Big tech is immune to the sell-off — everyone else is not

January 17, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on January 17th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The tech sell-off is hitting hard — but not evenly. The very largest companies have entirely different problems. Like Washington, Brussels, and billion-dollar lawsuits.

High inflation, possible rate hikes, and the risk that the US Federal Reserve will start easing off on its asset purchases. That’s been enough to rattle the stock markets on both sides of the Atlantic. And it’s been especially rough for tech stocks.

In Sweden, for example, cloud services company Sinch and the magazine platform Readly have lost over 11 and 15 percent respectively so far this year. In the US we’ve seen drops of more than 15 percent for hyped-up newcomers like UiPath (automation), Braze (communications), and Squarespace (websites and e-commerce).

But the sell-off doesn’t hit everyone equally. The very largest tech companies have served as the locomotive for a big chunk of US market performance for some time now, not just within their own sector. Research from the analysis firm Gavekal shows that since May 2021, half of the gain in the S&P 500 has come from just five stocks: the familiar Apple, Microsoft, Google, Tesla, and chipmaker Nvidia.

The picture that emerges is of a tech sector splitting into two distinct camps that both behave — and get treated — very differently: big tech and everyone else.

The first category holds giants like the ones just mentioned. Mature public companies that still post strong growth, several of them with good profitability. They’ve fallen only a few percent overall. These are companies so established that everyone has to factor in their plans and moves — even non-competitors.

The biggest risk they face isn’t the stock market — it’s politics. In the UK, Meta (formerly Facebook) was sued for around SEK 28 billion for improperly using user data. In the US, a federal judge recently let another lawsuit against Meta from the Federal Trade Commission proceed. The FTC contends Facebook has become a monopoly and is threatening to unwind its acquisitions of Instagram and WhatsApp, which took place in 2012 and 2014 respectively.

The courts will settle the legal question, but the market already treats Meta like a monopoly. The same goes for the other big-tech companies in the category. A mobile market without Apple is unthinkable. Amazon becoming less relevant in US e-commerce is a highly unlikely scenario. And searching online has long been synonymous with “googling”.

In the second category you find the next generation of companies. Smaller, fast-growing firms investing at the expense of profitability. Companies like Bumble (dating), Duolingo (language learning), and Affirm (payments). Often they’ve gone public out of a venture-backed environment where growth is prioritized above everything else.

This is the category that has taken, and is taking, the hardest hit as investors seek less risk in their portfolios. On the US market, this category has gone from being traded at an EV/Sales multiple of 16 times in February 2021 to around 7 times revenue now, according to Goldman Sachs.

How worried tech companies should be about the market may therefore depend, to some extent, on which category they belong to. And for those that haven’t made it public yet, the window may have closed, at least temporarily.

This week, the first IPO of the year, from HR company Justworks, was postponed — with a reference to “current market conditions”.

Apple’s App Store rules are strict — unless you’re China

January 13, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on January 13th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Apple’s strict App Store rules are well known — but for China, the company keeps inventing exceptions. When the Chinese state launches its own cryptocurrency in the app store, expect Apple to bend its own rules once again.

Tim Sweeney, CEO of Epic Games, summed up the much-covered App Store trial in a single sentence: “Apple has complete control of all software on iOS.”

The App Store is owned by Apple, and therefore controlled by Apple. But should it be? By and large, yes — at least according to the recently concluded case. Apple won on nine of ten counts, giving it, in broad strokes, a free hand to keep dictating the terms of its own app store.

That’s exactly why it’s worth looking more closely at how these terms are actually enforced inside Apple’s ecosystem. And more specifically — when they aren’t enforced at all. In China, for instance, the exceptions have been more numerous than anywhere else. The market — one of Apple’s most important — has been one of Tim Cook’s top priorities since he took over as CEO. And to stay on the right side of Chinese authorities, Apple has had to make many departures from rules it holds to firmly elsewhere in the world.

There’s no shortage of examples.

