Alphabet overtakes Apple to become most cash-rich company
theverge.com
theverge.com
The criticism was something like "You have so much cash on hand but no ideas to invest in. However, you can't pay a dividend because the second you do, you're admitting you've run out of ideas and are no longer innovating".
I think that may be somewhat of an overstatement, but given news like this, Thiel's got a point? Buying back their own stock (As mentioned by another commenter in [1]) is a better investment of that cash instead of investing in newer technology? Please prove me wrong with a good counterpoint because I don't want to believe its true.
The specter of technological and scientific stagnation that Thiel/Weinstein (Right and Left wing individuals) talk about so much really scares me.
[1]: https://www.bloomberg.com/news/articles/2019-07-25/alphabet-....
No mega company really has to have internal innovation. And I doubt the pretend internal startups ala skunkswork with an unlimited budget and extensive runways are a real replacement for innovation popping out of the marketplace among the bodies of a hundred other failed/acquihired startups.
Firebase (acquired in 2014) seems to qualify as semi-recent given it's become a massive product line in a few years.
It adds value to their cloud, is responsive to actual customer desires, and generally seems like a bargain at the right stage (a Google-supported tool being more valuable than a third-party GCP tool, even with Google's questionable dedication to longevity).
Just don't make the IBM / MS mistake and think adding more PMs to previously successful company is a good idea.
There are an almost unlimited number of things to do with money. Even if you have lots of money, the number of good opportunities exceeds the amount of cash. It doesn't even have to be high-risk acquisitions - Just anything that will get a good return.
With all of the failed and failing products from Google acquisitions, is that really a great idea?
Because it's inefficient. Google could buy a thousand biotech startups that are all doing innovative work trying to cure cancer and things like that, but that work has nothing to do with search engines or data centers, so it makes no sense to put it under the same roof. The same management staff isn't going to be effective in managing both types of business, all it's going to do is split their focus.
But give the money to the shareholders and the ones who want to can use it to invest in biotech, others can invest in electric cars or new types of power generation or energy storage or space exploration or whatever else.
Using the profits from search engines to fund cancer research and space exploration is great. Running those businesses inside the search engine company is pointless.
Yet it has a lot to do with Calico, another Alphabet company.
What if I want to invest in Calico but not Google, or vice versa? All it's doing is making the market less efficient.
Only they can't do it that way, because if you buy a share of Alphabet, basically the entire value is from Google and even if one of the little left-field bets triples in value it would have only marginal impact on the overall share price.
Meanwhile if you did want to do such a thing, the better solution would be to have a fund with the sole purpose of investing in high-risk biotech startups, and then invest in a slew of them to better diversify the risk. Then let retail investors buy shares in that entity, which is all biotech instead of being a tiny sliver of biotech but really mostly Google.
I'm reacting to the "even distribution" notion not taxing in general. I think there are legitimate reasons for government to collect taxes but ensuring even distribution of wealth isn't one of them, IMHO.
You're making a value judgement that it's worse to distribute some tax dollars than to turn a blind eye to poverty.
It's both.
You don't tax people and then provide everyone with a free dog, you just let people keep their money and they'll use it to get a dog if they want one.
If you want to help the poor, you don't give them bureaucratic programs that require them to buy specific amounts and types of food, housing and education, you just give them the money and they can figure out what they need better than you. In that case some of the money came from different people than it went to, but it's still the same principle.
Alternatively they fall prey to lotteries, casinos, drugs, alcohol, or any other number of things and you're right back at square one... give them more money.
It's a blackhole feel-good policy that ignores reality. It's better to put strong social safety nets in place. Buy the food and the clothes for them, maybe even establish a discretionary stippend. But don't just say to people here's 20K ... Good luck! Most people don't have a concept of budgeting... It's not going to work.
This is contrary to evidence. There are people who are poor and there are people who are addicts, but the extent to which they overlap is only because of the tendency of addiction to make you poor. The bulk of the poor are not poor because they piss their money away on drugs and casinos.
