Facebook’s Path To Communication Domination

Facebook’s Path To Communication Domination

Facebook shareholders should be cheering. And if you don’t own FB, you should be asking yourself why not. The company’s platform investments continue to draw users, and advertisers, in unprecedented numbers.

sms messaging is declining

With permission: Statista

People over 40 still might text. But for most younger people, messaging happens via FB Messenger or WhatsApp. Text messages have thus been declining in the USA. Internationally, where carriers still frequently charge for text messages, the use of both Facebook products dominates over texting. Both Facebook products now are leaders in internet usage.

And as their use grows, so do the ad dollars.

digital advertising now greater than tv

With permission: Statista

As this chart shows, in 2017 ad spending on digital outpaced money spent on TV ads. And TV spending, like print and radio, is flat to declining. While digital spending accelerates. And the big winner here is the platform getting the most eyeballs – which would be Facebook (and Google.)

Looking at the trends, Facebook investors should feel really good about future returns. And if you don’t own Facebook shares, why not?

What Business Leaders Can Learn From Bitcoin Fanatics

What Business Leaders Can Learn From Bitcoin Fanatics

On August 15, Bitcoin rose to $4,000, I wrote a column about the crypto-currency. At the time, I thought Bitcoin was reasonably obscure, and I doubted there would be many readers. I was amazed when the column went semi-viral, and it has had almost 350,000 reads. But even more amazing was that the column generated an enormous amount of feedback. From email responses to Facebook remarks and Tweets I was inundated with people who, largely, wanted my head.

I found this confounding and fascinating. Why would an article that simply said a crypto-currency was speculative draw such an enormous response? And why such hostility? Just as I had not anticipated much readership, I certainly did not anticipate the reaction. These factors led me to research Bitcoin owners, and develop some theories on why Bitcoin is such a big deal to its enthusiasts.

1 – Bitcoin owners want the value to increase

I made the mistake of thinking of Bitcoins as a form of cash. Something to be spent. But I discovered most owners are holding Bitcoins as an asset. Because there are technical limits on how many Bitcoins can be created, and how quickly, these owners see the possibility of Bitcoin value increasing. As “investors” in Bitcoins, they don’t want anything (like a negative column) to put a damper on Bitcoin’s ability to rise.

Such speculation is not uncommon. Many people buy land, gold, silver and diamonds because they expect limited supply, and growing demand, to cause the value to rise. Other people buy Andy Warhol prints, vintage automobiles, signatures of historical people or baseball cards for the same reason. I prefer to call this speculation, but these people refer to themselves as investors in rare assets. Bitcoin investors see themselves in this camp, only they think Bitcoins are less risky than the other assets.

Regardless the nomenclature, anyone who is buying and holding Bitcoins would be unhappy to hear that the asset is risky, or potentially a bad holding. But unlike all those other items I mentioned, Bitcoins are not physical. To some extent merely owning the other assets has a certain amount of its own reward. One can enjoy a diamond ring, or a Warhol print on the wall while waiting to learn if its value goes up or down. But Bitcoins are just computer 1s and 0s, and really a new kind of asset (crypto-currency.) These investors are considerably younger on average, a bit more skittish, and considerably more outspoken regarding the future of their investment – and those who would be negative on Bitcoins.

While wanting their asset value to rise makes sense, it is rare that speculators have been as passionate as those who responded on Bitcoin. I’ve written about many companies I feared would lose value, and thus were speculative, but those columns did not create the fervor with responses like those regarding Bitcoin

2 – Confusion between Bitcoin and Blockchain technology

Blockchain is the underlying technology upon which Bitcoins are created. I have now read a few hundred articles on Bitcoins and Blockchain.

I was struck at just how confusing authors on these topics can be. They will say the two are very different, but then go on at great length that if you believe in Blockchain you should believe in Bitcoins. Few columns on Blockchain don’t talk about Bitcoins. And all Bitcoin authors talk about the wonders of Blockchain.

There is no doubt that Blockchain technology is new to the scene, and shows dramatic promise. Many large organizations are investigating using Blockchain for uses from financial transaction clearing to medical record retention. This is serious technology, and as it matures there are a great many people working to make it as trustworthy as (no, more trustworthy than) the internet. Just as the web requires some rules about URLs, domain naming, page serving, data accumulation, site direction, etc. there are serious people thinking about how to make Blockchain consistent in its application and use – which could open the door for many opportunities to streamline the digital world and make our lives better, and possibly more secure.

There were many, many people who disliked my skeptical view of Bitcoins, and based their entire argument for Bitcoinvalue on their belief in Blockchain. I was schooled over and again on the strength of Blockchain and its many future applications. And I was told that Blockchain technology inherently meant that Bitcoins have to go up in value. Buying Bitcoins was frequently referred to as investing in “Internet 2.0” due to the Blockchain technology.

It is clear that without Blockchain you could not have Bitcoins. But the case demanding one owns Bitcoin because it is built on Blockchain (“the technology of the future” as it is referred to by many) is still being developed. To them I was the one who was confused, unable to see the future they saw built on Blockchain. There were hoards of people who were almost religious in their Bitcoin faith, indicating that there was yet still more underlying their passion.

3 – As trust in government declines, there is growing trust in technology

More than ever in modern history, people have little faith in their government. In the USA, favorable opinions of Congress and its leaders are nearly non-existent. And favorable opinions for the current President started out below normal, and have gotten considerably worse. It is reported now with some regularity that Americans have little trust in the President, Congress, Courts – and the Federal Reserve.

There were, literally, hundreds of people who sent messages talking about the failure of government based currencies. Most of these examples were South American, but still these people made the point, loudly and clearly, that governments can affect the value of their currency. Thus, these Bitcoin investors had lost faith in all government backed securities, including the U.S. dollar, euro, yen, etc. They believed, fervently, that only a currency based on technology, without any government involvement, could ever maintain its value.

Today if someone is asked to give personal information for a census on their city, county, state or country they will often refuse. They want nothing to do with giving additional information to their government.

But these same people allow Facebook, Google and Amazon to watch their most private communications. Facebook records their emotions, their personal interactions, friends, complaints and a million other things going on in users’ lives to develop profiles of what is interesting to them in order to send along newsfeeds, information and ads. Google has recorded every search everyone has ever done, and analyzes those to develop profiles of each person’s interests, concerns, desires and hundreds of other categories to match each with the right ad. Amazon watches every product search made, and everything purchased to profile each person in order to push them the right products, entertainment, news and ads. And they all sell these profiles, and a lot of other personal information, to a host of other companies who do credit ratings, develop credit card offerings and push their own items for sale.

