US Director Trades: A Cold Winter For Big Tech?

Ten years ago, it was considered cool to work for a tech startup. It still is (in case my boss is reading this) but the world is arguably a much more ‘tech-sceptic’ place today. The film director, Werner Herzog –always keen to make a profound point about the big picture– has said that ‘the last Century, the Twentieth, saw the demise of great social utopias. Our Century, the Twenty-First, will inevitably see the demise and the collapse of technological utopias.’ We will not colonise Mars. We will not achieve immortality with genetic manipulation. ‘Mind my word’, he says, ‘when we meet in one hundred years!’

We’re not here to predict the future, but it would be fair to say that people used to be much more optimistic about technology. Startup life was glorified, idealised and romanticised in documentaries like John Gau’s Triumph of the Nerds (1996) and movies like The Pirates of Silicon Valley (1999). Later in 2010, films like The Social Network celebrated Mark Zuckerberg’s success by portraying the founding of Facebook as a David-against-Goliath battle between good (Zuckerberg) and evil (the Winklevoss twins). Many people blamed bankers and politicians for the scandals and crises which mired the 2010s. The startup scene was seen as a less stuffy, less corrupt and potentially more lucrative alternative.

Fast forward to the 2020s and it seems like techies are now the bad guys. The potentially negative impact of social media was explored in Jeff Orlowski’s documentary, The Social Dilemma. ‘The Algorithm’ has superseded ‘The Man’ as the phrase which people, or at least conspiracy theorists, use to make reference to the mysterious, all-controlling ‘system’ that guides and prays on our every move. Bezos is the new Rockefeller, the rich person that everyone loves to hate.

This matters for investors. Cultural trends feed through to economic and political change, especially when regulators get involved. Political and economic factors in turn drive share prices. The prices of Amazon, Cisco, Meta and Microsoft have all fallen over the last year. These companies are also interesting because directors at these firms are selling shares in the companies they run…

Directors Selling Big Tech Meta

Meta’s Chief Legal Officer, Jennifer Newstead, has been selling shares in her company (see table below). Her firm faces problems. People seem to be logging into the platform less frequently. Facebook revealed the number of daily active users declined for the first time in Q4 2021. Some commentators question the company’s venture into virtual reality. Meta’s Reality Labs has so far been loss making and in February, Meta’s CFO said that he expects operating losses to ‘increase meaningfully’ in 2022. Furthermore, advertising revenues have been adversely affected by Apple’s iPhone privacy changes.

Newstead’s trades are particularly interesting because, as Chief Legal Officer, she presumably has clear insights into Meta’s ongoing battle with US regulators. They have been confronting Meta over antitrust concerns in recent years. Most significantly, Facebook has been accused by the US Federal Trade Commission of operating a ‘systematic strategy to eliminate threats to its monopoly’. We shouldn’t jump the gun and assume that Meta’s Chief Legal Officer is selling because she has insight into the company’s legal woes, but of course the possibility can not be overlooked.

Regulatory risk everywhere?

Amazon, like Meta, has seen its directors sell shares over the last month. Adam Selipsky, a Divisional CEO at the firm, sold $130,498 in the middle of September. It’s also worth noting that Amazon, like Meta, faces governmental risks. With perhaps too much control over the market, Amazon has been described as the company that all regulators love to hate. Last month, the California Attorney General announced a lawsuit alleging that Amazon stifled competition. Also in September, the French government announced plans to impose a minimum delivery fee of €3.00 for online book orders. This could level the playing field for independent bookstores struggling to compete against e-commerce giants.

Directors have also been selling at Microsoft, Google and Cisco. Microsoft’s transactions are worth exploring further, because sale transactions have been executed by particularly high-profile executives, including the Chief Executive Officer, Chief Financial Officer and President.

Chart 1: MSFT Director Sells

Regulatory risk could be one factor driving this trend. In late September, UK regulators said it would investigate competition in cloud services, a market dominated by the ‘hyperscalers’ Amazon, Microsoft and Alphabet. At the same time, it would be unfair to attribute pessimism about these companies to political risk only. Big Tech firms may be coming out of the hyper growth phase. Microsoft and Alphabet reported record earnings growth last year, but in Q2 2022, both firms missed the market’s expectations at the revenue and profit level – a sign that growth might be slower as we go forward.

High growth stocks typically command higher price-to-earnings multiples than stalwarts – i.e. firms with slow, but steady growth. For example, Procter amp; Gamble and Walmart both have p/e ratios around 20. Amazon has a staggering multiple of 102 using twelve-month-trailing figures and 35 using earnings from 2021. Put differently, the firm has a long way to fall if something goes wrong. Perhaps this is one reason Adam Selipsky and other directors at Amazon have been selling.

Dow 30 Directors Buying Tech Stocks

The tech sector may face a combination of regulatory risk and slowing growth, but this hasn’t stopped directors at two Dow 30 tech companies, IBM and Intel, from investing in the companies they run. In fact, these were the only buy transactions by Dow 30 directors over the last month or so.

