Both lists include some surprising players who will be directly or indirectly affected by the e-commerce giant's record stock offering.
Depending on how things go on Friday, when Alibaba starts trading on the New York Stock Exchange, there could be tens of thousands of winners from what’s expected to be a record initial public offering.
But as with all things in life, there are winners and then there are winners. Here’s a rundown of who those really big winners are apt to be, along with some potential losers.
1) Jack Ma, Alibaba founder and CEO
This former school teacher turned Internet mogul doesn’t need Alibaba’s IPO to go gangbusters. He is already the richest man in China, worth approximately $22 billion, according to Bloomberg. For Ma, who personally owns around 9% of Alibaba shares, any boost in the stock’s estimated value post-IPO will simply be icing on the cake.
Ma’s real victory comes in the retention of power. Because the Chinese government forbids foreign ownership of key strategic assets in China, this IPO is structured in an unconventional way. As MONEY points out in “No, Alibaba is Not the Next Facebook (and 4 Other Myths About this Mega-IPO Debunked,” investors who buy the stock don’t technically get to own the company. Ma and a group of Chinese citizens who founded and help run Alibaba are still the technical owners of the company’s assets.
Rather, investors simply get the rights to the profits that are sent to a holding company known as a “variable interest entity,” which is based in the Cayman Islands.
The upshot is, Ma gets to raise $25 billion in capital by going public, yet he is not beholden to his shareholders in the same way other publicly traded companies are. In other words, Ma gets his money without having to give up any power. That’s like winning the lotto.
2) Masayoshi Son, founder and CEO of Softbank
Son, who runs the Japanese tech and telecom giant Softbank, is now the richest man in Japan, worth nearly $20 billion, according to Forbes. For that, he can thank one of the greatest investment decisions in modern history.
In 2000, at the height of the tech bubble, Son invested $20 million in a Chinese startup and encouraged its founder, Jack Ma, to hang on during tough times.
That proved to be beyond smart. Son’s $20 million turned into around $55 billion in less than a decade and a half, which is another reason why Son is sometimes referred to as the “Bill Gates of Japan.” This is sweet redemption for an Internet visionary who reportedly lost upwards of $70 billion in wealth when the tech bubble burst in 2000.
3) Softbank and Sprint
Much has been written about how Yahoo owns around one fifth of Alibaba’s shares. Well, Masayoshi Son’s Softbank — the Japanese tech, telecom and Internet giant — owns more than a third of the e-commerce giant.
For Softbank, owning Alibaba will help it attract global investors who want an indirect — and more diversified — way to gain exposure to the Chinese company. In addition to its large stake in Alibaba, Softbank is a major player in the Japanese mobile phone market; has its hands in hundreds of tech and media companies throughout the world; and owns a 70% stake in Sprint.
Now Softbank will have a pile of cash to make strategic acquisitions to strengthen Sprint, which for years has lagged its larger competitors Verizon and AT&T. At the very least, Softbank can invest some if its Alibaba winnings in Sprint by improving its infrastructure.
After its IPO, Alibaba will have $25 billion burning a hole in its pocket. Already, Wall Street and Silicon Valley are drawing up a list of potential takeover and investment targets.
High up on that list is Snapchat. Yes, talks between the two companies — which would have had Alibaba take a minority stake in the messaging app business — ended more than a month ago.
But that may have been because of the noise surrounding Alibaba’s IPO, and the fact that Snapchat raised around $20 million in funding through another means: via the venture capital firm Kleiner Perkins Caufield & Byers. Forbes reports, though, that this represents just 3% to 5% of the company, whose overall value is said to be around $10 billion. So there’s plenty of opportunity for Alibaba to get a piece of the pie.
Alibaba isn’t the only deep-pocketed suitor reportedly interested in Snapchat. The company has already turned down an offer from Facebook, and there are rumors that Microsoft, which has developed a similar app to Snapchat called Windup, is also interested in buying the firm. Surely, having Alibaba circling this pond will only drive Snapchat’s price higher.
Alibaba has made a lot of small investments in U.S. companies, ranging from the app search engine Quixey to the messaging service Tango to the transportation app Lyft. But its $200 million investment in the online shopping site ShopRunner is the most intriguing because of how Alibaba may leverage it down the road.
Alibaba now owns 39% of the online service, which is aiming its sights on Amazon.com. Think of ShopRunner as a virtual mall, in which small storefronts of well-known retailers like Brooks Brothers, Neiman Marcus, and Eastern Mountain Sports can be found. As with Amazon Prime, ShopRunner charges a flat fee (in this case, $79 annually) in exchange for free 2-day shipping on purchases made throughout the year. Quartz points out that the model is similar to Alibaba’s Tmall, where the company gets a small cut for every item sold on top of the annual subscription fee.
While ShopRunner pales in comparison to Amazon right now, that could change if Alibaba decides to throw its full weight behind this service and uses this franchise as its American version of Tmall.
It sure seems odd to describe a company that owns around a fifth of one of the most valuable businesses in the world — a stake that’s worth about $35 billion — a loser.
But here’s the deal: Yahoo, by agreement, must sell around 27% of its stake in Alibaba at the IPO. And as it sells its stake, Yahoo shares will begin to lose the one thing that has wooed investors so far this year: that Alibaba mystique.
