Is The Bottom Almost Here?

[changegonnacome]

10 minutes ago, dealraker said:

It inevitablly becomes cyclical growth

Exactly - the social media/adtech space is about to discover for the first time the cyclicality that is advertising…it’s real business activity……artfully obscured as it has been by all the Silicon Valley rhetoric & mission statements. 

 

In the last recession ~2008 digital ad spend was some 10% of total ad spend…..the secular trend to digital advertising was so strong that it grew through that downturn….not now when digital constitutes easily 50%+…..when the CFO walks into the CMO office to ‘make the quarter’ the CMO has to cut the digital budget this time.

 

 

 

[Gregmal]

Google was also a huge beneficiary of crypto and ponzi companies throwing around money like it was 1999. No surprise that as those companies suffer so does ad spend. 

[changegonnacome]

13 minutes ago, Gregmal said:

Google was also a huge beneficiary of crypto and ponzi companies throwing around money like it was 1999. No surprise that as those companies suffer so does ad spend. 

People talk a lot about trickle down economics as it pertains to society. It’s a theory with little real evidence of success.

 

One place I know trickle down to be true - is as you alude too in Silicon Valley…it’s a circular economy with VC’s pouring money in at the top of the funnel where it trickles down to Google & Facebook ads to drive growth at all costs.

 

Ponzi’s/Crytpo sure - but don’t dismiss this result with rose tinted glasses…..this does not dissuade me from reading ALOT into these numbers as it pertains to the non-ponzi economy….i.e. the real economy. It speaks to a slowdown.

 

Before you @Gregmal start blaming the Fed and bs inflation narrative….one should note the fact that Fed policy acts with a significant lag…..what these results point to is a weakening in the consumer that pre-dated any real effect from the Fed rate rises….this is a slowdown that occurs in the absence of any Fed intervention , a slow down that occurs when purchasing power of some of 1/3 of an economies consumers (the marginal consumer with little wallet slack) begins to get destroyed by inflation. Then on the international side we have DXY strength & end market weakness etc

Edited October 26, 2022 by changegonnacome

[Castanza]

52 minutes ago, changegonnacome said:

Exactly - the social media/adtech space is about to discover for the first time the cyclicality that is advertising…it’s real business activity……artfully obscured as it has been by all the Silicon Valley rhetoric & mission statements. 

 

In the last recession ~2008 digital ad spend was some 10% of total ad spend…..the secular trend to digital advertising was so strong that it grew through that downturn….not now when digital constitutes easily 50%+…..when the CFO walks into the CMO office to ‘make the quarter’ the CMO has to cut the digital budget this time.

 

 

 

 

Where else is ad spend going to go in the next 10 years? Advertising will be internet based for the foreseeable future. Google isn't a one product shop just saying. You want to talk about META  that is entirely dependent on their two platforms and ad rev generated on them, then sure I hear you and agree. I also agree that we haven't seen a true cycle in the social media sector. 

 

- Cloud grew 37% yoy.

- Search still grew at 4%.

- YouTube was down 2% (vs peers? We will see).  66B Yearly users vs FB 16B and Instagram 6B. Nobody can touch YT yet.

- They have 116B in cash with 63B fcf ttm. 

- Revenue still grew yoy.

[UK]

2 hours ago, changegonnacome said:

 

Only thing you need to note - this is the slowest revenue growth for GOOG since 2013…..2013…..like pretty much a decade.
 

If that doesn’t given you pause I’m not sure what will. Advertising & GOOG is the canary in the coal mine for the economy and the canary in this case has stopped chirping.

 

Well: a. google is still growing 10+ percent after last years covid boom of like 40+ percent (and cloud is growing almost 40 per cent). b. what multiple you would give to a capex lite, global business growing at 10 per cent? c. even if economy will slow drastically, how much value of a business one or two subpar (not even loss making in googl case) years constitutes?  Of course it could get even cheaper and perhaps assumptions about business perspectives are even more important, but it is like first time from the years you mentioned (except for a brief period in 2020), when some of these really wonderful businesses (not only Google) are finally getting reasonably priced?

 

[dealraker]

2 hours ago, Dinar said:

Any reason why you do not own Aon?  Thank you.