Tencent, one of China’s (and the world’s) largest tech companies, has an app called WeChat. At first glance it looks like an ordinary chat app, but it functions increasingly like an entire mobile operating system of its own. You can talk to friends, pay for services and products — and install fully independent apps, inside WeChat itself. That may not sound particularly controversial, but it cuts against one of the most fundamental principles of the App Store. Or, as Philip Shoemaker, who was responsible for enforcing App Store rules until 2016, told The Telegraph:

“Apple grants WeChat a specific exception that they don’t grant anyone else in the world. It’s basically rule number one — you can’t have an app inside another app. WeChat is the only one allowed to.”

The exceptions go beyond the App Store.

Last summer Apple launched its privacy initiative “Private Relay” — a way to reduce data tracking of individuals. But the change didn’t apply in every country. Neither China, Saudi Arabia, nor Belarus was covered by the new policy.

Pulling apps that don’t suit China is an issue that has even reached Apple’s shareholders. Ahead of the March AGM, a proposal has been filed calling for Apple to give more transparency around apps that have been removed because of government pressure. Since 2017, 55,000 apps have disappeared from the Chinese App Store, according to the proposal. Apple’s board recommends that shareholders vote the proposal down.

Ahead of the Winter Olympics in Beijing comes the next challenge for Apple in China. The Chinese state has just launched a wallet app for the digital currency issued by the Chinese central bank. The idea is that the sports event will act as the launch for this new digital way to pay. That may sound smooth, but a senior official at the British intelligence service also described it as “the ability for a hostile state to surveil transactions”. The anonymity often touted as a benefit of cryptocurrencies risks being stripped right out.

The question now is whether Apple will also make an exception to its rules on cryptocurrencies in apps for China’s sake. Philip Shoemaker’s guess is that it will. Apple has taken a cautious stance on these apps until now, likely because the risk to individual consumers has been judged to be high. But if China’s aim is to build a parallel payment system, this may require yet another revision of the rulebook.

In many ways, Apple’s position has painted the company into a corner. On one hand, the picture of a mobile ecosystem that’s safe and secure is a foundational part of Apple’s self-image and its marketing. On the other, holding on to China as a large and growing market is of the highest possible priority. On top of that come new phenomena in the increasingly important gaming market that have been off-limits so far — so-called play-to-earn, a way to earn cryptocurrency through games. If Apple’s argument is that user privacy is the most important thing of all, it becomes hard to explain why the rules get adjusted as soon as a large and important market complains — or a new and profitable trend shows up.

Why the next Theranos is already being funded

January 4, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on January 4th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

One of Silicon Valley’s most celebrated companies turned out to be a fraud, in the legal sense of the word. But the investors who got taken in will probably fall into the same trap again.

“This is what happens when you work to change things. First they think you’re crazy, then they fight you, and then — all of a sudden — you change the world.”

Dressed in her now-famous black turtleneck and blazer, Elizabeth Holmes, CEO of the American blood-testing company Theranos, tried to explain away a critical article in the Wall Street Journal. She went on CNBC and said she was shocked that the paper had published claims that the company had problems, given that she had sent over thousands of documents she said proved the opposite.

That was 2015. It’s now 2022, and the article turned out to be largely correct. On Monday evening, Elizabeth Holmes was convicted of defrauding her investors. She now faces several years in prison.

What the trial has really been about is where the line sits between a genuine failure and deliberate fraud. That Theranos’s blood-testing machines didn’t work the way they were supposed to — that’s not in dispute. But Holmes had presented both their function, their precision, and her customer contracts in a way the court found to be on the wrong side of the law. She was acquitted on other counts relating to patient fraud, and on several more the jury couldn’t agree at all.

The trial has drawn a massive press corps and huge public interest. Holmes, who once appeared on the cover of a magazine under the headline “The next Steve Jobs”, has likely inspired a fair amount of schadenfreude. The company was valued in the billions and had some of the most prominent investors in the world — among them media mogul Rupert Murdoch and the Walton family, founders of Walmart.

The spectacle hides similarities with plenty of more ordinary companies. The phrase “fake it till you make it” — pretending while you try to catch up with what you’ve promised — is an extremely common philosophy among startups in both Silicon Valley and Sweden. Founders almost always have a big vision of what they want to build.

