April 3, 2018

An Aphorism for Tech

Are the markets really failing, or are they just trying to say something? Investing is not the same as managing stocks and assets are not companies, which run on balance sheets not words, and fed on executive management not shareholders. And when changes that have occurred since the public introduction of the internet have shaken industries to the core, none less prepared than retail nor more prepared than finance, it’s hard not to take the recent drop in tech valuation seriously but also with a little curiosity mixed in. Every description of tech companies is probably right, Facebook has been politically irresponsible, Apple is a classic capitalist pig, Microsoft is becoming the new “old” tech company and Google was first to monetize our privacy. A lot to absorb, but I admit I’m not as concerned as those who profit from fear would like us to be, but I’m also not without concern. These are volatile times and I think the stock market has simply caught up.

Facebook (FB)
It’s common for human beings to believe most sincerely in those things that also serve their personal interests. Since its inception FB has been surrounded with a contentious crowd including those as eager to exploit it as those to destroy it. Led by a man-child who up until this day continues to exhibit the adolescent mannerisms that are the earmark of the modern day billionaire.  Zuckerberg is nonetheless the face of FB and therefor is there any reason we should be surprised by anything that is being said to attack or defend the company’s values? No, and neither should we be surprised at the volatility the stock is experiencing, at least until it announces its earnings next month. In all the biggest problem facing Facebook has been discussed here before, namely that its revenue flow is based on consumer vigor, which in turn is elevated by cleverly aimed digital advertisers. If there is an economic slowdown in the future, and too much of the current volatility raises that probability, FB could find its revenue slowing as well. A current position of 1-2% is a good intermediate term play, and the recent drop is the beginning of an opportunity.

Apple (AAPL)
AAPL gave us the iPod. Some are old enough to remember listening to an AM radio with earphones, migrating to FM, to Walkman, to Discman, all the way to iPod. My point? Its originality didn’t rest in what the device could do it rested in how it did it. The move to the iPhone was then meticulously introduced and the subsequent introduction of the iPad alongside to complete a device for everybody that could do everything the previous products did and more. My other point? AAPL has a neat way of cannibalizing its older products such as IPod and even removing support of the device inside of a few years to compel users to upgrade to newer products. This kind of savvy capitalism is old school and in my opinion the behavior will increase because AAPL will unlikely come up with another brilliant idea soon and they know it. One reason why they are introducing their newest iPad, a nine inch model for $325 (cheap by Apple standards) is to target institutions of education. A noble aim, but also one likely to get crowded over the next five years as Microsoft and Google bring their own widely familiar hard/software products to the game. AAPL has sold off a lot, pays a decent dividend and will always be a good holding. A current position of 2-3% is a good long term play.

Google (GOOGL)
Google is between the proverbial rock and hard place. The company is very much beholden to advertising for the majority of its revenue, but areas that it could easily monetize such as its Android operating system for smartphones, it provides for free. No small give up for a product that was determined in 2017 to be installed on over 60% of all smartphones in use. Luckily the company does charge for many of its phone services such as Gmail and Google Maps. And while the company closed any further research on its Google Glass product, probably squandering billions of dollars, could the future of the driverless car be in doubt? A lot to absorb and a lot to risk. However the company is innovative and could bounce back in the same way as Facebook, at least it should. A current position of 1-2% is a good intermediate term play and an increase would be warranted when the sector overall looks beaten up enough.

Amazon (AMZN)
AMZN is, in my opinion, the most interesting company in history. Even as the President tweets that the company is hurting brick and mortar and the US postal service, the overreaction of the stock price ignores the introduction of email and the subsequent revisiting of a time Ford was similarly attacked when the automobile virtually ended the pre-industrial horse and carriage. While the concern for disappearing industries is no laughing matter, AMZN is a true innovative business model that hasn’t competed as much as it has stood in the way. And with its bloated balance sheet and reckless business strategy (Washington Post, Whole Foods, Zappos, etc.) what next, Electric Cars, A Sports Team? In my opinion one can carry a 2-3% position easily in AMZN for the long term, but don’t count on an announcement of dividend nor a decrease in volatility any time soon.

Microsoft (MSFT)
MSFT is a company that only occasionally steps away s from its primary business. In the same way Apple forgets that it is a hardware company before a software company, MSFT is the reverse. So when the company tries to enter the cellphone industry, they shouldn’t have and they realized it quickly. This highlights the welcome decisiveness and professionalism of the current management. All of which drive the company’s resources in continuing to build its most popular product, Office. The result has been a better performance in the recent decline, for both fundamental reasons, and also, like AAPL, because it pays a healthy dividend. The likelihood of MSFT continuing this trend is high and maintaining a current position of 2-3% for the long term is in my opinion manageable risk.

Recommended positions in the Tech sector are also based on the impact that the recent volatility could mean for prices overall. One impact of a market decline could be a pause in consumer spending. Patience is a good investment, therefore I’ll lookout for changes in consumer sentiment data, which has been very strong over the past 12 months. Other impacts are irrational actions led by a very large contingent of self-proclaimed investors who, courtesy of human nature, are inclined to sell with enthusiasm and procrastinate on buying. And lastly is the short contingent, led by tech trading and hedge funds who see an opportunity to use volatility to their advantage by exploiting the channels of media to send opinions with unsubstantiated confidence and often uncertain credibility. Oh yeah, and losses.