The Clock Is Ticking
Microsoft is on the clock... TikTok in the crosshairs... The clock is ticking... How to spot a great long-term investment... From viral video sensation to a Risk game piece... We're on the brink of a digital 'Cold War'...
Microsoft is on the clock...
We would say we can imagine the scene inside Microsoft's (MSFT) headquarters today, but no workers will be in their offices until at least January 2021, so that's not exciting.
Instead, we'll have to venture a guess on what the executive-level Teams chats and video conferences at the software giant look like...
And we're willing to bet the words "TikTok" have been written, said, or included in research documents a time or two. You've probably seen some of the headlines by now...
With U.S.-China tensions serving as a backdrop, Microsoft is in talks to buy a large part of TikTok, the privately-owned Chinese social media platform.
Microsoft scooping up the immensely popular social media platform would make news on any day... but the current circumstances have dialed up the drama...
Over the last few months, the viral video app has become synonymous as a COVID-19 "winner," much like Zoom Video Communications (ZM). TikTok now reports more than 800 million users.
Its popularity has spread largely among locked-down teenagers who are logging more time than ever on their smartphones and less time talking to other people. As a result, awareness of the TikTok platform – and where it comes from – has reached upper levels of the U.S. government.
Quickly, TikTok has become a major piece in a real-life game of Risk...
President Trump and Secretary of State Mike Pompeo have been threatening to ban the app entirely in the U.S. over accusations that the Chinese government uses it to steal Americans' data. This isn't a new accusation...
But what is new is that Microsoft recently stepped in with a suggestion that it could buy TikTok's U.S., Canada, Australia, and New Zealand business. President Trump is apparently on board, giving both sides a September 15 deadline.
Given the details, though, we have a lot more to say about this story, starting with a timeless lesson it gives for long-term investors...
One half of this story – Microsoft – is a household name of course...
Regular readers know the ticker MSFT takes the top two spots of our Top 10 Open Positions list at the bottom of our daily Digest e-mails.
Since Retirement Millionaire editor Dr. David "Doc" Eifrig's recommendation of the stock in 2010, it's up roughly 750%. (He re-recommended it late last year, too.)
And since our founder Porter Stansberry recommended Microsoft in 2012, it's up nearly 650%.
The mere fact that Microsoft is in a position to buy a large chunk of TikTok today is a confirmation of both Doc and Porter's investment theses about the company way back when...
Let me explain...
We looked back today at Porter's original recommendation in the February 2012 Stansberry's Investment Advisory. It was titled "A Great Lesson in the Only Sure Way to Get Rich in Stocks." It's amazing to read the issue eight years later. Porter wrote...
Make sure you save a copy of this month's letter.
It's a step-by-step, paint-by-numbers guide to making a fortune in stocks. No, I can't promise that your investments will pan out as well as a few of mine have over the last few years. But I believe anyone is capable of becoming a world-class investor. You only need to do three things...
- Find companies that will last.
- Only buy capital-efficient stocks that offer the potential of compounding returns.
- Buy shares at "no-risk" prices.
In this issue, Porter wrote that the next Federal Reserve and debt-fueled crisis "will be worse than the Great Depression" and laid out all the reasons why. Then, importantly, he told subscribers how they could protect and grow their money.
Porter and his team of analysts identified a list of 10 companies with market caps greater than $1 billion that fit his big criteria for a long-term investment, starting with his definition of a company that will last...
As Porter wrote back in 2012...
I'm only interested in buying truly great businesses, which in my book means that a company can earn a return equal to at least 10% of its assets.
His list included companies like Diamond Offshore, Analog Devices, and Symantec... and Microsoft. Then, Porter wrote...
The question is... which of these companies do you think you'll be able to hold the longest?...
There's only really one stock on my list this month that really jumps out at me. And that's Microsoft (Nasdaq: MSFT).
I know most investors have soured on the company because its products frequently stink and its share price has done nothing for more than a decade.
On the other hand, I see a company that's masterful at marketing, whose software runs all of the world's biggest websites, and whose cash flow continues to grow at an outstanding pace.
Over the last three years, the company has returned almost $40 billion to investors – or roughly 15% of the value of the entire company. Paying only seven years of cash earnings for a company like this seems awfully cheap.
While a lot of people may have left the company for dead as Apple (AAPL) stole a lot of tech headlines, long-term investors have been rewarded handsomely.
The company has increased its dividend for nearly two decades... Microsoft's business lines today include its Azure cloud-computing services, in addition to its most well-known Microsoft Office software and Windows operating system.
