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Investment Banking Interview Questions (with Answers)
Top Investment Banking Interview Questions (and Answers)
The purpose of this Investment Banking Interview Questions and Answers is simply to help you learn about the investment banking interview topics. As a fresher in this field, I am sure you may have had jitters as to what and how to prepare for your first step in this finance world. There could be an unlimited number of questions that can be asked on investment banking topics and since it is difficult to cover all of them here, we would be discussing a few of them which are important.
While reading through this write-up, I would suggest you actively keep answering the questions yourself before checking the correct answer. This will help you develop the habit of brainstorming and answering these questions in a structured way. Please consider this as a first draft of the article. I will keep on regularly updating this with more questions and answers based on your feedback.
The interview nowadays does not have the typical questions being asked which include the basics on financial concepts. The interviewers want the candidates to think and avoid theories which everyone usually knows. Also since these questions are technical ones there would always be a correct answer, so in case you find yourself not knowing a particular answer, don’t try and fake one. It is always better to confess that you don’t know.
Investment Banking Interview Questions have been divided into the following 6 topics
#1 – Accounting – Investment Banking Interview Questions
Investment Banking Interview Question #1
Tell me about the three most important financial statements and what is their significance
This is one of the most commonly asked investment banking interview questions.
- The three main financial statements are the Income Statement, Balance Sheet and Cash Flow Statement. Speaking about their significance, the income statement provides the revenue and expenses of a company and shows the final net income that it has made over a period of time.
- The balance sheet signifies the assets of a company such as a plant, property & equipment, cash, inventory, and other resources. Similarly, it reports the liabilities which include the Shareholders’ equity, debt, and accounts payable. The balance sheet is such that the assets would always equal the Liabilities plus shareholders equity.
- Lastly, there is a cash flow statement that reports the net change in cash. It gives the cash flow from the operating, investing and financing activities of the company.
Investment Banking Interview Question #2
In case you have the chance to evaluate the financial viability of the company which statement would you choose and why?
- It would be the cash flow statement. The reason being that it provides a true picture of how much cash the business is generating in actual terms.
- The cash flows are hence the main thing you actually pay attention to while you are analyzing the overall financial health of the business.
Investment Banking Interview Question #3
Let’s say that the depreciation expense goes up by $100. How would this affect the financial statements?
- Income Statement: With the depreciation expense decreasing Operating Income would decline by $100 and assuming a 40% tax rate, Net Income would go down by $60.
- Cash Flow Statement: The Net Income at the top of the cash flow statement goes down by $60, but the $100 Depreciation is a non-cash expense that gets added back, so overall Cash Flow from Operations goes up by $40. With no further changes, the overall Net Change in Cash goes up by $40.
- Balance Sheet: On the asset side because of the depreciation the Plants, Property & Equipment goes down by $100, and Cash is up by $40 from the changes on the Cash Flow Statement.
Investment Banking Interview Question #4
Imagine a situation where a customer pays for a mobile phone with a credit card. What would this look like under cash-based vs. accrual accounting?
- In the case of cash-based accounting, the revenue would not be accounted for until the company charges the customer’s credit card, obtains authorization and deposits the funds in its bank account.
- After this entry would be shown as revenue in the income statement and also as cash in the balance sheet.
- As against in accrual accounting, it would be shown as Revenue right away. But it would yet not appear as Cash in the Balance Sheet, rather it will be shown as Accounts Receivable.
- Only after the amount is deposited in the company’s bank account, it would be reported as cash.
Also, have a look at this detailed explanation on Cash vs Accrual Accounting.
#2 – Corporate Finance – Investment Banking Interview Questions
Investment Banking Interview Question #5
What is the formula for calculating WACC?
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- WACC = Cost of Equity * Proportion of Equity + Cost of debt * Proportion of debt (1-tax rate). Where, The cost of equity calculated using the Capital Asset Pricing Model (CAPM).