Soon after, pressure will grow on Yahoo CEO Marissa Mayer to use the proceeds of the Alibaba investment wisely, for future acquisitions. But Yahoo doesn’t exactly have a great track record with companies purchased. Remember its $1 billion acquisition of Tumblr? As the New York Times recently pointed out, “Yahoo’s chief executive, Marissa Mayer, will find out how investors value the businesses she actually runs.”
Tencent Holdings is a Chinese Internet company that competes head to head with Alibaba in a variety of businesses, ranging from online advertising to e-payments. Up until now, Tencent has been the largest Chinese internet stock, with a market value of around $150 billion. That will all change after Friday, when Tencent will drop to No. 2.
Moreover, in the run-up to Alibaba’s IPO, Tencent and other Chinese stocks have gotten short shrift as investors have fixated on Alibaba. See the chart below:
What threat does a giant online retailer like Alibaba pose to a mobile ride-sharing service? Well, in the U.S., Alibaba recently joined a group that invested $250 million in Uber’s rival Lyft. Meanwhile, in China Alibaba is taking on Uber by backing the taxi-booking service Kuaidi Technology.
As Fortune recently pointed out, Kuaidi has gone from zero to 100 million users and 1 million drivers in two years.
4) The Nasdaq
The Nasdaq is synonymous with hot tech stocks, such as Facebook and Google. But when Facebook went public two years ago, things did not go smoothly. Trading started about half an hour later than expected, traders complained of missed orders, and there were questions if investors were getting the prices they expected. Nasdaq officials admitted that they were embarrassed by the glitches.
It came as no surprise, then, that Alibaba chose to list on the NYSE over the Nasdaq. According to Reuters, “Alibaba executives worried about Nasdaq’s ability to handle their $21 billion initial public offering later this month, since the exchange botched Facebook’s market debut two years ago.”
Baidu, which runs the biggest search engine in China, has been among the most popular Chinese stocks held by U.S. investors. In fact, a ranking of stocks held by hedge funds this year showed Baidu as the top Chinese entrant, according to Business Insider. What’s more, Baidu was ranked as the most widely held American Depository Receipt (a type of foreign equity holding listed on American stock exchanges) last year.
That’s likely to change as Alibaba is an even bigger Chinese tech play, and it’s considerably more diverse in its holdings than Baidu.
A reality check on this e-commerce giant, in advance of the Chinese tech stock's much anticipated initial public offering.
Everything about Alibaba, the Chinese e-commerce giant, seems larger than life.
Its initial public offering, slated for Sept. 19, is expected to be the biggest IPO in U.S. history, raising possibly $25 billion.
The company is also China’s largest retailer, not to mention the biggest e-commerce player in the world, dwarfing U.S. companies like eBay EBAY INC. EBAY 7.5389% and Amazon.com AMAZON.COM INC. AMZN 0.1927% . Indeed, in the media, Alibaba has been described as China’s eBay, Amazon, and Google all rolled into one. Wow.
Of course, whenever there’s a convergence of three of the market’s favorite topics — tech investing, Chinese stocks, and IPOs — hyperbole has a way of creeping in.
So here’s a realistic look at the biggest myths about Alibaba that will help you put the stock in perspective.
Myth #1: Alibaba will be the most important stock to hit the market since Facebook.
Reality: Alibaba’s IPO may be bigger than Facebook’s, but its shares will have far less impact on the broader market.
Even though Alibaba is going public on the New York Stock Exchange, it’s technically not an American company. And that means the stock is not eligible for inclusion in the S&P 500 index, says Howard Silverblatt, senior index analyst with S&P Indices.
That, in turn, means that funds that track the major U.S. indexes will not be allowed to buy the stock, so the shares will have far less impact on how the broad market performs.
Plus, Alibaba is likely to be more volatile than other big tech stocks, as it won’t be included in those index funds that are required to hold all the stocks in their respective benchmarks in good times and bad. As Kevin Landis, chairman and president of the Firsthand Funds recently told Reuters: “There is a pretty strong argument that index inclusion equals stability.”
Reuters points out that by choosing to list on the NYSE rather than the Nasdaq, Alibaba gave up the possibility of being included in another well-tracked index: the Nasdaq 100.
Myth #2: Alibaba is like Amazon, eBay, and Google all rolled into one.
Reality: Alibaba isn’t China’s only Amazon, eBay or Google.
If you just read the headlines, you’d think that Alibaba is like the Borg — an intimidating collective that methodically goes from market to market devouring everything in its path. Yet the truth of the matter is that Alibaba, despite its size, faces stiff competition even in its home market.
Take the Google GOOGLE INC. GOOGL 0.1021% comparison. Alibaba is often described as the Google of China not because it runs a search engine, but because it leverages its consumer website for online advertising revenue.
But you know who else does that? Baidu.com BAIDU INC. BIDU -1.016% , which is the Google of China because it runs the leading search engine and uses it as a source of online ad revenues. Baidu is a $75 billion company that trades on the Nasdaq and can be found in some of the leading U.S. growth stock funds, such as T. Rowe Price Blue Chip Growth.
As for the Amazon comparisons, don’t forget that there is already an Amazon of China, which is listed on the Nasdaq: It’s called JD.com JD.COM INC ADS EA REPR 2 COM 'A' SHS JD -1.937% , a $40 billion company that went public in the U.S. earlier this year. JD.com is a retailer that sells directly to consumers, but it also runs an online marketplace where other sellers can find consumers — much like Amazon as well as Alibaba’s Tmall.
