Mad Hedge Technology Letter
January 4, 2021
Fiat Lux
Featured Trade:
(SPLINTERNET GOES FROM BAD TO WORSE IN 2021)
(AMZN), (APPL), (TIKTOK), (TWTR), (MSFT), (GOOGL), (FB)
Posts
The balkanization of the internet is exploding in the short-term, knocking off the aggregated value of U.S. Fortune 500 companies in one fell swoop.
In technology terms, this is frequently referred to as “splinternet.”
A quick explanation for the novices can be summed up by saying the splinternet is the fragmenting of the Internet, causing it to divide due to powerful forces such as technology, commerce, politics, nationalism, religion, and interests.
What investors are seeing now is a hard fork of the global tech game into a multi-pronged world of conflicting tech assets sparring for their own digital territory.
The epicenter of balkanization is the division between China and the U.S. tech economy with India as the wild card.
This is fast becoming a winner-take-all affair.
Silicon Valley is winning in India due to border conflicts along the Himalayan Corridor.
India took count of 20 dead Indian soldiers felled by the Chinese Army stoking a wave of national outcry against regional rival China.
The backlash was swift with the Indian government banning 59 premium apps developed by China citing “national security and defense.”
The ban included the short-form video platform TikTok, which counts India as its biggest overseas market.
TikTok was projected to easily breeze past 500 million Indian users by the end of 2021 and was clearly hardest hit out of all the apps.
India is the second biggest base of global internet users with nearly half of its 1.3 billion population online.
The government rolled out the typical national security playbook saying that the stockpiling of local Indian data in Chinese servers undermines national security.
China’s inroads in the Indian tech market are set to wane with recent rulings already impacting roughly one in three smartphone users in India. TikTok, Club Factory, and UC Browser among other apps in aggregate tally more than 500 million monthly active users in May 2020.
Highlighting the magnitude of this purge - 27 of these 59 apps were among the top 1,000 Android apps in India.
China dove headfirst into the Indian market with their smartphones, apps, and an array of hardware equipment. Now, that is all on hold and looks like a terrible mistake.
Chinese smartphone makers command more than 80% of the smartphone market in India, which is the world’s second largest.
One of the reasons Apple (AAPL) could never make any headway in China is because they were constantly undercut by predatory Chinese phone makers with stolen technology.
It’s also not smooth saying for domestic Chinese tech as Chinese Chairman Xi reign in the private sector with Alibaba’s founder Jack Ma’s whereabouts unknown as we start the new year.
This is happening on the heels of the Chinese Communist Party thwarting the Alipay IPO in Shenzhen which was posed to become the biggest IPO ever.
TikTok is also being eyed-up for bans in Europe and the United States recently as it constantly curries to Beijing’s every whim by banning content unfavorable to the Chinese communist party and rerouting data back to servers in China.
Chinese tech is clearly the main loser for their government’s “distract its own people at all costs” campaign to shield themselves from the epic contagion of the lingering pandemic.
What does this mean for American tech?
For one, India is strengthening ties with the U.S., being the biggest democracy in Asia, and will be a massive foreign policy loss and loss of face for the Chinese communist regime.
The resulting losses for Chinese tech will usher in a new generation of local Indian tech with Silicon Valley mopping up the leftovers.
Even though the U.S. avoided the carnage from this round of balkanization, the situation in Europe is tenuous, to say the least.
Fault lines will compound the problem of a multinational tech revenue machine and the relationship with France is on the verge of becoming fractious.
The relationship is worsening with the Europeans by a trade deal consummated between the EU and China along with Western European powers such as France, Germany, and Britain looking to add to their tax coffers by taxing big tech companies like Facebook (FB), Twitter (TWTR), Google (GOOGL) in 2021.
This would be a massive blow to not only revenue streams but also global prestige for American tech.
Not only do Silicon Valley leaders see a murky future outside its borders, but digital territories are also getting carved out as we speak domestically.
Amazon (AMZN)-owned Twitch and Twitter have clamped down on U.S. President Donald Trump’s account.
This could quickly spiral into a left-versus-right war in which there are competing apps for different political beliefs and for every subgenre of apps.
This would effectively mean a balkanization of tech assets within U.S. borders and division in 2021 is set to extend itself.
Silicon Valley wants products sold to the largest addressable market possible and that simply won’t happen in 2021.
The balkanization of the internet is now turning into an equally high risk as the antitrust and regulatory issues.
The issues keep piling up, but nothing has been able to topple big tech yet as they lead the broader market out of the pandemic.
