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Amazon, Google, and Facebook: Bigger is Better

Why giants thrive
The power of technology, globalisation and regulation

This is why a simple investing strategy that goes ‘long’ equal weight the three biggest, fastest growing, and most successful tech companies (AMZN FB and GOOG) has done so well. Is past performance indicative of future results? No, but as far as strategies go, it’s hard to beat.

If someone says an investment strategy is ‘fail safe’ usually that’s an indication that it’s time to run to the exits, but Facebook, Amazon, and Google are exceptions, just by virtue of their immensely strong fundamentals and the fact that after a decade or longer no one has been able to come up with viable alternatives to compete with them. I remember in 2004 during the Google IPO, pundits said that anyone could come up with a ‘Google alternative’…lol 12 years later and we’re still waiting. Or in 2008-2012, predictions of a ‘Facebook alternative’, which of course has yet to happen and likely never will.

In capitalism 2.0, Bigger is better.

Just because Myspace lost to Facebook doesn’t mean Facebook will suffer a similar fate.

Airbnb, Uber, and Snapchat…all more valuable than ever, with no viable competitors on the horizon, and their valuations and market growth just keep rising, year after year, to no end, despite endless predictions by pundits of a bubble.

Contrary to popular belief, predictions of collapse are actually as common, if not more so, than predictions of a continuation of a trend. During the 80′s – 2000′s housing boom, predictions of a housing bubble were commonplace. Predicting the 2006 housing crash does not make one a contrarian, because such bearish predictions were actually as common as predictions of the housing market rising. If that seems backward, it’s because the media as of 2008 has given more attention those those who predicted a bubble. For example, Michael Lewis’ bestseller The Big Short, about how some canny traders made a fortune betting against the mortgage market. But the media also ignores all the forecasters were wrong all the way up, only to be right purely by chance in 2008. Likewise, during the 90′s dotcom bubble the media gave more attention to those who were predicting higher prices, but there were still roughly the same number of people who were predicting lower prices, but it’s just that they were mostly ignored, creating a false consensus that everyone was euphoric.

From a market perspective, the number of sellers (pessimists) has to roughly equal the number of buyers (optimists). For prices to keep rising, you need people to sell to the buyers.

These huge tech companies companies don’t need to innovate that much, rather they have market dominance and effortlessly print money through their ad platforms and other services. As the Economist article mentions, they tend to be very well insulated from global economic events (unlike the energy sector or financial sector), and these huge tech companies are also especially well suited to take advantage of global markets. Google, Facebook, and Amazon derive a significant chunk of their revenue overseas. And they can use foreign markets, loopholes, and other accounting schemes to dodge regulations and taxes that are unavoidable for smaller companies.

Up until the late 2000′s, major tech companies seem to have a about a decade of solid growth and stock price appreciation, before tapering and contracting or even collapsing (Cisco, Oracle, Sega, Sony, Atari, 3com, Research in Motion, etc.), but nowadays, as of 2004 or so, major tech companies seem to do a much better job at retaining their growth, market share, and share price appreciation.

Also, the stock market has done a much better job of quickly punishing losers (gopro, fitbit, etc.) but also rewarding winners. The investing landscape is much more choosy and selective, which could explain why active management is having such a hard time in an otherwise very strong bull market. It’s not like the late 90′s when all tech stocks were indiscriminately bid higher. You have the pick the cream of the crop or you will fail. You have all these experts who manage millions or even billions of dollars and they are just as clueless as average investors.

Right Again: Tech Companies Keep Posting Blowout Earnings

Over and over again, I keep being right.

In mid-2015, in the article Why the Web 2.0/Tech 2.0 ‘Bubble’ Refuses to Burst, I wrote:

But I am pessimistic about the hardware unicorns (Fitbit, Skullcandy, GoPro, Jawbone) as opposed to the app/website ones, so It’s not like I am emphatically bullish about everything, and these hardware companies would fare much worse during a correction. The fact that hardware unicorns trade at a much smaller multiple than website/app ones is evidence of this vulnerability to macro economic factors, and the general tendency of hardware to be susceptible to fads and change in user tastes.

Since then, shares of hardware companies (Fitbit, Gopro) have done poorly, and social networking/ad-based internet companies have thrived.