The purchase by Intel’s CEO could be promising. One would expect that executive director buying is more valuable than other regular officer buying. Gelsinger’s transaction came just one day after his firm announced a $30bn collaboration with Brookfield Asset Management to expand its chip-making facilities in Arizona. This was arguably a contrarian buy, given that trades around $26, well below $54, where it was last year.

IBM’s share price has moved in the same direction as Intel’s – i.e. down – but in July, the firm announced that it beat second-quarter revenue expectations. The share price enjoyed a mini-rally immediately after results were announced, but unfortunately for David Farr, the stock resumed its downward price trend. Mr Farr bought the shares at $139. IBM now trades at $121.

Looking Beyond Big Tech

The prices of blue chip tech stocks have come under a lot of pressure recently. Readers may want to know what is going on in other industries…

Kellogg Foundation Sells Shares In…Kellogg Co

Although the market has taken a battering, Kellogg Co has bucked the trend. At the same time, The Kellogg Foundation has been selling shares in Kellogg Co. Let’s take a closer look…

The Kellogg Foundation is the philanthropic body which owns the vast majority of Kellogg shares (see below). Back in 2017, the Foundation owned around 19% of all Kellogg Co shares. That ownership has dropped to 16%. In September, the Foundation sold 100,000 shares at $72.48 each. What does this mean? My first impression was that this sale was linked to short-term factors, for example, the decision of Kellogg workers to unionise. Furthermore, you might expect consumers to cut down on premium products as they economise amid raging inflation.

Despite these potential red flags, the firm’s quarterly report suggested that demand for its cereals remained resilient. In August, the firm raised forecasts for sales and operating profit. Kellogg also has one of the highest StockRanks in the USA, 90, thanks in part to the firm’s strong brand. A company has a strong brand if customers are prepared to pay a premium for its products even though the product itself is not that differentiated from readily available alternatives. Kellogg has a strong brand according to this definition. Coco Pops sell for £3.50. The Tesco equivalent, Choco Snaps, sell for 85p, a quarter of the price. Pricing power typically translates into wide profit margins, 12% in the case of Kellogg.

So why has the Foundation been selling Kellogg shares? Whereas regulatory risk could mean that directors are bearish about Big Tech, it may not be the case that The Kellogg Foundation is bearish about Kellogg Co. The late Jim Slater, author of The Zulu Principle said, ‘Insiders might sell their shares for any number of reasons’. The Kellogg Foundation funds a number of philanthropic grants and programs by selling Kellogg shares. Furthermore, a quick look at the balance sheet suggests that the Foundation has been diversifying out of Kellogg Co stocks and increasing its exposure to diversified investments, which it defines as investments in public equity securities, fixed-income debt securities, mutual funds, commingled funds, hedge funds, real estate funds, and private equity funds. The Foundation’s annual reports acknowledges that it is ‘subject to market risk, resulting from its concentration in Kellogg Company common stock.’ It is of course possible that the Foundation is selling Kellogg Co stocks, not because it thinks the firm is a bad investment per se, but because it simply seeks a more diversified portfolio.

Contrarian Buying At Starbucks

Two directors at Starbucks, Richard Allison and Mellody Hobson, purchased Starbucks shares on 15 September, just two days after the firm lifted its long-term profit and sales outlook. On 13 September, the firm projected profits over the next three years to grow between 15% and 20% per share, up significantly from the previous forecast of 10%-12%. The firm has plans to reach 45,000 stores by the end of 2025 and plans to nearly double the number of stores to 9,000 in China. Starbucks currently trades around $85, compared to $111 this time last year, meaning recent director buying could be contrarian buying.

Is Big Tech The Place to Be?

The chart below shows director trades at Dow 30 companies. Buys are given a positive value, sells a negative value. We can see that there have been more sell transactions than buy transactions. Some defensive stocks, like Walmart and Home Depot, face director selling, but most of the selling was in tech stocks, namely Microsoft and Cisco. IBM was the only company to buck the trend in September.

The tech sector faces a combination of political, economic and even cultural risks. Perhaps Big Tech has deviated from its original mission. Bill Gates once said successful companies in the Twenty-First Century ‘will be those who empower others’. Many people may today feel they are used by, rather than empowered by, Big Tech. I always get the impression that ‘The Algorithm’ is listening to my conversation. I say ‘cat’, then YouTube suggests cat videos. Take that with a pinch of salt. My imagination tends to get the better of me, but a growing body of evidence suggests that social media platforms do whatever it takes to keep users logged in, even if the costs are emotional anxiety and political echo chambers.

Is it the end of Big Tech? Of course not. Tech companies are arguably better placed than most to innovate and reinvent themselves. Technology, like most things, is a double edged sword. It creates solutions as well as problems. Indeed, problems require solutions, so if problems exist, then opportunities abound for the next generation of tech entrepreneurs. Perhaps it isn’t the end of Big Tech. Perhaps investors should simply watch out for the next breakthrough. We don’t know what it will be. If you walked down the street in 1976 and asked people whether they wanted a personal computer, they’d say, ‘What’s that?’. That’s what makes the future so interesting. We simply don’t know what will happen next…

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