Does It Get Even Worse for Tech in 2023? — With Stephanie Link

Stephanie Link is the chief investment strategist and portfolio manager at Hightower Advisors. She is also a senior CNBC contributor. Link joins Big Technology Podcast to discuss whether a tougher year awaits the tech industry in 2023 as unfavorable market conditions persist. Join us for a conversation about the broader market, how Link evaluates stocks, and a breakdown of some companies she's watching including Meta, Amazon, and Apple. Stay tuned for the second half where we examine the state of deglobalization and its impact on the economy. If you like Big Technology Podcast, please rate it five stars ⭐⭐⭐⭐⭐ in your podcast app of choice. For weekly updates on the show, sign up for the pod newsletter on LinkedIn: https://www.linkedin.com/newsletters/6901970121829801984/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Alex Kantrowitz?

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• 0:43Alex Kantrowitz?

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• 1:03Speaker 01

  LinkedIn Presents.

• 1:19Alex Kantrowitz?

  Welcome to Big Technology Podcast, a show for cool-headed nuanced conversation of the tech world and beyond. Stephanie Link is our guest today. She's the Chief Investment Strategist and Portfolio Manager at Hightower Advisors. What is Hightower Advisors? Well, it has $3.3 billion in assets under management. That is a lot of money, $3.3 billion. And so why is Stephanie here today? Well, the tech industry has had a very difficult year in 2022, and it might just be the start. And I wanted to know, how much worse is this actually going to get for the tech industry? How much worse is this going to get for the broader economy, which has yet to feel some of the pain the tech has? And I couldn't think of anyone better than Stephanie. Not only is she a star investment strategist, but I also met her on set at CNBC.

• 2:04Alex Kantrowitz?

  And we kept talking during the breaks. This wasn't, you know, show up and give talking points. There was a true enthusiasm and depth of knowledge and interest in these companies that Stephanie demonstrates. And I think that's the type of person we want to listen to when it comes to this stuff.

• 2:20Alex Kantrowitz?

  A few things to consider when you're listening to Stephanie today. First of all, one of the questions I have, how much worse is this going to get for tech? Also, how much worse is it going to get for the rest of the economy? And then finally, some questions about globalization, because it does seem like we might be getting toward the end of that. And I want to know the implications if that happens. I think you're going to really love this conversation. Stephanie is one of the best. And so here we go. Stephanie, welcome to the show.

• 2:46Speaker 02

  It's great to be here. Alex, thanks for inviting me.

• 2:48Alex Kantrowitz?

  Great having you. It's always fun to have people on who I've met on set at CNBC. And I really, we've only, we've been on together once.

• 2:56Speaker 03

  Let's welcome in CNBC contributor Stephanie Link of Hightower, Big Technologies, Alex Kanchewicz, and also Star Tech Analyst Dan Ives of Wedbush is here with us on set as we await these earnings. Welcome, everybody. I said these are.

• 3:09Alex Kantrowitz?

  You know, I enjoyed our interaction a lot. It was fun. Like, we were talking in the breaks and stuff like that. I was like, all right, I feel like we got to get Stephanie on the show, talk about the economy, talk about tech. So I'm so glad you're here.

• 3:19Speaker 02

  Oh, thank you. And there's so much to talk about, too. I really enjoyed our time as well. So we have to thank, we have to, we have to thank halftime or overtime.

• 3:27Alex Kantrowitz?

  That's right. Definitely. So let's talk about you for, for, just to start, you've been a contributor at CNBC for like 12 and a half years. So people are always interested how folks get into this business. I'm curious how, how you got your start there.

• 3:42Speaker 02

  Yeah, it's interesting. So I've been in the finance world for just about 30 years. My first 16 years, I was on the sell side. And so I was marketing to the buy side, people that ran money, hedge funds, mutual funds, and the like. And then I did kind of a 180 and wanted to try to figure out if I could run money. And so I met Jim Kramer. We had a mutual friend. He was looking for someone to run his charitable trust at the street.com. And we met for 30 minutes and all we did was talk about stocks the whole entire time. And he hired me on the spot. And I have a story that is a little bit of a diversion, but I just to tell you that he's a really good, he has a really good heart. So he hires me on the spot. I accept.

• 4:27Speaker 02

  All seems like it's great. He said, take a month off. I just had a baby. He said, take a month off and you know what? Just enjoy and then we're going to hit the ground running. The day before I was supposed to start, I said, I can't leave my new baby. I just can't do it five days a week. So I call him up and I said, Jim, I really want a career and I want to be a mom, but I can't leave my daughter for five days. And he said, what are you talking about? I thought he was going to hang up the phone on me and said, he said, well, what do you need? And I said, what do you mean? What do I need? He's like, well, what will it take? I said, could I work two days from home? And this is back in 2007. We weren't zooming and webexing or anything. And he said, you know, how about you take

• 5:12Speaker 02

  three days work from home and two days in the city? And I thought that was really pretty cool, super understanding. And by the way, working from home was brutal. It was harder than working in New York City.

• 5:22Alex Kantrowitz?

  How did you do it?

