Perspectives On The Tech Industry

On the overall tech industry:

1. Prospective future growth: there is still a lot of inefficiencies in different industries. For instance, the media industries, with bundled products, will face increasing challenges from pay-per-view medias. Internet will be applied to more and more company. We can save people a lot of time. Another area filled with inefficiencies is in healthcare; however, the risk in this category lies in government regulation.
2. The current tech boom: One key reason for the current boom is the result of Infrastructure costs have dramatically cut down. The bandwidth, processer, storage cost, down 25% each year. Fundamentally deflationary trend over time.
3. The competitive landscape: More competitor. The business models have all been working, unlike 1999, when so many business models do not work at all. Management team and competitive risks will be the most important as we go forward and analyze a company. This is also in part due to the lessening of the costs over time.
4. Buzzword of 2015, a "unicorn bubble". Unicorns are defined as private companies valued at over $1 billion, and currently there are over 150 such companies in existence. The market has been generating tons of free cash flows.

Money generating models:

1. Ad, subscription, and retail models
2. The models are very important:

Who are the winners over the past few years?

1. The "FANGs" - Facebook , Amazon, Netflix, and Google

Who might be prospective buys in the future?

1. Top picks: Amazon, LinkedIn, Priceline , Expedia, Google
2. Negative outlooks: Twitter, Groupon, Yahoo

How to identify great value?

Successes:

1. Google and Facebook accounts for over 50% of all online advertising revenues around the world. Adverting model can be declining due to saturation. Can you come with a great advertising proposition for the company?
2. You have to catch the trend right. Google is like a tax on all internet usage, since searches are powered by Google. They need to get everything and anything they can put it online.
3. Strategic acquisitions and developments are important. Even though Motorola seemed odd, but it actually give Google significant patent protection. Google's android development is great.
4. As identified before, we need to look at: advertising, retail, travel (revenue generating model).
5. Companies need to be willing to make long-term bets. Yahoo failed to make a long term bet while Google did. For instance, Yahoo did not jump on the train for mobile software, for social media, and a number of other things.
6. Study in failure: Ebay did not significantly innovate instead. Ebay, the only reason that the stock prices are staying high is because they are buying back shares and using other accounting tricks to boost their earnings (of course, this cannot last). Look at the company's acquisition, Ebay made a certain number of acquisitions that are not related to its core business (they were owners of Skype at one point, what does Skype have to do with selling things online).
7. Amazon has super thin margins, but it is able to consistently generate growth to make itself bigger and more important. For Amazon, market share is key.

On Tesla specifically:

The unknowns about what a stock like tesla can do is enormous, and what the firm's potentials are somewhat questionable. It generates a lot of optional value in the sense that we aren't sure what they are doing. High volatility expected.

Companies that are not yet public but have interesting prospects:

1. Snapchat: key question is in how to expand snapchat, user base?
2. Airbnb: we are still looking at broad range of model.

Analyzing a company using the 4M framework:

1. 1. Management team, (have to meet them face to face).
2. 2. Business Model (social media is beautiful business model, 90% margin business).
3. 3. Moats can also change over time (Ebay, competitive advantages are not very sustainable for too long, because they miss the next coming trend). Yahoo missed a lot of these new trends (video, social media). A lot of moats are based on the network effect. Network businesses can be undermined, but they can create a good moat for a couple of years. Are they global moats or are they local moats? Important to determine if they can be undermined.
4. 4. Market opportunity. The greater the end opportunity the better it is. Google generated a large amount of TAMs (total addressable market). The market that Google enters contains huge amounts of end values.

Some specific things to be aware of when looking at these stocks:

1. Remember that each publication may have some sort of bias to them; for instance. Barron's has more of a value bend to the articles they write, so they might exhibit bias against high growth tech companies.
2. Financial practices of companies: The management teams increasingly make up their own Adjusted Ebitda, rather than using standard GAAP measures
3. Specific example of a risk: Alibaba, it is possible that they are over-stating their numbers? Can we trust the financials? The average Alibaba user spends more with Alibaba than with the Amazon user spends with Amazon, even though incomes per person in China is about 1/3 of the US. Perhaps this goes back to the idea of the inefficiency in China? Perhaps there are simply no other choices (brick and mortar stores simply aren't on par with online products)
4. We must also look at the industry in more detail as well:
5. Why is music a much more lousy business? There are only like 4 major labels, power is with the record labels. For instance, Pandora have gross margins of around 17%. Not much room to spend in r and d really.
6. Contrast this to the Netflix. Netflix faces significantly more players in the movie making landscape.