People who have no faith at all in government, and don’t believe government entities can make their lives better, leave their cookies on because they trust these tech companies to use technology to make their lives better. They believe in technology. Are these folks losing privacy? Maybe, but they see a direct benefit to what the technology operated by these tech companies can do for their lives.

For them, Bitcoin represents a future without government. And that clearly drives passion. Blockchain is a bias free, regulator free technology platform. Bitcoin is a government free form of currency, unable to be manipulated by the Federal Reserve, Exchequer of the currency, European Central Bank, Congress, Presidents, the G7, or anyone else. For the vocal Bitcoin owners, they see in Bitcoin a new future with far less government involvement, based on Blockchain technology. And they trust technology far more than they trust the current systems. They claim to not be anarchists, but rather believers in technology over human government, and in some instances even religion.

Leadership lessons from my Bitcoin journey

Often we try to explain away feedback, especially negative feedback or feedback that is hard to interpret, with easy answers. Such as, “they just want their asset to go up in value.” That is a big mistake. If the feedback is strong, it is really worth digging harder to understand why there is passion. Never forget that every piece of negative feedback is a chance to learn and grow. It is almost always worth taking the time to really understand not only what is being said, but why it is being said. There could be a lot more to the issue than face value.

If things are confusing, it is important to sort out the source of the confusion. If I’m talking about a currency, why do they keep talking about the technology? Saying “they don’t get it” misses the point that maybe “you don’t get it.” It is worth digging into the confusion to try and really understand what motivates someone. Only by listening again and again and again, and trying to really see their point of view, can you come to understand that what you think is confusing, to them is not. They aren’t confused, they see you as confused. Until you resolve this issue, both parties will keep talking right past each other.

You cannot lead if you do not understand what other people value. Their belief system may not match yours, and thus they are reaching very different conclusions when looking at the same “facts.” While I may trust the Fed and the ECB, and even banks, if others don’t then they may well have a very different view of the future.

When leaders lose the faith of those they are supposedly leading, unexpected outcomes will occur. Leaders cannot lead people who don’t trust them. Using the power of their office to force their will on others, and forcing conformance to existing processes, methods and systems can often lead to strong negative reactions. People may have no choice short-term but to do as instructed, but they may well be plotting (investing) longer term in a very different future. Failing to see the passion with which they are seeking that different future will only cause the leadership gap to widen, and shorten the time to a disruptive event.

I'd like to receive newsletters.

logo-footer
GET THE BOOK
Adam's book reveals the truth about how to use strategy to outpace the competition.
Create Marketplace Disruption book
PRESS & MEDIA
Follow Adam's coverage in the press and in other media.
FOLLOW ADAM
Follow Adam's column in Forbes.

Understand Growth Stalls So You Can Avoid GM, JCPenney and Chipotle

Understand Growth Stalls So You Can Avoid GM, JCPenney and Chipotle

Companies, like aircraft, stall when they don’t have enough “power” to continue to climb.
Everybody wants to be part of a winning company.  As investors, winners maximize portfolio returns.  As employees winners offer job stability and career growth.  As communities winners create real estate value growth and money to maintain infrastructure.  So if we can understand how to avoid the losers, we can be better at picking winners.
It has been 20 years since we recognized the predictive power of Growth Stalls.  Growth Stalls are very easy to identify.  A company enters a Growth Stall when it has 2 consecutive quarters, or 2 successive quarters vs the prior year, of lower revenues or profits.  What’s powerful is how this simple measure indicates the inability of a company to ever grow again.

Only 7% of the time will a company that has a Growth Stall  ever grow at greater than 2%/year.  93% of these companies will never achieve even this minimal growth rate.  38% will trudge along with -2% to 2% growth, losing relevancy as it develops no growth opportunities.  But worse, 55% of companies will go into decline, with sales dropping at 2% or more per year.  In fact 20% will see sales drop at 6% or more per year.  In other words, 93% of companies that have a Growth Stall simply will not grow, and 55% will go into immediate decline.

Growth Stalls happen because the company is somehow “out of step” with its marketplace.  Often this is a problem with the product line becoming less desirable.  Or it can be an increase in new competitors.  Or a change in technology either within the products or in how they are manufactured.  The point is, something has changed making the company less competitive, thus losing sales and/or profits.

Unfortunately, leadership of most companies react to a Growth Stall by doubling down on what they already do.  They vow to cut costs in order to regain lost margin, but this rarely works because the market has shifted.  They also vow to make better products, but this rarely matters because the market is moving toward a more competitive product.  So the company in a Growth Stall keeps doing more of the same, and fortunes worsen.

 But, inevitably, this means someone else, some company who is better aligned with market forces, starts doing considerably better.

This week analysts at Goldman Sachs lowered GM to a sell rating.  This killed a recent rally, and the stock is headed back to $40/share, or lower, values it has not maintained since recovering from bankruptcy after the Great Recession.  GM is an example of a company that had a Growth Stall, was saved by a government bailout, and now just trudges along, doing little for employees, investors or the communities where it has plants in Michigan.

tesla going up a hill

Tesla- enough market power to gain share “uphill”?

By understanding that GM, Ford and Chrysler (now owned by Fiat) all hit Growth Stalls we can start to understand why they have simply been a poor place to invest one’s resources.  They have tried to make cars cheaper, and marginally better.  But who has seen their fortunes skyrocket?  Tesla.  While GM keeps trying to make a lot of cars using outdated processes and technologies Tesla has connected with the customer desire for a different auto experience, selling out its capacity of Model S sedans and creating an enormous backlog for Model 3.  Understanding GM’s Growth Stall would have encouraged you to put your money, career, or community resources into the newer competitor far earlier, rather than the no growth General Motors.

This week, JCPenney’s stock fell to under $3/share.  As JCPenney keeps selling real estate and clearing out inventory to generate cash, analysts now say JCPenney is the next Sears, expecting it to eventually run out of assets and fail. Since 2012 JCP has lost 93% of its market value amidst closing stores, laying off people and leaving more retail real estate empty in its communities.

In 2010 JCPenney entered a Growth Stall.  Hoping to turn around the board hired Ron Johnson, leader of Apple’s retail stores, as CEO.  But Mr. Johnson cut his teeth at Target, and he set out to cut costs and restructure JCPenney in traditional retail fashion.  This met great fanfare at first, but within months the turnaround wasn’t happening, Johnson was ousted and the returning CEO dramatically upped the cost cutting.

