Apple, Amazon, and other soon-to-be Trillion Dollar Babies

The summer of 2018 has been populated by speculation on the future of the tech industry and tempestuous debate on the direction of our economy. We have discussed the scandals of the likes of Facebook and Twitter but, this time, we are looking on the bright side of the tech industry with the frontrunners of innovation, Amazon and Apple. The recent highlight? Apple reached the inconceivable $1 Trillion valuation crux for a company… Amazon quickly followed suit.

The only way to aptly start this article is to awe over what ‘Trillion’ means and looks like. To begin, find the nearest ruler or roughly picture one foot in your head. Now, you need to visualize the distance between the earth and the moon. That distance is roughly 1.3 Billion feet long and in order to reach one trillion, take 770 trips to the moon or take a trip to Mars. Let that sink in. Comparing the companies to countries, per 2017 GDP data, both Apple and Amazon would find themselves beating all but 16 countries.

A year ago, Apple’s total Market Capitalization (total firm market value) sat at $830 Billion while Amazon’s fell short at $460 Billion. With Apple’s colossal popularity, we expected the firm to hit the milestone sooner or later. On the other hand, Amazon burgeoned from a new way to order textbooks to capturing 49% of the e-commerce market and now, potentially, a soon-to-be healthcare provider, all within the past decade.

Now that 2 of the 5 FAANG giants (Facebook, Amazon, Apple, Netflix, and Alphabet/‘Google’) have soared to a trillion dollar valuation, and with Alphabet flirting with $900 Billion after a strong Q2 earnings report was released, which company will join the podium? The tech industry has seen a jet-fueled growth due to strong quarterly reports, technological and e-commerce needs, and the continued expansion of the US economy. While Wall Street analysts expect to see the largest growth from a $530 Billion valued Berkshire Hathaway, the race boils down to two true contenders: Microsoft and Alphabet, yet two more tech companies.

In the case of Alphabet, despite a $5 Billion fine in Q2 from the European Union, the company still managed to have a strong quarterly performance. However, ever since the earnings report brought Alphabet’s peak, the firm has been in decline; Google’s absence at the congressional hearing did not help. With ensuing claims of shadow banning via Twitter, Facebook, and Google, the US Senate looks to further regulate the industry. Unlike Alphabet, Microsoft did not have to make an appearance at the September 5th congressional hearing. Much like Alphabet, they and many other tech stocks took a hit, with Microsoft falling 3%. The industry took a massive drop but this could just be the start of a drawn out regulatory battle.

According to Goldman Sachs Chief US Equity Strategist, David Kostin, we may see pressing regulation and even potential reclassification. Kostin speculates that this could separate the more “social” tech firms, such as Facebook and Google, to be redefined with a new industry description. Could they fall into a subdivision of tech or something new? Furthermore, Kostin mentions that the remaining ‘tech’ firms would be deemed “legacy” tech. By splitting the mammoth tech industry into two categories, investors will have a stabler, hopefully regulation-averse, positions that separate the hazy futures of the likes of Facebook, Twitter, and Google while maintaining the sincere domination of true tech firms. Since Alphabet is a conglomerate that has branched into social media with Google Plus, they have a large representation of information tech thanks to the Google Pixel and Chromebooks, technological research, and so much more. Seriously, click here to learn more. Goldman Sachs’s Kostin is trying to categorize a giant with arms in multiple industries; Facebook and Microsoft have far simpler distinctions. This is where I draw my conclusion and shift my focus back to the question at hand, who’s the next trillion dollar baby?

Separating the non-information technology firms from the social media-esque firms will allow investors to capture the growth of the tech industry without having to deal with as much of its regulation and spotlight. On September 5th, the only companies that were scheduled to appear at the congressional hearing were Facebook, Google, and Twitter, and the largest of the three did not even show. Despite the hysteria of regulation focusing on Kostin’s “Communications Services” firms, Microsoft and other major tech “legacies” took huge hits. Goldman Sachs’s reasoning? The massive presence of contemporary tech positions in ETFs (exchange-traded funds). The split would tighten the current industry and shift the focus of investors to their respective sides. It would also reduce the overall volume of holdings and trades of tech companies that are included in the same indexes, but only because they are in the tech industry with the likes of Facebook. The chief US equity strategist states that the legacy firms will grow at a slower pace than the new communications services sector, despite including the burgeoning Amazon and Apple.