- The formula is Cost of Equity = Risk free rate + Beta* Equity risk premium
- Cost of Debt = The risk-free rate is basically the yield of a 10-year or 20-year US Treasury
- Beta is calculated based on how risky are the comparable companies and equity
- Risk Premium is the percent by which stocks are expected to out-perform “risk-less” assets.
- The proportion is basically the percentage of how much of the company’s capital structure is taken up by each of the components.
Investment Banking Interview Question #6
There are two companies P and Q which are exactly the same, but one P has debt whereas Q doesn’t have any. In this case, which of the two companies would have a higher WACC?
- In this scenario company, Q would have a higher WACC, because debt is less expensive than equity.
Investment Banking Interview Question #7
The interviewer at this juncture might ask you the reasons why debt is considered to be less expensive?
- The answer is as follows; Interest on debt is tax-deductible (hence the (1 – Tax Rate) multiplication in the WACC formula).
- Debt holders would be paid first in a liquidation or bankruptcy.
- Instinctively, interest rates on debt are usually lower than the Cost of Equity numbers you see.
- As a result, the Cost of Debt portion of WACC will contribute less to the total figure than the Cost of Equity portion will.
#3 – Valuations – Investment Banking Interview Questions
Investment Banking Interview Question #8
Describe the ways in which a company is valued
This is another very common investment banking interview question.
Precedent transaction analysis
- This is also called as Transaction Multiple Valuation
- This is when you look at how much others have paid for similar companies to determine how much the company is worth.
- To use this method effectively you need to be extremely familiar with the industry of the company you are valuing as well as the normal premiums paid for such a company.
Comparable Company Analysis
- Comparable company analysis is similar to Precedent Transactions Analysis except you are using the whole company as an assessment unit, not the purchase of a company.
- So to use this method you would also look for out similar companies to the one you are valuing and look at their price to earnings, EBITDA, stock price and any other variables you think would be a pointer of the health of a company.
Discounted Cash Flow Analysis
- This is when you use future cash flow, or what the company will make in the upcoming years, to determine what the company is worth now.
- To calculate DCF you need to work out what the probable or future cash flow is for a company for the next 10 years.
- Then work out how much that would be in today’s terms by “discounting” it at the rate that would give a return on investment.
- Then you add in the terminal value of the company and that will tell you how much the company is worth.
Investment Banking Interview Question #9
Which are the situations in which we do not use a DCF in the valuation?
- We would not use a DCF in the valuation if the company has unstable or unpredictable cash flow or when debt and working capital serve a fundamentally different role.
- For example, financial institutions like banks do not re-invest debt and working capital forms a major part of their balance sheets- so here we do not use a DCF for such companies.
Investment Banking Interview Question #10
List the most common multiples used in a valuation
Valuation questions are very common in investment banking interviews.
These are relative valuation techniques given below-
Investment Banking Interview Question #11
Briefly explain leveraged buyout?
One of the technology investment banking interview questions.
- A leveraged buyout (LBO) is when a company or investor buys another company using mostly borrowed money, loans or even bonds to be able to make the purchase.
- The assets of the company being acquired are usually used collateral for those loans.
- Sometimes the ratio of debt to equity in an LBO can be 90-10.
- Any debt percentage higher than that can lead to bankruptcy.
Investment Banking Interview Question #12
Explain the PEG ratio?
- This stands for Price/earnings to growth ratio and takes the P/E ratio and then accounts for how fast the EPS for the company will grow.
- A stock that is growing rapidly will have a higher PEG ratio. A stock that is finely priced will have the same P/E ratio and PEG ratio.
- So if a company’s P/E ratio is 20 and its PEG ratio is also 20 some might argue that the stock is too expensive if another company with the same EPS has a lower P/E ratio, but that also means that it’s growing faster because the PEG rate is 20.
Investment Banking Interview Question #13
What is the formula for Enterprise Value?
- The formula for enterprise value is: the market value of equity (MVE) + debt + preferred stock + minority interest – cash.
