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Making Markets EP31: Musk’s Twitter Stake, Wrestling with the Chips Act, A Look Ahead at Tech Earnings
by Daniel Newman | April 11, 2022

In this episode of Making Markets, Daniel Newman looks into a few of this week’s big headlines including Elon Musk’s stake and board role at Twitter, where things are with the Chips Act and what must happen next, and a look at what tech earnings are going to look like in the next few weeks as earnings season is rapidly approaching.

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Transcript:

Daniel Newman: Elon Musk grabs headlines as he makes a big bet on Twitter while supply chains continue to cause headaches and a plan to manufacture more in the US is a long tail plan to a shorter term problem. Also, what lies ahead for the tech earnings wave that is just ahead. We dig into this and more on this week’s Making Markets.

Announcer: This is the Making Markets Podcast brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies bridging the gap between strategy, markets, innovation and the companies featured on the show. The Making Markets Podcast is information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host, principal analyst and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Hey everybody. Welcome back to this week’s episode of Making Markets. Sorry I was a way for a bit. It’s been crazy, hectic, chaotic, just coming back from a brief jaunt to Augusta where I got to see Tiger Woods play a couple of holes. So that’s pretty interesting, big headline in the media. Maybe not much to do with markets, but I think everybody likes to see a comeback story. So that’s going to be something of a market story coming up as earnings are approaching, and we’re going to talk about that today.

In this episode, we’re going to hit on three different things. This is going to be one of those me talking episodes, because there’s just a lot going on. I mean, we had huge news this week. We’re going to start off talking a little bit about the Elon Musk Twitter deal, that’s pretty interesting. Then we will dive a little bit into where we’re at with the CHIPS Act and the FABS Act, and what’s going on with semiconductors and supply chain resiliency, and then we’ll come around and we’re going to talk a little bit about what is ahead with tech earnings.

We’re going to talk about that at a macro level, because there’s a lot of data out there if you just want to know what to expect from a certain company. But really what we’re dealing with here are some major forces that have shifted over the past couple of quarters and have turned the market into a much more volatile unpredictable place for tech companies. So, what is that going to mean for the overall markets? We’re going to hit on that.

So, let’s start with the Elon Musk story. I had the chance to talk to The Wall Street Journal about what was going on there, and the first question that came to mind for everybody was, “Is Elon Musk taking a near 10% stake in Twitter, and now being brought onto its board of directors going to be a good thing for Twitter? Does it make the company a meme stock? What’s going to happen and what about growth?”

Twitter is a company that has lagged the market, lagged its competitors perennially in growth. It struggled with innovation. It doesn’t necessarily have as good of an ability to monetize its users, and yet it’s still a platform that most in the media, a lot of executives, pundits, thought leaders, they love it. When it comes to real-time information, Twitter’s a great place to go. When you’re wanting to follow the economy, you’re wanting to follow the war in Ukraine, you want to follow what’s going on with that celebrity, I don’t know if there’s a better outlet than Twitter for it.

Of course, Elon Musk is an enigmatic when it comes to his general demeanor and personality, but also the way he uses Twitter. Sometimes controversial, sometimes almost crazy. He challenges politicians, he challenges policy makers, he challenges pretty much everything. He challenges the way we all think. And by the way, that is Elon Musk being Elon Musk. Elon Musk rightfully wonders why after building basically the entire electric vehicle industry in the United States, he can’t seem to get credit from the Biden administration. But having a large stake in Twitter and being on the board of directors, at least as I see it is going to be a really positive thing, more for Twitter than for Musk.

Now, I imagine with him often being provocative and sometimes somewhat insensitive with what he’s tweeting, him holding this share is sort of a hedge against ever being de-platformed by Twitter. But I think moreover, he appreciates the engagement, he appreciates the platform as a way to communicate, all the things I said about real-time access. And he’s using his great wealth and access to be able to get closer to that company.

I think from a freedom of speech standpoint, he will constantly be challenging because he uses it. Of course, Jack has come out and said, “We don’t guarantee any sort of freedom of speech. They’re private companies.” One A is not the entire premise of Twitter. But let’s talk about why it’s going to be a great thing for the company. I mean, first and foremost, Twitter saw about a 30% stock increase in the days following the Musk announcement. Now some people could say that kind of makes the stock a bit of a meme stock, but look at how Tesla moves. Is Tesla meme stock? I don’t really think so. Now trading it more than 200 times for earnings that is obviously an indicator that Tesla is highly valued, maybe too highly valued given market conditions, but Twitter is not valued that much. So this did not take the PE in any sort of unfathomable ratio, but it also to me coincides with the loyalty of the Musk faithful and of Musk’s community in terms of following his investments into stocks.