Alibaba is actually closest in structure to eBay, as it runs a consumer-to-consumer online auction site in addition to an electronic payment service called Alipay that’s a lot like eBay’s Paypal.
Here too, though, there’s stiff competition. Tencent Holdings TENCENT HOLDINGS LTD. TCEHY 0.4065% , a Chinese Internet and media company, operates Tenpay. Baidu offers Baidu Wallet, and there there are scores of Chinese banks that are getting in on the e-pay game.
Myth #3: You will own the most important Chinese company through this IPO.
Reality: Actually, this IPO won’t give you any ownership stake in the company at all.
Alibaba’s offering is being portrayed as an opportunity to own the most important company in China. Technically, the shares you buy won’t give you any ownership stake in this company. That’s because the Chinese government restricts foreign ownership of key strategic assets.
To get around this, Chinese companies that list abroad have come up with a complex structure called a “variable interest entity.” In Alibaba’s case, the VIE is based in the Cayman Islands and is entitled to the profits that Alibaba in China generates.
This may sound like a distinction without a difference, but it can lead to major complications. For instance, even though many Chinese companies including Baidu have gone public using VIE’s, the Chinese government has not ruled on the full legality of such a structure, the New York Times has reported.
Plus, disputes over transparency are bound to rise as foreign owners have no say in the actual operation of the underlying company. In a famous case in 2011, Yahoo, a long-standing investor in Alibaba, got into a dispute with co-founders Jack Ma and Simon Xie, claiming that they had improperly moved the Alipay bill-paying unit out of the the part of Alibaba that Yahoo partially owned an interest in.
The dispute was eventually resolved, but because the shareholders of the company (in the 2011 case, Yahoo; but going forward the public) don’t actually own and control the underlying company that generates the profits, disputes like this are bound to arise.
Myth #4: CEO Jack Ma is the Jeff Bezos of China.
Reality: Jack Ma is more like Jack Welch than Jeff Bezos.
Because Alibaba is a big player in e-commerce like Amazon.com, founder and CEO Jack Ma is often compared with Amazon founder and CEO Jeff Bezos.
But while Bezos is a consummate disrupter who is leveraging technology to change the way we consume, Ma seems to have none of these types of ambitions. Instead, there’s a growing sense in management circles that Ma is simply like an old-school head of a conglomerate who just wants to dominate every business his company is involved in.
“Alibaba doesn’t look much like Facebook, Google, or even Amazon,” Walter Frick recently argued in the Harvard Business Review. “Instead, it operates more like GE.”
Frick went on to cite this passage from a 2010 Harvard Business School case study on Alibaba written by professor Julie Wulf:
By his own admission, Ma was a fan of Jack Welch, so it was only natural that his organization came to resemble that of GE in some regards. Just as Welch did not dictate an overall theme or strategy for GE, Ma preferred not to set one agenda from Alibaba’s corporate center, but rather to have each subsidiary set its own strategy. Much like Welch’s famed “#1 or #2” objective for each of these businesses, Alibaba’s governance inspired its subsidiaries to be the leaders of their respective industries. Ma explained, “Business unit presidents must have the freedom to do what is right for their business. I want business units to compete with each other…and focus on being the best in their businesses.
This would explain why the company is involved not just in online retail, but in wholesale supply, logistics, computer services, cloud computing, media, marketing, and finance.
Myth #5: Alibaba threatens U.S. tech and e-commerce companies.
Reality: Alibaba’s growth lies in China, not in the U.S. .
There’s a stat floating around that says Alibaba controls some 80% of all Chinese e-commerce. That makes it sound like Alibaba is done conquering its home market and is looking abroad because that’s the only way to grow.
In reality, Alibaba is a big player in what is still a developing marketplace in China for online sales. By sheer numbers, China is a huge market, but less than half its households are online, and consumer spending makes up only around a third of its economic activity (compared with two thirds in the U.S.).
So future growth will be attained by making sure that it continues to control a large swath of the Chinese market as more and more consumers get online and as consumer spending there becomes a bigger and bigger part of the country’s larger economy.
In the U.S., the company has launched small efforts, including its 11 Main marketplace. But as MONEY’s Kristen Bellstrom recently noted, “At least in its current form, 11 Main is no match for America’s current online retail kingpins.”
Just as U.S. firms ranging from Wal-Mart to Netflix have run into cultural difficulties and stiff competition abroad, Alibaba has to figure out the nuances of American consumers and tastes before it can even try to conquer this market.
More likely, Alibaba’s goal at this point is limited to attracting Western investors and — as Greg Besinger pointed out in the Wall Street Journal — establishing a foothold in the U.S. so it can start selling more American-made goods to its Chinese customers.
So American e-commerce companies should relax — at least for the moment.
For the first time since the dotcom era, 83% of this year's IPOs have negative earnings. Does that mean we're in a new tech bubble?
For investors looking to place bets on newly public companies, 2014 has been an amazing year. Through the month of August, 204 businesses have held initial pubic offerings for their stock, for a combined value of $46.4 billion. According to the Wall Street Journal, both of those numbers are the highest the IPO world has seen since 2000.
But 2014 is close to setting another millenium record: The percentage of IPOs where the company has negative earnings–that is, is losing money–is nearing a 14-year peak. A report from Asset Allocation Advisers, using data from SentimenTrader, shows the proportion of in-the-red IPOs recently hit 83%, just one point lower than their previous high in 2000. That year seems to be coming up a lot–remind me what happened around then?
