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.
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.
Why not buy some companies and get some proper entrepreneurs back into the mix of management? I can't remember any recent major Google acquisitions.
No mega company really has to have internal innovation. And I doubt the pretend internal startups ala skunkswork with an unlimited budget and extensive runways are a real replacement for innovation popping out of the marketplace among the bodies of a hundred other failed/acquihired startups.
Buying best of breed solutions that integrate with their cloud is as good an ever-present option as I can think of.
It adds value to their cloud, is responsive to actual customer desires, and generally seems like a bargain at the right stage (a Google-supported tool being more valuable than a third-party GCP tool, even with Google's questionable dedication to longevity).
Just don't make the IBM / MS mistake and think adding more PMs to previously successful company is a good idea.
There are an almost unlimited number of things to do with money. Even if you have lots of money, the number of good opportunities exceeds the amount of cash. It doesn't even have to be high-risk acquisitions - Just anything that will get a good return.
> Why not buy some companies and get some proper entrepreneurs back into the mix of management?
Because it's inefficient. Google could buy a thousand biotech startups that are all doing innovative work trying to cure cancer and things like that, but that work has nothing to do with search engines or data centers, so it makes no sense to put it under the same roof. The same management staff isn't going to be effective in managing both types of business, all it's going to do is split their focus.
But give the money to the shareholders and the ones who want to can use it to invest in biotech, others can invest in electric cars or new types of power generation or energy storage or space exploration or whatever else.
Using the profits from search engines to fund cancer research and space exploration is great. Running those businesses inside the search engine company is pointless.
> Google could buy a thousand biotech startups that are all doing innovative work trying to cure cancer and things like that, but that work has nothing to do with search engines or data centers
Yet it has a lot to do with Calico, another Alphabet company.
That's just them doing the silly thing they ought not to be doing. What synergy exists that causes Calico to be better off as part of Alphabet instead of as an independent company?
What if I want to invest in Calico but not Google, or vice versa? All it's doing is making the market less efficient.
Google investors won't be able to invest in high-risk biotech startups if they aren't accredited. Everyday investors are only allowed to access weird investments through the left-field bets of big companies.
> Google investors won't be able to invest in high-risk biotech startups if they aren't accredited. Everyday investors are only allowed to access weird investments through the left-field bets of big companies.
Only they can't do it that way, because if you buy a share of Alphabet, basically the entire value is from Google and even if one of the little left-field bets triples in value it would have only marginal impact on the overall share price.
Meanwhile if you did want to do such a thing, the better solution would be to have a fund with the sole purpose of investing in high-risk biotech startups, and then invest in a slew of them to better diversify the risk. Then let retail investors buy shares in that entity, which is all biotech instead of being a tiny sliver of biotech but really mostly Google.
No, that's assuming that the free market is best at distributing wealth. Evenly distributing at least some of the money isn't the same as "spending" it.
The casual assumption that it is appropriate for government to tax people in order to distribute wealth "evenly" is disturbing.
I'm reacting to the "even distribution" notion not taxing in general. I think there are legitimate reasons for government to collect taxes but ensuring even distribution of wealth isn't one of them, IMHO.
Uni is even to a cap which is completely different than even. Making sure everyone has enough to comfortably survive without restricting high earners from chasing riches is not the same as evenly distributing wealth.
You don't tax people and then provide everyone with a free dog, you just let people keep their money and they'll use it to get a dog if they want one.
If you want to help the poor, you don't give them bureaucratic programs that require them to buy specific amounts and types of food, housing and education, you just give them the money and they can figure out what they need better than you. In that case some of the money came from different people than it went to, but it's still the same principle.
> you just give them the money and they can figure out what they need better than you.
Alternatively they fall prey to lotteries, casinos, drugs, alcohol, or any other number of things and you're right back at square one... give them more money.
It's a blackhole feel-good policy that ignores reality. It's better to put strong social safety nets in place. Buy the food and the clothes for them, maybe even establish a discretionary stippend. But don't just say to people here's 20K ... Good luck! Most people don't have a concept of budgeting... It's not going to work.
> Alternatively they fall prey to lotteries, casinos, drugs, alcohol, or any other number of things and you're right back at square one...
This is contrary to evidence. There are people who are poor and there are people who are addicts, but the extent to which they overlap is only because of the tendency of addiction to make you poor. The bulk of the poor are not poor because they piss their money away on drugs and casinos.
Moreover, giving people stuff instead of money doesn't help the addicts -- or anyone else -- because stuff is fungible like money, only less efficiently. You give an addict food and shelter and they'll sell the food and sublet the shelter and go blow the money on their addiction. Because the root of their problem isn't that they don't have enough food or housing or money, it's that they need to break their addiction or they will never hold onto those things.
Meanwhile giving out stuff instead of money only costs the taxpayer more for the same amount of benefit, because that inefficiency is universal. You give people money for clothes and they'll buy clothes with it, even if they already have clothes, because they can't spend it on anything else. But that's just a waste of the taxpayer's money, when it could otherwise have gone to something they actually needed.
Returning money would create inflation for acquiring future cash cows (think : firebase)
Imagine, if Google returned money then investor gets the money and now they try to invest it somewhere else, highly likely, these guys will go after companies which Google want to buy out. Why make it expensive for yourself to buy your threats?
The idea is that investment opportunities are shrinking, more money in market for limited opportunity is what creates inflation, makes it expensive for everyone to acquire new companies.
It's specially true for big tech companies where pension funds and other investment fund own large chunk of stock, if they get the money, they'll put it in venture capital or private equity which either increases cost to acquire technology (patents etc...) Or existing businesses.
Google has already created inflation from their stock price. The houses in the Bay Area have doubled in 5 years precisely because FANG engineers have had their shares skyrocket 6-10x, so they buy multiple houses.
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).
>Their CEO, Sundar Pichai, gets a huge stock-based compensation
I'm as cynical as they come, but I'm skeptical that all people at these levels are that driven by their compensation. They are ultra-wealthy, and forever will be; a few extra million here or there isn't anything compared to what they stand to lose in wealth and reputation in the face of negative public sentiment.
> I'm skeptical that all people at these levels are that driven by their compensation.
