Understanding The Big Tech Stocks

in anything. I mean, it is February, but February is not one of my favorite times of the year because the weather is pretty miserable. No, we are in uh, the middle or maybe slightly later part of the middle of earning season. What makes you like earning season so much? Well so, for those who don't know, and probably everyone does, most companies report their earnings uh four times a year, and they tend to cluster over the span of a

few weeks. And so much of the time we talk macro, we talk about the FED, we'll talk about trade, inflation, economic data or whatever. And then every once in a while we get to pause and actually hear from the companies themselves and really get a sort of a corporate

perspective on how things are going. And of course, from an investor perspective, this is what really matters, because you can sort of have these broad movements and other times of the year, but if you want to know how a sort of specific investment in companies are doing, this is when you glean the most as sort of raw information. So I'm going to take the other side of this and say that I normally don't get that excited about earning season. However, I'm willing to admit that this time

around it is slightly more interesting than usual. But because we have a lot of really broad sort of macro economic themes that everyone is currently talking about. So a couple that spring to mind. You know, we have to slow down in China, whether or not that's actually affecting US companies earnings, and we've seen some really heavy hitters, including Caterpillar and Apple sort of blame things on a

slowdown in China. We have the retail apocalypse in the US as well, this idea that bricks and mortars stores are doing worse than other types of stores. So some big, big thematic issues and questions currently running through earning season. Yeah, absolutely, and especially the violence sell off that we saw at the end of a lot of people. You know, people

adjust their future expectations based on what just happened. We saw earnings estimates comes down for a lot of companies, and everybody wanted to know because in the end fundamentals in theory or with drive markets, was that just a blip or companies really seeing a decline in profits? And the other thing that I think is interesting from a sort of sectoral perspective is that for the last couple of years, especially a handful of really red hot tech

stocks that everyone was about have just dominated markets. If

you own them, you've done really well. Of course, I'm talking about companies like Amazon and Facebook and Netflix and so on, Apple of course, and each one of them has sort of stumbled a little bit for different reasons, and they've come well off their highs from last summer, and I think going forward there's still this big question like are they just gonna go back to dominating their respective industries like they did in or did the sharp

rewriting of these stocks sort of represent something fundamental where they're just not going to be able to put up numbers like they did in the past, right, the famous fang stocks which led the market higher basically for the past few years and then suddenly let it very, very sharply lower in the latter half of last year. And to your point about a sharp rerating, you kind of have to wonder what happened to make everyone sort of collectively wake up and realize that their expectations for all

these companies were sort of out of lack of the fundamentals. Like, it's a bit chicken and egg, isn't it. Is it the market or is it actually that the fundamental picture has changed? Well, Uh, that's very well put. And today's guest on the out Lots podcast, I think is someone very well positioned to talk about it. We talked to him a lot on TV around earnings time, and I thought, Okay, I want to have a longer discussion about some of these companies. So today we're going to be talking to

Lead Rogan. He is the founder and CEO of Estimized, which is a company that collects by side estimates for earnings. But he's also incredibly knowledgeable about the market overall, about the business models of these big tech companies, about why investors either get excited or lose excitement towards these companies, and so just a great perspective hopefully to answer some of the questions that we've posed right now. I've been

you follow him on Twitter. He's been covering the trend we're seeing for years and years, and I think we'll have a lot to say about this topic. So Lee, thank you very much for joining us. That's that's way too kind and introduction. No, but I'm serious because often, like well, I think we tend to speak about these companies and sort of we abstract them. And so Facebook is online advertising and social media, or Apple they have

to sell a lot of iPhones. And one of the things that I really enjoy talking to you about is you really seem to have a very good understanding of sort of where the where the levers are and where the hinges are and these companies that make them tick and get investors excited, and what is it about one that is more exciting and appealing to investors that have given time? And uh, I feel like we you can drill in to a level on on some of these companies in a way that most people I talk to

you can't. I Admittedly, personally, I think live maybe five years in the future with like my interest in technology, but my experience as a PM and an analyst on the equity hedge fund side kind of draws me back into like, what is the rational expectation for the next you know, quarter year, two years in these stocks? So

it kind of converges at some point there. But uh, yeah, we live in a time now when there's so much creative destruction in tech, and the kind of destruction disruption multiple has increased so much for both new technology companies that get disrupted by other new technology companies as well as old industrial companies and healthcare companies that get disrupted too. So yeah, it's it's interesting all around. Okay, So here's my first question, based on the interaction that you and