The last time such a large share of IPOs were profitless was at the top of the dotcom bubble, and when that bubble burst, the S&P 500 lost almost half of its value. Gregory Schultz, co-owner of Asset Allocation Advisers, and co-author of the report, thinks more earnings-free IPOs are one indication the tech bubble is back.
“It might come in the same box with a different color bow, but like Yogi Berra said, it’s deja vu all over again,” Schultz told MONEY. “The impression I get is if you have a mobile app and a website, you can gather money.”
Why is the market so willing to support the latest web startup, never mind profits? Schultz thinks low interest rates and the Fed’s policy of “quantitative easing” have made investors are more willing to put their cash in risky ventures in hopes of capturing a higher return.
But while some think the new IPO boom could mean the market is overvalued, others see a different explanation. Rich Peterson, an analyst at S&P Capital IQ, says a surge in profitless IPOs is actually driven by the kind of companies seeking public investment. And it’s not just tech stocks. “One of the more popular or active sectors for IPOs has come in the biotech field,” says Peterson. His numbers shows this type of firms taking up about 22% of year’s IPO market so far. “By their nature, biotechnology companies don’t make money [early on], they burn through a lot of cash, so it’s not surprising.”
Early indicators suggest most of 2014’s IPO class is actually doing quite well. Of the 134 companies that did IPOs this year and reported second quarter earnings, 72 beat analyst expectations, and only 54 missed their mark. Peterson cautions that an IPO’s early success does not guarantee good results in the long run, but says the high share of zero-profit IPOs does not concern him.
Of course, the simplest explanation for more earnings-negative IPOs is that stocks are currently in high demand. The S&P 500’s price-to-earnings ratio, based on ten years of average earnings, is a little above 25. That’s higher than historical norms, meaning the public is willing to pay a lot for equities in general. When investors are especially eager to buy stock, it makes sense for companies to obtain capital (or for founders to cash out) by selling shares. In short, the rise of the no-profit IPOs is a predictable side effect of the market boom. Less predictable is when the boom ends.
In the 10 years since Google became a public company, there have been a lot of predictions made about the search engine giant. And it turns out, a lot have been wrong.
”I wouldn’t be buying Google stock, and I don’t know anyone who would.”
— Jerry Kaplan, futurist, in the New York Times, Aug. 6, 2004
The problem with making any public pronouncement about Google GOOGLE INC. GOOGL 0.1021% is that if you end up being embarrassingly wrong, someone can just Google that prediction to remind you how off the mark you were.
So that’s what we did.
With Tuesday being the 10th anniversary of the tech giant’s historic IPO, MONEY Googled the sweeping predictions that were made about the company and the stock leading up to and after the company’s public offering on Aug. 19, 2004, when Google shares began trading at an opening price of $85 a share.
To be fair, no one could have really predicted the stock would soar more than 1,000%—10 times greater than the S&P 500 index—in its first decade as a publicly traded company. You have to remember that in 2004, the Internet bubble was still a recent memory and Google’s offering was seen as the first significant tech IPO in the aftermath of the 2000-2002 tech wreck.
Still, it’s hard not to wince at some of the things said about what is now the third most-valuable company, with a market cap of nearly $400 billion.
1) Google won’t last.
What are the odds that it is the leading search engine in five years, much less 20? 50/50 at best, I suspect… — Whitney Tilson, The Motley Fool, July 30, 2004
In a memorable 2004 column, value investor Whitney Tilson argued that there was a significantly better chance that Dell would still be a leading computer company in the year 2024 than Google would be a leading search engine in 2009.
Obviously, he was wrong as Google still controls nearly 70% of all search and more than 90% of the growing mobile search market. (Meanwhile, Dell’s PC market share has shrunk considerably and desktop computers aren’t even a growth area anymore).
His argument may have made sense at the time. “Just as Google came out of nowhere to unseat Yahoo! as the leading search engine, so might another company do this to Google,” he wrote, adding that “I am quite certain that there is only a fairly shallow, narrow moat around its business.”
Yet Tilson made the mistake of underestimating the actual search technology. In the early 2000s, Google’s algorithms could search billions of pages at a time when rival search engines were able to get to just tens of millions. That lead in search capability gave Google enough time to leverage that technology into a dominant position in online advertising. Today, Google controls about a third of all global digital ad dollars.
2) Google’s founders won’t last.
These Google guys, they want to be billionaires and rock stars and go to conferences and all that. Let us see if they still want to run the business in two to three years. — Bill Gates at Davos, in 2003.
Microsoft co-founder Bill Gates was, of course, referring to Google co-founders Sergey Brin and Larry Page. Not only did the Google guys not go away, eight years later Page took over as CEO, and under his tenure the company became the dominant player in the smartphone market; made inroads into social media and e-commerce; and began dabbling in more futuristic technologies such as driver-less cars that are likely to boost interest in the stock going forward.
3) Google is a one-trick pony.
I mean, come on. They have one product. It’s been the same for five years — and they have Gmail now, but they have one product that makes all their money, and it hasn’t changed in five years. — Steve Ballmer, former CEO of Microsoft, in the Financial Times, June 20, 2008.
The bombastic Ballmer, who also predicted that the iPhone would go nowhere, wasn’t the first to call Google a one-trick pony. Yet Ballmer was flat out wrong. Today, Google has several tricks up its sleeve. The company still dominates search, but it is also a major player in mobile search, mobile operating systems, online advertising, e-commerce, social media, cloud computing and even robotics.