All of your arguments make sense...except that we see people at these levels take actions to increase their compensation so frequently, even at the risk of their reputations.
I don't know about Pichai personally, nor can I explain WHY the mega-rich are so interested in getting richer when it can't possibly change their day-to-day or even long-term comfort, but there does seem to be a lot of evidence suggesting they are motivated by that.
For some it is a competition. If you are on Forbes' top 10 it can be a sport to "beat" others on that list and rank up. Some (see Bill Gates) see that that competition is of little value and look for ways to spend their fortune in "sensible" ways.
It's silly to say that the person who spent decades scheming his way to to the top that list at the expenses of an entire industry, is not "seeing the value in that competition”. He just mellowed out when he got old and his wife convinced him.
The rich are interested in getting richer because it's fun. And there are real benefits for thousands of people to growing an organisation. It's easy to justify.
I don't know Sundar Pichai, but evidence suggest that folks of similar means make many decisions based on personal financial outcomes. They may not "need" the money, but it's a good scorecard.
> if Google thinks its company is significantly undervalued, in which case buybacks are smart
Honest questions here, as my stock understanding is fairly limited: Why does a company care if it's "undervalued"? How does a buyback actually change that valuation? (doesn't the market cap remain the same after the purchase?)
No expert, but as a first guess, with their "insider information" (as the first party), if they believe the market undervalues them, they also expect a future correction (their price rising when they show revenue/market share/whatever proves the market wrong) and then they profit.
I think the idea is that if they think they are "undervalued", they can buy the stock back now for X and sell it for >X later to raise more cash for when they need it.
Or just that they can buy more shares in the buyback for the same amount of cash. All of the per-share fundamentals will go up more in that case, because there are fewer shares outstanding. Eventually, if the stock is truly undervalued, the market will realize it as shares are taken off the market and ownership is concentrated among those who recognize the value of the business, and the stock price will pop upwards.
it would be interesting if companies that size would distribute more to their employees
one fantasy calculation i do a lot is google-profits / total-google-employees or apple-profits / total-apple-employees and you get something like half a million dollars a year (60 billion dollars of profit divided by 132,000 apple employees for example)
in the above scenario, work a few years at a company like google or apple and your a millionaire basically... what would happen to the economy if suddenly there was hundreds of thousands of millionaires? how many new businesses and ventures could be started? would it in the end be good or bad economy? what about the company if it only had a few billion of liquid assets on hand instead of hundreds? would it make a difference?
Isn't that already what is happening at FAANG companies? According to levels.fyi, a senior developer at Facebook and Google is at ~$360k in total comp. After working 5 or 10 years, you could easily have $1M in savings (perhaps a bit more challenging given the cost of living where these companies are located, but still possible).
yea, that is definitely true that they are compensated very well, but i was thinking in a more “equitable” way considering the insane profits they are generating
if you added say half the profits to employees and half the stock as well, they could become multi-millionaires even sooner.... maybe it’s just my bias, but i feel like if those employees were really empowered by their earnings they would be more entrepreneurial and start all kinds of new ventures
i guess this is just my crazy idea, but it’s something i feel strongly recently... it’s just weird to me to see such huge amounts of capital just sitting there (or being used in buybacks)
An engineer at Google started a new ambitious project and the rewards were structured similarly to doing your own startup. After the math was done, his payment added up to $600M.
Anthony Levandowski then left for Uber and the rest is history.
Well this is not a new thought. That discussion goes back to the early days of industrialization and involves thinkers like Karl Marx and Friedrich Engels, where a chain of thoughts (alternative to "socialist mainstream" of giving the "production capital" to the state, where those two mentioned ended up) to put companies into a collective/cooperative, where the company is owned by the workers, thus workers make the decisions and take the profits. These thoughts are part of the roots of many social democratic parties in Europe. While this debate came to an end when the East collapsed, the capitalistic system won an Social Democrats became more market oriented (i.e. "New Labour" in UK or German SPD with Gerhard Schröder's reforms of unemployment and social systems)
The value of a company’s shares is the sum of its assets and its expected future earnings, both divided by the number of shares. The assets are a known quantity and do not fluctuate much in value, but the expected future earnings may. When a company makes a buyback, it is changing the constituent parts of its shares’ value to be less asset(ie. cash) heavy and more expected future earnings heavy. If the expected future earnings were underestimated for some reason, the result will be a more share than if the company had kept its cash. If OTOH the future earnings were overestimated, the value of the share will decline more than if the company had kept its cash.
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.
I think most people would agree he has an agenda, but your post is just an ad hominem attack against Thiel and doesn't address the original poster's question at all.
It is true that my comment is an ad hom attack, but as it speaks to the motive (and potential hypocrisy) of the speaker, it is not fallacious. It also speaks to the question as to whether or not Thiel has a point, hence the idiom "take with a grain of salt".
The fact that it speaks to his motive is exactly what makes it fallacious.
People’s motive’s have nothing to do with whether or not what they are saying is true or false. They are either speaking truth or not. Motives can explain WHY they are saying something untrue. But not IF what they are saying is untrue.
You are saying that Thiel has a reason to lie. But you aren’t addressing whether or not he is actually lying. Instead of attacking what he said, you are attacking him.
Of course you can discuss his motive. But it is a logical fallacy to use his motive to disprove his statement. The person I responded to said that since he showed motive, his ad hom attack wasn’t fallacious.
If someone without his proposed motives had made the same statement, the statement wouldn’t be more or less true.
They're using the fact that he said it as a point in favor of it being true.
However Thiel has a vested interest in making Google look worse. They're a competitor.
He wants to say that Google is no longer innovating and then uses a thin excuse to validate his claim. And we're supposed to trust his reasoning. But all he's really done is back-fitted a reason to his conclusion. He wants to believe that Google is no longer innovating, so he picked something Google is already doing and claims that that is evidence.
The first step would be to define "innovation" in a way all relevant parties can agree upon. Then we need to agree on the things Google has done that would qualify as innovation. Then we can plot how much innovation they've done then compared to now.
Also motive isn't a global immutable state. One person saying something one time, doesn't make everything that person does in every situation fall into the same context. Maybe its because I hang out in programming nerd circles, but I've seen otherwise intelligent people fall into this trap of using some kind of propositional logic to "prove" things.