Investment Banking Interview Question #14
Why do you think the cash is subtracted in the formula for enterprise value?
- The reason why cash is subtracted is that it is regarded as a non-operating asset and because Equity Value indirectly accounts for it.
Investment Banking Interview Question #15
Why do we consider both enterprise value and equity value?
- Enterprise value signifies the value of the company that is attributable to all investors, whereas equity value represents the portion available to equity shareholders.
- We consider both because equity value is the number the public at large sees, while enterprise value represents its true value.
Investment Banking Interview Question #16
What does it signify, if a company has a negative enterprise value?
- The company could have negative enterprise value when the company has extremely large cash balances or an extremely low market capitalization or both.
- This could occur in companies that are on the brink of bankruptcy or Financial institutions such as the banks, which have large cash balances.
#4 – Mergers and Acquisitions – Investment Banking Interview Questions
Investment Banking Interview Question #17
Briefly explain the process of a buy-side M&A deal
- Lots of time is spent completing research on the potential acquisition targets and with the company, you are representing, go through multiple cycles of selection and filtering.
- Based on the feedback from them narrow down the list and decide which ones are to be further approached.
- Meetings are conducted to gauge the receptivity of potential seller.
- Serious discussions with the seller take place which calls for in-depth due diligence and figuring out the offer price.
- Negotiate the price and other key terms of the purchase agreement.
- Announce the M&A deal/transaction.
Investment Banking Interview Question #18
Briefly explain accretion and dilution analysis
This one is another technical investment banking interview question.
- In order to gauge the impact of the acquisition to the acquirer’s earnings per share (EPS) and also compare it with the company’s EPS if the acquisition would have not been executed accretion and dilution analysis is undertaken.
- In simple words, we could say that in the scenario of the new EPS being higher, the transaction will be called “accretive” while the opposite would be called “dilutive.”
Investment Banking Interview Question #19
Given a situation where a company with a low P/E acquires a company with a high P/E in an all-stock deal, will the deal likely be accretive or dilutive?
- Other things being equal, in a situation where a company with a low P/E acquires a company with a high P/E, the transaction would be dilutive to the acquirer’s Earnings per Share (EPS).
- The reason for this is that the acquirer will have to shell out more for each rupee of earnings than the market values its own earnings.
- Therefore in such a situation the acquirer would have to issue proportionally more shares in the transaction.
Investment Banking Interview Question #20
What are the synergies and its types?
- Synergies are where the buyer gets more value than out of an acquisition than what the financials would predict. There are basically two types of synergies –
- Revenue synergy: the combined company can cross-sell products to new customers or up-sell new products to existing customers. Because of the deal, it could be possible to expand in new geographies.
- Cost synergies: the combined company could amalgamate buildings and administrative staff and can lay off redundant employees. It could also be in a position to close down redundant stores or locations.
Investment Banking Interview Question #21
How does Goodwill get created in an acquisition?
- Goodwill is an intangible asset that mostly stays the same over years and is not amortized like other intangibles. It only changes when there is an acquisition.
- Goodwill is basically the valuable assets that are not shown like financial assets on the balance sheet. For example, brand name, customer relationship, intellectual property rights, etc.
- Goodwill is basically the subtraction of the book value of a company from its equity purchase price. It signifies the value over the “fair market value” of the seller that the buyer has paid.
#5 – Initial Public Offerings (IPO) – Investment Banking Interview Questions
Investment Banking Interview Question #22
Briefly describe what would you do if you are working on an IPO for a client?
- First of all, we would meet the client and gather all the necessary information such as their financial details, customers and learn about the sector they belong to.
- After this, you would meet other bankers and lawyers the registration statement which would describe the company’s business and market to its investors.
- Next, you would receive comments from the SEC and keep revising the document until it is acceptable.
- Now you would spend the coming weeks in organizing roadshows where you would present the company to the institutional clients and also convince them to invest in them.
- After raising capital for the clients the company would start trading on the exchange.
