Growth's back on the menu, and so is M&A?

24 September 2023 | Issue #8 - Mentions TikTok, $AMZN, $META, $CRM, $NOW, $PCOR, $UBER, $NVDA, $MSFT, $NFLX, $CSCO, $SPLK

Welcome to the eighth edition of Tech takes from the cheap seats. This will be my public journal, where I aim to write weekly on tech and consumer news and trends that I thought were interesting.

It’s good to be back after a short trip to NYC. There was plenty of tech-related news flow and events this week. IPOs seem to also be back on the menu… and hanging by a thread.

Let’s dig in.

TikTok’s ecommerce push is full steam ahead

I’ve written about TikTok’s ecommerce ambitions in a previous post and this week brought some news about how it plans to spend its $550m+ Shop investment¹ in the US.

TikTok plans to offer steep holiday discounts in a monthlong campaign that will begin in late October, according to documents reviewed by Bloomberg. The social media app aims to lure inflation-battered shoppers to its new online marketplace, taking the first shot in a price war with established competitors Amazon.com Inc. and Walmart Inc.

TikTok, owned by Beijing-based ByteDance Ltd., is hosting training sessions next week with merchants selling on its marketplace. It is offering to subsidize discounts of as much as 50% to entice sellers’ participation in its Black Friday program, which begins Oct. 27 and runs through Nov. 30, according to the documents. A TikTok spokesperson confirmed the plans.

The company is betting that the busy holiday period — when US shoppers are projected to spend as much as $284 billion, according to Deloitte — will be a key time to stand out with discounts that compel shoppers to spend money on its new marketplace, which recently launched to US users of its app.

….

“There are over 200,000 verified US merchants on TikTok Shop selling legitimate products — including over 150,000 beauty products that have been validated through our process and represent some of the biggest names in the beauty business,” a TikTok spokesperson said last week.

Q4 is going to be an interesting period for retail and ecommerce as a whole. Consumers are feeling the pinch and trading down, while inflation was back up in August due to fuel prices. So far, TikTok Shop has been mostly filled with cheap cross-border goods from China, which isn’t as appealing to US consumers given lower quality items with shipping times extending over a week. Signing up more US merchants and funding steep discounts on better goods + free shipping is a much more attractive proposition. The Black Friday sales numbers across retailers will be a key metric to watch to garner the company’s impact.

Related: TikTok Shop Plans Expansion in Seattle, Grows Order Volume

Re-investing for growth

I enjoyed this podcast from Exchanges at Goldman Sachs with Research Analysts Eric Sheridan and Kash Rangan speaking about the themes and highlights they took away from the Goldman Sachs Communacopia + Tech conference a couple weeks ago.

“What I had noticed at the conference last week were companies had said the idea of cutting costs for the sake of cutting costs is more behind us than ahead of us, definitely a narrative shift to now is the time to invest for growth in a responsible way” - Eric Sheridan

The sentiment from investors and corporates has generally improved since last year’s conference, boosted by optimism from generative AI tailwinds, and cycling over a period of cost cutting and layoffs. The macro environment seems to have stabilized for a lot of these technology companies and it’s giving them confidence to invest again in headcount and other areas.

This coincides with a couple pieces of news coming out this week from Amazon, Meta and Salesforce.

Amazon will hire 250,000 people for full-time, part-time and seasonal fulfillment center and transportation roles, according to an announcement, while increasing the average pay for those positions up to $28 per hour.

Target said in a statement that it would add 100,000 seasonal team members for its “busiest season of the year.”

Amazon hired an estimated 150,000 workers last year, and previously pledged to hire 200,000 seasonal employees in 2019, according to Bloomberg, while Target pledged to hire 100,000 employees last year and in 2021.

Meta Platforms Inc. employees are slowly starting to enjoy coming into the office more, bouncing back from a morale crisis that set in after 20,000 of their teammates were laid off over the past year. One reason: the company has revived a number of popular pre-pandemic perks, from branded T-shirts to happy hours.

Staffers aren’t just noticing that perks exist, but that they seem to be supported — a contrast from last fall, when Meta’s snack bars started to look suspiciously bare, they said. At headquarters, La Croix, the sparkling beverage tinged with fruit “essence” that’s favored by millennials, started to run out in office fridges.

