Twitter’s Board decided in July to oust the CEO, Dick Costolo, due to frustration over company profits. As I wrote at the time, Twitter had continued to add members, at a rate comparable to its social media competition. And it had grown revenues, while remaining the industry leader in revenue per active user.
But the concern was a lack of profits. Oh my, if rapid revenue growth but weak profits were a reason to fire a CEO, how does Jeff Bezos keep his job?
Anyway, Mr. Costolo was replaced by an original founder and former Twitter CEO Jack Dorsey on an interim basis. Four months later, after failing in its effort to find a suitable full-time CEO, the Board has made Mr. Dorsey the permanent CEO. While he simultaneously remains full time CEO of Square, a mobile payments processing company.
As I said in my last column on this subject, investors better beware.
Facebook is tearing up the social media market. It has grown to be not only #1 in active monthly users, but at 1.5B monthly active users (MSUs) the site has 5 times the number of users that Twitter has. By adding a slew of new features and functions Facebook has become more valuable to its users – and advertisers.
According to Statista, simultaneously Facebook has grown Facebook Messenger to 700M MSUs, acquired WhatsApp with 800M MSUs and Instagram with 400M MSUs. By constantly expanding the ecosphere Facebook now has 3.4B MSUs – over 10 times the number of Twitter. Facebook is so dominant that even muscular Google, with all its resources, abandoned its efforts to compete with the juggernaut by killing Google+ (which had 300M MSUs) earlier in 2015.
Twitter had great organic growth numbers, but unlike competitors it does not dominate any particular category of social media. Linked in, with only 100M MSUs dominates business networking, and bosts a user base that skews older and more professional. Pinterest and Instagram are battling it out for leadership in photo sharing. But it is unclear how one would describe a social growth category that Twitter dominates.
I actively use Twitter. But among my peers I am the exception. When I ask people over 40 if they use Twitter I regularly hear “I don’t get it. It all looks completely chaotic. Why would I want to follow people on Twitter, and why would I want to post.” This sounds a lot like what people said of Facebook and Linked in 5 years ago. But those companies found their connection with users and people now “get it.”
So the question is whether Mr. Dorsey will make Twitter into a site that is ubiquitous, at least for one category. Can he make the product so useful that users can’t live without it, and that continues drawing in massive new numbers of users?
Twitter has not changed much at all since it was founded. It still depends on users to sign on, start tweeting, and search out others a user wants to follow. And that means follow for some reason other than that person is a celebrity or politician that simply can’t stop spouting off. The Twitter user has to hunt for like minded individuals, find a way to connect with folks who are informative to their needs and then create a dialogue — and all with pretty much the same character limits and shrunken link technology available many years ago.
Apple floundered as a manufacturer of niche PCs. The returning CEO, Steve Jobs, resurrected the company by putting all his money on mobile. It wasn’t an improved Mac that turned around Apple, but rather the launch of the iPod and iTunes, followed by the iPhone and the iPad. The way Apple stole the thunder from previously dominant Microsoft was by creating new products built on the mobile trend that led to explosive growth.
Mr. Costolo left Twitter in far better shape than Apple was in when Mr. Jobs retook the reins. But will Mr. Dorsey be able to launch a series of new products that can create an Apple-like growth explosion?
Square, where Mr. Dorsey ostensibly spends half his time, is preparing to go public. But, even though it is currently considered by many the leader in its marketplace, Square is looking down the barrel of ApplePay – a technology on every iPhone that could make it obsolete. Then there’s also Google Wallet that is on all the other smartphones. Plus well funded outfits like PayPal and Mastercard. Square will need a very competent, capable and visionary CEO to guide its development competing with these – and other – well funded and powerful companies. Square will need to add features, functions and benefits if it is create long-term value.
A lot of new products are needed by two relatively small companies in short order if they are to survive. Success will not happen by cutting costs in either. It will require intensive product development with very rapid product cycles that bring in millions upon millions of new users.
Twitter was once a disruptive innovator. Now it is hard to recognize any innovation at Twitter. Does Mr. Dorsey get it? And if he does, can he do it? And do it twice, simultaneously?
A recent analyst took a look at the impact of electric vehicles (EVs) on the demand for oil, and concluded that they did not matter. In a market of 95million barrels per day production, electric cars made a difference of 25,000 to 70,000 barrels of lost consumption; ~.05%.
You can’t argue with his arithmetic. So far, they haven’t made any difference.
But then he goes on to say they won’t matter for another decade. He forecasts electric vehicle sales grow 5-fold in one decade, which sounds enormous. That is almost 20% growth year over year for 10 consecutive years. Admittedly, that sounds really, really big. Yet, at 1.5million units/year this would still be only 5% of cars sold, and thus still not a material impact on the demand for gasoline.
This sounds so logical. And one can’t argue with his arithmetic.
But one can argue with the key assumption, and that is the growth rate.
Do you remember owning a Walkman? Listening to compact discs? That was the most common way to listen to music about a decade ago. Now you use your phone, and nobody has a walkman.
Remember watching movies on DVDs? Remember going to Blockbuster, et.al. to rent a DVD? That was common just a decade ago. Now you likely have shelved the DVD player, lost track of your DVD collection and stream all your entertainment. Bluckbuster, infamously, went bankrupt.
Do you remember when you never left home without your laptop? That was the primary tool for digital connectivity just 6 years ago. Now almost everyone in the developed world (and coming close in the developing) carries a smartphone and/or tablet and the laptop sits idle. Sales for laptops have declined for 5 years, and a lot faster than all the computer experts predicted.
Markets that did not exist for mobile products 10 years ago are now huge. Way beyond anyone’s expectations. Apple alone has sold over 48million mobile devices in just 3 months (Q3 2015.) And replacing CDs, Apple’s iTunes was downloading 21million songs per day in 2013 (surely more by now) reaching about 2billion per quarter. Netflix now has over 65million subscribers. On average they stream 1.5hours of content/day – so about 1 feature length movie. In other words, 5.85billion streamed movies per quarter.
What has happened to old leaders as this happened? Sony hasn’t made money in 6 years. Motorola has almost disappeared. CD and DVD departments have disappeared from stores, bankrupting Circuit City and Blockbuster, and putting a world of hurt on survivors like Best Buy.
