep dive into AI, and the likely winners and losers of the swiftly evolving Tech markets.

As for the Magnificent Seven, Julian started with a rather brilliant comparison of the seven stocks to the fate of the gunfighters in the famous 1960 film (which itself is a remake of Akira Kurosawa’s Seven Samurai). (Ah, back in my student day’s I had a Betamax collection of Kurosawa – and as a uber-pseud reckon him the greatest film maker of all time.. Throne of Blood beats MacBeth every time!)

Of the seven gunslingers, four of them die in the battle for the village. Three survive – one of whom decides to become a farmer alongside the villagers he saved. Steve McQueen and Yul Brynner ride off into the sunset. Which of the current Big 7 Tech Stocks will we still be talking about in 5 years time?

First of the gunfighters to go down is Harry, convinced he’s fighting for gold – Harry is Tesla. Its clear Tesla is already out the Magnificent Seven. The EV maker is massively underperforming for several reasons, not least being it’s just a car company, struggling with all the demand factors all car companies struggle with like competition, choice, people, margins, deliverables, and profits. Additionally, the spell of Musk is broken – his demands for 25% of the firm to “focus on AI” is not happening, his dabbling in pharmaceuticals (and not for investment purposes), and his efforts to relocate to Texas, suggest further conflict and disillusionment ahead. Great company, but not a 4 times the value of more profitable and better Toyota.

Second to fall in the film was the gambler, Lee, played brilliantly by Robert Vaughan. Julian reckons that’s Apple. Apple has a fantastic annuity-like business selling new-but-the-same bright-shiny-new stuff to addicts like myself, but it’s not innovated new product for a decade or more. My kids aren’t using iPhones. It’s reliant on China for growth (and still on China supply chains). The new Vision Pro headset is described as brilliant but “Sad” in reviews. When it comes to AI, they admit they “have no moat”, which means massive Capex spend to come – not that they can’t afford it. Apple is not going to change the world using AI – it sells “stuff”. It’s only a buy at the right price. The lustre is wearing thin.

Third to hit the dirt will likely be Alphabet/Google, played by Charles Bronson in the film. Good guy, but as Julian puts it Google has everything to lose – as was shown to the downside stock reaction when it missed numbers last week. It may now be a verb to Google the internet, but the swiftness at which advertising revenues follow fashions and platforms, changing from search and YouTube to TikTok and Instagram, has left Google struggling as other channels on Meta and elsewhere benefit – meaning Google’s revenue bases are in constant challenge and flux. The AI bet demands massive CapEx spending to compete with Microsoft, and Meta which is going a different direction which could well prove cheaper and more effective.

(Each week I am going to declare a “Quote of the Week”: thus far this week’s winner is Matein Khalid from Dubai: “Google is a verb, Bing is not and AskJeeves was eaten alive by a tribe of cavemen in Silicon Valley back in the Stone Age.”)

The fourth gunfighter to fall is the James Coburn character – Microsoft. There is nothing like a mature company suddenly re-emerging back into the limelight, but Microsoft is already fully priced on the expected success of it’s everything AI “Co-Pilot” AI product – putting it head-to-head with Google. However, our own tech team tell us integrating the Co-pilot AI into client business is an absolute GDPR and data nightmare and simply won’t happen soon. It’s an example of a great new tech where the practical limits will hold it back – and there may be more suitable alternatives.

So, what about the three gunfighters that survive?

The Steve McQueen character is Nvidia – which looks the most vibrant survivor. As long as everyone else wants to play in the AI space, Nvidia is the picks and shovels of the game – or as Julian puts it: “the arms dealer in a very big war”. At some stage competition and supply meeting demand will blunt its rise, but for now Nvidia seems unstoppable. It looks fully priced – but so did Tesla at one point before it soared higher! Julian reckons Amazon is the ultimate survivor – and through Prime is generating ad revenue. He may be right – it’s an increasingly mature business – so does it justify the multiple?

Who is the real winner? Much as it hurts to say, it may well be Mark Zuckerberg’s Meta, according to Julian. (I reckon it looks good because it was cheap…) Going for cheaper, open source, focused AI rather than the AI of everything makes Meta’s approach affordable at a scale where it can be adopted. As an advertising firm I question how Meta succeeds when even my generation has given up on the Ad-stream that is Facebook. Julian pointed how WhatsApp is currently a zero-revenue stream, and not factored into the price, but provides Meta with incredible information on its product – us, the users.

I did make the point that maybe AI is a red-herring, a factor the market is massively over-exaggerating the importance and practicallity of – just like Wall Street banks paying billions for MetaVerse real-estate a few years ago. Today, digital tummbleweed rolls through these empty ghost-towns…

Still plenty to play for in Big Tech – but, there are other businesses out there in other sectors that are just as economically critical… just saying..

Mae Culpa time: I really cocked it up….

Second Topic this morning is the launch of my new Alternatives Advisory Business – which I am running alongside my role as Strategist at Shard.

Yesterday I discovered not only is there already a Bowline Capital Partners in the market, but the two chaps behind it also named their firm for the same yachting knot, and have been going 15 years. Not only, but also, we are all members of same yacht club, and we know each other! Oops. (I’d chosen Bowline Capital Advisors as the name of my new business because in 2008 I was set to launch a hedge fund – but markets being markets, we got the Global Financial Crisis instead.)

The names and logos are too similar. Great minds think alike – fools seldom differ. So yesterday became a thinking day as I figured out a new name for my new firm – which is a bit embarrassing.

I was looking for a sailing connected name:

• I was thinking One-and-In Capital, BOTW Capital (Bring out the Whomper), or Bang-the-Corner Partners – but these are sailing in-jokes.
• Scallywag Capital didn’t have quite the tone I’m looking for.
• Blackbeard Capital is a tad bloodthirsty.
• Brave Black Flag Capital? Nice, but a black flag means you are out the race.
• Bramble Bank Capital, named for the Solent sandbank where we play cricket on at lowest tide is a bit tame.
• Shambles Capital – sums up my career to well. (Its a sandbank outside the Needles that eats yacht keels.)
• There is already a Batfish Capital – Batfish being the name of my yacht.

I began to panic… How about Stags Breath Capital – a brand of whisky that features in Whisky Galore? Or Curlew Capital after one of the birds I watch on the river? Or name it after a Scottish Mountain?

Nope it had to be something sailing related…

Having searched the internet again…. my new firm will be Wind Shift Capital!

Let me explain my thinking:

• Success in Yacht Racing and Investment Management both depend on spotting the “Shifts” in the direction of the wind or market sentiment as they occur and reacting quickly to them.
• Just as markets are in constant motion, moment by moment the race course changes as “lifts” and “headers” generated by the constantly shifting wind challenge yachtsmen to find the fastest route and best winds to the race marks.
• The winner is usually the sailor who reads the wind the best, just as the best investors figure out how sentiment, opportunities and likely outcomes determine the best returns..

The website will be up and running soon…

Out of time, and back to launching the day job!

Bill Blain

Strategist – Shard Capital

Principal – Wind Shift Capital

Author – The Morning Porridge