Now seeing that 30% bump, it’s not based upon any material change in the current business, because Musk’s only been around a couple of days. You saw him come online right away and ask an edit button. By the way, raise my hand and say, “Heck, yes. I would love an edit button.” But this also was an opportunity to have some new blood come in, certainly impact the shape of the board. Drive revenue, bring new ideas to the company, sustainable business growth and bring a more loyal class of investors that are going to basically blindly support what Musk is doing because when Musk gets into something and gets behind something, it tends to drive the stock up and bring greater value to the shareholders.

So overall it’s hard to think the deal is anything but good for Twitter, for Twitter investors and for Twitter users. Of course, Musk is always going to be a controversial figure, somewhat polarizing, and I don’t expect that to change, but he’s brilliant. Everything he seems to do turns to gold. Investors trust and follow him and companies that he invest in tend to gain market valuations. So good move for Twitter. Interesting move for Musk. I’m still a big Twitter fan, so rooting for the company to do well.

Let’s talk next a little bit about what’s going on in the semiconductors in CHIPS space. So had the chance to go to Washington DC this week. I attended a LeadershIP conference as in LeadershIP with IP capitalized. And it was basically policy makers, former and current judges, academics and a lot of it was a pining about basically, what are we going to do going forward to solve this supply chain issue and specifically with semiconductors. I have a pine and market watch in other places about longer term, the deflationary impact of technology, and the fact that more or less that I think even if the economy continues to turn, interest rates continue to go up, that the semiconductor space will continue to flourish because when companies moved to automation, when they invest in AI, data analytics, cloud, software, remote work, all those things require more CHIPS, more semiconductors.

Sure some of the areas like devices, new laptops, monitors, computers, maybe even buying new cars, could slow down a little bit in an era of less liquidity, no stimulus. But all, I think in demand for CHIPS and technology actually will be pretty strong. And we’ll cover that a little bit more in a few minutes when I get to the part about what to expect in the next quarter as earnings approach. But here’s along the short of it. There are really two divergent focus areas that all need to really come full circle and work in unison. And that is one, resiliency of the manufacturing which is what the FABS and semiconductor the CHIPS Act is all about, is about bringing significant investment to repatriate some of the manufacturing. Now remember 7% of CHIPS in 1990 were manufactured in the US 12% today, 0% of the leading edge.

And we’re seen with the shortage what’s going on with the China Taiwan, and even with Russia and Ukraine and certain supplies that we have a lot of different ways in a very complex supply chain to have issues with resiliency. And when you take out the fact that none of it’s manufactured here, it creates an even greater risk profile. Intel of course, is building its megafab in Ohio. They’re expanding in New Mexico and Arizona. You see TSM coming to the US and Arizona, Samsung semiconductor building and expanding capacity here in the US as well. But of course these are multiyear projects. It’s going to be probably two years, if not longer, based on other parts of the supply chain that it’s going to take before that manufacturing capacity comes here.

On top of that, with some of our immigration challenges, how quickly we’re able to get the level of talent to work in these FABS is going to be another issue that we’re going to have to figure out. We don’t have a lot of the engineering talent standing by. These jobs in FABS are not low end. These are high end engineers, PhDs, masters engineering, physicists, chemical engineers. These are the kind of people that are going to be working in FABS. So we are going to be creating jobs, but they are going to be jobs at the upper end of the academic and educational scale.

But overall, we’ve got this force with is more manufacturing, more resiliency, and we do need to bring some level of that back. Does it need to be 50%? I don’t know if it needs to be 50%. That’s some of the goals that we’ve heard out there. But I would say getting back to that level of 1990 would be a sensible approach to make sure that we can continue to work with the east and their leading edge manufacturing capabilities, but concurrently never run into a situation like we did in the last couple years.

On the other end of this is the FABS and all moreover even the intellectual property and design challenges. The US is a leader in many ways of all the innovation and development of intellectual property. Companies like Qualcomm and Intel of course do a lot of this in media. And these fabulous companies, they’re developing technologies in some cases like Qualcomm, they’re doing a lot of the licensing of these technologies and the act needs to really make sure that there’s enough dollars being invested including the companies that are current and the companies that are up and coming that are designing capability, designing the next generation of communications. This was 5G or maybe 6G and investing in making sure that their intellectual property is protected. That they’re able to license and profit from taking 5, 10, 15 years to develop technology. This then licensed and utilized by these leading technology companies, platform makers.