Investment Banking Interview Question #23
What are the benefits of a company getting listed on an exchange?
- It is an important step for a company to achieve liquidity
- There are certain investors who would want to invest only in exchange-listed issuers
- It helps the company establish a recognized value for their stock which in turn could also help it use stock for acquisitions rather than cash
#1 – Miscellaneous – Investment Banking Interview Questions
Investment Banking Interview Question #24
What is in a pitch book?
Pitch book depends on the kind of deal the company is pitching for but the common structure would include:
- Bank credentials to prove their expertise in completing similar deals before.
- Summary of company’s options
- Appropriate financial models and valuation
- Investment Banking Charts
- Potential acquisition targets or potential buyers
- Summary and key recommendations
Investment Banking Interview Question #25
Tell me a company you admire/follow and pitch me a stock
You need to structure your answer for such investment banking interview questions keeping in mind the following;
- Give the name of the stock you have been following and the reason for the same
- Quickly summarize what the company’s business
- Provide a quick overview of the financials to indicate its size and how profitable it is. Also if you can provide with specific details on Revenue, EBITDA multiples, or its P/E multiple
- Provide reasons as to how the stock or their business is more attractive than its rivals.
- You should speak about the trend the stock has had at least in the past 3-5 years.
- You could also talk about the future outlook for the company.
Investment Banking Interview Question #26
When buying a company why do private equity firms use leverage?
- The private equity firm reduces the amount of equity to the deal by using significant amounts of leverage (debt) to help finance the purchase price.
- By doing this, it will increase the private equity firm’s rate of return substantially when exiting the investment.
Investment Banking Interview Question #27
What is convexity?
- Convexity is a more accurate measure of the relationship between yield and price changes in bonds in relation to the change in interest rates.
- Duration calculates this as a straight line, when in actuality it is a convex curve, hence the name.
- This is used as a risk calculation because it can tell how a bond yield will respond to interest rate changes.
Investment Banking Interview Question #28
Define the risk-adjusted rate of returns
- When looking at an investment you cannot simply look at the return that is projected. If the profit from investment A is greater than the profit from investment B you may immediately want to go with investment A.
- But investment A might have a greater chance of a total loss than investment B so even though the profit may be larger, it is a lot riskier and therefore not necessarily a better investment.
- The adjusted rate of return is when you not only look at the return that an investment may give you, but you also measure the risk of that investment.
- The adjusted rate of return is usually denoted as a number or rating.
- If you are technically minded you may also want to mention the ways that risk is measured: beta, alpha, and the Sharpe ratio, r-squared and standard deviation.
The key to successfully answering these technical investment banking interview questions is to apply the concepts you’re learning and test yourself. Hope this has helped you learn some important question and answers on investment banking topics and brings you steps closer to crack the high profile interviews. All the best
P.S. Kindly note we have only touched upon the technical questions and their types, apart from these you would also have to prepare for the personal questions, why investment banking Interview questions and brain teasers which are usually part of testing the candidates.
Investment Banking Interview Questions and Answers Video
In this guide, we list the top 28 most common asked Investment Banking Interview Questions and Answers that you must know. Here we discuss the tips to answer the Investment banking interview questions on accounting, valuations, modeling, Pitchbook, M&A, IPO, Leveraged buyouts and others. You may also have a look at these Q&A to learn more –
Coronavirus: Global shares suffer worst week since financial crisis
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US markets have suffered their worst week since the global financial crisis of 2008, as fears over the impact of the coronavirus continued to grip investors.
The three main US indexes ended the week down 10% or more from last Friday, despite a last-minute rally in prices.
Earlier, the main European markets fell sharply, with London’s FTSE 100 index down 3.2% for the day.
Investors are worried the coronavirus could spark a global recession.
The Dow settled 1.4% lower on Friday, recovering from earlier lows, while the S&P sank 0.8% and the Nasdaq was roughly flat.
Amid the sell-off, Federal Reserve chair Jerome Powell put out an unusual statement, saying the US central bank was “closely monitoring” developments.