Joe has had. Joe said, you're very very good at pulling out the different parts of different tech companies. Should we be lumping all these different companies under the umbrella term tech? Like for instance, we talked about the Fang stocks, which is a particular subset of tech it do they actually share much in common? What do we mean when we say tech or thing? So the biggest thing that

I think is going on in a macro sense. And uh, we saw it when Schumer and um Um and Sanders came out and said, basically, we don't want you know, companies doing buy backs. You need to provide you know a certain amount of uh you know, uh upward revision to your labor kind of cost. And what's going on is that technology throughout the entire ecosystem is driving gross margins because you need less people to generate that same revenue dollar. So I think that there actually is a

general thing across the entire spectrum that goes on. Now. Of course, you know, the business models are different, but overall, the leverage that capital has on labor at this point is just it's expanding so quickly. I have a friend who used to be a a PM and energy PM at a hedge fund here New York moved home to Austin, Texas to build a energy services technology company, right because he recognized that it's just so inefficient at this point,

even in that industry. Um and I think that's happening across the board with you know, large companies and small companies. So then when we talk about the facebooks and the Amazons and the Netflix of the world. Where do they fit into this trend? Is it that they are essentially the most leveraged in terms of capital to labor or are they facilitating other entities in their drive to be

uh more efficient? Honestly, I think it's the former. UM. I believe I could be wrong with this, but I believe Facebook is the company that has the highest revenue dollars per employee in history. Now they've increased headcount over the last year pretty substantially. I don't know if that's true anymore, but it definitely used to be uh. And you see that across the board. UM, it's pretty amazing

what's going on, honestly, UH. And then you get things like Tinder, right which have just exploded in an entire industry of what people care about, right, Like, what is one of the most fundamental things that you have to do is you find somebody to fall in love with and marry and and be with. And these platforms have just made life so much more efficient for people. And the leverage that they have on people's dollars and time.

I think the other thing that people haven't quite graphed yet, and it started with kind of the online games and remember it from like Zinga and stuff, but it was just such the like the front end of this massive trend is people are generally bored. People need to find

things to do with their time. And the algorithms that we've developed that started as linear models and now our machine learning models, and the massive amounts of data that we collect on people and their behavior inside of these platforms, whether it's Amazon with their shopping habits, or Facebook with their reading habits, or or Tinder with their you know,

swiping habits. It's it's on one hand, amazing and the other hand, I find incredibly dangerous that these models are managing people's behavior so well at this point that I'm not quite sure people really understand are they getting something good out of these platforms? Are they getting something but out of these platforms with the platforms are are are massaging their behavior so much And that's obviously flowing through to their you know, are poo their average revenue per user,

which Facebook was up another like sevent this quarter. Um, So they have so much leverage with the technology and the data on our behavior now that that's only going to increase that these models get better. So aside from the potential societal damage. I mean, I think you just enunciated the goal case. Sorry, yeah, it is of bol case. It's also the like, yeah, it's fearful societally, but it

is the bool case, right. So the bool case is sort of this, um, you know, technology and the capital that tech has basically has this huge amount of leverage on labor costs and that's a big advantage in today's market, and so they're sort of accruing all these various benefits

through that. I'm curious what you think happened in the fourth quarter and sort of late third quarter of last year when we did have that big sort of sudden disappointment or disbelief in the tech companies that had previously been leaders of the market. I honestly think, you know, looking at our entire data set UM, we collect estimates on on everything in the US public markets as well as the economic estimate data, and I think the number one thing that we saw was that financial has actually

led to the downside, not technology. And what that said to me, along with the fact that the credit markets were literally frozen, the corporate credit markets stopped everything for like a month and a half, that it was actually more of a macro thing than it was a technology thing. And the second those credit markets on froze, we got

this huge rebound in everything. So as things freeze up, the higher beta names obviously get hit harder, and those were, you know, the tech names, and portfolio managers that you know have to liquidate things tend to liquidate the things that have been performing best, which is not a good strategy because you're supposed to hold your winners and sell your losers. But that's just what happens in hedge fund

and asset management world. Um So the rerating of the multiple for these names, I don't think it was a fundamental thing. Yes, growth is slowing, obviously we are probably going to have an earnings recession in f y nineteen, But I don't think this was a technology specific thing. I think it was just when you look at the beta of some of these names, when people sold everything across the board and what was kind of a slow motion panic because of the credit markets. Yeah, these things

got hit the hardest. Nonetheless, we have seen some of these big companies clearly run into some idiosyncratic stumbles and it started actually not at the end of last year, but in the middle of last year. The first bomb was Facebook. I think it was one of the biggest single day market cap losses any day, and they're like, yes, we're going to have to spend a lot more money than we thought. What is going on, Let's start with them.

