BigTech: A New Definition

BigTech has been a big driver of the stock market for the past decade. The names are familiar – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, Meta, Oracle, Cisco, Salesforce, AMD.

Others, past and present, have included Netflix, Uber, Lyft, Peleton, Shopify, Spotify, Airbnb, WeWork, Workday, Bookings, PayPal, and Adyen.

I have two questions: (1) are some of these companies really “tech” companies and (2) why would it matter if the answer is “No”.

Through the convergence of the internet and smart phones, many companies have arisen that use this convergence to develop new services to the public. How we hail cabs, rent videos, buy used cars and shop for food and booze, just to name a few, have been radically altered. With this technology, we can book a flight to Dublin as well as the place to stay, grab a table for dinner in the Temple Bar district, split the check with our traveling companions and summon a ride home after one too many pints. This technology has truly changed the way we live our lives.

Yet, are the companies using these technologies themselves technology companies? I say “No”. Just because your public interface is a mobile device, that does not make you a tech company. Uber is a cab company. Netflix rents videos. Peleton is a stationary bike with an iPad attached. Airbnb is a vacation rental agency and WeWork rents office space. I can go on and on, but you get the point. Using technology to provide a new service doesn’t grant you a visa into BigTech country.

Okay, so who cares? Why are you being pedantic, Bill? Well, because if one is looking at what sectors are driving the market, it behooves one to know which companies are in those sectors. Currently, 2023’s rally in the S&P 500 is being driven by seven tech companies, Alphabet, Apple, Meta, Nvidia, Amazon, Microsoft and Tesla.  The narrowness of the rally might be of concern to some investors. However, we are told by many analysts that this is actually good news, as it’s the start of a “tech rally” and thus, there is plenty of upside once the other tech companies take part.

Hence, my point. If you are counting on tech companies who are not really tech companies to broaden a rally, you are going to be counting a long time. WeWork is driven by the demand for office space, which is collapsing. Airbnb is driven by consumer spending for vacations at a time when many are predicting a recession. The same for Shopify, Uber, Lyft and Bookings. Netflix is facing backlash from their password sharing decision, sketchy new content and a hangover from the excesses of COVID. Ditto for Peleton. None of these so-called tech companies are being driven by the boom in tech. They are being driven by forces that having nothing to do with tech.

True tech companies will continue to prosper due to AI mania (I’ll have an upcoming post on that) and the very nature of the industry. But so-called BigTech will get no help from the tech wannabes who are nothing but service companies. If you are buying tech, buy the actual tech companies, not the ETFs littered with “me too’s”.

I Told Ya So

If you’ve been following my posts about Peloton (PTON) and taken my advice, you’ve done quite well for yourself. Just to recap, back in December 2020, I explained why, at $161 per share, Peloton was grossly overvalued and, therefore, recommended shorting the stock.

Then, in May 2021, I followed up with another post detailing how correct the prior advice had been. At the time of that post, Peloton had lost about half its value, falling from $161 per share to $83 per share. I said, however, that there was still time to profit from selling this stock short, as I thought the proper valuation for Peloton was about $28 per share.

Well, here we are. Peloton right now has broken through my $28 valuation, falling to $24 per share. My advice now is to close out your short position and take your profit. While the stock may continue to drop a bit more, that’s simply investor panic and/or price momentum.

In summary, had you purchased $1,000 of June 2022 deep out-of-the-money puts back in December 2020, you’re sitting on a tidy profit, upwards of $200,000. If you listened to me and are cashing in, well done! And if not, shame on you.

Peloton Follow-Up

Back on December 22, 2020, I detailed why Peloton Interactive (PTON), with a market capitalization of $42.2 billion was ridiculously overpriced at $161 per share. I recommended selling your shares if you were an owner or shorting Peloton if you weren’t.

Today, Peloton closed at around $83 per share, with a market cap of $24.3 billion. So had you taken my advice and shorted 100 shares, you’d be sitting with a $7,800 profit representing a whopping 145% annualized return.

While some of Peloton’s price decline is attributable to recent issues with defective equipment requiring a product recall, the decline in price began much earlier, as savvy investors began selling their positions to less sophisticated investors who were jumping on the Peloton bandwagon.

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Peloton Interactive (PTON), the innovative company that pioneered gluing an iPad to the handlebars of a stationary bike, this week was added to the NASDAQ 100 stock index. Based on a market cap of $42.2 billion, Peloton became one of the 100 largest non-financial companies traded on NASDAQ.

With only a market cap of $5 billion prior to the pandemic, in the past nine months Peloton’s market cap has soared past much better-known companies, such as Marriott, Mitsubishi Electric, General Mills, Fiat-Chrysler, eBay and the Ford Motor Company.

With the size of the home fitness market currently at $11.5 billion and Peloton yet to generate a profit on $1.8 billion in revenue, one wonders about the company’s valuation. I always view things from the perspective of a buyer or seller. So, if a buyer purchased Peloton for $42.2 billion, what would their return look like? A simple, “back-of-the-envelope” analysis would look something like this:

If the buyer instead bought 10-year Treasury bonds, they’d get a 0.9% return. Pretty poor, but very safe. If the buyer bought a high-yield junk bond fund, the return is about 4.5% and high-dividend ETF returns are in the 5% to 8% range. Thus, an investor writing a $42.2 billion dollar check to buy Peloton, a high-flying company who’s growth has been driven by a “once every century” pandemic, would want a return in excess of 10% as compensation for assuming such huge risk.

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