On this episode of Okay, Computer, Dan and FirstMark Capital’s Rick Heitzmann discuss how the rising cost of capital will impact companies in 2023 (2:00), Rick’s biggest lessons and mistakes from 2022 (6:00), why many private companies still aren’t taking appropriate markdowns (7:00), SpaceX’s new, sky-high valuation (18:00), which sectors will be recession-proof in 2023 (22:00), OpenAI and Microsoft reportedly joining forces and the disruptive threat to Google search (23:30), the odds of TikTok facing a regulatory crackdown in the U.S. (27:00), and if a major tech company should look at acquiring Lyft (33:30).
Check out the stories and tweets discussed in the episode:
-Unlimited Funds CIO Bob Elliott’s Twitter thread on losses in venture funds
-Atreides Management CIO Gavin Baker’s Twitter thread on rapid shifts in time spent on competing social media platforms
-The Information: Microsoft and OpenAI Working on ChatGPT-Powered Bing in Challenge to Google
-WSJ: Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge
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And as always we want to hear your feedback. Please hit us with any comments at contact@riskreversal.com, and follow us at @OkayComputerPod.
Show transcript:
Dan Nathan: [00:00:00] All right. Welcome to Okay, Computer. I am Dan Nathan. I’m here with Rick Heitzmann. Rick. Happy New Year. [00:00:42][42.9]
Rick Heitzmann: [00:00:43] Happy New Year to you, man. It seems we’re back in the saddle, excited for the new year. Hopefully, fortunes change a little bit. [00:00:49][6.3]
Dan Nathan: [00:00:49] Well, yeah. I mean, listen, I don’t feel like we left the saddle. I don’t know about you here. I feel like. I mean. [00:00:53][4.2]
Rick Heitzmann: [00:00:54] Depends on the saddle that you’re talking. Some of us left the saddle for a little bit. [00:00:58][4.3]
Dan Nathan: [00:00:58] Yeah. Same spot as I saw you last last year. So let’s get it a lot going on here, man. I mean, we’ve spent a lot of time, obviously, talking about the public markets. And again, the Nasdaq closed down a little more than 30% of the year. The S&P 500 closed down a little less than 20% on the year. We know some major damage had been done in the tech sector and there was a rotation late in the year into value, into some non-tech areas in general, which kind of, I think masks some of the devastation in the public markets, at least in the technology sector. We’ll hit all that a little bit. But one of the themes I think was really interesting going back a year ago, I mean, you were talking about the lag that you see in private markets to public markets, and you actually had some I don’t mean to say actually, I hate qualifying them bad, really good. [00:01:45][46.6]
Rick Heitzmann: [00:01:45] We also actually, now I’m doing it it’s contagious. We also saw was when the public markets cracked in about November of last year. A lot of people thought it might have been a head fake. It was actually people going out on Twitter, on TV saying, hey, this is just like that month of COVID where the markets are cracking. And some of us believe that, hey, this is a fundamental thing that’s not going to unwind in a matter of weeks. [00:02:12][26.2]
Dan Nathan: [00:02:12] All right. Well, here’s a quote from Jan fifth. Okay, Computer, probably our inaugural Okay, Computer in 2022. [00:02:16][4.6]
Rick Heitzmann: [00:02:17] 365 days [00:02:18][1.0]
Dan Nathan: [00:02:19] From Rick H. What we are seeing, I think, as everybody is anticipating interest rates rising, folks are therefore discounting growth harder. And what I think is really interesting about that, I think to your point, is a lot of people didn’t think that the Fed was going to stick to it and raise rates as high as they have over the course of 2022. And what’s interesting about this comment here is that the stuff that got hit the hardest was anticipating higher rates. So when you think about high valuation tech stocks that kind of had not great valuation support and rising interest rate environment, anything related to crypto in Web three sort of stuff. Obviously SPACs had a difficult time in that environment, so it was kind of an unwind of that [00:02:57][37.8]
Rick Heitzmann: [00:02:57] And also long dated profits, right? So, you know, the discount rate on that profits went from zero to material. And if you don’t think you’re going to be able to generate cash for several years, DCF is going to pull back in those profits and significantly discount them. And this is after a period of years where no one really thought about that and only people were chasing growth. And the interesting thing also was the amount of time, it’s probably not fully through the private market yet. I think we’ve talked about we’re about halfway across the lake, but even took a couple months after this for the public markets to trough in that people didn’t understand the implications. I would say management didn’t fully understand the implications of what this incredible rise in the cost of capital would bring. [00:03:44][46.5]
