This week, shares in Google, Facebook, and Tesla reached an all-time high on Wall Street, helping push the NASDAQ to its tallest peak since the dot-com crash 14 years ago. These three tech outfits are very different operations, but right now, they have at least one thing in common: each has taken a strong stance on unproven tech. On Wall Street, it seems, risk is in. The question is whether such faith in Silicon Valley’s aggressive optimism will ultimately be rewarded.
Facebook just spent $19 billion on ad-free messaging service WhatsApp. Google is buying up robotics companies and artificial intelligence startups — as well as the smart thermostat maker Nest — in a bid to become the digital mediator not just on computing devices but across the rest of the physical world. And Tesla is positioning itself not as a car company, but an energy company that happens to make cars. In the past, bankers in bow ties and suspenders may have eyed extreme risk with skepticism, but today’s Wall Street is embracing the sunny confidence of Silicon Valley “disruption.”
During the dot-com bubble, investors threw money at everything on the internet, because no one knew the value of any of it. The medium was just too new. But that’s not what’s happening here. Two decades after the web reached the mainstream, the contours of our tech future have become clearer. We have a better idea of which players have the greatest influence over the shape of things to come. This winnowing seems to have inspired a new attitude among investors. These days, the market isn’t betting on everything. It’s not even betting on Apple. But it is making big bets on businesses that are themselves betting big.
Facebook Escapes Friendster’s Fate
Ironically, Facebook’s initial opportunity to define the future came because the company that got there first couldn’t follow through. Friendster launched in 2002, two years before Facebook, and it showed early signs of owning the concept of online “friending.” But Facebook’s superior execution, combined with Friendster’s missteps, allowed Mark Zuckerberg and his band of accidental billionaires to become the internet’s default social network.
Anyone who still doesn’t understand why Zuckerberg decided to spend $19 billion — about one-tenth of Facebook’s total value — to purchase WhatsApp should remember the cautionary example of Friendster. In four short years, Facebook amassed as many registered users as Friendster — about 115 million. After its first four years, WhatsApp has surpassed 450 million. Though that’s still a long way from Facebook’s current audience — 1.2 billion — WhatsApp is adding about a million new users each day.
But user numbers alone aren’t the only reason Facebook had to fear WhatsApp. Much like Facebook compared to Friendster, WhatsApp does much of what Facebook does but potentially better. Like Facebook, WhatsApp lets you update your status, share photos and videos, send messages, and reveal your location. In short, it lets you network socially. And arguably, it lets you connect with more granular control and less distraction than Facebook. Plus, there are no ads.
Instead of fearing or ignoring this rivalry, however, Zuckerberg co-opted it. Though WhatsApp was little-known in the U.S. before it was acquired, Facebook anticipated it — and the entire messaging medium it represents — as an existential threat. In the clichéd jargon of Silicon Valley, such a decision might be described as visionary. But that connotes some kind of mysticism or magical divination. In the case of Facebook’s WhatsApp acquisition, there’s no mystery: This is a hard business calculation based on user numbers, precedent, and profit potential that comes with a future that could include billions of users.
And Wall Street is rewarding the company’s decisiveness. On Monday, just days after the WhatsApp acquisition, investors pushed Facebook’s stock price to $70.78, 30 percent than it was just a month ago. You could say the market is responding to Facebook’s panache. Paying $19 billion for anything takes a kind of self-assurance that few possess. But they also see that this type of forward-looking acquisition can pay off.
“When Google bought YouTube for about a billion-and-a-half dollars years ago, people laughed,” Carlyle Group co-CEO and co-founder David Rubenstein told Bloomberg TV. “How could you pay a billion-and-a-half dollars for a company that has no revenue? It has nothing. And yet today that seems like a cheap price.”
Google Joins the Real World
Google might been thinking of its YouTube acquisition when it paid about twice as much for Nest, the internet-of-things startup known for its networked thermostats and smoke alarms. With the purchase, Google acquired not just those products but a platform on which to build a whole world of physical stuff infused with digital intelligence. For Google, which still makes most of its money from desktop advertising, it’s an effort to harness the momentum of a fast-approaching future before it outruns the search giant.
For some people, this is an ominous thing. Siva Vaidhyanathan, author of The Googlization of Everything (And Why We Should Worry), said as much in a recent interview with The New York Times. “We’ve been perfectly happy to let Google be the benevolent dictator of our web experience. It has made the web pleasant and usable as well as navigable, making things like malware and pornography less obvious. We should be happy with Google becoming the operating system of our phones as well. But now it is striving to become the operating system of our lives,” he said. “It is interested in tracking, monitoring and monetizing everything we do, online and offline, with our cars and eyeglasses and thermostats. Are you surprised a lot of people are resisting that vision? It’s a tremendous amount of control by one company.”
