Counterparties: Low tech
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First, Apple released decidedly “meh” earnings this week for the second quarter. Then, Netflix did, too. Then Zynga. Then Facebook. Not all of these companies are in the same boat: Apple reported strong growth but missed analysts’ lofty expectations; Netflix topped analysts’ estimates but experienced a big slowdown in growth. Still, the stocks of all four companies ended the week down: Apple’s shares fell around 3% on the week; Netflix’s were down 28%; Zynga’s were down 36%; and Facebook’s fell 17%.
Apple’s case is probably the most instructive. Part of what’s going on is the continuation of the trend that Larry Summers picked up on at Fortune’s BrainTech conference last year: that the earnings of tech companies are undervalued relative to the earnings of industrial companies. As he pointed out then, once you subtract Apple’s Scrooge McDuck-size pile of cash, Apple’s price-earnings ratio is only about two-thirds of GE’s. But another part of what’s happening is what Peter Thiel highlighted at this year’s BrainTech conference and that we blogged about last week: big tech companies like Apple, Microsoft and Google have excess cash and a shortage of scalable, innovative ideas worth a chunk of it.
Take Apple’s cash hoard in particular (now over $117 billion). Apple may have just plunked down $356 million in cash in its bid for AuthenTec, but that’s only 5% of the $7.04 billion in cash that Apple accrued since the end of June alone. What Matt Yglesias wrote this week about Microsoft could apply to Apple as well: “Innovation is really hard. Staying on top once your core business has saturated the market is really hard”.
Adam Lashinsky made an observation during Peter Thiel’s panel that there is a notable exception to this trend: “Amazon is the only one, in my mind, of the big tech companies that’s actually reinvesting all its money, that has enough of a vision of the future that they’re actually able to reinvest all their profits”. He was almost spot-on: With heavy investments in its business Amazon was able to eke out a profit of a penny per share this quarter. Barney Jopson had a great piece in the FT earlier this month that detailed Amazon’s capital investments, from its own “digital market place with millions of customers, to petabytes of server space and to state-of-the-art warehouse facilities serving myriad forms of commerce”. Investors don’t seem to mind Amazon’s paltry income for the time being. Although its profit, like Apple’s, came in below analysts’ estimates for the second quarter, Amazon’s shares finished up 4% on the week. – Peter Rudegeair
On to today’s links:
Yields of 7+ percent too much to bear – Spain discussing full-scale, $366 billion bailout with Germany – Reuters
Draghi made his statement, now he has to back it up – Bloomberg
“Convertibility” and the ECB’s monster challenges – FT Alphaville
The irreversible euro: Did Draghi pull a “the crisis is contained to subprime”? – Tim Duy
“Millions have suffered needlessly” because of the structure of the bailouts – Kevin Drum
Not the strongest argument: “you can screw [management and risk-taking] up at a small bank or a large bank” – Reuters