As of July 2016, the S&P 500 closed at another record high, and Google, Facebook, and Amazon reported yet another quarter of blowout earnings:

Facebook crushes Q2 earnings, hits 1.71B users and record share price

Amazon just posted a record profit for the third straight quarter

Alphabet’s stellar earnings send its share price soaring

Facebook stock is above $130 (it was at $20 in 2012 back when pundits thought it was doomed due to the bad IPO and unfounded fears over Facebook being unable to adapt to mobile usage), Google above $780. (Times TWO for the A and B shares – combined it’s almost $1,600. Mind-blowing considering it was at $100 combined in 2004…let that sink in.) Amazon now at $770.00 share….was at $7.70 in the early 2000′s. That is not a misplaced decimal. Everything just keeps going up and keeps being better then expected, as much as the media keeps repeating the same lines about the ‘economy being weak’, the ‘stock market being overextended’, or ‘tech valuations being a bubble’.

Does that make me a superforecaster? Maybe, but a lot better than z3r0hedge and Karl Denninger of MarketTicker.org, who have been collectively banging their heads against the wall about the same ol’ doom and gloom stuff since 2009 to no avail. You got to know when to throw in the towel and admit being wrong, or that you have no talent at predicting things (of course, z3r0hedge has built a very lucrative business out of scaring people to buy overpriced gold and other bad investments). Most people would be better prognosticators if they tuned out their personal biases in the prediction making process, or if they had a better understanding of macroeconomics (QE is not money printing, for example), investing (index funds beat individual stock picking, with few exceptions), and the stock market (stocks rise because of profits & earnings growth…everything else is noise).

Somewhat related: Donald Trump doesn’t read much. Being president probably wouldn’t change that.

He said in a series of interviews that he does not need to read extensively because he reaches the right decisions “with very little knowledge other than the knowledge I [already] had, plus the words ‘common sense,’ because I have a lot of common sense and I have a lot of business ability.”

Trump said he is skeptical of experts because “they can’t see the forest for the trees.” He believes that when he makes decisions, people see that he instinctively knows the right thing to do: “A lot of people said, ‘Man, he was more accurate than guys who have studied it all the time.’ ”

I kinda feel the same away when it comes to making economics predictions. I don’t need to read dozens of technical books to understand the gist of the situation, relying more on intuition, yet pretty much all my predictions have been right. It’s more about applying existing knowledge and filtering out the noise, than just absorbing as much as possible. Many experts, both on the left and right, were wrong since 2009. Krugman, in 2012, predicted that the sequester and budget cuts would cause a major decline in employment and possible recession, and he also predicted the unraveling of the Euro – wrong on both counts. At the same time, on the ‘right’, there were many failed predictions of hyperinflation, crisis, bear market, recession, and dollar collapse. Interestingly, James Altucher, despite not being an economist, like myself, also predicted everything correctly. I think that agrees with how experts and ideologues sometimes get it all wrong, whereas outsiders with a clear mind can make the correct connections instead of being clouded by too much information or personal biases.

But everything keeps going up, and will continue to do so: Bay Area real estate; S&P 500 and Nasdaq 100; tech stocks like Google, Facebook, and Amazon; leading web 2.0 companies like Slack, Snapchat, Uber, Pinterest, Air BNB, and Dropbox.

Amazon, Facebook , Google – three stocks to rule the world. They cannot do any wrong, and I don’t mean that sarcastically. Buying these stocks is like investing in the companies that are building the matrix, but it’s real life.

It’s just nuts..even Microsoft and Cisco in the 90′s..the growth was finite, but there is no limit to Facebook, Google and Amazon. Every quarter is a crusher…over and over, year after year.

Just when you think their growth is ‘stalled out’, something new comes along. Now it’s mobile. Or it’s ‘messaging’. In a few years, maybe it will be virtual reality.

The small mobile screen is perfect for advertising. Adsense ads are everywhere – Bloomberg, Forbes, Fortune, etc. Sometimes major brands try Adsense alternatives but always go back because Adsense pays the most and has the most advertisers. Whenever someone clicks those ads, Google makes money and so does the publisher. Facebook also plans to unveil a similar 3rd party ad platform.

The most common retort is that something ‘new and better’ will replace Facebook, Google, and Amazon. Fat chance (or at least not for a verrry long time):

People said the same thing about Google in 2004 ‘Anyone can make a search engine; Microsoft has so much money they can crush Google’ (Despite dozens of iterations and expensive marketing campaigns, Bing never grew.)

Same thing about Facebook in 2010 ‘Anyone can build a social network’ (Many have tired and failed.)

Same thing about Apple in 2003-08 ‘Sony/Microsoft/ etc can make a music player/phone’ (Zune anyone?)

In the 80′s, how would have guessed that Microsoft, decades later, would still be the dominant player in operating systems? Apple and Linux never got above a couple percent. Only thirty years later has Microsoft become ‘slightly less relevant’, but the company continues to generate enormous profits, and has diversified its business substantially beyond Windows.