For a small number of companies, all it takes is time to actually get there, while most others fold or pivot long before. Dressing up what your company can do in front of users, investors, and prospective hires is essentially standard.

Since these exaggerations are so common, you have to ask what the investors actually knew about Theranos before they put money in. Did they even understand how hard the problem was that Holmes was trying to solve? And if so, how close the company really was to a solution? The questions that got asked were partly limited by the fact that Holmes avoided taking money from more specialized venture-capital firms. Instead, she talked to wealthy families whose expertise was limited.

But the real mistake here may have been the fear of missing out on a good deal. There simply isn’t time to find out how much is actually true. Because before you do, the company may have picked other investors instead.

Can a trial like this change how investors approach due diligence? Angela Lee, who teaches venture capital at Columbia Business School, doesn’t think so. “People don’t want to miss a good deal. If anything, I’ve actually seen an even faster timeline for due diligence in recent years”, she told Bloomberg. She also confirmed how common exaggeration and embellishment are among founders: “I would say 15 percent of founders do this every day.”

It’s easy, as they say, to be wise in hindsight. After the Theranos scandal broke, investors came forward to say that they had seen something was off. But every day, half-truths are presented by entrepreneurs at an accelerating pace.

Similar events are therefore likely to happen again. When the fear of missing an investment opportunity is greater than the risk that something doesn’t add up — it’s only a matter of time before we see the next Theranos. If not in court, then at least in bankruptcy.

Crypto’s real charge is political, not financial

December 29, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on December 29th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The criticism of cryptocurrencies as speculative products without any underlying value often misses the point. What’s interesting about the asset class isn’t only its price — it’s the power structures it reveals, and that it could flip upside down.

Are you a fox or a hedgehog?

That’s the question the Canadian professor Philip Tetlock poses in his book “Superforecasting: The Art and Science of Prediction”. The book uses animals as metaphors for the traits needed to succeed in this difficult craft.

People classified as hedgehogs are, in this context, very good at one single thing. Think experts or ideologues who see the world through their chosen lens. Being a fox, by contrast, means being more agnostic, without a fixed worldview. Foxes know a little about a lot and are more interested in being right now than in having been right from the start.

When Tetlock studied this, he found that people classified as foxes were far more accurate in their predictions. They were also better at judging the probability of them. If you want to be good at forecasting the future, then, it’s best not to be too deep in your own trench — or your own establishment, if you prefer.

That line of thinking is worth keeping in mind when looking at where the new economy is headed. One hotly debated piece of it is cryptocurrencies, which many critics argue have nothing to do with ordinary people or the real economy. They’re treated instead as speculative products without any underlying fundamentals. The topic should therefore be handled with caution, some argue.

Those views are of course both legitimate and worth considering. But if, like Tetlock’s fox, you want to examine the claims more agnostically, you can see similar speculative tendencies in traditional stock trading too. Tesla’s market cap is, at the time of writing, over $960 billion — more than ten times that of General Motors, even though Tesla delivered just under half as many cars in the most recent quarter. Kinnevik-backed Teladoc, which operates in digital health care, has lost over 68 percent just this year. And that’s on established exchanges, in ordinary shares. Failing to see that there’s a high level of speculation spread across the entire market quickly becomes a rather one-eyed analysis.

There are also other big differences between stock trading and cryptocurrency, more of the philosophical kind. At its core, it’s a polarization between a centralized and a decentralized structure. Exchanges act as central marketplaces where buyers and sellers meet. Cryptocurrencies can be traded in a decentralized way — peer to peer, without any intermediary. That may sound trivial, but the small change has the potential to alter every power relationship inside the financial system. What role does an exchange or a bank play if every trade can happen without them?

The clearest collision between these two worldviews can be seen in China. Ahead of the 2022 Winter Olympics in Beijing, Chinese authorities have encouraged the use of the digital renminbi — a kind of Chinese e-krona. At first glance it resembles other cryptocurrencies, since it’s fully digital and handled accordingly. But the anonymous and decentralized component is, in this particular case, entirely stripped out. Jeremy Fleming, head of the British intelligence agency GCHQ, told the Financial Times that digital currencies had a lot of potential, but “if wrongly implemented, it gives a hostile state the ability to surveil transactions”. You can hardly get more centralized than a state watching every single purchase.