The point? When markets shift, they often shift a lot faster than anyone predicts. 20%/year growth is nothing. Growth can be 100% per quarter. And the winners benefit unbelievably well, while losers fall farther and faster than we imagine.
Tesla was barely an up-and-comer in 2012 when I said they would far outperform GM, Ford and Toyota. The famous Bob Lutz, a long-term widely heralded auto industry veteran chastised me in his own column “Tesla Beating Detroit – That’s Just Nonsense.”
Mr. Lutz said I was comparing a high-end restaurant to McDonald’s, Wendy’s and Pizza Hut, and I was foolish because the latter were much savvier and capable than the former. He should have used as his comparison Chipotle, which I predicted would be a huge winner in 2011. Those who followed my advice would have made more money owning Chipotle than any of the companies Mr. Lutz preferred.
The point? Market shifts are never predicted by incumbents, or those who watch history. The rate of change when it happens is so explosive it would appear impossible to achieve, and far more impossible to sustain. The trends shift, and one market is rapidly displaced by another.
While GM, Ford and Toyota struggle to maintain their mediocrity, Tesla is winning “best car” awards one after another – even “breaking” Consumer Reports review system by winning 103 points out of a maximum 100, the independent reviewer liked the car so much. Tesla keeps selling 100% of its production, even at its +$100K price point.
So could the market for EVs wildly grow? BMW has announced it will make all models available as electrics within 10 years, as it anticipates a wholesale market shift by consumers promoted by stricter environmental regulations. Petroleum powered car sales will take a nosedive.
The International Energy Agency (IEA) points out that EVs are just .08% of all cars today. And of the 665,000 on the road, almost 40% are in the USA, where they represent little more than a rounding error in market share. But there are smaller markets where EV sales have strong share, such as 12% in Norway and 5% in the Netherlands.
So what happens if Tesla’s new lower priced cars, and international expansion, creates a sea change like the iPod, iPhone and iPad? What happens if people can’t get enough of EVs? What happens if international markets take off, due to tougher regulations and higher petrol costs? What happens if people start thinking of electric cars as mainstream, and gasoline cars as old technology — like two-way radios, VCRs, DVD players, low-definition picture tube TVs, land line telephones, fax machines, etc?
What if demand for electric cars starts doubling each quarter, and grows to 35% or 50% of the market in 10 years? If so, what happens to Tesla? Apple was a nearly bankrupt, also ran, tiny market share company in 2000 before it made the world “i-crazy.” Now it is the most valuable publicly traded company in the world.
Already awash in the greatest oil inventory ever, crude prices are down about 60% in the last year. Oil companies have already laid-off 50,000 employees. More cuts are planned, and defaults expected to accelerate as oil companies declare bankruptcy.
It is not hard to imagine that if EVs really take off amidst a major market shift, oil companies will definitely see a precipitous decline in demand that happens much faster than anticipated.
To little Tesla, which sold only 1,500 cars in 2010 could very well be positioned to make an enormous difference in our lives, and dramatically change the fortunes of its shareholders — while throwing a world of hurt on a huge company like Exxon (which was the most valuable company in the world until Apple unseated it.)
[Note: I want to thank Andreas de Vries for inspiring this column and assisting its research. Andreas consults on Strategy Management in the Oil & Gas industry, and currently works for a major NOC in the Gulf.]
As market volatility reached new highs this week, CNBC began talking about something called “FANG Investing.” Most commentators showed great displeasure in the fact that prior to the recent downturn high growth companies such as Facebook, Amazon, Netflix and Google (FANG) had performed much better than all the major market indices. And, in the short burst of recent recovery these companies again seemed to be doing much better.
Coined by “CNBC Mad Money” host Jim Cramer, he felt that FANG investing was bad for investors. He said he preferred seeing a much larger group of companies would go up in value, thus representing a much more stable marketplace.
Sound like Wall Street gobblygook? Good. Because as an individual investor why should you care about a stable market? What you should care about is your individual investments going up in value. And if yours go up and all others go down what difference does it make?
Most financial advisers today actually confuse investors much more than help them. And nowhere is this more true than when discussing risk. All financial advisers (brokers in the old days) ask how much risk you want as an investor. If you’re smart you say “none.” Why would you want any risk? You want to make money.
Only this is the wrong answer, because most investors don’t understand the question – because the financial adviser’s definition of risk is nothing like yours.
To a broker investment risk is this bizarre term called “beta,” created by economists. They defined risk as the degree to which a stock does not move with the market index. If the S&P down 5%, and the stock goes down 5%, then they see no difference between the stock and the “market” so they say it has no risk. If the S&P goes up 3% and the stock goes up 3%, again, no risk.
But if a stock trades based on its own investor expectation, and does not track the market index, then it is considered “high beta” and your broker will say it is “high risk.” So let’s look at Apple the last 5 years. If you had put all your money into Apple 5 years ago you would be up over 200% – over 4x. Had you bought the S&P 500 Index you would be up 80%. Clearly, investing in Apple would have been better. But your adviser would say that is “high risk.” Why? Because Apple did not move with the S&P. It did much better. It is therefore considered high beta, and high risk.
You buy that?
Thus, brokers keep advising investors buy funds of various kinds. Because the investors says she wants low risk, they try to make sure her returns mirror the indices. But it begs the question, why don’t you just buy an electronic traded fund (ETF) that mirrors the S&P or Dow, and quit paying those fund fees and broker fees? If their approach is designed to have you do no better than the average, why not stop the fees and invest in those things which will exactly give you the average?
Anyway, what individual investors want is high returns. And that has nothing to do with market indices or how a stock moves compares to an index. It has to do with growth.
Growth is a wonderful thing. When a company grows it can write off big mistakes and nobody cares. It can overpay employees, give them free massages and lunches, and nobody cares. It can trade some of its stock for a tiny company, implying that company is worth a vast amount, in order to obtain new products it can push to its customers, and nobody cares. Growth hides a multitude of sins, and provides investors with the opportunity for higher valuations.
On the other hand, nobody ever cost cut a company into prosperity. Layoffs, killing products, shutting down businesses and selling assets does not create revenue growth. It causes the company to shrink, and the valuation to decline.