• 5:24Speaker 02

  It was, it was tough. It was 24/7, right? I mean, we used to compete with each other to, who got on the treadmill first at 3:30 in the morning. I mean, we were like crazy. So he taught me a lot about running money. And he, that's where I started doing videos with him at thestreet.com. And then one day CNBC and the street, they're very, they were very amenable to having both work at each company. And they had asked if someone would be interested in doing, doing the recap of Cisco on earnings day at 4:05. And I said, I'll, I'll, I'll give it a shot. And so I did. And that was Maria Bartiromo's show. She's no longer there. So anyway, started doing that. Then Larry Kudlow, started doing

• 6:08Speaker 02

  Larry Kudlow. And, and then Scott Wapner for halftime saw me doing an interview. And he said, would you want to be on the show? So that's kind of how it started. I wasn't really looking to be on TV, but just by default, you know, you know this just as well as I do, when you're passionate about stocks and sectors and the markets, you can tell on TV. And you really want, and I know they really want people like you and me on the show to, to help teach people too.

• 6:37Alex Kantrowitz?

  So let's get into the economy and start in an area that you know, you know, well, which is tech. When is it going to be enough for tech? Because obviously, like you look at these, the big tech companies, you look at, you know, even the smaller tech companies and they're getting hit even harder, right? So you're down anywhere. If you're, if you're lucky, you're down 20% this year. If you're Peloton, you're down what 90% or more. So obviously, this is a response to the Fed raising interest rates. That seems to be ready to tail off. But, but yeah, at its core, core level, when is it enough in terms of the bloodletting for tech?

• 7:17Speaker 02

  You know, it's a, it's a great question, Alex, but it's almost impossible to answer, but I can give you my best guesstimate. And the way I think about things, when at the, at its height of tech and com services, we kind of lump them together. It represented 38% of the S and P 500 in terms of a weighting. And just to give you something that was, that so, so it was well liked, well owned, and not cheap. Even the companies that had earnings, still not really cheap. But I got it. We all get it. We get the total addressable market stories and we get what we're doing in today's world in terms of productivity and, and all of the enhancements. And then of course, throw on COVID and everybody needed so much more stuff. So I, so I get that.

• 8:02Speaker 02

  But just to parlay that into, at the same time as tech and com services was 38% of the S and P 500, energy was 2%. Right. So fast forward, we're now at oh, just 34% of tech and com services in the S and P weighting. But now energy is at almost six. So just, it just goes to show you that things got a little bit hot and heated. And I think really they been, the technology sector in general and com services really benefited from COVID. And there was a big, huge pull, pull forward. We're seeing it now. A lot of companies are struggling. Enterprise

• 8:41Speaker 02

  demand is slowing a bit. And if you think, if you think about cybersecurity is slowing a bit, they're still really wonderful end markets and total addressable market stories, but they just saw a lot of pull through. We saw double and triple ordering within semiconductors. And so now you have wafer fab equipment numbers down in the 20s for next year. So I get it all. These stocks are down a lot, but I think they are going to struggle because interest rates are a problem and higher interest rates for long duration assets and tech and growth in general are long duration assets. And I'm not talking about the non earners because I don't really want to touch those at this point in time.

• 9:21Alex Kantrowitz?

  Non earners means companies that are not profitable.

• 9:24Speaker 02

  But not profitable, that's right. I have always said the momentum is great when it's going your way, but as soon as it reverses, it's almost impossible for a company doesn't have earnings. How do you value it?

• 9:37Alex Kantrowitz?

  Right.

• 9:37Speaker 02

  It's almost like back in 2000 when we used to say it's the eyeballs that everybody, right? Remember the dot com bubble? We would just say that's how you that's how you value technology stocks by the eyeballs. Okay, I'm sorry, but I've been doing this a long time. You have too. It's not by the eyeballs.

• 9:53Alex Kantrowitz?

  So I have to, I have to ask you a question about this. So we, we've had a couple of tech folks come on, on the, on the show over the past few weeks talking about why tech didn't anticipate it. There's also an argument that these companies are also quite responsible for some of the, the problems here. So Aaron Levy of Box was on the show last week and he talked about how tech itself lost sight of the fact that yes, there's growth, the future growth of a company is, is an important thing that investors are looking at, but also the margins, right?

• 10:23Speaker 02

  Sure.

• 10:23Alex Kantrowitz?

  And it seems like there was this, again, this infusion of money coming into the stocks. And so they thought it was only about growth and future potential of growth. Make it up in your head. Everybody decided to go for it and investors kind of followed along. But as this was happening, the margins were coming down because they started spending more. How much, how much of that plays into the fact that like now, okay, now with the Fed, you know, rate up, now you start to pay attention to that much more?

• 10:52Speaker 02

  Yeah, I mean, well, look, I think.

• 10:54Alex Kantrowitz?

  I mean, you're in meta, so I feel like you know the story well.

• 10:57Speaker 02

  Oh, God, I know.

• 10:58Alex Kantrowitz?

  And we're going to cover that in the second half for sure, but I want to hear your perspective on the broad stuff.