So what is going on with Facebook right now? Because obviously, as you said, if not currently at some point, the greatest revenue in history per employee. But we also know that there's numerous scandals. It's unclear the degree to which they're really hitting the business model or if it's just a thing that media people like to talk about. But what is going on with Facebook's business model right now?

So as it is with the other kind of social media companies, I think the market still has some PTSD from the tech boom or the tech bubble, because in the tech bubble you're talking about the one. Yeah, I don't, I don't consider this last round. Um. I think people are worried that as the user growth trails off, that as it was in the tech bubble, that the business will trail off as well, and the growth will trail off. I think that is PTSD because it doesn't seem like

that's actually going to happen this time. Largely because we've learned a lot, or they've learned a lot that by buying and bundling these other platforms like WhatsApp and and the rest, that they've kind of locked people into this ecosystem, especially on the social side, brilliant model using oh off to have people log into all their other stuff for for almost forever, you couldn't do Tinder without logging in via Facebook, right, they became the social graph instead of

just another social platform. So I think people were and still are, in a sense worried that as the growth trails off to sub ten percent, you over your kind of user growth rates, um that they're kind of leverage on that revenue stream kind of goes away. But the r POO numbers keep growing so quickly that they keep showing that they can just turn the dial on you

know what, people, what they get out of people. The regulatory side, I think is serious and that's probably what re rated the multiple because the growth hasn't slowed too much, and I think that that's, uh, it's fair. Do I really think that the government is going to clamp down too much on this, No, probably not. We probably don't have the you know, the gumption to do that politically we should, but we don't. There's too many other you know,

cross currents going on there um. But I do think that people on the BYE side assume that there is more risk than upside at this point given the growth rate, because there are so many other companies that are growing so quickly, especially in the enterprise tech space, that they could just rotate into. If we were in a situation where we weren't in this big kind of enterprise technology CAPEC supercycle, maybe Facebook would have held its multiple a

little bit better. But at this point, uh, you know, you can rotate into a lot of other things. So before we get into specific companies, um too much for for Facebook or for any other tech stock, or I should say, for any of the big tech stalks like the Fang stocks. Do you think the share prices that we saw before, say the middle of last year were justified by the earnings outlook or were they overly optimistic? Yeah?

I mean, I think given the growth rates in the you know, thirties, forties fift for some of these big companies on the revenue side, the multiples are certainly not outlandish, and given their ability to use their balance sheets and stock to buy other high growth names. I don't see why those multiples are not sustainable. UM Now when you take a look at something like Apple, which relies on a whole different kind of set of things that is more um you know, sale of iPhones based the you

know when they got over a trillion dollars in market cap. Yeah, there's some law of large numbers coming in there with just literally how many of these widgets can you sell every quarter every year? And what is the growth rate for them? And where are you in terms of UH saturation of the market. But Facebook isn't Facebook is not really growing their user base anymore. It's us How good can the platform get? How much leverage they have on

the people there already? And I don't see that going away if and he's done an incredible job of just creating this universe of things that you're locked into. I want to get to Apple in a second, but before I want to go back to what you said about the sort of enterprise software upgrade supercycle in these UH enterprise software cloud names, because actually in Q four, while we saw this big sell off, there were a handful of tech companies that almost seemed completely unaffected by it.

UM you know companies like work Day, which probably not a lot I think not a lot of people are probably that familiar with. But I think they're kind of like a salesforce type company. What is this class of companies that people got really excited about and why didn't they get caught up in the down draft to the same degree they did? Uh, they weren't down, they were

down again high beata names. If you listen to Mark being off sale for CEO on his earnings calls the last two years, basically he has been dead on right about the fact that he believes there is a supercycle going on in capex for enterprise technology. Basically, we got the tax legislation and that freed up a lot of money for investment, supposedly right now for really large companies.

We kind of saw them do share buy backs. But also when you look at the financial sector, they hadn't gone through a huge CAPEX cycle in a long time, a lot of legacy technology sitting around there. They did take the money and invest a lot in software. I think one of the reasons why people may not see as much CAPEX that they thought they would or should

have happened because of those tax cuts. UM is because it doesn't cost as much money anymore to do the cap expending because a lot of it's not it's it's not physical things, right, it's it's software driving your business. Um, it's not hiring a hundred thousand people, right, it's hiring

a couple of people to manage the software. And so we are seeing this massive investment in new software products sas products right that you don't have to software software is a service that you don't have to spend a ton of money to simply buy and install your you know, you're spending money every every month, every every year, right, it's not this massive investment up front and being off has been right, and it is driving everything from uh, you know HR which is kind of the workday thing,