That’s why it is lower risk to invest in FANG stocks than those so-called low-risk portfolios. Companies like Facebook, Amazon, Netflix, Google — and Apple, EMC, Ultimate Software, Tesla and Qualcomm just to name a few others — are growing. They are firmly tied to technologies and products that are meeting emerging needs, and they know their customers. They are doing things that increase long-term value.
McDonald’s was a big winner for investors in the 1960s and 1970s as fast food exploded with the baby boomer generation. But as the market shifted McDonald’s sold off its investments in trend-linked brands Boston Market and Chipotle. Now its revenue has stalled, and its value is in decline as it shuts stores and lays off employees.
Thirty years ago GE tied its plans to trends in medical technology, financial services and media, and it grew tremendously making fortunes for its investors. In the last decade it has made massive layoffs, shut down businesses and sold off its appliance, financial services and media businesses. It is now smaller, and its valuation is smaller.
Caterpillar tied itself to the massive infrastructure growth in Asia and India, and it grew. But as that growth slowed it did not move into new businesses, so its revenues stalled. Now its value is declining as it lays off employees and shuts down business units.
Risk is tied to the business and its future expectations. Not how a stock moves compared to an index. That’s why investing in high growth companies tied to trends is actually lower risk than buying a basket of stocks — even when that basket is an index like DIA or SPY. Why should you own the low-or no-growth dogs when you don’t have to? How is it lower risk to invest in a struggling McDonald’s, GE or Caterpillar or some basket that contains them than investing in companies demonstrating tremendous revenue growth?
Good fishermen go where the fish are. Literally. Anybody can cast out a line and hope. But good fisherman know where the fish are, and that’s where they invest their bait. As an investor, don’t try to fish the ocean (the index.) Be smart, and put your money where the fish are. Invest in companies that leverage trends, and you’ll lower your risk of investment failure while opening the door to superior returns.
Would you like to triple your revenue next year? And have plans to keep tripling it – or more – every year into the future?
Of course you would. But is your business positioned for such explosive growth? Are you in growth markets, creating new products with new technologies that meet unmet needs and have the potential to completely change your business? Or are you stuck doing the same thing you’ve always done, a litle better, faster and cheaper in hopes you can just maintain your position?
If you’re constantly looking at your “core” markets and solutions, and you know those aren’t going to grow fast, what keeps you from changing to make your company a high growth winner?
First, most people don’t try. Leaders say it all the time, “I’m so busy running a business I don’t have time to chase rainbows. Sure technology is changing, but I don’t understand it, nor know how to use it. I’m better off investing in what I know than trying to chase trends.” That’s often followed by dragging out the old saw, usually attributed to Warren Buffet, of “don’t invest in what you don’t know – and I don’t know anything about trends.” The comfort, and ease, of repeating what you’ve always done allows lethargy to set in – so you keep doing more and more of what you’ve always done, over and again, hoping for a different result. It’s been attributed to Albert Einstein that such behavior is the very definition of insanity.
Everyone is busy. We live in a “culture of busy.” Years of layoffs and cost reductions have left most leaders simply struggling to keep up with making and selling last year’s solution. Constant busy-ness becomes a convenient excuse to not take the time to look at trends, evaluate new opportunities or consider doing things entirely differently. Busy, busy, busy – until someone knocks your business off its blocks and then you have all kinds of time on your hands.
For those who overcome these 2 built-in biases, the opportunities today are extra-ordinary. It is possible to slingshot into leadership positions with new solutions, literally from out of nowhere. If you take the time and try. Listen, and just do it – to steal from a popular ad campaign.
ikeGPS was started in 2003 as a government/military funded products research company. Focusing on the technology of lasers and cameras, they won contracts to develop and prototype new solutions with technology mostly buried in universities and labs. It was a good business, made money for the founders, and was intellectually stimulating. If not growing very fast or showing much potential of growing.
Eventually ikeGPS started making products with lasers and cameras for finding physical assets. This turned out to be quite beneficial for electric utilities, which have to maintain some 200,000 power poles in the U.S alone. EPC (Engineering, Procurement and Construction) companies like Black & Veatch, Bechtel. Burns & McDonel , FMC and Foster Wheeler had a need to find big physical things, then measure their size and location between each other and major points. For utility company suppliers like GE laser cameras for asset location were a handy, if slow growing business. Good, solid, reliable revenues, but not something that was going to create a $100M company.
So the Managing Director, Glenn Milnes, and Chief Marketing Officer, Jeff Ross, set about to see what they could do to become a $100M business. Not because anything in their history said they could do so. Rather because they wanted to make their company a bigger, faster growing and lot more valuable entity.
The first thing they identified was the trend to mobile devices. They noticed darn near everyone has one, and they were using them for all kinds of interesting things. There were thousands and thousands of apps, but none that really took advantage of the cameras to do much measuring, or integrated lasers. While they didn’t know anything about mobile operating systems, or much about the kinds of cameras in mobile phones or the software used for popular mobile camera uses – they could see a trend.
What if they could take their knowledge about lasers and cameras and figure out how to make mobile phones a lot more powerful? Could they apply what they knew into markets where they had no experience, using technologies with which they had no experience? Would it work, or waste their time? If it worked, what would they make? If they made something, who would buy it?
Despite these great questions, they wanted ikeGPS to grow, and they decided to take the cash flow from their solid, but low growth historical business and plow it into development of a new product. So they took to internal company brainstorming to see what they might do. And they came up with the very clever idea of making an add-on device that construction workers, like concrete installers, pavers, carpenters, masons and such, could use with their mobile phones to replace tape measures. Something that would be simple, easy to use, work with the phones in their pockets and be a lot more accurate than decades-old technology.
So they went to the lab and built it. They started design in October, 2013, and a year later they had a product ready to launch. – Spike! They took it to social media, Google adwords, all the low-cost ad tools available to small business today. They also went to industry trade shows, bought some ads in industry trade magazines and ads on industry specific sites. Things were OK, but it was a slow slog.
As they were preparing to launch Spike they thought, “why don’t we reach for outsiders to gain some input on this product. Let’s hear what others might have to say.” So they launched a Kickstarter campaign, offering investors the product to try. Via this route they gained the eyes and ears of early adopters.
This was when the surprise happened. The earliest adopters, and biggest fans of laser measuring via mobile devices weren’t in the construction business. They were signage companies. ikeGPS listened to their feedback, and realized they could tweek Spike to be very relevant for folks in signage. The made themselves accessible to these early adopters, and turned a few into fanatical loyalists.
