The Rot Economy

I saw this article going viral The Rot Economy. This article is demonstrative of the common disconnect or misconception between how pundits perceive the US economy and technology companies vs. how things actually are.

At the center of everything I’ve written for the last few months (if not the last few years), sits a cancerous problem with the fabric of how capital is deployed in modern business. Public and private investors, along with the markets themselves, have become entirely decoupled from the concept of what “good” business truly is, focusing on one metric — one truly noxious metric — over all else: growth.

Growth as opposed to what? Losses? Stagnation? Even very conservative, ‘boring’ companies such as tobacco companies or retail invest heavily in research and development, such as new products and markets. Over the past decade retailers collectively spent tens of billions of dollars on self-checkout machines, apps, online delivery logistics, etc. Were any of these things truly necessary? Maybe not, but they all add up to staying ahead of competition and not becoming irrelevant or losing business. Covid unleashed huge demand for door or curbside delivery, which has persisted after the pandemic, so retailers had to invest heavily in those things.

In the public markets, that means that companies like Google, Meta, and Microsoft were rewarded for having unfocused, capital-intensive businesses that required mass layoffs when times got tough, because the market loved the idea that they’d found a way to save money. They weren’t punished for their poor planning, their stagnating products,

Meta laid off 13 percent of its headcount from 2021-2022. It’s not unprecedented for there to be large layoffs during recession or a market correction, such as in 2022. The business models of Google, Microsoft, and Meta are among the most profitable of any company on the S&P 500, with profit margins of around 30-percent, so how is that ‘capital intensive’ as the author claims? Sure, the Metaverse is capital intensive, but Meta overall as a company is very profitable despite having a considerable headcount and Metaverse losses. And what does the Metaverse have to do with Microsoft or Google, yet he lumps them together.

When I wrote in October that Mark Zuckerberg was going to kill his company, the street responded in kind, savaging Meta’s stock for burning cash building a metaverse that was never going to exist

So many people in 2022 and early 2023 got this wrong, with viral videos from 5-6 months ago predicting the demise of Meta. Now it’s almost at $300/share–a gain of over 180 percent for 2023.

I don’t think Zuck was at much risk of ‘killing his company’, although I don’t think the Metaverse was a good move. You can see below, revenue has held up, but the Metaverse took a big chunk out of net income, but this is survivable given that Meta’s overall business is still as strong as ever:

Meta’s core properties WhatsApp, Instagram, and Facebook are more dominant than ever, and it’s an advertising juggernaut. CPMs and CPC rates at record highs due to record advertising spending. Go ahead and try to find a company that is at the perfect intersection of profits, size, market dominance, and moat like Meta…maybe Microsoft and Google. Not many. Meta is especially well-positioned to handle high inflation because advertisers simply bid higher on the ads, while Meta is still free to use, so Meta does not have to pass on inflation to its users.

increases in the price of Meta’s shares, despite the fact that Facebook’s active user growth declined and they lost $13.7 billion on the same metaverse department that caused the stock to drop the last time.

‘Declining user growth’ is not that big of a deal, and is an inevitable and expected outcome of a logistic function of growth. We’re talking a second derivative going negative.

The markets seemed to ignore the $410 million fine that Meta received for GDPR violations, along with the fact that European users will now have to deliberately opt-in to sharing their data

Large occasional fines by the EU are seen by investors as a cost of doing business. See Google, which has been fined many times by the EU (there is even a Wiki page devoted to it).

A common argument is that the layoffs are the reason Meta stock has done so well, but many companies have/had big layoffs , like during the early 2000s or 2008-2010, and did not see anywhere close to such a huge recovery that Meta saw.

It’s a long article. The author goes on about Uber now:

Despite its ubiquity, companies like Uber should not exist. Uber has not made a profit from its businesses. They had a net loss of 1.21 billion last quarter, yet the street fell over itself to praise the company because “gross bookings grew 19% year-over-year” for their unprofitable businesses that largely hinge upon the government failing to impose sensible labor laws, a con that will eventually come to an end, and indeed, has ended in some territories like the UK, where Uber drivers are now recognized as employees, and are therefore entitled to pensions, paid vacation time, and a minimum wage. London, I note, is one of Uber’s most important markets.

I was right about Uber too. Uber stock is still above $40 and it’s worth $70 billion despite endless predictions of its demise over the past decade, and also constant bad press and criticism over regulation and labor laws. During Covid, Uber successfully pivoted to its delivery model, Uber Eats, which is seeing rapid growth and is just slightly profitable:

Yes, Uber is way overvalued by any conventional metric, but so what. The same could have been said for Google in 2004 after its IPO or Amazon in 2008. It’s more profitable for governments to regulate and tax Uber than block the service altogether.

But in the author’s defense, these criticisms are not totally without merit. We Work was/is a dumpster fire. Same for the money pyre that is crypto start-ups, and I agree that a lot of VC does seem like a way of offloading risky or otherwise inherently worthless investments to the general public. Same for SPACs. Much of the online ad ecosystem/economy does seem to fit within Graeber’s ‘bullshit jobs’ framework–how many site builders and cloud providers does the world need? Or crap peddled on Instagram. Who is buying this stuff? (Evidently, a lot of people and businesses are.) Same for many of these CEOs, VCs, and money managers being way overpaid relative to skill/competence, such as Cathie Wood whose firm pocketed $300 million in fees despite the the horrible performance of Ark investments, as I also correctly predicted. And for that I agree.

But in terms of investing, if you stay away from the dumpster fires (crypto, SPACs, We Work , etc.) the there is still a lot of money to be made. It is useful to separate the social critique from the investing thesis, which is still strong at least for Meta.