Dinar I bought all the brokers (after AJG) some 5-6 years before Elliott Spitzer's blitz on them (I'm guessing 2004-05-ish) so I've owned Aon since then.  I own AON, Marsh, Willis (which bought the entitiy I bought), and Brown and Brown (Poe and Brown).  At one time you could buy, yea I'm serious here, all the Poe and Brown you wanted for 10 times free cash flow while the business (and management told you flat out this was going to happen) grew earnings a 15% a year.  Yep, all you wanted...just lollygag around and call your broker because it was available.

 

Willis bought/partially merged (as I remember) with HIlb, Rogal, Hamilton which I owned.  I think that's when I took stock in Willis.  But somewhere along the line I bought a tad more Willis---- before it merged with Towers Watson.

 

For a tad more history, and this one is absolutely incredible....Hub Group or Hub International, can't remember exactly what they called it, was 40% owned by Prem Watsa and Fairfax.  But Hub was listed on the Toronto exchange, briefly got listed on the NYSE, then back only to Toronto.  You could buy, yes this again is absolutely true, all the Hub you wanted (if you were a small investor) for less than 8 times earnings, sometimes 6 times, while Hub just plugged 15 percent or more earnings growth.

 

Unfortunately Prem and Co voted to sell the dang thing...a VERY sad day in my life!  

 

Lastly, I think this is odd but it is what it is: 4 of my 25 investment club members are just flat out well-off from owning all of or parts of insurance brokers.  None of the others other than me have any concept of the publicly traded brokers and their history of success with the exception of saying, "Well, they call every day making offers."   

 

 

Edited October 26, 2022 by dealraker
adding stuff

[Gregmal]

18 minutes ago, dealraker said:

I own AON, Marsh, Willis (which bought the entitiy I bought), and Brown and Brown (Poe and Brown).

Ive met Hyatt a few times and for sure theres something different about owner operated businesses. BRO has been one of the most under appreciated long term compounders out there. 

[Dalal.Holdings]

How ‘bout them tech stocks. Guess you can only sell so many ads for boner pills, crypto, and weed

 

https://twitter.com/CundillCapital/status/1585278664958218241P

[changegonnacome]

1 hour ago, UK said:

Of course it could get even cheaper and perhaps assumptions about business perspectives are even more important, but it is like first time from the years you mentioned (except for a brief period in 2020), when some of these really wonderful businesses (not only Google) are finally getting reasonably priced?

 

I wasn't really commenting on GOOG's valuation per se.........simply thinking of it as a bellweather for the economy.

 

Definitely FANGMA will come down from its lofty FCF yield of old.........as financial instruments they have competition now not from TikTok or Alibaba.....................but from high yield savings accounts!

[Dalal.Holdings]

Don’t forget—these monopolies are ripe for antitrust actions.

 

When your valuations reach in the trillions, you’re flying too close to the sun, Icarus

[CorpRaider]

2 hours ago, Gregmal said:

Ive met Hyatt a few times and for sure theres something different about owner operated businesses. BRO has been one of the most under appreciated long term compounders out there. 

Thanks for the info @dealraker and @Gregmal.

Edited October 26, 2022 by CorpRaider

[UK]

2 minutes ago, changegonnacome said:

 

I wasn't really commenting on GOOG's valuation per se.........simply thinking of it as a bellweather for the economy.

 

Definitely FANGMA will come down from its lofty FCF yield of old.........as financial instruments they have competition now not from TikTok or Alibaba.....................but from high yield savings accounts!

 

Yes, I generally agree with that and (except for some adventures with china tech) has been waiting for that from like 2020 summer, and still at this point my exposure is mainly BRK, but I also think that some of those long duration stocks have already come down a good part of way, and also, that you should look further than 3-6-9 month in terms what could happen with economy/inflation/rates. These business (not only FANGs, but long duration-quality in general) not so long ago were valued at 30-35 PE. They generally are well diversified globally (no need to worry about currencies so much), have strong  pricing power and low capital requirements, so are inflation proof business wise (like Sees candy from WB letters on infliation), also usually are debt free or net cash and recession resilient. The only problem from perhaps until now was valuation but this problem is getting fixed as we speak. A lot of them come from 30+ PE to <20, some even to 10+. No need to look at questionable former darlings with questionable business models. And I agree It could be still premature, but if I can easily see >10 return from such businesses long term, I think they are starting to be attractive, at least for me. 15 percent would be even better. but generally I think we are not there yet. Also re inflation, I really like to discus about it but do not like to have strong opinion on it. Because like just 3 years ago everyone was afraid of high debts, automation, robots taking jobs from people (where are those robots now?) and permanent disinflation. Now everyone are talking about labor shortages and sees permanent high inflation, deglobalization etc. Meanwhile Japan still lives happily in a 0 rates world. So who knows for sure how future or even Autumn 2023 will look like? If after 12 month from now we are back at no growth and disinflation, growth will come back in favor.   