With this early success, they began to downplay construction and seek signage companies. Across 2 months they placed about $20k (not millions, thousands) in ads in the 4 largest publishers to the signage industry. This led to on-line product sales, and smashing reviews.
So then they made overtures to the large franchisors of signage related shops – with retail names like Fast Sign, Sign-o-Rama, Alphagraphics, Speedy Sign, Sign World, etc — in companies like Franchise Services and Alliance Franchise. Within 6 months of launch they had stopped chasing construction customers and were full-tilt developing signage companies, to great success. Even sign supply companies llke Reece Sign saw the benefit of promoting (and even reselling) these new laser camera add-ons for mobile devices to stimulate sales and move sign design and creation into the 21st century.
After making this switch, they initial launch sold 1,200 units at $500/unit retail . But better yet, contracts for promotion and reselling has the company convinced they will blow far beyond their projection of 4,000 units in the first year.But they did not simply forget about construction. The idea was still sound, but clearly the market had not developed. So they asked themselves, “if we listened to sign guys and they told us what to do, could we listen to construction guys for advice?”
They pursued finding out more about construction, and learned the market was dominated by brand names. Few products were bought without a strong brand name – and most products are purchased through the very large home improvement chains such as Home Depot, Lowe’s, Menard’s and others. But that would be a nearly impossible task, at extremely high cost, for little ikeGPS. So they pursued finding a partner which knew the industry.
In early 2015 ideGPS announced that Stanley Black&Decker would brand and sell Spike via traditional retail. The product should be on shelves before the end of year, and substantial additional sales volumes are expected.
In 2013 100% of ikeGPS revenues were in their traditional government/military and utility markets with their bespoke device. In just one year they developed a mobile device, and launched it. In 2015 1/3 or more of their $10.5 estimated revenue will be from Spike, and they expect to at a minimum triple revenues in 2016. And they think that rate of growth is sustainable into future years.
ikeGPS shows that it IS possible to move beyond historical markets and create new products for break-out growth. You aren’t stuck in old businesses with no hope of growth. if you want to grow, and reap the rewards of growth, you can. You have to
- Want to do it
- Take time to do it
- Pay attention to trends, and support obvious trend growth
- Learn about new technologies and how you can apply them. Start with the trend technologies first, then see how to apply something new. Don’t start by trying to push what you know onto another platform. Be ethnocentric in product development, not egocentric.
- Brainstorm how to meet unmet needs
- Listen to early sales results, and go where the need is highest/selling is easiest
- Don’t forget to learn from what did not work, and see if you can overcome early weaknesses.
eBay was once a game changer. When the internet was very young, and few businesses provided ecommerce, eBay was a pioneer. From humble beginnings selling Pez dispensers, eBay grew into a powerhouse. Things we used to sell via garage sale we could now list on eBay. Small businesses could create stores on eBay to sell goods to customers they otherwise would never reach. And collectors as well as designers suddenly discovered all kinds of products they formerly could not find. eBay sales exploded, as traditional retail started it slide downward.
To augment growth eBay realized those selling needed a simple way to collect money from people who lacked a credit card. Many customers simply had no card, or didn’t trust giving out the information across the web. So eBay bought fledgling PayPal for $1.5B in 2002, in order to grease the wheels for faster ecommerce growth. And it worked marvelously.
But times have surely changed. Now eBay and Paypal have roughly the same revenue. About $8B/year each. eBay has run into stiff competition, as CraigsList has grown to take over the “garage sale” and small local business ecommerce. Simultaneously, powerhouse Amazon has developed its storefront business to a level of sophistication, and ease of use, that makes it viable for businesses from smallest to largest to sell products on-line. And far more companies have learned they can go it alone with internet sales, using search engine optimization (SEO) techniques as well as social media to drive traffic directly to their stores, bypassing storefronts entirely.
eBay was a game changer, but now is stuck in practices that have become far less relevant. The result has been 2 consecutive quarters of declining revenue. By definition that puts eBay in a growth stall, and fewer than 7% of companies ever recover from a growth stall to consistently increase revenue by a mere 2%/year. Why not? Because once in a growth stall the company has already missed the market shift, and competition is taking customers quickly in new directions. The old leader, like eBay, keeps setting aggressive targets for its business, and tells everyone it will find new customers in remote geographies or vertical markets. But it almost never happens – because the market shift is making their offering obsolete.
On the other hand, Paypal has blossomed into a game changer in its own right. Not only does it support cash and credit card transactions for the growing legions of on-line shoppers, but it is providing full payment systems for providers like Uber and AirBnB. It’s tools support enterprise transactions in all currencies, including emerging bitcoin, and even provides international financial transactions as well as working capital for businesses.
Paypal is increasingly becoming a threat to traditional banks. Today most folks use a bank for depositing a pay check, and making payments. There are loans, but frequently that is shopped around irrespective of where you bank. Much like your credit cards, which most people acquire for their benefits rather than a relationship with the issuing bank. If customers increasingly make payments via Paypal, and borrow money via operations like Quicken Loans (a division of Intuit,) why do you need a bank? Discover Services, which now does offer cash deposits and loans on top of credit card services, has found that it can grow substantially by displacing traditional banks.
Paypal is today at the forefront of digital payments processing. It is a fast growing market, which will displace many traditional banks. And emerging competitors like Apple Pay and Google Wallet will surely change the market further – while aiding its growth. How it will shake out is unclear. But it is clear that Paypal is growing its revenue at 60% or greater since 2012, and at over 100%/quarter the last 2 quarters.
Paypal is now valued at about $47B. That is roughly the same as the #5 bank in America (according to assets) Bank of New York Mellon, and number 8 massive credit card issuer Capital One, as well as #9 PNC Bank – and over 50% higher valuation than #10 State Street. It is also about 50% higher than Intuit and Discover. Based on its current market leadership and position as likely game changer for the banking sector, Paypall is selling for about 8 times revenue. If its revenue continues to grow at 100%/quarter, however, revenues will reach over $38B in a year making the Price/Revenue multiple of today only 1.25.
