Were Mega-Cap US Tech Stocks ‘Imposters’ All Along?

Were Mega-Cap US Tech Stocks ‘Imposters’ All Along?

Over the past, let's call it three or four years, I've repeatedly referenced the suggestion that America's tech titans aren't actually growth stocks, but rather cyclicals in disguise. Note the careful wording. I said I've "referenced the suggestion," as opposed to suggesting as much myself. If the FANG contingent and its successor, FAAMG, were merely cyclicals in disguise, it was a pretty convincing ruse. And it went on for a long, long time. That conjures a pet peeve of mine: There's a thresh
Every story you need, no story you don't. It's that simple. Get the best daily market and macroeconomic commentary anywhere for less than $7 per month. Subscribe or log in to continue.

12 thoughts on “Were Mega-Cap US Tech Stocks ‘Imposters’ All Along?

  1. Great food for thought.

    “Finally, I’d pose a question to readers: How much of this is due to saturation?”

    The fact that many of the tech titans have been turning their attention to the other titans’ markets (such as AMZN getting into targeted advertising) suggests the answer is yes.

    1. Absolutely. Market has reached saturation. I’m not understanding what growth would look like at least in the domestic market. Everyone who wants a streaming account already has one.

      And incidentally, targeted marketing doesn’t work very well and that has to be hurting add sales. Case in point, last month I insulated my attic. I did some googling about insulation products. Now a month after I’m done I get targeted ads trying to sell me insulation. You can’t sell me stuff based on where I’ve been, you have to sell based on where I’m going, and the add AI hasn’t figured that out.

  2. Great post.

    Another “saturation” headwind is globalization turning into nationalism and the nature that these firms are the first movers and easily copied at this point.

    China has their own social networks and streaming platforms. Why not Europe too? At the end of the day there is data stored in a database or cloud storage, and these services simply gate access the information. AI has been democratized and open sourced — anyone can run a bunch of “posts” through a neural network with some user attributes and spit something back. There’s no innovation for owning the rights to a film and letting my television stream it.

    The same goes for cloud services. Azure / GCP / AWS, with minimal differences all offer the same services. I expect the same from Chinese cloud outfits.

    I wouldn’t say they were imposters all along, but the innovation happened over a decade ago. Now they just hire MBAs and expensive software engineers who think it’s impressive they work at big tech and don’t push the needle. I’m reminded of some quotes from Eric Schmidt about the software engineer who stole secrets from Google and went to Uber.

    Eric knew the business needed these types of driven folks, despite their personalities. Not someone who went to MIT, got good grades, puts in 40 hours a week, and makes a change in three years when their stock options vest.

  3. The industry is becoming mature and the barriers to entry for cloud are not that great. Amazon’s profits are mostly if not entirely tied to AWS, which has little to do with their core business. Their market share in the cloud market is significant, but they are not likely to expand beyond western countries in any meaningful way and those markets are getting saturated from what we are seeing.

  4. Thank you for this analysis. I’m shocked at how long these companies have been able to sustain their growth rates. I thought the law of large numbers would kick in much sooner than it did. At some point, very few things will move the needle to continue driving meaningful growth, but these companies kept figuring out how to sell more and more. Are we at the saturation point? I have no idea, but if nothing else, the cash flows should sustain enough stock buybacks to grow EPS.

    Interestingly, I was looking at the cash flows for Apple and Meta today. Apple’s operating cashflows are maybe 2.5x of Meta, but Apple’s valuation is nearly 10x. Why? Meta is outspending Apple 2 to 1 in CapEx. It’s no wonder investors aren’t enamored with Meta at the moment. Despite that massive investment in CapEx, Meta can’t even grow their top line.

  5. Your point raises an interesting question. If one is not paying for growth (or very low growth — concomitant with the growth of the economy) than what is one paying for when buying these stocks? Surely not dividends. Apple’s dividend is what, 0.6%? I guess we are paying for stock buybacks and an implicit promise of growth that may or may not come to fruition — as we are seeing.

    All of this — clinging to the belief that growth has no boundaries — will happen again and again. This one was a whopper with a few crazy (probably literally) personalities to match.

  6. As companies mature, they become more cyclical. Just a corporate truth. Meta has very long-term problems, read as, so long as Zuck is boss and has his VR metaverse delusion. The three cloud kings will be fine once the dollar stops appreciating. Google will have baby googles. Amazon will disrupt more businesses and spin ipo AWS. Microsoft will be the winner in VR gaming and other interesting things.

  7. Back about 12-15 years ago I opened a Facebook account, set all the security and privacy settings to the max, set a long random password, logged out. Never logged in again. Did it to stop potential imposters.

  8. A few truths need to be stated in relation this discussion. #1, there is no such thing as the tech “industry.” The word “industry” is defined as a group of firms that all make products that are more or less perfect substitutes for one and other. Tech is actually an economic sector in which there are many actual industries, chips, software, machines to make chips, and so forth.

    #2, no industry can grow faster than the economy as a whole indefinitely, otherwise it would become the entire economy. #3, no firm can grow faster than its industry indefinitely or it will become the industry. This has happened once or twice and we passed several laws to respond to just such an outcome. If it were to happen see #2.

    #4, as H has often accurately pointed out, no single point forecast will ever be accurate in the economy, the markets, etc.

    None of this is arguable. It’s all just the math involving statistical distributions and the nature of growth. Eventually, anyone betting the house against anything related to these truths will lose. We are just seeing the math. Eventually all growth rates fall without stopping.

    Some years ago a colleague of Michael Porter, the Harvard economist who first wrote about the nature and sources of competitive advantage, did a study of the conditions of major US industries. First, and this is a tautology, half of them were growing slower than the economy. Second, and not so obviously, more than 500 of our mature industries were actually suffering inexorable revenue declines. The same outcome is happening now and will keep happening in the future. It’s the math.

Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

NEWSROOM crewneck & prints