Silicon Valley is still subsidized by ultra-low interest rates and quantitative easing by the Fed. If this changes, look for tech to roll over.
Let’s hope that never happens.
Mad Hedge Technology Letter
December 28, 2020
Fiat Lux
Featured Trade:
(ECOMMERCE AND THE UNIVERSITY SYSTEM)
(AMZN), (APPL), (WMT), (TGT), (SHOP), (APPL), (MSFT), (GOOGL)
The genie is out of the bottle and life will never go back to pre-Covid ways.
Excuse me for dashing your hopes if you assumed the economy, society, and travel rules would do a 180 on a dime.
They certainly will not.
The messiness of distributing the vaccine is already rearing its ugly head with Germany botching the BioNTech-Pfizer vaccine delivery, deploying refrigerators that weren’t cold enough.
Moving on to tomorrow’s tech and the decisive trends that will power your tech portfolio, you can’t help but think about what will happen to the American university system.
A bachelor’s degree has already been devalued as traditional academics trumped by the digital economy invading its turf.
Another unstoppable trend that shows no signs of abating is the “winner take all” mentality of the tech industry.
Tech giants will apply their huge relative gains to gut different industries and have set academics and the buildings they operate from as one of their next prey.
Recently, we got clarity on big-box malls becoming the new tech fulfillment centers with the largest mall operator in the United States, Simon Property Group (SPG), signaling they are willing to convert space leftover in malls from Sears and J.C. Penny.
The next bombshell would hit sooner rather than later.
College campuses will become the newest of the new Amazon (AMZN), Walmart (WMT), or Target (TGT) eCommerce fulfillment centers, and let me explain to you why.
When the California state college system shut down its campuses and moved classes online due to the coronavirus in March, rising sophomore Jose Antonio returned home to Vallejo, California where he expected to finish his classes and “chill” with friends and family.
Then Amazon announced plans to fill 100,000 positions across the U.S at fulfillment and distribution centers to handle the surge of online orders. A month later, the company said it needed another 75,000 positions just to keep up with demand. More than 1,000 of those jobs were added at the five local fulfillment centers. Amazon also announced it would raise the minimum wage from $15 to $17 per hour through the end of April.
Antonio, a marketing and communications major, jumped at the chance and was hired right away to work in the fulfillment center near Vacaville that mostly services the greater Bay Area. He was thrilled to earn extra spending money while he was home and doing his schoolwork online.
This was just the first wave of hiring for these fulfillment center jobs, and there will be a second, third, and fourth wave as eCommerce volumes spike.
Even college students desperate for the cash might quit academics to focus on starting from the bottom at Amazon.
Even though many of these jobs at Amazon fulfillment centers aren’t those corner office job that Ivy League graduates covet, in an economy that has had the bottom fall out from underneath, any job will do.
Chronic unemployment will be around for a while and jobs will be in short supply.
Not only is surging unemployment a problem now, but a snapshot assessment led by the U.S. Census Bureau and designed to offer less comprehensive but more immediate information on the social and economic impacts of Covid showed that as recently as the period between November 25 and December 7 (including Thanksgiving), some 27 million adults—13 percent of all adults in the country—reported their household sometimes or often didn’t have enough to eat.
Yes, it’s that bad out there right now.
When you marry that up with the boom in ecommerce, then there is an obvious need for more ecommerce fulfillment centers and college campuses would serve as the perfect launching spot for this endeavor.
The rise of ecommerce has happened at a time when the cost of a college education has risen by 250% and more often than not, doesn’t live up to the hype it sells.
Many fresh graduates are mired in $100,000 plus debt burdens that prevent them from getting a foothold on the property ladder and delay household formation.
Then consider that many of the 1000s of colleges that dot America have borrowed capital to the hills building glitzy business schools, $100 million football locker rooms, and rewarding the entrenched bureaucrats at the school management level outrageous compensation packages.
The cost of tuition has risen by 250% in a generation, but has the quality of education risen 250% during the same time as well?
The answer is a resounding no, and there is a huge reckoning about to happen in the world of college finances.
America will be saddled with scores of colleges and universities shuttering because they can’t meet their debt obligations.
The financial profiles of the prospective students have dipped by 50% or more in the short-term with their parents unable to find the money to send their kids back to college, not to mention the health risks.
Then there is the international element here with the lucrative Chinese student that added up to 500,000 total students attending American universities in the past.
They won’t come back after observing how America basically ignored the pandemic and the U.S. public health system couldn’t get out of the way of themselves after the virus was heavily politicized on a national level.