That China is acting this way is hardly surprising. A top-down, authoritarian system can never benefit from decentralization, which is why it has the most to gain from clamping down. China has several times this year signaled its displeasure with cryptocurrencies and crypto trading — likely for similar reasons.

Even though cryptocurrencies are young and to a large extent speculative products, it’s worth viewing the criticism through a power lens. Behind the joke names, the occasional extreme volatility, and the sometimes outright embezzlement sits a radical idea about tearing down and rebuilding the financial system. It’s too early to say whether that will succeed. But it’s very clear who would have the most to lose if it did.

Reddit’s IPO will put its old problems on full display

December 17, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on December 17th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The jokes never stopped when Reddit — the launchpad for the GameStop rally — announced that it was itself going public. But the problems the site has been dragging around for years are about to be on full display.

“Gentlemen, it’s been fun burning my retirement money together with you these past few years.”

That’s what one user posted this week in the now-infamous Reddit forum Wallstreetbets after it became clear that their digital home wants to list in the US. The tone is typical: short, humorous, and packed with references to various memes.

For a tech company of its size, Reddit has drawn relatively little attention. It’s one of the ten most-visited sites in the US, and in Sweden one in seven people has used Reddit in the past year.

Unlike social networks such as Facebook and Twitter, much of the activity on Reddit seems to have flown under the radar of both the media and society at large. One reason may be the site’s complex content structure, with so-called subreddits — dedicated forums that discuss specific topics and phenomena. The content is open for anyone to read, but hard to get your head around for the uninitiated.

The site also gives off a trivial, amateur-forum vibe — a long way from the polished packaging of its Silicon Valley peers. The Swedish site Flashback gives a similar impression: much smaller and simpler than it actually is.

Behind that facade, though, sits a genuine force in both politics and the economy. The surge in so-called meme stocks like GameStop and AMC nearly a year ago started with discussions in the Wallstreetbets group. When the Capitol was stormed in Washington DC, a lot of the planning and activity took place in Trump-related forums. At that point the political pressure became too heavy even for Reddit, which shut one of them down shortly afterwards.

Handling controversial content is something that has followed Reddit since its launch in 2005. Passionate advocates of online free speech have seen the site as a refuge for conversations and debates that weren’t welcome or permitted at competitors.

But a more permissive stance on moderation has also turned the site into a magnet for harassment and online abuse. In an attempt to clean some of that up, Ellen Pao, then CEO of Reddit, banned a number of groups whose only activity was directing hate at overweight people. Shutting down groups like that might sound uncontroversial, but the members took it as an infringement on their free speech. The backlash — and the attacks on Pao personally — led to her stepping down as CEO.

In a public-company setting, questions like these will be scrutinized more than ever. Reddit is free to use, but it sells memberships to those who want extra features and a way to flaunt their status.

Most of the revenue comes from advertising. But placing ads in potentially controversial environments is risky, and not something that suits every kind of company. Last year companies like Coca-Cola, Unilever, and Microsoft halted all their social-media advertising for a period to take a stand against online hate. So don’t be surprised if new scandals emerge based on statements buried deep in Reddit’s many forums.

Reddit’s challenge sits right here — the balancing act between what members want and what is commercially viable and acceptable to advertisers. Much of the moderation is done by the members themselves, and Reddit is one of the few large sites on the internet that can genuinely be classified as a community. The members have strong opinions and they love Reddit. Picking too big a fight with them would be digging your own grave — the whole site is built on their engagement and their content.

At the same time, the IPO cranks up the pressure on Reddit to grow revenue. If advertisers don’t feel comfortable being associated with all the discussions the members want to have, that will be hard to pull off.

Having your vocal community as shareholders will add another layer of complexity. Rarely has a tech company gone public with users as passionate as Reddit’s. It remains to be seen whether they are as loud and freedom-loving as shareholders as they are as users.