Dan Nathan: [00:03:44] And you know, it’s interesting, there’s not too many periods. I think we can look back in our careers where we’ve seen that sort of unwind because in the past into the bear markets that we’ve seen, whether it was the financial crisis in 08 09 or going back to 2000 and the implosion of the dot com bubble, the Fed, the US Federal Reserve is doing the exact opposite of what they’re doing right now. Right? So it wasn’t a situation where they were lowering interest rates and easing monetary policy to combat what was going on and really trying to help quell what was going on in financial markets. And that’s going back to what you were just talking about during the COVID crash in February, March of 2020. That’s exactly what they did. They lowered interest rates. Never have we seen. I think the flipside of this is how quickly that they’ve raised them. [00:04:28][44.4]
Rick Heitzmann: [00:04:29] They kept lowering right. There is never a reconnection right since the financial crisis over a dozen years. Some was good, more was better, with fed lowering interest rates. So not only did companies get addicted to that consistently lower cost of capital, but investors it. And so no one really thought about when this unwinds for the first time since the early 2000 a generation ago for investors what does this mean more broadly and therefore this wasn’t in anyone’s models. [00:04:57][28.4]
Dan Nathan: [00:04:57] Yeah, so one of the things that we’ve tried to do, I think over the course of the last year is kind of really tease out some themes between public and private markets, specifically obviously in technology. And to me what I find fascinating about this exercise is that there’s a lot to be learned from both sides. And I’ve said this on the pod before. I think your background is really unique. You and I have been in the markets for about the same time but taken very different paths. You started at a very large hedge fund. I started at a very large hedge. You went into private tech I went into public markets and obviously done a bunch of stuff in media, but the intersection of those markets were really important, figuring out inflection points in markets. Right. And so talk to me a little bit about what you learned in 2022 having that background, having this macro outlook. Like you do and really focused on public markets because A you’ve had a lot of really successful private investments over the last 20 years that have gone to public markets. You’ve needed to be really cognizant of how public markets move. [00:05:48][50.8]
Rick Heitzmann: [00:05:49] If you listen to the podcast from a year ago, it’s amazing how on point we were. But, you know, I think the thing mistakes I made were a couple. One is, you know, you could say things on a podcast, but you have to act on them in order to profit from that. So, you know, it’s speculation versus really making that go into effect in the personal portfolio as well as a fund is when you start to see a crack and you think that’s going to be a secular crack, it’s a great time to sell even individual equities or even liquidating portfolio companies you think might not be performing or might not be structured correctly for the next wave of the cycle. The other thing is just if those companies, as a private market board member need capital, if you think you’re any capital, the best performing a capital is immediately. So how do you get that company, the capital they need, if you think you’re ahead of the curve on what’s going to happen in the markets? And the third thing would be if, you know, and you’re hearing from the public markets and oftentimes the public markets are the leading indicator of what people are hearing in the private markets 3 to 6 months later for the things we have talked about before. What are you hearing from the public markets, management, investors etc? Which gives you the canary in the coal mine for things that you’re doing. [00:07:03][74.4]
Dan Nathan: [00:07:03] You know what’s interesting about that, though? So when I think about trading public markets again, mark to market and things are moving around and emotion plays a lot heavier to it on a short term basis, right? One of the lessons that I learned, at least in markets, is when you feel like you’re wrong, move your feet just a little bit. Like like do something right, like make some sort of change. And it’s interesting because I think back to January and February of last year, we were spending a lot of time talking about what is some of the guidance that you’re giving to the companies that you sit on the boards up and having this experience over multiple cycles here and you were like, move your feet, but be aggressive, right? So on the point that you just made about raising capital, if you think you need more capital, do it now. If you think that your headcount is too great, then cut now. But don’t cut by a thousand cuts. Right? [00:07:47][43.6]
Rick Heitzmann: [00:07:48] Make an aggressive cut. Now, if you think this is going to last a while, you’ll always be able to backfill based on talent or based on something else. Dance by a thousand paper cuts is terrible. I mean, even you’re seeing in the public markets today, people were doing large layoffs. And then if they have to do a second layoff, they’re apologizing for it or doing it through, you know, other ways like normal attrition or managing folks out. And it really hurts morale. But the most important thing you could do as a CEO and there’s still some people doing it, as we saw from Salesforce last week, is make an aggressive cut. Be clear that this is going to be an aggressive cut. We’re right sizing our expense base to get from here to there because we have our hands on the throttle and we’re not doing this willy nilly. And therefore you have a path forward for the people that are still with the company and you’re able to project to your board, your investor base that you know exactly where you’re going, the milestones you’re going to hit and how we’re going to get there. [00:08:44][55.6]