The college campuses will be carcasses with lots of meat on the bones that will let Jeff Bezos choose the prime cuts.
This will happen as Covid’s resurgence spills over into a second academic calendar and schools realize they have no pathway forward and look to liquidate their assets.
There will be a meaningful level of these college campuses that are repurposed as eCommerce delivery centers with the best candidates being near big metropolitan cities that have protected white-collar jobs the best.
The coronavirus has exposed the American college system, as university administrators assumed that tuition would never go down.
The best case is that many administrators will need to drop tuition by 50% to attract future students who will be more price-sensitive and acknowledge the diminishing returns of the diploma.
Not every college has a $40 billion endowment fund like Harvard to withstand today’s financial apocalypse.
It’s common for colleges to have too many administrators and many on multimillion-dollar packages.
These school administrators made a bet that American families would forever burden themselves with the rise in tuition prices just as the importance of a college degree has never been at a lower ebb.
Like many precarious industries such as nursing homes, commercial real estate, hospitality, and suburban malls, college campuses are now next on the chopping block.
Big tech not only will make these campuses optimized for delivery centers but also gradually dive deep into the realm of digital educational revenue, hellbent on hijacking it from the schools themselves as curriculum has essentially been digitized.
Just how Apple has announced their foray into cars, these same companies will go after education.
Colleges will now have to compete with the likes of Google (GOOGL), Facebook (FB), Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) directly in terms of quality of digital content since they have lost their physical presence advantage now that students are away from campus.
Tech companies already have an army of programmers that in an instance could be rapidly deployed against the snail-like monolith that is the U.S. university system.
The only two industries now big enough to quench big tech’s insatiable appetite for devouring revenue are health care and education.
We are seeing this play out quickly, and once tech gets a foothold literally and physically on campus, the rest of the colleges will be thrust into an existential crisis of epic proportions with the only survivors being the ones with large endowment funds and a global brand name.
It’s scary, isn’t it?
This is how tech has evolved in 2020, and the tech iteration of 2021 could be scarier and even more powerful than this year’s. Imagine that!
AMAZON PACKAGES COULD BE DELIVERED FROM HERE SOON!
Mad Hedge Technology Letter
December 23, 2020
Fiat Lux
Featured Trade:
(HOW SILICON VALLEY STAYS AHEAD)
(MSFT), (ORCL), (FB), (SNAP), (QCOM), (TWTR)
Northern Californian tech companies stopped innovating because of the monopolistic nature of their current business models.
They keep one principle close to their vest – to crush anything that remotely resembles competition.
This has been going on in Silicon Valley for years and the government still hasn’t taken their finger out to do much about it.
The end result is an ever-growing impoverished U.S. middle class and bleak prospects for their children.
Why does the U.S. government largely sit on the sidelines and turn a blind eye?
If I deploy the concept of Occam's razor to this situation, a philosophical rule that entities should not be multiplied unnecessarily which is interpreted as requiring that the simplest of competing theories be preferred, my bet is that most of U.S. Congress own stock portfolios and these portfolios are spearheaded by the likes of Apple (AAPL), Facebook (FB), Amazon (AMZN), Google (GOOGL), Netflix (NFLX), and of course Tesla (TSLA).
This has come into the open frequently with members of Congress even front-running the March sell-off with their own portfolios like U.S. senator Kelly Loeffler from Georgia selling $20 million in stock after attending special intelligence briefings in the weeks building up to the coronavirus pandemic.
It’s a direct conflict of interest, but that's not surprising for politics in 2020, is it?
It’s also why Congress hasn’t acted on Silicon Valley’s excessive abuse of power.
The government likes to jawbone to the public saying they will make competition a level playing field, but actions show they are doing the opposite.
The Silicon Valley oligarchs are whispering in the ear of Congress and they listen.
Well, what now?
Fast forward to the future – and it was only in mid-September, TikTok — the Chinese-owned, video-sharing phenomenon — was being forced to sell its U.S. operations.
The situation is still pending, and TikTok has asked for extensions hoping to arrive at the next administration.
Given the app’s 100 million U.S. users, this forced divestment by President Trump triggered a delirious auction pitting tech giants Microsoft (MSFT), Oracle (ORCL), and Twitter (TWTR) against one another.
The White House and Big Tech are boiling the free for all down to a combined story of national security and opportunistic capitalism amid unfortunate geopolitical tension between the U.S. and China.