4) And who cares about search anyway?
Search engines? Aren’t they all dead? — James Altucher, venture capitalist (sometime in 2000)
You have to give Altucher credit for fessing up to what he admits may have been “the worst venture capital decision in history.” Three years ago, the trader/investor blogged about how his firm, 212 Ventures, had an opportunity in 2000 or 2001 to be part owner of the company that would later become an integral part of Google for a mere $1 million.
As he told the story, one of the associates of his firm had approached him with an opportunity in 2000. “A friend of mine is VP of Biz Dev at this search engine company,” the associate told him. “We can probably get 20% of the company for $1 million. He sounds desperate.”
To which Altucher replied: “Search engines? Aren’t they all dead? What’s the stock price on Excite these days? You know what it is? Zero!”
“No thanks,” Altucher said. That company was Oingo, which changed its name to Applied Semantics, which in 2003 was purchased by Google and re-branded AdSense. As Altucher points out, “Google needed the Oingo software in order to generate 99% of its revenues at IPO time. Google used 1% of the company’s stock to purchase Oingo, which meant that Altucher’s potential $1 million bet would have been worth around $300 million in 2011.
5) Microsoft will chase Google down.
Word has it that Microsoft will feature an immensely powerful search engine in the next generation of Windows, due out by 2006… As a result, Google stands a good chance of becoming not the next Microsoft, but the next Netscape. — The New Republic, May 24, 2004.
Alas, Microsoft’s Bing search engine didn’t come out until three years after the article said it would. And it wasn’t until last year when Microsoft truly embedded Bing into Internet Explorer on Windows 8.1.
Even if Bing gains traction on desktops — where it still only has about a 19% market share — search is transitioning to mobile. And there, Google utterly dominates and will probably stay in control because its Android operating system powers around 85% of the world’s mobile devices, versus Windows’ mere 3% market share.
6) Google isn’t a good long-term investment.
Don’t buy Google at its initial public offering. — Columnist Allan Sloan, Washington Post, Aug. 3, 2004.
I’m back from the beach and it’s clear that my advice turned out to be wrong…But now that the price is above the original minimum price range, I’m not in doubt. So I’ll repeat what I said three weeks ago. This price is insane. And anyone buying Google as a long-term investment at $109.40 will lose money. — Allan Sloan, Washington Post, Aug. 24, 2004.
Well, investors didn’t lose their shirts. A $10,000 investment in Google back then would have turned into more than $110,000 over the past decade. By comparison, that same $10,000 invested in the S&P 500 would have grown to less than $22,000. Howard Silverblatt, a senior index analyst for S&P ran some numbers and discovered that only 12 stocks currently in the S&P 500 wound up outpacing Google during this stretch.
To his credit, Sloan, now a columnist at Fortune, later admitted that “I was wrong, early and often, on Google’s stock price when it first went public, for which I ultimately apologized.”
7) Google isn’t a good value.
If you have any doubts at all about Google’s sustainability — you may, for example, recall that Netscape browsers used to be just as ubiquitous as Google home pages — you shouldn’t touch the stock unless its market capitalization is well under $15 billion. — MONEY Magazine, July 2004.
Okay, so we’re not infallible either. If you had followed MONEY’s line of thinking, you never would have purchased this stock because at the opening price of $85, the company was already valued at $23 billion. And it never dipped below that level on its way to a near $400 billion market capitalization today.
MONEY based its analysis on numbers crunched by New York University finance professor Aswath Damodaran, an expert on valuing companies.
Damodaran came to the $15 billion assessment after figuring that Google would generate a total of nearly $48 billion in cash over its lifetime. That turned out to be a bit off, as Google has generated that amount of free cash flow in just the past five years.
Again, this was an example of how difficult it is to estimate the future value of a corporation based on what the company is up to at the moment.
8) Google will avoid being evil.
Don’t be evil. We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company. — Google’s 2004 Founders’ IPO Letter.
Now, evil is in the eye of the beholder. Some privacy buffs think Google long crossed the line when it began tracking user behavior across all of its services including search, Gmail, You Tube, etc.
Progressives, meanwhile, point to Google’s lobbying efforts as a sign the company is behaving like any other corporation. The company has reportedly contributed to conservative causes such as Grover Norquist’s Americans For Taxpayer Reform, which seems to belie the company’s left-leaning Silicon Valley culture.
Then there’s the fact that Google’s chairman Eric Schmidt has stated that he is proud of how the company has managed to avoid billions in taxes by holding company profits in Bermuda, where there is no corporate tax.
Whether you think this qualifies as evil or not, it highlights what folly it was to try to ban evil.
As Schmidt stated in an interview with NPR:
“Well, it was invented by Larry and Sergey. And the idea was that we don’t quite know what evil is, but if we have a rule that says don’t be evil, then employees can say, I think that’s evil,” he said. “Now, when I showed up, I thought this was the stupidest rule ever, because there’s no book about evil except maybe, you know, the Bible or something.
It's been a decade since Google went public. Here are 10 ways the company has transformed the market—and our lives— since.
Back in 2004, investors weren’t entirely sure what to make of Google, and skeptics abounded. Fast-forward to today, when we can look back at how far the company has come, in ways that inspire both awe and concern. Below are 10 examples of its influence.
