Monday, 8 May 2017

Tech 2.0: The Good, The Bad and The Ugly

The Good:

Google/Alphabet is a brilliant business so my main worry is regulatory trust busting and technological change. This company generates huge piles of cash and has an amazing network effect which gives it a wide moat. Based on my analysis it is simply just a bit overvalued at present. Certainly something I would like to own in future.

Amazon also has a huge network effect –it looks a lot overvalued by traditional metrics but it is a massive disruptor and it can and does make money even when not taking over the world. Not something you want to short – but it takes a real believer to go long at these levels. However I tend to get cautious when everybody sees something as a foregone conclusion – i.e everybody will buy everything at Amazon in future appears to be the consensus now – people used to think this about Walmart.

Facebook – again huge network effect – notice the recurring theme here – it is proving very profitable but probably sowing the seeds of its own destruction now my news feed is awash with viral videos and pictures of friends of friends I have never met with their babies. Still along with its compadre Google this is the company capturing all the advertising market online.

The 10 Years of Tech Returns

The Bad:

Snap – I cant see this making money in any meaningful way but it is as yet unproven – I wouldn’t be long but I wouldn’t be short. It definitely is very popular with the next generation probably because of all those parents on Facebook. Still it could just be another…

Twitter – This is a bad stock but a great platform – I use twitter a lot it’s a great way to connect directly with excellent content and share ideas – but hard to monetize – if they get good at monetizing it the Achilles heel is it will become as annoying as Facebook and probably lose users. I am indifferent to the stock unless it gets near my $6 price target and Jack Dorsey leaves. Or alternatively starts to generate a profit.

The Ugly:

Tesla – they are taking a boring business with low margins – building cars – and turning it into some sort of special ‘cult of Musk’ – all the established auto manufacturers can make better cars (at a profit) and the EV competition will be huge in about – well now as far as I can see. This is a capital burning machine throwing money at every possible futurist fantasy to lay down some excellent electric infrastructure and battery technology for everybody in the future. 

They have no real network effect or sustainable competitive advantage that I can see. Instead they want tonnes of capital to try and create a network effect be it supercharger stations or driver less tech.

Not to be mistaken for an investment.

Netflix – caught between a rock and a hard place. Owning a platform to distribute other people’s content is not very profitable. The underlying business is a great one but it has fewer barriers to entry as switching costs are not high. However spending $6-8 billion in 2017 on original content may well not be a good idea either.

I get nervous when companies try too hard to create content. Content that will be really popular screams to be created…don’t tell me HBO came up with Breaking Bad because they back tested their data and found people really like shows about schoolteachers who make meth in New Mexico….great content is content that needs to be written and not for the sake of it.

I write these blog posts when some idea, stock, trend etc – like tech 2.0 – fires my imagination – not because I need to churn out more ‘content’ as then said content is highly likely to be derivative nonsense (perhaps this whole post is derivative nonsense too).

Either way that is a lot of cash to spend on content and I would be surprised if it makes their existing limited network effect (being the ubiquitousness of 'Netflix & Chill') any better.

So just like tech 1.0 – if you are in the business of spending a lot of cash for no obvious return even in the medium term you are sooner or later going to get in trouble when people wake up and remember capital is not risk free. The survivors of tech 1.0 are now great looking businesses which used their scale and competitive advantages to build a huge network effect with relatively low capital intensity (especially Google). S0 each recessionary capital shake down will eliminate the losers and leave us with a new crop of winners. Long overdue.

Disclaimer: I have modest short positions in (NASDAQ:NFLX) Netflix and (NASDAQ:TLSA) Tesla. These are opinions only, not investment advice. If in doubt read my disclaimer. 

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