It just posted another huge quarter.
All these years later, at the end of 2019, Microsoft's free cash flow ("FCF") was $38 billion. That's why the company can afford to get into this hot-button TikTok issue. Reports today put the price tag between $10 billion and $30 billion, with Microsoft agreeing to bring TikTok's millions of lines of artificial intelligence "code" to the U.S. within a year.
It makes business sense to Microsoft to gain control of TikTok's user base and this code, and fold them into Microsoft's existing business. Whether that pays off in the long term is another matter, but the point is they can do it.
If you're a Stansberry Alliance partner or Stansberry's Investment Advisory subscriber we think you'll get a kick out of re-reading this old issue. You can find it here.
(And if you don't subscribe, you can give our flagship advisory a try risk-free today. Click here for more details.)
The advice is timeless, just like Microsoft's spot at the top of our Open Positions list.
TikTok, on the other hand, could use a description...
Most people with a smartphone under the age of 35 know what TikTok is, and I (Corey McLaughlin) am willing to bet that most people with a smartphone under the age of 25 regularly post to the app.
As I wrote earlier, TikTok reports 800 million users worldwide, and more than 100 million in the U.S. Since the Chinese company that owns it, ByteDance, is private, we don't really know TikTok's financials. But the app is immensely popular.
TikTok is the latest hot social-media platform... following in the footsteps of Snapchat (SNAP), which followed Instagram, which followed Facebook (FB), which came after a lineage of others like Myspace and AOL Instant Messenger...
It's essentially a platform where users can post short video clips. You can easily add image effects and music to what you post. That's not a new idea. (The short-lived service Vine used a similar concept). What's notable is TikTok's scale and how well it works.
The app is driven by algorithms that spit out a continuous stream of user-created content. It's addictive. Think Netflix's (NFLX) "watch the next episode" feature... for 60-second videos.
As you may imagine, a lot of the "programming" includes silly stuff like teenagers dancing and would-be comedians offering trite commentary on images of Chick-fil-A workers taking orders from your car window (a COVID-19 era change).
Each video is tracked in views, and users can follow other people and get followed, much like Facebook.
No doubt, it's one big virtual popularity contest. But it also has a strong "network effect" driving its success. Eugene Wei, a longtime Silicon Valley blogger and early employee at Amazon (AMZN), put it well in a post on Monday...
TikTok takes content from one group of people and match it to other people who would enjoy that content. It is trying to figure out what hundreds of millions of viewers around the world are interested in. When you frame TikTok's algorithm that way, its enormous unrealized potential snaps into focus.
And bigger picture, all of this content created on TikTok is valuable data. Just look at how Big Tech firms like Alphabet (GOOGL) have used huge volumes of user data to grow enormously over the last two decades.
And if "data is the new oil," as our Stansberry Investment Advisory team says that it is, that means the stakes in this potential Microsoft-TikTok deal are higher than a lot of people may imagine...
The context is akin to Middle East-style oil conflict between the U.S. and China...
Charges of Chinese "data harvesting" have been thrown around by the U.S. and other government officials around the world. They argue that China's ruling Communist Party has free access to ByteDance's data... things like pictures and video of their users' faces, location data, or what they like. And the government can, and will, use that data to its advantage. As American Consequences executive editor Buck Sexton, a former CIA officer, wrote in a great analysis this morning...
So far, the issue is not any especially nefarious technology, it's the connection to a Chinese government that is increasingly seen around the world as authoritarian, untrustworthy, and aggressive.
That said, the espionage threat of the TikTok app may be overblown...
There is no special functionality that would make TikTok a better social-media platform than many others to send sensitive information. Anyone who wants to transfer America's commercial or defense secrets to their handlers back in Beijing could just as easily use WhatsApp or a similar encrypted communication platform.
And while there may be some ways to use mass data harvesting of Americans to gain a long-term strategic advantage, it's not clear how or why TikTok is a unique vulnerability. After all, the Chinese can hack into (and have hacked) much larger, more sensitive U.S. systems.
ByteDance has repeatedly denied anything nefarious is happening. It says that all U.S.-based data is stored on U.S. servers and have some offices here. But the accusations remain.
So much so that the U.S. president and Secretary of State have threatened to ban TikTok in the U.S., just like leaders in India, the second-largest market in the world, already have done with TikTok and dozens of Chinese apps.
On Sunday, Microsoft stepped in with its potential solution...
The company suggested it could buy TikTok's business in the U.S., Canada, Australia, and New Zealand, and spoke with Trump about it. Reports suggest that he is on board, giving the companies 41 days to work out a deal.
It's a win-win because Microsoft could use TikTok's massive "network" of users to monetize its existing software and platforms (and keep adding to those "cash earnings")... and the U.S. government would get a geopolitical leg-up on China.
Chinese state-run media is furious already, alleging that the proposed TikTok deal would be equal to "theft" of a Chinese company...
There's also the matter at hand of the comment the president made on TV over the weekend indicating that Microsoft could pay the U.S. Treasury Department a large amount of money as part of any agreement.
And that Treasury Secretary Steve Mnuchin is involved in the negotiations.
Too much government intervention all around, if you ask me...
And that's another long-lasting point...
All of a sudden, videos of teenagers doing the "shuffle dance" have become chess pieces in geopolitical tensions between the U.S. and Chinese governments.
As Buck put it this morning in American Consequences...
America has entered a new phase in its relationship with China where even the possibility of some insight or advantage at our expense is intolerable.
He called this particular chapter an early stage of a digital "Cold War." It's hard to find any reason that it's not. In other words, the clock may be tik-tocking on more than just one deal...
This is all a long way of serving up a reminder... about the importance of owning capital-efficient, long-lasting companies, like the one on the "buy" end of this flashy proposed deal.
In this Fed-fueled market, it's easy to 'get out over your skis'...
Many stocks are up double- and triple-digits since March's bottom...
This is a good time to check up on your portfolio today, and make sure you're prepared with the type of stocks (and proper position sizing) that can protect and grow your wealth in the long term.
Over eight years ago, our founder recommended one of these companies at a good price, and the decision is still paying off in new, unexpected ways. It was – and is – the only sure way to get rich in stocks.
New 52-week highs (as of 8/4/20): Agnico Eagle Mines (AEM), Alexco Resource (AXU), Alibaba (BABA), BlackLine (BL), Sprott Physical Gold and Silver Trust (CEF), Cognex (CGNX), Costco Wholesale (COST), Curaleaf (CURLF), Dollar General (DG), Digital Realty Trust (DLR), DocuSign (DOCU), Electronic Arts (EA), Emergent BioSolutions (EBS), Equinox Gold (EQX), Expeditors International of Washington (EXPD), VanEck Vectors Gold Miners Fund (GDX), General Mills (GIS), SPDR Gold Shares (GLD), GrowGeneration (GRWG), Home Depot (HD), Kirkland Lake Gold (KL), Midas Gold (MAX.TO), Osisko Mining (OBNNF), Pan American Silver (PAAS), Procter & Gamble (PG), Sprott Physical Gold Trust (PHYS), Sprott Physical Silver Trust (PSLV), Rollins (ROL), ProShares Ultra Technology Fund (ROM), Sea Limited (SE), Global X Silver Miners Fund (SIL), iShares Silver Trust (SLV), Trulieve Cannabis (TCNNF), TFI International (TFII), Torex Gold Resources (TORXF), The Trade Desk (TTD), Take-Two Interactive Software (TTWO), Tudor Gold (TUD.V), Victoria Gold (VGCX.TO/VITFF), Vanguard Inflation-Protected Securities Fund (VIPSX), Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP), and Zebra Technologies (ZBRA).
In today's mailbag, Crypto Capital editor Eric Wade responds to a question about bitcoin based off Eric and Fred Marion's Tuesday Digest... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"One thing I have yet to understand or see explained is how a planet of 6 billion people are going to share only 21 million Bitcoins. Can you help me get my head wrapped around that or explain why that train of thought is wrong?" – Paid-up subscriber Jerry B.
Eric Wade comment: I love this question, and it comes up a lot. Whenever I hear it, I think back to when the "immutable scarcity" of bitcoin really started to sink in for me. Because honestly, that's one facet of bitcoin that takes some getting used to when we live in a digital world where just about everything can be duplicated, increased, or inflated. Bitcoin, on the other hand, has a fixed supply and that can take some getting used to for folks.
But once they get it, often the next question is about how small 21 million seems compared with the billions of people. So yes, there will never be enough bitcoin for us all to have a full bitcoin. But you don't have to buy a full bitcoin. For some people, the right amount to own is one tenth of a bitcoin. If you think about it, my long-term target price for bitcoin is $1 million each... so one one-hundredth of a bitcoin would be worth $10,000.
So no, your train of thought is not wrong because that hard-to-wrap-your-head-around scarcity is what makes bitcoin attractive to most of the people who own it.
All the best,
Corey McLaughlin
Baltimore, Maryland
August 5, 2020