Senior analyst on why the biggest technology will become bigger

In 2010, he suggested

Tesla

(TSLA) stock, and called Elon Musk the next Steve Jobs. In the past ten years, Tesla has earned about 59% of its returns for investors each year.

Like the calls that fell into Milunovich’s National Research Team Hall of Fame for Institutional Investors; he recently retired after years of work at Wolfe Research. Barron Over the years, of course, sat down with Milunovich, of course, to listen to his views on technology. An edited version of the conversation follows.

Barron: The Nasdaq Index has risen by 31% this year, and the S&P 500 has fallen by 7%. Are we going into a bubble?

Steve Milunovich: Today at least [1999] Technology bubble. And the valuation is extreme. You have a day trader back, SPAC [special purpose acquisition companies]. These seem to be signs of excessive prosperity.

High-tech investors who are a bit value-biased, or just unable to buy stocks at 30 times the sales, make them very frustrated.Many of them are [dot-com] Bubbles, they are waiting to explode. They said, “We know how it will end. We just don’t know when.” In a way, I was in that camp. Even growth investors are worried. In 1999, everyone knew it was getting crazy. However, if you are not in Yahoo! As well as other popular stocks, you have underperformed and risked unemployment. There are some similarities today. Fundamentally, it is really different. We are beyond the eyeballs.

Indeed, it is reasonable to use price and eyeball measures to justify the impossible P/E ratio.Today, cloud-based software companies like

Zoom video communication

[ZM] with

Salesforce.com

[CRM] Is trading at a three-digit P/E ratio, while others such as

relaxation

[WORK], Lack of income. Is that reasonable?

Many of these software-as-a-service companies do have business visibility. You can assume that revenue has increased by 30%, [improving] Profit margins, some of which valuations are reasonable. The current ability to generate free cash flow is the difference between today and the technology bubble.

The coronavirus has accelerated the pace of technology adoption.

Covid-19 really promotes digital transformation-Covid is lingering. When I talked to resellers, they thought that more than half of their employees would not return to the office. People increasingly believe that there is a long-term tailwind here.

However, what is worrying is that the economy cannot recover. Even for software companies, this is a problem. I still worry about valuation. We now also see the hope of the Internet that people expected at the time. We see technology ubiquitous in its impact on other industries. The total potential market of these companies is much larger than expected.

What big trends are you looking at?

In the past five to ten years, perhaps the most important thing is the rise of platform companies. The company is located between two user groups and benefits from network effects. This is indeed another form of company structure.It turns the company upside down, thereby creating value outside the company wall [by others].

Define the platform company.

There are two types of platform companies. [First] Is a platform for establishing transactions between buyers and sellers, such as

Uber Technology

[UBER]. The platform company is in the middle and is responsible for each transaction. The other type is ecosystem company.

Microsoft

[MSFT] with

apple

[AAPL] Create an ecosystem with a lot of third-party value.

Amazon.com

[AMZN],

letter

[GOOGL]with

Facebook

[FB] Is an ecosystem-style platform company.and also

Alibaba

[BABA] possible

Tencent

[TCEHY].

visa

[V] with

MasterCard

[MA] In our technological world. You can debate this.

Those are big companies.

Nine of the top ten technology companies by market capitalization are platform companies. They become stronger and stronger as they get bigger, which of course brings antitrust problems. They become huge because their income is growing very fast, which is attributed to the increase in revenue-the more buyers, the more sellers; the more sellers, the more buyers. You will get a very profitable company. They still have three to five years of double-digit revenue growth in front of them.

What will limit their growth?

When you look back at technology leaders, they tend to decline over time. To some extent, size is not good for you. These companies have not yet done this. Therefore, we are in the middle game before size becomes an issue.

IBM Corporation

[IBM] Microsoft solved their problem. Antitrust challenges undoubtedly affect their ability to operate, and make them less aggressive than other methods.

But on the positive side, it was not antitrust that made them successful, but disruptive technology. In the case of IBM, it was the rise of microprocessors that changed the economics of computing. For Microsoft, the first thing they missed was the Internet, and then mobile devices.

What is the next disruptive trend?

New technologies we are all considering: Internet of Things, artificial intelligence, autonomous driving. Platform companies are leaders in these areas. They have resources. I haven’t seen smaller companies bring them down.

Are you not worried that these platform giants will break up?

Of course there are certain risks. I don’t think this will be a death knell. Breaking them apart is not good for consumers, and historically, US antitrust regulations have been based on consumer damage. Splitting Facebook or Google may reduce the network effects of multiple businesses they are engaged in. Regulators may deny the ability to make acquisitions. This is very important. Now everyone is turning around and saying: “Oh, Facebook shouldn’t be allowed to buy Instagram,” although no one knew at the time that Instagram would be like it is today.

U.S.-China relations have been deteriorating. What do you foresee?

The situation in China far exceeds our trade concerns last year. This is a philosophical question in terms of the way the two countries want to manage their governments.There is a lot of evidence that China has stolen American technology over the years and made things like

Motorola

And Nortel is in a very difficult position.Espionage helps Huawei [China’s largest tech conglomerate] Create products comparable to Nortel and other communication equipment suppliers, and then [China] Underestimated them. It is commendable that the Trump administration woke up. China hopes to become a technological powerhouse. It requires local capabilities. The one thing it doesn’t have is semiconductors.

Almost every electronic device uses semiconductors.

I would say

TSMC

[TSM] Has become the most important technology company in the world.

Intel

[INTC] There is a problem that it lags behind in manufacturing technology and suffers product delays. TSM is making [fabricating] 80% of the semi-finished products used in the United States may be established in the United States within the next four years.

China hopes to establish its own semi-industry. But equipment manufacturers and software manufacturers are Americans. The United States tried to crack down on Huawei and did not allow it to buy semiconductors from the United States. We allow them to buy semiconductor capital equipment and tools, but without software, they will not be able to design semiconductors. The status quo may be maintained: the United States will restrict certain technologies, but the complete disruption of US semiconductor tool technology will cause repercussions.

Do you have a favorite stock?

[At Wolfe Research] We have conducted a more quantitative screening of basic techniques and quantitative factors. When you look at some companies that have performed well in the past 6 to 12 months,

Shopify

[SHOP],

Nvidia

[NVDA],

Current service

[NOW],

Paypal

[PYPL]I do believe that these companies have the ability to continue development. They are category creators.

The best thing a technology company can do is create a new category and then become the leading brand in that category. For example, Nvidia.It basically created GPU, graphics processing unit category [for video games]. Shopify is a fascinating company; everyone who wants to compete with is a back office

Amazon.

ServiceNow hopes to become the enterprise software company of the 21st century. It began to provide IT service management-tracking IT assets and providing service desk support-and has expanded to customer and human resource service management. A distributor who spoke with us said: “You are a ServiceNow customer today, otherwise you will be.”

Thank you Steve.

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