Meanwhile, eBay is valued at about $34B. Given that all which is left in eBay is an outdated on-line ecommerce conglomerator, stuck in a growth stall, that valuation is far harder to justify. It is selling at about 4.25x revenue. But if revenues continue declining, as they have for 2 consecutive quarters, this multiple will expand. And values will be harder and harder to justify as investors rely on hope of a turnaround.
eBay was a game changer. But leadership became complacent, and now it is very likely overvalued. Just as Yahoo became when its value relied on its holdings of Alibaba rather as its organic business shrank. Meanwhile Paypal is the leader in a rapidly growing market that is likely to change the face of not just how we pay, but how we do personal and business finance. There is no doubt which is more valuable today, and likely to be in the future.
Dick Costolo was let go from his role as CEO of Twitter, to be replaced by a former CEO that was also fired. Unfortunately, it looks very strongly as if the Board made this decision for the wrong reasons.
Even though investors have been unhappy with Twitter’s share price, as CEO Mr. Costolo was doing a decent job of growing the company and improving profits. And even though analysts keep offering reasons why he was fired, it looks mostly as if this was a political decision in a company with a “soap opera” executive culture. Investors should be worried.
Let’s compare Mr. Costolo to CEO Zuckerberg’s performance at Facebook, and Mr. Bezos’ performance at Amazon. The latter two have been widely heralded for their leadership, so it sets a pretty good bar.
None of these three companies have enough earnings to matter. If you aren’t a growth investor, and you always value a company on earnings, then none of these are your cup of tea. All are evaluated on revenue and user metrics.
As you can see, Twitter’s revenue growth exceeds its comparators. Yes, its decline has been more dramatic, but we are comparing Twitter to companies that are much older and bigger. The net is to understand that revenues are growing, and at a better clip than Facebook and Amazon.
Next we should look at active monthly users. Again, these numbers are growing at all 3. And some analysts have said it is the deceleration in the rate of new user growth that doomed Mr. Costolo. But this defies logic given that during his tenure Twitter has dramatically outperformed its competition.
Lastly, let’s look at the “quality” of users. We can measure this by calculating the revenue per user. If this goes up, then the company is growing it top line by gaining more revenue per user – it is not “discounting” its way to higher volume. Instead,we can expect profits to improve based upon growth in this metric.
And here we can see that Twitter has wildly outperformed Facebook and Amazon. Twitter has grown its revenue per user by over 9-fold in the last 4 years, an excellent 75% per year compounded. Facebook, by comparison, roughly tripled its revenue/user (still very good) creating a 25%/year growth (certainly not to be sneezed at.) Amazon’s growth per user across the full 4 years was 25% – or about 4%/year.
It isn’t hard to see that Mr. Costolo has been doing a pretty good job leading Twitter.
But Twitter has had a very checkered past when it comes to leaders. Several articles have been written about the revolving door on the CEO office, with founders back-stabbing each other as money is raised and efforts are made to improve company performance technologically and financially.
The Board has shown a proclivity to spend too much time listening to rumors, and previous CEOs. Rather than focusing on exactly how many users are coming aboard, and how much revenue is generated on those users.
The returning CEO was himself previously replaced. And during his tenure there were many technical problems. Why he would be inserted, and the best performing CEO in company history shunted aside is completely unclear. But for investors, employees, users (of which I am one) and customers this change in leadership looks to be poorly conceived, and quite concerning. Mr. Costolo was doing a pretty good job.
Data on revenues came from Marketwatch for Twitter, Facebook and Amazon. Data on users (in Amazon’s case customers) came from Statista.com for Twitter, Facebook and Amazon. Charts were created by Adam Hartung (C).
Last week saw another slew of quarterly earnings releases. For long term investors, who hold stocks for years rather than months, these provide the opportunity to look at trends, then compare and contrast companies to determine what should be in their portfolio. It is worthwhile to compare the trends supporting the valuations of market leaders Google and Facebook.
Google once again reported higher sales and profits. And that is a good thing. But, once again, the price of Google’s primary product declined. Revenues increased because volume gains exceeded the price decline, which indicates that the market for internet ads keeps growing. But this makes 15 straight quarters of price declines for Google. Due to this long series of small declines, the average price of Google’s ads (cost per click) has declined 70%* since Q3 2011!
While this is a miraculous example of what economists call demand elasticity, one has to wonder how long growth will continue to outpace price degradation. At some point the marginal growth in demand may not equal the marginal decline in pricing. Should that happen, revenues will start going down rather than up.
Part of what drives this price/growth effect has been the creation of programmatic ad buying, which allows Google to place more ads in more specific locations for advertisers via such automated products as AdMob, AdExchange and DoubleClick Bid Manager. But such computerized ad buying relies on ever more content going onto the web, as well as ever more consumption by internet users.
Further, Google’s revenues are almost entirely search-based advertising, and Google dominates this category. But this is largely a PC-related sale. Today 67.5% of Google ad revenue is from PC searches, while only 32.5% is from mobile searches. Due to this revenue skew, and the fact that people do more mobile interaction via apps, messaging apps and social media than browser, search ad growth has fallen considerably. What was a 24% year over year growth rate in Q1 2012 has dropped to more like 15% for the last 8 quarters.
So while the market today is growing, and Google is making more money, it is possible to see that the growth is slowing. And Google’s efforts to create mobile ad sales outside of search has largely failed, as witnessed by the recent death of Google+ as competition for Twitter or Facebook. It is the market shift, to mobile, which creates the greatest threat to Google’s ability to grow; certainly at historical rates.
Simultaneously, Facebook’s announcements showed just how strongly it is continuing to dominate both social media and mobile, and thus generate higher revenues and profits with outstanding growth. The #1 site for social media and messenger apps is Facebook, by quite a large margin. But, Facebook’s 2014 acquisition of What’sApp is now #2. WhatsApp has doubled its monthly active users (MAUs) just since the acquisition, and now reaches 800million. Growth is clearly accelerating, as this is from a standing start in 2011.
Facebook Messenger at #3, just behind WhatsApp. And #5 is Instagram, another Facebook acquisition. Altogether 4 of the top 5 sites, and the ones with greatest growth on mobile, are Facebook. And they total over 3billion MAUs, growing at over 300million new MAUs/month. Thus Facebook has already emerged as the dominant force, with the most users, in the fast-growing, accelerating, mobile and app sectors. (Just as Google did in internet search a decade ago, beating out companies like Yahoo, Ask Jeeves, etc.)