“The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity,” he said. “We will use our tools and act as appropriate to support the economy.”
The news of more coronavirus cases, notably in Italy, has raised concerns of a much larger economic effect than previously expected.
Bank of England Governor Mark Carney on Friday warned the outbreak could lead to a downgrade of the UK’s growth prospects.
Other countries are also reassessing their economic forecasts, as hundreds of firms warn of disruptions to their supply chains and a decline in consumer demand.
US tech giants Apple and Microsoft are among the companies that have said their business will be affected, while investment bank Goldman Sachs warned on Thursday that the coronavirus is likely to wipe out any growth in US company profits this year.
Shares in airlines have been especially hard-hit as travel bans are imposed and companies limit staff travel. On Friday, airline group IAG – which owns British Airways and Iberia – said its earnings had been affected by “weaker demand” as a result of the outbreak.
More anxiety ahead
“A known unknown” is how one major company boss described the economic fallout of coronavirus to the BBC.
But what the markets have woken up to – perhaps belatedly – is that the disruption to the economic activity from coronavirus is wider, deeper and perhaps longer lasting than previously assumed.
As major outbreaks spring up outside China, it is clear that it is not just global supply chains but also demand from consumers that’s suffering, as efforts to contain the virus keep them away from shops, bars and restaurants.
What is unknown is exactly how bad and how lasting the impact could be. But what is known is that this comes at an already tricky time for the global economy with Japan, Italy, China and the UK among those already seeing growth faltering.
As economists slash their growth forecasts, policymakers are debating how much they can do to help, given how low interest rates remain. What’s entirely clear is that investors face more anxiety ahead.
Mayank Mishra, a strategist at Standard Chartered Bank, said: “Previously the market had taken some comfort in the falling infection rates in China as a result of containment measures put in place earlier.
“But the spread of the coronavirus infection outside China, with clusters emerging in South Korea, Italy and Japan, has increased concerns significantly.”
In Europe, Germany’s Dax index fell 4.2%, while France’s Cac 40 index sank 3.9%.
Earlier on Friday, in Asia, Japan’s Nikkei 225 index dropped 3.7%, bringing its fall for the week to more than 9%. China’s Shanghai Composite index also fell 3.7% on Friday.
Traders fled to less risky investments, such as government debt, sending bond yields to new lows. Meanwhile, oil prices also fell on fears the virus would hurt demand, with Brent prices dropping more than 3% to about $50 a barrel on Friday, the lowest level for more than a year.
US President Donald Trump, who has claimed credit for a sharp rise in share prices during his tenure, blamed the falls on investor fear of “the unknown” – as well as concerns about the Democratic candidates hoping to challenge him in November’s presidential election.
“People look at it and they say how long will this last,” he said. “It’s an election . I don’t think that’s helping.”
Several key global market indexes – including the FTSE 100 and the Dow Jones – have fallen more than 10% from recent highs. A drop of that magnitude is generally referred to as a correction.
However, share prices were hovering at record levels before the sell-off started, noted Sonja Laud, chief investment officer at Legal & General Investment Management.
Will the Fed cut interest rates?
The Dow and S&P 500 have now retreated roughly to where they were in August, while the Nasdaq has returned to December prices.
“What markets are trying to digest is how long this is going to go on and what the economic damage will be,” she said.
Many analysts now predict the US central bank will cut interest rates in an attempt to counter any impact. James Bullard, who sits on the Fed’s board of governors, said Friday that cuts are “a possibility” should the virus continue to spread, but he warned that market expectations would not force the bank to act.
Ms Laud said that many central banks had little room for manoeuvre, because rates are already so low.
“Realistically it’s mostly the Fed and to some extent the Bank of England that still have the chance to cut rates,” she told the BBC.
“I think there will be a huge focus on governments to step up fiscal stimulus under the assumption there is not a lot more that central banks can do to stimulate the economy.”