The problem was that retail had already started changing dramatically, due to the rapid growth of e-commerce.  Looking around one could see Growth Stalls not only at JCPenney, but at Sears and Radio Shack.  The smart thing to do was exit those traditional brick-and-mortar retailers and move one’s career, or investment, to the huge leader in on-line sales, Amazon.com.  Understanding Growth Stalls would have helped you make a good decision much earlier.

This recent quarter Chipotle Mexican Grill saw analysts downgrade the company, and the stock took another hit, now trading at a value not seen since the end of 2012.  Chipotle leadership blamed bad results on higher avocado prices, temporary store closings due to hurricanes, paying out damages due to a “one time event” of hacking, and public relations nightmares from rats falling out of a store ceiling in Texas and a norovirus outbreak in Virginia.  But this is the typical “things will all be OK soon” sorts of explanations from a leadership team that failed to recognize Chipotle’s Growth Stall.

chipotle employeesPrior to 2015, Chipotle was on a hot streak.  It poured all its cash into new store openings, and the share price went from $50 from the 2006 IPO to over $700 by end of 2015; a 14x improvement in 9 years.  But when it was discovered that ecoli was in Chipotle’s food the company’s sales dropped like a stone.  It turned out that runaway growth had not been supported by effective food safety processes, nor effective store operations processes that would meet the demands of a very large national chain.

But ever since that problem was discovered, management has failed to recognize its Growth Stall required a significant set of changes at Chipotle.  They have attacked each problem like it was something needing individualized attention, and could be rectified quickly so they could “get back to normal.”  And they hoped to turn around public opinion by launching nationwide a new cheese dip product in 2017, despite less than good social media feedback on the product from early customers. They kept attempting piecemeal solutions when the Growth Stall indicated something much bigger was engulfing the company.

What’s needed at Chipotle is a recognition of the wholesale change required to meet customer demands amidst a shift to more growth in independent restaurants, and changing millennial tastes.  From the menu options, to app ordering and immediate delivery, to the importance of social media branding programs and customer testimonials as well as demonstrating commitment to social causes and healthier food Chipotle has fallen out-of-step with its marketplace.  The stock has now lost 66% of its value in just 2 years amidst sales declines and growth stagnation.

We don’t like to study losers.  But understanding the importance of Growth Stalls can be very helpful for your career and investments.  If you identify who is likely to do poorly you can avoid big negatives.  And understanding why the market shifted can lead you to finding a job, or investing, where leadership is headed in the right direction.

I'd like to receive newsletters.

logo-footer
GET THE BOOK
Adam's book reveals the truth about how to use strategy to outpace the competition.
Create Marketplace Disruption book
PRESS & MEDIA
Follow Adam's coverage in the press and in other media.
FOLLOW ADAM
Follow Adam's column in Forbes.

The Three Steps GE Should Take Now – And The Lessons For Your Business

The Three Steps GE Should Take Now – And The Lessons For Your Business

Monitor displays General Electric Co. (GE) at the New York Stock Exchange (NYSE) October, 2017. Photographer: Michael Nagle/Bloomberg

For years I have been negative on GE’s leadership.  CEO Immelt led the dismantling of the once-great GE, making it a smaller company and one worth quite a bit less.  The process has been devastating to many employees who lost their jobs, pensioners who have seen their benefits shrivel, communities with GE facilities that have suffered from investment atrophy, suppliers that have been squeezed out or displaced and investors that have seen the value of GE shares plummet.

But now there is a new CEO, a new leadership team and even some new faces on the Board of Directors.  Some readers have informed me that it is easier to attack a weak leader than recommend a solution, and they have inquired as to what I think GE should do now.  I do not see the GE situation as hopeless.  The company still has an enormous revenue base, and vast assets it can use to fund a directional shift.  And that’s what GE must do – make a serious shift in how it allocates resources.

Step 1 – Apply the First Rule of Holes

The first rule of holes is “when you find yourself in a hole, stop digging.”  (Will Rogers, 1911) This seems simple.  But far too many companies have their resourcing process on auto-pilot.  Businesses that have not been growing, and often are not producing good returns on investment, continue to receive funding.  Possibly because they are a legacy business that nobody wants to stop.  Or possibly because leadership remains ever hopeful that tomorrow will somehow look like yesterday and the next round of money, or hiring, will change things to the way they were.

In fact, these businesses are in a hole, and spending more on them is continuing to dig.  The investment hole just keeps getting bigger.  The smart thing to do is just stop.  Quit adding resources to a business that’s not adding value to the market capitalization.  Just stop investing.

Will rogers, american humorist

When Steve Jobs took over Apple he discontinued several Macintosh models, and cut funding for Macintosh development.  The Mac was not going to save Apple’s declining fortunes.  Apple needed new products for new markets, and the only way to make that happen was to stop putting so much money into the Mac business.

When streaming emerged CEO Reed Hastings of Netflix quit spending money on the traditional DVD/Video distribution business even though Netflix dominated it.  He even raised the price.   Only by stopping investments in traditional distribution could he turn the company toward streaming.

Step 2 – Identify the Trend that will Guide Your Strategy

All growth strategies build on trends.  After receiving funding from Microsoft to avoid bankruptcy in 2000, Apple spent a year deciding its future lied in building on the trend to mobile.  Once the trend was identified, all product development, and new product introductions, were targeted at being a leader in the mobile trend.

When the internet emerged GE CEO Jack Welch required all business units to create “DestroyYourBusiness.com” teams.  This forced every business to look at the impact the internet would have on their business, including business model changes and emergence of new competitors.  By focusing on the internet trend GE kept growing even in businesses not inherently thought of as “internet” businesses.

GE has to decide what trend it will leverage to guide all new growth projects.  Given its large positions in manufacturing and health care it would make sense to at least start with IoT opportunities, and new opportunities to restructure America’s health care system.  But even if not these trends, GE needs to identify the trend that it can build upon to guide its investments and grow.

Step 3 – Place Your Bets and Monetize

When Facebook CEO Mark Zuckerberg realized the trend in communications was toward pictures and video he took action to keep users on the company platform.  First he bought Instagram for $1 billion, even though it had no revenues.  Two years later he paid $19 billion for WhatsApp, gaining many new users as well as significant OTT technology.  Both seemed very expensive acquisitions, but Facebook rapidly moved to increase their growth

chess pieces and cash

and monetize their markets.  Leaders of the acquired companies were given important roles in Facebook to help guide growth in users, revenues and profits.