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Goldman Sachs’ David Kostin
With that being said, we’ve come to our answer. And the winner is… it depends. If Alphabet continues to face ensuing regulation, do not expect the company to reach $1 Trillion next. Unless the firm quickly survives the tumultuous sentiment of the public spotlight, expect Microsoft to take the crown.

Although we have crowned a winner- well two tentative winners- what if neither company hits the landmark soon? With all of the discussion surrounding continuously increasing market caps within the current tech industry, analysts often poke at the idea of potential overvaluation; and your local Pitt Business Review Analyst will quickly do the same. So, what is the major difference between the dotcom bubble and our hypothetical tech bubble? Well for starters, some of our major tech firms have lived through the bubble already, but the prime reason is that they were backed by tangible goods and technological advancements. FAANG is comprised of five leading tech corporations frontrunning advancements and differentiation in the tech industry, however, two of the firms generate their profits through intangible services: Netflix leading as the largest video streaming service (double that of YouTube) and  Facebook managing 2.5 Billion active individuals (with even more accounts) on its four media platforms. The companies’ values come from their massive user bases.

Nowadays, you cannot simply slap on a .com and see an immediate rise in stock price. If you’re looking for potential bubble speculation, I am sure you have read up on some of the ICO (independent coin offerings) names thanks to the crypto craze. Back in late 2017 and early 2018, with names including coin or blockchain, your stock could rise 200%; just ask the new and improved Long Island Iced Tea, which changed its name to Long Blockchain Corp. Or, maybe you have heard of DogeCoin, the coin named after an internet meme? While I will not touch upon cryptocurrency any further, focusing on the more qualitative side, name changing serves as a strong example of a potential bubble. Furthermore, many of our contemporary tech giants felt the wrath of the dotcom bubble and survived. Amazon in particular, now valued in the $1900 per share range, eclipsed at $107 and dropped to less than $7 per share during the crash. Companies like Amazon have already passed the hurdle by diversifying their companies internally to be more than just part of a new fad or craze. To add another point to the argument, strong consumer sentiment and economic expansion have driven every major index to new highs in 2018. With economic expansion comes an increase in equity and an increase in equity drives investor sentiment; just ask the roaring 20’s. As the FED moves closer to raising interest rates 4 times this year, thanks to continued growth, it is tough to ignore the paralleled growth of the S&P 500 and the Dow Jones Industrial Average specifically. Keep in mind that this is a quick qualitative analysis on a potential bubble and there is far more digging that can be done; I encourage you all to dig further yourselves. Lastly, in 1999, the Capital Markets were on a completely new level, with 468 firms seeing an initial public offering (IPO) in the US markets, while in 2017, we saw 174 IPOs. The US markets have learned their lesson on the maturity of firms and their readiness to see the public markets. The last questions remain, what does the future hold for the tech industry? Will we see a slip in tech market caps?

Within the tech sector, homing in on the “Communications Services” group, the major performers that come to mind will be the obvious Alphabet (depending on its distinction) and Facebook. However, most of the industry, in terms of frequency, are made of positions on the smaller, large-cap side. Can you guess one of the most infamous or, in better words, disappointing tech positions? Here is a clue, they opened up with a market cap of ~$28 Billion, hit its high the next day, and dropped 55% since its initial offering, which occurred a year and a half ago. If you guessed Snap Inc (or Snapchat) you have earned a pat on the back. Another security historically performing poorly, Twitter. Social media-esque firms have been criticized for their necessity to be a social ‘requirement’ and develop their revenue streams constantly.

A 2011 Aalto University research study discussed, in the abstract, what MySpace could do to keep up with the fast-paced growth of the social media realm. As abundantly clear now, MySpace is virtually non-existent. They have gone through different remodelings and ownerships but the platform is painfully on the verge of extinction. For this reason, if social media were the main a driver of the tech industry, there would be a much more concerning question about bubble potential. However, the only social media-esque firm in FAANG is Facebook and the strongest performers in the tech industry fall under the “legacy” category anyway.