and updating how you manage your people to how you manage your you know, internal systems, how you manage your logistics, how you manage your payment network. Square is on fire right now because every you know, every store that you go to, every juice bar is now running a Square machine. Right. And and then on top of that, it's amazing that companies like this now they have all the data and they can offer that juice bar owner debt right and to you know, invest in their company and you know,

kind of sidestep the whole regular financial system. So it's all adding up to a lot of leverage for these companies that are small and makecap companies mostly, but their growth rates are incredible and there's really no reason those growth rates should slow significantly unless we get a real economic downturn. Okay, I'm gonna jump in and steal Joe's idea for the next question. Uh, much like any tech entrepreneur, really, um, Apple, We're going to talk about Apple. Lots of concerns around

Apple at the moment. Is it going to be able to sell as many phones in the future. Are its current phones too expensive or not innovative enough to make people buy new models? Plus you have the sort of glaring um issues around China and this notion that maybe Chinese nationals just aren't buying as many phones as they used to. Maybe they're buying from um, non Apple competitors, like you know, domestic manufacturers. Where do you stand on Apple and which concerns do you think are sort of

justified at the moment. I think there's some near term concerns and some long term concerns that are much bigger. Um. I think near term the risks aren't that high. The Apple multiple is already pretty low. The installed user base, you know, for the phones isn't going away tomorrow. It's gonna take at least at least two to three years to really turn over that installed base if something else were to come out to kind of subsume the market. Um. Near term though, the risk is China really, which has

been driving a lot of the growth. They were down twenty year over year and revenue this quarter this past quarter, and I think Tim Cook has a little bit less visibility than he used to on his revenue because of the fact that China is is such a question mark. UM. So I think investors have to look at that. But it's very hard to believe that they're going to be able to push the multiple for Apple down too much further.

It's already a pretty cheap stock as it goes. I think, you know, people look at the services side of the company, which is growing very quickly, which has a higher margin, and say, hey, you know, this company should have a higher multiple. I don't necessarily believe that's the case, and I think the market agrees as it hasn't given the company that higher multiple. I think that that services revenue is also more at risk than people think if the

installed base of hardware kind of disappears long term. The risk is basically this, The AI is coming, and it's coming to consumers. You know, Alexa is great for Amazon in terms of their ability to collect data on what you want. It's God knows, it's listening to me in my living room because I get ads like five minutes later for things my wife and I are talking about that we have never searched for at all. They're definitely listening. But that that AI is not the A I'm talking about.

I'm talking about something that probably comes out of Google or some left field place the Google buys. That completely changes the paradigm for your interaction. Is the operating system. And if somebody gets there before Apple, when a lot of a lot of companies are investing in this stuff, specifically Google, the Chinese companies are obviously investing heavily, and they have tremendous amounts of data that drives all of this.

If they get there before Apple, which has notoriously been bad in this specific space and has not had success as Syria as a disaster if they get there before Apple risks the hardware not becoming important anymore if it's

just the software. I want to talk about this a little bit further, this idea of the hardware becoming less important to software, because something I think you pointed out during a TV appearance recently is how in China, whereas in the US we think of iOS as being the main platform for that we use, we download ad from the app store and so forth, that it's really we chat and the software that is the main thing that people interact with, and then people can add all kinds

of services onto that. So I want you to explain that. But also a story that's emerged recently in the US, or just immerged recently period is some of these fights between Apple and Facebook and Apple and Google referring to developer access, and I'm wondering if there's a connection there where Apple is starting to worry that even in the US, that these services from the likes of Facebook and Google could essentially become the user's main home rather than iOS.

So explain this issue, because I don't think maybe people totally understand it and and say, is this kind of what we're seeing the battle now playing in the US. Yeah,

so I'll explain it from my own personal perspective. Frankly, um, I switched over to Apple from BlackBerry in two thousand five something like that, right to get an iPhone, and I've refused to switch over to Google, which all of my other productivity apps are on Gmail Calendar, just like every Google docs everything, because they don't the Android operating system. Apple just simply, I think, has a better operating system, the apps work better, it's more seamless, all of these things.