Netflix leads the streaming war, but it has tough competition.  So Netflix has committed spending over $6billion on new original content to keep customers from going to Amazon Prime, Hulu and others.  This large expenditure is intended to allow ongoing subscriber growth domestically and internationally, as well as raise subscription prices.

This week CVS announced it is planning to acquire Aetna Health for $66 billion.  On the surface it is easy to ask “why?” But quickly analysts offered support for the deal, ranging from fighting off Amazon in prescription sales to restructuring how health care costs are paid and how care is delivered.  The fact that analysts see this acquisition as building on industry trends gives support to the deal and expectations for better future returns for CVS.

During the Immelt era, there were attempts to grow, such as in the “water business.”  But the investments were not consistent, and there was insufficient effort placed on understanding how to monetize the business short- and long-term.  Leadership did not offer a compelling vision for how the trends would turn into revenues and profits.  Acquisitions were made, but lacking a strong vision of how to grow revenues, and an outsider’s perspective on how to lead the trend, very quickly short-term financial metrics built into GE’s review process led to bad decisions crippling these opportunities for growth.  And today the consensus is that GE will likely sell its healthcare businessrather than make the necessary investments to grow it as CVS is doing.

Successful leadership means moving beyond traditional financial management to invest for growth

In the Welch era, GE made dozens of acquisitions.  These were driven by a desire to build on trends.  Welch did not fear investing in growth businesses, and he held leaders’ feet to the fire to produce successful results.  If they didn’t achieve goals he let the people and/or the business go.  Hence his nickname “Neutron Jack.”

For example, although GE had no background in entertainment, GE bought NBC at a time when viewership was growing and ad prices were growing even faster.  This led to higher revenues and market cap for GE.  On the other hand, when leaders at CALMA did not anticipate the shift in CAD/CAM from dedicated workstations to PCs, Welch saw them overly tied to old technology and unable to recognize the trend, so he immediately sold the business.  He invested in businesses that added to valuation, and sold businesses that lacked a clear path to building on trends for higher value.

Being a caretaker, or steward, is no longer sufficient for business leadership.  Competitors, and markets, shift too quickly.  Leaders must anticipate trends, reduce investments in products, services and projects that are off the trend, and put resources to work where growth can create higher returns.

This is all possible at GE – if the new leadership has a vision for the future and starts allocating resources effectively.  For now, all we can do is wait and see……
will rogers quote: Even if you're on the right track you'll get run over if you just sit there.

I'd like to receive newsletters.

logo-footer
GET THE BOOK
Adam's book reveals the truth about how to use strategy to outpace the competition.
Create Marketplace Disruption book
PRESS & MEDIA
Follow Adam's coverage in the press and in other media.
FOLLOW ADAM
Follow Adam's column in Forbes.

The Only Surprise At GE Was That Anyone Was Surprised

The Only Surprise At GE Was That Anyone Was Surprised

GE Sign in Schenectady, NY- Hearst Newspapers

General Electric announced quarterly results this week, and and they were pretty bad.  Profits were nowhere near expectations, and the company lowered expectations for the year.  Cash flow was also disappointing, not even strong enough to cover the dividend.  Now analysts are really negative on company prospects, and most expect the dividend to be cut.

Meanwhile the new CEO, John Flannery, is admitting to horrible results as he removes most of the previous CEO’s top execs in a leadership housecleaning.  He is promising to cut costs dramatically, and sell off an additional $20billion of businesses in order to restore a higher level cash flow.  And according to the AP, Flannery will make faster progress toward “returning GE to its industrial roots.”

In other words, CEO Flannery continues the strategy of making GE smaller, and a less hospitable workplace, that his predecessor Immelt started implementing 16 years ago.  That’s the strategy that has seen GE lose ~45% of its value since Immelt took the top job, and lose over 60% of its value since peaking at $60 in 2000.  So far, GE just keeps shrinking in size, and value, and leadership gives no indication it has a plan to grow GE revenues and profits in future markets building on major market trends.

GE logo at plant in Hungary, 2017, Bloomberg

In other words, CEO Flannery continues the strategy of making GE smaller, and a less hospitable workplace, that his predecessor Immelt started implementing 16 years ago.  That’s the strategy that has seen GE lose ~45% of its value since Immelt took the top job, and lose over 60% of its value since peaking at $60 in 2000.  So far, GE just keeps shrinking in size, and value, and leadership gives no indication it has a plan to grow GE revenues and profits in future markets building on major market trends.

 What’s most surprising is that people seem surprised by the horrible current performance, and surprised that GE is in such terrible condition.  All the way back in December, 2010 this column highlighted selections for CEO of the year, and CEO of the decade, and in doing so pointed out that GE’s Immelt was on nobody’s list.  Even though his predecessor, Jack Welch, was widely lauded.

Immelt inherited one of America’s strongest, fastest growing and most valuable companies.  But in the first few years of his leadership the company completely failed to maintain Welch’s gains, and under Immelt’s mismanagement nearly went bankrupt by not preparing for the near-collapse of financial services in the Great Recession. It was obvious then that Immelt was trying to be a “caretaker” of GE, a “steward” of its history.  But he was not an effective leader with plans for a growing future, and competitors were beating up GE in all markets.  Even upstarts like Facebook, and its CEO Mark Zuckerberg, were far outperforming the stagnating, declining GE.

 By May, 2012 it was impossible to miss the mismanagement at GE.  This column selected CEO Immelt as the 4th worst CEO of all publicly traded American companies (beaten in badness by Mike Duke of WalMart who was pushed out during allegations of international bribery and fraud, Ed Lampert of Sears who has now completely destroyed the once great retailer, and Steve Ballmer of Microsoft who over-invested in Windows and Office while missing every major tech development of the last 15 years before being forced out by the board.)  By 2012 it was time for the Board of Directors to take action and replace Immelt.  But few investors amplified this column’s cries for change, and quiet complacency set in as people simply expected GE to perform better.  Just because it was GE, it appeared, as there were no signs the company understood market trends and how to ignite growth.

Of course, performance did not improve at GE.  By April, 2015 GE was the victim of a total leadership failure.  The company was not developing any major new trends, and Immelt’s focus was on unraveling old businesses, mostly via sales to external parties, in order to increase cash.   And the cash was used for share buybacks and dividends, rather than investing in growth. A slow, and badly implemented, liquidation of one of America’s oldest, and greatest, companies was underway.

