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Mar 4, 2019

Useless and Unemployable? Build a 21 Lessons Portfolio Alphabet, Facebook, Amazon to Dominate Algorithmic World

by Richard Morrison

Richard MorrisonYuval Noah Harari’s bestselling books Sapiens, Homo Deus and 21 Lessons for the 21st Century deal with the past, present and future of humanity. Along with showing us how foolish and cruel humans have been, Dr. Harari suggests—he stresses that he’s not predicting—that over the next few decades, advances in Artificial Intelligence (AI) could replace almost every occupation performed by homo sapiens. All cars, vans and trucks might soon be driverless, while human doctors, pharmacists, teachers and other professionals may be replaced by algorithms far more intelligent than any homo sapiens.

Such a world would reward those who control the algorithms, while everyone else would be part of what Dr. Harari describes as a “global useless class” of unemployable folk whose only valuable asset would be the billions of bits of data that the giant tech companies could harvest.

“Many people might share the fate not of nineteenth-century wagon drivers, who switched to driving taxis, but of nineteenth-century horses, who were increasingly pushed out of the job market altogether,” Dr. Harari writes in 21 Lessons for the 21st Century.

The gap between rich and poor, already wide, could expand to a chasm between the billions in the useless class and a tiny handful of technology billionaires who have control over the companies producing AI, robots, 3D printers and other replacements for humans, Dr. Harari writes.

How would we build a 21 Lessons portfolio to profit from such a scenario?

There are dozens of small- and mid-cap companies working on AI, machine learning and robotics. If the companies are publicly traded, speculators with a high tolerance for risk can buy their shares and wait for a generous takeover bid from one of the tech giants. Google, for example, acquired 11 Canadian technology companies between 2005 and 2016, according to Wikipedia. In my opinion, however, it’s easier and less risky just to become a long-term momentum investor and take stakes in the giants themselves, whose growth shows no signs of slowing.

Alphabet Inc., formerly Google, is likely to benefit from AI, since it has in-house experts to shrewdly identify promising AI acquisitions and the cash to pay for them, together with a long track record of making risky investments that have paid off. Few companies harvest data better than Facebook, while, if any of the useless folk have any money left to spend while they sit at home, would be the likely beneficiary.

You already have a small stake in these names if you own a broad-based U.S. equity index mutual fund or Exchange-Traded Fund (ETF), since they are among the world’s top 10 largest companies. Even if Dr. Harari’s possible scenarios don’t come true, these three are obvious choices for investors seeking steady, long-term growth.

Alphabet Inc. (GOOG/NASDAQ)

Alphabet’s Google has more than 80% of the global online search market, allowing its advertisers to reach prospective customers efficiently.

Google split its shares two for one in March 2014, with shareholders at the time receiving one GOOGL class A voting share and one GOOG class C non-voting share. Both classes of shares are up 87% since the split. A third class, the B class shares, held by insiders, do not trade publicly and carry ten votes each. The controversial move allowed founders Sergey Brin and Larry Page to keep a 51% ownership stake in the company. Google restructured itself as Alphabet in 2015, a corporate umbrella that reflects its acquisitions, yet still includes the Google search engine as its major holding.

The company has made many questionable acquisitions, but as Mr. Page writes in a mission statement for Alphabet:

“We did a lot of things that seemed crazy at the time. Many of those crazy things now have over a billion users, like Google Maps, YouTube, Chrome and Android. And we haven’t stopped there. We are still trying to do things other people think are crazy but we are super excited about.”

In the third quarter of fiscal 2018, Alphabet reported net income of $9.192 billion or US$13.06 per share on revenue of US$33.74 billion. Revenue was up 21% over the same quarter of 2017, while net income and earnings per share were both up by more than 36%.

At a recent price of US$1,116, Alphabet has a market capitalization (shares times share price) of US$777 billion and trades at about 42 times trailing 12-month earnings of US$26.55 per share. Alphabet’s 2018 earnings are expected to come in at US$45.02 per share, says a survey of 15 analysts provided by Thomson Investors Network. That means that at a share price of US$1,116, Alphabet shares are trading at just 24.8 times the 2018 consensus estimate.

A recent Morningstar Equity Analyst Report on Alphabet gives the shares a fair value estimate of US$1,300.

“For advertisers, value is created mainly through growth of the large user base to target and from behavioral data compiled and analyzed,” Morningstar senior analyst Ali Mogharabi writes in a recent report. “As users and search requests grow and more data is gathered, advertisers’ demands for ads increase, helping Google to further monetize the network.”

