Protocol Index: Two tiers of tech stocks

What Matters Today

• U.K. GDP numbers for April were released this morning, showing the economy contracted 20% month-on-month. The country entered lockdown shortly after the U.S., suggesting that U.S. Q2 numbers will be grim. U.S. consumer sentiment data for June, released at 2 p.m. PDT, will show whether sentiment is picking up at all.a

Today's News

As of 5:49 a.m. PDT: Nasdaq Futures: 1.48% | Euro 600: 1.18% | Nikkei: -0.75% | Hang Seng: -0.73%

OPPORTUNITIES

• OpenAI launched its first commercial product, a general-purpose language API.
• Adobe earnings beat expectations, though its revenue missed. Its stock jumped on increased subscription revenue.
• Netflix is reportedly in discussions with Reliance Industries' Viacom18 to produce new Netflix content.
• From Protocol: Snap's new Camera Kit could turn the company into a massive AR platform. The company also announced Snap Minis, which hint at super-app ambitions.
• ByteDance has increased its U.S. workforce from around 300 people a year ago to over 1,000 today.
• Airstar, Xiaomi's digital bank, launched in Hong Kong.
• PCI will make Singapore's contact-tracing wearables.

THREATS

• Microsoft said it will stop selling facial-recognition technology to the police until a federal law regulates its use.
• Xiaomi and Oppo are reportedly importing smartphones to make up for production shortages in India — and paying hefty tariffs to do so.
• China told Apple to remove two podcast apps from the App Store.
• The U.K.'s competition authority said it would investigate Facebook's GIPHY acquisition.
• S&P said SoftBank's buyback plans raise questions about its "financial soundness and creditworthiness."

DEALS

• Instacart raised $225 million at a $13.7 billion valuation, up from its 2018 valuation of $8 billion.
• Postman, an API development platform, raised $150 million at a $2 billion valuation.
• Palantir is reportedly planning to file for its IPO in the next few weeks and wants to start trading this fall.
• DoorDash has nearly secured new funding, The Wall Street Journal reports, which would value the company at more than $15 billion.

Everyone's Thinking About

Two tiers of tech stocks

When last week's not-as-bad-as-expected job numbers were released, something interesting happened to tech stocks: They dropped. And that move got me thinking about whether we can actually treat "tech stocks" as one single thing anymore.

• There are two groups of tech stocks right now. On the one hand, you've got the mega-caps: Apple, Microsoft, Amazon, Alphabet, Facebook. "They are the modern utilities," Anup Srivastava, a professor at the Haskayne School of Business, recently told me.
• "They have become safe havens — we have seen this in COVID times," Srivastava said. People might not be buying clothes or cars, he noted, but we're all still using Facebook, Google and our laptops.
• That helps explain why those stocks have surged amid the crisis — as some of America's biggest and best-capitalized companies, they're an obvious place for investors to park their cash.

But that's not the only reason. "There is one subtle difference between the previous utilities and the current utilities, which is a question about growth," Srivastava said.

• "The previous utilities needed certain physical assets": factories, land, pipes. But Big Tech doesn't need any of that. "There is no variable cost" for internet companies like Google and Facebook, Srivastava explained, "so you cannot draw a one-to-one mapping between a cost and a revenue."
• The upshot? "When they grow, they grow like wildfire," Srivastava said. Big Tech provides an unusual combination of stability and high growth.

That's helping the other group: small, higher-risk companies. Smaller tech companies can ride on Big Tech's coattails, even though they don't have nearly the same amount of stability. Investing in a small tech stock is "basically buying lottery tickets," Srivastava said: "I'm hoping that I will get sold out to a bigger giant."

• That said, he doesn't think this is a '90s style bubble. Companies today list much later, so they tend to be "relatively more stable." Private equity and venture capital investors have absorbed some of the risk away from public investors.

But there are big problems. "COVID is a very bad crisis," Srivastava said. It's helping to fuel irrationality, where people label non-tech companies (like food delivery firms) as tech companies.

• When we spoke on Wednesday, Srivastava said the "market is too optimistic" and not taking into account the effect COVID is having on economic activity. Srivastava thought tech's surge might also be too large, saying the sector isn't immune from wider economic disruption.
• "The biggest sales person on earth today is Google and Facebook. A sales person makes money when things get sold" — and if advertisers aren't buying, they're in trouble too.

On Wednesday, Srivasta told me he was "at a loss to understand" the buoyant market. Yesterday, the NASDAQ plunged more than 5% — suggesting investors might have finally woken up, too.

Overheard

• "Collecting the three companies that actually understand how to make a profit in this sector might not be such a bad idea." — Just Eat Takeaway.com CEO Jitse Groen explained why the company is acquiring Grubhub.
• "The unfinished work of racial justice and equality call us all to account. Things must change, and Apple's committed to being a force for that change." — Tim Cook announced that Apple would spend $100 million to establish a Racial Equity and Justice Initiative, which will involve spending more with its black-owned suppliers.
• "We're announcing a multi-year $100 million fund dedicated to amplifying and developing the voices of Black creators and artists and their stories." — YouTube's Susan Wojcicki said the fund would first be used to host a fundraising event tomorrow.
• "Securing new clients in China, or even in Asia, could be more challenging from now on as prospective clients would think twice before they buy American equipment or technologies like ours." — An anonymous U.S. semiconductor exec told the Nikkei Asian Review that the Huawei supply restrictions could seriously backfire.
• "Beidou was obviously designed a few decades after GPS, so it has had the benefit of learning from the GPS experience." — The Australian Centre for Space Engineering Research's Andrew Dempster said China's GPS competitor, set to be completed this month, could have advantages.

Closing Bell

Robinhood rewrites bankruptcy rules

Last month, Hertz filed for bankruptcy protection. Its stock tanked, obviously. But retail investors — many of whom have got sucked into trading thanks to Robinhood — decided that its cheap stock actually represented a bargain opportunity (I have a sneaking suspicion that most of them did not know that bankruptcy tends to wipe out equity holders). That influx of interest drove its stock back up: At one point, it was trading at almost double its pre-bankruptcy levels, just to give you a sense of how insane this all is. And in an unprecedented turn of events, Hertz is now looking to issue up to $1 billion in new shares, taking advantage of its nonsensical price to help restructure the company. Ahead of markets opening this morning, its shares were up 53%. When people said fintech would forever change finance, I'm not sure this is what they had in mind.