When workers first started noticing the sparser selections, Meta’s stock was posting its worst performance in history. Investors weren’t buying into Zuckerberg’s vision for virtual reality, and advertisers had tightened their budgets. The depressing snack bars presaged a bigger move: Meta’s first major layoff, of 13% of its workforce, or 11,000 employees.

Salesforce Inc. is hiring 3,300 people across departments, marking a new investment after it eliminated 10% of its workforce in a restructuring earlier this year.

“Our job is to grow the company and to continue to achieve great margins,” Chief Executive Officer Marc Benioff said Thursday in an interview at the company’s annual conference in San Francisco. “We know we have to hire thousands of people.”

The pool of new hires will be roughly equally split among sales, engineering, and those working on the company’s data cloud product, Chief Operating Officer Brian Millham said. “We have some very successful parts of our business right now, and we want a surge in those areas.”

Salesforce is betting that interest in artificial intelligence will fuel a new cycle of tech investment, particularly in its data cloud product, which helps customers organize information from multiple sources. It announced earlier this week that existing clients will get to use some capacity of data cloud for free.

The San Francisco-based company, the top maker of customer relations software, is trying to reduce expenses, boost profit and revive revenue growth. Investors have backed the company’s efforts, sending shares up 65% this year through Thursday’s close.

The new hires restore 40% of the headcount that was slashed in January, when Salesforce said it would eliminate 8,000 jobs amid an effort to boost profits. But executives have said further strategic cuts may still occur. ****The company reported it had 70,456 workers at the end of July.

Many of the hires will be “boomerangs,” or people who worked at Salesforce before going to a different company, Benioff said. Attracting boomerangs is a new success metric for the company, he added.

It seems that companies have adjusted to the new interest rate environment, are seeing demand indicators inflect in the business and are comfortable re-investing after a period of cutting costs and efficiency. It may be that generative AI helped provide the soft/no landing that the economy needed. It’s also possible that companies are investing right before we head into a consumer induced recession. I don’t know the answer but given that enterprises were the first to move and cut at the beginning of 2022, it’s positive to see that they’re feeling the stabilization and will lead the recovery. And of course, it would be remiss of me not to mention ServiceNow CEO Bill McDermott announcing on CNBC that 2024 will be a very large year for IT spend.

Co-pilots, co-pilots everywhere

Speaking of ServiceNow - the company announced its Vancouver release this week, which embeds generative AI across all workflows on the Now Platform (for IT Service Management, Customer Service Management, HR Service Delivery and Creator). It incorporates a range of GenAI features such as case, incident and agent chat summarization, virtual agent, and search capabilities, which is being powered by a domain specific ServiceNow LLM that was built for the enterprise and optimized for accuracy and data privacy. In terms of pricing - the GenAI features are being made available through ServiceNow’s Professional Plus or Enterprise Plus SKUs. Its Pro SKU is about 25% higher than its standard plan, while Enterprise is 20-25% above Pro. It’s interesting to see that the company’s opted not to go with a consumption element to pricing as other companies have suggested they might. Using a domain specific LLM for its features would certainly lower the inference costs for the company so internal forecasts must’ve been attractive enough from a margin standpoint.

I know we’re still very early in the adoption cycle for GenAI but with all the recent product announcements coming out gravitating towards virtual assistants and chatbots (Procore, UberEats, Salesforce to name a few), it reminded me of a thread from a few months back.

Apart from maybe Adobe’s Generative Fill, I hadn’t really seen many useful interactions with GenAI through a GUI. It was great to see some more on display with Microsoft’s Co-pilot announcement this week, which will be released as part of its Windows 11 update on September 26. Microsoft 365 Co-pilot (its Office version) will be generally available for enterprise customers on 1st November 2023. These product announcements look really interesting, but I’m still struggling to see how GenAI can be bigger than the internet like some commentators have suggested. It’ll be interesting to watch what other companies figure out now that Microsoft has led the way on GenAI product releases.

It’s also interesting to see the Co-pilot announcement come the same week there were reports of speculation that Microsoft had been scaling down its orders for Nvidia’s H100 chips. Nothing’s been confirmed to be clear, but DigiTimes is a publication specialising in the semi and electronics industry from Taiwan (though i’ve seen people online comment on them being known for speculation.)