So I am stuck in that operating system. But in China and I don't care about the hardware anymore. The Google's hardware just as good as Apple's hardware. At this point. In China, they've now gone to the next step above that where we chat and we pay are an ecosystem in and of themselves. So people just go into these apps and they have all sorts of amazing utilities inside of it. It's they're literally paying for everything. It's stores

inside of these apps. They've got their email that it's everything, and so the the operatings doesn't even matter anymore because it's subsumed inside of the app. You have to know that Google is thinking about this with kind of the ecosystem that they've built. Uh. And and there are others an Apple, which is not good at building software outside of the os Like what's the last piece of software

that you love from Apple? Right, Maps was a disaster, and so Apple risks seriously falling way behind and having the Harvard is not matter at all. It could be that we get to a payments place in the U S which we're way behind on, where one of these apps subsumes it. It could be it could be it

could be something else, could be a social thing. It could be whether Facebook has tried to bundle all these things together but like you know, I don't think it's worked that well instead of one app, or it could be an AI. So it could be any of these things that just rips Apple's revenue flow away from it from selling you know, this hardware which a thousand dollars for a phone right where you can get a good one for like two d h um. So, you mentioned

the possibility of an earnings recession. I think you said this year in nineteen So is there a risk that part of that earnings recession comes from tech companies as a whole, or are we going to see weakness in one firm, say an Apple, offset by strength in another firm like a Google Goal to the point you were just making about a sort of closed software ecosystem. And secondly, if we get an earnings recession, how disastrous is that for the market's given that earnings have been pretty strong

for a few years now. Yeah, So on the first question, I think it's the latter. I think it's gonna be a bit more idiosyncratic. The the enterprise market is going to continue to be really strong unless the general economy falls off a cliff, which I think is you know, on like maybe we get a recession in you know, late nineteen twenty something like that. But I just don't think it will matter too much for that cycle. At some point, that cycle will come to an end, but

it doesn't seem to be ending anytime soon right now. Yeah, certain companies will have their own issues, but I don't think a broader earnings recession will come about because of tech. The way that we're seeing the numbers, it looks like if it happens, it's going to happen because of two things. One industrials because of China and to the consumer in the US. We think consumer estimates are still too high for nineteen UM. You have a great UH analyst over here,

Seema Shah. I think we're in agreement there that we're probably on the back part of the you know, top of the hill for consumer growth, and the risk there is that those estimates and actuals continue to come down. Further. We're seeing in our data set, which tends to lead the cell side data set in either direction up and down, that estimates have come down quite a bit. And and we're right now we would be projecting an earnings recession for UM, which would mix between Q one and Q

two um fy nineteen. Well, on that cheery note of expecting an earning it won't matter. It's not to the second question. Sorry, I don't think it's gonna matter that much unless you get another credit market issue or or some other macro issue. Just because you're negative on you know, the earnings numbers. Again, market's gonna look forward a year, right and the numbers right now, you know people are

taking that into considerations. All right. Well, on that positive note, Lee, Drogen really appreciate you on I was very excited to have a chance to talk to you for a longer time than we get on TV, and I really just, uh, I learned a lot, So thank you very much. Yeah, thanks for having I love the odd Lots name for the five it's thanks, I think than thanks. Thank Tracy.

I always learn a lot talking from Lee, and I feel like even in that short conversation, some of these ideas, like about the platform wars, how I could really up end how we interact with the Internet and our computers. Um why people are so excited about some of these enterprise cloud companies. I feel like I just learned a ton about the current landscape of tech and tech investing. Yeah,

it was a great conversation. But you know what I always wonder when we're whenever we're talking about tech, I always wonder if tech, more than other industries, is something of a wild card when it comes to making earnings estimates or forecasts for the future, just because I mean, technology is basically all about searching for the next paradigm or the next breakthrough in business, and it seems so hard to figure out what that might be, and so I don't know, I just find it more difficult than

than a lot of other things. I also think It's interesting too that I think a lot of the people who are running these companies come from sort of non traditional backgrounds where maybe they don't feel beholding to this idea of like, oh, we gotta like hit this estimate. And Jeff Bezos is probably the most famous in this respect of not thinking about the court, thinking about each quarter's numbers as being important to hit. So there are just a lot of wild cards in the industry, both

short term and long term. And yeah, as you said, like whatever is that. You know, there was one day when it looked like IBM head ultimate lock in and then no one even like talks about them anymore. So absolutely there's short term and long term volatility in terms of where all this is going. Yeah, and for every Jeff Bezos, I guess there's a sort of Elizabeth Holmes right, who made far too outlandish promises and basically, um, well

uh didn't make it. Let's put it that way. Um, But anyway, earnings recession in ten, that'll be something interesting and that'll be a story we're watching on that happy note. Yes, um okay, So this has been another edition of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Wisn't thal You could have follow me on Twitter at the Stalwart and you should definitely follow Lee on Twitter He's at

l Droken. Also be sure to follow our producer topor Brehead he's at or His Tea, as well as the Bloomberg head of podcast Francesca leaving at Francesca Today. Thanks for listening.