• 11:02Speaker 02

  I knew you were going to get there. I knew you were going to get there, but we'll get, we will definitely get there. You have to own it. Um, absolutely. I think companies, not only did they see a pull forward in demand during COVID, and not even during COVID, like demand was always really strong. These companies were a lot smaller 10 years ago, right? So you did get that really explosive growth and then you had, then you had another leg of growth higher because of COVID. All of that is good. Everybody thought that would last forever to your point. So they all over hired. And that was, that's part of the problem why we have an unemployment rate where, well, it's not a problem. It's great to have an unemployment rate below four, but that's one of the reasons why the labor market is so tight.

• 11:45Speaker 02

  Uh, is because you had this phenomenon in mainly in tech, but again, as I mentioned, almost 40% of the S and P 500 is tech. And com services. And so you had this over hiring, overspending. And as I like to say, I mean, Zuckerberg spent like a drunken sailor, but so did Alphabet for years and years and years and Amazon, right? So all of the big companies which represent such a big part of the market, they were all doing the same thing. And they were fighting over each other. Who's going to get who and what are you paying for these people? And now all of a sudden, demand starts to slow. And I don't think it's a disaster in terms of the demand side of things. It's just normalizing.

• 12:25Speaker 02

  But they had these loaded cost structures that really at the end of the day, we really have to say, shame on you management teams, right? Because they had to see that what people were spending on enterprises and consumer, what they were spending on was really a lot dominated by, uh, by, by, by COVID and, and this, and this pent up demand. And now you're seeing a shift away from goods. Everybody has that laptop. Everybody has that, that iPhone. Uh, everybody, which by the way, the new iPhone, I don't know if you have it is super heavy and big.

• 12:58Alex Kantrowitz?

  I haven't, I haven't upgraded. I'm still, I, I am still on the 10. Um, I feel like there's very little difference between 10 and, and the newer models. I will upgrade 15 because I think there's going to be USB C charging. So that, that's a big deal for me. So I thought about 14. I'm ready. My screen's cracked. The phone sucks, but uh, I need that USB C because I don't want to invest another phone with a, um, the old, old charger if they're going to switch it again. Been there.

• 13:24Speaker 02

  It's a pain, it's a pain in the, I'm in there. That's right. It's a pain. But, uh, but look, I mean, you know, at the end of the day, maybe, maybe we'll have an upgrade cycle with Apple, but do they need any, does anybody need any more Macs or, or iPads? You know, or AirPods? Well, I do because I'm the only one that loses AirPods like

• 13:41Alex Kantrowitz?

  I don't think you're, you're the only one. I definitely, I'm one AirPod person. So, um, but I just like to go back broadly here about the cuts, right? So you're an investor, right? So you're looking at, are they cutting enough? And then the meme right now is that there's a big slowdown and there's big cuts. Here's, here's some stats to consider. Right before the pandemic, so March, uh, 2020, Meta had what 48,000 people, 46, 47, 48. They had 87,000 before they announced this cut. So that will bring them back down to 77,000. Still 30,000 more than March 2020. Basically, you know, close to double, uh, well, at least 75% more than they had pre pandemic. Amazon, right? The, right now, uh, they're talking about

• 14:24Alex Kantrowitz?

  10, a potentially 10,000 person drawdown there. Um, they're hiring 150,000 people just for the holiday season. When I started covering Amazon for, for my book, Always Day One, they were at like 600,000 people and that felt huge. And that was in 2017. Now they're well over a million. So my theory here is that these companies have done a little bit of cutting to show Wall Street they're serious, but they're still hoping that it's going to go back and haven't done anything close to what the market actually demands that they do. So, but, but like they've gotten the headlines and sort of looks like they're doing more. So I, so I think that we're not, we're not anywhere close to as bad as it can be if this continues. What's your perspective there?

• 15:04Speaker 02

  Hundred percent agree with you. So Meta, it's thirteen percent of of costs that they're cut, you know, that they're cutting.

• 15:10Alex Kantrowitz?

  Yeah.

• 15:10Speaker 02

  I mean, they still are huge in terms of how bloated they are. And you mentioned Amazon and the confusion there. And I thought the real tell, I haven't on Amazon in a really long time, that I thought the real tell for Amazon was in the first quarter of this of this year, when they started talking about having to cut data centers and close data centers. And I thought, Amazon is closing data centers? Is demand really that bad? Well, demand has fallen, but also you have a lot of other competitors out there that have gotten better at what they're doing in terms of distribution and data centers and warehousing and that sort of thing. So I I kind of feel like Amazon's not a special

• 15:54Speaker 02

  situation, but that was the tell for me that things were going awry.

• 15:58Alex Kantrowitz?

  Interesting. Who are you worried about if you're Amazon? Who are you worried about? Like shop Shopify? I feel like they're not not very threatening.

• 16:07Speaker 02

  I think you're worried about. So let's just let's just pick on retail.

• 16:10Alex Kantrowitz?

  Okay.

• 16:11Speaker 02

  I think you're worried about Walmart and Target.

• 16:13Alex Kantrowitz?

  Okay, so those companies. So it's traditional reach. It's like the sorry, go ahead, go ahead.

• 16:18Speaker 02

  It's like the paybacks. It's the payback of the old like legacy companies that have spent oodles and oodles of money trying to be better at what they did. So they don't have to be so reliant on Amazon, right?

