Big Tech: The Big Divergence?

And also: AI as a tool for globalization. Digital advertising and Cloud as the engines for the digital economy. Money shifting to "hard tech" startups. Antitrust vs. competition and geo-strategy

Big Tech companies in 4Q21: The big divergence?

• This week we saw rather extreme moves in the stock prices of Big Tech companies, and in opposite directions. Google and Amazon seem to have been the winners, with Meta Platforms (Facebook) as the big loser. Microsoft and Apple, which reported their results the previous week, would remain in the middle

• First, on Tuesday, Alphabet (Google’s owner) presented its 4Q21 results and impressed investors so much that approx. +$130bn of value were created in just one day. The drivers were both organic (very significant revenue growth, compared with peers, at +32%, 2x vs. the average rate for the 5 Big Tech, even if it means a deceleration with respect to previous quarters) and inorganic (a 20-1 split to make the stock more liquid).  Sustaining this rhythm in 2022 will be challenging, according to the WSJ, because lower app store fees (to respond to regulatory pressures) will have an impact, and the need to make cloud services profitable could affect their growth. There is also the overall antitrust threat in several markets

• Then, on Wednesday, Meta Platforms (Facebook) reported the first (small) fall in daily users ever for the “blue app”, and a -5% fall in earnings per share vs. last year, which were attributed to competition for the audience (TikTok) and less effective ads , due to Apple’s iOS privacy tools. The stock fell more than -20% and approx. -$200bn of value were destructed in the process

• Finally, on Friday, Amazon presented relatively lukewarm results, with a deceleration of revenue growth, loses in e-commerce both in the US and International segments, and an increasingly negative cash flow, due to the massive long-term investments that the company is making. In spite of all that, they managed to surprise investors positively, both with the Cloud (AWS) and with the announcement of a price increase in Amazon Prime. As a result, share price exploded, creating almost $200bn of value in one day

The week

1. Consumers and businesses, after COVID

What is happening

New consumer risks:

• More questions emerge about the safety of TikTok. Teenage girls identify posting “stuff showing your body” as the way to succeed in these social networks. And (unsurprisingly) this seems to be bad for their mental health (WSJ)

• People are using Apple Tags to track other people’s movements. Apple is working on solutions (WSJ)

• Tesla discontinues one (dangerous) anti-pilot feature (Bloomberg)

The post-pandemic economy:

• Under demographic pressure (scarcity of national workers), Japanese companies are starting to use AI, complemented with off-shore human teams, for quality inspection. This could help release Japanese workers for other (higher value-added) tasks (FT)

• The pandemic might be seen as a catalyst for “creative destruction” in the economy, at least when you look at the figures for new companies created in the last few months. Entrepreneurship seems to be trendy once again (FT)

What it means

• Artificial Intelligence could be a tool for globalization, as AI algorithms can be used to substitute some key local skills, specific to some markets like Japan, and help shift the activities off-shore, with no delivery risks. This is actually starting to happen in Japan, for quality-control activities, where the country’s workers have traditionally been differential

• TikTok looks like the new target for online safety regulators. Facebook’s results this week might have shown that the company’s apps are not (exactly) where the risk is higher, as of now

• In the post-pandemic world, startups are trendy again, and part of the shift away from traditional jobs (“The great resignation” could be driven by people founding their own companies

2. Platforms and digital enablers

What is happening

Alphabet results: Revenue growth in search advertising and the announcement of a stock split excite investors. Shares surge (WSJ)(FT). Comments: (WSJ)(FT)

Meta Platforms results: Facebook loses daily users for the first time ever, and the company reports weak profitability. Shares fall more than -20% (-$200bn) (WSJ)(FT). Comments: (FT)(FT2)(WSJ)(NYTimes)

Amazon results: Growth in cloud / AWS (~40% vs. last year, equivalent to ~+$17bn/yr) and a price rise in Prime make the company market cap grow more than +$190bn (WSJ)(Bloomberg)(WSJ2)

Snap and Pinterest were (negatively) affected by Facebook’s results, but their reports showed they’re much better off (Bloomberg)(WSJ)

Spotify made responsible of the (controversial) content of Joe Rogan’s podcast. A cultural fight is under way in the US (WSJ)

AI:

• DeepMind releases a tool to automatically program code (WSJ)

• Facebook is spending a lot of money in AI, but with much less return than Google or TikTok (for now) (FT)

Connectivity:

• Activist investor Cevian finds internal support for its plans for Vodafone (FT)

• 5G operators in the US are stealing Fixed BB customers from cable companies (Bloomberg)

What it means

• Advertising on consumer apps remains a significant (and relatively healthy) component of the digital economy. Google and Facebook are the two companies with highest revenue growth rates, among Big Tech. The problem with Facebook is that they seem to have started to lose the battle for attention, both due to consumers’ preferences (vs. TikTok, Snap, and even Pinterest) and to competitors’ moves (Apple’s privacy tools)

• The cloud is the other big growth and cash flow generator in the digital world. E-commerce is struggling to be profitable (Amazon is losing money in its traditional core business)

• In the US, where cable has traditionally had almost no competition in Fixed BB, 5G is starting to succeed as an alternative to provide fixed access to households

3. Financing digital innovation

What is happening

After the Facebook debacle, investors are starting to look a bit deeper into “Big Tech”, with different views for different firms (WSJ)

In China, VC money is shifting from consumer apps to “hard tech”, including chips and robotics (FT)

Amazon and Nike are considering to buy Peloton (WSJ)(FT)

Bitcoin is seen as a dangerous bet, even if its advocates were right about the long-term (WSJ)

VC is excited about crypto (FT). More in NYC than in Silicon Valley (Bloomberg)

Emerging themes for investors:

• Metaverse: In a FT interview, S Nadella confirms that the Metaverse is behind the acquisition of Activision Blizzard (FT). Consensus is growing that we will need regulations for the Metaverse (FastCompany)(Protocol)

• Electric Vehicles: The cost of batteries could be a barrier for adoption (WSJ). Also charging infrastructure is seen as a key enabler, and lots of innovative companies are working on this (WSJ)(Fox2)

• Flying cars: The FT debates if we will have them anytime soon (FT)

• Energy: Solar geo-engineering emerges as an alternative to fight against climate change (albeit a bit risky…) (Bloomberg)

What it means

• Deep changes might have started in how money flows to technology companies. First, investors have started to understand that not all Big Tech are equal. This will impact valuations from now on. The silver lining for the (current) losers (e.g.: Meta) could be that regulators also understand this, and decide to release some of the pressure. Second, consumer apps (e.g.: social networks, e-commerce) are becoming less attractive (as seen in China, this week), with priority shifting to “harder” technologies (often involving atoms, not only bits) like semiconductors

• Linked to this “focus shift” to atoms, charging infrastructure for electric vehicles is becoming an emerging priority, as a key enabler for adoption. Maybe there is an opportunity for 5G operators in this, as there might be deployment synergies (at least in some markets)

4. Building new rules for the (digital) game

What is happening

Antitrust:

• A US Senate panel approved a bill that is expected to limit what Apple and Google can do with their app stores (WSJ)

• The Microsoft-Activision deal will be reviewed by the FTC (WSJ)

• Advertisers want antitrust authorities to review Google’s proposal to replace cookies (Bloomberg)

• Big Tech try to defend against antitrust by supporting geo-strategy think tanks (FT)

The “Tech Cold War”

• Germany blocks the acquisition of a local chipmaker by a Taiwan company (Bloomberg)

• A ruling against the Google Analytics service in Europe on potential risks to send European data to the US is creating concerns on other American companies doing business in Europe (WSJ)

• Both the US and Europe are developing strategies to counter China’s global influence (with specific focus on technology) (WSJ)(FT)

What it means

• Antitrust regulatory activity against Big Tech continues, but several signs this week show potential constraints to these initiatives: (1) Facebook’s results might have been very negative for the stock, but they do show the company’s vulnerability to competitors, a powerful argument against antitrust actions; (2) Privacy protection initiatives, like Apple’s iOS tools or Google’s plans against cookies, might have competitive implications (that is why advertisers are complaining to antitrust authorities), and there may be privacy vs. competition trade-offs here; (3) Big Tech companies are arguing that antitrust actions to weaken them could actually weaken the West in its Tech ”Cold War” against China. Is there a trade-off between competition and geo-strategic priorities?