1. It has changed our language. Despite Microsoft’s best efforts, there’s a reason “Bing” never caught on as a verb, let alone as a beleaguered anthropomorphic meme. The phrase “to Google” is so popular that the company is actually worried about losing trademark rights if the term becomes generic, like “escalator” and “zipper,” which were once trademarked.
2. It has changed our brains. Recent research has confirmed suspicions that 24/7 access to (near) limitless information is not only bad for human discourse—it’s also making us worse at remembering things, regardless of whether we try. And even if we aren’t conscious of it, our brains are primed to think about the Internet as soon as we start trying to recall the answer to a tough trivia question. Essentially, Google has become our collective mental crutch.
3. It set the stage for Facebook and Twitter’s sky-high valuations. Yes, lofty valuations based on mere speculation were also common back in the dot-com fervor of the ’90s, says Ed Crotty, chief investment officer for Davidson Investment Advisors. But Google broke new ground by proving that even just the potential for a huge audience could pay off in a big way.
“In the early days, when people were thinking in terms of web portals, the barriers to entry didn’t seem high for search,” Crotty says. That meant Google’s competitive advantage wasn’t clear. But “the tipping point was when Google was able to scale up their audience enough to attract ad agencies, and then further improve their algorithms, since those get better with scale. That’s partly why you see tech companies now willing to forgo profits for a period of time in order to build an audience.” And also why investors are willing to throw money their way.
4. It has taken over our cell phones. Since the first Android phone was sold in 2008, Google’s mobile operating system has bulldozed the competition. Today it claims nearly 85% of market share, nearly doubling its hold over the last three years. Next stop, self-driving cars?
5. It has transformed the way we use e-mail. Gmail was invented a decade ago, before bottomless inboxes were a sine qua non. It’s hard even to remember those dark ages when storage space was sacred—and deleting emails was as tedious-but-necessary as flossing. Today our accounts serve as mausoleums, housing long-forgotten files, links, and even whole relationships. Google itself has touted alternative uses for Gmail, such as setting up a virtual time capsule for your newborn—though in practice accounts can’t be owned by anyone under 13. But even that last point is about to change.
6. It’s changed how we collaborate. Back in 2006, Google acquired the company behind an online word processor named Writely. With that bet, Google created a world where it’s taken for granted that people can collaborate on virtually any type of document, whether for work, play, or (literally) revolution.
7. It has allowed us to travel the globe from our desks. Yes, MapQuest was popular first. But Google Maps (and Earth) has become much more than a tool for measuring travel routes and times. Since Google Street View came onto the scene in 2007, it’s been possible to “visit” distant destinations, give friends a virtual tour of your hometown, plan ahead of trips, and waste even more time on the Internet. Of course, the more popular a tool, the more useful it is to those who’d like to spy on us.
8. It has influenced the news we read. Ranking high in Google search results is serious business and can have a profound effect on the success of companies, media outlets, and even politicians. When I just Googled “how SEO affects journalism,” this link was at the top of my search results. How is that significant? Well, for one, that story itself has been so successfully search engine optimized that it still tops the list despite being four years old.
But most importantly, many of the concerns raised in the piece have not gone away—such as the pressure to “file some pithy blog post about the hot topic of the moment” at the expense of covering stories that would be prioritized based on traditional measures of newsworthiness. What that means for you, the reader: more headlines like this and this.
9. It has turned users into commodities. We all love free stuff, but it’s easy to forget that services offered by companies like Google and Facebook aren’t truly “free,” as data expert Bruce Schneier has pointed out. Remember that all of your data (across ALL of the services you use, and that includes Calendar, Maps, and so on) is a valuable good that Google is packaging and selling to its real customers—advertisers.
10. It’s changed how everyone else sees YOU. Unlike your Facebook profile, the links that turn up when potential employers (or love interests) Google you can be near-impossible to erase. Perhaps unsurprisingly, Google uses the fear of embarrassing search results to encourage people to manage their image through Google+ profiles.
Billionaire hedge fund manager George Soros and billionaire investor Warren Buffett are both buying tech stocks—but decidedly different kinds. So who would you bet your portfolio on?
Both billionaire investor Warren Buffett and billionaire hedge fund manager George Soros have had somewhat troubled relationships with tech stocks over the years.
Buffett famously punted on tech throughout the 1990s, declaring that “we have no insights into which participants in the tech field possess a truly durable competitive advantage.” So his investment company Berkshire Hathaway severely lagged the S&P 500 in the late 1990s — but at least it missed the tech wreck in the early 2000s. For Soros, the opposite was the case: His fund stayed at the Internet party too long in 2000.
Recently, though, both octogenarians have been dabbling in this sector — but in decidedly different ways.
SEC filings released on Thursday indicate that while Buffett is looking to the past for time-tested but overlooked plays on this sector, Soros seems only to be interested in future trends.
Buffett and ‘Old Tech’
Buffett is taking the old school approach. Quite literally. His tech sector holdings — indeed, his entire portfolio — looks as if it was straight out of the early or mid 1990s.
This technology service provider — which has run into difficulties in the crowded cloud computing space lately — has seen its revenue growth decline for several quarters while its stock has been under fire.
No doubt, Buffett clearly sees IBM as a value, as the stock trades at a price/earnings ratio of around 9, which is about half what the broad market currently trades at. In his most recent letter to Berkshire shareholders, Buffett described IBM as one of his “Big Four” holdings, along with American Express, Coca-Cola, and Wells Fargo.