• 16:31Alex Kantrowitz?

  You know, it kind of reminds me of the Netflix story where like Netflix was seen as this like the they're the only one that's going to do streaming. And then all these other companies were seen as laggards. And we focus on their other businesses, business like Disney, for instance. And Amazon, they caught up. And and even Apple and then Apple got in. So all of a sudden, that first mover digital advantage where we said that, oh, Netflix is a tech company. Actually, Netflix was a streaming company that just built the tech early. And and that's what's happening to Amazon, too.

• 17:04Speaker 02

  Yeah, yeah, yeah, yeah.

• 17:05Alex Kantrowitz?

  That is interesting.

• 17:07Speaker 02

  For sure. No, it's a good. It's a really good point. And and so it's all of a sudden, it's the slowdown, it's the overbuild, it's the overspend, and now competition. And it's like, wow, that's a recipe, a really bad combination, especially when your stock. In Amazon's case, it's trading at 80 times earnings still.

• 17:26Alex Kantrowitz?

  Right.

• 17:26Speaker 02

  I know you did some of the parts. I get it. I got it. The thing that's frustrating, well, I know we're going to talk about Meta. The thing that's frustrating about that one is it's not expensive. You know, you gotta, I think there are pieces within technology and places that you can absolutely be nibbling right here, especially those that have good market share, good balance sheets, great free cash flow. That's super, super important. So I think you can pick at a few, but I'm not inclined right now to go overweight my benchmark just yet. I'm still really underweight.

• 17:58Alex Kantrowitz?

  Let's take one minute just for those who are not, not well versed. When you say something's expensive or cheap, a stock is expensive or cheap. What do you mean by that?

• 18:06Speaker 02

  So there's a lot of different ways of looking at evaluation. What, what are you willing to pay for a stock? And what I look at is I like to use price to earnings, the price of the stock and the earnings that is, are expected and future numbers.

• 18:20Alex Kantrowitz?

  Right.

• 18:21Speaker 02

  I always also though, look at the past. So for, so for some historical context, if a stock traded at on an average of 20 PE, price to earnings in the past, and it now trades at 15 times. Well, okay, A, why? And, and is it a bargain? It, it, there's something really, really, really wrong. And so that's where doing fundamental analysis comes to play.

• 18:46Speaker 02

  Other industries, sometimes it's enterprise value to EBITDA. Sometimes it's price to sales. Sometimes it's price to growth. I really try not to get caught up in that, in any of that. I like to use PE. I like earnings. I like predictable earnings and that means I'm going to miss some things that trade at very high multiples, even if it's cheaper than its historical average. But that's just me because I'm a little bit more of, as I say, a GARP investor, growth at a reasonable price.

• 19:15Alex Kantrowitz?

  So when you look at those, those multiples, you're, are you like in tech 30, 30, 30 times?

• 19:22Speaker 02

  There, there are, I mean, there are, well, now you can get a, like, you can get Apple at twenty three times.

• 19:29Alex Kantrowitz?

  Okay.

• 19:29Speaker 02

  But I'm not thinking that's all that cheap when the overall.

• 19:31Alex Kantrowitz?

  But that's not cheap. So why is that?

• 19:33Speaker 02

  Right.

• 19:33Alex Kantrowitz?

  Yeah.

• 19:33Speaker 02

  Right. Oh, well, why is that? Oh, I think.

• 19:36Alex Kantrowitz?

  Oh, they're hardware. They're hardware.

• 19:37Speaker 02

  Yeah. Well, I think they're installed base. Yeah. Although, you know, they, they were a big beneficiary, as I said, of a stay at home. So I, I, I think services is, is, is, I get nervous there. And that was a disappointment when you and I were on.

• 19:50Alex Kantrowitz?

  Yes.

• 19:50Speaker 02

  Overtime. We talked about that. And, um, you know, iPhones, but have stayed resilient. So people are willing to, to, to, to, plus, by the way, they have a ninety billion dollar buyback. So they're buying their stock every single day. So that's nice support.

• 20:03Alex Kantrowitz?

  Right.

• 20:04Speaker 02

  That's why I think that stock is expensive. It's really, really expensive and it's seven percent weighting in the S and P five hundred. That's how big it is.

• 20:12Alex Kantrowitz?

  So the S and P is, by extension, fairly expensive. Well, at least in that, on that, on that front. Before we go to break, I just want to ask you, the, the broader economy. Obviously, it hasn't hit very much to outside of tech. Uh, so earnings are okay. Uh, consumer spending is pretty strong. People have jobs. I think that I was listening to the daily, they said one point seven job openings for every worker. I'm curious how many of those are actually real. But the yield curve is inverted, so you can get more money on, you know, a shorter term bond than you can on a long term, at least a better interest rate, which means that, okay. You know, bond investors believe that the economy is going to get better over, over the long term, but it's going to be, be brutal in, in the short term. So what's going on with, with this economy?

• 20:56Alex Kantrowitz?

  It's a very strange economy because we have all these different, like, we have signals that it's strong, we have signals that it's really about to go to crap. Like, what do we believe here?