Ultimately, the growth of the legacy group is not in question, especially if separated from the communications services sector. Citing Kostin, “The Zuckerberg hearing revealed to many government officials the scale of personal data that FB users had agreed to allow the firm to gather, raising regulatory risks.” And now under fire for allegations of improper shadow banning, there is a grim uncertainty for firms connected to Facebook, which focus mainly on Alphabet but further extend to the rest of the FAANG group. Companies connected with Facebook on Goldman Sachs’s radar have underperformed the industry.

With ensuing regulation, Alphabet’s strong connection with Facebook, and no apparent tech bubble, the future shines brightest for Microsoft, taking its third place spot on the trillion-dollar pedestal. I will be checking back in once we see a company approach quadrillion!

 

Sources:

{1}http://fortune.com/2017/03/06/apple-iphone-use-worldwide/

{2}https://www.marketwatch.com/story/this-is-how-much-money-exists-in-the-entire-world-in-one-chart-2015-12-18

{3}https://www.nytimes.com/2018/09/04/technology/amazon-stock-price-1-trillion-value.html

{4}https://ycharts.com/companies/GOOGL/market_cap

{5}https://abc.xyz/investor/

{6}https://abc.xyz/investor/pdf/2018Q2_alphabet_earnings_release.pdf

{7}https://www.watchlistnews.com/q3-2018-eps-estimates-for-alphabet-inc-class-a-reduced-by-analyst-googl/2329901.html

{8}https://www.cnbc.com/2018/08/03/these-are-the-next-companies-poised-to-hit-1-trillion.html

{9}https://www.investopedia.com/terms/f/faang-stocks.asp

{10}https://ca.finance.yahoo.com/news/goldman-regulation-hit-big-tech-134500977.html

{11}https://9to5google.com/2018/07/23/alphabet-q2-2018-earnings/

{12}https://www.cnbc.com/2018/07/10/eu-hits-alphabet-google-with-android-antitrust-fine.html

{13}http://www.proactiveinvestors.com/companies/news/204268/faang-report-google-snubs-us-senate-hearing-on-election-meddling-j-crew-sets-up-shop-in-amazoncom-204268.html

{14}https://ycharts.com/companies/MSFT/market_cap

{15}https://www.cnbc.com/2018/01/31/microsoft-earnings-q2-2018.html

{16}https://ycharts.com/companies/SNAP/market_cap

{17}https://seekingalpha.com/article/4079526-tech-stocks-overvalued-market

{18}https://seekingalpha.com/article/4079735-overbought-overvalued-top-tech-stocks-much-might-think

{19}https://www.bbc.com/news/technology-33862367

{20}https://www.cnbc.com/2018/07/18/microsoft-earnings-q4-2018.html

{21}http://epub.lib.aalto.fi/en/ethesis/pdf/12544/hse_ethesis_12544.pdf

{22}https://www.geekwire.com/2016/study-amazon-video-now-third-largest-streaming-service-behind-netflix-youtube/

{23}https://www.lombardiletter.com/companies-that-died-and-survived-the-dotcom-bubble/9106/

{24}https://www.nasdaq.com/article/the-number-of-2018-us-tech-ipos-will-double-over-the-next-10-days-cm949716

{25}http://www.historyofdomainnames.com/dotcom-bubble/

{26}https://www.cnbc.com/2017/12/21/long-island-iced-tea-micro-cap-adds-blockchain-to-name-and-stock-soars.html

{27}https://www.fxstreet.com/news/fed-on-its-way-to-raise-rates-four-times-this-year-uob-201809100642

{28}https://www.marketwatch.com/story/ipos-shatter-records-in-1999

{29}https://www.statista.com/statistics/270290/number-of-ipos-in-the-us-since-1999/

{30}https://www.ey.com/Publication/vwLUAssets/ey-global-ipo-market-climbs-to-10-year-high-in-2017/$FILE/ey-global-ipo-market-climbs-to-10-year-high-in-2017.pdf

 

London Buses Run on Bio-Bean

Bio-Bean, a British startup, has started to partner with companies such as Shell and Argent Energy to create a coffee-based diesel fuel to be used in London’s various busses. In 2013 the company was founded by Arthur Kay and is the first company that aspires to industrialize the process of recycling waste coffee grounds into biofuels and chemicals.

The company does not believe in waste; just misplaced resources that they strive to produce into clean fuel. On their website, Bio-bean states that “spent coffee grounds are highly calorific and contain valuable compounds, making them an ideal feed stock from which to produce clean fuels.” The startup saw potential to create this fuel from the 500,000 tons of coffee grounds in UK landfills and an opportunity to help save the environment by reducing the amount of methane, a greenhouse gas, from the atmosphere.