Beyond IBM, Buffett prefers lower-priced but slower growing internet backbone companies to fast-growing but pricey content providers. This is part of a tech investing trend that MONEY contributing writer Carla Fried recently addressed.
Other stocks he recently purchased or positions that he has been adding to include the Internet infrastructure company Verisign VERISIGN INC. VRSN -0.163% and internet service providers Verizon VERIZON COMMUNICATIONS INC. VZ 0.4824% and Charter Communications CHARTER COMMUNICATIONS INC. CHTR -2.706% .
Soros’ ‘New Tech” Bets
By contrast, Soros seems to be trying to ride current and future trends — albeit with highly profitable names.
In the second quarter, Soros added to his stake in the social media giant Facebook FACEBOOK INC. FB 0.0506% . Last month, Facebook shares hit a record high after the company reported robust profits. Plus, Facebook has proven to Wall Street that it can conquer the mobile advertising market, as nearly two-thirds of its revenues now come from mobile ads.
Facebook isn’t the only mobile bet Soros is making. He has also been recently adding to his stake in Apple APPLE INC. AAPL 0.6393% , which along with Google dominates the mobile computing space. New data from IDC showed that Apple’s iOS operating system held about a 12% market share among phones shipped in the second quarter — even though demand for iPhones has fallen as consumers await the arrival of the new iPhone 6, which will be introduced in September.
For the moment, Soros’ bets on these new tech names seem to be in the lead.
But over the long-term, would you bet on Team Soros or Team Buffett?
The social media company blew past expectations—using an unofficial measure of profits. Based on generally accepted accounting principles, Twitter is still in the red.
When you get used to receiving complicated messages in a short amount of space — in, say, 140 characters — you grow accustomed to overlooking key details.
That was evident late Tuesday, when investors reacted to Twitter’s earnings announcement by sending shares of the social media company soaring more than 30% in after-hours trading.
Investors pounced on some better-than-expected results found high up in Twitter’s earnings release. This included the fact that revenues in the second quarter jumped 124% to $312 million, and that the company earned $0.02 a share, slightly stronger than what analysts had been expecting.
Nevermind that those profits were based on an adjusted, alternative method of measuring earnings that critics have come to criticize. Using generally accepted accounting principles (GAAP), Twitter TWITTER INC. TWTR -0.3092% actually lost $145 million in the quarter, or $0.24 a share.
What’s more, Wall Street analysts tallied by Zacks.com still expect Twitter — based on GAAP standards — to lose $0.98 a share in 2014 and another $0.87 a share in 2015. So it’s probably premature to regard the second-quarter results as a breakthrough for the profitless company.
User Growth Rebounds
To be fair, there were promising developments in the second quarter. Twitter reported that so-called timeline views, which are the company’s equivalent of page views, hit a record 173 billion in the quarter.
This was an important point, as timeline views in the prior quarter fell short of the company’s peak performance in 2013, despite the fact that there are more Twitter users than ever.
In the second quarter, the Twitter’s so-called average monthly active users (MAUs) rose an impressive 24%. Active users who use mobile surged even more, by 29% in the past year to 211 million.
By comparison, timeline views grew a relatively modest 15%, which means the company still needs to work on converting Twitter account holders into truly active users.
This morning, three research firms changed their rating on Twitter stock in the wake of the company’s earnings results. Bank of America upgraded its recommendation on the stock to a “buy”. UBS upgraded its rating to a “neutral”. And Pivotal Research downgraded the shares to a “sell” as Thursday evening’s surge pushed the stock above analysts’ target price.
That pretty much sums up the still-cloudy picture at Twitter.
Amazon.com and Pandora Media learn the hard way that potential profits just won't cut it anymore in this market. Take note, Twitter.
Updated 7/25/14 4:15 pm
Investors sent a loud message to e-commerce and social and streaming media companies on Friday: profit-less potential just won’t cut it anymore.
Nowhere was this clearer than at Amazon.com, which seems to be able to deliver everything these days — tablets, streaming video, even food — with the exception of earnings.
After the company announced a wider-than-expected loss Thursday, the stock fell nearly 10% Friday, helping push the entire market lower at the end of the week.
In what sounds like a broken record, the e-commerce giant reported another robust quarter of sales — up an impressive 23% versus the same period a year ago — yet still can’t seem to turn a profit.
As costs rose in the recently ended quarter — as the company invested in new areas such as its recently announced Fire smartphone and a new unlimited e-book rental service — Amazon AMAZON.COM INC. AMZN 0.1927% reported a net loss of 27 cents per share. That was nearly twice the loss that Wall Street analysts had been bracing for.
Even worse, the e-tailer warned investors that the third quarter won’t be much better. Amazon officials forecast that net sales would likely grow between 15% and 26% in the current quarter but that the company would probably suffer an operating loss of between $410 million and $810 million.
For more than a decade, Amazon shares trounced the broad market, as company leaders managed to convince investors not to focus on short-term losses, but rather the long-term potential for this company to dominate retail and consumer electronics.
They tried to do the same on Thursday, pointing to the company’s entry into the smartphone market. “Customers all over the U.S. will begin receiving their new Fire phones — including Firefly, Dynamic Perspective, and one full year of Prime,” said CEO Jeff Bezos, in announcing his company’s results. “We can’t wait to get them in customers’ hands.”
Investors shot back: “We can’t wait until we start seeing some profits in shareholders’ hands.” By Friday afternoon, it was clear that investors have had it with Amazon’s just-you-wait attitude with earnings.
