Blain: Time To Sell Some Tech

Authored by Bill Blain via MorningPorridge.com,

“Tell him I’ve just worked out a completely new strategy. It’s called running away.”

Not a lot to cheer in markets this week as politics and Covid dominate the stage. The slide in European stocks highlights increasing concerns for what look likely to become a double dip Virus hit. Rising US job claims suggest it’s also going to suffer a second pandemic knockback. On the other hand, companies are still making money, the global economy pootles along and investors will see dividends from sectors having a “good pandemic” remain strong. The world is divided into winner and losers: the Occident vs Orient, Tech and Services vs Hospitality, Property and Travel. 

Interesting comment from Goldman which says it’s time to buy value stocks and sell some Tech. They say is due to some mumbo-jumbo about three-four month trading patterns they observed back in the last crisis regarding reversals into cyclical shorts, but to be honest life is literally too short to read analyst’s turgid prose. I suspect most bank research is written to please compliance officers, and approved by committees to make sure no one is offended.

But the thing is – I totally agree! Time to sell some Tech.

This is time to get real about fundamental stocks, and that also means its probably time to cull Tech Stocks. Which ones though? Changes are coming. Everyone loves Tech, especially tech that’s disruptive and creates who new markets and revenue streams. But good tech spawns imitators, and as we are about to find out, Regulation. Nothing strangles new revenues as surely as regulation. 

Let’s start with the Streaming Wars. 

A few weeks ago I triggered another Teams storm with my suggestion Disney will win the Streaming Wars, while Netflix is doomed.. I was told it was a risky call. I stuck to my guns: competition is the critical issue. There already more streaming services than you can point a sharp, pointy stick at.. 

Netflix is the clear streaming leader with 32% of total streamtime viewing. It produces plenty of its own fantastic content, and has rights on plenty of other stuff that people want to see. Disney’s streaming services get a respectable 16% of streamtime, but has the advantage of a great stable of entertainment classics plus the Marvel, and Star War franchises. Its already spending more on content than Netflix. In less than 1 year Disney+ has attracted 60 million subs. 

(Personally, I am mulling over a subscription for Britbox – I still haven’t seen the final episode of Blakes 7 so I still have no idea what the classic UK cheap-as-chips space opera was all about, and apparently every episode of UFO and Space 1999 is on it! Yay! Because I am a registered Apple Addict, I have Apple TV, but there frankly isn’t much to watch..) 

Disney has just announced a refocus to spend more on creating new content for its streaming businesses. 

It didn’t have much choice. Coronavirus has slaughtered its Parks business (down 83% from 6.6 bln in Q3 2019) and new studio business (down 55% since this time last year). What’s spectacular is that The Mouse corporation has responded fast to the challenge. The virus has shaken Disney awake. Creation, Distribution and Monetisation of content is its future. 

It’s using its streaming platform well. Hamilton the Movie, only available on Disney+, was apparently a great success, but I gave up after 20 mins because She-who-is-Mrs-Blain kept asking who was who, who they were, where it was, what it was all about and why were we watching it.. (I told her: A long long time ago in a galaxy far, far away…)

Disney’s decision to launch new films direct into the Stream would probably have got more plaudits if it hadn’t been the live action version of Mulan. A controversial choice. 

How many other studios will also monetise direct to the stream? The whole film industry has been pressured by Covid. (Films make a fraction of the revenues of the Home Gaming sector – which is one reason our in-house VC fund, Sure Ventures has been so successful.) Few other studios have the range of marketing opportunities Disney has to sell merchandising tat alongside their content. 

As the streaming wars are fought to a bitter end, I suspect Disney will rise. What’s interesting is it will demonstrate that incumbent old businesses can weather, innovate and prosper when new disruptive technologies change the narrative. The risk for the other streamers, including Netflix, is that their tech premium reduces as competition rises and their lack of profitability dooms them to also ran status. 

I reckon we will see the same thing in Electric Vehicles. 

It’s the hot sector. Just this week we’ve seen a UK electric vehicle start up Arrival raise $118 mm from the private market – to build 10000 commercial vehicles a year on a “flexible skateboard model”.  US EV maker Lucid is launching a luxury 480 hp model based at $78k with a 400+ mile range. Volkswagen is “accelerating” a massive capex programme to “automate and digitalise” new EV plants in the US and Germany to build batteries and new car bodies. BMW has just announced its new “5th” generation EV tech, including a home charging “wallbox” that can fill you car full of electric liters in a mere 3.5 hours. Wow… (US readers.. mild sarcasm alert.) Porsche is going a slightly different road – investing in “synthetic fuels”. 

You get the drift.. 

Competition in the EV sector is going to pull down margins.. and probably increase the cost of lithium meaning at least one very large market-capitalisation maker of a very small number of cars is going to struggle not just with competition, but meeting promises to get the cost down and actually make real profits selling cars…. rather than regulatory credits.. Competition is real and will reduce windfall/first mover advantages and profits.

Another major issue is Regulation. 

• Amazon, Facebook, Apple and Google are all in the political crosshairs for “anti-competitive, monopolist behaviours” and are likely to suffer new anti-trust regulations. 

• Nations around the globe look unable to agree on how to tax the Tech multinationals who charge in one country, bill in another, and deliver to a third. 

• And then there is the issue I highlighted yesterday of surveillance capitalism and how certain tech firms have utilised Algorithms to monetise us – which looks, smells, and feels just like subliminal advertising, which was banned in the 1960s. 

• There are worries a Biden presidency will accelerate regulation of Tech. 

We all know.. the moment government starts to regulate anything… is the moment to sell. 

In the case of Google and Facebook – government has to act. But the others? Maybe Amazon has become a monopoly? Would it change much to break it up the same way the oil majors were forced to unravel 120 years ago?  If people are stupid enough to pay £1200 for the new iPhone XII then their problem (Me! Me! Me! I am an addict. I need help.)

Meanwhile… 

Speaking of cars, lets talk about proper Motors.. the ones that run on dead dinosaurs. Next week my very great mate and market legend, Alex Bridport, a bond market veteran who remembers trading the original South Sea Bubble Bonds, is doing the The Mille Miglia for the fifth time. It’s a race in proper old cars all round Italy. Normally its run in May with nice warm days “this year the delay means it’s going to be a very different kettle of poisons!” He added: “It’s simply an incredible experience in the moist beautiful country in the world!” 

Good luck to him!