But the ultimatum for ByteDance, TikTok’s Chinese Mainland owner, is more accurately understood as a dark window into Silicon Valley’s utter failure to innovate, and a warning signal of its transformation into a mere protector of long-established turf.
If you don’t have it, claim national security threats, and steal it.
Silicon Valley has long adhered to the motto, “Move fast and break things” – but that was long ago when Steve Jobs was busy making the first iPod and iPhone.
That was a time when Silicon Valley headed by luminaries like Jobs was actually innovating.
Tech has now turned mostly into a digital marketing lovefest with cheap shortcuts and big swaths of the internet corrupted.
The truth is Silicon Valley couldn’t be more corporate and monolithic than it is now, and they use the corporate machine to serve the ends they desire for their shareholders to the devastation of the majority of U.S. society.
Big Tech is just in love with buybacks like the rest of corporate America and the only reason they avoid it now is to appear as if they are in tune with public discourse and not tone-deaf.
I believe that once 2021 rolls around, a floor will be set with U.S. tech because they will initiate a new wave of buybacks.
Huawei, another punching bag of the Trump administration’s tech war with China, is just an externality to Silicon Valley’s inability to innovate.
In remarks to reporters in March 2019, Chinese politician Guo Ping said, “The U.S. government has a loser’s attitude. They want to smear Huawei because they can’t compete with us.”
It’s sadly true that the U.S. has fallen so far behind the Chinese in 5G development that they have opted to scratch and claw back their position through geopolitics.
Huawei not only possesses more 5G-related patents than any other company (some 13,474). It also holds a larger share of standard-essential patents (or SEPs) – about 19% of them to be precise versus 15% for Samsung, 14% for LG, 12% for each of Nokia and Qualcomm, and just 9% for Ericsson.
The writing is on the wall that Silicon Valley is falling behind and that gap is accelerating.
ByteDance produced the hottest new social media platform on a global scale, and Facebook, in typical fashion, responded by brazenly copying TikTok, adding a feature called Reels to Instagram.
Facebook has also tapped the political back channels to encourage the U.S. government to ban TikTok not because it threatens Facebook’s model but because Facebook is concerned about national security.
What a joke.
Don’t forget that Mark Zuckerberg has been attempting to destroy Snapchat (SNAP) for years after CEO Evan Spiegel refused to sell it to Zuckerberg.
The rest of the tech ecosphere has given a free pass to the anti-trust violations because they don’t want to be the next takeout target.
Make no bones about it, Silicon Valley, aided by the Trump administration, is about to do a smash and grab job on China’s best tech growth asset then do the same thing to Huawei’s 5G apparatus.
This cunning maneuver alone has the knock-on effect of not only extending the tech rally in U.S. public markets but increasing the scarcity value and emboldening the Silicon Valley oligarchs.
The de-facto robbing of Chinese tech in broad daylight is overwhelmingly bullish for the U.S. tech sector and that is why no foreign tech player will be able to compete again in the U.S.
So why innovate? Why deploy capital into research and development when you can just nick a foreign company's crown jewel?
Exactly, so innovation does not happen and will not happen.
We, as consumers, have been thrust into the cluster of ever-degrading smartphone apps that offer less and less utility.
But ultimately, even if you hate Silicon Valley at a personal level, it is literally impossible to short them, and now they are resorting to adding foreign companies on the cheap, what other passes will government, society, and corporate America give American tech?
In either case, it’s not for me to judge, and as a technology analyst - I am bullish U.S. tech because love it or hate it, revenue is still growing and relative to the rest of the U.S. economy, they are still growth dominators.
However, one must ponder when these actions will come back to bite, if it ever does. Even though integrity has been sacrificed for profits, 2021 is poised to be the most exciting tech year with the sector usurping an even bigger portion of the broader U.S. economy.
Mad Hedge Technology Letter
December 16, 2020
Fiat Lux
Featured Trade:
(THE NEW SALESFORCE)
(NOW), (CRM), (SAP), (ORCL), (IBM), (MSFT)
During Bill McDermott’s leadership as CEO, German software firm SAP's market value increased from $39 billion to $156 billion.
No doubt that this experience at SAP paved the way to become one of the fastest-growing major cloud vendors in 2020.
McDermott is now CEO of ServiceNow (NOW), a company that offers specific IT solutions. It allows you to manage projects and workflow, take on essential HR functions, and streamline your customer interaction and customer service. It does all of this, thanks to a comprehensive set of ServiceNow web services, as well as various plug-ins and apps.
Their market value has doubled to $100 billion and this is just the beginning.