Dan Nathan: [00:08:44] Yeah, So so again, we’re going to ping pong back and forth between public and private. And so you made this comment on January 19th. So thanks to Nick for pulling this stuff out from early 2022. You said the beating that’s been happening in the Nasdaq, you haven’t felt as much in the large cap names in the Apples and the Amazons, and you’re really felt it in the sub $20 billion names. It’s a really interesting looking back now a year is that the Mega-cap tech stocks were still kind of holding in there. Right. And because their weight in the major indices, they were really kind of overshadowing what was already a bear market across a lot of tech stocks. So I’m curious just kind of given some of the things that you see now, you know, we see Apple, a couple of other names [00:09:23][39.1]
Rick Heitzmann: [00:09:24] One of the themes there, the generals get shot last. [00:09:26][1.8]
Dan Nathan: [00:09:27] Yeah, yeah, yeah. [00:09:27][0.3]
Rick Heitzmann: [00:09:27] And what you’re seeing is people get concerned about certain trends on the small caps or they’re afraid to get stuck in them because they’re less liquid. But I think that Apple and Amazon were almost flat at that time, and no one had really been concerned by them. When there was the preliminary flight to quality, people were trading out of the smaller cap names, trading into larger cap names because they didn’t want to lose their presence in tech. And then since then, these guys have all gotten cut in half because it was more secular than, It was more long term than people would have guessed. [00:09:58][31.0]
Dan Nathan: [00:09:58] Yeah. And I guess the thing is, starting this year, it’s kind of interesting because Apple and Tesla really fell out of bed in December. And I think those were two of the generals that I think a lot of investors were waiting for. And there were no shortage of stocks that in the Nasdaq that were down 70, 80% or so. Which kind of leads me back to this conversation that we’ve been having for a while, is this lag to the private market. So there’s some estimates that venture capital in 2023 could be in store for a massive drawdown. There’s a really good thread, Nicole, throw it in the show notes from a guy named Bob Elliott from Unlimited Funds, and he was just on Patrick O’Shaughnessy’s invest like the best and that’s how. I’ve been following him is a great follow, actually. But here is the tweet. He says, While it may be difficult to predict the public markets in 23, it’s pretty easy to figure out that venture funds are on track to lose $1 trillion in value from its peak. The vast majority of these losses have yet to be recognized. 23 will bring more realistic marks. And then he’s got a thread. So we’ll throw that threat in there. Talk to me a little bit about what does that mean. Now, again, without understanding what the denominator is here, that’s not maybe that useful, but when you think about in 2022, in public markets here in the US, I think it was about eight or $9 trillion of market cap that was lost here. And when you think about the value, so that trillion dollar number, let’s say that’s going to be a sign to mark’s, that venture capital, where does that happen? Does it happen? Going back to the conversation we just had in some of the much larger names, the instacart’s in this, in that or whatever, that we haven’t seen those sort of marks yet where their public comps are down 60, 70 or maybe 80%? [00:11:29][90.5]
Rick Heitzmann: [00:11:30] FTX, a lot of it’s happening. So what we’re seeing is that, you know, if let’s say the year comps are down 50%, you know, as a private company, you should be down 60%, right? You’re illiquid. And in a time where most investors in the public and private markets are scared, they’re for the fear creates a need for liquidity. So illiquid does have a steeper discount than what they do otherwise. At one point, I think in mid 21, we figured out that there was a illiquidity premium, which was crazy. I think we talked about on a show about nine months ago, but now we’re seeing a significant discount for the illiquidity in venture. So if tech’s down 50%, it should be down 60%. So there should be a 60% markdown. Then there is a bunch of different reasons why people haven’t taken those markdowns. I think the good firms have taken those markdowns mark to market on a quarterly basis and some sectors hurt more than others. Right. So we’ve seen crypto take a significant hit, to a certain extent, financial services and health care also taking a significant hit. So there’s areas where not only within the 50%, they’re down more than that 50%, but we’re taking that hit as good stewards of capital. At the same time, not everybody is. I mean, there’s there’s there’s