 

As for Google, sure it could have temporary problems, but big picture, Google and Meta are still global online advertising duopoly, there are few real alternatives at this point from advertisers point of view, sure they are big at this point so recession could be more pronounce for them, than in 2009, but economy will come back at some point (*at least if nukes will not start to fly) and than it is like tollbooth on global growth. Not to mention still fast growing Cloud, AI and other bets in case of Google. Also this digitization, which was turbocharged during pandemic, I think it is far from over, Microsoft talks about just getting started, cloud based businesses seems still supporting this claim. Than again if one is afraid of technology changes, companies like UMG or LVHM or similar story maybe less growth but more visibility. How much cheaper then 18 PE you expect them to become? 15x so another -10 percent from there? I remember KO trading at some 12x F PE in 2009 spring, but not sure if probability of such scenario is high? 

 

UK 

 

 

 

[Gregmal]

That is a good point and a dominantly prevailing theme during every downturn. The bear camp deliberately ignores anything beyond 12 months and always uses those near term scare tactics to lobby for even more extreme price declines, completely ignoring what’s already occurred and it’s context.

 

I’m not a FANG fan but they’re closer to fairly valued than they are to overvalued(except for maybe Amazon) so it’s dumb to be shorting them. They’re great companies, at this point, mediocre but ok stocks to own, but overall with a little bit of effort one can do far better buying other stuff.

[dealraker]

2 hours ago, Gregmal said:

Ive met Hyatt a few times and for sure theres something different about owner operated businesses. BRO has been one of the most under appreciated long term compounders out there. 

That's pretty cool Greg.  Here's a story for you.  My parents died young and I have no children so family for me is my sister's bunch, now down to the nephew/nieces and great n/n's, and great-great n/n's.  So my family is moving out of the builder's supply business back in the early 1990's and my brother in law (sis's husband) comes to me and says, "We decided we want you to manage some of our money for us."   I go, "Well not sure I want to do that but I will anyway."  He sets up the account and he comes do see me and says, "Why did you do that?"  I said, "I'll make up the difference if you lose money."  LOL...I'd put the entire amount in Poe and Brown.   Of course you know where that went.  They'd arranged to pay me for my 'management' but I just laughed about that.  

 

He calls me a couple days ago and says, "I want my money back...we lost 10% in one day."  He was accurate with the day's loss...but being silly of course.  He still owns all the stock within the lumber company.

[Castanza]

1 hour ago, Gregmal said:

That is a good point and a dominantly prevailing theme during every downturn. The bear camp deliberately ignores anything beyond 12 months and always uses those near term scare tactics to lobby for even more extreme price declines, completely ignoring what’s already occurred and it’s context.

 

I’m not a FANG fan but they’re closer to fairly valued than they are to overvalued(except for maybe Amazon) so it’s dumb to be shorting them. They’re great companies, at this point, mediocre but ok stocks to own, but overall with a little bit of effort one can do far better buying other stuff.

 

Reminds me a bit of AAPL in 2018 when everyone was freaking out. Then @rb backed the truck up. 

[Dalal.Holdings]

 

 

Employees of a long unprofitable tech company who stole from owners of the business over the years with massive amounts of Stock Based Comp about to realize what Winter is really going to bring. Another harbinger of doom.

 

Winter is Coming, and for these folks it's going to be the hardest.

 

[Parsad]

1 hour ago, Castanza said:

 

Reminds me a bit of AAPL in 2018 when everyone was freaking out. Then @rb backed the truck up. 

 

Fully agree! 

 

Tomorrow morning, you'll essentially be able to buy a global company, with $120B in revenues, $30B in annual profit, $40B in cash/securities, $9B in debt, buying back $3-6B of shares a quarter, with 3B users worldwide for a single digit P/E!

 

Cheers!

[EBITDAg]

8 minutes ago, Parsad said:

 

Fully agree! 