Moreover, giving people stuff instead of money doesn't help the addicts -- or anyone else -- because stuff is fungible like money, only less efficiently. You give an addict food and shelter and they'll sell the food and sublet the shelter and go blow the money on their addiction. Because the root of their problem isn't that they don't have enough food or housing or money, it's that they need to break their addiction or they will never hold onto those things.
Meanwhile giving out stuff instead of money only costs the taxpayer more for the same amount of benefit, because that inefficiency is universal. You give people money for clothes and they'll buy clothes with it, even if they already have clothes, because they can't spend it on anything else. But that's just a waste of the taxpayer's money, when it could otherwise have gone to something they actually needed.
Imagine, if Google returned money then investor gets the money and now they try to invest it somewhere else, highly likely, these guys will go after companies which Google want to buy out. Why make it expensive for yourself to buy your threats?
The idea is that investment opportunities are shrinking, more money in market for limited opportunity is what creates inflation, makes it expensive for everyone to acquire new companies.
It's specially true for big tech companies where pension funds and other investment fund own large chunk of stock, if they get the money, they'll put it in venture capital or private equity which either increases cost to acquire technology (patents etc...) Or existing businesses.
I am talking specifically about inflation for purchasing future cash cows.
I'm as cynical as they come, but I'm skeptical that all people at these levels are that driven by their compensation. They are ultra-wealthy, and forever will be; a few extra million here or there isn't anything compared to what they stand to lose in wealth and reputation in the face of negative public sentiment.
But I could be wrong.
All of your arguments make sense...except that we see people at these levels take actions to increase their compensation so frequently, even at the risk of their reputations.
I don't know about Pichai personally, nor can I explain WHY the mega-rich are so interested in getting richer when it can't possibly change their day-to-day or even long-term comfort, but there does seem to be a lot of evidence suggesting they are motivated by that.
Honest questions here, as my stock understanding is fairly limited: Why does a company care if it's "undervalued"? How does a buyback actually change that valuation? (doesn't the market cap remain the same after the purchase?)
one fantasy calculation i do a lot is google-profits / total-google-employees or apple-profits / total-apple-employees and you get something like half a million dollars a year (60 billion dollars of profit divided by 132,000 apple employees for example)
in the above scenario, work a few years at a company like google or apple and your a millionaire basically... what would happen to the economy if suddenly there was hundreds of thousands of millionaires? how many new businesses and ventures could be started? would it in the end be good or bad economy? what about the company if it only had a few billion of liquid assets on hand instead of hundreds? would it make a difference?
if you added say half the profits to employees and half the stock as well, they could become multi-millionaires even sooner.... maybe it’s just my bias, but i feel like if those employees were really empowered by their earnings they would be more entrepreneurial and start all kinds of new ventures
i guess this is just my crazy idea, but it’s something i feel strongly recently... it’s just weird to me to see such huge amounts of capital just sitting there (or being used in buybacks)
Anthony Levandowski then left for Uber and the rest is history.
I saw him on CNBC claiming that Google was unpatriotic for dropping the government project Maven (machine vision for millitary drones) and that Google was also a Chinese sympathizer - despite there being no evidence and also the fact that you can't even use Google in China. The same Google employees that revolted against and killed Maven also did so against project Dragonfly. Thiel is on the board at Facebook so this could be part of his strategy for stirring the pot.
https://www.axios.com/peter-thiel-says-fbi-cia-should-probe-...
People’s motive’s have nothing to do with whether or not what they are saying is true or false. They are either speaking truth or not. Motives can explain WHY they are saying something untrue. But not IF what they are saying is untrue.
You are saying that Thiel has a reason to lie. But you aren’t addressing whether or not he is actually lying. Instead of attacking what he said, you are attacking him.
If someone without his proposed motives had made the same statement, the statement wouldn’t be more or less true.