• 21:06Speaker 02

  I know. Well, first and foremost, I think it's very important to remember the market, by definition, S and P five hundred, that's what I use. The market is already down eighteen percent on the year. And the market is a forward looking indicator. It discounts things that are going to come in the next six to eight to ten, twelve months. So we are really pricing in.

• 21:30Speaker 02

  I don't know if it's a recession, but definitely a slowdown. And the yield curve, if you look at a long, if you look at the 30-year Treasury, that the yield will trade on growth expectations. And the fact that we're seeing an inversion, short rates higher than long rates, that just tells you the market, the bond market is already telling you, we're going to slow down. The equity market is already telling you earnings are at risk because we're going to slow down. Now, whether we go into a recession or not, it doesn't matter. But the, but the fact of the matter is, is that we are discounting a lot of bad news. All that being said, the market always climbs a wall of worry.

• 22:12Speaker 02

  And the worry is the Fed has already overdone it in terms of raising rates. And we won't feel the impact to the overall economy for another six to nine months. Why do I say that? Because it's just a simple lag impact.

• 22:27Alex Kantrowitz?

  Right.

• 22:27Speaker 02

  When you raise or lower rates, it takes a while to get into the system.

• 22:31Alex Kantrowitz?

  Well, do you think that's, yeah, do you think we will? You think that's true?

• 22:35Speaker 02

  I think, I think, yeah, yeah, yeah, I think we're definitely going to slow. Whether or not we're going to slow, whether we're going to slow into a recession or not, that's, that's a big question because there is, to your point, you made a great one. The jobs market is white hot.

• 22:48Alex Kantrowitz?

  Right, but the Fed is, I'm sure the Fed is looking at that and it's just going to keep at it because that's a major contributor to inflation.

• 22:55Speaker 02

  I know.

• 22:56Alex Kantrowitz?

  It's like you can't, you kind of can't win.

• 22:58Speaker 02

  Right, I know. Wages and rents are really, really important. So I kind of think we're in a trading range until we can kind of get a sense as to what is, what is the slowdown? Is it a recession and what happens to earnings? And so we'll trade on, we'll make, like, if we get a CPI number that's much lower than expected, we can rip higher, totally go up. If we get one that's hotter, we can, we can kind of decline. But I think it's just a trading range, kind of a market, until we can really get some certainty.

• 23:30Alex Kantrowitz?

  Right.

• 23:30Speaker 02

  Yeah, so, so that's what I think is going on. I don't think it's all bad, though. I don't think it's all gloom and doom. I really don't. I'm very, I'm very impressed with the job market and wages. That's good for the consumer.

• 23:40Alex Kantrowitz?

  Right.

• 23:41Speaker 02

  We just got to get parts of this inflation better, better under control.

• 23:45Alex Kantrowitz?

  Yeah, yeah, it'll be, what's your gut tell you about 23 in terms of what, you know, 10 really bad, one not so bad? One really good. Where's, what's your gut say?

• 23:54Speaker 02

  Oh, it's so hard.

• 23:56Alex Kantrowitz?

  Don't go out of this one.

• 23:57Speaker 02

  That's boring. That's so boring.

• 23:59Alex Kantrowitz?

  Yeah. Let's get a six or a four.

• 24:01Speaker 02

  So I would, I would say, well, you know what? I would say the first half of the year, I think is going to be challenging.

• 24:07Alex Kantrowitz?

  Okay.

• 24:07Speaker 02

  Right? So is six, is six the bad?

• 24:10Alex Kantrowitz?

  Yes.

• 24:10Speaker 02

  Six is the bad. Let's just call six the bad. Six or seven may be bad.

• 24:14Alex Kantrowitz?

  Right.

• 24:14Speaker 02

  Um, and then I think the Fed stops, we assess the situation and second half of the year, they could actually ease. And hopefully they get inflation into a better control. And then I think we can rally in the second half. So I would give that then like a, yeah, like a, like a three or a four by the second half of the year. So yeah, that equates to a five, which is so boring.

• 24:35Alex Kantrowitz?

  Okay. Well, hey, look, it's, it's good. Well, we'll take it if we end up at the three, four at the end of the year. It's a much better position than a lot of us are hoping, are expecting to be. Stephanie Link is with us. She's the chief investment strategist and portfolio manager at Hightower Advisors, CNBC contributor as well. When we come back after the break, we're going to talk about Meta, Apple, semiconductors, maybe Elon. We're going to try to do it all in about 15 minutes because Stephanie is about to go on air. Back after this. This episode is brought to you by App Point. Everyone's racing to roll out AI right now. Co-pilots, chatbots, agents doing real work. But here's the part nobody loves talking about. All that AI runs on your data.

• 25:17Alex Kantrowitz?

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• 26:05Alex Kantrowitz?

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• 26:50Alex Kantrowitz?

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• 27:09Alex Kantrowitz?