I don't understand. Supposedly Thiel "claimed that Google was unpatriotic for dropping the government project Maven" - why are we talking about truthiness? How is this a provable statement?
You are certainly welcome to attack someone if you want, but that doesn't change the fact that your post doesn't speak to the argument at all. Thiel can both have an agenda AND be correct, they aren't mutually exclusive.
The debate mentioned above was in 2012. That's many years ago, long before any recent "jingoistic bend", so I don't think it's relevant. Actually I don't see how it would be relevant anyway, since it has nothing to do with his actual argument in this case.
"... 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 wouldn’t start one company. I would take a leaf out of Y Combinator’s book, and start funding lots a small startups, as well as advising them. I’d would attempt at investing in such a way that I create an ecosystem of companies that can learn from each other and support each other. I’d focus on climate resilience. Lots of current practices will be disrupted by changes we are already seeing. Easy? Probably not, but I think it could work well.
Google's done that repeatedly with Google Labs, GMail Labs, Google X, Area 120, department-internal projects like Search Demo Days, 20% time, Google Ventures, giving high-performing employees a charter to work on whatever they want for a couple quarters, etc.
It never seems to work, and it never seems to work for the reasons outlined in The Innovator's Dilemma. Big companies are held hostage by their customers. A new company needs to a.) find new customers b.) be hungry and c.) have total freedom to configure the market around oneself. None of these exist within the cushy environment of a big company - a.) is contradictory with maintaining Google's brand image, b.) is contradictory with continuing to pay the people involved in these efforts, and c.) is contradictory with Google getting first dibs on the spoils of these efforts.
I wouldn’t start one company. I would take a leaf out of Y Combinator’s book, and start funding lots a small startups, as well as advising them
There are only two YC companies that have gone public and both of those are still losing money -- PagerDuty and Dropbox and as far as I know, none have reached profitability.
Yes most companies do that on the books, including movie productions, Amazon, etc. It’s not because their business model still doesn’t work, it’s because the point of corporate income tax is to make sure the corporation doesn’t hoard money and instead reinjects it into business expenses such as payroll.
Yes but my point is that if they're reporting profits it'd mean they'd have run out of things to spend money on (R&D, employees, product dev, etc). The whole point of VC funding is that so much money will go towards product dev that they'd need external funding.
A company like Dropbox does not need to keep its headcount to maintain their current product and extract profits (of which they lose a big chunk to corporate income tax). If they wanted to show profit they can easily tighten, focus, and get rid of R&D and new product development.
They aren’t cash flow positive. No company chooses not to be cash flow positive to avoid taxes. That’s not how things work. Do you feel the same way about Uber and Tesla? Do you think they aren’t showing a profit to avoid taxes or because they still haven’t figured out how to sell their products at a cost that will cover fixed and variable costs?
> If you had $25B to start a company what idea would you tackle?
Medical. I would provide FDA approval process funding and indemnification for medical devices.
Medical is rife with areas that could be disrupted by startups. The blocking limitation is that you can't afford the funding to get clearance for your product.
And yet the FDA was the reason why thalidomide didn't get approved and affected the US much less than elsewhere.
While I have lots of beef with the FDA and could easily write encyclopedic tomes on the subject, there is practically no other agency anywhere that actually makes sure before the fact that drugs or devices are actually better than nothing and actually fit for purpose.
The biggest problem is that the FDA could move much faster if they had a way to do detailed monitoring on things after approval. Alas, there is no incentive or system to handle that.
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.
You think Stadia is viable considering the lag? It's obviously worthless for competitive or even serious gamers. I am skeptical it will be enticing for casual gamers.
I think it will be really enticing for people that want to play sports games but don't want to invest in a console. Those customers are also not going to be the ones concerned about latency.
It has no real advantages to buying a console because you still have to buy the games individually as they explained. It is no different than financing a gaming console except you could eventually pay it off unlike Stadia.
I don't think it is out of the realm of possibility and I see them taking the same path as Netflix currently. They are launching with big games that people know, but they need to get people hooked with new exclusive games, and a bunch of cheap stuff so they can have the "Play 10k games for $X/month" marketing tagline.
n=1 but I if were considering the two options, I would simply not want one that has me owning more electronic waste (console). I am not sensitive to the price either way, but I am sensitive to owning more electronics.
There’d be almost the same amount of electronics just sitting in Google’s servers.
People don’t game 24/7 but if Google want to provision for peak loads like Christmas they can’t really get away with having less?
I'm going to sign up. I have a Pixel phone, I have an aging gaming laptop, and I want to continue play some new games. I'm not serious enough to be concerned by lag, and if it's awful, I'm out $129. Big deal.
No thanks, as a casual gamer, I have no interest in those games (I prefer single player ones and RPGs) and stadia sounds nice since I don't have to invest in gaming hardware while still being able to play a game every once in a while when one comes out that I like while still being able to have good graphics.
Also, I will be presumably able to play it on mobile, TV, and any laptop I have (I actually played it on a chromebook during the beta) which is super convenient.
I rarely game. But after hearing about Stadia, I thought now I would like to try out some games. I am just excited to see how it turns out in the end (all if them: Microsoft, etc)
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.
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?
> What does Elon know that Google as a whole doesn't?
It's not what he knows per se, it's what he does, it's the source of his motivation for being and doing.
It's that invention and innovation is most often driven by individuals - whether acting together or in solitary - in pursuit of something that matters to them. You saw this throughout the industrial revolution. You saw it at Bell Labs and Xerox PARC. You saw it with regards to the individuals that pushed the Internet and tech universe forward, from Ted Hoff to Dennis Ritchie to Tim Berners Lee.
It wasn't a giant corporation and team of 100 people that created Doom and Quake. It was a tiny team of highly motivated people doing something that mattered to them. That same conceptual story frequently occurs throughout modern history.
Elon Musk desperately wanted (wants) to build Tesla and SpaceX. Steve Jobs cared about Apple as though he were maniacal about it, like it was his true love. Who at the very top of Alphabet/Google cares about anything they do there that much? I haven't seen any evidence that there is anyone at the top of their organization that fits that.
Maybe not Google, but Alphabet has a lot of far looking investments. I would argue even more varied and extreme than Elon Musk.