However Thiel has a vested interest in making Google look worse. They're a competitor.
He wants to say that Google is no longer innovating and then uses a thin excuse to validate his claim. And we're supposed to trust his reasoning. But all he's really done is back-fitted a reason to his conclusion. He wants to believe that Google is no longer innovating, so he picked something Google is already doing and claims that that is evidence.
The first step would be to define "innovation" in a way all relevant parties can agree upon. Then we need to agree on the things Google has done that would qualify as innovation. Then we can plot how much innovation they've done then compared to now.
I don't understand. Supposedly Thiel "claimed that Google was unpatriotic for dropping the government project Maven" - why are we talking about truthiness? How is this a provable statement?
"... when we look at CAPEX and R&D as a percentage of revenue ... over the past 25 years, we see that the overall investment intensity of S&P 500 firms, while quite volatile on a year-to-year basis, has been rising over the past decade, and is now near peak levels not seen since the late 1990s."
If you had $25B to start a company what idea would you tackle?
If Google/Alphabet does too many investments which fail shareholders will cry.
It never seems to work, and it never seems to work for the reasons outlined in The Innovator's Dilemma. Big companies are held hostage by their customers. A new company needs to a.) find new customers b.) be hungry and c.) have total freedom to configure the market around oneself. None of these exist within the cushy environment of a big company - a.) is contradictory with maintaining Google's brand image, b.) is contradictory with continuing to pay the people involved in these efforts, and c.) is contradictory with Google getting first dibs on the spoils of these efforts.
What's wrong with that ?
There are only two YC companies that have gone public and both of those are still losing money -- PagerDuty and Dropbox and as far as I know, none have reached profitability.
Medical. I would provide FDA approval process funding and indemnification for medical devices.
Medical is rife with areas that could be disrupted by startups. The blocking limitation is that you can't afford the funding to get clearance for your product.
While I have lots of beef with the FDA and could easily write encyclopedic tomes on the subject, there is practically no other agency anywhere that actually makes sure before the fact that drugs or devices are actually better than nothing and actually fit for purpose.
The biggest problem is that the FDA could move much faster if they had a way to do detailed monitoring on things after approval. Alas, there is no incentive or system to handle that.
Also, I will be presumably able to play it on mobile, TV, and any laptop I have (I actually played it on a chromebook during the beta) which is super convenient.
What does Elon know that Google as a whole doesn't?
It's not what he knows per se, it's what he does, it's the source of his motivation for being and doing.
It's that invention and innovation is most often driven by individuals - whether acting together or in solitary - in pursuit of something that matters to them. You saw this throughout the industrial revolution. You saw it at Bell Labs and Xerox PARC. You saw it with regards to the individuals that pushed the Internet and tech universe forward, from Ted Hoff to Dennis Ritchie to Tim Berners Lee.
It wasn't a giant corporation and team of 100 people that created Doom and Quake. It was a tiny team of highly motivated people doing something that mattered to them. That same conceptual story frequently occurs throughout modern history.
Elon Musk desperately wanted (wants) to build Tesla and SpaceX. Steve Jobs cared about Apple as though he were maniacal about it, like it was his true love. Who at the very top of Alphabet/Google cares about anything they do there that much? I haven't seen any evidence that there is anyone at the top of their organization that fits that.
>We are excited about… Getting more ambitious things done. Taking the long-term view. Empowering great entrepreneurs and companies to flourish.
that they are into empowering the organisation rather than being into particular bits of tech like iPhones or rockets.
They have Waymo for self driving, Verily for health and biotech, remote connectivity with Loon, and many more. And let's not forget of X itself which is even more experimental and out there.
They also invest heavily in all sorts of research, such as multiple fusion projects, and competitions such as their 1m$ moon prize.
Even within Google itself, Deepmind is doing all sorts of great research. They have Duplex, Stadia, Soli, etc.
If anything, I think the issue is that they have too many things going on.
