What Wall Street Thinks of Tech w/ @howardlindzon

The following is a transcription of a bonus episode of the Techmeme Ride Home podcast. Listen below, or subscribe here: (Apple Podcasts | Google Podcasts | RSS)

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Brian McCullough: (Techmeme Ride Home podcast) [00:01:13] Howard Lindzon, thanks for coming on the Techmeme Ride Home.

Howard Lindzon: howardlindzon[00:01:18] Hey, happy New Year.


Brian McCullough: [00:01:19] I feel like it was just three months or so ago that tech was basically the king of the world on Wall Street, like you know, the first trillion-dollar companies were happening, something like 8 of the top 10 companies in the world by market cap were tech. But the sentiment has changed, I guess. How is Wall Street thinking about tech as an industry right now?

Howard Lindzon: [00:01:40] Well I mean the markets are not just about the public markets. The markets are about obviously early stage, and startups, and private equity, and then international. But you know, 2017 was really the wild year in the sense that there was just a record low volatility. I think 2018, even in the scope of history is just an average year in volatility. So I think what set up the end of 2018 was really 2017 was such a great year. Apple got to a trillion, so we crossed that checkmark off. Amazon quickly followed to a trillion. And as we go into this weekend Microsoft’s now, after 16 years, I think what’s most interesting is it’s the biggest company in the world. So 16 years between being the number one company in the world, and it’s back on top. So I think it’s a pretty exciting time for tech. Obviously if you own the leading tech stock it’s been a bad few months.

Brian McCullough: [00:02:43] Right.

Howard Lindzon: [00:02:43] You’ve got to keep it in perspective. I mean you have to keep it in perspective.

Brian McCullough: [00:02:48] I’m trying to get a sense of what the perspective of traders and what people on Wall Street are — so I mean tech has basically been one of the the big leaders in the last several years. What historically does it usually mean if the leaders in a given bull market suddenly all turn south in lockstep? Is that a signal that people on Wall Street look at?

Howard Lindzon: [00:03:15] Ah, they may. The thing is that what’s happened is because of indexing and market caps, everybody owns the same stocks. We’re in this phase where because of technology and because technology has kind of become ubiquitous for the Fortune 500 or Fortune 1000 companies, I mean they all have to become tech companies at some level. That, and money pouring in to passive investing — which really isn’t passive investing — and the market cap issue — everybody owns the same stock. So when everybody decides to sell, of course the largest cap stocks take the biggest hit. I think the biggest misnomer is that, you know, you can just invest in the S&P 500 and it just goes up every year. We had 9 straight years of gains in the S&P 500. So for those people that don’t pay attention to history, we were due, sadly, for something like the end of 2018. You know, I think 2017 a lot of bad behavior started to creep into the market, 2016 and 2017. And we saw 2018 play out with, like, you know, people hate Facebook. People don’t trust large tech companies. … It’s always hard to predict when the market will care. And starting September, the market started to care.

Brian McCullough: [00:04:41] So you’re almost saying — I don’t want to put words in your mouth — you’re almost saying that like because they had been so successful, because the tech companies were the biggest market cap stocks, everyone’s owning them, that on some level they’re the victims of whatever is happening to the overall market. But is there anything happening in the businesses of the large tech stocks in common that is causing investors to reassess their growth prospects?

Howard Lindzon: [00:05:09] For sure. You know, law of large numbers for one thing, as we’re seeing with Apple. You know the product’s so good that the upgrade cycle’s just not happening, right? People are keeping their phones for 3 to 5 years which is hurting the stock. But I think that’s the opportunity, right? Apple’s being laughed at right now for the decline. But really, the world is changing. We’re going more to audio, we’re going to AR and VR slowly. Maybe more slowly than people expect. But Apple’s pretty well positioned because they have distribution and they have high customer satisfaction and maybe they’ve pushed way too hard on pricing and maybe they relied too much on China. But this is what happens. The company is so big they’re going to make massive mistakes just like Facebook, Amazon, Netflix. So I think we’re just seeing a pullback and I don’t think it’s the beginning of something crazy. But if it is, you know, buying Apple at $140 or Facebook at $120, this is what you’re supposed to do. If you really believe in tech for the next 20 years, you buy 25–30 percent sell-offs in great companies. You don’t have to buy them all, but you’ve got to really have a thesis and understand the catalysts. For me, [with] Apple, nothing changes because they have the stores, they have the customer satisfaction in the U.S. I think, like I said, the two most interesting stories are, first that Microsoft is now the biggest company in the world again, and how how it’s done that over 16 years. So if people think [this is] the end of Apple because they’re down 30%, they’re crazy. You know, 20 years from now I really suspect Apple will be in the top 10 companies still in the world. I think we’re going to have multitrillion dollar companies. It may take 3 or 4 years of digestion to get people back to a trillion. Just like when Cisco first hit half a trillion dollars, I don’t know, 18 years ago.

