32 BARRON’S October 19, 2020
For the past 37 years, Steve Milunovich
been a critical, and crucial, observer of
virtually every technological trend—and
Photograph byVICTOR LLORENTE
Q&A
An Interview With Steve Milunovich
Technology Strategist
Taking the
Long View
Of Tech
W
hen Steve Milunovich started his career
as a technology analyst in 1983, personal
computers were just starting to become
ubiquitous. He didn’t have email for an-
other decade.
In the 37 years since, he’s been a criti-
cal, and crucial, observer of virtually
every technological trend—and every company behind
it—through decades of political and cultural change.
Investors and business leaders have been wise to listen
to him; those who didn’t often regretted it. In 2003, Mi-
lunovich penned an open letter to Sun Microsystems
CEO Scott McNealy warning that the company needed
to embrace Linux or risk irrelevance. Sun stock peaked
in 2000 at $258.63.Oracle(ticker: ORCL) bought Sun
in 2010 for $9.50 a share.
In 2010, he recommendedTesla(TSLA) stock, and
referred to Elon Musk as the next Steve Jobs. Tesla has
earned investors about 59% a year over the past decade.
Calls like those landed Milunovich in Institutional
Investor’s All-America Research Team Hall of Fame; he
recently retired after many years at Wolfe Research.
Barron’ssat down with Milunovich—virtually, of
course—to hear his views on tech after all these years.
An edited version of that conversation follows.
Barron’s: The Nasdaq is up 31% this year, crushing
the S&P 500’s 7%. Are we heading into a bubble?
Steve Milunovich:Today does rhyme, at least, with the
[1999] tech bubble. And valuations are at extremes.
You’ve got day traderscoming back, andSPACs [special
purpose acquisition companies]. Those all seem to be
signs of excess exuberance.
Tech investors who have a bit of a value bias, or just
can’t buy stocks at 30 times sales, are extremely frus-
trated. Many of them were around during the [dot-com]
By AL ROOT
October 19, 2020 BARRON’S 33
every company behind it—through
decades of political and cultural change.
Investors and business leaders have
bubble, and they’re waiting for this to
blow up. They’re saying, “We know
how this ends. We just don’t know
when.” To some degree, I’m in that
camp. Even growth investors are con-
cerned. In 1999, everybody understood
it was getting crazy. But if you weren’t
in Yahoo! and other stocks that were
hot, you were underperforming and at
risk of losing your job. Today has some
similarities to that. From a fundamen-
tal standpoint, it does feel different.
We’re beyond valuing eyeballs.
True, the metric of price-to-eye-
balls was used to justify impossi-
ble price/earnings ratios. Today,
cloud-based software companies
like Zoom Video Communications
[ZM] and Salesforce.com [CRM]
are trading at triple-digit P/Es,
while others, like Slack [WORK],
lack earnings. Is that justifiable?
A lot of these software-as-a-service
companies do have visibility on busi-
ness. You can make a case that with
30% revenue growth and [improving]
margins, some of these valuations are
justified. And the current ability to
generate free cash flow is a difference
between today and the tech bubble.
And the coronavirus has sped up
the pace of tech adoption.
Covid-19 has been a real accelerant to
digital transformation—and Covid is
hanging around. When I talk to resell-
ers, they believe that over half of em-
ployees will not go back to offices.
There’s an increasing belief that there’s
a secular tailwind here.
There’s concern, however, that the
economy could not come back; that’s
an issue even for software companies.
And I still worry about valuations. We
are also now seeing the promise of the
internet that people back then antici-
pated. We are seeing technology be-
come pervasive in its effect on other
industries. The total addressable mar-
kets for these companies is much big-
ger than forecasted.
What’s a big trend you’re watching?
Perhaps the most important thing in
the last five to 10 years is the rise of
the platform company—a company
that sits between two user groups and
benefits from network effects. It really
is a different form of corporate struc-
ture. It inverts the corporation, so that
the value is created outside the corpo-
rate walls [by others].
Define platform company.
There are two types of platform com-
panies. [First] are platforms that create
a transaction between a buyer and a
seller, likeUber Technologies
[UBER]. The platform company is in
the middle, taking a piece of every
transaction. The other type is the eco-
system company.Microsoft[MSFT]
andApple[AAPL] create ecosystems
with lots of third-party value.Ama-
zon.com[AMZN],Alphabet
[GOOGL], andFacebook[FB] are
ecosystem-style platform companies.
AlsoAlibaba[BABA] and maybe
Tencent[TCEHY].Visa[V] andMas-
tercard[MA] are in our tech universe.
You can debate that.
Those are huge companies.