10 Risky Investments
Any Investment Pitched as a Sure Thing
Want to find a legitimate investment? Look for evidence that the company or the fund has had a bad year.
Bernard Madoff claimed that his fund showed returns of 10 to 12 percent a year, every year. In hindsight, experts say those figures should have been the first sign of trouble for those who lost millions of dollars in the high-profile Ponzi scheme.
If you don’t see any bad years in the sales information for the investment, check how far the returns outstrip returns on the stock market. If they consistently outperform the market, think twice.
Pitches for these types of investment opportunities often appear when the stock market is faltering; salesmen look for investors who are wary of losses in the stock market, and they show numbers to build confidence.
The expert view on why investment fraud succeeds is that the sales pitches for these investments play on people’s fear or greed. Watch for pitches that stir those emotions. If you start feeling scared or greedy, step back and wait to commit your cash.
Read on for links to more information about investing.
Finance Planning Tips
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Related HowStuffWorks Articles
- Apostolou, Barbara, and Nicholas G. Apostolou. “Keys to Investing in Common Stocks.” Barron’s Educational Series, Inc. 2004.
- Connelly, Eileen A.J. “View Timeshares as a travel aid, not an investment.” Aug. 30, 2009. (Oct. 18, 2020) http://www.buffalonews.com/business/article10116.ece
- Consumer Federation of America and Primerica. “Typical American Household has assets of less than $1,000.” Oct. 28, 1999. (Oct. 18, 2020) http://www.consumerfed.org/pdfs/primerica2.pdf
- Fisher, Ken, and Lara Hoffmans. “How to Smell a Rat: The Five Signs of Financial Fraud.” John Wiley & Sons, Inc. 2009.
- Grable, John. Professor of Personal Finance, Kansas State University. Personal interview. Oct. 15, 2020.
- Heingartner, Douglas. “Despite Grabbing Headlines, Art Prices Don’t Appreciate Well.” International Herald Tribune. Oct. 29, 2009. (Oct. 18, 2020) http://www.nytimes.com/2009/10/29/business/global/29iht-nwart.html
- Swedroe, Larry E., and Jared Kizer. “The Only Guide to Alternative Investments You’ll Ever Need: The Good, The Flawed, The Bad and the Ugly. The Way Smart Money Diversifies Risk.” Bloomberg Press. 2008.
- Tyson, Eric. “Investing for Dummies.” Wiley Publishing, Inc. 2008.
- Tyson, Eric. “Personal Finance for Dummies.” Wiley Publishing, Inc. 2006.
- Tyson, Eric. Personal interview. Oct. 19, 2020.
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Why are tech stocks risky investments?
I’ve seen this mentioned so much in writings about intelligent investing, but I don’t understand why.
Are Amazon and Netflix tech stocks?
8 Answers 8
They are not. You will have to put up some really crazy explanation to define Microsoft as risky.
Generally companies without a solid business are risky. Netflix IS there – their idea is very valid (customer myself, I love them), but they run a huge deficit and it is unclear whether this will play out or not. Tesla is risky – the concept is amazing, but look at how much money they burn and how high their debts are.
Amazon – so far they quite nicely manage to reinvest their huge profits, but they (a) are profitable, (b) it is not something others can easily copy (logistics centers) and (c) they have some income streams (like Microsoft, Azure turns into a huge profit center).
Compare that to Apple – (a) very profitable, (b) unclear how the future looks as they (c) mostly depend on one income stream (iphone sales). While I would be sure they survive as a company, I sort of love saying there is no way to justify their price and unless they come up with alternative revenue streams, their upside is limited.
Unproven companies with mostly unproven business models are risky. One trick ponies are risky. Many of those are in tech.
The point about tech companies is that most (a) are unproven and often come with (b) unproven models. Also (c) they can easily get sidetracked. Look at AMD – they have an amazing processor lineup now. Many years ago their Bulldozer architecture flopped and it took them a long time – and doubting their survivability – until they managed to pull off the ZEN architecture. High risk – one wrong step and you may lose a lot of money.