Brian McCullough: [00:07:20] Yeah yeah yeah.

Howard Lindzon: [00:07:20] So I remember when Cisco hit half a trillion dollars if we look back at that we go, wow. I mean they were relying on customers that really couldn’t afford to pay,[chuckles], you know — their customers disappeared. Apple’s customers aren’t disappearing. The second most interesting story is for all [that’s] said and done, Google, which kind of sold Baidu at the IPO and never really went into China… All of a sudden, Apple got into China, had this whole headache of China and all their their systems and supply chain. And Google has never really done anything in China and is now equal in market cap to Apple. So for all incentive purposes Apple can still be a massive company even if they retreated from China, which they won’t. So there’s just a lot of exciting times ahead. And you think about Google and people say Google’s done. They haven’t even dealt with China or a lot of these Eastern Asian countries so — I don’t know. When everybody is bearish, I think you have to look at these companies and go, where are we gonna be in 10 to 15 years?

Brian McCullough: [00:08:24] I want to want to come back to Microsoft. But first one more thing on Apple real quick. How surprised were you by that announcement last week? Because it seems like they’ve been laying the groundwork for this. You know, not reporting unit sales, touting services growth as going forward the growth engine. Do you think that this was a convenient time for them to announce that sort of thing, like pointing to China as a weakness? Or did you think that this was due and coming?

Howard Lindzon: [00:08:50] They telegraphed that it’s coming. I mean I don’t really ever care about — I’ve owned the stock for 15 years and I’ve never really cared about unit sales. Did I get surprised by the speed of this decline? Yes. But like I said, 2017 was silly. It is not 2018 that was silly, it was 2017. You know this surge from 700 billion to a trillion-one is kind of silly. And so we’re right back to where we were a year ago. And you know when Trump took office, the stock was 500 billion. So nothing would surprise me here. I think the tone of the letter was probably — I think if he could take it back — I think people saw through that. But at the same time, live and learn. I mean they’re only going to be smarter from these mistakes. So it’s painful short term. You know Apple’s my — I don’t really own a lot of stocks in general because I focus on early stage investing anymore but I talk about stocks all day because it’s so interesting. But I don’t know. I think this panic in Apple is really over-done and I kind of look forward to seeing how they behave going forward. I’m talking to you using AirPods and my iPhone. I live on my MacBook Air. Maybe I’m in the 5 percent so I can afford to upgrade every product cycle. I live a little bit in the future and maybe the products just aren’t necessary to upgrade anymore. But between the stores, and the amount of money they invest in R&D, and the customer satisfaction, and the lock-in with people over 40 years old once they get into Apple products having the stores within 5 miles of their home, I think it’s going to be pretty hard at least in America to unseat them.

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Brian McCullough: [00:10:40] So okay, maybe talking about both Apple and Microsoft. I was talking on the a16z Podcast recently, Chris Dixon and I were talking a little bit about this. About how it’s almost like everybody has had this one trick in tech for the last 10 or 15 years of scale, especially when mobile came aroun,d and it’s almost like maybe what we’re seeing is that the low-hanging fruit has been plucked already. Like you put a smartphone in every human being’s pocket — greatest business ever, right? Gin up a different kind of chat app and you have a billion users in 6 months if you’re lucky, right? So I’m wondering if some of what we’re seeing is that people are going to have to learn new tricks and that Microsoft may be specifically — like they’ve done that, like you said, they had their decade and a half in the wilderness, kind of. And they’ve learned how to reinvent and maybe that’s what people like Apple and Facebook also have to have to start thinking about.

Howard Lindzon: [00:11:34] Well, yes. And a lot of the time Wall Street wants new tricks, right? For years Apple got away with boxed product and upgrade cycles and then Intuit, Adobe [happened], then it became all about recurring revenue. So Microsoft — maybe in 10 years Wall Street will demand something else from these companies. But a lot of it is chasing each other’s tails, right? Sometimes Wall Street wants recurring revenue over just plain vanilla growth. Maybe Facebook will be penalized for the next 20 years because even though they have all this data, they don’t have a subscription business. So we don’t really know how Wall Street will behave, so I try not to think about that. You just want to find businesses with catalyst. And for Microsoft the catalyst is: Wall Street loves subscription recurring revenue. Microsoft continues to build lock-in with corporations. And Apple is a little bit farther behind there, because they don’t have — even if they switch completely to the subscription business, their revenues would drop because they relied on the upgrade cycle. So it’s a little bit more than just one trick because a lot of it depends, as public companies, on what Wall Street wants and it’s fickle. Wall Street’s a pretty fickle place.