The ‘Big Three’ (Ford, GM, and Chrysler) enjoyed a reign that lasted over fifty years until foreign brands gained a foothold.

Too many people are trying to extrapolate the future from the past, using the tech crash of 2000 (a single data point) for predicting the future, when the empirical evidence suggests that successful, profitable companies with market dominance can have decades-long uninterrupted expansion in growth and share prices. Walmart…anther example. Only recently, after nearly half a century of uninterrupted growth, have things finally begun to slow down. But part of the reason why companies like Google, Facebook, and Amazon are so successful, even more so than Cisco and Microsoft in the 90′s, is because of their huge network effects and market dominance. Snapchat is another one. Air BNB. These are not flashes in the pan, but have enormous, entrenched userbases that are not only loyal and will stick around, but the advertising potential is also significant. Just look at Facebook, and the power of advertising and market dominance (quoting from a comment):

Facebook will be doing $16 to $20 billion in profit within five or so years. They’ll have accumulated $60 to $80 billion in cash. They’ll have a half trillion dollar market cap in the next few years. They’ll liberally use the cash and market cap to buy into any market they’re missing out on, just as Microsoft purchased LinkedIn and Skype to try to stay in the game.

These types of companies do not dislodge so easily such that they get “eaten for lunch” in the mere span of ten years. It’s the exception for one of them to implode. This is especially true given that Facebook is still ramping, their sales growth is still extraordinary and their daily actives are still growing just fine for their size. They likely won’t even peak on users for a few years, at a minimum; and afterward, they still have years to grow their non-US ad business a lot, because that part of their business is wildly non-optimized.

In ten years, Facebook will just be reaching the equivalent business plateau that Microsoft hit circa 2000-2003. They’re still a very young business in the first half of their growth phase, they haven’t even reached mild stagnation yet. A business doing $2 billion in quarterly profit, growing sales at 50%, and they’re going to get eaten for lunch within a decade? It’s extremely unlikely, as the mountain of cash they’re accumulating will buy their continued place in the ecosystem, whether the anti-FB crowd likes it or not.

Compare that to the 90′s when you had much higher PE ratios and much weaker earnings. In 2000, the Nasdaq 100 had a PE ratio above 100; it’s only 20 now. The S& 500 had a PE ratio of 35; now it’s only around 17. There are real fundamentals at work here behind these high share prices, not just euphoria.

Facebook – Protecting Your Privacy

Why Facebook Is Emasculating And How To Stop It

The solution, of course, is to delete your profile. And while some Conservatives complain about Facebook (as the ROK article above does), many conservatives and libertarians use Facebook. And Facebook is hardly liberal in the sense that it generates billions of dollars of revenue a year while spending millions on accountants to minimize taxes.

This is why I am not joining the left’s ‘bash Facebook’ chorus. Facebook is a capitalism success story that makes so much money not only because it’s addicting, but also because of advertising. It meets a need; people choose to use Facebook because they derive some sort of enjoyment from it, and advertisers also find it useful for generating business and leads. If Facebook were as awful as the left insists it is, people would simply choose to not use it and it would go away Myspace.

Most people who use Facebook don’t really understand all the features of the site. While the features may be intended be helpful, in an Orwellian sense they can be used ‘spy’ on you. Deleting your profile is sometimes not good enough. You need to make sure your name is not tagged or shows up in a Google or Facebook search, which can be determined by running this query into Google to see if your name is on Facebook:

site:http://facebook.com “your name”

This is always public, and Google is very efficient at indexing public content posted on Facebook.

And run this query into the browser address bar to see if your name is on Facebook:

https://www.facebook.com/search/str/(your name)

(you must be logged in for it to work)

If someone on Facebook mentions your name and his profile privacy setting is set to ‘public’, your name may show up in a search of both Facebook.com and Google. It may also appear if he tags you in a photo. This information can be accessed by the general public.

To fully escape the reach of Facebook, you will have to tell your friends to not mention you and to not upload pictures of you.

Care must be taken to not post stuff on Facebook that may harm you later if someone were to find it on a search of Facebook or Google linking to your name. If your friend mention your name in an embarrassing light, you have to tell him to remove it since that information may be visible on Facebook or Google even if your profile is squeaky clean and private.

Part of the problem is that SJWs (or anyone) can use this information to incriminate you. And most employers being the spineless cowards that they are won’t stand-up for employees and will fire them for the smallest of imagined offences to ‘save face’. The economy may also be to blame in that the supply of labor vastly exceeds supply, so it’s often no skin off their back to get rid of you; there will always be replacements, especially in the low-skills sectors of the economy. Employers can just uses these as excuses to cut payroll. The problem is not technology. Instead it’s the values of society, where we have to be paranoid.