They have Waymo for self driving, Verily for health and biotech, remote connectivity with Loon, and many more. And let's not forget of X itself which is even more experimental and out there.
They also invest heavily in all sorts of research, such as multiple fusion projects, and competitions such as their 1m$ moon prize.
Even within Google itself, Deepmind is doing all sorts of great research. They have Duplex, Stadia, Soli, etc.
If anything, I think the issue is that they have too many things going on.
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.
Exactly, just because you have a lot of cash doesn't mean you should force investment into things that may not make sense. It's like if you had a huge buffet and force fed yourself until you threw up. If anything, Google probably gets flak for having too many ideas and being all over the place. People keep saying they need more focus, yet when they do that, they get accused of not having any more ideas...
Investors and board members would be way more wary of how the company is run if Google decided to do drastic things outside the scope of their core business (like Google Amusement Parks) for superfluous reasons, which would further make them lose money is the stock sinks.
At Google’s size they can invest a lot in R&D and product iterations, but because they are so big the innovation seems way less drastic relative to their size. Put it this way, if I put a new motor, deck, and paint on a small boat, it would seem like I did a lot, whereas if a giant cruise ship did the same thing, it wouldn’t really carry the same impact to outside viewers.
I mean, at the alphabet scale, they have pretty wild stuff like waymo, loon, verily, calico, wing, etc. Even at Google, there's pretty cool tech too like stadia, soli, duplex, and so on.
There are opportunity costs and risks associated with holding onto excess cash. Continuing to hold that cash sort of implies at least some difficulties in making a decision on what to do with it. Doing nothing, or just sticking the cash in short-term securities, has a cost of its own. That's not the same as thinking the company has no ideas, of course. But for companies like Apple and Google, those ideas often aren't necessarily capital intensive ones--at least relative to the size of their cash holdings--and when they're successful, can wind up exacerbating the problem by generating...more cash.
This deftly misses Theil's point and the supposed fallacy is wholly irrelevant. Alphabet's success came off the back of world-changing innovation; now their best offering is the stagnant status quo, yet they position themselves as creatives building the future.
This is a semantic argument which misses the point.
Let's rephrase:
Alphabet has far more cash than it has ideas, which is definitely a good sign that it is far past being classified an innovative company and stockpiling it can be seen as denial.
This is measuring innovation by how big a spender you are. Maybe that isn't a good metric? It seems likely that whatever other companies you consider innovative also aren't spending hundreds of billions on their ideas.
So, the point is that they have a ton of cash. You hold cash because you want to invest in your own company. Implicitly, by not paying it out as dividends or buying back stock with that money, Alphabet is saying to the market "Trust us, we'll put that money to better use than you would. We'll make you a lot more money with this money"
To look at it from another perspective: if it's cheap for you to innovate, ok great! That means you can innovate a bunch more! Spend all that cash innovating away! Oh, you can't spend it all? That means you don't have a bottomless supply of ideas that you haven't been able to try out, it means you're already innovated out and should just buy back the stock to give the money back to investors
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?
Well, for starters it used to be fast (so we know it can be done and they have the source code to reference), so I imagine a couple of months of dev time (tens of thousands?) would be enough to make significant improvements.
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.
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.
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
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.
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.
Google's problem is that if they enter existing industries, they attract the ire of competition regulators. Google could eat entire industries if they wanted to, but there would be hell to pay from the EU and US regulators. So they are stuck trying to innovate.
I wonder how Google could help with solving climate change... perhaps that would be a very profitable problem to solve without regulators trying to stop them (because public goodwill)
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.
At the same time, companies with a strong warchest are better prepared to weather the storm of an economic downturn and to afterwards, purchase valuable assets for pennies on the dollar.
> “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
The thing here is you have to be confident in your ability to deploy capital during those downturns. Your average expected return over multiple cycles (cash returns mid/late cycle + opportunistic investments beginning of cycle) needs to be higher than broad equity returns.
^This.. I don't see why people thinking hoarding cash when capital is cheap is a bad strategy. It totally ignores the fact that ease of raising and cost of capital is time dependent. If you had a war chest of cash in 2008/2009, that'd be insanely valuable.
On the other hand, that's timing the market. But as the common wisdom goes, time in market pays better. Or does it? Do these companies know something that we don't? Is it different when you have piles of money?
Smart, wealthy shareholders love cash hoarding. Especially if the cash is held tax free in overseas accounts.
The share price is boosted allowing them to get returns in the form of pure capital gains.
If the company were to pay dividends, sure, most of those dividends would be taxed at capital gains rates as well. But that money has to be taxed at the highest US corporate income tax rate first. Thus, significantly reducing overall value.
To go a step further, the wealthy don't even have to cash out their shares as the price climbs and climbs. They can get low interest loans using the shares as collateral. This deferring taxes indefinitely and leaving all their capital in these huge companies that are outperforming the SP500 anyway.
True for ordinary dividends, but almost all stock dividends meet the criteria to be treated as qualified dividends, taxed at capital gain rates. For example, in Vanguard's S&P 500 index fund, about 98% of dividends are qualified [1]. Of commonly traded classes of stocks, only real-estate funds mostly pay out ordinary dividends.
No, they didn't necessarily pay tax earning that 100m. See double irish sandwich and other modern tax avoidance strategies allowing companies like apple to hold infinite amounts of cash in overseas accounts tax free.
In the U.S., if you've held the stock for at least one year, its dividends are taxed at a very favorable long-term capital gains rate. Stock held for less than a year is however taxed like regular income.
It's not that favorable if all the corporate cash is stored overseas in low tax holding countries.
The corporation will have to repatriate the money and pay corporate income tax on it before they give you your dividends.
Alternatively, they could just grow that hoard of cash and let your stock appreciate after which you can sell a few shares and get capital gains rates on capital that didn't have to be double taxed.
> Ya, that's finance 101. But here's Finance 5400:
And another point: you have to imagine that the richest companies in the world have the best possible financial expertise on staff. It is safe to assume they know what they are doing.
The goals of extremely ABC-heavy portfolios (i.e. those of its founders and top executives) probably involve a lot less volatility for ABC than diversified external investors would want to see.