In fact, the easiest way to invest in StarLink is to buy Alphabet stock.
It's perfectly fine to say that you have lots of investment ideas, but they don't add up to needing $100 billion to implement them. Especially when you are earning more cash every quarter.
At Google’s size they can invest a lot in R&D and product iterations, but because they are so big the innovation seems way less drastic relative to their size. Put it this way, if I put a new motor, deck, and paint on a small boat, it would seem like I did a lot, whereas if a giant cruise ship did the same thing, it wouldn’t really carry the same impact to outside viewers.
Let's rephrase:
Alphabet has far more cash than it has ideas, which is definitely a good sign that it is far past being classified an innovative company and stockpiling it can be seen as denial.
To look at it from another perspective: if it's cheap for you to innovate, ok great! That means you can innovate a bunch more! Spend all that cash innovating away! Oh, you can't spend it all? That means you don't have a bottomless supply of ideas that you haven't been able to try out, it means you're already innovated out and should just buy back the stock to give the money back to investors
Then give dividends?
Investors want companies to invest where it makes competitive sense, in the amount that makes competitive sense, and return a dividend (or do buybacks) for all the cash beyond that.
Investors only invest for the dividend/buyback ultimately -- if it didn't exist, every stock would be valued $0.
I think it's perfectly clear to anyone that all of the tech Big 5 are plenty profitable enough to innovate plenty and also provide dividends/buybacks.
The criticism is perhaps valid for a company 1/100th the size of Google, or maybe even 1/10th... but certainly not current Google-size.
https://www.thebalance.com/why-dividend-stocks-outperform-no...
Also, is buying back stock really any different than a dividend? I would say that it is, but only in the sense that most of that buy back money gets transferred to employees in stock grants.
Power-law distribution in stock-based compensation.
And when I say buy it also means invest internally in new technology.
And this has nothing to do with company's size.
For big public companies, it's the opposite. If a company wants to fundraise 10% of its market-cap, either for an acquisition or major investment, it doesn't require nearly as much effort. It can issue new shares, and immediately sell them to investors the next day for cash. The hard part is finding profitable investments, not raising the funds to make it happen. Hence why there's little competitive advantage in hoarding cash.
On the flip side, having a big cash hoard is bad for your investors' returns. It bloats your market-cap, without having any impact on earnings. This means that your P/E ratio is now inflated, and your earnings yield is reduced. From an investor's perspective, if you have invested $100 in the company, you're only only getting back $6 in profits every year, not $7 or $8.
Another way to look at this, is that Google/Apple invest their cash hoard very conservatively, in things like short-term treasuries, because of which their returns are very low. Whereas most of their investors would far prefer to invest the money in investments that produce better returns, such as the S&P 500. By not returning the cash hoard to its investors, Google is essentially forcing them to make low-return investments that they would never make otherwise. Of course, investors aren't going to be happy with this, and they will retaliate by lowering their valuation of GOOG stock, thus depressing the share price.
Curiously, GOOG and AAPL are two of the many large companies who have large cash hoards who are themselves part of the S&P 500.
> “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
The thing here is you have to be confident in your ability to deploy capital during those downturns. Your average expected return over multiple cycles (cash returns mid/late cycle + opportunistic investments beginning of cycle) needs to be higher than broad equity returns.
Smart, wealthy shareholders love cash hoarding. Especially if the cash is held tax free in overseas accounts.
The share price is boosted allowing them to get returns in the form of pure capital gains.
If the company were to pay dividends, sure, most of those dividends would be taxed at capital gains rates as well. But that money has to be taxed at the highest US corporate income tax rate first. Thus, significantly reducing overall value.
To go a step further, the wealthy don't even have to cash out their shares as the price climbs and climbs. They can get low interest loans using the shares as collateral. This deferring taxes indefinitely and leaving all their capital in these huge companies that are outperforming the SP500 anyway.