Google is moving rapidly to monetize this user base. From nothing in early 2012, Facebook’s mobile revenue is now $2.5B/quarter and represents 67% of global revenue (the inverse of Google’s revenues.) Further, Facebook is now taking its own programmatic ad buying tool, Atlas, to advertisers in direct competition with Google. Only Atlas places ads on both social media and internet browser pages – a one-two marketing punch Google has not yet cracked.
Google’s $17.3B Q1 2015 revenue is 30 times the revenue of Facebook. There is no doubt Google is growing, and generating enormous profits. But, for long-term investors, growth is slowing and there is reason to be concerned about the long term growth prospects of Google as the market shifts toward more social and more mobile. Google has failed to build any substantial revenues outside of search, and has had some notable failures recently outside its core markets (Google + and Google Glass.) Just how long Google will continue growing, and just how fast the market will shift is unclear. Technology markets have shown the ability to shift a lot faster than many people expected, leaving some painful losers in their wake (Dell, HP, Sun Microsystems, Yahoo, etc.)
Meanwhile, Facebook is squarely positioned as the leader, without much competition, in the next wave of market growth. Facebook is monetizing all things social and mobile at a rapid clip, and wisely using acquisitions to increase its strength. As these markets continue on their well established trends it is hard to be anything other than significantly optimistic for Facebook long-term.
* 1x .93 x .88 x .84 x .85 x .94 x .96 x .94 x .93 x .89 x .91 x .94 x .98 x .97 x .95 x .93 = .295
If you don’t drink gin you may not know the brand Tanqueray, a product owned by Diageo. But Tanqueray has been around for almost 190 years, going back to the days when London Dry Gin was first created. Today Tanqueray is one of the most dominant gin brands in the world, and the leading brand in the USA.
But gin is not a growth category. And Tanqueray, despite its great product heritage and strong brand position, has almost no growth prospects.
Any product that doesn’t grow sales cannot generate profits to spend on brand maintenance. Firstly, if due to nothing more than inflation, costs always go up over time. It takes rising sales to offset higher costs. Additionally, small competitors can niche the market with new products, cutting into leader sales. And competitors will undercut the leader’s price to steal volume/share in a stagnant market, causing margin erosion.
Category growth stalls are usually linked to substitute products stealing share in a larger definition of the marketplace. For example sales of laptop/desktop PCs stalled because people are now substituting tablets and smartphones. The personal technology market is growing, but it is in the newer product category stealing sales from the older product category.
This is true for gin sales, because older drinkers – who dominate today’s gin market – are drinking less spirits, and literally dying from old age. In the overall spirits market, younger liquor drinkers have preferred vodkas and flavored vodkas which are “smoother,” sweeter, and perceived as “lighter.”
So, what is a brand manager to do? Simply let trends obsolete their product line? Milk their category and give up money for investing somewhere else?
That may sound fine at a corporate level, where category portfolios can be managed by corporate vice presidents. But if you’re a brand manager and you want to become a future V.P., managing declining product sales will not get you into that promotion. And defending market share with price cuts, rebates and deals will cut into margin, ruin the brand position and likely kill your marketing career.
Keith Scott is the Senior Brand Manager for Tanqueray, and his team has chosen to regain product growth by using sustaining innovations in a smart way to attract new customers into the gin category. They are looking beyond the currently dwindling historical customer base of London Dry Gin drinkers, and working to attract new customers which will generate category growth and incremental Tanqueray sales. He’s looking to build the brand, and the category, rather than get into a price war.
Building on demographic trends, Tanqueray’s brand management is targeting spirit drinkers from 28-38. Three new Tanqueray brand extensions are being positioned for greatest appeal to increasingly adult tastes, while offering sophistication and linkage to one of the longest and strongest spirits brands.
#1 – Tanqueray Rangpur is a highly citrus-flavored gin taking a direct assault on flavored vodkas. Although still very much a gin, with its specific herb-based taste, Rangpur adds a hefty, and uniquely flavored, dose of lime. This makes for a fast, easy to prepare gin and tonic or lime-based gimlet – 2 classic cocktails that have their roots in England but have been popular in the US since before prohibition. And, in defense of the brand, Rangpur is priced about 10-20% higher than London Dry.
#2 – Tanqueray Old Tom and Tanqueray Milacca appeal to the demographic that loves specialty, crafted products. The “craft” product movement has grown dramatically, and nowhere more powerfully than amongst 28-42 year old beer drinkers. Old Tom and Milacca leverage this trend. Both are “retro” products, harkening to gins over 100 years ago. They are made in small batches and have limited availability. They are targeted at the consumer that wants something new, unique, unusual and yet tied to old world notions of hand-made production and high quality. These craft products are priced 25-35% higher than traditional London Dry.
#3 – Tanqueray No. 10 is a “super-premium” product pointed at the customer who wants to project maximum sophistication and wealth. No 10 uses a special manufacturing process creating a uniquely smooth and slightly citrus flavor. But this process loses 40% of the product to “tailings” compared to the industry standard 10% loss. No. 10 is the high-end defense of the Tanqueray brand (a “top shelf” product as its known in the industry) priced 75-90% higher than London Dry.
No. 10 is being promoted with “invitation only” events being held in major U.S. cities such as New York, Chicago and Atlanta. No. 10 “trunk events” bring in some of the hottest, newest designers to showcase the latest in apparel trends, accompanied by hot, new musical talent. No. 10 is associated with the sophistication of super-premium brands – individualized and rare products – in a members-only environment. Targeted at the primary demographic of 28-38, No. 10 events are designed to lure these consumers to this product they otherwise might overlook .
Rather than addressing their gin category growth stall with price cuts and other sales incentives, which would lead to brand erosion, price erosion, and margin erosion, the Tanqueray brand team is leveraging trends to bring new consumers to their category and generate profitable growth. These innovative brand extensions actually build brand value while leveraging identifiable market trends. Notice that all these sustaining innovations are actually priced higher than the highest volume London Dry core product, thus augmenting price – and hopefully margin.
