It is amazing what institutional investors – especially large holders – put up with. Do Portfolio Managers communicate with CEOs any longer? PMs used to speak with management teams to provide feedback around capital allocation decisions, financial disclosures and more. My sense is that less of this interaction occurs today. Below we cover a few examples. We also cover yesterday’s proposed Big Tech regulation. Innovation will slow at each firm (Alphabet, Amazon, Apple, Facebook) regardless of what the FTC may or may not do.
Tickers mentioned: AAPL, AMZN, BKNG, FB, GE, GOOG, PLTR, T
Palantir’s (tkr: PLTR) financial reporting: Analytics firm Palantir went public last week. We first became aware of Palantir circa 2014. Palantir customer deployments require considerable work given the amount and variety of data Palantir’s platform ingests and processes. I view Palantir as a Services company with a Software wrapper. I raised an eyebrow when Palantir Co-Founder and CEO Alex Karp stated (I’m paraphrasing, actual interview is below) “we have Software-like 80% gross margins“. Yet PLTR’s G&A line runs at 25% of Revenue excluding stock comp. A true software company would run G&A at 10-15% of Revenue. I question whether Palantir has allocated expenses that belong in Cost of Revenues to G&A in order to artificially inflate Gross Margins. It is a question worth asking, especially for new institutional holders.
General Electric (tkr: GE) served with Wells Notice: GE gets let off easy. The SEC slapped GE with a $50 million fine in 2009 as a penalty for accounting fraud charges. Former GE CEO Jeff Immelt kept his job. This week GE disclosed that the SEC served a Well Notice to the firm on September 30th concerning its long-term care policies which we wrote about last year. After reading through a number of statutory filings last year from a variety of insurance carriers we feel comfortable saying that GE’s disclosures in this area are significantly lacking in transparency (that’s being kind).
John Stankey’s (AT&T CEO) cautious approach is backfiring: Stankey inherited the CEO chair in April 2020. Thus far his cautious approach runs counter to what I would want from a wartime CEO (we are in a COVID war). Stankey has a brand new shiny streaming platform (HBOMax) to which he could release new movie and TV content. Instead, Stankey has curled up in the fetal position. After months of delays on what was to be this year’s summer blockbuster for WarnerMedia – Tenet – the movie was eventually released in selected theaters globally via a staggered schedule and suffered at the box office given low theater attendance.
AT&T missed an opportunity in our view to release Tenet direct to HBOMax during COVID lockdown. Endeavor’s (owned by Silverlake), UFC business pushed to hold live events during lockdown and has significantly grown its audience this year as a result.
Lesson learned? On Monday WarnerMedia/AT&T announced that it would push a slate of big movies back including Dune (Dec 2020 release date pushed to October 2021), and The Batman (October 2021 release date to March 2022). Who is to know if another virus or something else out of left field won’t cause further delay? “Wait-and-see” is rarely the best approach. It appears that the Wonder Woman 1984 release was designated for HBOMax in the past hour, so perhaps Stankey has heard our calls for a more aggressive approach.
“Big Tech” Regulation. House Democrats publish results of 16 month study: Who knows what the long-term outcome will be, but we are certain the FTC won’t have a decision(s) around whether to regulate or how to regulate Alphabet, Amazon, Apple and Facebook by year-end. This will be a decade-long process if not longer (see Microsoft). The 449 page report (read HERE), does not engender confidence (only one product graphic?)
The primary risks for Alphabet, Amazon, Apple and Facebook as it relates to proposed Government regulation are two-fold and “innovation” is the keyword. First, each firm will become more risk-averse -especially on the M&A front. Thus, innovation will slow. Second, this proposed regulation issue is not going away and will absorb significant management bandwidth – which will also slow the pace of innovation.
We believe that if the FTC were to take action it would choose the path of least resistance. In our view this would include some sort of action geared toward reducing Alphabet’s and Amazon’s ability to promote their own products and services across their respective platforms at the expense of competitive offerings. I don’t have an issue with Alphabet’s practices nor Amazon’s. However, I’m not a Federal Government entity looking to expand my purview (House Democrats want additional funding to expand the FTC).
Examples of choosing the path of least resistance as it relates to Alphabet and Amazon could include actions where the subject matter would be relatively easy for government employees to understand and the actions would be easy to measure. For example, in the case of Alphabet one action the FTC could take would be to limit Google/Alphabet’s ability to promote its services across its Web properties. For example, listing the Google Travel service at the top of a Google Search results Webpage while a competing offering from Booking.com (tkr: BKNG), may be placed toward the bottom of the same results page (or lower). This despite an increase in Advertising unit fees that BKNG pays to GOOG. Similar action could be taken on Amazon’s retail Website where it currently often promotes Amazon products ahead of competitive offerings.
I could imagine the FTC forcing Facebook to provide more transparency around user data and enhanced privacy controls. A forced breakup would be extremely difficult. A large fine (a shakedown) would not be out of the question. Forced breakups for any of the Tech giants would be difficult. Were I Amazon, Alphabet or Apple I would spin off business units to unlock value (that’s a different story and you have to pay for that advice).
Apple and Google Toll booths. I could imagine the FTC taking 50 basis points from Apple and Alphabet related to every App Store and Google Play Store 30% commission. I’m not in favor of this type of government action and am generally against FTC intervention.