probably two different areas why people aren’t when we saw a lot of people raising a lot of money very quickly, some folks moved to an annual fund cycle. Historically, venture was a three year fund cycle. So when you’re on an annual fund cycle, you have to raise capital every year. When you have to raise capital every year, you want to show your numbers are still good. And you know, a lot of people, if you’re just charting the market, were up 20, 30, 40, 50% in 2020 and 2021. And then do you really want to mark yourself down in the middle of a fundraise? You should. That’s the right fiduciary thing to do. But obviously incentive systems are against that. The second thing we’ve seen is a lot of the private capital came from crossover of public fund. Dan I don’t know if you saw Matt Levine from Bloomberg, who writes the money stuff, has a lot of great pieces today, was writing about how these incentives happen in venture capital. And if you’re in venture capital, a traditional venture capitalists like me, you know, you get management fees based on your cost. And that doesn’t change over time. If you’re a bigger hedge fund and a lot of people in alternative asset management, you get your fees based on the current value. So you’re going to get more fees the more something’s written up. And if you don’t have the market to market like a normal stock, you’re incented to keep it marked up. In addition to that, if you’re going into the end of the year, where you’re able to get paid out. At the end of the year. You have a double incentive to kind of keep that up instead of marking it down. So I think you’re going to see is a lot of people getting out of privates in the first and second quarter who might have been hedge funds or nontraditional players and seeing a lot of inventory on the secondary market as we look at and we track it for our companies for a variety of reasons, there’s a fair amount of secondary market players and we’re seeing those secondary market positions. The end of last year be down 60, 70% even for the best companies in the unicorns. Some have held in, but largely down 60, 70%. And we think that’s going to go down even further going into the first quarter. [00:14:45][195.0]
Dan Nathan: [00:14:45] Alright so let’s break this down for one second, because in the last cycle, let’s say during the financial crisis or going back 20 years during the dot com implosion, VC was much smaller. And to the point that you just made is that right now a huge participant in the last few years that’s been driving a lot of this kind of FOMO valuation stuff in a zero rate environment are these crossover funds or hedge funds that have large pools of capital allocated to public markets and or liquid markets, and then they’ve gone heavy into private markets, But because their incentive structures are different than traditional VC, they love the market on the way up, they’re pushing the valuations up. But on the flip side, we haven’t seen the flip side of this yet. Okay. They might have to take the marks. And if they have redemptions because that works differently than in VC, then they might have to sell the stuff that they can sell, right? Like that’s liquid in the public market. [00:15:35][49.4]
Rick Heitzmann: [00:15:35] And we saw some of that when Apple turned over in the second quarter of last year when people were had a lot of redemptions and Apple was the big liquid tech stock that they were using as a flight to quality, but was also the most liquid way to get capital out. [00:15:49][13.6]
Dan Nathan: [00:15:49] Now, that’s an interesting one. Again, you know, this is something that we want to keep a close eye on as you kind of see. What are some of the marks taken by some really big crossover funds. When you see the Fidelity’s and the Wellingtons, they seem to be really good at it. They seem to cut deep when you see them. [00:16:03][14.4]
Rick Heitzmann: [00:16:04] They’re good fiduciaries right there. They’re actually trying to mark to market regardless of if they have a perverse incentive not to. [00:16:10][6.5]
Dan Nathan: [00:16:11] All right. So on the flip side of that, right. So we’re going to see some marks. There’s going to be probably some unusual values if you have the ability. So it’s funny that you talk about like what’s the activity in the secondary market and I think there’s probably going to be some funds that take advantage of some for selling and they’re going to buy some. [00:16:25][14.1]
Rick Heitzmann: [00:16:25] I think it’ll be a fantastic opportunity for funds who really understand those underlying assets and really understand who the winners are going to be. And I think people are going to make a lot of money doing that. [00:16:36][10.4]
Dan Nathan: [00:16:36] Does First Mark participate in the secondary markets on the buy side? [00:16:38][1.9]
