Alphabet's earnings report; The Gap Between the Haves and Have-Nots of Tech Widens; Amazing day for Tesla; Stupid to twice stupid; Comments on the Willow breast pump

By Whitney Tilson

Tuesday, February 4, 2020
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1) Investors are once again failing to see the big picture at Google’s parent company Alphabet (GOOGL), which reported fourth-quarter earnings after the close yesterday.

The stock is down today because revenues came in slightly below expectations, but I simply see another amazing quarter by an extraordinary company.

It’s truly remarkable that a company of this size – $162 billion in revenue in 2019 – is still growing at this rate: 17% (19% constant currency) during the fourth quarter and 18% (20% constant currency) for the year. If that’s slowing growth, give me more of it!

Operating margin declined slightly in the fourth quarter from 21% to 20%, but that was mainly due to a jump in losses from “other bets” (the most valuable of which is self-driving car company, Waymo) from $1.3 billion to $2 billion. Excluding this, the operating margin of Alphabet’s core business rose from 24.6% to an even more remarkable 25%.

Earnings per share rose 20% to $15.35 for the quarter and $49.16 for the year.

Both sides of the free cash flow equation improved as well during the fourth quarter: operating cash flow rose 11% from $13 billion to $14.4 billion, and capital expenditures fell from $7.1 billion to $6.1 billion.

It’s great to see Alphabet pouring more and more of its enormous free cash flow into share repurchases, which rose 130% year over year from $2.7 billion to $6.2 billion.

And at long last, Alphabet is finally breaking out the revenues for YouTube ads – which rose 31% from $3.6 to $4.7 billion in the fourth quarter – and Google Cloud – which jumped 53% from $1.7 to $2.6 billion. The latter is a distant third to Amazon’s (AMZN) and Microsoft’s (MSFT) cloud offerings, but the growth is impressive.

2) All five tech giants – the others being Apple (AAPL) and Facebook (FB) – have now reported earnings – and, as this New York Times article captures, nothing has changed: The Gap Between the Haves and Have-Nots of Tech Widens. Excerpt:

With each passing quarter, tech’s wealthiest companies are building on their power, making it harder for smaller outfits to compete and for entrepreneurs to build the next Google or Facebook.

Amazon and Microsoft are profiting from the shift to cloud computing. Apple continues to own the premium market for apps, smartphones and wearable devices, while Google and Facebook are maintaining their grip on digital advertising.

This gravitational pull toward a handful of companies could have far-reaching implications for the global economy. Few tech outfits can afford to make the investments necessary to keep pace with the giants. The rest? They often have to pay up for access to the giants’ many, many customers and technology.

“The strong are getting stronger, and the weak are getting weaker. It’s a market of haves and have-nots,” said Daniel Ives, managing director of equity research at Wedbush Securities. “In 20 years covering tech, it’s unlike anything I’ve ever seen.”

Despite saber-rattling in Washington and elsewhere, it is clear that regulatory and legal scrutiny of the tech industry’s most valuable companies so far has done little to hurt the bottom line.

Here’s an amazing – and alarming – statistic from the article:

The large technology firms that dominate the public stock markets are at the extreme edge of a broader trend in American corporate life. Over the last half-century, the biggest American companies have captured a fatter share of profits produced by public companies, according to research from Kathleen M. Kahle, a University of Arizona finance professor, and René M. Stulz, an economist at Ohio State University.

In 1975, the top 100 public companies snared about 49% of the earnings of all public companies. By 2015, that share had jumped to 84%, their research showed.

3) What an incredible couple of days for Tesla (TSLA). On the heels of various bits of good news, shares rose $129 (20%) to close at $780 yesterday… and then they rocketed up another $160 this morning before pulling back slightly.

Last summer, the company’s market cap bottomed out at $32 billion. Tesla gained more than $23 billion in market cap yesterday. For perspective, only 305 U.S. companies have a market cap exceeding $23 billion.

Tesla’s market cap now stands at roughly $160 billion, larger than all but 39 U.S. companies.

I have no regrets about missing this on the long side – I’m just glad I recognized (and told my readers) that it was a bad short at $295 on October 24.