Nine of the 10 largest tech companies
by market value are platform compa-
nies. They’ve been getting stronger as
they get bigger, and that, of course,
brings antitrust concerns. They get
huge because they have very fast reve-
nue growth, because of increasing
returns—the more buyers, the more
sellers; the more sellers, the more buy-
ers. You get very profitable compa-
nies. They still have three to five years
of double-digit earnings growth in
front of them.
What could limit their growth?
When you look back at technology
leaders, they tend to fall off over time.
There comes a point where size works
against you. That hasn’t yet happened
to these companies. So we’re in the
middle innings, before size becomes a
problem.IBM[IBM] and Microsoft
went through their issues. Antitrust
challenges definitely affected their
ability to operate, and caused them to
be less aggressive than they might
have been otherwise.
But on the positive side, it wasn’t
antitrust that got them—it was disrup-
tive technology. In the case of IBM, it
was the rise of the microprocessor
that changed the economics of com-
puting. For Microsoft, it was first the
internet, and later mobile, which they
missed.
What’s the next disruptive trend?
The new technologies we all think
about: the Internet of Things, artifi-
cial intelligence, autonomous driving.
The platform companies are leaders
in those areas; they have the re-
sources. I don’t yet see smaller com-
panies that are going to put them on
their back feet.
You’re not concerned that these
platform giants will be broken up?
There is certainly some risk; I don’t
think it’s going to be the death knell.
Breaking them up is negative for con-
sumers, and historically U.S. antitrust
regulation uses consumer harm as the
criterion. Breaking up a Facebook or a
Google would probably reduce the
network-effect benefit of the multiple
businesses they are in. Regulators
might take away the ability to make
acquisitions; that‘s concerning. Now
everybody looks back and says, “Oh,
Facebook shouldn’t be allowed to buy
Instagram,” although, at the time, no-
body knew Instagram was going to be
anything like what it is today.
U.S.-China relations have been de-
teriorating. What do you foresee?
The China situation goes well beyond
the trade concerns we had last year.
It’s a philosophical issue in terms of
the way the two countries want to run
their governments. There’s plenty of
evidence that China has stolen U.S.
technology for many years, and put
companies like Motorola and Nortel in
very difficult positions. Espionage
helped Huawei [China’s largest tech
conglomerate] create products compa-
rable to Nortel and other comm-equip-
ment vendors, then [China] under-
priced them. To its credit, the Trump
administration woke up to that. China
wants to become a technology power.
It needs indigenous capabilities. The
one thing it has not had is semicon-
ductors.
Semiconductors are used in virtu-
ally every electronic device.
I would argue thatTaiwan Semicon-
ductor[TSM] has become the most
important tech company in the world.
Intel[INTC] is having problems; it
has fallen behind in fabrication tech
and has suffered product delays. TSM
is fabbing [fabricating] 80% of the
semis used in the U.S. It might actu-
ally build a fab in the U.S. in the next
four years.
China wants to build its own semi
industry. But the equipment makers
and software makers are American.
The U.S. is trying to hit Huawei and
not allow it to buy semiconductors
from the U.S. We allow them to buy
semiconductor capital equipment and
tools—but they can’t design semicon-
ductors if they don’t have software.
Probably the status quo will be main-
tained: The U.S. will limit certain tech-
nologies, but a total cutoff of U.S.-
based semiconductor-tools technology
would cause repercussions.
Any favorite stocks?
[At Wolfe Research] we did a more
quantitative screen with a mix of fun-
damental technical and quantitative
factors. When you look at some of the
big outperformers over the last six to
12 months—names likeShopify
[SHOP],Nvidia[NVDA],Service-
Now[NOW],PayPal[PYPL]—these
companies, I do believe, have sustain-
ing powers. They are category cre-
ators.
The most powerful thing a tech
company can do is create a new cate-
gory, and then become the leading
brand within that category. Nvidia,
for example. It basically created the
category of GPUs, graphical process-
ing units [for video games]. Shopify
is a fascinating company; it’s the back
office for everyone that wants to com-
pete with Amazon. ServiceNow
wants to be the enterprise software
company for the 21st century. It
started providing IT service manage-
ment—tracking IT assets and provid-
ing help-desk support—and has
branched out into customer and hu-
man-resources service management.
One reseller we spoke with said,
“You’re either a ServiceNow cus-
tomer today, or you will be.”
Thanks Steve.B
been wise to listen to the tech
analyst; those who didn’t often
regretted it.
“Covid-19 has been a real accelerant to digital
transformation—and Covid is hanging around.”
The
Real
No. 1?
“I would argue
that Taiwan
Semiconductor
has become the
most important
tech company in
the world.”
50%-Plus
The share of
workers
Milunovich says
might permanently
work remotely,
rather than return
to an office.