Wednesday Wealth Recap:
- We’re all aware of the inflation crisis currently wreaking havoc on American lives. But you might not be aware of who’s responsible for this disaster. In Monday’s article, Alexander Green holds the bureaucratic bungling in Washington accountable.
- There’s a stark difference between being rich and being wealthy. This week our friend Rebecca Barshop, Senior Managing Editor of Profit Trends, asks an important question: What does wealth mean to you? Your answer might surprise you. And, more importantly, it might help you learn how to become even wealthier.
- In the spirit of Giving Tuesday, yesterday we shared the story of Monica and Robert Kinder, who have fostered more than 20 children impacted by the nation’s opioid crisis over the last eight years. Please join us in showing the Kinder family the same selflessness that they have continuously shown the children they welcome into their home.
Victims of their own success, Big Tech companies are under fire.
Silicon Valley’s giants have become more than just the first trillion-dollar companies in the world.
Today, Microsoft, Apple, Google, Amazon and Facebook decide how we work, what news we see, what brands we buy and even how some of us vote.
The belief that Big Tech’s impact – economic, social and political – has become too great is now widespread. It is one of the rare issues upon which both sides of the political aisle agree. (I recommend you watch the documentary The Social Dilemma on this topic.)
Thus far, attempts to rein in Big Tech through regulation and fines have barely registered as pinpricks on the thick skin of these giants.
For example, the $2.7 billion fine recently levied on Google by the European Union is equivalent to roughly 2% of the company’s cash holdings. It’s barely a slap on the hand.
In my view, a Teddy Roosevelt-style “trustbusting” government campaign to break up America’s tech giants is not a matter of if but when.
The good news is that this will unleash a tsunami of investment opportunities for savvy investors.
It also means that the secret to making money on tech stocks over the next decade will not be investing in Big Tech stocks themselves.
Instead, it will be investing in Big Tech’s spinoffs.
Lessons From the Breakup of AT&T
In 1982, AT&T essentially had monopoly control over both telephone services and equipment in the United States.
AT&T provided anywhere between 80% to 85% of the country’s telephone lines. In addition, AT&T’s Western Electric division produced almost all telephone equipment in the U.S.
Yes, AT&T conducted cutting-edge research in its much-vaunted Bell Lab. But by the early 1980s, AT&T represented the antithesis of innovation.
AT&T’s engineers famously refused to redesign handsets, pointing out that the current models were built to last 75 years. In the minds of these engineers, unneeded durability trumped consumer wants.
Then, in 1984, the federal government broke up AT&T into seven new “Baby Bells.” In doing so, it unleashed one of the greatest revolutions in the history of U.S. technology.
Overnight, consumers could use phones made by any manufacturer. Phone prices fell dramatically.
The cost of long-distance calls plummeted as AT&T found itself in competition with Sprint and MCI. Innovation exploded as speakerphones and answering machines became commonplace.
It’s no exaggeration to say that AT&T’s breakup ultimately led to the telecom boom of the late 1990s – a boom that minted fortunes for millions of investors.
AT&T’s Lessons for Big Tech
Much like AT&T’s Bell Labs, Silicon Valley’s tech giants have reputations as cutting-edge innovators.
These reputations do not preclude them from abusing their monopolistic power, which whistleblowers suggest they do.
Take the example of Facebook.
Imagine if the U.S. government forced Facebook to divest itself of just two divisions – Instagram and WhatsApp.
On its own, Instagram is already worth more than $100 billion.
WhatsApp is the most popular app in more than 100 countries and generated between $5 billion and $10 billion in revenues for Facebook in 2020. As a result, investors would value an independent WhatsApp at tens of billions of dollars.
Big Tech divestitures are hardly unprecedented. Some have been met with enormous success.
In July 2015, eBay (Nasdaq: EBAY) spun off PayPal (Nasdaq: PYPL). PayPal stock opened at $38.
Today PayPal trades at $190 – and is almost 5X more valuable than eBay itself.
Why Investors Love Spinoffs
Investors love when a piece of a business is spun off into a new, independent company.
Spinoffs work for three reasons.
First, spinoffs allow each company to focus on creating value through their independent businesses. As a result, ideas that had been languishing in an oppressive environment can flourish.
Second, spinoffs destroy the “conglomerate discount.” The stock market tends to undervalue conglomerates because of the complexity of analyzing them. Separate entities create pure-play stocks easy to value.
Third, spinoffs make managers more responsible, more accountable and more incentivized. Put simply, a spinoff can make managers rich. As famed spinoff investor Joel Greenblatt put it, “Capitalism works.”
Even old-school companies are jumping on the spinoff bandwagon.
In the late 1990s, General Electric (NYSE: GE) was the world’s most valuable company. Its portfolio included businesses from jet engine manufacturers to financial firms. Today, GE is spinning off its healthcare and energy arms to focus on aviation.
Pharmaceutical giant Johnson & Johnson (NYSE: JNJ) is spinning off its consumer products division (which makes Band-Aids, Neutrogena, Tylenol and baby powder).
Japanese consumer electronics giant Toshiba (OTC: TOSYY) is spinning off its energy infrastructure and computer devices businesses.
What’s Ahead for Big Tech
I’ve already hinted at how I expect the Big Tech story to unfold.
Calls from U.S. voters will pressure the U.S. government to rein in the power of Big Tech.
Equally important, investors will pressure companies to spin off certain divisions as Big Tech’s stock returns wane.
The actions of GE, Johnson & Johnson and Toshiba all suggest that the appetite for spinoffs among investors is growing.
And I expect these spinoffs will turn into some of the best investment opportunities over the coming decade.
Mark my words… and more importantly, don’t miss out.
Click here to watch Nicholas’ latest video update.