TikTok’s dark side — built on purpose

December 11, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on December 11th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Behind the scenes at TikTok and Instagram, there are decisions and priorities where young people’s health is weighed against money. And the people in charge hide and duck the truly hard questions.

“The algorithm finds what I’m interested in. That makes it very personal. It’s almost as if it understands you better than you understand yourself,” says Fiona, 25, in SvD’s investigation of the app TikTok.

What she’s describing is the entire point. The algorithm is supposed to be able to predict what you’ll watch, and the better it is at that — the longer you stay in the app. And see more ads, which is how TikTok makes money.

The model is simple, but treacherous. A generous interpretation is exactly this — that you are presented with the content you want. What you watch, like, send on to a friend — everything helps sharpen the algorithm’s precision. It sounds relatively innocent.

But a more accurate analysis is that you are presented with the content that the algorithm thinks you will actually watch. And as SvD’s investigation shows, the overlap between what you want and what you end up watching is not necessarily very large. Even people who have explicitly marked that they don’t want a certain type of content can still get it in their feed over and over.

TikTok’s Nordic spokesperson, Parisa Khosravi, tells SvD that “we have several settings available for our users to control their own experience on the platform, including by selecting ‘not interested’ on a video. I’m sorry if someone has nonetheless been met with content they have actively opted out of.”

That’s regrettable, of course, but the description of the problem paints a picture of an algorithm that runs itself. That, of course, is not the case. It’s programmed with an intent. And in TikTok’s case, it fulfils its intent extraordinarily well compared to other social networks — that’s why the app has become so popular.

TikTok isn’t alone with these deflections. This week, Adam Mosseri, head of Instagram, testified before the US Senate. The topic was, fittingly, online safety for children. Mosseri described how technically complex it is to distinguish a 12-year-old — a child under US law — from a 13-year-old who can be treated as an adult. One of his proposed solutions was that someone else should fix the problem — the phone makers. “It’s a challenge for the industry,” Mosseri said, pushing the question further away from his own business.

What both Khosravi and Mosseri are right about is that these are genuinely complex problems to solve. This is hard — even for the most talented programmers. But what they overlook is that the problems are also entirely of their own making. Eating disorders weren’t invented by TikTok, but being fed encouragement around them is a direct consequence of how the app is built. Arguing, as TikTok’s spokesperson or Instagram’s head have done, that it’s not their intent does not free them from responsibility.

Nor can they claim ignorance of the phenomenon. The display of harmful behaviour has long been a well-known fact at the social networks. In The Wall Street Journal’s series “The Facebook Files”, internal research was described showing, for example, that young women felt worse from using their service, Instagram. That was also one of the reasons the Senate invited Instagram’s head in for the hearing this week.

The research community has also pointed to the same phenomenon for a long time. A study from 2007 showed how there were dedicated forums whose sole purpose was to encourage eating disorders. Another study, from 2010, described how similar content differed across different social networks.

Nearly 15 years later, we are still met by those in charge hiding behind the hard questions they themselves helped create. Responsibility is most easily shown by what gets prioritised. You can still — with a few simple search terms — end up straight in a world that helps you become unwell. The priorities can hardly be clearer than that.

Power shift: tech giants are building the new conglomerates

December 6, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on December 6th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

As classic conglomerates are being dismantled, the next generation is being built in Silicon Valley and China. Power ambitions are growing as the biggest tech companies now want to expand using established methods.

Being the CEO of a listed company is surely hard. Being the CEO of two at the same time is probably at least twice as hard. And if one of them has ambitions to become the next generation’s financial conglomerate — then it might get to be a bit much, even for the most diligent.

This was the situation Jack Dorsey faced this week. He stepped down as CEO of Twitter, and just two days later renamed the payments company Square — the other listed company he runs — to Block. Name changes are in fashion in Silicon Valley. A little over a month earlier, Mark Zuckerberg renamed Facebook’s parent company Meta. Search giant Google did the equivalent back in 2015, when it renamed its parent Alphabet.

Name changes may sound mostly like semantics and branding. But if you look past the new logos and graphic profiles, you can see something more interesting. It’s an expression of grander ambitions. These IT giants, often referred to as Big Tech, have established themselves so well in their home markets that they now consider themselves ready to take on entirely different fields and expect similar success.