The stock is now clearly in bubble territory – but I’m not yet ready to call the top. I’ve learned from hard experience – I can show you the scars on my back – that once a valuation gets stupid, there is little to prevent it from going to twice stupid!

I’m waiting for the ultimate tell – when my shoeshine guy (not that I have one, but you know what I mean) tells me I need to buy Tesla’s stock…

4) In my January 10 e-mail, I wrote about the Willow breast pump – which I thought was “the single most innovative and life-altering product” I saw at the Consumer Electronics Show in Las Vegas last month. Many readers, friends, and family replied with interesting comments and insights that I wanted to share (all are anonymous except the hilarious first one from my mom):

  • Whoooeeee, perfectly sensible that you (of all former babies) should be interested in breast feeding. Your devotion to breastfeeding was legendary for 13 months – demanding to be nursed every two hours initially and then tapering off to only every four hours. And each episode would last 45 minutes; punctuated by blissful smiles to me. Those were the days when a good mother believed in “supply on demand”!! Egads, our first year of life together was a feeding frenzy! And if the supply was late or hurried, you would yowl unremittingly. I tried a few times to let you cry; needless to say, you won after I laid in bed thinking you were harming yourself. Luckily, we both survived… Love, Mom
  • Please please please please tell me this is a female-owned and led company… [Answer: Yes, both Willow and Elvie are.]
  • I literally have nightmares from my pumping days (in the Warden’s office on Rikers, leaning my back against a door in the basement of Gracie Mansion in a room with no lock, in my car on side-streets, in a cubicle in an open floor plan at Tweed…). I would have paid anything to have a more portable and discrete option.
  • My kids are 8 and 10 years old, so I did this more recently than your wife, but the tech is always improving. My mother-in-law had some sort of hand crank thing. I thought my portable Medela with a battery was this amazing tech advance because I could walk around with it and it was hands free with a bra contraption. But yes, open office plan and the almighty billable hour meant my income was lower due to pumping.
  • Also, I should say that Gen X and Millennial men are much better at talking about these things without getting all weird, especially if their wives have been through it. My husband used to call it “boob juice” as in “Hun, do I need to bring boob juice to the nanny?” My understanding is that most baby boomer couples didn’t have conversations like this.
  • My brother and I had a conversation about various breast pump options when his wife was in the hospital and he was trying to figure out insurance; which should have been weird for both of us, but from the guy perspective, talking to your sister about her breast pumping is good way to make your wife’s life easier. So while of course I think we need more women in VC, I think if there are men in WC who watched their partner go through this, it’s got a better chance of being funded.
  • You’re right – this is a field in which innovation is desperately needed. Both as a mom and as a pediatrician, I have a lot of experience with the trials and tribulations of breast pumps!
  • I just did a quick review of the Willow vs the Elvie. On first glance, the Willow has one big problem – the bags/containers only collect 4oz of breastmilk per breast at a time. The Elvie, and most existing pumps, can collect 5oz per breast. While not all moms are able to pump that much, many can – and having to change a bag midway through a pump could be a dealbreaker.
  • Love that there are people trying to make life easier for working moms!
  • Nearly silent and hands free is huge. They also look small and more discreetly portable, another plus (versus the big black box you need to carry with the old style pumps).
  • In my recollection, pumping takes about 15 minutes every 3-4 hours (depending on the point in your post-pregnancy). Personally, I would find it distracting to do a work call while pumping, but nice to know that would be an option with the near silent version. Not having to hold the pump to your breast seems like the biggest game changer.
  • Women who work pump because you have to or you are in pain or your supply dries up. Women who don’t work still pump so their supply doesn’t go down when kid is sick and not eating or because when you drink alcohol… which most women will do at some point after 3/6/9 months… you need to pump and dump (the OTHER pump and dump lol).
  • Awesome!! I used a hands free pumping bra to breastfeed while taking conference calls but the damn noise always gave me away. 
  • I shared this with my wife, who is a postpartum doula. I said I thought it looked fantastic but that price! Her response: “Some people really hate to pump. And put the $499 up against the cost of formula and it starts to look better.” Looks like a winner!
  • So cool! Btw, in terms of financing, there’s a lot of insurance that will pay, at least part of it.

Best regards,

Whitney

Whitney Tilson

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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