Rick Heitzmann: [00:16:39] We have we have it’s not a core part of our business, but we will, especially when there’s an asset we know, company we’re already an investor in that we really understand the business well and we just find it mispriced largely because there is illiquidity where there is, you know, a distressed seller from an institutional base is a large holder of former employee or a founder who’s looking to get some liquidity to buy a house or something like that. We try to facilitate that transaction and make that happen. But we think one of our predictions for 2023 and we went through this as a team yesterday was that of those unicorns. And it was funny looking at these unicorn valuations we see on the secondary market, there is a real bell curve around being down 50 to 60%. We thought that was irrational and that there is a lot of companies on there that we think should be down 100% and there’s companies that should be flat. And going back to our theme last year that we’ve we started talking about last year of babies with the bathwater. This is a great area to find, you know, some babies and some bathwater. And there’s companies that are growing executing its a plan in a great sector probably have a fairly short time horizon to liquidity and when the IPO market reopens, they’ll be one of the first groups out the door. But for all the reasons that we just talked about, there is some for sellers in creating good opportunities. [00:17:58][79.1]
Dan Nathan: [00:17:58] Well, it’s funny, you know, this leads me to Gavin Baker of Atreides Management who we both know and like and have a lot of respect for. He tweeted this out last week. I think it was a chart from the Financial Times about a bunch of private companies and the valuations epic games on their byte dance is on their klarna scale AI Stripe and a handful of others, and then Space X. And I think his quote was that one of these charts is not like the other because most of them are upper left to the bottom right. There’s one chart sticking out there that’s bottom left to the upper right and it’s Space X and we just saw that Space X just did a raise, I think, at $137 billion. Andreesen led that and there was this is what, a year after they raised maybe 120 billion. And what’s fascinating to me about this is that do you know of any other private tech companies that have actually been marked up over the last year. [00:18:49][50.7]
Rick Heitzmann: [00:18:49] Not of this size and scale. I mean, especially in the growth area where all these other kind of premium unicorns were, everybody, including Stripe, which was the most valuable private company in the world for a short period of time. But it seems as if Space X has passed them. Yeah, we’re all down significantly. Again, not because they underperformed and from what I’ve heard, Stripe was up over 60% in revenue last year, but the multiples have just come down commensurately and therefore they’re not as valuable as they once were. But I think Space X is a certain extent in a very different space. [00:19:21][31.3]
Dan Nathan: [00:19:21] That’s that’s a great segway. So this was January 9, 2022. Okay. And you actually said this, and I think this is pretty fascinating. So you’re just reiterating this right here. But this is a year later. You said, I think sadly, we’re going to see a lot of companies whose numbers don’t change or even go up, but the valuation goes down as you just see a lot of the air come out of the multiples. And again, that is this kind of mechanism that we’ve seen from the public markets to the private markets. So that’s a good example. I will say this, that Space X, while that valuation keeps going to the upper right on a multiple of sales, it’s still like crazy expensive. And then we’re going to spend some time on 2023 on space and the related stuff because I have actually a handful of CEOs of space related in the private markets that are [00:20:07][46.4]
Rick Heitzmann: [00:20:09] It’s the final frontier. [00:20:09][0.1]
Dan Nathan: [00:20:09] You know, I guess it’s kind of interesting. I mean, like. [00:20:11][1.8]
Rick Heitzmann: [00:20:12] I think it’s definitely something new. A lot of great firms have a lot of things that are going on around that. And actually Space X is a point of its evolution that they have a lot of people spinning out from space X looking at a facet of it. But you know, up until this point, at least from a broader non early stage start up perspective, Space X was a one of one, which is why I think you’re seeing their valuation persist. I don’t know enough about the numbers to know what those multiples are with the rest of the PNL looks like. But they were one of one company participating in a, you know, a sovereign game. Yeah. And obviously competing well with them. So it’s an incredible company.[00:20:50][38.8]
Dan Nathan: [00:21:34] You just spend some time planning your team and you guys have a history of being early and right on some big consumer themes, right ad supported sort of stuff. And, you know, that was basically a huge part of the private tech investment convergence between mobile and social and broadband and just kind of the unlocking of that. But we haven’t seen a lot of innovation on that front. There’s not a ton of new social apps, and we’ll talk about TikTok in a little bit. But when you think about big themes, we just talked about space, climate, health, tech, are these things that you think are going to capture a lot of venture dollars in the next year or two because some of them are kind of recession proof? [00:22:18][43.1]
