- I think I know Elon Musk’s next big move…
- Why an antitrust probe could be great news for tech investors
- Please, steer clear of these two “tech dinosaurs”
It just got much worse…
When it comes to coronavirus, numbers out of mainland China have not been accurate. In 24 hours, the revised numbers jumped by almost 15,000 to a total of around 60,000 infected.
And the death toll jumped by 242 as well. Hard to understand how there was a “miscount” of dead bodies.
The method of diagnosing patients who were or were not affected was not accurate. Two Communist Party officials in Hubei province have been fired on the back of the latest developments. And the latest developments leave us with even less confidence in the numbers than before.
We are now seeing announcements daily about corporations lowering the sales forecasts for the first quarter. China’s car sales have fallen the most in eight years nationwide due to the crisis. We can clearly see the economic toll.
And in the tech world, the Mobile World Congress – held in Barcelona each year – has been outright canceled. Done.
This is the first time in the conference’s history. It’s one of the biggest tech conferences of the year. Last year, 109,000 people attended. I have been so many times that I lost count.
And I’m already seeing tech companies make sharp adjustments. Apple has already focused its efforts on securing 5-nanometer A14 chips for its forthcoming 5G enabled iPhones. These will be the “brains” of Apple’s new iPhones this fall. And they are manufactured in Taiwan.
Efforts are being made to secure components in the supply chain from manufacturers outside of mainland China. The effort is to reduce risk in the supply chain, which could be affected by the COVID-19 coronavirus outbreak.
We can see Apple shifting focus for near-term product revenues to ensure that the 5G iPhone launch in the fall will go well. And Apple isn’t the only one. Any manufacturing or biopharmaceutical company that has part of its supply chain in mainland China right now is scrambling to develop a backup plan.
For the benefit of investors, I’ll keep following the story. But for now, let’s turn to our insights.
Starlink’s big announcement…
Readers are no doubt familiar with Elon Musk’s privately owned space exploration company, SpaceX.
The president and chief operating officer of SpaceX, Gwynne Shotwell, recently told a group of investors that Starlink – SpaceX’s satellite constellation – is likely to spin off and go public. There’s no set timeline, but this will likely happen in the next two or three years.
We’ve talked about Starlink several times before. The stated goal is to create a satellite network around the Earth that can provide communications access to anywhere on the planet.
But my sneaking suspicion is that Starlink will become a backhaul network for space. It will allow satellites to communicate with base stations on Earth 24 hours a day.
This is an ambitious project. Starlink’s goal is to blanket the Earth with at least 12,000 satellites… maybe as many as 42,000. The current Starlink network is already the largest around Earth. And assuming SpaceX makes it to its minimum target of 12,000 satellites, it will have achieved something that incumbents have dreamt of for decades.
At that scale, Elon Musk estimates that Starlink could bring in $30 billion in revenue every year. And to me, that signals why he would want to spin out Starlink into its own company…
I believe Musk wants to raise additional capital or debt to help fund Starlink’s build-out. He’s using the same tactics that he used with Tesla.
With such tremendous revenue potential, the investment banks, private equity, and venture capital (VC) funds are going to line up. And the talk of a spinout and initial public offering (IPO) isn’t cavalier… it is intentional.
With the prospect of a Starlink IPO in a few years, the banks, private equity firms, and VCs have a clear exit. They can invest now and book their profits when Starlink goes public in a few years.
Given that most VC deals typically don’t have any exit for 8–10 years, this is an attractive proposition.
Musk and SpaceX are being very strategic here. This move will help raise capital for SpaceX as well – not just Starlink. That’s critical to Musk’s plan.
Musk wants to keep SpaceX private until it is making regular trips to Mars. But in order to do so, it will need an injection of capital. A successful Starlink capital raise and subsequent IPO is clearly part of the strategic plan…
And for investors, a publicly traded Starlink could be a very attractive investment target. More to come…
The FTC just launched an antitrust probe against the Big 5…
Big news from the Federal Trade Commission (FTC). It is launching an antitrust probe against Alphabet (Google), Apple, Amazon, Facebook, and Microsoft.