ServiceNow almost doesn’t exist after numerous attempts to be acquired, like the time it was almost sold to VMware for $1.5 billion.
Company founder Fred Luddy, who is now chairman, and the board of directors were intrigued by the VMware offer, but venture-capital firm Sequoia Capital argued that $1.5 billion wasn’t a premium at that time let alone market rate for this burgeoning cloud player.
Then-CEO Frank Slootman was eventually replaced by former eBay Inc. (EBAY) CEO John Donahoe in February 2017, who took the company to $3.46 billion in annual 2019 sales.
Donahoe then bolted for Nike Inc. (NKE), and McDermott joined from SAP, locking in the firm for a new era of meteoric growth.
ServiceNow is now on its way to become the defining enterprise-software company of the 21st century and if you look at their position in the market today, they’re the only born-in-the-cloud software company to have surpassed $100 billion market cap without large-scale M&A.
This underdog cloud company whose automation software is deployed to improve productivity is leading to what is known as a “workflow revolution.”
Their set of software tools fused with the sudden emphasis on digital tracking of employees and business systems — has played into ServiceNow’s strengths.
The seismic shift is accelerating: By 2025, most of the millennial generation will work from home permanently, based on internal company reports.
It expects revenue of $4.49 billion in fiscal 2020 and still has a mountain to climb with revenue of just 20% of Salesforce, one-sixth of SAP, and one-ninth of Oracle Corp. (ORCL).
But ServiceNow is catching up as corporations and government agencies pour billions of dollars into their digital infrastructures.
So far, more than $3 trillion has been invested in digital transformation initiatives. Yet only 26% of the investments have delivered meaningful returns on investment.
This is launching the workflow revolution, where ServiceNow is the missing cog that can integrate systems, silos, departments, and processes, all in simple, easy-to-use cross-enterprise workflows.
A demand surge for “workflow automation” technology went parabolic in 2020 and is part of the puzzle helping ServiceNow sustain 25%-plus revenue growth.
ServiceNow most recently raised its full-year guidance after disclosing it has 1,012 customers with more than $1 million in annual contract value, up 25% year-over-year.
That included 41 such transactions in the third quarter, with new customers such as the U.S. Senate and New York City’s Mount Sinai Hospital.
ServiceNow raised guidance for the full year on subscription-revenue range to between $4.257 billion and $4.262 billion, up 31% year-over-year in constant currency.
The company has detailed a goal of $10 billion in annual sales as something feasible in the mid-term and its bevy of strategic relationships will help, like in July, Microsoft Corp. (MSFT) expanded its relationship with ServiceNow; shortly thereafter, Accenture (CAN) and IBM created new business units in partnership with ServiceNow to develop new opportunities.
In March, ServiceNow added a new computing platform, Orlando, that added artificial intelligence and machine learning that lets the MGM Macau casino resort, for example, use a virtual agent to automate and handle repetitive requests.
The integration of virtual agents will supplement casino employees with 24/7 support experiences when human staff is unavailable.
After hitting the $100 billion market cap, McDermott has identified M&A as the catalyst to take NOW higher with the CEO squarely looking at artificial intelligence targets.
ServiceNow has enabled firms to unite front, middle and back office functions, increasing productivity during this time period when speed and simplicity matter the most to digital customers.
I would describe NOW as a baby brother to Salesforce and its entrance into the first and most likely continuous acquisition cycle will most probably result in higher share prices.
ServiceNow turns out to be placed in the perfect position benefitting from Americans moving their careers online with the added effect of the broad-based secular digital migration to remote work.
As long as this firm is generating revenue in the mid-20% annually, it will be a constant buy-the-dip candidate for the foreseeable future regardless of whether there is a pandemic or not.
Mad Hedge Technology Letter
December 2, 2020
Fiat Lux
Featured Trade:
(SALESFORCE TRIES TO STAY RELEVANT IN THE CLOUD)
(CRM), (WORK), (MSFT), (GOOGL)
This was basically a deal they had to do even though I believe Salesforce (CRM) massively overpaid for Slack (WORK).
The other option would be to fall even further behind Microsoft (MSFT) who has hit a home run with their own in-house iteration of Slack-ish software called Microsoft Teams.
In fact, this is the biggest acquisition in Salesforce’s software history and purchasing the software developer Slack for over $27 billion marks a new chapter in their history.
Through a combination of cash and stock, Salesforce is purchasing Slack for $26.79 a share and .0776 shares of Salesforce.
Other big software deals such as IBM’s $34 billion purchase of Red Hat in 2018, the largest in its history, followed by Microsoft’s $27 billion acquisition of LinkedIn in 2016 are also noteworthy.
