The Ecosystem Play Update ($AAPL, $AMZN, $FB, $GOOG, $MSFT)

By: ispeculatornew
Date posted: 03.16.2015 (3:00 am) | Write a Comment  (1 Comment)

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Last night I saw a very interesting video about the main ecosystems which got me thinking. It’s a quick view if you have a few minutes:

Then this morning I decided I’d write a bit more and started looking back for my previous posts about the ecosystem play. My first post about it seems to have been posted 2 years ago to the day. In that article, and many others that followed, I argued that the ecosystem companies will dominate the tech space and that as technology enters our daily lives, they will become incredibly powerful. I’ve said multiple times that owning all of them would be a smart play. Some of you would be surprised to learn that since then I only took significant stakes in Apple Inc (AAPL) and Facebook (FB). Those have obviously been the right picks:

AAPL Chart

AAPL data by YCharts

Apple and Facebook are actually the only 2 names that have outperformed the Nasdaq Index (qqq). And to this day, I remain very hesitant about buying either Amazon (AMZN) or Google (GOOG). What am I waiting for? I’m not exactly sure. Both remain at least as dominant as they were and I have little doubt that their ecosystems will continue to gain ground. So what’s the problem?

It’s All About Focus

If I ask you what these companies are about (leaving Microsoft aside for now), I’d have an easy time describing that for 2 companies:

Apple: Building and expanding its current ecosystem that starts from the iPhone but is quickly expanding its reach both in terms of hardware and software (Apple Pay, HealthKit, HomeKit, etc). Apple is about producing the best phones, tablets, smart watches, and is increasingly moving into the luxury arena. Apple has generally been good about building a core infrastructure (think app store, Health Kit, Home Kit) and letting developers and companies build content and hardware around those.

Facebook is all about connecting people and has been doing so for over a billion people on its main Facebook platform. As the younger generation has moved towards platforms, Facebook bought the most powerful of those, Instagram and also is the dominant player in terms of messenging services with both Facebook Messenger and WhatsApp. Facebook is about connecting users with friends and family but also with brands which has been an incredible source of profit.

It becomes more difficult for the 2 others:

Google continues to be the dominant search service in the world even though its search market share has declined mostly because of its lost Mozilla deal. Google is also behind the dominant mobile O/S and while the high end users are almost exclusively with Apple, Android remains the dominant player when looking at pure user numbers. The main problem though is that it’s not exactly clear how that will work out as more mobile players such as Xiaomi and Samsung attempt to move away from the “pure” Google services powered Android. Google is also attempting to offer its own fiber service (Google Fiber), working on a wireless internet service, offers online storage, builds its own devices, cars, drones, has a shipping service, etc.  It’s unclear to me which of these activities are core, which will be 10 years from now and what type of business Google will be a decade from now.

Amazon is even more difficult for me to understand. It’s first layer of being the everything store is incredibly powerful and through building (by very far) the top online commerce and distribution chain, Amazon has set itself up to command a large part of the growing online commerce and successfully compete with the likes of Walmart (WMT), Best Buy, etc. That being said, Amazon is hardly focused on that part alone. It has also been vocal about its ambitions to move into very different industries ranging from online groceries to building tablets, phones, buying a gaming video website, producing tv shows and movies, its own streaming service, etc. For most of those efforts, you could see logical reasons behind those moves (such as the threat of a smaller presence in a mostly mobile world) but I think it’s rather clear that building a phone from scratch and spending billions of dollars into a product that ended up being a major flop is a big reason to be worried about Amazon.

Is The Ecosystem Play Still Attractive?

I’m less of a believer in the overall ecosystem play (as in owning all 5 of these names) as I was a few years ago and I think the main thing I will be tracking going forward is the company’s focus. Companies that try to do “everything” are not only much more difficult to value but I would also argue unlikely to succeed against smaller, more nimble operations that have clear focus. Apple is now moving into a product category with rumors about many others coming (such as cars) so I will certainly track the company’s focus but I think it’s safe to say that Apple and Facebook remain my top picks going forward as ecosystem plays. I’ll likely write a more complete, separate post about Microsoft in the near future as that company has been going through a very interesting transition in the past few months.

What are your thoughts on the ecosystem play? Would you agree that Apple and Facebook are the two clear picks as of right now? 

Disclosure: Long Apple (AAPL) and Facebook (FB)

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1 Comment

  1. Comment by Johan Lindén — March 22, 2015 @ 11:55 am

    very nice video! Appreciate it!

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