While I think you're probably right, a blanket assumption that "they're smarter therefore they know best" is why everyone was so surprised by what happened to Enron. I do not think this is the case with Alphabet, just saying you shouldn't blindly trust experts. There's also the subprime mortgages issue from just over 10 years ago which is much better understood now, but at the time people didn't understand them and just assumed the experts were right.
Nobody is claiming that money managers have omniscience.
What they do certainly have is more information and expertise than a random internet commenter. They don't know everything, but it's safe to assume they know more than you.
Well the actual decision-making tends to be more important than just what one knows. A pile of cash seems more indicative of investment paralysis than some grander strategy. Like, "we can't figure out the best investment to make with this money, so the safest thing we can do is hoard it until we come up with a better idea".
Again, this is pure speculation. You have approximately 0% of the information available to the people who make these decisions, so why bother guessing? It's boring and pointless.
At the end of the day look where the major banks ended up after the crisis. Mostly unchanged. They knew what they were doing. It's just that what they were doing wasn't in the public's interest.
Better than unchanged, even. Sure, some lost and were scooped up, but by and large the financial sector is even stronger than before with all of the consolidation that's happened.
> They can get low interest loans using the shares as collateral. This deferring taxes indefinitely
And in case a superinflation strikes, all those loans are effectively wiped out while they keep the assets (the corporate off-shore hoard might suffer as well though, but it might be sufficiently mobile and well-managed to avoid the worst). If capitalism was a video game, it would get terrible ratings due to utterly botched difficulty scaling.
Yeah, but in a sharp downturn you get margin called and possibly wiped out if you aren’t careful. A lot more rich people have lost everything from that sort of problem than the number of rich people made even richer as a result of extreme inflation. And Weimar like inflation seems increasingly less of a near term risk considering that German 30 year yields just turned negative for the first time ever today.
"Icahn controls 53 million shares of Apple, worth $5.3 billion, which gives him about a 0.9% ownership in the company. In his letter, Icahn lays out his reasons that Apple should repurchase its own shares"
Companies can return money to investors using share-buybacks - this avoids any taxable event for investors, while also not suffering from the downsides of hoarding cash.
There is one significant tactic where it makes sense to hoard cash temporarily - keeping it overseas while waiting for a tax holiday or a reduction in the tax rates. This only works as a temporary tactic though. If any company announced that they were going to hoard cash over a long period, it would depress the share-price significantly. This is exactly why activist investors like Icahn pressure their companies to reduce their cash hoards.
Repurchasing shares though is better for him than dividends. Decreasing the supply of shares, which increases the per share price, can often be better for investors than getting the cash directly.
How does cash raise market cap aside from maybe causing uninformed investors to drive the price up? Isn't market cap share price * shares outstanding? Hence, capitalization in the market, rather than capital available internally.
Imagine a company has 100 shares and for argument's sake let's assume that company is never going to turn a profit but break even forever.
What would you pay for one of those shares? Nothing, right? The company is worthless.
Now imagine that same company has a bank balance of $100. Each share now also owns a 1% share of the bank balance (because it owns 1% of the company itself). How much would you pay for such a share? Anything below a dollar seems pretty good to me!
In other words, the more valuable assets the company holds, the more we'd be willing to pay for shares of the company, all else equal. This is called the 'book value' of a company and is total assets - intangible assets (patents, goodwill) and liabilities.
Note that the real-life situation is slightly more complex because you can't always get at the assets, even if you buy the shares for cents on the dollar. But the general idea is that you can buy shares until you have enough voting rights to dole out the cash as dividends.
Yes market cap is share price * shares outstanding. The shares that are bought-back are destroyed, lowering the number of shares outstanding, increasing the per-share price.
“Google/Apple invest their cash hoard very conservatively, in things like short-term treasuries, because of which their returns are very low”
This is actually wrong.
Apple alone wholly owns one of the world’s largest investment funds - Braeburn Capital - that actively manages over $270b of Apples assets leveraging very sophisticated investment strategies.
The extent to which managing its cash is now a value-add part of Apple’s business is well outlined in the tongue-in-cheek article from WSJ “Apple Is a Hedge Fund That Makes Phones”
> On the flip side, having a big cash hoard is bad for your investors' returns.
This is absolutely true, but sort of misses the point. What happens in practice is that such stocks end up being disfavored and investors prefer to buy other securities with better dividends. Which has the effect of depressing the share price. Which has the effect of making it harder for the company to raise money via issuing debt or stock.
...which the company doesn't care about in the first place, because it's sitting on a truck load of cash and doesn't need to raise money.
Honestly, the jury is very much out on whether or not this kind of behavior is bad for companies in a micro sense. Really all it means in practice is that these companies haven't been able to find a way to invest this money productively, they're out of ideas to purse, or markets to expand into. And that's bad, but it's not bad because of cash.
In a macro sense, though, the argument is clearer: all that money sitting around doing nothing (well, nothing but sitting around in safe investments) does nothing for the GDP as a whole, and in particular it does nothing for the bulk of the population with little to no investment holdings.
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.
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
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.
The difference is cost of failure. If you lose a game you play another, so tolerance for risk taking is high. If Google or APPL screws in an economic downturn up they go bankrupt and don't get a second chance.
Cost of failure is a huge decider of optimal behavior.
Very interesting way to look at the topic. However, if I adopt that perspective, I come to the opposite conclusion.
Corporations are limited liability. It is expected that shareholders have distributed ownership in many companies.
For Starcraft rankings, the possibilities are -1 or +1. For investing, it's more like -1 to infinity. It's a distribution within those bounds. Increasing the likelihood of hitting that -1 roll of the dice is completely acceptable if it is counter-balanced by a greater average benefit at the long end of the tail.
Starcraft is different. Because there are only 2 outcomes (excepting draws), an increase in the chance of the -1 outcome necessarily comes with a decrease in the change of the +1 outcome. It would be more like a public company if they gave ranking bonuses for overkill of the opponent.
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.
The game is a little bit different because you don't just win by crushing your opponent like you do in a 1v1 RTS. This game goes on.
I'd say the situation is more akin to a Free-for-All situation in a game like Age of Empires 2, where the winning strategy is generally to take control of key resources and suck them dry while fighting as little as possible. And then when you need to fight someone during a tech switch, you bury them with your accumulated bank.