Last year, the London Stock Exchange agreed to buy data provider Refinitiv for $27 billion, though the deal has yet to be cleared by European regulators.
Salesforce has decided to grow via M&A as CEO Marc Benioff hopes to stave off a growth downturn by pre-emptively addressing these potential problems.
His goal is to get more investors on board for the long haul.
In the short term, the jury is out on whether Salesforce can “grow into” the high valuation which they agreed to pay for Slack.
Other deals made by Salesforce are when the company spent $15.3 billion on data visualization company Tableau in 2019 and, a year earlier, they captured MuleSoft for $6.5 billion whose back-end software connects data stored in disparate places.
The future of enterprise software is transforming the way everyone works in the all-digital, work-from-anywhere world and Salesforce will be one of the leading voices in how this plays out.
Don’t forget that Salesforce started the enterprise cloud revolution, and two decades later, they are still tapping into all the possibilities it offers to transform the way we work.
For Slack, this is a major victory because they had begun to see the writing on the wall with two uninspiring earnings reports which signaled that Microsoft was having their cake and eating it too.
For Salesforce to pay a 30%-40% premium for Slack reveals the sense of desperation permeating into the ranks of Salesforce management.
Another takeaway is that enterprise software is putting their money where their mouth is convinced that the shelter-in-home economy will last long after the brutal public health crisis is over.
I tend to agree with this diagnosis, but I don’t agree with overpaying for Slack at the degree in which they did.
However, the climate of cheap rates and high liquidity feeds into the normalcy of overpaying for quality assets.
What’s so bad about Slack?
Slack has blamed the downturn in fortunes on some of its small business customers being hurt by the pandemic.
The company has loosened contract structures and extended credits to help them out which is a major red flag.
The slowdown has only fueled nervousness that Microsoft (MSFT) Teams’ ascent is weighing on Slack’s growth potential.
Teams now has more than 115 million users while Slack has a fraction of that, despite having the edge in the minds of most in terms of user interface.
Slack’s slowing growth, in turn, hurt its sentiment and ultimately its stock price.
Salesforce could have acquired Slack for a discount in a year or two, but by that time, Salesforce would be left in the dust.
Salesforce had to act with urgency even if Slack still expects to post a net loss this fiscal year. It’s unclear when Slack will turn a profit-making company even less attractive.
Salesforce will need to subsidize Slack’s losses for the time being.
What’s in it for Salesforce?
Salesforce could help easily scale up Slack to more high-paying corporate customers in a major challenge to Microsoft Teams which would vastly help Slack’s margins.
There are also numerous synergies in being under the Salesforce umbrella which would only strengthen the profit potential of the communications platform.
By acquiring Slack, a business chat service with over 130,000 paid customers, Salesforce is bolstering its portfolio of enterprise applications and filling out its broader software roster as it seeks additional growth engines.
Salesforce obviously believes that the sum of the parts will be greater than each individual segment and I agree.
Salesforce’s annualized revenue topped $20 billion in the fiscal second quarter, with growth of 29%. But the forecast for the full year of 21% to 22% growth would represent the company’s slowest rate of expansion since 2010.
Microsoft and Salesforce are direct rivals at this point and Salesforce is the dominant player in customer relationship management software, where Microsoft is a distant challenger. Both companies tried to buy LinkedIn, the professional networking site, but Microsoft was the ultimate winner.
The company’s core Sales Cloud product for keeping track of current and potential customers delivered $1.3 billion in revenue, up 12% year over year and that’s simply not good enough to be considered a “growth asset.”
Many investors won’t bite at the bid unless a burgeoning tech company is north of 20% and preferably plus 30%.
Salesforce will now embark on a narrative of engineering growth to fit its investors’ preferences, but I do hesitate to think that this will most likely mean continuing to overpay for software companies.
Salesforce does have the resources to absorb this pricey endeavor but is it sustainable when the likes of Microsoft, Google, and so on are competing for the same assets?
Does this mean that Twitter would be $60 billion in today’s climate?
That’s a scary thought.
M&A could disappear soon from tech because the valuations might reach some sort of peak that even cash-rich Silicon Valley firms might balk at.
Yes, we are getting to that stage of tech. Tech is becoming a luxury.
In the short term, buy Salesforce’s dip as some investors will sell as a way to signal to Salesforce that they aren’t happy with their capital allocation strategy and ultimately this isn’t a guarantee of adding growth and could possibly backfire in Benioff’s face.