But that’s not a worry for Wall Street. For investors, the Nest deal looks like the promise of more profits. Whatever you think of Google’s grip on so much of the world’s information, the company shows no sign of loosening its hold. Along with its purchase of Nest, Google’s well-publicized recent forays into self-driving cars and robotics show a company eager to engage in the world beyond our screens. If Google can figure out how to organize and monetize the world’s physical data like it has the web’s, its value could grow even greater than the nearly $410 billion market cap the company reached yesterday, when investors pushed Google’s stock price to $1,220 per share.
An Energy Company That Also Makes Cars
Among all the celebrity startup founders in Silicon Valley, the ambitions of Tesla CEO Elon Musk are the most cartoonishly simple. A first-grader might doze off before you finish explaining Google or Facebook’s ad businesses. But not Musk’s. Spaceships. Electric sports cars. And the things that power those cars: giant batteries.
It’s this last product that caught the attention of Morgan Stanley analyst Adam Jonas, who recently more than doubled the investment bank’s target price for shares in Telsa, Musk’s electric car company. “Tesla’s quest to disrupt a trillion-dollar car industry offers an adjacent opportunity to disrupt a trillion-dollar electric utility industry,” Jonas wrote in a note to investors. “If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again.”
Optimism about Tesla’s future, which grew after the company reported better-than-expected quarterly results last week, picked up even more momentum after the Jonas’s note, sending the company’s shares up nearly 14 percent yesterday to close at a record $248. The excitement centers around Tesla’s “Gigafactory.” In its earnings press release, the company says its new plant will make its battery packs much cheaper and “accelerate the pace of battery innovation.” This will make not only electric cars cheaper, the company says, but will also allow it to supply the “massive volume of stationary battery packs” needed by the solar industry.
Such an arrangement would work out well for Musk, who is also the chairman of solar energy startup SolarCity. But beyond the short-term business advantages, it’s hard to resist the appeal of that a car company that could double as a producer of renewable energy sources rather than a consumer of non-renewables.
There’s no consensus on whether the company’s audaciousness is worth billions. After all, Tesla was trading as low as $34 within the past year. Unlike highly profitable Google and Facebook, Tesla still maturing. The company delivers only a few thousand cars every quarter. What’s more, its battery idea could easily come to little. Battery technology has so far been one of the most stubborn bottlenecks in the advancement of mobile technology. That said, the company that breaks this bottleneck will be richly rewarded. And Musk’s follow-through on at least some of his crazier plans makes him an easy pick for Wall Street.
Apple Plays It Safe
In the midst of all this investor excitement about the future, one very significant company is missing. Apple is still worth much more than any of the other companies listed here (though Google is catching up fast). And it still makes more money. But its share price has stagnated since peaking about a year-and-a-half ago.
Last week, Apple took another hit on Wall Street when Barclays analysts downgraded their rating on its stock. In a note to investors, the firm said it expected Apple to slow down in much the same way Microsoft did after the height of its success around the turn of the century. The potential for big new growth just isn’t there, Barclays said. Even rumors of new Apple products to come, such as wearables and TVs, weren’t enough to convince the wary analysts.
“Frankly, we just couldn’t quite bring ourselves to use smart watches or TVs as reasons to raise numbers–nor were we fully convinced that these products could move the needle like new categories did in the old days,” the firm said.
What’s so shocking about this change in attitude is how quickly investors have gone from seeing Apple as the most innovative company in the world to one that plays it a little too safe. Most recently, instead of releasing new products or buying new companies, Apple was undertaking a massive stock buyback program. In a way, such a conservative move is in keeping with Apple’s culture. As a company, Apple works in deep secrecy, often for years, to design and build products that enter the world more fully realized than any other hardware in history. It’s not about to rush something to market. A bad product, after all, would probably hurt its share price more than no product.
But risk aversion is clearly not a trait the market values these days. Big flags planted on the fresh ground of the near future are what Wall Street wants to see. Back in the dot-com bubble days, those banners flew with the logos of such short-lived pretenders as Pets.com and Webvan. But out of that cacophony have emerged a few forgers of the future that have inexorably changed how much of the world operates. And for now, at least, investors have decided to put their billions behind the ones who are moving most aggressively to try to change it again.