Rick Heitzmann: [00:22:18] I think there’s probably a couple different buckets where we think are interesting. I think space is kind of interesting. I think very, very few people understand it enough to know what the real economics are and how that changes over time. I mean, I looked at a company, it seemed super interesting. It was an Uber for items in space. I thought I didn’t understand Space well enough to do it although it was [00:22:38][20.5]
Dan Nathan: [00:22:41] Uber for items in space. [00:22:41][0.0]
Rick Heitzmann: [00:22:41] You know, I have this payload that has to move from the space station to this Space X flight, and I have a spot on that Space X flight. It’s no different than. [00:22:49][8.5]
Dan Nathan: [00:22:51] Do you think that in the next ten years, you want to be the Uber of, you know what I mean? Like, is that what you want your startup to be? Because that was great in like in 2016 17. [00:22:58][6.9]
Rick Heitzmann: [00:23:00] Yeah, I didn’t invest I mean, I’m sure, it was a great team. I’m sure someone invested, but, you know, the Uber of Space grew out of a bigger area. That’s not what we do. We invest in areas we know really well, but we’re obviously incredibly curious and fascinated by some of these things. But I think space will be a great area climate. I think we’re in the early days. It’s getting a little bit frothy in terms of valuations, but everything from the Inflation Reduction Act to just fundamental changes in the way engineering and science is creating both the cost of producing power as well as the cost of transmitting power will create great opportunities there. And as an individual, I’m investors in a couple of funds that seem to be doing amazing things, especially in Europe, and then I think, you know, that one hot area is generative AI. I mean, everyone knows Chat GPT. [00:23:48][47.3]
Dan Nathan: [00:23:49] You’ve got to talk about it, have you been have you been messing around with this thing? [00:23:50][1.3]
Rick Heitzmann: [00:23:51] Oh yeah, it’s fun [00:23:51][0.0]
Dan Nathan: [00:23:52] Yeah. So, so it’s interesting. [00:23:54][1.5]
Rick Heitzmann: [00:23:55] You going to put your lens of pictures in the show notes. [00:23:57][2.0]
Dan Nathan: [00:23:57] A few weeks ago, it seemed to take the tech ecosystem by storm. It’s like any time I sat down with anybody and are like, kind of everyone’s just doing, Oh, you’ve got to check out this. You got to do this, you got to look at this thing and they’re sharing this and that or whatever. And it seems like one of those things where it feels like you can’t get up to speed fast enough on what’s going on and the sort of disruption that this app. Okay, So let’s let’s just take a step back here so this was introduced by Open Mind. This was originally a nonprofit, right? And then a few years ago, you know, Microsoft invested $1,000,000,000 and they found a lot of commercial uses of this technology that this is going to be weaponized by a company like Microsoft. So this headline yesterday that Microsoft had open AI working on chat GPT powered Bing in challenge to Google. Now here’s a deal. I don’t know about you. I haven’t Bing’d anything in in maybe like seven or eight years. I don’t know if I’ve. [00:24:46][48.4]
Rick Heitzmann: [00:24:46] Bing is still being a so multibillion dollar business, if you can believe it, largely because of powers Microsoft cites. I saw one study which showed what’s better you know open AI or because remember Google do you feel lucky single bullet. Here’s your answers that didn’t work that well. And most people said, hey, I’m just going to go with the normal Google search. Open AI search is better. It’s hitting in 95 plus percent, the first ones there. And if your Google and your business model is, I want to see the whole search. So maybe I’ll click on what I really want and maybe I’ll click on the ad just to the right of it. It kind of throws your business model for a loop. And if you’re Microsoft, who’s one of the favorite things they’ve done over the last 20 years is poke Google. This is clearly something you should do from an offensive and defensive perspective. [00:25:33][46.7]
Dan Nathan: [00:25:33] Well, right. And they already have the skin in the game with $1,000,000,000 investment the information article cites. Microsoft is preparing to launch a version of its Bing search engine that uses the artificial intelligence behind chat GPT to answer some search queries rather than just showing you a list of links. Okay, and which is interesting. So then take a step back. This was on December 22nd. This is from the New York Times. A new chat bot is code red for Google’s search business. So again, if you’re thinking about reasons to kind of second guess some of the massive tech incumbents here in the public markets, this might be one. And, you know, it’s interesting to mention that Google or Alphabet in February of 2022. Okay, So 11 months ago made a new all time high at $150 after they reported their Q4 earnings and now is trading very near its 52 week lows at $88, you know, one of the largest publicly traded companies. [00:26:28][54.7]
Rick Heitzmann: [00:26:28] And the vast majority, they do a million things now, the vast majority is from search and Edwards. And so if you think about no different than we’re talking about other companies focusing innovating on your core product. Probably the last large part of the last ten years of Google has been doing everything. But yeah, and, you know, if you look at Google search, it hasn’t innovated that much. I mean, obviously the quality of search has gotten better. They’ve added some things, but their core product, their golden goose, probably threatened for the first time in 20 years. [00:26:57][29.0]