Snapchat’s Huge Windfall : The State of Web 2.0

Looks like my 2014 prediction of Snapchat, originally valued at $4 billion, being worth $30 billion by 2016 is coming true.

This talk of bubbles reminds me of 2007 when everyone, including all the experts, was certain Facebook was a bubble at a valuation of $15 billion after Microsoft invested; now it’s worth $200+ billion. Then in 2012 after Facebook’s hugely publicized botched IPO and Nasdaq error, all the experts again said the web 2.0 bubble had burst; the stock price and earnings have since doubled. Unlike the big blowups of Friendster, Myspace, Digg, etc..these post-2008 web 2.0 valuations have proven to be extremely sticky. Pinterest, Twitter, Dropbox, Air B&B, Tinder, Snapchat, Whatsapp, Uber, Instagram…all keep going up with no end in sight, year after year until either IPO (which finally creates volatility) or buyout. One mistake a lot of forecasters make is assuming that a steep ascent in an asset price must terminate with an equally steep crash (); anther overlooked but quite common outcome is things stay flat, which is what we’ve seen with many of these large web 2.0 valuations one they have reached maturity. An example is Twitter, which plateaued at a valuation of around $8-11 billion from 2008 all the way until its IPO in late 2013. And then Faebook, which hit a plateau of around $100 billion from 2011 until its IPO in 2013. There’s hardly any big failures or blowups, except perhaps Zynga and Groupon (although it’s still worth $5 billion).

My prediction is these web 2.0 valuations will keep rising for many years to come because that is the path of least resistance, and the investor demand and user growth for these companies is seemingly unquenchable. The unending web 2.0 boom and unending wrong predictions about its demise show how these ‘obvious’ parallels to the old tech bubble of 1995-2000 are just so wrong. There’s more at play here, such as the investor flight to quality (more money chasing fewer companies), huge user growth, huge monetization potential from smartphone engagement, the very large millennial population that use these services, and ability of these web 2.0 companies to carve out niche dominance and then keep it.

To understand the fight to quality, which we also are observing in the post-2011 US stock market, think about it like this: A VC firm has $x in assets. The historic market return is 7%. The firm can plow this money in to a guaranteed winner like Snapchat or Uber and make 100-300% within a couple years – up to 20x times the typical market return. Or they can divvy the money into dozens of smaller companies, of which one of them may become the net Uber, but the expected value of later allocation is actually less than the former strategy. Why gamble on scratchers when you can play an all-black roulette wheel. Because of risk-averse VC firms, many start-ups are turning to crowd-sourcing sites like kick-starter.

In 2012 when the left was certain Facebook’s mobile usage would cannibalize its highly profitable desktop-based advertising revenue, I correctly predicted that mobile usage would supplement desktop usage, not supplant it, because people would simply spend more total time online, switching between the desktop when at home and the mobile device when on the go. Total internet time has nearly doubled between 2010 and 2013 and desktop usage has remained constant.

As recent earning reports from Facebook have shown, making money from mobile users is not a problem:

An overused argument by the left is that successful web 2.0 companies like Facebook and Snapchat can be undone by a shrewd competitor, but this is easier said than done, especially in a market that is as saturated as social networking. A ‘this time is different’ argument can be made in that when Myspace was popular , social networking was an emerging industry and any company had the opportunity to seize and solidify market share. Facebook sized upon Myspace’s weaknesses and gained permanent dominance when social networking as an industry matured. The left predicted Ello would give Facebook a run for its money, but it faded – like all Facebook competitors past and present – as quickly as it emerged, and all that VC money spent on ill-fated AstroTurf PR campaigns about how Ello was the ‘not new thing’ – wasted. You saw similar ‘winner take all’ coalescence in the 80′s with personal computers and operating systems, and again in 90′s with search engines. Lycos, Yahoo, Alta Vista, Web Crawler, and Ask Jeeves were all supplanted by Google, which has remained on top ever since. Same for Microsoft; decades later Windows is still the uncontested market leader, with alternatives far behind. Another analogy is the formation of the solar system where initially you had a lot of chaos and dust, but after a few hundred millions years everything solidified into planets and has remained the same for billions of years.

Within the next year or two, we’re probably going to see Uber being worth $100 billion before IPO, Snaphat $50 billion, Tinder $10 billion, Air B&B $50 billion, etc. Take every present valuation and quadruple it. Back in the 90′s, $100 million was a big deal; now that’s just a rounding error or the equity of just a single early employee. Insane, but very prosperous times we’re living in. And it’s got a long way to go.