This reminds me of a talk I watched with Peter Thiel and Eric Schmidt. I know Thiel is controversial, but he was well-meaningly digging at Google for running out of ideas and no longer innovating.
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.
This argument relies on a fallacy of binary thinking: either you have ideas or you don't.
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.
Once you get to Google or Apple scale, you’re essentially a government and run into the same problems with central planning that governments do. It’s absolutely the right move to return the money to shareholders and let them reallocate it to more economically promising endeavors. That doesn’t make a statement about innovation stagnation on the whole, it just reflects the reality of diminishing returns to scale.
"... 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?
I think Google invests a lot. Look at CapitalG, GV etc. And now within Google itself, 2 projects which I think are aiming to become platforms: Stadia, Fuschia.
Personally, I have been disappointed with Google in the AR front. Haven't heard much about investments/ acquisitions. OTOH, Apple has been acquihiring small teams, investing in microLEDs etc. Though, overall Alphabet's investments are much diverse.
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.
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.
They already get a decent amount of flak for investing a lot of money in their Other Bets. Imagine how much shareholder animus there would be if they started investing 10s of billions more?
It is always better to return excess profits to the shareholders than to do stupid things. If there's nothing interesting to buy - you don't buy. I know we're deep into an amazing 10 year bull run and it seems like the more crazier things you buy the better you will fare, but things change. There will be buying opportunities in the future.
And when I say buy it also means invest internally in new technology.
When you invest large sums into a new long term project it gets in as capex in your quarterly results, significantly altering your balance sheets and missing analyst expectations. There are tons of ambitious projects companies can invest in including medical research (ex. cancer medicines), communication networks (ex. ubiquitous wifi), transportation networks (ex. flying cars, underground tunnels), space (ex. astroid mining, zero-g manufacturing), robotics etc. Most of them will need a tremendous amount of capital and very long term vision. Typically stock market would support projects with low to medium capex and high payouts in near to medium term. Everything else would tank your stock. There is no dearth of interesting challenges and ambitious ideas but the way we have setup public companies, quarterly results and analyst expectations of continous growth simply doesn't allow big capital expenditures.
It's not that they've run of ideas, it is that they've run out of market. There's only so much resources you can pull out of the set of people browsing the web. That set's size has stabilized. Its resources have been divided between largely online shopping and (indirectly) advertising, and the flow paths have been laid down and also stabilized. There's only so much new market every year, and there's only so much they can compete away from the other players, who are also in a similar position.
Personally, I love and welcome this new era of StagnationTalk because it brings to light much of what is true in the Holocene: time limited, organizations persist with the teleology that they serve the existence of the organization, and not a higher purpose, that we are limited with information in our transactional decision-making and need to step-up the grid/infra with more intelligent digestibility of fresh information. innit interestin
The only way he doesn't have a point is if Google thinks its company is significantly undervalued, in which case buybacks are smart. Their CEO, Sundar Pichai, gets a huge stock-based compensation, so you have to factor in how management has a large incentive to grow the stock value, but not necessarily in the long term (making buybacks desirable regardless of whether the company is actually cheap or not).
That stagnation can be argued to exist in google. But I'd argue Elon and bezos (up until recently) have been pushing tech hard. The DARPA robotic challenges and biochemical engineering and ml that keep chugging along in the background will provide competitors to goog if they sit on their web advertising model forever.
Thiel is also on a jingoist bend against Google, so I would take whatever he says with a grain of salt.
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.
It's hard not to acree with Thiel here. We only need to look at Elon Musk to realize that there are still plenty of opportunity for moonshot investments.
What does Elon know that Google as a whole doesn't?
Finance 101: Being cash-rich is a major advantage in environments where fundraising is a major hurdle, and where the funds can be put to productive use very quickly. For example, for a startup to raise funds for a major marketing campaign, it has to go through a lengthy and attention-demanding process of pitching to VCs and negotiating terms. Hence why having a big war-chest ready to fire, can be a competitive advantage for a startup.
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.
In StarCraft, you always want to be at 0 minerals and 0 gas because that means you are maximizing your investment into buildings and units. People make fun of you if you don't have the skill to optimize for this.
Google is clearly ultra late game zerg. They are floating minerals, gas, and larvae to remax on a tech switch. This analogy is holding up surprisingly well.
That's a general rule, but there can be scenarios in which it isn't true, they're just far away from the "current meta" ie the way you'll usually see the game played.
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.
You also want to survive rushes by the skin of your teeth because it indicates you min maxed your defense perfectly, investing as much as possible into your growth.
I wonder if Facebook is following that approach. Ie, maximizing growth and planning to just barely survive legal scrutiny
What if you suddenly unlock a unit (or maybe a shop comes selling units) that costs 1000 resources, which would take you 5m to get up to. Especially if when said unit becomes available isn't predictable, it may be a huge advantage to have some resources in reserve.