Ads, the final frontier

There are three things that are certain in life: Death, taxes and ads used to subsidize consumption. Amazon announced this week that it would start showing ads on Prime Video, while introducing a higher priced ad-free tier.

The U.S. tech giant said on Friday ads will be introduced in the U.S., the UK, Germany and Canada in early 2024, followed by France, Italy, Spain, Mexico and Australia later in the year.

Amazon's ad-free tier will cost another $2.99 per month in the U.S., where a Prime subscription currently costs $14.99 per month, or $139 per year. Pricing for other countries will be shared later, the company said.

I’m surprised that it took this long - the value proposition for advertisers is really clear to advertise with Amazon. They already have a ton of data but are currently focused on search/intent based ads on the ecommerce site. It may have taken them some time to build the ad stack for the video medium (whereas Netflix chose to partner with Microsoft, and are now reviewing this strategy). According to Insider Intelligence, Prime Video is the third-largest video-streaming platform in the US with 157.3 million subscribers, trailing YouTube and Netflix. The company said that it plans on showing fewer ads than traditional TV and other streaming providers, but given YouTube generates about $30bn in (fairly high margin) ad revenue, you can see how lucrative this could be for the company (which generated $19bn in LTM EBIT).

Software M&A

A couple of software acquisitions were notable this week, namely Cisco’s deal to buy Splunk and Salesforce buying Airkit.ai.

Software giant Cisco is buying publicly traded security-software Splunk in a cash deal worth $28 billion, the companies announced Thursday. Cisco offered $157 per share of Splunk, a more than 30% premium to the software company’s last closing price.

The merger will bulk up Cisco’s cybersecurity efforts, “moving from threat detection and response to threat prediction and prevention,” Cisco CEO Chuck Robbins said on a conference call. The deal is the largest technology transaction of the year, followed by Silver Lake’s $12.5 billion acquisition of Qualtrics.

At a high level there does seem to be some strategic fit behind Cisco owning Splunk and consolidating the company into its existing APM and Observability offering with AppDynamics (a company it acquired in 2017). What’s stark is how much the APM market has evolved since that first acquisition. The company paid ~17x revenue² for the leader (as rated by Gartner) in the space, versus ~6.4x for a ‘soft’ leader in Splunk today. You can see from the chart the number of competitors that have come into the market over the last seven years, and how the leads have shifted. AppDynamics seems to have faltered under Cisco, dropping out to the left quadrant, while Cisco recently reported in its 2022 annual report that AppDynamics revenue had declined yoy. I don’t have much confidence that they’ll be able to turn their offerings around by adding Splunk to the mix, but hey, at least it’ll be ‘Non-GAAP EPS accretive in year 2’. This does go to show how hard it is underwriting long-term investments in this space though.

Salesforce has signed a definitive agreement to acquire Airkit.ai, a creator of AI powered customer service applications and experiences. Airkit.ai enables Fortune 500 and fast growing businesses to build flexible, omni-channel customer engagement applications, and AI-based customer service agents.

Upon close of the acquisition, Airkit.ai will become a part of Service Cloud and continue to be led by Adam Evans, Co-Founder and CTO of Airkit.ai. Prior to Airkit.ai, Adam was the Co-Founder and CTO of RelateIQ, acquired by Salesforce in 2014, and became a key part of Sales Cloud Einstein.

Airkit.ai is a Salesforce AppExchange partner and a Salesforce Ventures portfolio company.

After hearing whispers out of Dreamforce that the company was looking to make an acquisition, I was relieved to see this announcement from Salesforce. It looks like a small tuck-in that will help them accelerate their AI offerings in the Service Cloud. I think this makes sense and should be an easy sell to plug into their existing distribution network. It seems to be small enough not to impact its FY24 guide and will be closing in the second half, but some investors I’ve spoken to think there may be something bigger in the works. At least one thing’s for sure - if Adam Evans ever leaves the company, you should be watching his movements with great interest.

That’s all for this week. If you’ve made it this far, thanks for reading. If you’ve enjoyed this newsletter, consider subscribing or sharing with a friend

I welcome any thoughts or feedback, feel free to shoot me an email at portseacapital@gmail.com. None of this is investment advice, do your own due diligence.

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1. Estimate based on planned losses of $500m, $4m/day in GMV and a 3% take rate (from The Information).

2. AppDynamics was run rating $211m in revenue for 2016, from the S1.