At Block (formerly Square), you could see expansive tendencies even before the name change. This past spring, the company bought the music service Tidal from the rapper and businessman Jay-Z. That the company was for sale was widely known, but few expected that a payments company like Square would be the buyer. The company — which has the US as its main market — is best known for offering a point-of-sale system with related services to shops and restaurants. What would they do with a service that, essentially, mostly resembles Spotify?

A possible answer can be found in another part of the Block portfolio: Cash App. It’s an app where, like Swish, you send money between individuals, and you can also buy bitcoin. Part of Cash App’s success lies in its close relationship with the hip-hop world, where it has, for example, collaborated with the rapper Megan Thee Stallion to educate fans about bitcoin and cryptocurrencies. Back in 2019, Dorsey said that the company had, somewhat surprisingly, managed to get close to hip-hop culture, and described how beneficial that had been for them. Tying in Tidal in that context — and putting Jay-Z on its board to boot — is therefore perhaps not as strange as it might first sound.

The idea that the sum of the parts is greater than each company alone is a familiar one in the corporate world. But just as Big Tech accelerates its expansion plans, we’re seeing signs of how the previous generation is being dismantled. Last month, the conglomerate General Electric announced it would be split into three parts. The pharmaceutical company Johnson & Johnson and the hardware company Toshiba are also splitting up. In these cases, pressure from shareholders to focus the businesses has finally become too great, because the supposed synergies from the conglomerates haven’t been realised to a sufficient extent.

In China too, the power ambitions are visible, including among tech companies like Tencent. The company is best known for owning the chat app WeChat, but it’s also one of the world’s biggest investors and owners in gaming. They also have enterprise services, financial products, music streaming, and robotics development in their portfolio — to name only a few. The owner of TikTok, ByteDance, also sells, among other things, calendar and cloud services to businesses as well as a social media platform. The connection between those offerings and the popular video app isn’t entirely clear to an outsider, but it may not be entirely illogical given the power they hold.

The common denominator among the tech companies that have chosen the conglomerate path is a strong starting position in their market. Perhaps so strong that they are — or at least feel — almost unchallenged. That they want to expand with this as a foundation is therefore no surprise. But like the industrial conglomerates, shareholders’ patience won’t be infinite with the Big Tech companies either. If Jack Dorsey can’t sell more financial services with the help of a music streaming service — then in time, he too will have to start dismantling the building blocks of his new Block.

Bitcoin — soon just like any other stock?

December 3, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on December 3rd, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

How best to hedge against rising inflation? Ask a major US bank and, among many investors, the answer seems to be bitcoin. But new numbers show that the cryptocurrency behaves more like a regular asset class than many believe.

The message from the finance house JPMorgan Chase was clear: inflation concerns have, once again, put the fear into investors. And in the hunt for a hedge — a position meant to reduce risk exposure — people have turned back to bitcoin. And, the bank’s experts noted, some investors have even started to view bitcoin as a better hedge than gold — the traditionally safe haven in turbulent times.

Johan Javeus, chief strategist at SEB, is on the same track. In an interview with TT, he points to bitcoin as a way to try to handle inflation:

“Both in the US and Europe, the central banks are printing an enormous amount of money right now. They create money out of thin air and there’s more money in the economy — that contributes to the value of money going down. That problem doesn’t exist for a cryptocurrency like bitcoin, because the supply is limited. In that sense, you can say it’s a hedge against inflation.”

Comparisons between bitcoin and gold are not new. Crypto terminology like “mining” — extracting from a mine — comes from exactly there. The reasoning is that there is only a certain amount of bitcoin (21 million, to be exact) and that it should therefore be a stable store of value over time.

Stability, however, is not something bitcoin and other cryptocurrencies have made themselves known for — at least not so far. Enthusiasts argue, though, that bitcoin’s volatility is decreasing and becoming less of a problem. Bitcoin can work as a hedge against inflation, but above all against the broader stock market too, they argue. The received wisdom among crypto investors is that the currency’s price shouldn’t behave the way stocks do overall.

