Ballmer Versus Smit: Hooper Owner Versus Suit

September 27, 2022

I learned that Steve Ballmer — former, much loved leader of Microsoft for 14 culturally rewarding years — allegedly said something like “Google is a one-trick pony.” Okay, where’s the supporting data? One liners are not hyperlinked to Mr. Ballmer’s detailed, Harvard-infused spreadsheet about the Google’s business. Nah, Google sold online ads. Its inspiration came from outfits most 20 somethings struggle to associate with innovation; specifically, GoTo.com, Overture.com, and Yahoo.com. (The yodel might spark some awareness in young wizards, but probably not too many will think of the Big Bear creative who crafted the sound. (Factoid: The creator of the Yahoo yodel was the same person who did the catchy Big Mac jingle with the pickle on top. But you knew that, right?)

I thought of Mr. Ballmer and his understated, low energy style when I read “Gerrit Smit on Alphabet’s Underappreciated Growth Drivers.” Mr. Smit is a senior financial whiz at Stonehage Fleming. The company’s objective is to get paid by people with money for services, which including advice. The firm’s Web site says:

Supporting many of the world’s leading families and wealth creators across generations and geographies

Since I live in rural Kentucky, it will not surprise you that I interpret this sentence to mean, “We advise and get paid whether the investment pays off or falls into the Mariana Trench.”

The thesis of the article is that Alphabet Google YouTube DeepMind will grow no matter what happens to advertising, whether regulators keep nicking the estimable firm, or competitors like Amazon and TikTok continue to bumble forward with their lame attempts to get big and prosper.,

Mr. Smit offers:

Alphabet is one of the scarcer quality technology-driven companies with free options on further future organic growth drivers. It invests heavily in artificial intelligence, quantum computing, self-driving cars (Waymo) and biotechnology (Verily Life Sciences). It is particularly active in healthcare, having last year alone invested US$1.7-billion in visionary healthcare ideas, earning it fifth position of all companies in the Nature index (which tracks the success of scientific analysis in life sciences). It recently also completed the acquisition of Fitbit.

My instinct is to point out that each of these businesses can generate cash, but it is not clear to me that the volume of cash or its automated, bidding magic will replicate in these areas of “heavy” investment. Smart software continues to capture investor interest. However, there are some doubts about the wild and crazy claims about its accuracy, effectiveness, and political correctness. I like to point to the problem of bias, made vivid by AGYD’s handling of Dr. Timnit Gebru and others employees who did not get with the program. I also enjoy bringing up Google’s desire to “solve death” which has morphed into forays into America’s ethically and intentionality-challenged health care sector. Perhaps Google’s senior executives will find subrogation more lucrative than ad auctions, but I doubt it. Self driving cars are interesting as well. An errant WayMo will almost certainly drive demand for health care in some circumstances and may increase sales of FitBits in the event the person injured by a self-driving car follows a rehabilitation routine.

But these examples are “bets,” long shots, or as AGYD likes to say “moonshots.”

Yeah, great.

Here’s another statement from Mr. Smit’s “buy Google stock now” and “let us buy that stock for you” essay:

While Alphabet keeps reinvesting actively and last year spent over 12% of sales on research and development, it has built a strong record of generating excess free cash flow – in our view the main reason for investing in a stock, and the main determinant of the fundamental value of a business. Alphabet’s free cash flow sometimes takes a large step upwards and then stabilises, but seldom takes a large step backwards. This clearly is of comfort to investors.

But Mr. Smit is hedging his rah rah:

The current economic outlook is particularly uncertain, and the overall advertising market may not impress for a while. Although Alphabet can easily “manage” its financial results by holding back investment in, say, Google Cloud, it is not so short-sighted. Regulatory risks have been looming for a long time, in essence resulting from the company’s effectiveness.

Net net: Buy shares in AGYD… now. Monopolistic businesses have that special allure.

Stephen E Arnold, September 27, 2022

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