Dan Nathan: [00:26:58] We haven’t even gotten to TikTok. There’s a lot of data out recently talking about the threat that TikTok is to the dominance that, you know, Apple and Alphabet and Facebook. You know, they are basically about 50% of the U.S. digital ad spending in 2022. So you have this one threat from TikTok. Okay. So this Chinese social app that’s taking the world by storm. And on the other side, you have Microsoft. This is a really interesting point about Microsoft. So the fact that they are pushing hard in Bing and search is not a big part of their business model. But you know what? A large part of Microsoft’s valuation over the last call it five or seven years, really since Satya Nadella took over nearly, I guess a decade ago, was cloud the public cloud, azure, and so it’s interesting, today, UBS downgraded shares of Microsoft. Okay. Normally you just say ah some bulge bracket firm downgrade of the stock, whatever. The stock was down 5%. Think about that on a $1.7 trillion market cap on a day that the Nasdaq closed up on the day. And so you think about if they’re having some pressure on their SAS offerings and on their public cloud, and that’s decelerating. Okay. And they’re going to move into, you know, advanced machine learning technology for their search app. That could be a really interesting theme. And again, what are you trying to do you’re trying to [00:28:15][77.5]
Rick Heitzmann: [00:28:16] It might be a risk on the video game side, right? Yeah, They still have Activision out there and they have a great platform and Xbox Live and they have great content. But that was going to be a real IP moat in the Activision acquisition and that’s very much up in the air. [00:28:30][14.8]
Dan Nathan: [00:28:31] Was that 70 billion right? It’s kind of interesting when you think about this is that, you know, Microsoft, I’m sure, was like cash in stock, but they have a $107 billion in cash. They have $77 billion in debt. All of these massive companies that just gorged, they had this massive cash generation. And big part of the bull thesis was that cash balance. Well, what did they do, though, over the last five years? They actually gorged on debt a lot of these companies. And so their net cash position is much lower. And unless there’s some cashflow issues that we don’t see down the road, that’s never going to be an issue. [00:29:01][30.6]
Rick Heitzmann: [00:29:02] No. Part of it from a regulatory basis. But they didn’t really make the transformative acquisitions and we’ve talked about it for a while of everyone likes playing M&A matchmaker of who should buy what. It’s fun, it’s great and who’s going to buy way. If if Microsoft can’t buy Activision, where should they spend the $70 billion? Is it air table? Is it notion? Is it all of the above? How do they leapfrog their competition? And I think that regulatory environment scared some people away. And prices over the last couple of years of private companies where it may be irrational for the public market investor. So if you couldn’t do it in the bull market, can you do it in the bear market? If all of your stock is down, your cash is still your cash, although it’s generating interest income today. I’m waiting to see if anyone is bold enough to go and do that, maybe other than Bob Iger. [00:29:51][48.6]
Dan Nathan: [00:29:51] You know, it’s funny, though. I mean, that’s a great point about it’s generating interest income for the first time in a very long time. We have Fed funds just under 5% or so. So there is an alternative. Cash is king and now you can earn a return on it. And so for the first time in a long time, there is an alternative to cash. But to your point on some of these mega names, they’re down 30, 40, 50% is probably the way that they’ve been buying back their stocks the whole way up. They should probably continue to do it now. And that would show, I think, a continued level of confidence. So I want to go back to that one point we were just talking about. So so Google and Facebook. So their combined digital ad market share in the U.S. is just below 50%. So first time it’s below 50% since 2014. And when you think about it, we’ve spent some time talking about Amazon’s ad business. We’ve been talking about Apple’s ad business and how quickly both of those are growing. And then, of course, TikTok. So let’s talk about TikTok, because this is a huge theme over the last few months. Again, this is something that was picked up from a few years ago when the Trump administration was trying to do a force sale of TikTok. But it seems like this is becoming very bipartisan at a time where the war between the US and China is not going to be a shooting war. It’s going to be an economic cold war. And this seems like low hanging fruit to me, the TikTok thing. And so again, I could see Google and Facebook stepping up their lobbying efforts because [00:31:16][85.1]