Yeah well the discussion moves into the value of money in trying to win a tech race.
Elon's Starlink broadband provider via very-near-earth satellites could be leveraged to provide a real-world advantage against google's internet dominance.
If that conflict happened google would have to dump money into blue origin and would that be enough to counteract the advantage Starlink would have in dumping it's profits into getting more advantage?
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.
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.
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.
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.
The margins on making and selling smartphones are razor thin. Nobody (except Apple, because of their efficient business model) is really making much money selling smartphone hardware.
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
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.
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?
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.
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[ 3.0 ms ] story [ 243 ms ] threadhttps://www.bloomberg.com/news/articles/2019-07-25/alphabet-...
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-....
No mega company really has to have internal innovation. And I doubt the pretend internal startups ala skunkswork with an unlimited budget and extensive runways are a real replacement for innovation popping out of the marketplace among the bodies of a hundred other failed/acquihired startups.
Firebase (acquired in 2014) seems to qualify as semi-recent given it's become a massive product line in a few years.
It adds value to their cloud, is responsive to actual customer desires, and generally seems like a bargain at the right stage (a Google-supported tool being more valuable than a third-party GCP tool, even with Google's questionable dedication to longevity).
Just don't make the IBM / MS mistake and think adding more PMs to previously successful company is a good idea.
There are an almost unlimited number of things to do with money. Even if you have lots of money, the number of good opportunities exceeds the amount of cash. It doesn't even have to be high-risk acquisitions - Just anything that will get a good return.
With all of the failed and failing products from Google acquisitions, is that really a great idea?
Because it's inefficient. Google could buy a thousand biotech startups that are all doing innovative work trying to cure cancer and things like that, but that work has nothing to do with search engines or data centers, so it makes no sense to put it under the same roof. The same management staff isn't going to be effective in managing both types of business, all it's going to do is split their focus.
But give the money to the shareholders and the ones who want to can use it to invest in biotech, others can invest in electric cars or new types of power generation or energy storage or space exploration or whatever else.
Using the profits from search engines to fund cancer research and space exploration is great. Running those businesses inside the search engine company is pointless.
Yet it has a lot to do with Calico, another Alphabet company.
What if I want to invest in Calico but not Google, or vice versa? All it's doing is making the market less efficient.
Only they can't do it that way, because if you buy a share of Alphabet, basically the entire value is from Google and even if one of the little left-field bets triples in value it would have only marginal impact on the overall share price.
Meanwhile if you did want to do such a thing, the better solution would be to have a fund with the sole purpose of investing in high-risk biotech startups, and then invest in a slew of them to better diversify the risk. Then let retail investors buy shares in that entity, which is all biotech instead of being a tiny sliver of biotech but really mostly Google.
I'm reacting to the "even distribution" notion not taxing in general. I think there are legitimate reasons for government to collect taxes but ensuring even distribution of wealth isn't one of them, IMHO.
You're making a value judgement that it's worse to distribute some tax dollars than to turn a blind eye to poverty.
It's both.
You don't tax people and then provide everyone with a free dog, you just let people keep their money and they'll use it to get a dog if they want one.
If you want to help the poor, you don't give them bureaucratic programs that require them to buy specific amounts and types of food, housing and education, you just give them the money and they can figure out what they need better than you. In that case some of the money came from different people than it went to, but it's still the same principle.
Alternatively they fall prey to lotteries, casinos, drugs, alcohol, or any other number of things and you're right back at square one... give them more money.
It's a blackhole feel-good policy that ignores reality. It's better to put strong social safety nets in place. Buy the food and the clothes for them, maybe even establish a discretionary stippend. But don't just say to people here's 20K ... Good luck! Most people don't have a concept of budgeting... It's not going to work.
This is contrary to evidence. There are people who are poor and there are people who are addicts, but the extent to which they overlap is only because of the tendency of addiction to make you poor. The bulk of the poor are not poor because they piss their money away on drugs and casinos.
Moreover, giving people stuff instead of money doesn't help the addicts -- or anyone else -- because stuff is fungible like money, only less efficiently. You give an addict food and shelter and they'll sell the food and sublet the shelter and go blow the money on their addiction. Because the root of their problem isn't that they don't have enough food or housing or money, it's that they need to break their addiction or they will never hold onto those things.
Meanwhile giving out stuff instead of money only costs the taxpayer more for the same amount of benefit, because that inefficiency is universal. You give people money for clothes and they'll buy clothes with it, even if they already have clothes, because they can't spend it on anything else. But that's just a waste of the taxpayer's money, when it could otherwise have gone to something they actually needed.
Imagine, if Google returned money then investor gets the money and now they try to invest it somewhere else, highly likely, these guys will go after companies which Google want to buy out. Why make it expensive for yourself to buy your threats?
The idea is that investment opportunities are shrinking, more money in market for limited opportunity is what creates inflation, makes it expensive for everyone to acquire new companies.
It's specially true for big tech companies where pension funds and other investment fund own large chunk of stock, if they get the money, they'll put it in venture capital or private equity which either increases cost to acquire technology (patents etc...) Or existing businesses.
I am talking specifically about inflation for purchasing future cash cows.
I'm as cynical as they come, but I'm skeptical that all people at these levels are that driven by their compensation. They are ultra-wealthy, and forever will be; a few extra million here or there isn't anything compared to what they stand to lose in wealth and reputation in the face of negative public sentiment.
But I could be wrong.
All of your arguments make sense...except that we see people at these levels take actions to increase their compensation so frequently, even at the risk of their reputations.
I don't know about Pichai personally, nor can I explain WHY the mega-rich are so interested in getting richer when it can't possibly change their day-to-day or even long-term comfort, but there does seem to be a lot of evidence suggesting they are motivated by that.