 

Tomorrow morning, you'll essentially be able to buy a global company, with $120B in revenues, $30B in annual profit, $40B in cash/securities, $9B in debt, buying back $3-6B of shares a quarter, with 3B users worldwide for a single digit P/E!

 

Cheers!

As a bagholder, unfortunately that company just did $0 in FCF, and that's with $3B in SBC not burdening that calc, in Q3. YTD FCF with SBC backed out is now implying a ~2% FCF yield on 2022 numbers, with no desire to pull back on expenses, so that number is probably even lower on '23 figures. Just a terrible intermediate term outlook.

[Parsad]

1 hour ago, EBITDAg said:

As a bagholder, unfortunately that company just did $0 in FCF, and that's with $3B in SBC not burdening that calc, in Q3. YTD FCF with SBC backed out is now implying a ~2% FCF yield on 2022 numbers, with no desire to pull back on expenses, so that number is probably even lower on '23 figures. Just a terrible intermediate term outlook.

You’re looking at one quarter or one year.  That’s what drives markets to do irrational things…like META’s current valuation.  The assumption is that META will neither grow again, nor generate positive free cash.  Cheers!

[bathtime]

1 hour ago, Parsad said:

 

Fully agree! 

 

Tomorrow morning, you'll essentially be able to buy a global company, with $120B in revenues, $30B in annual profit, $40B in cash/securities, $9B in debt, buying back $3-6B of shares a quarter, with 3B users worldwide for a single digit P/E!

 

Cheers!

At $105 after hours, net of cash, is not much over 2x sales. That seems decent if they can normalize earnings, capex, and margins over long term. 

[Dalal.Holdings]

May have to think further back than 2018 to come up with how bad it can get for tech and for how long, I’m afraid.

 

i’m finding great opportunities outside megacap tech. Why would I invest in the sector with wretched excess from the dying bull?

[changegonnacome]

3 hours ago, EBITDAg said:

As a bagholder, unfortunately that company just did $0 in FCF, and that's with $3B in SBC not burdening that calc, in Q3. YTD FCF with SBC backed out is now implying a ~2% FCF yield on 2022 numbers, with no desire to pull back on expenses, so that number is probably even lower on '23 figures. Just a terrible intermediate term outlook.

Advertising businesses are cyclical…….there’s an old market heuristic about buying cyclicals when they look expensive, not when they look cheap…..in regard to meta/goog…..the question is where we are and what remains & at what speed will the secular shift to digital ad spend continue at……for GOOG you only need to answer that question and be comfortable based on your assessment ……for META there are way more difficult questions be answered.
 

META is not Apple in 2017, Google just might be….but not quite yet.

[changegonnacome]

And then.........they started shooting the Generals.......

[mattee2264]

It is a bit of a re-run of the Nifty Fifty. Some of the FAANG stocks have been proven not to quite be as good businesses as everyone thought them to be. Others are still great businesses but mature and unlikely to grow anywhere near as fast as they did (especially during the pandemic which was a total bonanza for them) and rising interest rates is much more painful for them because they are priced as growth stocks. 

 

I'm a little leery with META. It is bad enough that social media is far more fickle and faddish than search with Tik Tok a formidable competitor they can't simply buy out like the other challengers. But then you also have all this futuristic metaverse crap. 

 

Netflix the programming isn't great and there is a lot more competition. 

 

Tesla is bound for a fall. It is the poster child of the pandemic bubble.

 

Google looks solid with its moat still intact but of course advertising is cyclical and its mature 

 

Apple and Microsoft still look like cream of the crop. But of course fabulous businesses though they may be their high PE ratios make them vulnerable to sentiment i.e. the PE investors are prepared to pay for a great business. So PE compression is likely still a tailwind and they are mature businesses and Apple has already exploited the opportunity in services and Microsoft in cloud so those revenue streams are more mature and unlikely to allow for as fast growth going forward and even with great companies slowing growth gets punished harshly by markets.

 

But yeah I think that how low markets go does depend to a large degree on what happens to the market leaders given that the market is still very concentrated with over 20% of the value of the S&P 500 represented by the tech giants. 

 

[Spekulatius]

I would argue that the FANG are too large to be Nifty Fifties. Xerox etc never were that large relative to the economy back in the 1960's than the FANG are right now. it's the law of large numbers more than anything else that is a problem for the FANGS, not so much the valuation (valuation was the main issue with the  Nifty Fifties back then).