Which made GE a target for activist investors, and Trian Funds took up the challenge, investing $1.5B in GE stock and taking a seat on the GE board.  Finally, it was time for action. Immelt was pushed out and Flannery was put in, and dramatic cuts and re-organizations led the discussions. Current appearances indicate GE will be significantly dismantled, assets will be sold, and in short order GE will look nothing like the great company it once was.

But, the question remains, why did things have to become so bad before the board took action? Why were people surprised?  Why didn’t Jim Cramer scream for a leadership housecleaning 7, 5 or 3 years ago?  Why didn’t shareholders vote against CEO compensation plans on the “say-on-pay” measures, exerting their voice to change a lackluster board that was allowing an incompetent CEO to remain in the job? Why wasn’t the pension fund, constantly whittling away at retiree benefits, forcing change?  Why were so many people, so many leaders, so quiet about what was an obvious business failure? A failure that needed to be addressed, first and foremost, by replacing the CEO?

So GE’s stock value has taken a big hit of late. And now people seem surprised by the admission of how bad things really are.  What’s really surprising is that people are surprised. This was not hard to see coming.

I'd like to receive newsletters.

logo-footer
GET THE BOOK
Adam's book reveals the truth about how to use strategy to outpace the competition.
Create Marketplace Disruption book
PRESS & MEDIA
Follow Adam's coverage in the press and in other media.
FOLLOW ADAM
Follow Adam's column in Forbes.

The Waltons Are Cashing Out Of Walmart — And You Should Be, Too

The Waltons Are Cashing Out Of Walmart — And You Should Be, Too

Employees restock shelves of school supplies at a Walmart Stores Inc. location in Burbank, CA.  Bloomberg

Last week there was a lot of stock market excitement regarding WalMart. After a “favorable” earnings report analysts turned bullish and the stock jumped 4% in one day, WMT’s biggest rally in over a year, making it a big short-term winner.  But the leadership signals indicate WalMart is probably not the best place to put your money.

WalMart has limited growth plans

WalMart is growing about 3%/year.  But leadership acknowledged it was not growing its traditional business in the USA, and only has plans to open 25 stores in the next year.  It hopes to add about 225 internationally, predominantly in Mexico and China, but unfortunately those markets have been tough places for WalMart to grow share and make profits.  And the company has been plagued with bribery scandals, particularly in Mexico.

And, while WalMart touts its 40%+ growth rate on-line, margins online (including the free delivery offer) are even lower than in the traditional Wal-Mart stores, causing the company’s gross margin percentage to decline.  The $11.5 billion on-line revenue projection for next year is up, but it is 2.5% of Walmart’s total, and a mere 7-8% of Amazon’s retail sales.  Amazon remains the clear leader, with 62% of U.S. households having visited the company in the second quarter.  And it is not a good sign that WalMart’s greatest on-line growth is in groceries, which amount to 26% of on-line salesalready.  WalMart is investing in 1,000 additional at-store curb-side grocery pick-uplocations, but this effort to defend traditional store sales is in the products where margins are clearly the lowest, and possibly nonexistent.

It is not clear that WalMart has a strategy for competing in a shrinking traditional brick-and-mortar market where Costco, Target, Dollar General, et.al. are fighting for every dollar.  And it is not clear WalMart can make much difference in Amazon’s giant on-line market lead.  Meanwhile, Amazon continues to grow in valuation with very low profits, even as it grows its presence in groceries with the Whole Foods acquisition.  In the 17 months from May 10, 2016 through October 10, 2017 WalMart’s market cap grew by $24 billion (10%,) while Amazon’s grew by $174 billion (57%.)

Even after recent gains for WalMart, its market capitalization remains only 53% of its much smaller on-line competitor.  This creates a very difficult pricing problem for WalMart if it has to make traditional margins in order to keep analysts, and investors, happy.

Leadership is not investing to compete, but rather cashing out the business

To understand just how bad this growth problem is, investors should take a look at where WalMart has been spending its cash.  It has not been investing in growing stores, growing sales per store, nor really even growing the on-line business.  From 2007-2016 WalMart spent a whopping $67.3 billion in share buybacks.  That is over 20 times what it spent on Jet.com.  And it was 45% of total profits during that timeframe.  Additionally WalMart paid out $51.2 billion in dividends, which amounted to 34% of profits.  Altogether that is $118.5 billion returned to shareholders in the last decade.  And a staggering 79% of profits.  It shows that WalMart is really not investing in its future, but rather cashing out the company by returning money to shareholders.

 “Say on pay” votes are often seen as a measure of how happy investors are with a company.  The average disapproval level on executive pay is 4.3%.  At Target, Macy’s and Kroger the disapproval is 6.1%, 6.3% and 6.9%.  Investors, however, disapprove of the compensation for WalMart’s leaders at a whopping 16.7%; nearly 4x the average and 2.5x its competition.
So very large investors, who control huge voting blocks, recognize that things are not going well at WalMart.  But, because of the enormity of the share buybacks, the Walton family now controls over half of WalMart stock.  That makes it tough for an activist to threaten shaking up the company, and lets the Waltons determine the company’s future.

Buybacks signal Strategy

Walmart annual meeting 2014, walmart.com

With WalMart’s announcement last week that it intends to spend another $20 billion on additional share repurchases, the Walton family’s strategy is clear.  They are cashing out the business.  As money comes in they are going to continue spending little on the traditional business, and in no way do they intend to invest at a level to really chase Amazon on-line.

There will be marginal enhancements.  But the vast majority of the money is being returned to them, via $20 billion in share repurchases and $1.5 billion in cash dividends annually.

Amazon spends nothing on share repurchases.  Nor does it distribute cash to shareholders via dividends.  Amazon’s largest shareholder, Jeff Bezos, invests all the company money in new growth opportunities.  These nearly cover the retail landscape, and increasingly are in other growth markets like cloud services, software-as-a-service and entertainment.  Comparing the owners of these companies, quite clearly Bezos has faith in Amazon’s ability to invest money for profitable future growth.  But the Waltons are far less certain about the future success of WalMart, so they are pulling their money off the table, allowing investors to put their money in ventures outside WalMart.

Investing your money, do you think it is better to invest where the owner believes in the future of his company?

Or where the owners are cashing out?

I'd like to receive newsletters.

logo-footer
GET THE BOOK
Adam's book reveals the truth about how to use strategy to outpace the competition.
Create Marketplace Disruption book
PRESS & MEDIA
Follow Adam's coverage in the press and in other media.
FOLLOW ADAM
Follow Adam's column in Forbes.