In previous years, the company produced various products such as the “Coffee Log”, (£7.99 or about $10.75) a product used to sustainably heat homes. The log works by packing together 25 cups of ground coffee into a block of material that has been measured to produce “about 20% more energy than wood” (Bio-Bean). Currently, the startup is taking its goals a step forward and is planning to turn coffee waste into a clean fuel to be tested in  the public transit network of London.

As of November 20th, 2017, The company has produced a total of 6,000 liters of coffee oil and, with the help of the London Transit Authority, planed to power one London bus for a year to test for efficiency. Bio-Bean collects coffee waste from various cafes, restaurants, and factories in the area, then sends the wastes to a recycling plant. There the grounds are dried before the coffee oil can be extracted. The coffee oil is then blended with other fuels and oils to produce B20 Bio-fuel (20% bio-components) which can be used in diesel buses and vehicles without additional modifications. Use of this fuel costs significantly less than the use of traditional diesel fuels and allows for a cleaner environment.

It is always interesting to see how a small project such as Bio-Bean develops and progresses with time. The creation of the coffee log was unique as it introduced recycled coffee as a way to heat a home. The new deal with Shell and Argent takes this small startup to the next level. As they create this futuristic fuel, many could call into question its ability to be used in society. There are many other alternatives that attempt to reduce the emission of harmful gases, such as electric cars, but unfortunately are making small changes in the environment. Thus, it will be fascinating to see if Bio-Bean will be a leader in making the planet healthier

Bio-bean is not the first company to pursue an interest in alternative fuel sources. Many other companies have seen the potential for the successful adaptation of bio-fuel and have implemented it in many ways that are both similar and different to what Bio-Bean attempts to do.

In 2017, a company by the name of Fiberight began construction on a facility with the intention of converting “trash and in some cases corn stalks or wheat straw” (Barney)  into a form of bio-fuel. This company, while also focusing on recycling, has set a goal of “transforming… solid waste and other organic feed stocks into next generation renewable bio-fuels with cellulosic ethanol as the core product” (Barney).

Another company working towards a similar goal is Plastic2Oil. This company, while doing essentially what the name entails, combats liter while producing an “ultra-clean, ultra low sulphur fuel” (Barney). The company is able to take on two problems with one solution. This is done by utilizing liter and other waste in their production of fuel. In doing so, there is an “economic benefit” for the government and other organizations as litter becomes less of an issue. The company tends to have around an 86% success rate when creating this fuel from litter and for every 8.3 pounds of litter collected one gallon of fuel is able to be produced.

Despite London’s goal of an emission-free transport network by 2050, as of time of writing, Bio- Bean has no formal agreement to continue using its coffee based fuel in London buses. The company is currently looking for new markets and for ways to continue to innovate. Recently in a written statement, the company set its sights on America as “there is huge potential to expand the project into the U.S, which drinks the most coffee on the planet, 400 million cups a day” (Bio-Bean).

Sources:

www.bio-bean.com/

https://finance.yahoo.com/news/shell-bio-bean-coffee-drinkers-103200063.html

http://money.cnn.com/2017/11/20/technology/coffee-fuel-bus-london-bio-bean/index.html

https://www.budgetdumpster.com/blog/5-companies-turning-trash-fuel/

Facebook Cambridge Analytica Scandal

Facebook has recently been under fire for its handling of the Cambridge Analytica scandal. It can be difficult to understand and follow all of the events that took place. To start, in 2015 Global Science Research, a company owned by Aleksandr Kogan, harvested the data of 270,000 users who willingly sold their information to the company through the app “thisisyourdigitallife.” This was done in a legal manner and in line with all government regulations because the users voluntarily sold their data. However, the app also unknowingly harvested the data of the friends of these users. This is also compliant with Facebook’s policy, as the data of friends can be mined for use by app developers and academics. The data was then sold to Cambridge Analytica, which is a violation of Facebook’s policy on data mining. Christopher Wylie, a co-founder of Cambridge Analytica, blew the whistle on the events which led to national coverage of the issue. On March 16 of 2018, Facebook recognized the situation and suspended Cambridge Analytica from the website for selling the data to a third party. The tech firm reaffirmed that this was not a data breach as the users who downloaded “thisisyourdigitallife” voluntarily consented to having their data mined; the data of their friends should not have been sold to Cambridge Analytica. A day later, Cambridge Analytica issued a statement saying that it deleted all of the data it had received from Global Science Research after learning that it was not obtained in compliance with Facebook’s data privacy policies. Facebook CEO, Mark Zuckerberg, has since issued apologies in newspaper advertisements, stating that this was a “breach of trust,” and has agreed to testify before Congress about the matter on April 11.