Facebook Inc. (FB/NASDAQ)

Facebook, the dominant global social networking website, had 1.52 billion average daily active users and 2.32 billion monthly active users in December, up 9% from the same month a year ago, the company said in a Jan. 30 release.

Launched by CEO Mark Zuckerberg from his dormitory room at Harvard University in 2004, Facebook, now based in Menlo Park, Calif., had 35,587 employees in December.

Facebook has faced controversy over content and data privacy. In the wake of the bad publicity however, the company has taken several steps to allay concerns. For example, users will be able to appeal content decisions to an independent oversight board. As well, on Jan. 28 “Data Privacy Day,” the company invited users to take a “privacy checkup” and launched a hub to help businesses access its data and privacy resources. The same day Facebook announced it had taken steps to preserve the integrity of elections by blocking and removing fake accounts and “bad actors,” limiting the spread of false news and information and forcing political advertisers to be more transparent.

Facebook went public on May 1, 2012 at US$42.05 and the shares began a steady climb, peaking near US$200 on June 1, 2018. Although the stock has since slipped to US$147, Facebook shareholders have still outperformed the underlying Nasdaq index over the past five years.

For 2018, Facebook reported net income of US$22.11 billion or US$7.57 per share on revenue of US$55.84 billion. Revenue was up 37% over 2017 while net income was 39% ahead and earnings per share were up 40%. The results exceeded analysts’ consensus estimates of US$7.37 per share, the mean estimate of 15 brokerages as compiled by Thomson Investors Network.

Analysts have high hopes for Facebook and any disappointment on the earnings front produces a selloff. For example, over two days in late July last year, Facebook shares plunged 19% after earnings fell short of analyst estimates.

The company bought back US$9.4 billion worth of its shares in the first three quarters of 2018 and in a filing with the U.S. SEC in December, Facebook’s board announced it would buy back a further US$9 billion in shares.

At a recent price of about US$170, Facebook’s market capitalization is about US$489 billion, making among the 10 largest companies in the world. At US$170 Facebook shares trade at about 22.5 trailing 12-month earnings of US$7.57 per share. Inc. (AMZN/NASDAQ)

Amazon began selling books online in July 1995 and has since become the world’s largest retailer, offering clothing, consumer electronics, garden tools, sporting goods, shoes and jewellery, auto and industrial parts and an assortment of other products. Amazon uses customer data on past purchases to make further purchase recommendations.

Amazon went public at US$18 on May 15, 1997. The stock split two for one in June 1998, three for one in January 1999, and two for one in September 1999. The share price climbed steadily for the next 15 years, hitting US$500 in 2015, when the rise began accelerating. Amazon stock doubled to US$1000 between 2015 and 2017, passed US$1500 in early 2018 and finally hit US$2000 per share last September.

Since then Amazon shares have fallen about 14%. At a current price of US$1,719, Amazon has a market capitalization of US$871 billion and trades at about 85 times its 2018 earnings per share.

Amazon’s results for 2018 were impressive. In 2018, the company had net income of US$10.1 billion or US$20.14 per diluted share on net sales of US$232.9 billion. Net sales were up 30% over 2017 and would have been even better had US$1.3 billion in favourable exchange rates been included.

The company’s highlights for 2018 included several developments in the areas of Artificial Intelligence and machine learning, including dramatic improvements to Alexa, the company’s voice-based AI home assistant found in its Echo products.

In the first quarter of this year, said it expects sales of US$56 billion to US$60 billion, a gain of between 10% and 18% from the same quarter of 2018.


There is no way to sensibly describe either Alphabet, Facebook or as undervalued securities, nor are they suitable for income-seeking investors. These giants are always under scrutiny and both new regulations and competition are risks. Huge fines may be imposed for such things as the improper use of data, which could hurt earnings temporarily. In the long run, however, these three are likely to profit from a world of Artificial Intelligence and other disruptive technologies.

Any new regulations surrounding Artificial Intelligence and data harvesting may mean little, however, if the world’s governments do not do something to address global warming, Dr. Harari writes in 21 Rules for the 21st Century:

“Whatever you think about regulating disruptive technologies, ask yourself whether these regulations are likely to hold even if climate change causes global food shortages, floods cities all over the world, and sends hundreds of millions of refugees across borders. In turn, technological disruptions might increase the danger of apocalyptic wars, not just by increasing global tensions but also by destabilizing the nuclear balance of power.”


Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.