Toys R Us – How Bad Assumptions Fed Bad Financial Planning Creating Failure

Toys R Us – How Bad Assumptions Fed Bad Financial Planning Creating Failure

Toys R Us filed for bankruptcy this week.  And the obvious response was “another retailer slaughtered by Amazon and on-line retailing.”  But this conclusion comes short of describing why Toys R Us leadership did not do the obvious things to keep Toys R Us relevant.

Amazon and WalMart both eclipsed Toys R Us in toy retail sales.
Chart courtesy of Felix Richter, Statista

Everyone, and I mean everyone, knew over the last decade that customers were buying more stuff on-line, including toys. And everyone also knew that WalMart was pushing extremely hard to keep customers going to their stores by offering products like toys at low prices.  And, it was clear that customers were shifting to buying more toys from both these retailers.  If this was so obvious to everyone, why didn’t Toys R Us leadership do something?  After all, Toys R Us is a multi-billion dollar revenue company.

The LBO

It was over 30 years ago when financiers discovered they could buy a company, sell off some assets and otherwise increase the company’s cash, then convince banks and bondholders to load the company with debt.  These financiers would then pull out the cash for themselves, and leave the company with a ton of debt.  The LBO (leveraged buy out) was born, invented by investment bankers like KKR (named for founders Kohlberg, Kravis & Roberts.) They would use a small bit of private equity, and then use the company’s own assets to raise debt money (leverage) to buy the company.  By “restructuring” the company to a lower cost of operations, usually with draconian reductions, they would increase cash flow to make higher debt repayments.  Then they would either take the money out directly, or take the company public where they could sell their shares, and make themselves rich.  This form of deal making birthed what we now call the Private Equity business.

In 2005, KKR and Bain Capital (which included former Presidential candidate Mitt Romney) bought Toys R Us for about $6.6billion, plus assuming just under $1B of debt, for a total valuation of $7.5billion.  But the private equity  guys didn’t buy the company with equity.  They only put in $1.3billion, and used the company’s assets to raise $5.3billion in additional debt, making total debt a whopping $6.2B.  Total debt was now a remarkable 82.7% of total capital!  At the time of the deal interest rates on that debt were around 7.25%, creating a cash outflow of $450million/year just to pay interest on the loans.  At the time Toys R Us was barely making a profit of 2% – so the debt was double company net profits.

KKR and Bain buy Toys R Us logos

Debt led to bad management decisions and ultimately bankruptcy of the U.S. company

The biggest assumption behind a debt-financed takeover is that the company can cut costs to improve cash flow and thus pay the interest.  But behind that assumption is an even bigger assumption.  That the marketplace won’t change dramatically.  The KKR and Bain Capital leaders assumed they could shrink Toys R Us in a way that would lower operating costs.  They also assumed they could sell some under-utilized assets to raise cash.  They did not assume they would need contingency money if competition, and the marketplace, changed in some unplanned way.

eCommerce was pretty new in 2005.  Amazon was an $8.5 billion company, but it didn’t make any profits and very few predicted then it would become today’s $100 billion behemoth.  Because the financiers didn’t anticipate a big market shift to ecommerce, they focused on the war with Walmart and Target.  Their plans were to lower operating costs, close some stores that were underperforming, license some offshore stores, and sell some assets (like real estate owned or leases) to raise cash and repay the debt.

amazon.com toy car screen shot

But they weren’t prepared to take on another, entirely different competitor on-line.  As Amazon’s growth affected all retailers, Toys R Us simply did not have the resources to fight the traditional discount and dollar brick-and-mortar retailers, and build a major on-line presence, and keep paying that debt. While it is easy to sit on the sidelines and say that Toys R Us should have spent more money building its on-line presence in order to remain relevant, the fact is that the deal in 2005 left the company with insufficient cash flow to do so.  Regardless of what leadership might have wanted to do, simply keeping the lights on was a tough challenge when having to pay out so much cash to bondholders.

And the investors simply did not expect that the growth of on-line retailing would stall traditional retail stores, thus creating a major loss of value for retail real estate.  U.S. retail real estate value had increased in value for decades.  The assumption was that the real estate, whether owned or leased, would continue to go up in value.  Real estate was a “hard” asset that KKR and Bain Capital could bank on for raising cash to repay the debt.  But as on-line retail grew, and traditional retail declined, America became “over stored” with far too much retail space.  Prices were shattered in many markets, and it was not possible for Toys R Us to sell those assets for a gain that would meet the debt obligations.

With $400 million of debt coming due next year, Toys R Us simply doesn’t have the cash flow, or assets, to repay those bondholders

Old assumptions about finance are a big problem for companies today.  Assumptions about “leveraging” hard assets, and intangibles like brand value, are no longer true.  Competitors emerge, markets change, and old assets can lose value very fast.  Assumptions about business model stability are no longer true, as new competitors using newer technology create new ways to sell, and often at lower cost than was ever expected.  Assumptions about customer loyalty, and market share stability, are no longer true as new competitors appeal to customers differently and cause big shifts in buying behavior very fast.  The speed with which technology, competitors, markets and customers shift now requires companies have the funds available to invest in change.

This story isn’t just about debt.  The very popular activity of “returning money to shareholders by repurchasing stock” is a terrible idea.  Stock repurchases do not make a company more valuable, nor a stronger competitor.  Instead they burn through cash to reduce the company’s capitalization, and manipulate ratios like EPS (earnings per share) and P/E (price/earnings) multiple.  Stock repurchases hurt companies, and make them less competitive.  Good companies return money to shareholders by investing in growth, which raises sales, profits and increases the stock price making the company truly more valuable.

Toys R Us isn’t a story about Amazon, or eCommerce, taking out another retailer

A&P Family store 1950's painting

Toys R Us isn’t a story about Amazon, or eCommerce, taking out another retailer

A&P Family store 1950's painting

The important part of the Toys R Us story is realizing that the wrong financial decisions can doom your organization.  You can have a great vision, and even great ideas about new ways to compete.  But if you don’t have the money to invest in growth, it won’t happen.  If leaders don’t have the money to spend on new projects and new markets, because they’re sending it all to bondholders or using it to  repurchase shares in hopes of propping up a stock price, eventually there will be a market shift that will doom the old business model and leave it unable to compete.

To succeed today leaders need the money to invest in change, and they have to constantly invest it in change, or their companies will lose relevancy and end up like Toys R Us, Radio Shack, Circuit City, Aeropostale, The Limited, Payless Shoes, Gander Mountain, Golfsmith, Sports Authority, Borders Books and the great, original American retailer A&P.

I'd like to receive newsletters.

