Blain's Morning Porridge - May 3rd 2018. Apple becomes Dull, Boring and Predictable - and its a

Blain’s Morning Porridge – May 3rd 2018

“It’s a bitch girl but it’s gone too far ‘cause you know it don’t matter anyway..“

The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.

After keeping rates on hold, a Fed hike in June is nailed on. Inflation is on/near target – but the unspoken consensus was no pressure to go early. Dollar stays high. Stocks down a bit. 10-year bonds at 2.97. Yawn. In Europe mildly disappointing data leaves the ECB without any pressing need to act. The UK government looks riven, undecided and looking for straws to clutch over Customs and Brexit – no change there then. In short.. same as, same as.. None of it really matters nor will be remembered in a few years/months/weeks/days.

Meanwhile.. back in the real world, where stuff is interesting..

“I’m sorry I criticised you, Apple. You win”, was the headline on an interesting Bloomberg opinion piece yesterday. The author went on to say: “Tim Cook’s company is a rock of common sense in an industry that’s gone rogue.” He called it the “perfect tech company, an example to the rest of Silicon valley”. Critically the article concluded “Apple exemplifies what economists describe as the maturity of the information technology revolution. It shows that a stage of useful progress is over…”

I wonder what Steve Jobs would think of the company he so personified becoming a stand-up mature company – but we’ll never know… A very good friend of mine, who just happens to be a senior Apple exec here in the UK, took me to task y’day for my comments about the lack of innovation: “they’s been saying that about Apple for a decade and our stock as quadrupled. I remember the analysts crying out “if Apple doesn’t produce a Netbook, it’s dead in the water.”” I can’t even remember what an Netbook was..

I never thought I’d give Apple a gold star for being Dull, Boring and Predictable, but that’s what it’s become.

There are lessons to be learnt from that realisation.

With the assistance of Martin Malone, my Macro Economist, we took a look at Apple and the other tech giants over the past 10-yrs. Apple is clearly a mature company – those of us old enough will remember the classic breakthrough Advert from 1984! One of the great cameo moments in Forrest Gump (1994) is Tom Hanks receiving his stock statement from Apple and telling Jenny he’d invested in a fruit company…! Apple was worth $140 bln in 2008 – today its worth $870 bln.

It’s much the same thing for the rest of the FAAAT names (I’m patenting that!) in terms of market capitalisation:

2008 2018 Annualised Growth

Facebook $20 bln (est) $500 bln 38%

Amazon $25 bln $770 bln 41%

Apple $140 bln $870 bln 20%

Alibaba $20 bln (est) $460 bln 37%

Tencent $20 bln $470 bln 37%

During the same 10-years, the rest of the S&P produced 7% annual returns. Even the other top 10 names, like JPM, Berkshire and J&J were in single digits. New Tech has been the clear winner.

Past performance in no guide to the future, but so much expected growth is tied to digitisation technologies – whether that’s the destruction and reinvention of the high street, new travel modes, medical, educational, computing – you name it and there will be something new. (I tried that and said: “Coal”. Nope.. new Clean Coal tech makes it much more interesting!)

Not a single sector is exempt from new tech solutions and ways of doing it better/cheaper/cleaner. Even the oldest profession is under threat from robotics – or so I’m reliably informed!

Of course, not every Tech marvel is going to succeed.

Leading us neatly to Tesla. While the papers all express incredulity at Elon Musk’s refusal to answer boring questions – like: how does the order book translate to paid-for cars? – it’s credibility that’s on the line. Give Musk as gold star for elevating Electric Vehicles to the forefront of the consumer want list and creating a new market. Don’t even worry about how close to production targets Tesla might get. But be very, very concerned about how fast its burning through its cash pile - $1.1 bln in the last quarter!

According to the WSJ, Telsa’s remaining cash position of $2.7 bln will barely cover debt payments and long-term capital leases through the year. It could avoid a new capital raise, but only if it delivers way more cars than expected. (Instead, Must skipped that question – and falling short of target is always the case at Tesla.) A normal prudent firm would raise capital now, when it still can – but Musk says he won’t because he doesn’t need to. (Blain’s Mantra No 7 is raise capital when you can, not when you have to!)

And then there is We Work – the darling office-share company. Valued around $20bln, its just sold a $702 mm bond – which has crashed nearly 5 points in the few days since launch. Even by the standards of the speculative Hi-yield market, that’s a stunning slap in the face with a wet haddock. We Work’s business sounds great – give the rising tide of self-employed and start-ups access to great social offices and foster the millennial vibe. But any banker will tell you that holding long-term leases and renting them out by the month is the equivalent of borrowing long and lending short – a pretty sure fire route to collapse! Sometime in the near future, We Work is planning an IPO. You have been warned…

Some tech/disruption ideas are brilliant, innovative and work. Other great ideas just don’t work as well.. if at all. Anyone for a perpetual motion machine startup I met y’day…?

Out of time and back to the day job..

Bill Blain