Monday's Musings: What's Up With Big Tech Stocks? The Insider View For 2019

December 23, 2018

Big Tech Still Remains Attractive, Especially With The Recent Valuation Downgrade

Markets are still cautious.  Global outlook looks very different than the US outlook.  Actual economy and Wall Street remain disconnected.  Meanwhile, markets are trying to figure out a rational explanation of which one is the leading vs lagging indicator.  

Algo’s have been reset so the markets are operating on different rules and that model will be reset again soon.  Why Big Tech?  They play in a winner takes all market.  Apple and Google provide 99% of all the consumer software in the US.  Facebook, Google, and Amazon drive almost 63% of all advertising dollars

As for the race to 1T in valuation, We’ll see a resurgence in 2019 of one of the FAANG’s plus Microsoft vie for the title. So here's the run down

MICROSOFT $120 by Q2 2019
Investment Relationship - NO
Individual Owned - NO
Family Owned - YES

CEO Satya did a good job taking a page from the Marc Benioff play book. Become the tech guru, espouse tech for good, write a book, go dominate Davos, open up partnerships, champion social causes, and transform the image.  Next, clean up the cloud business with Office 365 and Azure doing a great job. Shed bad acquisitions such as Nokia and write a new manifesto.

The future was a younger base so Satya made some smart acquisitions to attract a younger developer base like Git Hub and grab social graph data like LinkedIn before Salesforce could grab it. Meanwhile renewing the Xbox and Surface business paid dividends.  Dynamics still needs some work in the enterprise space, but Scott Guthrie’s team is doing a good job with the rest of the enterprise products and Cloud.

Who would have thought Microsoft would come so far? Satya and co may make it to $1T in market cap in 2019 again.


FACEBOOK - UNDER 160 UNTIL Q3 2019.  
Investment Relationship - NO
Individual Owned - NO
Family Owned - NO

Facebook lost trust among the public.  All the cover ups lead back to Sheryl Sandberg.  She should be fired for incompetence and lack of transparency to Zuckerberg.  Watching ad revenues during the holiday season for signs of growth.  Facebook needs to get on the right side of privacy.  The stock will become a non-growth stock if they can’t show growth above 40% in MAU's.   Despite flattening MAUs, Zuck and team need to raise their revenue per user at the 30% rate. They have to go beyond advertising into commerce, entertainment, and other areas if they want to grow.  Facebook can't remain a one trick pony to make it as a growth stock. They are the weakest FAANG.


APPLE - $200 in Q2

Investment Relationship - NO
Individual Owned - NO
Family Owned - YES

Smart moves in adding HQ’s and workers in Tier 2 cities such as Austin, Seattle, Culver City, and San Diego.  Apple in surveys is seen as most trusted of the pack in data privacy, and the Metaio move a few years back gave them the right foundation for augmented reality (AR).  The new watch did fairly well.   However, they are behind on AI as evidenced by SIRI’s failures though hiring John Giannandrea is a good move and will change the game if he can get past the silo'd culture.  

Apple also spent $2B+ on maps with nothing to show for it yet so the physical mobility project is behind (car).  Home Pod was a failure at pricing. The India market was a miss with too high price points and Jio and XiaoMi killing it on the low end phone market.  Most important, they got the price points wrong for the XR and XS for markets like China.

That being said, the services revenue is growing and the will eventually become more than 20% of the company revenue by 20%. ASP’s were up and profitability was high so the developed world saw Apple as a luxury brand and not a phone.  


AMAZON - Back to 2000 By end of Q4 2019

Investment Relationship - NO
Individual Owned - NO
Family Owned - YES

Amazon is the Standard Oil of our time. At the turn of the 20th century, Standard Oil built a vertically integrated oil market. If data is the new oil of the digital age, Amazon is the vertically integrated data monopoly in upstream,  mid stream, and downstream.  With so many business models in play, competitors fight the wrong war. The FTC has now clue what anti-trust to bring. In order to level the playing field, the government will need to split them into 3 to 4 companies.  

They are now the #3 digital advertiser with 4% of the market and we expect almost $12B in ad sales by 2020 after Google and Facebook.  Alexa is a privacy nightmare about to be exposed and customers are rumbling about the pricing models of AWS cloud despite the growth. AWS is a cloud company that's about to create massive lock-in on customers while Google has been asleep for 3 years.

New growth from ads, pharmacies, food, business to business, and Philips Healthcare’s IOT work there are big drivers for growth.