For the year, Amazon shares have lost nearly a fifth of their value.
The streaming music company reported a loss of 6 cents, which was worse than the 4-cent a share loss that investors were expecting.
The company tried to spin the news in a positive light by stressing its relative success in mobile advertising, a hot topic in tech these days.
“Our better-than-expected second-quarter results demonstrate success and continued business acceleration as a result of our investments in mobile and local advertising,” Pandora’s chairman and CEO Brian McAndrews noted in the company’s press release. “Mobile advertising reached a record 76% of total ad revenue and local grew at 144% year-over-year.”
Wall Street would have none of it.
As second-quarter earnings season gets underway, the market’s stance should worry other profit-less tech companies that are set to report their results next week.
On deck for Tuesday is Twitter TWITTER INC. TWTR -0.3092% . The social media company, whose shares have already fallen 39% this year, is expected to report a loss of 29 cents a share when it announces its results next week.
Many tech companies saw their high-flying stocks lose altitude this year.
Leaders in social media like Twitter TWITTER INC. TWTR -0.3092% and LinkedIn LINKEDIN CORP. LNKD -1.2311% fell more than 40% from their 2014 highs. Others, such as the retailer Amazon.com AMAZON.COM INC. AMZN 0.1927% , took more modest drops, although shareholders might not have found them modest at the time.
These types of stocks, among others, are cheaper than they were, but are they cheap enough?
They almost certainly can’t be considered bargains by normal valuation yardsticks. The price-earnings ratios for tech companies — in cases where there are earnings — can run close to or into triple digits.
Portfolio managers are finding, however, that some businesses offer sufficient growth potential to warrant bets around current prices.
Kevin Landis, manager of the Firsthand Technology Opportunities Fund, has been adding to his position in Twitter, a longtime holding, because he expects the stock to improve over the long haul as the company evolves from an upstart held in tech portfolios into a respectable blue chip that will be far more widely owned.
“It’s only a matter of time before Twitter goes into the S&P 500,” says Landis, a Silicon Valley investor since the days of CompuServe email addresses composed of long strings of numbers. “Like Google 10 years ago or Facebook two years ago, everyone will have to own them.”
The reason that Twitter plunged in the first place, losing more than half its value, is that investors pulled back ahead of anticipated selling by corporate insiders. Many feared a massive dumping of Twitter stock once the lock-up period from the company’s November initial public offering ended. That has abated, Landis says, and the stock “really looks like it has found a bottom.”
Landis also holds Google GOOGLE INC. GOOG 0.1735% along with Facebook FACEBOOK INC. FB 0.0506% , which has nearly quadruped in value since late 2008, but he’s having reservations about the latter. Landis questions how much growth potential Facebook has left and warns that he may sell before the year is out.
“I’m still happy to hold it, but at over $160 billion [in market value], how much can it possibly make in the next 10 years?” he wonders. “I don’t know that we’ll hold it forever.”
Landis has no such misgivings about LinkedIn, a social-media company for professionals. He remained invested through the recent plunge and believes that the stock is worth buying today.
“We own it and would consider adding to it,” he says. “It’s a top brand. It’s hard to imagine a scenario where LinkedIn fades from view.” The $110 million Firsthand Technology Opportunity is up an annualized 20% in the five years through June 27, according to Lipper.
John Toohey, head of equities for USAA Investments, which offers the $571 million USAA Science & Technology Fund, has similar opinions about Facebook and LinkedIn, only reversed.
Facebook, a holding in several USAA portfolios, including Science & Technology, is the one with the greater growth potential, in his view, because its everyman customers are more tolerant of having ads thrust in their faces than the professionals who use LinkedIn.
“They have huge opportunities to monetize their base,” Toohey says about Facebook. Still, he encourages the company not to be greedy by saturating the site with ads or allowing ads that are targeted so precisely to users that it becomes obvious just how much information the company has on them.
“People are fine being marketed to,” Toohey says, “but they need to strike a delicate balance.”
Amazon.com, whose stock fell more than 25% earlier in the year, may need to execute a balancing act of its own. Amazon has spared little expense in growing its business to become a dominant retailer, but companies that spare little expense tend to have thin profit margins and generate anemic cash flow, Toohey notes. USAA Science & Technology delivered an annualized return of 21 percent in the past five years.
“We own some Amazon, but we’re cautious about it,” he says. “The challenge is whether they’ll ever slow down spending to ramp up cash flow and margins.”
Another possible impediment to Amazon and its shareholders is that it sends out so many packages at such short notice that delivery services like FedEx Corp. and United Parcel Service Inc. eventually may balk at doing the heavy lifting, at least at current prices.
“Amazon could shoot themselves in the foot,” Toohey warns. “If FedEx and UPS are going to be able to support all that volume with two days’ notice, they’ll have to hire people and do logistics. Are they going to get paid for it?”
Prospective buyers of tech high fliers may be asking themselves the same question.
Recalling the 2000 crash, Landis concedes that investors can get hurt in companies like these, but he highlights a difference between now and then – a dearth of opportunities for growth in other assets.
“After a long bull market, there’s nothing to go back to,” he says. “When people take money off the table and look around, they see that gold is played out, at least for now; there’s not much [to make] in bonds, and stocks of old-guard companies aren’t growing that fast.”
“You can go for dividend yield,” he says, “or you can go for growth.”