It’s a thesis that has come unstuck lately. Instead, new figures show that the correlation between bitcoin and the large-cap index S&P 500 over 100 measured days this autumn has been among the strongest of the entire year. That is: when the stock market has gone up, bitcoin has followed, and vice versa. The exact opposite of the reasoning above.

The question of what role cryptocurrencies can play in an investment portfolio has also been the subject of research. In a recently published study from the University of Western Australia, a trio of researchers looked at how well bitcoin could work as a hedge against volatility in the S&P 500. The result was another bit of a buzzkill for some investors, with the conclusion that bitcoin was “a rather poor hedge and diversifier of risk” in that context. On the contrary, portfolio risk rose even when exposure to bitcoin was as low as one percent. There are, of course, more reasons to include different types of assets in a portfolio than just minimising risk. But the study effectively undermines the argument that bitcoin should be counter-cyclical.

So how should you think about bitcoin and other cryptocurrencies? To begin with, it’s worth remembering that all cryptocurrencies are different. Not all of them, like bitcoin, have a fixed supply. Ethereum, the world’s second largest cryptocurrency, was expanded and had new currency continuously added until this past summer — when they changed their technical system to reduce the risk of inflation. So it’s not the crypto technology itself that protects against inflation — whether you buy the thesis about its function as a hedge or not.

On top of that, you can clearly see an institutionalisation of the crypto world, which matters in this context. Coinbase, one of the biggest crypto exchanges, reported in its third quarter that a full 72 percent of trading volume was done by institutional traders. Beyond that, there are now several exchange-traded funds that track the bitcoin price, without savers needing to buy the underlying asset.

Could it be that the crypto world is being normalised? And in doing so both stepping into Wall Street’s better rooms and losing a bit of the novel lustre it once had. Tim Cook, CEO of Apple, described his view of cryptocurrencies like this: “I think it’s reasonable to have as part of a diversified portfolio.”

An asset like any other, in other words.

It’s a fair distance from the financial revolution that was promised by some of the earliest enthusiasts at the start.

Big tech is hiding a crash in the rest of the sector

November 30, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on November 30th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Zoom: down 61 percent. Twitter: minus 40 percent. And Pinterest: down 53 percent. The crash among established tech companies can be hard to spot if you are leaning comfortably on the popular tech funds.

In politics they are often lumped together as big tech — companies like Facebook, Amazon, Apple, Microsoft and Google. They have landed in regulators’ crosshairs countless times — most recently in the EU, which is preparing to push through a new law aimed at every tech company with a market cap above 80 billion euros.

But talking about big tech as one sweeping category is usually wrong. The label captures the companies’ size and influence rather than any shared technology — they each dominate different areas. They may set the direction for the tech world, but they are hardly representative of it or its health.

Because in a year when the five giants are at — or close to — all-time highs on the stock market, many of the smaller tech companies have at the same time been crashing. Pandemic winner Zoom has lost 61 percent in a little over a year. Teladoc — one of Kinnevik’s holdings — has dropped 63 percent since February. Established companies like Pinterest (-53 percent) and Twitter (-40 percent) are pointing sharply down.

Many new listings have had a tough time too. Half of all companies that went public and raised more than a billion dollars in capital are now trading below their IPO price. Among them: the stock trading app Robinhood, the delivery service Deliveroo, and China’s Didi, often described as the Uber of China.

In Sweden, too, the past three months have produced blood-red numbers. Market rockets Evolution Gaming and Sinch have dropped 37 and 40 percent from their peaks. Both, it should be said, are still up on a full-year basis. Worse is the e-commerce company Desenio, which has plunged a full 74 percent since its IPO in February this year.

The decline is not entirely visible to those who mainly hold funds. Nordnet’s Indexfond Teknologi, which tracks the MSCI World Information Technology index, has for example risen 29 percent since its launch this summer. But in the underlying index you find both Apple and Microsoft, each weighted around 17 percent. The enormous success of big tech, in other words, masks what has happened in the index overall — which also includes iZettle-owner PayPal (-39 percent), another heavy faller.