Since Christopher Wylie blew the whistle on the scandal, Facebook has been rapidly losing value. The share price has dropped from $185.90 to as low as $152.22 as the news broke on March 16. This 18% decline in share price has caused Facebook to lose $80 billion in value, and Mark Zuckerberg’s net worth has also declined by $14 billion. With new facts about the scandal being uncovered every day, Facebook’s stock could face a major decline in the coming weeks. Mark Zuckerberg plans to have his Congressional hearing in April; he will hopefully be able to reassure users, investors, and the government that Facebook is capable of safely guarding the information of its users if he wishes to avoid further decline in share price or lawsuits.

Facebook and all tech companies need to make it their number one priority to safely secure the information of its users and customers. It is their duty to ensure that our information will not be sold without our consent. Hopefully the steep decline in Facebook’s share price will result in a wake-up call for the tech firm to increase its data and information security. Data privacy has been a hot-button issue lately with recent data breaches at Uber and Equifax receiving a high amount of national attention. After Equifax’s breach of data in September of 2017, the share price dropped dramatically, from $142.72 to $92.98 in the matter of 8 days after the news broke, leading to the company losing over $5 billion in value. This breach caused Equifax to lose nearly one third of its value all because the company failed to protect the information of its customers. Facebook stands out amongst these, as the information sold to Cambridge Analytica was used to create and target specific political advertisements for then candidate Donald Trump. Regardless, Facebook and all tech firms need to improve their policies and procedures when it comes to data privacy to avoid losing billions in value after data breaches.

Facebook did not take the necessary steps to ensure that all data being collected was done in compliance with its data privacy policies. Although Cambridge Analytica was the one to actually break the rules by purchasing the illegally obtained data, Facebook did not do enough to monitor the situation. After the data was collected, Facebook failed to track where it was used, causing the sale of the data to Cambridge Analytica to go right over Facebook’s head. Facebook, and all tech companies that retain customer data, must ensure that all data is properly collected and sold to those who rightfully can use it. Facebook’s data privacy policy is merely text on a page when the company fails to enforce its own guidelines. If Facebook wishes to avoid this issue again, and if it would like to set a precedent for the tech industry, then the company should begin monitoring the supply chain of data taken from its users. Currently, the social media platform has “strict confidentiality obligations” to which vendors and service providers must comply. Facebook does not list what these strict rules are, but the company clearly failed its users by not ensuring that Global Science Research and Cambridge Analytica were in compliance with these obligations. Tech firms need to begin tracking the stream of data and ensuring that all data is being properly collected and sold by legal means. Tech firms have seen many examples of the devastation that a data breach can do to a company’s value, and all should take Facebook’s latest mishap as a final warning to increase their security for data collection.

Sources:

https://www.aljazeera.com/news/2018/03/cambridge-analytica-facebook-scandal-180327172353667.html

https://ca-political.com/news/cambridge-analytica-responds-facebook-announcement

http://www.businessinsider.com/mark-zuckerberg-newspaper-ads-apologize-for-cambridge-analytica-scandal-2018-3

https://newsroom.fb.com/news/2018/03/suspending-cambridge-analytica/

https://www.nytimes.com/2018/03/27/technology/facebooks-zuckerberg-said-to-agree-to-testify-before-congress-over-data-privacy.html?rref=collection%2Fsectioncollection%2Fbusiness&action=click&contentCollection=business&region=rank&module=package&version=highlights&contentPlacement=2&pgtype=sectionfront

http://money.cnn.com/2018/03/27/news/companies/facebook-stock-zuckerberg/index.html

https://www.marketwatch.com/story/equifaxs-stock-has-fallen-31-since-breach-disclosure-erasing-5-billion-in-market-cap-2017-09-14
https://www.facebook.com/privacy/explanation