NETFLIX - 350 by Q2

Investment Relationship - NO
Individual Owned - NO
Family Owned - YES

Great buying opportunities for Netflix. France and Germany are growing for Netflix as many international markets.  In general, with 137.1 M subs worldwide, they are the leaders in the market. we expect them to pass 150M subscribers in Q1 2019.

Downside risk is the $10B debt load to acquire content.  Amazon, Apple, Disney, and others are aggressively going after their business.  They have to master content, distribution, and tech and that will create the network ecosystem model in a digital business espoused by Consellation Research


GOOGLE - $1300 target by Q2

Investment Relationship - NO
Individual Owned - NO
Family Owned - NO

Ad business is still going on strong.  Cloud is the future and Diane Greene’s departure will help clear the way as new CEO Thomas Kurian from Oracle arrives.  It’s growing at $1B a quarter but this quarter they will miss numbers.  

There are still rumors over the weekend that Google wants to buy Snap. Google has the best machine learning and AI in the market and that’s a huge advantage.  Waymo has a $200B opportunity out there if they can successfully execute from concept to commercialization


TESLA - 350 by Q2
Investment Relationship - NO
Individual Owned - NO
Family Owned - YES

They will blow all delivery numbers and set records for Q4.  The end of the $7500 federal tax credit (cut in half) is part of the driver and a bit of the risk for Q1 2019.  New Easter egg feature such as romantic mode and emissions testing mode (Flatulence on Demand) put a smile on customers faces. The Semi (Truck) is making huge traction as well as Model 3 sales.


SERVICE NOW - $200 by q2, $230 if a bidding war

Investment Relationship - NO
Individual Owned - NO
Family Owned - NO

ServiceNow is a target of acquisitions talks and merger and acquisition strategy discussions among the enterprise players.  Incompetent management team despite a great product.  The challenge is the enterprise requires an enterprise CEO not a consumer tech CEO.

Almost every partner we’ve met with of ServiceNow questions the management team’s strength and the departure of a few key technical executives confirm this.  Great growth story and adoption though despite incompetent management team. ServiceNow is a platform and needs to act like one. Customers see them as more than ITSM, they are low code, no code platform for extending the cloud landscape.


ADOBE $250 by Q2

Investment Relationship - NO
Individual Owned - NO
Family Owned - NO

Adobe has carefully managed their portfolio. Some will say CEO Shantanu Narayen has turned around the company since 2007 and brought a conservative approach to the stewardship of the company. Just when insiders and analysts thought they wouldn't rock the boat, they made two significant enterprise acquisitions - Magento (commerce) and Marketo (marketing) will give Adobe the enterprise credibility they seek to build on the Experience Cloud of the house.

However, Adobe and Brad Rencher must operate those units with more integration if they are to succeed. The story for Enterprise is there and all the pieces are coming together.

With a low PE ratio despite their growth when compared to Salesforce.com, this stock has a lot of upside as well as the overall company. Constellation expects the PE ratio should rise given the opportunity to dominate Creative to Commerce in B2B2C.  The challenge will be whether the management team will make the right moves to become more enterprise and go head on with Salesforce. The opportunity to take 1B PDF users and tie them to AdobeSign creates a powerful opportunity to own identity, the holy grail of creative to commerce.


The Bottom Line


Tech is still strong with 20 to 40% growth. Investors will find it hard to find other asset allocation classes this good and this dominant. With valuations down, Constellation can see the shift back to big tech in Q1 2019, especially now with depressed valuations. Everyone's waiting the Q4 holiday numbers before making the plunge. So FAANG plus MIcrosoft, Adobe, Salesforce, ServiceNow, and Tesla are still all hot and Baidu, Alibaba and Tencent drive the China market.


Your POV.


Ready to dive into the big tech plunge in Q1 2019?  Do you understand the business model implications of digital and network economies?  Add your comments to the blog or reach me via email: R (at) ConstellationR (dot) com or R (at) SoftwareInsider (dot) org.


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Although we work closely with many mega software vendors, we want you to trust us. For the full disclosure policy,stay tuned for the full client list on the Constellation Research website. * Not responsible for any factual errors or omissions.  However, happy to correct any errors upon email receipt.


Constellation Research recommends that readers consult a stock professional for their investment guidance. Investors should understand the potential conflicts of interest analysts might face. Constellation does not underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover—either directly or indirectly, such as through employee stock-purchase pools in which they and their colleagues participate.

As a general matter, investors should not rely solely on an analyst's recommendation when deciding whether to buy, hold, or sell a stock. Instead, they should also do their own research—such as reading the prospectus for new companies or for public companies, the quarterly and annual reports filed with the SEC—to confirm whether a particular investment is appropriate for them in light of their individual financial circumstances.


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