Edit: *qualified dividends
No, ordinary dividends are taxed as income.
[1] https://advisors.vanguard.com/VGApp/iip/advisor/csa/investme...
(It's 90 days for preferred shares.)
The corporation will have to repatriate the money and pay corporate income tax on it before they give you your dividends.
Alternatively, they could just grow that hoard of cash and let your stock appreciate after which you can sell a few shares and get capital gains rates on capital that didn't have to be double taxed.
Shouldn't they be buying back their own shares?
noego's point is that that $100MM might be more valuable if freed up to invest in a risk-asset, but not that is has no value whatsoever.
And another point: you have to imagine that the richest companies in the world have the best possible financial expertise on staff. It is safe to assume they know what they are doing.
"It is safe to assume they know what they are doing" because they're managing a ton of money has been proven wrong over and over again.
What they do certainly have is more information and expertise than a random internet commenter. They don't know everything, but it's safe to assume they know more than you.
And in case a superinflation strikes, all those loans are effectively wiped out while they keep the assets (the corporate off-shore hoard might suffer as well though, but it might be sufficiently mobile and well-managed to avoid the worst). If capitalism was a video game, it would get terrible ratings due to utterly botched difficulty scaling.
If you have $10B in stock, you probably aren't going to borrow so much as to even get close to a margin call in a market downturn.
Any evidence to back this up? Activist investors generally pressure companies to not hoard cash, for exactly the reasons outlined earlier. Example: http://money.com/money/3484599/icahn-letter-apple-cash/
"Icahn controls 53 million shares of Apple, worth $5.3 billion, which gives him about a 0.9% ownership in the company. In his letter, Icahn lays out his reasons that Apple should repurchase its own shares"
Companies can return money to investors using share-buybacks - this avoids any taxable event for investors, while also not suffering from the downsides of hoarding cash.
There is one significant tactic where it makes sense to hoard cash temporarily - keeping it overseas while waiting for a tax holiday or a reduction in the tax rates. This only works as a temporary tactic though. If any company announced that they were going to hoard cash over a long period, it would depress the share-price significantly. This is exactly why activist investors like Icahn pressure their companies to reduce their cash hoards.
What would you pay for one of those shares? Nothing, right? The company is worthless.
Now imagine that same company has a bank balance of $100. Each share now also owns a 1% share of the bank balance (because it owns 1% of the company itself). How much would you pay for such a share? Anything below a dollar seems pretty good to me!
In other words, the more valuable assets the company holds, the more we'd be willing to pay for shares of the company, all else equal. This is called the 'book value' of a company and is total assets - intangible assets (patents, goodwill) and liabilities.
Note that the real-life situation is slightly more complex because you can't always get at the assets, even if you buy the shares for cents on the dollar. But the general idea is that you can buy shares until you have enough voting rights to dole out the cash as dividends.
This is actually wrong.
Apple alone wholly owns one of the world’s largest investment funds - Braeburn Capital - that actively manages over $270b of Apples assets leveraging very sophisticated investment strategies.
The extent to which managing its cash is now a value-add part of Apple’s business is well outlined in the tongue-in-cheek article from WSJ “Apple Is a Hedge Fund That Makes Phones”
https://www.google.com/amp/s/www.wsj.com/amp/articles/apple-...
https://www.wsj.com/articles/apple-is-a-hedge-fund-that-make...
This is absolutely true, but sort of misses the point. What happens in practice is that such stocks end up being disfavored and investors prefer to buy other securities with better dividends. Which has the effect of depressing the share price. Which has the effect of making it harder for the company to raise money via issuing debt or stock.
...which the company doesn't care about in the first place, because it's sitting on a truck load of cash and doesn't need to raise money.
Honestly, the jury is very much out on whether or not this kind of behavior is bad for companies in a micro sense. Really all it means in practice is that these companies haven't been able to find a way to invest this money productively, they're out of ideas to purse, or markets to expand into. And that's bad, but it's not bad because of cash.