  And we're back here for the second half of Big Technology Podcast with Stephanie Link. She's the chief investment strategist and portfolio manager at High Tower Advisors. Stephanie, thanks again for coming. Here's the meta question. Tech companies have to reinvent, right? They do. And if you look at it through the history, a tech company that does not try to reinvent, they're toast, right? And sometimes those reinventions are so strange, right? Where like Microsoft, for instance, it took them a long time to realize we have to cannibalize our Windows business and cannibalize our server and tools business, which was all about putting servers inside offices and build for the cloud, which is going to make server and tools go away and make the desktop operating system much less important than the browser.

• 27:54Alex Kantrowitz?

  And that's a tough story to sell. And it's probably why it took them so long. When you're meta, right? If you believe that your transformation is going to be in this metaverse direction, maybe similar to the way that Microsoft might have believed they were moving to cloud, and that's going to take some attention away, and you're all systems go. It's costly. But the market isn't going to give you the leverage to do that. So how do you transform? How do you transform if the market is telling you not to? And if you're an investor? How do you, how do you weigh that, weigh that, the need to just constantly be reinventing with the need to get your money out of the stock, or at least be, be trading in a good spot, you know, as, as at all times?

• 28:39Speaker 02

  It's a tough one.

• 28:40Alex Kantrowitz?

  Right, because we're looking at decades versus quarters, so.

• 28:42Speaker 02

  I know, I know. And oh, by the way, we were talking about cost before.

• 28:47Alex Kantrowitz?

  Right.

• 28:47Speaker 02

  If they were to come out, and I bet you believe, I bet you agree with this, if they were to come out and say, we're going to spend five billion a year instead of 10 billion a year on the metaverse, I think that stock would be up 25% on that, on the day. I really truly do, especially given how oversold it is.

• 29:04Speaker 02

  But they have committed to 10 billion. Zuckerberg wants to go after this. None of us have any clue when the ROI is going to happen, turn on investment. We have no idea. Is it 10 years? Is it 20 years? Is it five years? And that's what's upsetting because the narrative has changed from a pretty solid company with a great business mix on the legacy front of things. And, and by the way, they're making progress in Reels. It's now at a three billion revenue run rate from zero, what was it, seven, eight months ago?

• 29:35Alex Kantrowitz?

  Yeah, they know how to copy. They're very good at that. Yeah.

• 29:38Speaker 02

  They're very good. They're very good at copying. You're right. And stories, when they messed that up, it took them two quarters to fix and they fixed it. So I think they're in the process of, of, of improving Reels. I think they can monetize what WhatsApp. I think having two and three billion daily and monthly active users has size and scale. It's not going away anytime soon. So back to the eyeballs, they actually do have eyeballs.

• 30:02Alex Kantrowitz?

  But on the reinvention question though, how do, how do they have that room? How do investors give them that room if that's what's eventually better for the company?

• 30:10Speaker 02

  Well, it's, it's, you know, having to ignore Metaverse.

• 30:15Alex Kantrowitz?

  Yeah.

• 30:15Speaker 02

  And focus on legacy. Cause right now they're getting very little credit for legacy. And that's why I mentioned Reels, WhatsApp, daily and monthly active users. It's having cost discipline. And, and it's, and it's at some point, I think I've said this on TV like five times.

• 30:34Alex Kantrowitz?

  Yeah.

• 30:34Speaker 02

  At some point, five times EBITDA means something. That is so incredibly cheap. This stock trades at 10 times earnings and there are real earnings. So I just feel like at some point. I overstayed my welcome, no, no question about it, but I do think at some point you have to appreciate when you split up the two pieces, what are you getting for the thing that they're doing already? Well, right. And can you overlook that metaverse? And a lot of people can't. And to be honest, why it's bringing where it is, right?

• 31:05Alex Kantrowitz?

  Yeah, they're still doing five billion or so in profit a quarter, at least they did last quarter with all the spending. So

• 31:11Speaker 02

  That's why I say EBITDA is an important tool. It's five times profitability, you know? So, yeah, I know.

• 31:17Alex Kantrowitz?

  Have you rethought your invest, the way that you'll invest in companies with founders who have complete control after this? Because a lot of people are like, you know, Zuckerberg is, you know, he's, he's unaccountable and therefore this is what's happening. So does that change the way you invest? Because we have others like that. We have Snap, for instance.

• 31:35Speaker 02

  Yeah, no, it's a very good question. And I think it's something you absolutely have to pay, pay attention to because if he didn't have complete control, you know that there would have been an activist involved in this. And you know, an activist would have said, slash that 10 billion and, and, and call it a day. Um, so yes, it does make me think twice about it. That being said, the same thing happened to Alphabet, right? With their share class situation, which was absurd when they announced it. And eventually they got management in, they listened to investors and they got the right managers into place

• 32:18Speaker 02

  that eventually weren't the founders, right? The founders then, you know, kind of, you know, ran off into the sunset with their billions. Um, so maybe that has to happen here. I'm not entirely sure. I'm pretty darn sure if Zuckerberg were to retire tomorrow. Yeah, that's another catalyst for the shares, but I don't think that's happening.

• 32:36Alex Kantrowitz?

  Yeah, I don't, I don't think he's stepping away. Uh, it seems like he's the, it's what he lives for is to

• 32:42Speaker 02

  Yeah, he's digging in.

• 32:44Alex Kantrowitz?