Too often leaders see their market stagnate and use that as an excuse lower expectations and accept sales decline. They don’t look beyond their core market for new customers and sources of growth. They react to competition with the blunt axe of pricing actions, seeking to maintain volume as margins erode and competition intensifies. This accelerates product genericization, and kills brand value.
The Tanqueray brand team demonstrates how critical sustaining innovation can be for maintaining growth at all levels of an organization. Even the level of a single product or brand. They are using sustaining innovations to lure in new customers and grow the brand umbrella, while growing the category and achieving desired price realization. This is a lesson many brands, and companies, should emulate.
Microsoft launched its new Surface 3 this week, and it has been gathering rave reviews. Many analysts think its combination of a full Windows OS (not the slimmed down RT version on previous Surface tablets,) thinness and ability to operate as both a tablet and a PC make it a great product for business. And at $499 it is cheaper than any tablet from market pioneer Apple.
Meanwhile Apple keeps promoting the new Apple Watch, which was debuted last month and is scheduled to release April 24. It is a new product in a market segment (wearables) which has had very little development, and very few competitive products. While there is a lot of hoopla, there are also a lot of skeptics who wonder why anyone would buy an Apple Watch. And these skeptics worry Apple’s Watch risks diverting the company’s focus away from profitable tablet sales as competitors hone their offerings.
Looking at these launches gives a lot of insight into how these two companies think, and the way they compete. One clearly lives in red oceans, the other focuses on blue oceans.
Blue Ocean Strategy (Chan Kim and Renee Mauborgne) was released in 2005 by Harvard Business School Press. It became a huge best-seller, and remains popular today. The thesis is that most companies focus on competing against rivals for share in existing markets. Competition intensifies, features blossom, prices decline and the marketplace loses margin as competitors rush to sell cheaper products in order to maintain share. In this competitively intense ocean segments are niched and products are commoditized turning the water red (either the red ink of losses, or the blood of flailing competitors, choose your preferred metaphor.)
On the other hand, companies can choose to avoid this margin-eroding competitive intensity by choosing to put less energy into red oceans, and instead pioneer blue oceans – markets largely untapped by competition. By focusing beyond existing market demands companies can identify unmet needs (needs beyond lower price or incremental product improvements) and then innovate new solutions which create far more profitable uncontested markets – blue oceans.
Obviously, the authors are not big fans of operational excellence and a focus on execution, but instead see more value for shareholders and employees from innovation and new market development.
If we look at the new Surface 3 we see what looks to be a very good product. Certainly a product which is competitive. The Surface 3 has great specifications, a lot of adaptability and meets many user needs – and it is available at what appears to be a favorable price when compared with iPads.
But …. it is being launched into a very, very red ocean.
The market for inexpensive personal computing devices is filled with a lot of products. Don’t forget that before we had tablets we had netbooks. Low cost, scaled back yet very useful Microsoft-based PCs which can be purchased at prices that are less than half the cost of a Surface 3. And although Surface 3 can be used as a tablet, the number of apps is a fraction of competitive iOS and Android products – and the developer community has not yet embraced creating new apps for Windows tablets. So Surface 3 is more than a netbook, but also a lot more expensive.
Additionally, the market has Chromebooks which are low-cost devices using Google Chrome which give most of the capability users need, plus extensive internet/cloud application access at prices less than a third that of Surface 3. In fact, amidst the Microsoft and Apple announcements Google announced it was releasing a new ChromeBit stick which could be plugged into any monitor, then work with any Bluetooth enabled keyboard and mouse, to turn your TV into a computer. And this is expected to sell for as little as $100 – or maybe less!
This is classic red ocean behavior. The market is being fragmented into things that work as PCs, things that work as tablets (meaning run apps instead of applications,) things that deliver the functionality of one or the other but without traditional hardware, and things that are a hybrid of both. And prices are plummeting. Intense competition, multiple suppliers and eroding margins.
Ouch. The “winners” in this market will undoubtedly generate sales. But, will they make decent profits? At low initial prices, and software that is either deeply discounted or free (Google’s cloud-based MSOffice competitive products are free, and buyers of Surface 3 receive 1 year free of MS365 Office in the cloud, as well as free upgrade to Windows 10,) it is far from obvious how profitable these products will be.
Amidst this intense competition for sales of tablets and other low-end devices, Apple seems to be completely focused on selling a product that not many people seem to want. At least not yet. In one of the quirkier product launch messages that’s been used, Apple is saying it developed the Apple Watch because its other innovative product line – the iPhone – “is ruining your life.”
Apple is saying that its leaders have looked into the future, and they think today’s technology is going to move onto our bodies. Become far more personal. More interactive, more knowledgeable about its owner, and more capable of being helpful without being an interruption. They see a future where we don’t need a keyboard, mouse or other artificial interface to connect to technology that improves our productivity.
Right. That is easy to discount. Apple’s leaders are betting on a vision. Not a market. They could be right. Or they could be wrong. They want us to trust them. Meanwhile, if tablet sales falter….. if Surface 3 and ChromeBit do steal the “low end” – or some other segment – of the tablet market…..if smartphone sales slip….. if other “forward looking” products like ApplePay and iBeacon don’t catch on……
This week we see two companies fundamentally different methods of competing. Microsoft thinks in relation to its historical core markets, and engaging in bloody battles to win share. Microsoft looks at existing markets – in this case tablets – and thinks about what it has to do to win sales/share at all cost. Microsoft is a red ocean competitor.
Apple, on the other hand, pioneers new markets. Nobody needed an iPod… folks were happy enough with Sony Walkman and Discman. Everybody loved their Razr phones and Blackberries… until Apple gave them an iPhone and an armload of apps. Netbook sales were skyrocketing until iPads came along providing greater mobility and a different way of getting the job done.
Apple’s success has not been built upon defending historical markets. Rather, it has pioneered new markets that made existing markets obsolete. Its success has never looked obvious. Contrarily, many of its products looked quite underwhelming when launched. Questionable. And it has cannibalized its own products as it brought out new ones (remember when iPods were so new there was the iPod mini, iPod nano and iPod Touch? After 5 years of declining iPod sale Apple has stopped reporting them.) Apple avoids red oceans, and prefers to develop blue ones.