Honest questions here, as my stock understanding is fairly limited: Why does a company care if it's "undervalued"? How does a buyback actually change that valuation? (doesn't the market cap remain the same after the purchase?)
one fantasy calculation i do a lot is google-profits / total-google-employees or apple-profits / total-apple-employees and you get something like half a million dollars a year (60 billion dollars of profit divided by 132,000 apple employees for example)
in the above scenario, work a few years at a company like google or apple and your a millionaire basically... what would happen to the economy if suddenly there was hundreds of thousands of millionaires? how many new businesses and ventures could be started? would it in the end be good or bad economy? what about the company if it only had a few billion of liquid assets on hand instead of hundreds? would it make a difference?
if you added say half the profits to employees and half the stock as well, they could become multi-millionaires even sooner.... maybe it’s just my bias, but i feel like if those employees were really empowered by their earnings they would be more entrepreneurial and start all kinds of new ventures
i guess this is just my crazy idea, but it’s something i feel strongly recently... it’s just weird to me to see such huge amounts of capital just sitting there (or being used in buybacks)
Anthony Levandowski then left for Uber and the rest is history.
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.
https://www.axios.com/peter-thiel-says-fbi-cia-should-probe-...
People’s motive’s have nothing to do with whether or not what they are saying is true or false. They are either speaking truth or not. Motives can explain WHY they are saying something untrue. But not IF what they are saying is untrue.
You are saying that Thiel has a reason to lie. But you aren’t addressing whether or not he is actually lying. Instead of attacking what he said, you are attacking him.
If someone without his proposed motives had made the same statement, the statement wouldn’t be more or less true.
However Thiel has a vested interest in making Google look worse. They're a competitor.
He wants to say that Google is no longer innovating and then uses a thin excuse to validate his claim. And we're supposed to trust his reasoning. But all he's really done is back-fitted a reason to his conclusion. He wants to believe that Google is no longer innovating, so he picked something Google is already doing and claims that that is evidence.
The first step would be to define "innovation" in a way all relevant parties can agree upon. Then we need to agree on the things Google has done that would qualify as innovation. Then we can plot how much innovation they've done then compared to now.
I don't understand. Supposedly Thiel "claimed that Google was unpatriotic for dropping the government project Maven" - why are we talking about truthiness? How is this a provable statement?
"... 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?
If Google/Alphabet does too many investments which fail shareholders will cry.
It never seems to work, and it never seems to work for the reasons outlined in The Innovator's Dilemma. Big companies are held hostage by their customers. A new company needs to a.) find new customers b.) be hungry and c.) have total freedom to configure the market around oneself. None of these exist within the cushy environment of a big company - a.) is contradictory with maintaining Google's brand image, b.) is contradictory with continuing to pay the people involved in these efforts, and c.) is contradictory with Google getting first dibs on the spoils of these efforts.
What's wrong with that ?
There are only two YC companies that have gone public and both of those are still losing money -- PagerDuty and Dropbox and as far as I know, none have reached profitability.
Medical. I would provide FDA approval process funding and indemnification for medical devices.
Medical is rife with areas that could be disrupted by startups. The blocking limitation is that you can't afford the funding to get clearance for your product.
While I have lots of beef with the FDA and could easily write encyclopedic tomes on the subject, there is practically no other agency anywhere that actually makes sure before the fact that drugs or devices are actually better than nothing and actually fit for purpose.
The biggest problem is that the FDA could move much faster if they had a way to do detailed monitoring on things after approval. Alas, there is no incentive or system to handle that.
Also, I will be presumably able to play it on mobile, TV, and any laptop I have (I actually played it on a chromebook during the beta) which is super convenient.
What does Elon know that Google as a whole doesn't?
It's not what he knows per se, it's what he does, it's the source of his motivation for being and doing.
It's that invention and innovation is most often driven by individuals - whether acting together or in solitary - in pursuit of something that matters to them. You saw this throughout the industrial revolution. You saw it at Bell Labs and Xerox PARC. You saw it with regards to the individuals that pushed the Internet and tech universe forward, from Ted Hoff to Dennis Ritchie to Tim Berners Lee.
It wasn't a giant corporation and team of 100 people that created Doom and Quake. It was a tiny team of highly motivated people doing something that mattered to them. That same conceptual story frequently occurs throughout modern history.
Elon Musk desperately wanted (wants) to build Tesla and SpaceX. Steve Jobs cared about Apple as though he were maniacal about it, like it was his true love. Who at the very top of Alphabet/Google cares about anything they do there that much? I haven't seen any evidence that there is anyone at the top of their organization that fits that.
>We are excited about… Getting more ambitious things done. Taking the long-term view. Empowering great entrepreneurs and companies to flourish.
that they are into empowering the organisation rather than being into particular bits of tech like iPhones or rockets.
They have Waymo for self driving, Verily for health and biotech, remote connectivity with Loon, and many more. And let's not forget of X itself which is even more experimental and out there.
They also invest heavily in all sorts of research, such as multiple fusion projects, and competitions such as their 1m$ moon prize.
Even within Google itself, Deepmind is doing all sorts of great research. They have Duplex, Stadia, Soli, etc.
If anything, I think the issue is that they have too many things going on.
In fact, the easiest way to invest in StarLink is to buy Alphabet stock.
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.
At Google’s size they can invest a lot in R&D and product iterations, but because they are so big the innovation seems way less drastic relative to their size. Put it this way, if I put a new motor, deck, and paint on a small boat, it would seem like I did a lot, whereas if a giant cruise ship did the same thing, it wouldn’t really carry the same impact to outside viewers.
Let's rephrase:
Alphabet has far more cash than it has ideas, which is definitely a good sign that it is far past being classified an innovative company and stockpiling it can be seen as denial.
To look at it from another perspective: if it's cheap for you to innovate, ok great! That means you can innovate a bunch more! Spend all that cash innovating away! Oh, you can't spend it all? That means you don't have a bottomless supply of ideas that you haven't been able to try out, it means you're already innovated out and should just buy back the stock to give the money back to investors
Then give dividends?
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.
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.
Power-law distribution in stock-based compensation.
And when I say buy it also means invest internally in new technology.
And this has nothing to do with company's size.
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.
Curiously, GOOG and AAPL are two of the many large companies who have large cash hoards who are themselves part of the S&P 500.
> “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
The thing here is you have to be confident in your ability to deploy capital during those downturns. Your average expected return over multiple cycles (cash returns mid/late cycle + opportunistic investments beginning of cycle) needs to be higher than broad equity returns.
Smart, wealthy shareholders love cash hoarding. Especially if the cash is held tax free in overseas accounts.