The mainstream media covered the broad strokes of the story. But here’s the detail many missed…
The FTC is taking a different angle than normal antitrust investigations. The agency will examine small deals over the last decade. It is going to analyze whether the Big 5 have engaged in anticompetitive behavior by buying out small companies to eliminate a potential future competitor or to control a technology.
The FTC is especially interested in those instances where the acquired company was later shut down entirely.
This is a clever angle. And the FTC is also looking at whether these companies gained an unfair advantage because of all the data they have been collecting on consumers.
I think the FTC is looking in the right places if it is serious about this probe. After all, Alphabet/Google has a near monopoly in mobile phone operating systems. It has about 75% market share. But the more subtle, decade-long acquisitions and competitive practices will certainly tell a much more interesting story.
I believe both Apple and Amazon will come out of this clean. Their business models are not dependent on harvesting consumer data and targeting ads. That’s not true for the other three…
I expect Facebook, Google, and Microsoft will get knocked, largely because of their data surveillance practices. Microsoft used to be less of a predator, but after its $27 billion acquisition of LinkedIn, things have changed significantly.
And here’s the takeaway for investors…
I don’t believe much will come of this probe other than a few fines. Perhaps companies will need to divest certain assets. But the uncertainty around this probe could pull stock prices down, presenting a great investment opportunity.
That’s precisely what happened with Facebook when readers of my large-cap investing service, The Near Future Report, invested in the stock in October 2018. Regulatory fears at the time were overblown. We got in at a great price and are now sitting on gains of 44%.
And on the off chance the regulatory actions are significant, these “Big Tech” stocks would likely be prohibited from quashing smaller competition. In that scenario, investors would simply have more small-capitalization investment targets.
Either way, savvy technology investors like us can use this to our advantage.
The real reason Xerox is pushing to acquire HP…
We talked about Xerox’s final stand back in November. That was when Xerox (XRX) announced its desire to acquire HP (HPQ) – the computer and printer company that spun out of Hewlett Packard in 2015.
I call this Xerox’s last stand because the company completely missed the digital revolution. HP did as well. These are two dying dinosaurs, desperately clinging to their old ways.
Humorously, HP is three times bigger than Xerox. Plus, Xerox is $4 billion in debt. Xerox simply doesn’t have the money to make this deal. The deal is ironically predicated on being able to leverage HP’s free cash flow to pay back the debt raise for the deal.
And Xerox just increased its offer by $2 per share in hopes of getting HP’s board to the negotiating table. With this bump, the offer is at a premium to where HPQ has been trading.
And that begs the question: How does this move make any sense?
Well, new details shine a light on what’s happening behind the scenes…
Famous activist shareholder Carl Icahn is driving this whole deal. It’s a game of chess – for a multibillion-dollar profit.
As it turns out, Icahn owns 11% of Xerox. And he went out and acquired about 5% of HP. Clearly, Icahn has an underlying motive here.
Assuming the deal is accepted, Icahn would make a fortune on his HPQ holdings. His gross proceeds would be well over $1 billion.
Then, after the acquisition closes, Xerox will leverage the assets of HP using debt to boost its own financial metrics. This will drive up the share price after a few quarterly reports, boosting Icahn’s 11% stake in Xerox significantly.
Then, I predict he’ll cash out, having profited handsomely from both sides of the trade. He’ll leave behind a combined company with billions of debt, a massive pool of layoffs, lack of investment in future products, and not much of a future.
So we won’t be fooled. What’s going on with Xerox and HP is nothing more than a bunch of financial engineering that will benefit one hedge fund and its limited partners… Everyone else will get the short end of the stick.
At the end of the day, these companies will be left for dead. As I said back in November, investors should steer clear of both.
Editor, The Bleeding Edge
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