 

 

Starbucks Closing Teavana Is A Long-Term Troubling Sign For Investors

Starbucks Closing Teavana Is A Long-Term Troubling Sign For Investors

Amid all the political news last week it was easy to miss announcements in the business world.  Especially one that was relatively small, like Starbucks announcement on Thursday July 27, 2017 that it was closing all 379 of its Teavana stores.  While these will be missed by some product fanatics, the decision is almost immaterial given that these units represent only about 3% of Starbucks US stores, and about 1.5% of the 25,000 Starbucks globally.

Yet, closing Teavana is a telltale sign of concern for Starbucks investors.

Starbucks founding CEO Howard Schultz returned to the top job in January, 2008,  promising to get out of distractions such as music production, movie production, internet sales, grocery products, liquor products and even in-store food sales in order to return the company to its “core” coffee business.  Since then Starbucks valuation has risen some 5.5-6 fold, from $9.45/share to the recent range of $54 to $60 per share.  A much better return than the roughly doubling of the Dow Jones Industrial Average over the same timeframe.

Yet, one should take time to evaluate what this closing means for the long-term future of Starbucks.  This is the second time Starbucks made an acquisition only to shut it down.  In 2015 Starbucks closed all 23 La Boulange bakery cafes, with little fanfare.  Now, after paying $620M to buy Teavana in 2012, they are closing all those stores.  While leadership blamed its decision on declining mall visits (undoubtedly a fact) for the closures, Teavana is not missing goals due to the Amazon Effect.  There are multiple options for how to market Teavana’s fresh and packaged products far beyond mall store locations.  Choosing to close all stores indicates leadership has minimal interest in the brand.

Starbucks’ focus leaves little opportunity for new growth

Starbucks under construction. Photo by Jamie Lytle

It increasingly appears that today’s Starbucks literally isn’t interested, or able, to do anything other than build, and operate, more Starbucks stores.  And Starbucks is clearly doubling down on its plans to be Starbucks store-centric.  The company opened 575 new units in the last year, and announced plans to open more stores creating 68,000 additional US jobs in the next 5 years.  Further, Starbucks is paying $1.3B to buy the half of its China business previously owned by a partner.  Clearly, leadership continues to tighten company focus on the “core” coffee store business for the future.

This sounds great short-term, given how well things have gone the last 8 years.  But there are concerns.  Sales are up 4% last quarter, but that is wholly based upon higher prices.  Customer counts are flat, indicating that stores are not attracting new customers from competitors.  Sales gains are due to average ticket prices increasing 5%, which is marginal and likely refers to higher priced products.  Starbucks is now relying completely on new stores to create incremental growth, since bringing in new customers to existing stores is not happening.

Frequently this stagnant store sales metric indicates store saturation.  A bad sign.  Does the US, or international markets, really need more, new Starbucks stores?  It was 2010 when comedian Lewis Black had a successful viral rant (PG version) claiming that when he observed a Starbucks across the street from another Starbucks he knew it was the end of civilization.

Lewis Black and Starbucks, end of universe rant

What happens when the market doesn’t need new Starbucks stores?

One does have to wonder when the maximum number of Starbucks will be reached.  Especially given the ever growing number of competitors in all markets. Direct competitors such as Caribou Coffee, The Coffee Bean, Seattle’s Best, Gloria Jean’s, Costa, Lavazza, Tully’s, Peet’s and literally dozens of chain and independent coffee shops are competing for Starbucks’ customers.  Simultaneously competition from low priced alternatives is emerging from brands like Dunkin Donuts and McDonald’s, now catering more to coffee lovers.  And non-coffee fast casual shops are seeking to attract more people for congregating, such as Panera, Fuddruckers, Pei Wei, TGI Friday’s and others.  All of these are competitors, either directly or indirectly, for the customer dollars sought by Starbucks.  Are more Starbucks stores going to succeed?

As McDonald’s, Pizza Hut and other fast food chains learned the hard way, there comes a time when a brand has built all the market needs.  Then leadership has to figure out how to do something else.  McDonald’s invested heavily in Boston Market and Chipotle’s, but let those high growth operations go when it decided to refocus on its “core” hamburger business – leading to heavy valuation declines.  Starbucks is closing Teavana, but should it?  When will Starbucks saturate?  And what will Starbucks do to grow when that happens?

Starbucks has had a great run.  And that run appears not fully over.  But long-term investors have reason to worry.

Is it smart to make such a huge bet on China?
Will store growth successfully continue, with all the stores that already exist?
Will direct and indirect competitors eat away at market share?

What will Starbucks do when it has reached it market maximum, and it doesn’t seem to have any emerging new store concepts to build upon?

The #1 Real Estate Stock To Own Is Built On Trends – Alexandria Real Estate Equities (NYSE:ARE)

The #1 Real Estate Stock To Own Is Built On Trends – Alexandria Real Estate Equities (NYSE:ARE)

Writing on trends, I frequently profile tech companies that use trends to outperform competitors. But using trends is not restricted to tech companies.

By following trends, since 1998 Alexandria Real Estate Equities has tripled the performance of the NASDAQ, quadrupled returns of the S&P 500, and quintupled the Russell 2000.  Alexandria has even outperformed technology stalwart Microsoft, and investment guru Berkshire Hathaway by 230%.

alexandria return comparisons

Although you probably never heard of it, Alexandria has trounced its real estate peers.  Over the last three years Alexandria has returned double the FTSE NAREIT Equity Office Index, and double the SNL US REIT Office Index.  Alexandria’s value has almost doubled during this time, and produced returns 2.3 times better than such well known competitors as Vornado Realty Trust and Boston Properties.

alexandria real estate three year shareholder return is

In 1983, Joel Marcus was a lawyer in the IPO market when he noticed the high value launch of biotech firms like Amgen and Genentech.  He began tracking the growth of biotechs to see what kind of opportunity might appear to serve these high growth companies.

By 1994 Marcus realized that these companies were struggling to find appropriate real estate to serve their unique needs for laboratory space, and the infrastructure these labs require.  It was a classic under-served market, and it was growing fast.

Jacobs Engineering (NYSE:JEC) was serving some of these companies’ needs, including erecting structures for them.  But Jacobs did not own any buildings or consider itself a real estate developer.  So Marcus approached Jacobs about starting a company to meet the real estate needs of this high growth biotech industry.  Marcus put up some money, Jacobs put up some money, and other friends/associates combined to raise $19 million.  There was no professionally managed money involved – and no real estate developers.