In a macro sense, though, the argument is clearer: all that money sitting around doing nothing (well, nothing but sitting around in safe investments) does nothing for the GDP as a whole, and in particular it does nothing for the bulk of the population with little to no investment holdings.
https://www.bloomberg.com/news/articles/2019-07-25/alphabet-...
I wonder if Facebook is following that approach. Ie, maximizing growth and planning to just barely survive legal scrutiny
Cost of failure is a huge decider of optimal behavior.
Corporations are limited liability. It is expected that shareholders have distributed ownership in many companies.
For Starcraft rankings, the possibilities are -1 or +1. For investing, it's more like -1 to infinity. It's a distribution within those bounds. Increasing the likelihood of hitting that -1 roll of the dice is completely acceptable if it is counter-balanced by a greater average benefit at the long end of the tail.
Starcraft is different. Because there are only 2 outcomes (excepting draws), an increase in the chance of the -1 outcome necessarily comes with a decrease in the change of the +1 outcome. It would be more like a public company if they gave ranking bonuses for overkill of the opponent.
There are strategies that play through late-game. Because resources are finite in StarCraft, after a certain point your income is always zero. At that point if one player has "money in the bank" they're actually ahead not behind, because they can build more units in response to their opponent's current composition which can't be countered.
Ordinarily for example if you're crushing a Protoss and they build a Dark Shrine as a last ditch, no problem get detection and shut DTs down before they cause trouble. But if you have no income and nothing left in the bank then you may just never be able to detect those DTs with what you have, and no way to build a detector. Now you're in a race - win before the DTs kill you.
There are some crazier corner cases, if you lose all workers and can't afford to build more then spending everything also becomes a bad idea for a similar reason and spending down to zero actually increases your risk of not being able to buy workers if somehow you lose them all.
I'm not against goog, appl, ect building warchests, but the analogy does break down.
I'd say the situation is more akin to a Free-for-All situation in a game like Age of Empires 2, where the winning strategy is generally to take control of key resources and suck them dry while fighting as little as possible. And then when you need to fight someone during a tech switch, you bury them with your accumulated bank.
Elon's Starlink broadband provider via very-near-earth satellites could be leveraged to provide a real-world advantage against google's internet dominance.
If that conflict happened google would have to dump money into blue origin and would that be enough to counteract the advantage Starlink would have in dumping it's profits into getting more advantage?
Idk, but just making the point
Furthermore, if you're already at the unit cap, and all your building are already working at peak efficiency, there may be no good way of spending those resources without wasting them.
Saudi Aramco may soon be publicly traded, so we have some information on them, but what is interesting is that while we know they are more profitable than Alphabet, we aren't sure exactly where they are putting all their money. It could be going to a holding scheme that could very well top Alphabet in terms of cash on hand.
There is probably a Russian entity that gives Alphabet a run for its money as well.
We're halfway through 2019, I'm sitting in a small eurozone country and still can't give them my money and order a Google Pixel properly from their site. Using this example because I consider a phone to be a relatively expensive device that probably generates a good profit over its lifetime. Other non-hardware products which produce smaller profits, such as activating a magazine subscription on the Google News application probably don't even register on their radar.
Apple, with all its failings, is always there and never misses the opportunity to ring the cash register. Sometimes they move slowly, but always make it eventually. Won't even go to non-hardware players like Netflix.
Come to think of it, maybe having so much cash is a mixed blessing for Alphabet, because it could be the actual cause if the above mentioned behaviour.
https://www.bloomberg.com/news/articles/2019-08-03/buffett-s...
Due to the 3 classes of Alphabet shares, I’m not hanging my hat on this happening due to how voting rights are structured. Probably won’t happen with Facebook or Snapchat either for the same reason.
How much wealth will be wiped out ...
I know it seems like a doomsday scenerio, but if the US goes through a moderate hyperinflation, do these companies die?