  Exactly. So let's move on to their top nemesis, which is Apple.

• 32:51Alex Kantrowitz?

  First of all, you know, well, let's just talk about the China situation. So Apple is super reliant on China. They're trying to move away in some areas. It's been a rocky couple of months in China. How do you view all of that when you think about Apple?

• 33:08Speaker 02

  It's disappointing that they didn't make changes earlier.

• 33:11Alex Kantrowitz?

  Right.

• 33:12Speaker 02

  Every company I know, and not just technology, but every company I know, every sector, they've all been diversifying their supply chains all over the world. Now, Apple has two, but they are still very dependent on the suppliers there, manufacturers there. And even if they do an about face and say, we're going to get to eventually, you know, 10% of our operations are going to be in China, it's going to take years. It's years and years. It's like five years down the road, it's going to take them to fully diversify, to build plants and facilities. And oh, by the way, it's going to be more expensive.

• 33:53Speaker 02

  So onshoring in the U.S. is a great concept for the country. Great concept for the country. Terrible concept for a company that wants to be profitable. So I think they will have their challenges. They'll get through it. But on the flip side, China's not going to stay closed forever. And we know this week, we've heard them starting to reopen and be more liberal on COVID. They're eventually going to open up 100%.

• 34:22Alex Kantrowitz?

  Right.

• 34:22Speaker 02

  I think 2023, a theme is China recovering and China seeing stronger growth than expected. And as that happens, that will certainly help them for sure. But it's a, it's a real pain point right now.

• 34:34Alex Kantrowitz?

  Right. And China's going to open as we go through this moment of deglobalization. So I'm going to come back to Apple, but there was a really interesting speech that no one paid attention to. There was one thread about it on Twitter. It's Morris Chang from Taiwan Semiconductor. He said globalization is almost dead and this is the end of the beginning. So as, as he works to, you know, open some plants up in the U.S., obviously, we know why that's happening because having them in Taiwan is, is, you know, a liability. I've heard, you know, maybe 5% to 10% of the U.S. GDP could go away if we're not, if we don't have access to those plants. So.

• 35:10Speaker 02

  But I would just say one thing.

• 35:13Alex Kantrowitz?

  Okay.

• 35:13Speaker 02

  Taiwan Semiconductor, they're doubling down or tripling down on building out in the US.

• 35:20Alex Kantrowitz?

  Right. Yes, exactly.

• 35:21Speaker 02

  It's only four, it's only four percent, though.

• 35:24Alex Kantrowitz?

  Right.

• 35:24Speaker 02

  Their production.

• 35:25Alex Kantrowitz?

  Exactly.

• 35:26Speaker 02

  They're still very tied to Taiwan, you know what I mean?

• 35:29Alex Kantrowitz?

  Right, exactly. Uh, no, they, and they are working, but these plants take a long time to, to build. So, um, what, what, so that's just sort of a lead into, to this broader question, which is, what do you think the, the longer term impacts of this deglobalization is going to have on, on our economy? The companies you watch? I know it's a pretty broad question, but it has to factor into the way that you think about these companies.

• 35:53Speaker 02

  When you asked me about the economy and I said, the bright spot is jobs. The second bright spot is onshore, US onshoring.

• 36:00Alex Kantrowitz?

  So you think this is good?

• 36:01Speaker 02

  And, and, yeah, it's very good for our country. I just think it's really going to be a challenge for profitability.

• 36:11Alex Kantrowitz?

  Right.

• 36:11Speaker 02

  Their costs are going to, are going to, to go much, much higher. But, you know, what is the price you want to pay for security, stability, independence, all of that? But I still believe if you, if you think about the demographics in China, they're still very powerful. So, okay, maybe many companies don't build as much, many US companies don't build as much over there or manufacture over there. You're still going to have the demand side of the equation, I think, be quite strong. From the consumer, um, and just based on the, the demographics. And, um, and, and I mean, that, that goes, that goes from Caterpillar and Estee Lauder to Apple

• 36:54Speaker 02

  and, and, and, and several of the semiconductor companies for sure. So I, the globalization, I think, is a good thing. I think we, we just all relied on China way too much, but that took years in the making.

• 37:08Alex Kantrowitz?

  Right. Yeah, this didn't, didn't happen overnight and didn't happen by accident. So, um, and it is interesting because we've spent like a good chunk of this talking about how tech companies need to restore margins. And if you're, if you're bringing production on, sure. But, by the way, I, I do agree, I think it's good. If you've lost access to Taiwan Semiconductor and you're a company like Apple, which I think relies on them, you're, you're in some. You're in deep trouble if you can't get those semiconductors. That's that's it for a while. So but it will be very interesting to see what the impact is on the business. And I think it's a very underappreciated story that no, no, yeah. So.

• 37:46Speaker 02

  And I think also, uh, it goes back to the double and triple ordering, not only was demand so strong during the pandemic, but it was also you couldn't get anything.

• 37:56Alex Kantrowitz?

  Right.

• 37:56Speaker 02

  Right. So it was like a double whammy. So now you got this whole thing unraveling and that's why we are where we are.

• 38:02Alex Kantrowitz?