Brian McCullough: [00:12:47] Well, speaking of subscriptions and SaaS and things like that, you probably have seen that CNBC article going around this morning suggesting acquisitions Apple could do to juice growth. They suggested, I think, Disney and Tesla but also Salesforce. Do you think that there’s any acquisitions that you could foresee Apple making this year?

Howard Lindzon: [00:13:13] It’s a good question. I wrote about this planetary positioning. I gotta think that Benioff, Disney, Netflix are in this position where they too could be planets. You know, up there with Apple, Microsoft, and Facebook and TenCent and Alibaba. So I don’t think Salesforce is looking to sell. He has a co-CEO, he seems to be loving what he’s doing as co-CEO Benioff and thinking about the future. So I don’t think it behooves — yeah, so I don’t see anything huge. I think everybody is just playing that beginning of the year speculation game. … I think the planets will be buying companies, whether it’s Nike buying like a Peloton or a Lulu[lemon]. I think there’ll be huge acquisitions. I just don’t think there’ll be something like, that size.

Brian McCullough: [00:14:11] I did read your blog post about that. And you also recently wrote on your blog that you didn’t feel like people are appreciating the risk in the markets right now and that could be a ton of things, obviously, even trade war concerns and all that sort of stuff. There’s a bunch of big tech IPOs coming this year. Do you have any thoughts on possible perils for those guys coming out of the gate in the next 6 to 8 months or so?

Howard Lindzon: [00:14:39] Well, the question is how badly do they need the money and how bad the market is. A lot of it’s based on sentiment, right? All those companies, Lyft, Uber, could have been public 4 years ago. So the question is timing.

Brian McCullough: [00:14:52] Do you think they’ve maybe waited too long?

Howard Lindzon: [00:14:55] No but…you know, yes. It is what it is. Yes from a selfish standpoint, because it would been fun for investors like us — regular investors — to have access to those companies and trade them and armchair quarterback ’em as public shareholders, not just watching them being reported on as private companies. So yes, I think shame on us for all our past sins that these companies stayed private longer for whatever reasons, as we all know. But I think the supply is coming. And I think what’s more concerning is if the markets — if people are appreciating the risks and markets continue to struggle this year and these companies need to get public, well that’s just more supply for the market. They need a strong market because obviously the market has to absorb all the supply from hundreds of billions of dollars of new issues. So it always comes down to supply/demand. If they need to get public this year and the markets are bad, it’s going to be terrible. If the markets are firm and they get public that’s much better for those companies.

Brian McCullough: [00:15:58] I’m not going to ask you to handicap whether or not we’ve got a recession coming in the next 18 months, that’s completely unfair, but I would ask you this. Again, because I’m thinking about this idea that tech has been the leader especially in the last five years in the current bull market. What does the history of the markets tell us happens to an industry that is the leader in a bull market when a recession does happen? Do they get hit worse than than others comparatively?

Howard Lindzon: [00:16:29] It’s a good question. I not that much a student of economics anymore. I’m more focused on catalysts and sentiment. I think these companies still have massive catalysts for growth. So many levers that they can push for, whether it’s data, or subscription, or ad revenue, or just attention. I don’t think in terms of recession. The world so big and connected, I don’t think in terms of recession anymore. I just think in terms of the overall picture and tech isn’t so easy anymore. There’s enterprise software, there’s consumer software, there is media — because tech and media have finally, you know, like a Netflix is really the first tech and media company to be done well. And maybe Disney if they can get their act together this year with their launch. But I think there’s so many different aspects of tech that it’s not so much about just new leaders versus old leader. I think FAANG stocks may see a few years of underperformance but they were outperforming for a while. But right now it looks like enterprise software. Wall Street continues to love subscription business. VCs continue to want to back subscription startups, enterprise startups, and that’s where it seems to be. All the acquisitions are happening: the Adobes, the Intuits, the Saleforces are buying companies. I think the HubSpots will start buying companies like Okta, Mongo, Elastic, so open source. I mean it’s just an incredible time. Even though 2019 is shaping up to be a tough year, as we saw with IBM and RedHat, I think you’re going to see tens to hundreds more of these type of deals — especially if the market’s weak.

Brian McCullough: [00:18:18] Thank you Howard. Anything you want to plug?

Howard Lindzon: [00:18:22] I blog at howardlindzon.com every day. People can subscribe there and get my daily missive on trends. Obviously I’m Chairman of StockTwits, which is a great social network for traders and investors.

Brian McCullough: [00:18:35] — An amazing resource —

Howard Lindzon: [00:18:37] And our fund is Social Leverage. We invest in early stage enterprise and financial services companies. So if you’re a founder in the enterprise and financial services space, track us down.