AI: Time for Big Tech 'Spin-Offs'. RTZ #410

AI: Time for Big Tech 'Spin-Offs'. RTZ #410

The Bigger Picture, Sunday July 7, 2024

The AI Bigger Picture topic I’d like to focus on this Sunday, is my long-expressed view that US big tech should be proactively thinking about creative unbundling some of their core assets, via creative ‘Spin-Offs’. And do it proactively, ahead of the intensifying antitrust driven regulatory actions by authorities in the US, Europe and beyond. The opportunity is even more timely with the tail-winds of the AI Tech Wave opportunities ahead. Let me explain.

This week again saw Big Tech companies trying to position their companies and disparate assets to take advantage of the capex intensive, long-term opportunities around the AI Tech Wave. This past week saw Amazon doing a creative ‘AI-HireQuisition’ of an AI Agentic workflow LLM AI Unicorn, Adept. That followed a similar deal by Microsoft with AI LLM AI unicorn Inflection just a few weeks ago.

These moves come in the teeth of greater focus by regulators in the US around antitrust concerns around the big tech ‘Magnificent 7’. And of course beefier regulatory moves in the EU against US big tech companies as well.

But as these big tech companies each hit valuations of multiple trillions of dollars in recent months, they have a range of underlying assets that are not getting their due value in the public markets.

It’s a topic I discuss in this week’s ‘Trends with Friends’ video podcast with my friends Howard Lindzon and JC Parets (Recommend subscription, for free). Full video here of the episode mentioned, with the ‘Spin-Off’ discussion at the 21 minute mark).

Both Howard and JC are successful private and public market investors, and we discuss on their Trends with Friends Podcast here on Stocktwits’ YouTube page, (again, starting at the 21 minute mark). The whole show is a good weekend watch, with other topics being discussed like the Tech/AI opportunities in India, Amazon’s moves against inroads from Chinese ecommerce leaders Temu and Shein, and other topics of the day. Last week’s podcast, on ‘AI’s Value Creation’, can be seen here for leisurely weekend viewing.

Back to this Sunday’s topic, a case for big tech ‘Spin-Offs. As I discuss above, there are many cases of assets housed within these big tech companies, that may not have an opportunity to grow to their eventual potential. And be relatively under-valued by the markets.

One example of potentially under valued assets, would be something I’ve discussed months ago: Alphabet/Google and its YouTube business.

And Wall Street is starting to take note. This weekend’s Barron’s piece “A YouTube Spinoff Could Unlock $190 Billion in Value in Alphabet, Says Analyst”, is a timely case in point:

“Europe’s antitrust regulators would like to break up Alphabet to reduce its Google unit’s dominance of internet advertising. That would be fine with Needham analyst Laura Martin, who thinks investors fail to see the value of Alphabet businesses such as YouTube.”

“We believe that [Alphabet] is worth more in pieces than together,” Martin concludes, “so we welcome regulators’ attempts to break up” Alphabet.”

“Alphabet has been Needham’s top pick among large-cap stocks this year. In a Wednesday note, Martin estimates that a stand-alone valuation of YouTube would see the business worth more than 50% above the value it gets inside Alphabet. A partial spinoff of YouTube might therefore add another 8% to Alphabet’s current stock price of $190, and help it reach her price target of $210.”

“Averaging her values for YouTube’s ad business, and adding $175 billion for the subscription units, the Needham analyst arrives at a stand-alone value for YouTube of some $535 billion.”

“But Alphabet’s current enterprise multiple of 6.3-times revenue would value YouTube at only about $350 billion, or $190 billion less.”

“So if YouTube were spun off, even partially, by the choice of Alphabet’s board or the mandate of regulators, Needham estimates that about $190 billion in trapped value would be added to Alphabet—or some $15 a share.”

The analyst takes a detailed ‘sum of the parts’ look at the various pieces, that puts a value on YouTube alone at over half a trillion dollars. With Alphabet/Google sitting at a $2.3+ trillion valuation, and Alphabet/Google trading around $192. The whole piece is worth a read for its detailed analysis. In my view, one could do similar ‘sum of the parts’ analysis at other big tech companies as well.

But this piece highlights a broader point I’ve been making for big tech ‘Magnificent 7’ businesses for a few years now. Their ‘sum of the parts’ Parts are likey worth more if they’re spun-off in small parts, still allowing for the control their parents crave. Especially ahead of the AI Tech Wave stack opportunities, and the likely capex and other investments they’re likely to need to execute at AI Scale.

An example is Softbank, whose strategy I discussed recently. Specifically, they’re currently focused on the Power and Chips Boxes 1 and 2 above. Especially with their minority IPO in recent months of ARM Holdings, with Softbank still owning over 90% of the company. The market cap of ARM Holdings this week was almost $190 billion.

It’s a win-win for both sides, with the market getting an AI driven semiconductor investment opportunity beyond leadership players like Nvidia. And Softbank and founder/CEO Masa Son gets additional flexibility for further capex intensive AI investments with its ongoing ownership of the majority of ARM Holdings.

The AI Bigger Picture topic I’d like to outline again, is my long-expressed view that US big tech should be proactively thinking about creative ‘Spin-Offs’ of some of their core assets to achieve several key objectives:

  1. Allow key, substantial businesses with their current multi-trillion plus dollar market cap empires to compete and thrive relatively independently for bigger markets, outside the shadow of their current parents. And independent world-class management teams getting more direct attention from media and markets worldwide.

  2. Provide additional public entities that investors can focus on investing in directly, in public markets starving for growth, and new IPOs at Scale. With access to deeper information flows that can be analyzed by industry specific buy and sell-side analysts on an ongoing basis. It’s something I strived to do with fellow industry Analysts in the Internet wave, in my prior professional capacity at Goldman Sachs.

  3. Allow new innovations leveraging this AI Tech Wave, that can be accelerated with greater independence across expanded TAMs (total addressable markets). Up and down the AI tech stack above.

These are but a tip of the iceberg of the proactive possibilities. And I can cite deeper work across multiple big tech companies and a range of relatively under-appreciated assets. Topics for future posts and podcasts. Again, this week’s podcast discussion on Spin-Offs, India and other subjects can be seen here.

Overall, the broader opportunity for ‘Spin-Offs’ by big tech is a timely one, especially in these early days of the AI Tech Wave. And the increasing regulatory headwinds in the US and abroad. That’s the AI Bigger Picture here this Sunday. Stay tuned.

(NOTE: The discussions here are for information purposes only, and not meant as investment advice at any time. Thanks for joining us here)

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