Big Tech Is Raking in the Cash
Amazon vs. the Supreme Court... Big Tech is raking in the cash... Alphabet and Facebook sell a lot of ads... Be careful buying shares today... Look past the big names... The countdown to tonight's big event...
Someone could easily write a daily newsletter on the 'FAANG' stocks alone...
You could cover the good and the bad of the entire Big Tech sector... or simply focus on one of the monster individual FAANG companies – Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), or Alphabet/Google (GOOG).
That's because these companies touch more areas of life than most folks can imagine...
And it's also why whispers of increased "regulation" of these companies are never far away. The idea has been in the air for years, yet it hasn't materialized in a Standard Oil or AT&T sort of way. But we keep hearing the calls...
Most recently and significantly, Supreme Court Justice Clarence Thomas made his view loud and clear in a public opinion... Thomas said that companies like Amazon should be treated as public utilities – like telecom companies, for example.
This is not a new argument...
But the whole "these are essential businesses and should be treated as such" part of the story was renewed amid the COVID-19 pandemic. Plus, the story also hit Thomas personally earlier this year...
In early February, Amazon pulled a documentary film about Thomas, which first aired on PBS, from its streaming service. And the documentary's producers said it did so quietly, without giving any explanation.
Perhaps this isn't a coincidence then... But about two months later, Thomas wrote in an opinion (on another case, where the Supreme Court said former President Donald Trump had the right to block people on Twitter)...
Today's digital platforms provide avenues for historically unprecedented amounts of speech, including speech by government actors. Also unprecedented, however, is the concentrated control of so much speech in the hands of a few private parties...
Thomas went on to argue that the market share of these companies is too big today. He mentioned Amazon, Facebook (roughly 3 billion users), and Alphabet (90% of global Internet searchers) by name and said...
A person always could choose to avoid the toll bridge or train and instead swim the Charles River or hike the Oregon Trail, but in assessing whether a company exercises substantial market power, what matters is whether the alternatives are comparable. For many of today's digital platforms, nothing is.
To this, we say the alternative is to just not use them. But he's right... It is hard these days to quit Twitter, Facebook, or anything else related to the ubiquitous Internet platforms.
Take the growth of Amazon, for example, over the past 12 months...
What would life be like without the company, which seemingly offers everything a person would want to buy and reliable delivery to boot?
It would be a lot different... As we wrote in November, the country nearly turned into the "United States of Amazon" in the depths of COVID-19.
In Jeff Bezos' final letter to shareholders as Amazon CEO last week, he said the company added 50 million Prime subscribers worldwide since January 2020. In the U.S. alone, the number of Amazon Prime members is now nearly 150 million... That's 45% of the entire U.S. population.
And that's also pretty close to the record number of people who voted in last November's presidential election (roughly 159 million). In fact, "Amazon subscribers" would've easily won if the election were decided by the amount of the company's paying customers versus the Electoral College or the popular vote.
This is all to say the drumbeats for regulation will probably continue... But we don't see any immediate signs – in the U.S., at least – that we there will be any serious, meaningful legislation that will break these companies into pieces in the near future.
Meanwhile, in the first quarter of 2021, Big Tech raked in tons of cash...
This was a big takeaway from a round of quarterly earnings reports that came out this week... which, as always, our Stansberry NewsWire team has reported on extensively.
With more people working from home, perhaps needing new or updated equipment and spending more time on their devices than they likely imagined, the revenues of companies like Apple, Alphabet, Facebook, and Microsoft (MSFT) were phenomenal – and record-setting, in some cases.
Apple reported record revenue of $89.6 billion (or roughly 10% of a small federal stimulus plan) for its fiscal 2021 second quarter, which ended in March. Roughly half of that ($47.9 billion) came from iPhone sales, particularly the company's new 5G-capable phones. Apple also announced a $90 billion share-buyback program... and said that it would hike its dividend again.
CEO Tim Cook said Apple was able to avoid disruption from the global chip shortage, mainly because it started making its own new chips last year. But he acknowledged that the company might take a $3 billion to $4 billion hit this quarter from disruptions in its "legacy" semiconductors supply chain, which mainly relates to its iPads and Mac computers.