So why are these crashes happening? There are several contributing macro factors, and the prospect of future rate hikes is likely a strong one. Tech stocks fell when Jerome Powell was reappointed as chair of the US central bank, since he is expected to raise rates going forward. Low rates are generally seen as favorable for tech stocks, as the hunt for yield increases and risk appetite rises. There is of course also worry about new covid variants and how they might affect the economy.

But what also becomes clear in today’s market climate is that big tech has a resilience many smaller tech companies lack. The giants all enjoy enormously strong market positions with monopolistic tendencies in parts of their businesses. Google’s share of the search market is for example over 85 percent, despite — or because of — the fact that it is more than 20 years since the company was founded. And there is nothing to suggest that this balance of power will shift in the near term, even if new players join the big tech group in time.

Looking at tech companies as one solitary category can therefore be treacherous. And it is one step further down in the sector that you find the e-commerce, business services, gambling, ad sales and payment companies that all build their own markets with the help of technology — and that may be having a particularly rough time right now. For anyone who wants to keep track of their holdings, it is worth digging deeper than the index number or big tech.

Footnote: stock prices are as of November 30th, before the opening of the US market.

The fintechs coming for the corporate card giants

November 26, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on November 26th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Eurocard and American Express have long dominated the Swedish corporate card market. Now the next generation is coming for them. Dressed up as tech companies, they are fighting for the billion-kronor market that corporate card spending represents.

Wedged between a gas station and an on-ramp to the Bay Bridge sits South Park — a small oasis in San Francisco’s SOMA district. The area is best known for having housed countless venture capital firms and Instagram’s first office.

As one of the few green spaces nearby, it is also a popular lunch spot. The restaurant South Park Café is a local classic that has been there for 34 years. But in 2019 it was taken over by a new and slightly unexpected owner: the credit card company Brex, which had its own offices around the corner. The restaurant stayed open, but the floor above was turned into a kind of office lounge for cardholders called the “Oval Room” (Silicon Valley has never been shy about grand associations). A local institution had been reshaped by a company founded just two years earlier.

Offering exclusive perks to cardholders is a familiar idea — but mostly for wealthy private individuals. The difference this time is that it is not personal cards being used, but corporate ones. When a company picks a credit card today, factors like add-on services and the perks on offer matter far more than they used to, both for the company itself and for its employees.

The trend is driven from the US, where companies like Brex and Ramp have become popular with startups and quickly reached billion-dollar valuations. The explanation is SaaS — software as a service — cloud services that do not require any hardware. They all rely on card payments to collect money from their customers quickly. And because startups use so many different SaaS tools, the payment volumes on cards add up fast. The fact that the US still often pays invoices by mailing a physical check makes cards look, by comparison, like a fast and simple solution.

The same phenomenon exists in Sweden, but with a slightly less glamorous framing so far. Here it is mostly about minimizing paperwork and simplifying expense management. With add-on services, for example, bookkeeping can happen faster and the overview of employee spending can become clearer. In this category you find card companies like Danish Pleo and Swedish Mynt. The underlying business model, though, is the same as before: give companies a card, and make money on all the purchases made with it.

As competition tightens, the services are getting more and more specific. The Swedish company Juni has targeted companies that do digital ad buying — something that often needs to be paid for by card. By integrating with ad sellers like Facebook and Google Ads along with store platforms like Shopify, the company can give customers a clearer picture of where the money is going and how well their marketing is actually working. The space is hot among investors, and Juni’s valuation grew 900 percent in just eight months.

For these card companies there is also value in owning all the payment data in one place. Whoever has the most relevant data is probably best positioned to make an accurate risk assessment. That can in turn be used to offer things like short-term credit or loans. There is a running joke in the industry that you have to win over the company’s CFO, since they usually decide which card provider to use. Solve the CFO’s headache and you are well on your way.

The underlying business model is one we recognize from companies like Eurocard and American Express. Get a credit card, buy services and ads with it, and the company makes a little money on every transaction. Those are also the companies squarely in the crosshairs of this new generation. But when big incumbents try to build services it tends to take a long time and not go very well. Expect several large acquisitions in this area — as soon as the incumbents realize they cannot build the surrounding services as well as the upstarts.