Biotech industry wordle

Focusing on the rapidly expanding biotech scene in San Diego, the newly created Alexandria bought 4 buildings.  They refocused the buildings on the unserved needs of local biotech companies and did a quick flip, breaking even on the transaction.  With just a bit of money Alexandria had proven that the market existed, the trend was real and users were under-served.

But, like any idea based on an emerging trend, growing was not easy.  Using their first transaction as “proof of concept” CEO Marcus and his team set out to raise $100 million. Quickly Paine Webber (now UBS) secured $75 million in debt financing.  But moving forward required raising $25 million in equity.

Over the next few weeks Alexandria pitched a slew of nay-sayers.  From GE Capital to CALPERS investors felt that their first deal was a “1-trick pony,” and this “niche market” was not a sustainable business.  Finally, after 29 failed pitches, the AEW pension fund, an early stage real estate investor, saw the trend and invested.

The Alexandria team realized that fast client growth meant there was no time to develop from ground up. They focused on high growth geographies for biotech, places where the trend was more pronounced, and bought 11 existing properties:

  • In Seattle they found a cancer center they could buy, improve and do a sale-leaseback
  • In San Francisco they identified a portfolio of properties in Alameda they could improve, lease to biotech companies and even suit the needs of the FDA as a tenant
  • In Maryland they identified opportunities to support the lab needs of the Army Corps of Engineers forensic research lab, and ATF testing lab for imported vodka, and a medical testing lab near Dulles – which is now leased to Quest Diagnostics

Realizing that companies needing labs tended to cluster, leadership focused on finding locations where clusters were likely to emerge.  They bought land in San Francisco, San Diego, New York and Worcester, MA. What looked like risky locations to others looked like profitable opportunities to Alexandria due to their superior trend research.

Historically pharma companies built their headquarters, and labs, in suburban locations where development was easy, and labs were welcome. Alexandria realized the new trend for emerging companies was to be near universities in urban environments, and although land was costly — and development more difficult — this was the right place to leverage the trend.

Today Alexandria is the bona fide market leader in labs and tech facilities in the USA. By seeing the trend early they bought land which is now so expensive it is practically untouchable – even for $1 billion. Their development pipeline includes Mission Bay, Kendall Square, the Manhattan borough of New York City and RTP (Research Triangle Park.) Today companies want to be where the lab is — and frequently the lab space is now owned, or being developed, by Alexandria.

alexandria real estate Campus Pointe, California
alexandria real estate equities Research Triangle Park
alexandria real estate equities new york

This didn’t happen by accident. Not at the beginning nor as Alexandria plans its future growth.  The company maintains a team of 13 researchers studying market trends in technology, and under-served real estate needs. They constantly track employers of tech/research people, competitors, historical and emerging customers — and identify prospective tech tenants who will need specialized real estate.  A few of the leading trends Alexandria follows include:

  • Urbanization — The siloed campuses set in bucolic suburbs is the past
  • Innovation externalization — Over 50% of innovation in big pharma is now outsourced. And universities are spinning out innovations faster than ever into development centers for testing and commercialization
  • Nutrition and disease management — These are emerging markets ripe with new products making their way to commercialization, and needing space to grow

Alexandria’s historical and ongoing successes relied first and foremost on using trends to understand underserved markets where needs will soon be the greatest.  This is an important lesson for all businesses. No matter what you do, what you sell, or your industry you can generate higher returns, outperform your peers, and outperform the market rewarding investors by identifying trends and investing in them.

Thanks to Joel Marcus for providing an interview to explain the history and current practices at Alexandria.

Why You Should Own Facebook And Not Snapchat

Why You Should Own Facebook And Not Snapchat

People love to watch tech stocks, because there is so much volatility. Just today (April 27, 2017) Alphabet beat expectations and its shares rose $34 (about 4%) after hours. GOOG is up 15.5% in 2017, and 31% for the year. But not all tech stocks do this well. Twitter, for example, had a nice increase of late — but TWTR is down 33% since peaking in early October, and it is down 69% from 10/2014 highs.

So how is an investor to know which tech stocks to own, and which to eschew?

They key, of course, is to watch trends. And to recognize who absolutely dominates those trends. When it comes to the rapidly growing world of social media, it is increasingly clear there is only one Goliath — and that is Facebook.

Snapchat created a lot of interest when it hit the scene. A darling of the most youthful set, it was growing very fast and had exceeded 100 million users by January 2016. By January 2017 Snapchat added another 60 million users — growing 60%. But since going public the stock has dropped about 10%.  And according to Marketwatch only 12 analysts rank it a “buy” while 23 rank it a “hold,” “underweight” or “sell.”

Should you buy Snapchat? After all, Facebook dropped after its IPO

As the chart from Statista shows, in just eight months Instagram Stories has blown way past the user base of Snapchat. In April 2012 Facebook paid $1 billion for Instagram, then a popular photo-sharing app, which had no revenues. The idea was to leverage Facebook’s installed base to grow the app.  Since September, 2013 Instagram has been adding 50 million users per quarter. Instagram now has 600 million active users and became one of the five most popular mobile apps in the world.

The Facebook App Ecosystem Totally Dominates Mobile. Chart reproduced courtesy of Felix Richter at StatistaFelix Richter, Statista, https://www.statista.com/chart/5055/top-10-apps-in-the-world/

The Facebook App Ecosystem Totally Dominates Mobile. Chart reproduced courtesy of Felix Richter at Statista

Looking at Facebook, one has to marvel at how the company has kept users in its ecosystem. As the Statista chart shows, since 2016 Facebook has had four of the top five mobile app downloads. Now that Instagram Stories has blown past Snapchat, Facebook holds all four top positions.

Does anyone remember when Facebook purchased Beluga in 2011 for about $20 million? That is now Messenger, and it opened the door for sending pictures and video.  Do you remember the $19 billion acquisition of WhatsApp — which had only $10 million in revenues? Both have added multiple capabilities, and now Messenger has 1 billion active users, and WhatsApp has 1.2 billion users.

In fiscal 2012 Facebook hit $1 billion in quarterly revenue, and ended the year with just over $4 billion in annual revenues. Q4 2016 exceeded $8.8 billion, and for the year $27.6 billion.

It is for good reason that almost twice as many analysts are skeptical of Snapchat’s future value as those who think it will go up.

Snapchat is competing with Facebook, a company that has shown time and again it can watch the trends and put in place products that initially meet, but then eventually exceed customer expectations.  One might like to think Snapchat is a good David, putting up a good fight. But this time, investors are likely to be much better off betting on Goliath.  Facebook still has a lot of opportunity to grow.