|Tesla is worth mentioning. I give Elon Musk a tremendous amount of credit for advancing alternative energy in the public sphere, and pushing other companies to be competitive in that regard. However, as it stands now, the company is a black hole of unprofitability, running on a lot of hype, hope, and cash deposits for cars that may or may not be ready far into the future. The market seems excited that they delivered approximately 103,000 vehicles in 2017. Ford produced 6.4 million cars in 2016. Ford is worth 42 billion dollars, and Tesla is worth 58 billion. Financial legend Jim Chanos, the person who discovered accounting irregularities in Enron which ended up helping to bring the company down, is short Tesla stock, which means he is betting that the stock goes down. This is not a stock I would buy for a dividend growth investment. However, I would not short this company as they are on the forefront of innovation. It is just that the cash flow statements of the company do not inspire me to invest in this business, until I see more mature operations.|
Facebook is a similar tale with different details. Big Technology companies were allowed to get away with a lot in the previous decade as the United States was very permissive in not demanding technology companies be liable for much at all, so that they could grow unencumbered. We are currently seeing more regulation enter the space, as government entities push for more accountability especially around full disclosure of campaign funding . When a stock is rising and has momentum, it is a terribly exciting time. But there may come a time, especially in the age of trade tariffs and reaction to globalization, when more limits are imposed on Big Tech than are currently priced into the markets . That time may come sooner than later .
There also seems to be a bit of public backlash around social media, where thought leaders are questioning the utility of its addictive and potentially vacuous nature. Furthermore, if these large companies such as Facebook are indeed a platform, and not a media company, as they have historically claimed, they might then have to be classified and regulated as a utility. Facebook is currently trying to serve many masters, and is struggling with its identity. It must be addictive to be able to charge top dollar for advertising, but it must also be appealing enough for people to stay on it and feel good about it and themselves for the long run. There is also the issue of incentive, where Mark Zuckerberg, Facebook’s founder, has 60% of the voting power. He may not feel the need to pay himself dividends if he owns over $70 billion of equity in FB. There has also been drama in the past where he wanted to retain voting majority control of the company even if he sold more than a majority of his shares, and this was ultimately vetoed after shareholder revolt. This does not reflect well on current corporate culture. I could be wrong, and if Facebook decides to pay a dividend I will reconsider. Even then, I would wait for a track record, and a cheaper valuation before buying.
I can write many more paragraphs in continued analysis, but suffice it to say, I prefer investing in more mature companies that have a good track records, solid fundamentals, and recurring cash flows and a corporate culture that is favorable to shareholders. An investor must always be vigilant, but over the long term, history has shown that the odds of success are better with companies that have the discipline and corporate culture of paying regular dividends for an extended period of time .
Before I close the book on FAANG in this email I should also mention Amazon. Amazon is a remarkable business that has managed to stretch itself quite far into the world and in commerce in general. US retail revenues were around $5 trillion in 2017, and about 4% of that total was transacted through Amazon in 2017, an impressive number. They have a similar SaaS style valuation where Prime subscriptions are valued highly by the market, and they also indeed offer software as a service in their AWS (Amazon Web Services). They have also been effective at trying to circle many businesses’ wagons in various ways. We see them undertake many business initiatives, some of them great, and some of them silly. They are not afraid to take risks.
They are becoming a more and more impressive business as time goes on. Even more recently, it seems that they have beat Apple to the punch when it comes to home-based speakers. While I thought that they failed at electronics because they did a terrible job at trying to get their Amazon phone to the public, they actually rallied their resources afterward to supply cheaply made home speakers to the public. We will see how it plays out as the technology is still nascent. While we wait, I am comforted that of the 5 trillion dollars of retail business revenues achieved in the US, approximately $4.8 trillion of it was not transacted via Amazon. Somehow I think that diversified investors might be able to profit from even a small percentage of that bounty.