Which company will be more successful in 2020? Time will tell. But, since 2000 Apple has gone from nearly bankrupt to the most valuable publicly traded company in the USA. Since 1/1/2001 Microsoft has gone up 32% in value. Apple has risen 8,000%. While most of us prefer the competition in red oceans, so far Apple has demonstrated what Blue Ocean Strategy authors claimed, that it is more profitable to find blue oceans. And they’ve shown us they can do it.
The Netflix hit series “House of Cards” was released last night. Most media reviewers and analysts are expecting huge numbers of fans will watch the show, given its tremendous popularity the last 2 years. Simultaneously, there are already skeptics who think that releasing all episodes at once “is so last year” when it was a newsworthy event, and no longer will interest viewers, or generate subscribers, as it once did. Coupled with possible subscriber churn, some think that “House of Cards” may have played out its hand.
So, the success of this series may have a measurable impact on the valuation of Netflix. If the “House of Cards” download numbers, which are up to Netflix to report, aren’t what analysts forecast many may scream for the stock to tumble; especially since it is on the verge of reaching new all-time highs. The Netflix price to earnings (P/E) multiple is a lofty 107, and with a valuation of almost $29B it sells for just under 4x sales.
But investors should ignore any, and in fact all, hype about “House of Cards” and whatever analysts say about Netflix. So far, they’ve been wildly wrong when making forecasts about the company. Especially when projecting its demise.
Since Netflix started trading in 2002, it has risen from (all numbers adjusted) $8.5 to $485. That is a whopping 57x increase. That is approximately a 40% compounded rate of return, year after year, for 13 years!
But it has not been a smooth ride. After starting (all numbers rounded for easier reading) at $8.50 in May, 2002 the stock dropped to $3.25 in October – a loss of over 60% in just 5 months. But then it rallied, growing to $38.75, a whopping 12x jump, in just 14 months (1/04!) Only to fall back to $9.80, a 75% loss, by October, 2004 – a mere 9 months later. From there Netflix grew in value by about 5.5x – to $55/share – over the next 5 years (1/10.) When it proceeded to explode in value again, jumping to $295, an almost 6-fold increase, within 18 months (7/11). Only to get creamed, losing almost 80% of its value, back down to $63.85, in the next 4 months (11/11.) The next year it regained some loss, improving in value by 50% to $91.35 (12/12,) only to again explode upward to $445 by February, 2014 a nearly 5-fold increase, in 14 months. Two months later, a drop of 25% to $322 (4/14). But then in 4 months back up to $440 (8/14), and back down 4 months later to $341 (12/14) only to approach new highs reaching $480 last week – just 2 months later.
That is the definition of volatility.
Netflix is a disruptive innovator. And, simply put, stock analysts don’t know how to value disruptive innovators. Because their focus is all on historical numbers, and then projecting those historicals forward. As a result, analysts are heavily biased toward expecting incumbents to do well, and simultaneously being highly skeptical of any disruptive company. Disruptors challenge the old order, and invalidate the giant excel models which analysts create. Thus analysts are very prone to saying that incumbents will remain in charge, and that incumbents will overwhelm any smaller company trying to change the industry model. It is their bias, and they use all kinds of historical numbers to explain why the bigger, older company will project forward well, while the smaller, newer company will stumble and be overwhelmed by the entrenched competitor.
And that leads to volatility. As each quarter and year comes along, analysts make radically different assumptions about the business model they don’t understand, which is the disruptor. Constantly changing their assumptions about the newer kid on the block, they make mistake after mistake with their projections and generally caution people not to buy the disruptor’s stock. And, should the disruptor at any time not meet the expectations that these analysts invented, then they scream for shareholders to dump their holdings.
Netflix first competed in distribution of VHS tapes and DVDs. Netflix sent them to people’s homes, with no time limit on how long folks could keep them. This model was radically different from market leader Blockbuster Video, so analysts said Blockbuster would crush Netflix, which would never grow. Wrong. Not only did Blockbuster grow, but it eventually drove Blockbuster into bankruptcy because it was attuned to trends for convenience and shopping from home.
As it entered streaming video, analysts did not understand the model and predicted Netflix would cannibalize its historical, core DVD business thus undermining its own economics. And, further, much larger Amazon would kill Netflix in streaming. Analysts screamed to dump the stock, and folks did. Wrong. Netflix discovered it was a good outlet for syndication, created a huge library of not only movies but television programs, and grew much faster and more profitably than Amazon in streaming.
Then Netflix turned to original programming. Again, analysts said this would be a huge investment that would kill the company’s financials. And besides that people already had original programming from historical market leaders HBO and Showtime. Wrong. By using analysis of what people liked from its archive, Netflix leadership hedged its bets and its original shows, especially “House of Cards” have been big hits that brought in more subscribers. HBO and Showtime, which have depended on cable companies to distribute their programming, are now increasingly becoming additional programming on the Netflix distribution channel.
Investors should own Netflix because the company’s leadership, including CEO Reed Hastings, are great at disruptive innovation. They identify unmet customer needs and then fulfill those needs. Netflix time and again has demonstrated it can figure out a better way to give certain user segments what they want, and then expand their offering to eat away at the traditional market. Once it was retail movie distribution, increasingly it is becoming cable distribution via companies like ComCast, AT&T and Time Warner.
And investors must be long-term. Netflix is an example of why trading is a bad idea – unless you do it for a living. Most of us who have full time day jobs cannot try timing the ups and downs of stock movements. For us, it is better to buy and hold. When you’re ready to buy, buy. Don’t wait, because in the short term there is no way to predict if a stock will go up or down. You have to buy because you are ready to invest, and you expect that over the next 3, 5, 7 years this company will continue to drive growth in revenues and profits, thus expanding its valuation.
Netflix, like Apple, is a company that has mastered the skills of disruptive innovation. While the competition is trying to figure out how to sustain its historical position by doing the same thing better, faster and cheaper Netflix is figuring out “the next big thing” and then delivering it. As the market shifts, Netflix is there delivering on trends with new products – and new business models – which push revenues and profits higher.
That’s why it would have been smart to buy Netflix any time the last 13 years and simply held it. And odds are it will continue to drive higher valuations for investors for many years to come. Not only are HBO, Showtime and Comcast in its sites, but the broadcast networks (ABC, CBS, NBC) are not far behind. It’s a very big media market, which is shifting dramatically, and Netflix is clearly the leader. Not unlike Apple has been in personal technology.