  Yep. Okay. But double, triple ordering means that just companies are bulking up just, you know, just in case they lose access and that's creating a bigger.

• 38:11Speaker 02

  I think it was more of they couldn't get the chips.

• 38:14Alex Kantrowitz?

  Right.

• 38:15Speaker 02

  They couldn't get the stuff.

• 38:17Alex Kantrowitz?

  Yeah.

• 38:17Speaker 02

  Couldn't get the merchandise. You talk to some of the retailers, they couldn't get the merchandise. And then all of a sudden, we wake up one day. And a perfect example is Target says that they're going to have a 2% operating margin versus eight. So talk about that being the deleverage. And that's because all the inventory showed up one day and they had all the wrong stuff. They had all the goods that everybody wanted. They didn't have services, stuff that people wanted. And so it's happening everywhere, not just in tech, but it's certainly happening in tech, too.

• 38:46Alex Kantrowitz?

  Yeah. Okay. So I know you have like, uh, seven minutes before you have to call and CNBC will will get you out of here in in four. Is it three or four? Is that okay?

• 38:57Alex Kantrowitz?

  Elon Musk, uh, he is having a week and he's had many of them in a row. What is the risk to Tesla here in terms of, you know, Twitter's private and he's probably gonna, I mean, whatever's gonna happen there is we, we don't really have a good understanding and it's Elon's money at the end of the day. Uh, but a lot of, a lot of, uh, uh, you know, investors' money is in Tesla right now. So what is the, what is the risk there to Tesla if Elon keeps acting like this and dividing his attention?

• 39:26Speaker 02

  Yeah. Yeah. No, no, no. Yeah, sure. No, I mean, the pushback could be, could be real at a time. When you have a ton of competition happening too, right? So it's from and that talk about from the legacy

• 39:40Alex Kantrowitz?

  Yeah.

• 39:40Speaker 02

  Oh, ease, right? And it was a one man band, no pun intended, or pun intended for such a long time. And now, all of a sudden, in the next three to five years, you're, I mean, you're going to get a ton of EV cars and trucks. I think it'll be fine. I mean, the company itself will be fine. There's enough demand and his products are amazing. Um, I think I'm very intrigued with the trucks in a big, big way. I think there's a huge amount of demand there, given the massive shortages we have in drivers and and the inefficiencies that we have. Um, but I, I think that from owning the stock, I think it's going to be a challenge.

• 40:21Speaker 02

  And it goes back to, not only is it a challenge because he's got issues, you'll have pushback in competition, but it also goes back to the conversation we had at the beginning of the show, if interest rates stay high, growth and growth stocks and tech will likely lag. So there'll be a price at one point, there'll be a time when you want to really load up the truck. I personally think it's a cult stock. I think people love it or hate it.

• 40:45Alex Kantrowitz?

  Right. And, and you're, he's gonna, the, the thing is, he, he's gonna lose people in the cult. Um, and, and that's gonna hurt. If, if a premium, um, on Tesla was the Elon acolytes, it's gonna go away. I, I started for the first time having people who are, you know, true Tesla acolytes text me and be like, what the heck do I do? Because I'm watching what he's doing and I don't know what to do about this stock right now. And it is down significantly over the year. So something to watch.

• 41:16Speaker 02

  You're in the crosshairs right now. You're in the crosshairs right now and it's very expensive and yeah, it's a tough one. It's a tough, tough one. I wouldn't touch it. I don't own it, but I never have. So to be honest, I, I didn't make all the tons of monies that most other people did.

• 41:29Alex Kantrowitz?

  Yeah. All right, Stephanie Link, thank you so much for joining.

• 41:32Speaker 02

  Thank you. It was great to be here. Happy holidays.

• 41:36Alex Kantrowitz?

  Happy holidays. We'll let you go on air. And that'll do it for us here on this week's Big Technology Podcast. Thank you, Stephanie Link for joining us. Really a pleasure speaking with you and I hope to see you back on set sometime soon. Thank you, Nate Guatney, for handling the audio. Thank you, LinkedIn, is having me as part of your podcast network. Thanks to all you, the listeners. A lot of people responded and we really shot up the rankings. We were number 10 on the Apple top charts for tech news last time I checked. Thank you. Thank you. Thank you so much for rating us five stars. Any more ratings, you know, would go a long way. So if you haven't done the rating yet, takes a couple of seconds. And if you hit the five stars, it'll mean a lot to us. All right.

• 42:16Alex Kantrowitz?

  Well, oh, yeah. Next week, next week, we have Andy Yen, who is the CEO of Proton Mail. Great timing because Apple has a serious deal going on in terms of their move to encryption. So we'll speak about that. Also speak about the merits of doing anything encrypted at all. I think that's still worth conversation on that front. Dave Friedberg from the All In Podcast was supposed to join this week. He couldn't make it. So try to get him in 2023. And, and as we come close to the end of the year, I just wanted to say thanks to all of you listeners. And I say it every week, but show can be anything without you. And week in, week out,

• 42:57Alex Kantrowitz?

  I appreciate you being here. Okay. Well, until next time, that will do it for us here. We will see you next week on Big Technology Podcast.

• 43:13Speaker 04

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