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.
In BotW, it's best to have all meals posible prepared already because if you get hit and ran out of meals, you'd be getting half the replenishment fro the raw ingredients.
It's important to note that what they really mean is most cash-rich of companies for which public information is available. There are some state owned enterprises around the world that might be able to beat this amount of money even if they don't have the name recognition of Google or Apple.
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.
This will come out as pure whining and probably off-topic, but how on Earth can they can have so much money (in cash no less) and at the same time can't sell some of their flagship products worldwide?
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.
Personal conspiracy theory: these tech companies are sitting on their piles of cash waiting for the next recession so they can go on a shopping spree for all the cheap startups unable to raise any further rounds and unprofitable IPO'd unicorns crashing on the stock market
I’ve always wondered what Apple does with all the cash it has and this seems like a great place to ask. What do companies do with it all? Is there an article that goes into the details? Is it invested? In what? Hoarded in a bank vault? What precautions are in place for such large amounts?
Why dont Google, Microsoft or Apple start operating more like Amazon? these companies have so much cash that thet could literally start 100s of startups within with small teams just like Amazon is doing.
Google had a Earnings Per Share of $14.21 in the recent quarter. Google can return a dividend or share buyback of up to that amount. They can say that they have plenty of good ideas and are working on them but just don’t have $20 Billion dollars worth of good ideas. Apple and Microsoft are strongly viewed companies that give dividends.
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.
Maybe they can just convert a bunch of their contractors to fulltime and create new customers for their Pixel phones, Chrome laptops- like Ford did 100 years ago.
If the economy was hyper-inflating large institutions and corporations would be the first to trade their cash for other securities and assets like real estate.
[+] [-] wpasc|6 years ago|reply
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-....
[+] [-] skybrian|6 years ago|reply
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.
[+] [-] ralph84|6 years ago|reply
[+] [-] Jun8|6 years ago|reply
"... 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?
[+] [-] sharcerer|6 years ago|reply
[+] [-] crazygringo|6 years ago|reply
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.
[+] [-] outside1234|6 years ago|reply
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.
[+] [-] jartelt|6 years ago|reply
[+] [-] H8crilA|6 years ago|reply
And when I say buy it also means invest internally in new technology.
And this has nothing to do with company's size.
[+] [-] sytelus|6 years ago|reply
[+] [-] forgotmypw|6 years ago|reply
[+] [-] vizzah|6 years ago|reply
[+] [-] sova|6 years ago|reply
[+] [-] defertoreptar|6 years ago|reply
[+] [-] friendlybus|6 years ago|reply
[+] [-] jammygit|6 years ago|reply
[+] [-] killjoywashere|6 years ago|reply
[+] [-] tus88|6 years ago|reply
[+] [-] bduerst|6 years ago|reply
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.
[+] [-] pyb|6 years ago|reply
What does Elon know that Google as a whole doesn't?
[+] [-] neonate|6 years ago|reply
[+] [-] noego|6 years ago|reply
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.
[+] [-] skybrian|6 years ago|reply
https://www.bloomberg.com/news/articles/2019-07-25/alphabet-...
[+] [-] wufufufu|6 years ago|reply
[+] [-] aero142|6 years ago|reply
[+] [-] tialaramex|6 years ago|reply
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.
[+] [-] AlanSE|6 years ago|reply
[+] [-] jammygit|6 years ago|reply
I wonder if Facebook is following that approach. Ie, maximizing growth and planning to just barely survive legal scrutiny
[+] [-] ehsankia|6 years ago|reply
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.
[+] [-] argonauto|6 years ago|reply
[+] [-] parsimo2010|6 years ago|reply
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.
[+] [-] aduitsis|6 years ago|reply
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.
[+] [-] jameslk|6 years ago|reply
[+] [-] partiallypro|6 years ago|reply
[+] [-] JauntTrooper|6 years ago|reply
https://www.bloomberg.com/news/articles/2019-08-03/buffett-s...
[+] [-] JohnJamesRambo|6 years ago|reply
[+] [-] stygiansonic|6 years ago|reply
[+] [-] rvn1045|6 years ago|reply
[+] [-] dmoy|6 years ago|reply
[+] [-] webninja|6 years ago|reply
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.
[+] [-] vadym909|6 years ago|reply
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] neonate|6 years ago|reply
[+] [-] gesman|6 years ago|reply
How much wealth will be wiped out ...
[+] [-] tempsy|6 years ago|reply
[+] [-] robertAngst|6 years ago|reply
I know it seems like a doomsday scenerio, but if the US goes through a moderate hyperinflation, do these companies die?
[+] [-] patrioticaction|6 years ago|reply
[+] [-] wyxuan|6 years ago|reply
[+] [-] mankyd|6 years ago|reply
[+] [-] malshe|6 years ago|reply