The share price is boosted allowing them to get returns in the form of pure capital gains.
If the company were to pay dividends, sure, most of those dividends would be taxed at capital gains rates as well. But that money has to be taxed at the highest US corporate income tax rate first. Thus, significantly reducing overall value.
To go a step further, the wealthy don't even have to cash out their shares as the price climbs and climbs. They can get low interest loans using the shares as collateral. This deferring taxes indefinitely and leaving all their capital in these huge companies that are outperforming the SP500 anyway.
Edit: *qualified dividends
No, ordinary dividends are taxed as income.
[1] https://advisors.vanguard.com/VGApp/iip/advisor/csa/investme...
(It's 90 days for preferred shares.)
The corporation will have to repatriate the money and pay corporate income tax on it before they give you your dividends.
Alternatively, they could just grow that hoard of cash and let your stock appreciate after which you can sell a few shares and get capital gains rates on capital that didn't have to be double taxed.
Shouldn't they be buying back their own shares?
noego's point is that that $100MM might be more valuable if freed up to invest in a risk-asset, but not that is has no value whatsoever.
And another point: you have to imagine that the richest companies in the world have the best possible financial expertise on staff. It is safe to assume they know what they are doing.
"It is safe to assume they know what they are doing" because they're managing a ton of money has been proven wrong over and over again.
What they do certainly have is more information and expertise than a random internet commenter. They don't know everything, but it's safe to assume they know more than you.
And in case a superinflation strikes, all those loans are effectively wiped out while they keep the assets (the corporate off-shore hoard might suffer as well though, but it might be sufficiently mobile and well-managed to avoid the worst). If capitalism was a video game, it would get terrible ratings due to utterly botched difficulty scaling.
If you have $10B in stock, you probably aren't going to borrow so much as to even get close to a margin call in a market downturn.
Any evidence to back this up? Activist investors generally pressure companies to not hoard cash, for exactly the reasons outlined earlier. Example: http://money.com/money/3484599/icahn-letter-apple-cash/
"Icahn controls 53 million shares of Apple, worth $5.3 billion, which gives him about a 0.9% ownership in the company. In his letter, Icahn lays out his reasons that Apple should repurchase its own shares"
Companies can return money to investors using share-buybacks - this avoids any taxable event for investors, while also not suffering from the downsides of hoarding cash.
There is one significant tactic where it makes sense to hoard cash temporarily - keeping it overseas while waiting for a tax holiday or a reduction in the tax rates. This only works as a temporary tactic though. If any company announced that they were going to hoard cash over a long period, it would depress the share-price significantly. This is exactly why activist investors like Icahn pressure their companies to reduce their cash hoards.
What would you pay for one of those shares? Nothing, right? The company is worthless.
Now imagine that same company has a bank balance of $100. Each share now also owns a 1% share of the bank balance (because it owns 1% of the company itself). How much would you pay for such a share? Anything below a dollar seems pretty good to me!
In other words, the more valuable assets the company holds, the more we'd be willing to pay for shares of the company, all else equal. This is called the 'book value' of a company and is total assets - intangible assets (patents, goodwill) and liabilities.
Note that the real-life situation is slightly more complex because you can't always get at the assets, even if you buy the shares for cents on the dollar. But the general idea is that you can buy shares until you have enough voting rights to dole out the cash as dividends.
This is actually wrong.
Apple alone wholly owns one of the world’s largest investment funds - Braeburn Capital - that actively manages over $270b of Apples assets leveraging very sophisticated investment strategies.
The extent to which managing its cash is now a value-add part of Apple’s business is well outlined in the tongue-in-cheek article from WSJ “Apple Is a Hedge Fund That Makes Phones”
https://www.google.com/amp/s/www.wsj.com/amp/articles/apple-...
https://www.wsj.com/articles/apple-is-a-hedge-fund-that-make...
This is absolutely true, but sort of misses the point. What happens in practice is that such stocks end up being disfavored and investors prefer to buy other securities with better dividends. Which has the effect of depressing the share price. Which has the effect of making it harder for the company to raise money via issuing debt or stock.
...which the company doesn't care about in the first place, because it's sitting on a truck load of cash and doesn't need to raise money.
Honestly, the jury is very much out on whether or not this kind of behavior is bad for companies in a micro sense. Really all it means in practice is that these companies haven't been able to find a way to invest this money productively, they're out of ideas to purse, or markets to expand into. And that's bad, but it's not bad because of cash.
In a macro sense, though, the argument is clearer: all that money sitting around doing nothing (well, nothing but sitting around in safe investments) does nothing for the GDP as a whole, and in particular it does nothing for the bulk of the population with little to no investment holdings.
I wonder if Facebook is following that approach. Ie, maximizing growth and planning to just barely survive legal scrutiny
Cost of failure is a huge decider of optimal behavior.
Corporations are limited liability. It is expected that shareholders have distributed ownership in many companies.
For Starcraft rankings, the possibilities are -1 or +1. For investing, it's more like -1 to infinity. It's a distribution within those bounds. Increasing the likelihood of hitting that -1 roll of the dice is completely acceptable if it is counter-balanced by a greater average benefit at the long end of the tail.
Starcraft is different. Because there are only 2 outcomes (excepting draws), an increase in the chance of the -1 outcome necessarily comes with a decrease in the change of the +1 outcome. It would be more like a public company if they gave ranking bonuses for overkill of the opponent.
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.
I'm not against goog, appl, ect building warchests, but the analogy does break down.
I'd say the situation is more akin to a Free-for-All situation in a game like Age of Empires 2, where the winning strategy is generally to take control of key resources and suck them dry while fighting as little as possible. And then when you need to fight someone during a tech switch, you bury them with your accumulated bank.
Elon's Starlink broadband provider via very-near-earth satellites could be leveraged to provide a real-world advantage against google's internet dominance.
If that conflict happened google would have to dump money into blue origin and would that be enough to counteract the advantage Starlink would have in dumping it's profits into getting more advantage?
Idk, but just making the point
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.
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.
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.
I know it seems like a doomsday scenerio, but if the US goes through a moderate hyperinflation, do these companies die?
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.
How much wealth will be wiped out ...
https://www.bloomberg.com/news/articles/2019-08-03/buffett-s...