Rick Heitzmann: [00:31:17] That’s going to be the key thing. I mean, if you look at Instagram being flattish over the last year, SNAP being flattish over the last year, and you know, a lot of that going to TikTok, although TikTok, amazingly is down over the last six months. So there’s a couple of things to unpack there. But just in general, are social media companies which are not allowed to participate in the Chinese market. Are getting beaten up by Chinese competitors. So there’s a lot of people, whether it’s in California, it’s actually on both the left and the right who are saying, hey, if these guys are using algorithms that affect our privacy rules, are not putting on any indulgence mechanisms that they use in their home country, you know, we need to figure out a way to curtail them. One of my predictions for this year is there will be fundamental regulatory pressure that will force the way TikTok operates to be different. I don’t think it will be banned. I think it’s very hard to ban a foreign asset here. Aside from something like the Russia situation. But what you’re going to see is any indulgence rules, which means you can’t spend more than X amount of time on it. You’re going to see that data and especially personal data, privacy issues are going to be housed here and auditable by our government. And you’re going to see a lot of pressure to get TikTok out of our kids hands. [00:32:31][74.3]
Dan Nathan: [00:32:31] Yeah. So interestingly, though, you know, going back, this was a story I think in late December, TikTok admits to using its app to spy on reporters in efforts to track leaks. So basically, I guess the powers that be over there at Bytedance, they were basically taking location data from Tik Tok users and where they might have been relative to these reporters who were reporting these stories and their own employees. That’s scary stuff. If you see more of that start to pick up, then that kind of drumbeat for some sort of banning will actually only increase. Now, the other thing I’d say is that you just referenced some of the data as it relates to time spent on TikTok trailing off again, this goes back to Gavin Baker’s Twitter feed here. You showed me this one and I thought this was really interesting. This was from Jan 3 time spent for almost every major social network has accelerated through November from a summer trough, and most are now growing faster than TikTok. And that was some data from BofA. And so I guess that would start to actually quell some fears if we were to start seeing usage kind of trail off. [00:33:31][59.9]
Rick Heitzmann: [00:33:31] Unfortunately, regulators hacked, you know, in a 12 month rearview mirror. You’re going to see the regulatory effect that had a stranglehold on M&A last year at a time where it would have really helped some companies on both the buy and sell side. We acted too slowly. Now I think folks are acting too slowly around TikTok, the way they use data and the way they track people. [00:33:50][18.6]
Dan Nathan: [00:33:50] All right. So keep an eye out on this. This is the last one here. So this is a company called Lyft. I don’t have a position in it. I’m not talking my book, but it’s got a $4.1 billion market cap. It’s got $1.8 billion in cash. It’s got $1 billion in debt. That makes for a three and a half billion dollar enterprise value. Just think about that as an asset, as a brand, as the data that they have from their fleets. It’s yeah, I mean, there’s no shortage of companies that could buy that. It would be a rounding error. [00:34:18][27.8]
Rick Heitzmann: [00:34:19] So who let’s let’s play matchmaker. [00:34:20][1.2]
Dan Nathan: [00:34:21] Probably Google Alphabet. [00:34:22][1.1]
Rick Heitzmann: [00:34:23] And you think Google wants to be in the ridesharing business?\ [00:34:25][1.6]
Dan Nathan: [00:34:25] I think they probably want to be in the data business that, you know, I mean, I think Alphabet could buy it. I think Apple could buy it. I think Amazon could buy it. And I don’t think there would be any justification for a regulatory pushback. [00:34:35][10.3]
Rick Heitzmann: [00:34:36] I’d actually go the other way on that. I think that Lyft is the type of company which might get sold, but it’s sold for $1,000,000,000. You know, it’s a subscale player or a number two player in a market. They haven’t proven out to unit economics. They haven’t been able to scale, you know, largely, you know, do they have a great reason to exist? Does the buyer have enough synergies to have that make it happen? So if you’re Apple, you know, if I have an iPhone, do I really need an ICar from Lyft, which is perceived as not the premium brand, it’s not uber black or even Uber, which your iPhone is supposed to be. It’s more of the Android. So maybe Google, it makes sense. Going back to what you said before, if I were these guys, I’d be focusing, not defocusing on money losing assets. [00:35:18][42.3]
Dan Nathan: [00:35:19] No doubt about it. All right. We covered a lot of ground today. We got a whole year to kind of go through all of this stuff, man. And it just feels like the calendar turns and we don’t get a break here, but we’re back at it. It’s great to see you again. Thanks for joining me and I’ll see you really soon on. Okay, Computer [00:35:33][14.3]
Rick Heitzmann: [00:35:33] Awesome I’ll see you soon man. [00:35:33][0.0]
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