Twitter Bleeds its Shareholders
'Just Buy FAAMG' vs 'Bernie has Won': Munger's Hint to Lower Your Expectations, Twitter Employees are Taking the Firm From Shareholders
Twitter’s Q1 != pretty. We’re going to leave you to read about Q1 elsewhere and instead focus on the big picture here: namely, 2020 Should have been a gangbusters year for Twitter (for obvious reasons), but you wouldn’t know from its financial results:
Twitter produced negative cash earnings for shareholders in 2020
Since IPO in 2013, shares outstanding of TWTR have increase about 30%, diluting the ownership stake of long term share holders
TWTR’s stock based compensation as % of Op Cash Flow is significantly higher than Facebook, close to a whopping 50% in 2020
Taking Op Cash Flow and subtracting capex and stock based compensation gives a measure of owner earnings, or what I call “Shareholders’ Cash Earnings” (really just FCF less stock based comp). As is apparent, Facebook has grown this measurably while Twitter is stuck in a rut. In fact, in 2020, this figure was negative for Twitter.
The pandemic and notable political events of the past year ought to have drawn traffic and boosted Twitter’s results. Instead, 2020 was a meek year for the platform.
Remember that stock based comp is a non-cash expense, so it gets added back to net income in order to come up with Op Cash Flow. Despite its “non-cash” nature, it’s a very real expense borne by continuing shareholders as it dilutes their interest in the firm.
Tech companies routinely give away significant pieces of the firm in their early stages to employees, but the general idea is that once the flywheel gets spinning at more mature speeds, less and less is given to employees on a percentage basis over time. Twitter, however, has thus far failed to achieve escape velocity and employee equity compensation continues to be a significant drag for major shareholders.
The question if you are a TWTR investor is where is all the return on the stock based comp? Why hasn’t Op Cash Flow risen for the past 3 years despite employees receiving a significant interest in the firm?
Munger’s Hidden Warning For Today’s Investor
Well, of course, it's a lot harder. And I think one consequence of the present situation is that Bernie Sanders has basically won. And that's because the-- with the everything boomed up so high and interest rates so low. What's going to happen is the millennial generation is going to have a hell of a time getting rich compared to our generation. And so the difference between the rich and the poor and the generation that's rising is going to be a lot less. So Bernie has won. He did it by accident, but he won.
—Charlie Munger, 2021 Berkshire Annual Meeting. Source: Yahoo Finance
Charlie’s statement above has a basic warning implied for those who hold assets that are “boomed up” by low rates: your future does not hold good prospects. In fact, I’ll extrapolate here that he’s saying be prepared for the possibility that your wealth contracts…
In a very related note, here’s a headline from Barron’s over the weekend:
Apple and Other Big Tech Stocks Had a Disappointing Week. 6 Reasons to Keep Buying Them.
Of course, getting zero mention in the article: interest rate risk, even in the “what could go wrong” section of the article, tucked away in the last paragraph...
Recency bias certainly helps with people who just blindly “buy FAAMG” because, with the benefit of hindsight of course, last March was a huge buying opportunity in FAAMG especially. The companies have moats, yes, but they are worth significant % of GDP already. AAPL is worth over $2 Trillion (~10% of U.S. GDP). Will it in 30 years it be worth tens of trillions?
There have been lots of inequality of returns, winner-take-all effects in corporate America as Buffett highlighted when he revealed the top 20 companies by market cap while observing the change in the names to make that list from 30 years prior. The question is: will this continue? Clearly none of the twenty names from 30 years ago are still on the list. If you are buying FAAMG or even an index, however, you are implicitly betting on it to continue:
It is worth noting that index investors may not be spared the pain in FAAMG + TSLA getting hit by rising rates given over 23% weight in the S&P. And on average, these firms are trading at a P/E above 40, or an earnings yield of less than 2.5%. Think about where rates have to rise in order for that to become unsustainable—it’s a low hurdle. In fact, the only thing that can sustain it is for these already massive firms to continue growing profits at high rates…
As Buffett joked, lowering interest rates is like lowering gravity…lower it enough and he is going to go compete in the Tokyo Olympics. As both Charlie and Warren repeatedly noted, no one knows what the consequences of our current unprecedented fiscal + monetary regimes will be (for them, it’s a movie that’s keeping them on the edge of their seats), but one thing is certain: that there will be consequences.
No one knows the path of rates in the future, but if someone turns gravity back on, we know that asset prices will follow the laws of gravity and Warren won’t be going to the olympics.