View profile

Here Come The Entrees (Cestrian Stocks Bulletin #40)

Here Come The Entrees (Cestrian Stocks Bulletin #40)
By Cestrian Capital Research, Inc • Issue #40 • View online
Software’s almost done eating the appetizers. The entrees are at the pass.

DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Marx Was Wrong
In the 19th century, the many works of Karl Marx featured a common theme, being the anticipated victory of labor over capital. Workers, Marx wrote, would rise up once their collective false consciousness gave way to clear vision such that they could see the world for how it really was; a world in which the owners of the means of production - the capitalist class or bourgeoisie - dehumanized those who sold their labor for money - the proletariat - by alienating them from that which was truly theirs, their own time, paying simply the lowest possible cost of that time and retaining the profits thereon.
Very much an Enlightenment scholar, Marx did more than just anticipate the successful revolution, he believed it was an inevitable, deterministic outcome of history, another step in the progression of the modernizing, post-feudal world. Now, had he been right, he would been one of the first placed up against the wall in the inevitable Terror that would have followed. The original champagne socialist, many of Marx’s writings were created when in residence at a grand pad owned by his buddy Engels’ capitalist father. The very air Marx breathed and the water he drank was paid for by the profits alienated from the proletariat that Marx claimed he sought to save.
As it turns out, Marx was flat wrong. For reasons we can discuss for at least the next century, it turns out that the laboring class can never quite get it together for long enough to turf the bourgeoisie out of town. On the rare occasions when they have, the result has been less the land of milk and honey and more that of the Lord of the Flies.
You know which philosopher got it right? Care to guess? Kafka? Hegel? Wittgenstein? J S Mill? Foucault? Nope. All too complicated and lacking practicality. No, the victor in understanding historical determinism, the true embodiment of the dream of the Enlightenment, that’s Marc Andreesen. Yep, the pointy-headed guy who kind of invented the web browser in the early 1990s. No champagne socialist this but instead a software guy coming out of the University of Urbana-Champaign, IL. Started out a worker, joined forces with a friendly capitalist in the shape of Jim Clark, IPO’d Netscape in 1995, then got crushed in a machine press owned by Messrs Gates and Ballmer, then proprietors of the largest code-milling operation in the land. Suitably educated about the ability of even the very smartest of labor to defeat a wall of capital, Andreesen reinvented himself a capitalist, and declared in 2011 that the revolution would be led not by a cigar-smoking icon in a weird hat, but by code. Yes, code. Because, Andreesen had observed, “software is eating the world”.
If you haven’t read the blog post in which this point was first made, you must. It was prophetic indeed. It remains on the a16z website, here.
In the ten years that have passed since, software has munched through some crudités, and enjoyed a plate of appetizers. Want proof? Check the Nasdaq performance this last decade. And remember that in 2011, non-tech folks though tech was just another industry. They didn’t know, because they couldn’t see the world for how it really was, that tech was going to devour every industry. And so in those early days before the deluge, people were not prepared. People who worked in hotels, libraries, directory enquiries services, newspapers, video rental stores, movie theaters, electronics retailers, all these people, they weren’t ready. And so when their jobs were swept away before them, it came as a surprise. Because all the while declaiming “tech is a force for good!”, the motive waves coming out of Silicon Valley and its imitators have been nothing short of a devastating tsunami in all these traditional industries.
Tech, you see, is exactly like a tsunami. If you are sat atop the wave, surfing and tweeting and enjoying a wild rush into the shore, it’s wonderful. Software is the most profitable and cash generative business model ever devised. Find us any other industry in which scores of companies can achieve >50% p.a. revenue growth at scale, and deliver >20% cashflow margins whilst growing at that rate (oh, and have several years’ revenue visibility in the bag to boot). But if you are in the path of the tsunami, well, you know how that ends. Smashed against the rocks. Without exception.
Well folks, we’re only just past the appetizers. We wrote recently that the crazy insane ride that tech enjoyed in 2020 may have been just the first move up in a long, long set of motive waves. We stand by that. Zoom out far enough, wait long enough, ride out the pullbacks and the downturns and the naysayers and the traditionalists and the value prophets, we are very confident that tech will be higher over the years to come than it is now. Because it is early yet.
Now, the entree is about to be served in the wake of the Covid pandemic. Around the world you have millions of people who have not worked for a year or more. Some have received government payments, some have not. Depends on your station in life. Those who are vaccinated - or not vaccinated but not fearful either - are now eligible to return to work. But a very strange thing has happened when they weren’t looking. There is less work around. And why is that? Because software has eaten their jobs and those jobs aren’t coming back. Raging economic growth notwithstanding.
We observed midway through the Covid crisis that employers had worked out how to advantage themselves in this environment. Some went about it subtly, some not. Read this note to get our take on it from that time.
And now? Here’s where we are:
Image source - New York Post
Image source - New York Post
Job creation rates in the US are below expectations, and it’s because people still don’t realize how powerful the automating, deflationary force of tech is.
The next wave is long Covid. Millions of people worldwide are going to find that the infection that didn’t kill them - that for the lucky ones maybe just gave them a tough time for a few weeks - may come back to haunt their lungs, their immune system, their vital organs. Not so much that they are in hospital. But enough that working full time is like climbing a mountain all day, every day. And there isn’t enough money in the world to pay welfare to this burgeoning standing army - whether your politics determine that you want to or don’t want to, there just is not enough money to do so.
Companies, being the kind loving souls that they are, will deal with this labor shortage the way that companies do best. They will find ways to get by and then to prosper with less labor. And how will they do that? With more technology. Be it software process automation or robotic automation, the long Covid generation will bequeath to the world a structurally lower level of employment and a fundamentally higher degree of machine involvement in the economy. Oh, and more people living under the freeway.
So it’s time to choose. Labor, or capital. Wetware, or software.
Our job here is not to help you with your moral or political direction. That’s something only you can ponder and/or act upon. No, our job is to help you to become a better investor. And if you want to become a better investor through the coming tsunami? Stay laser-focused on tech. Look in your own daily life at where you used to deal with people, but now you deal with machines. Consider what steps in the process that involves, which products you and your chosen vendors rely upon. Think about which stocks are likely to prosper in a world where the new proletariat are structurally unemployed, and the machines are on the rise. This is what we do, all day long. We think about it, write about it, chart the opportunities, analyze the fundamentals, and invest our own capital behind the ideas.
Want to join in the process, for free? Join Cestrian Stocks Symposium, here. A forum for anyone who wants to become a better investor. Stock by stock channels for all the top names in tech, investor & trader education channels, and a general discussion forum. High quality content, old lags like ourselves and newcomers all welcome, nobody is stock-shamed, ever. Twitter, it is not.
Cestrian Capital Research, Inc - 10 July 2021.
Did you enjoy this issue?
Become a member for $9 per month
Don’t miss out on the other issues by Cestrian Capital Research, Inc
Cestrian Capital Research, Inc

We help you become a better investor.

You can manage your subscription here.
If you were forwarded this newsletter and you like it, you can subscribe here.
Powered by Revue
5000 Birch St, West Tower, Ste 3000, Newport Beach, CA 92660