Alphabet reported record first-quarter revenue, too...
The Internet search and, well, everything giant made more than $55 billion, a 34% year-over-year increase, with strength across many of its business lines. As NewsWire analyst Nick Koziol reported on Tuesday...
CFO Ruth Porat said the strong quarter reflected "elevated consumer activity online and broad based growth in advertiser revenue." As we've noted in recent months, the pandemic has forced an acceleration in online services – in everything from shopping to advertising. That has been a tailwind for GOOGL's business.
GOOGL's cloud business continued to grow rapidly, as well. Google Cloud revenue was $4 billion in the quarter, up 46% from the same quarter a year ago. Like the advertising business, this area has also been boosted by the pandemic. With workers out of the office and working remotely, businesses needed to store all their data in the cloud.
In another part of the Alphabet story, we continue to be amazed by how great of a move its purchase of YouTube for $1.65 billion back in 2006 has proven to be...
Last quarter alone, YouTube brought in $6 billion in advertising revenue. That's up 49% from a year ago. So as you can see, the deal long ago started paying for itself.
Like Apple, Alphabet announced a stock-buyback plan – for $50 billion in shares, or about 6.6% of its shares outstanding – boosting value for existing shareholders.
People are buying a lot more (expensive) Facebook ads as well...
Facebook generated more than $26 billion in revenue, beating the consensus expectations of Wall Street analysts. Its advertising business led the way. As NewsWire analyst Daniel Smoot reported yesterday...
CFO David Whener said FB's strong earnings and revenue were fueled by a 30% year-over-year rise in the average price per advertisement. He also said a 12% increase in the number of advertisements that the company delivered played a major role as well.
That's the good news for Facebook. Given its user size and network effect, the company is able to charge higher prices for ads, and it's selling even more of them... Inflation hits the digital world, too, it seems.
Here's a taste of regulation-related concern, though...
Daniel also reported that Facebook is worried about a new update in Apple's recently launched iOS 14.5 mobile operating system, which will first ask users to "opt in" to having personal information, location data, and more collected... rather than the go-try-to-find-your-privacy-settings and "opt out" status quo.
We don't know what the outcome of this change will be. But we suspect it won't stop advertisers from spending money on Facebook ads, which are making cash for the company today.
And don't forget the cloud...
That was the biggest boom for Microsoft, which brought in $41 billion in revenue last quarter. Revenue from its Azure cloud division grew 50% year over year, a pre-pandemic comparison. As Daniel from our NewsWire team reported on Tuesday...
MSFT CEO Satya Nadella said the company's strong results were fueled by an acceleration in the adoption of digital services. He added that while many had said this transition may begin to slow, that MSFT is seeing a "second wave" across the industry that has helped bolster demand for its cloud platform.
This is all to say... from a cash-flow perspective – which is what we care about when evaluating companies – times might have never been better for Big Tech than they were in the first three months of 2021.
But on the other hand, the risk-reward balance for buying new shares of these stocks isn't the best in the world right now...
Be careful if you're thinking about buying Big Tech today...
Or at least consider the context...
We've talked about "frothy" valuations for a while, and tech stocks are a shining example. A number of indicators can lead you to that conclusion.
Sure, shares of Amazon or Apple could still double from here. But they're the longtime "knowns" to everyone who does a sniff of research. Plus they carry near-term risks...
Despite the Big Tech companies having record quarters, you might remember the shares of these companies sold off earlier this year... at the same time that Wall Street became worried about the Fed potentially easing up on its "easy money" policies in the face of inflation.
We're still in a "Melt Up," of course... And the Fed is promising to do its thing for another year. But there's always a chance that the tide could turn earlier than people might think.
Inflation fears and reality could reach the point where the Fed switches its current course and hikes rates... or more likely, a new higher-tax policy becomes closer to a reality.
If either scenario were to happen, the Big Tech powers – though flush with cash – could be among the first stocks to sell off again... or rise less, at the very least.
You might be better off looking at smaller tech companies today...
That's the message from our colleague and True Wealth editor Dr. Steve Sjuggerud.
We know this might sound counterintuitive given all the glowing reports we shared about Big Tech today... But that's exactly the point.
A year ago, many folks believed the FAANGs would be doing well today given the "at home" tailwinds in play... bought shares... and pushed prices higher. But in recent months, these stocks haven't surged nearly as much...
Since the start of 2021, the stocks of Apple and Amazon are roughly flat... and Alphabet is only up about 2%. Facebook is the leader of the group, up about 7% so far this year.
In the late stages of a Melt Up – where the rich have already gotten richer and everyone is high on higher prices – it pays to look past the big names...
For example, dot-com-era darling Qualcomm (QCOM) – today known for making chips, ironically – was up more than 2,000% during the final 12 months of the Melt Up in the late 1990s.
However, most of those gains came early... The stock rose "only" about 230% in the final six months of the bull market.
In comparison, the biggest gains of five to 10 times were really made in some of the lesser-known names as investors hit peak euphoria. DISH Network (DISH), for example, went up more than 700% during the whole dot-com boom... and 500% of that gain came in the final eight months.
Of course, to make those gains, you want to be aware of the environment you're in and sell before the "Melt Down" as well. Again using Qualcomm as an example, it crashed hard from its early 2000 high... and didn't reach that level again until the past few years.
Fortunately, Steve has a plan for which stocks to own as this new phase of the Melt Up plays out...
In yesterday's Digest, we told you that bitcoin and cryptocurrencies will be part of the discussion in Steve's "Melt Up" event tonight. (A reminder, by the way... the action starts in just about two hours, at 8 p.m. Eastern time.)
Well, I can report today that Steve will also talk about tech stocks during tonight's presentation. Specifically, if past Melt Ups are any indication, it's the little-known smaller tech stocks that can really take off in this phase of the bull market.
Steve will share all of the details this evening... Save your spot for free right here if you haven't already. (Also, existing True Wealth Systems subscribers and Alliance Partners... we'll send an e-mail this evening with the details about how you can access all of Steve's latest research. So stay tuned.)
Goldman Sachs Adviser Weighs In on Bitcoin-Gold Debate
Following the recent bitcoin-versus-gold debate between MicroStrategy (MSTR) CEO Michael Saylor and billionaire philanthropist Frank Giustra, our colleague Daniela Cambone is starting to break down the takeaways from the big event...
Today, Daniela catches up with Josh Crumb for some analysis. Crumb, a Goldman Sachs adviser and BitGold founder, highlights the highs and lows of Saylor and Giustra's performances...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
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In today's mailbag, we respond to a paid-up subscriber's issues with a few statements in yesterday's Digest... and more thoughts on our bitcoin-gold debate. On a related note, Frank Giustra wrote a postgame report on his website this week. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I trust gold as being less volatile than crypto's like Bitcoin. I see cryptocurrencies as just that, transactional currency, while I see gold as an asset which is a compact store of value. In that respect, Gold is money, while crypto is a better form of currency than the dollar. A gold backed crypto makes all the "cents" in the world." – Paid-up subscriber John C.
"Saylor made more fact-driven points than Frank. Frank's point about government intervention is one that I'm afraid of. And, yes, they can and will if they see a potential for major disruption. Read Atlas Shrugged by Ayn Rand. We are there now, the book was written in the early 1950s.
"Either way, in my mind, the miners will win because blockchain tech is here to stay. My bet is on the miners." – Paid-up subscriber Mike C.
"Corey, Quote... 'That might sound shady and hard to accept...' Versus what?
"Why use the word shady in your sentence? What is shady about everyone who buys into the idea of bitcoin and buys it, as a result makes it better for everyone already who has also bought? Contrast that to keeping your savings in dollars. Have you used the word 'shady' when describing the Federal Reserve's relentless money creation out of thin air that devalues YOUR paycheck every month? If not, why not? Their actions are those that are truly shady, as we don't have a chance to vote on their printing and the inflation they intentionally create is under reported and intentionally mis-characterized.
"And... why mention that Culkin [the] football player took and 'failed' the CFA Level 1 exam? How many people in the world ever attempt that exam when they are a senior in college? He was attempting to educate himself when most second semester seniors are having a great time playing, especially those who are going on to a professional football career. Have you passed that exam as a writer for a financial publication read by thousands of people?
"Your bias is showing.
"How much bitcoin do you own?
"I can guess that answer." – Paid-up subscriber Kevin J.
Corey McLaughlin comment: Kevin, first of all, thanks for writing in. This will probably surprise you... I actually agree with all of your points.
Let's hit each question, because I want you to know exactly where we're coming from...
First... have we ever used the word "shady" to describe the Federal Reserve? We chuckled at this one... You're right that we haven't used the exact word "shady" in regard to the Fed, but I'm pretty sure we've said worse.
For one example, last May, we likened Fed Chair Jerome Powell to Tony Montana from the cult movie Scarface. We also love our colleague Dan Ferris' "juiced balls" analogy about what the Fed does to stocks and have cited it frequently... And of course, we've pointed out the devaluation of the dollar time and time again.
Personally, I believe the central bank (and Congress, which oversees it) has been a – if not the – driving factor in the size of the "wealth gap" and all kinds of problems in this country. And I think it has way too much influence on the daily lives of many people that might not even know the Fed exists... or are unfamiliar with how it works.
That's exactly why, as we said yesterday, Fed policy is a big reason why a decentralized thing like bitcoin has become so popular in the first place.
Next... why did we mention that Culkin "failed" the Chartered Financial Analyst ("CFA") exam?
Most importantly, we weren't taking a shot at him by bringing this up. We brought it up as a detail mainly because he talks about it... And we were actually trying to give the guy credit... We wanted to show that he's serious about investing. Passing the exam is far from an easy task. And beyond that, we were trying to show that this serious investor is turning to bitcoin today.
Once upon a time, I did begin to study for the Certified Financial Planner ("CFP") exam... It isn't the CFA exam, but it's along the same lines. However, I stopped soon after starting.
I was learning too much "on the job" and knew I was better suited to help the already established experts share their messages instead. Plus, as is often the case, life got in the way. Admittedly, I wasn't playing college football, going to school, and working at the same time like Culkin... I was only doing the last two, but unfortunately a day only has 24 hours.
It's also worth noting that Culkin said he was in the "top decile of the 62% failure rate" of folks who didn't pass that year's test... even though he didn't have the proper time to study.
As you've alluded to, that's no small feat. Plus, when looking at the bigger picture, failure is not a bad thing... especially if you learn from it.
I believed the positive sentiment about Culkin would be clear in the context of the other details yesterday about him "not fitting the pro football player stereotype"... But if that didn't come across to everyone, as a writer, that's my mistake.
Finally, I hesitate to comment on your assumption about my biases... As your everyday, average Joe Digest writer, we never want to be biased against one thing or another.
The primary goal of the Digest is to share our editors' and analysts' great research and connect the dots each day between what's going in our company and what's going on in the rest of the world. And of course, we try to do it in an informative, entertaining, and interesting way.
We give the best advice we can, make sure subscribers know about our best research, and try not to overwhelm the meat of our work with personal opinions – unless someone asks, of course, as is the case with this response.
In a way, it's a compliment that you would think I'm biased against bitcoin...
That's far from the truth. In fact, I often think that I lean too much in favor of cryptos in the Digest, thus the comment in yesterday's edition about how bitcoin sentiment "might sound shady." It's an acknowledgment of the "other side."
I own bitcoin... I first bought some in the summer of 2017 and only wish I had bought more back then. I've added to the allocation over the years. We're always learning, of course, though I'm content with the risk-management decisions that I made at the time.
Some people in our industry make big claims without mentioning the risks of a particular investment, much less utter any words about important topics like proper position sizing or acknowledging the alternative point of view.
We're not those people. And we hope this clears things up. Thanks again for writing in, Kevin.
All the best,
Corey McLaughlin
Baltimore, Maryland
April 29, 2021