The reason I think people call tech stocks are risky is that by some measures they are. Take Netflix ($NFLX), the company is currently trading at more than 200x their current earnings. So that tells you lots of the upside is already “priced in” as they call it. Also, $NFLX market cap (total value) at the moment exceeds the value of Disney, while disney has a revenue of 9 Billion dollars in income (+multiple revenue streams) compared to 749Mil for $NFLX.
In general Tech stocks have high P/E. Some even have very little profit. So these companies depend on growth. The moment they stop growing/stall growth/ stop growing their valuations will suffer. And these swings add to your portfolio volatility. (another way to measure risk is how hard the value of your portfolio swings up and down).
A good example is Tesla $TSLA and this video explains how they depend on the growth to keep their business going. https://www.youtube.com/watch?v=BHS0H5AwGjU&t=289s
In quick summary, Techs depend on growth (good when the economy is growing), they are volatile and you pay a high price relative to earnings. Hence according to some, they have more risk.
Hope this helped you a bit.
PS: there is an etf out there called QQQ and they go passive on the nasdaq 100 (mostly tech stocks) so check that out if you want exposure to tech. It’s cheaper and less risky (due to diversification than owning one (expensive in USD) share of amazon or netflix.)
In 2005, MySpace was on top of the world. Everyone had an account there.
In 2020, MySpace is a footnote. Even the people with accounts there don’t bother to use them. They all moved to Facebook. And of course now people are talking about moving away from Facebook. If that happens, Facebook would go from being one of the big four tech companies to just another footnote.
Other examples include Napster, AOL, Digital Equipment Corp, Research in Motion, and the SCO Group.
It’s not so long ago that there was a huge battle between Blu-Ray and HD DVD for determination of who would be the HD recording format of choice. Supposedly Blu-Ray won. But Netflix moved to streaming instead of Blu-Ray. Blu-Ray is still the medium used for recordings, but most people don’t bother with recordings. They just stream.
When I had Netflix, I used it about equally for original content and distributed content. This suggests that someone else could jump in with their own original content and I would stream them. And the distributed content could move easily to a different platform. For example, Netflix and Amazon have been fighting over the Dr. Who streams.
What if Dr. Who said a pox on both their houses and went full on cable? Or BBC America dropped cable and became a streaming service? If every supplier did that and Netflix had some original content struggles, Netflix could become a footnote.
I think there is more to this question.
Is really also asking, what actually is a tech stock? At the turn of the century the automobile was a leap forward in human technological prowess, now that’s the auto sector. Ford is an Automotive company, does Ford innovate technology anymore? Probably, to some extent I’m sure various manufacturing processes are improved but it’s just an Automotive company. You certainly don’t think, OH YEA Ford is a tech company because remember 100 years ago when Henry Ford figured out a production line?
Is Google a tech company?
20 years ago a couple ultra-nerds figured out a new way to index the internet and took a quantum leap forward in internet search. More recently Google has assisted in other forward movements related to internet infrastructure. But what’s Google’s business. It seems that Google is now the advertising subsidiary of Alphabet. Alphabet also owns some essentially hedge funds that finance various tech R&D, but is Google a tech company?
Is Apple a tech company? It seems to me that Apple is a hugely profitable hugely vertically integrated tangible consumer products company.
Is Netflix a tech company? Seems to me that Netflix is a levered to its eyeballs video content producer and distributor.
You can go down the list. What is a tech company? To my mind, a tech company is an organization that exists for R&D. It employs engineers and scientists and other nerds to research things, then develop a product/solution/fix for whatever externality the research uncovered. This sort of business is risky because your research may never uncover anything interesting and the product you spend time developing might not have any market viability. I think calling Twitter a tech company just because the business fully relies on the internet, would be like calling FedEx an aerospace company because it relies so heavily on planes.
Don’t just believe what the company tells you it is. Where is your money derived? That’s the business you’re in.
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