So this is part of the CHIPS Act and what they call a FABS Act is that there’s some dollars to be spent in terms of making sure that we’re protecting IP, but we also have kind of mixed policy. We have mixed opinions in the current administration, and there is some calls to loosen IP regulations. And this is pretty concerning to me because when we are developing great technology, oftentimes when the patents are not protected, what we end up doing is we allow other countries and such to, in this case, probably most likely China to take advantage of intellectual property, to license or to not license, and then utilize, distribute, and basically gain in the market as innovators above us. Something we don’t want to lose.

We’ve already lost the manufacturing, but we got to do is protect the intellectual property and the design that patent holders here, and the companies that are investing. The tech transfer out of academia and make sure that is going into investment. And that’s being supported by our policy makers and the courts to protect them because it takes a long time to develop IP. And it does not take a long time to lose all that investment. So something to watch is going to be the CHIPS Act, the house, the Senate, they need to come together, merge ideas and come up with a certain bill and pass it. They need to get moving on this because 50 billion or so that their planning is not actually a lot.

So let’s come full circle here to the third topic of this week’s Making Markets. And that is what to expect in this quarter’s earnings. Now, this can be really interesting because with recent FMC, interest rates on the rise, earnings compression, you’re starting to see valuations of private companies coming down. Public. A lot of the tech companies have pulled back. Some of the big ones have run back up. The Microsofts, Googles, Amazons have actually recovered a lot. So as Tesla. A lot of smaller tech companies, SaaS companies, companies that had smaller shrunken less than profitable earnings reports or had not become positive earnings yet, I’ve seen their stocks fall 50, 60, 70 plus percent.

That’s been interesting but a big question mark is really what do we expect from this particular set of earnings now that we are a few quarters past the initial fall that came around Thanksgiving? We’re starting to see interest rates hike. We’ve still got a war going on. You’ve got inflation out of control and not necessarily any sign of slowing down. And on top of that, now the fed is looking at tapering the balance sheet, which means even less liquidity. We’ve got the Build Back Better Plan is not passed. It seems dead on arrival. And basically you’ve got no short term plan that I can discern to inject liquidity to consumers. It’s going to quickly go into the economy. What we do have is some strength. We have not seen compression of GDP, and we have not seen the job market start to capitulate in any way.

Here’s the long and the short of it, it’s early but I actually think you’re going to see another quarter of pretty strong results from the tech industry. I don’t think you’ve seen a slow down yet. And going back to my statement and I’m going to stick by this and my preview quarters. I’ll probably say this again next quarter, the tech is deflationary. So your semiconductor companies are going to see strong sales. The question is going to be, is will any demand hiccups due to the supply chain? It’s been continuous. Many of them have big backlogs. So watching their forward guidance into the next quarter is going to be interesting. If they cleared out some of that backlog, that’s going to be interesting to watch.

Companies like Microsoft, Google, Amazon, many of them have record quarters, record results over the past few quarters. Amazon will be a little interesting with some of the discretionary and the e-commerce side of its business. I expect AWS, which has grown over 16 billion a quarter to continue to see its growth. It’s been north of 30%, these past quarters. Azure at 50% or so, even Oracle, Google. Google has continued to lose with its cloud business, but its search has been super strong. YouTube has been solid.

It’s just hard to think that even in a slightly less accommodating fed environment, the tech has suddenly lost its luster. I think companies that are looking to stay strong, to grow, to actually be in a good position for scale of personnel are all investing in tech. You’re seeing data growing at scale which means more compute, more workloads. You’re needing more software to run your business. Now you’re seeing disaggregation of a lot of your systems of records. So you’re getting systems of finance, systems of HR, systems for procurement, systems for operating data sales and all these systems need to be tied together making companies like ServiceNow interesting. You’re seeing the metaverse pop up. You see companies like Microsoft and Adobe and Nvidia, all being big players in this space.

So I think tech is going to have another strong quarter. I think it’s going to stay in good shape. I think a lot of the doom and gloom is too soon to really predict. And I don’t really care about 100 to 200 more basis points. I think tech is actually the answer to a lot to companies to continue to grow despite a less accommodating situation from the fed. And hopefully Cathie Wood and some of her thesises are right, even though she’s been mostly wrong lately, but that I do agree with her about the deflationary value of tech. The longer horizon, and the fact that tech is going to solve most companies strategic initiatives forward. However, most of ’22 might be a little bit tougher, but for tech, I still think growth. I still think strength, but guidance is going to be the area to watch. And that’s it for here. That’s it for now. So have a good week.

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About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio