How Google Stole the Show from Apple

How Google Stole the Show from Apple

The three highest valued publicly traded companies today (2/3/16) are Google/Alphabet, Apple and Microsoft.  All 3 are tech companies, and they compete – although with different business models – in multiple markets. However, investor views as to their futures are wildly different.  And that has everything to do with how the leadership teams of these 3 companies have explained their recent results, and described their futures.

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Looking at the financial performance of these companies, it is impossible to understand the price/earnings multiple assigned to each. Apple clearly had better revenue and earnings performance in all but the most recent year.  Yet, both Alphabet and Microsoft have price to earnings (P/E) multiples that are 3-4 times that of Apple.

 

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Much was made this week about Alphabet’s valuation exceeding that of Apple’s.  But the really big story is the difference in multiples. If Apple had a multiple even half that of Alphabet or Microsoft it’s value would be much, much higher.

But, as we can see, investors did the best over both 2 years and 5 years by investing in Microsoft.  And Apple investors have fared the poorest of all 3 companies regardless of time frame.  Looking at investment performance, one would think that the revenue and earnings performance of these companies would be the reverse of what’s seen in the first chart.Apple-Google-MSFT

The missing piece, of course, is future expectations.  In this column a few days ago, I pointed out that Apple has done a terrible job explaining its future.  In that column I pointed out how Facebook and Amazon both had stratospheric P/E multiples because they were able to keep investors focused on their future growth story, even more than their historical financial performance.

Alphabet stole the show, and at least briefly the #1 valuation spot, from Apple by convincing investors they will see significant, profitable growth.  Starting even before earnings announcements the company was making sure investors knew that revenues and profits would be up.  But even more they touted the notion that Alphabet has a lot of growth in non-monetized assets.  For example, vastly greater ad sales should be expected from YouTube and Google Maps, as well as app sales for Android phones through Google Play.  And someday on the short horizon profits will emerge from Fiber transmission revenues, smart home revenues via Nest, and even auto market sales now that the company has logged over 1million driverless miles.

This messaging clearly worked, as Alphabet’s value shot up.  Even though 99% of the company’s growth was in “core” products that have been around for a decade!  Yes, ad revenue was up 15%, but most of that was actually on the company’s own web sites.  And most was driven by further price erosion.  The number of paid clicks were up 30%, but price/click was actually down yet another 15% – a negative price trend that has been happening for years. Eventually prices will erode enough that volume will not make up the difference – and what will investors do then?  Rely on the “moonshot” projects which still have almost no revenue, and no proven market performance!

But, the best performer has been Microsoft.  Investors know that PC sales have been eroding for years, that PC sales will continue eroding as users go mobile, and that PC’s are the core of Microsoft’s revenue.  Investors also knows that Microsoft missed the move to mobile, and has practically no market share in the war between Apple’s iOS and Google’s Android.  Further, investors have known forever that gaming (xBox,) search and entertainment products have always been a money-loser for Microsoft.  Yet, Microsoft investors have done far better than Apple investors, and long-term better than Google investors!

Microsoft has done an absolutely terrific job of constantly trumpeting itself as a company with a huge installed base of users that it can leverage into the future.  Even when investors don’t know how that eroding base will be leveraged, Microsoft continually makes the case that the base is there, that Microsoft is the “enterprise” brand and that those users will stay loyal to Microsoft products.

Forget that Windows 8 was a failure, that despite the billions spent on development Win8 never reached even 10% of the installed base and the company is even dropping support for the product.  Forget that Windows 10 is a free upgrade (meaning no revenue.)  Just believe in that installed base.

Microsoft trumpeted that its Surface tablet sales rose 22% in the last quarter!  Yay! Of course there was no mention that in just the last 6 weeks of the quarter Apple’s newly released iPad Pro actually sold more units than all Surface tablets did for the entire quarter!  Or that Microsoft’s tablet market share is barely registerable, not even close to a top 5 player, while Apple still maintains 25% share.  And investors are so used to the Microsoft failure in mobile phones that the 49% further decline in sales was considered acceptable.

Instead Microsoft kept investors focused on improvements to Windows 10 (that’s the one you can upgrade to for free.)  And they made sure investors knew that Office 365 revenue was up 70%, as 20million consumers now use the product.  Of course, that is a cumulative 20million – compared to the 75million iPhones Apple sold in just one quarter.  And Azure revenue was up 140% – to something that is almost a drop in the bucket that is AWS which is over 10 times the size of all its competitors combined.

To many, this author included, the “growth story” at Microsoft is more than a little implausible.  Sales of its core products are declining, and the company has missed the wave to mobile.  Developers are writing for iOS first and foremost, because it has the really important installed base for today and tomorrow.  And they are working secondarily on Android, because it is in some flavor the rest of the market.  Windows 10 is a very, very distant third and largely overlooked.  xBox still loses money, and the new businesses are all relatively quite small.  Yet, investors in Microsoft have been richly rewarded the last 5 years.

Meanwhile, investors remain fearful of Apple.  Too many recall the 1980s when Apple Macs were in a share war with Wintel (Microsoft Windows on Intel processors) PCs.  Apple lost that war as business customers traded off the Macs ease of use for the lower purchase cost of Windows-based machines.  Will Apple make the same mistake?  Will iPad sales keep declining, as they have for 2 years now?  Will the market shift to mobile favor lower-priced Android-based products?  Will app purchases swing from iTunes to Google Play as people buy lower cost Android-based tablets?  Have iPhone sales really peaked, and are they preparing to fall?  What’s going to happen with Apple now?  Will the huge Apple mobile share be eroded to nothing, causing Apple’s revenues, profits and share price to collapse?

This would be an interesting academic discussion were the stakes not so incredibly high.  As I said in the opening paragraph, these are the 3 highest valued public companies in America.  Small share price changes have huge impacts on the wealth of individual and institutional investors.  It is rather quite important that companies tell their stories as good as possible (which Apple clearly has not, and Microsoft has done extremely well.)  And likewise it is crucial that investors do their homework, to understand not only what companies say, but what they don’t say.

 

 

 

Apple’s Debacle – Why Growth is All That Matters

Apple’s Debacle – Why Growth is All That Matters

Apple announced earnings for the 4th quarter this week, and the company was creamed.  Almost universally industry analysts and stock analysts had nothing good to say about the company’s reports, and forecast.  The stock ended the week down about 5%, and down a whopping 27.8% from its 52 week high.

Wow, how could the world’s #1 mobile device company be so hammered?  After all, sales and earnings were both up – again!  Apple’s brand is still one of the top worldwide brands, and Apple stores are full of customers.  It’s PC sales are doing better than the overall market, as are its tablet sales.  And it is the big leader in wearable devices with Apple Watch.

Yet, let’s compare the  stock price to earnings (P/E) multiple of some well known companies (according to CNN Money 1/29/16 end of day):

  • Apple – 10.3
  • Used car dealer AutoNation – 10.7
  • Food company Archer Daniel Midland (ADM) – 12.2
  • Industrial equipment maker Caterpillar Tractor – 12.9
  • Farm equipment maker John Deere – 13.3
  • Defense equipment maker General Dynamics – 15.1
  • Utility American Electric Power – 16.9
  • Industrial product company Illinois Tool Works (ITW) – 17.7
  • Industrial product company 3M – 19.5

isadWhat’s wrong with this picture?  It all goes to future expectations.  Investors watched Apple’s meteoric rise, and many wonder if it will have a similar, meteoric fall.  Remember the rise and fall of Digital Equipment? Wang? Sun Microsystems? Palm? Blackberry (Research in Motion)?  Investors don’t like companies where they fear growth has stalled.

And Apple’s presentation created growth stall fears.  While iPhone sales are enormous (75million units/quarter,) there was little percentage growth in Q4. And CEO Tim Cook actually predicted a sales decline next quarter!  iPod sales took off like a rocket years ago, but they have now declined for 6 straight quarters and there was no prediction of a return to higher sales volumes.  And as for future products, the company seems only capable of talking about Apple Watch, and so far few people have seen any reason to buy one.  Amidst this gloom, Apple presented an unclear story about a future based on services – a market that is at the very least vague, where Apple has no market presence, little experience and no brand position.  And wasn’t that IBM’s story some 2.5 decades ago?

In other words, Apple fed investor’s worst fears.  That growth had stopped.  And usually, like in the examples above, when growth stops – especially in tech companies – it presages a dramatic reversal in sales and profits.  Sales have been known to fall far, far faster than management predicts.  Although Apple has not yet entered a Growth Stall (which is 2 consecutive quarters of declining sales and/or profits, or 2 consecutive quarters  than the previous year’s sales or profits) investors are now worried that one is just around the corner.

Contrast this with Facebook.  P/E – 113.3.  Facebook said ad revenues rose 57%, and net income was up 2.2x the previous year’s quarter.  But what was really important was Facebook’s story about its future:

  • Facebook is now a “must buy” for advertisers
  • Mobile is the #1 ad trend, and 80% of revenues are from mobile
  • Revenue/user is up 33%, and growing
  • There are multiple unmonetized new markets that Facebook is just developing – Instagram, WhatsApp, FB Messenger and Oculus

In other words, the past was great – but the future will be even better.  The short-term result?  FB stock rose 7.4% for the week, and intraday hit a new 52 week high.  Facebook might have seemed like a fad 3 years ago, especially to older folks.  But now the company’s story is all about market trends, and how Facebook is offering products on those trends that will drive future revenue and profit growth.

Amazon may be an even better example of smart communications.  As everyone knows, Amazon makes no profit.  So it sells for an astonishing P/E of 846.9.  Amazon sales increased 22% in Q4, and Amazon continued gaining share of the fast growing, #1 trend in retail — ecommerce.  While WalMart and Macy’s are closing stores, Amazon is expanding and even creating its own logistics system.

Profits were up, but only 2/3 of expectations – ouch!  Anticipating higher sales and earnings announcements the stock had run up $40/share. But the earnings miss took all that away and more as the stock crashed about $70/share!  A wild 12.5% peak-to-trough swing was capped at end of week down a mere 2.5%.

But, Amazon did a great job, once again, of selling its future.  In addition to the good news on retail sales, there was ongoing spectacular growth in cloud services – meaning Amazon Web Services (AWS.)  JPMorganChase, Wells Fargo, Raymond James and Benchmark all raised their future price forecasts after the announcement, based on future performance expectations.  Even analysts who cut their price targets still kept price targets higher than where Amazon actually ended the week.  And almost all analysts expect Amazon one year from now to be worth more than its historical 52 week high, which is 19% higher than current pricing.

So, despite bad earnings news, Amazon continued to sell its growth story.  Growth can heal all wounds, if investors continue to believe.  We’ll see how it plays out, but for now things appear at least stable.

Steve Jobs was, by most accounts, an excellent showman.  But what he did particularly well was tell a great growth story.  No matter Apple’s past results, or concerns about the company, when Steve Jobs took the stage his team had crafted a story about Apple’s future growth.  It wasn’t about cash flow, cash in the bank, assets in place, market share or historical success – boring, boring.  There was an Apple growth story. There was always a reason for investor’s to believe that competitors will falter, markets will turn to Apple, and growth will increase!

Should investors think Apple is without future growth?  Unfortunately, the communications team at Apple last week let investors think so.  It is impossible to believe this is true, but the communicators this week simply blew it.  Because what they said led to nothing but headlines questioning the company’s future.

What should Apple have said?

  • Give investors a great news story about wearables.  Show applications in health care, retail, etc. that really makes investors think all those people with a Timex or Rolex will wear an AppleWatch in the future.  Apple sold investors the future of iPhone apps long before most of people used anything other than maps and weather – and the story led investors to believe if people didn’t have an iPhone they would miss out on something important, so they were bound to go buy one.  Where’s that story when it comes to wearables?
  • ApplePay is going to change the world.  While ApplePay is #1, investors are wondering if mobile payments is ever going to be big.  What will make it big, when, and what is Apple doing to make this a multi-billion dollar business?  ApplePay launched to a lot of hype, but very little has been said since.  Is this going to be the Apple version of Microsoft’s Zune?  Make investors believers in ApplePay.  Convince them this is worth a lot of future value.
  • iBeacons are one of the most important technology products in retail and inventory control.  iBeacons were launched as a great tool for local businesses, but since then Apple has said almost nothing.  B2B may not be as sexy as consumer markets, but Microsoft made investors believers in the value of enterprise products.  Demonstrate that Apple’s technology is the best, and give investors some stories about how companies are winning.  Most investors have forgotten about beacons and thus they no longer plan for substantial revenues.
  • Apple has the #1 mobile developer community, and the best products are yet to come – so sales are far from stalling.  Honestly, the developer war is critical.  The platform with the most developers wins the most customers.  Microsoft taught investors that.  But Apple never talks about its developer community.  IBM has made a huge commitment to develop iOS enterprise apps that should drive substantial future sales, but Apple isn’t exciting investors about that opportunity.  Tell investors more stories about how Apple is king of the developer world, and will remain in the top spot – better than Android or anyone – for years.  Tell investors this will turn users toward tablets from PCs faster, and iPod sales will start growing again as smartphone and wearable sales join suit.
  • Apple will win big revenues in auto markets.  There was lots of rumors about hiring people to design a car, and now firing the lead guy. What is going on?  Google has been pretty clear about its plans, but Apple offers investors no encouragement to think the company will succeed at even winning the war to be in other manufacturer’s cars, much less build its own.  Given that the story sounds limited for Apple’s “core” products, investors need some stories about Apple’s own “moonshot” projects.
  • Apple is not a 1-pony, iPhone story.  Make investors believe it.

Tim Cook and the rest of Apple leadership are obviously competent.  But when it comes to storytelling, this week their messaging looked like it was created as a high school communications project.  Growth is what matters, and Apple completely missed the target.  And investors are moving on to better stories – fast.

 

Why Cheating is Prevalent – and We Can’t Stop It

Why Cheating is Prevalent – and We Can’t Stop It

Cheating in sports is now officially prevalent.  The World Anti-Doping Agency (WADA) last week issued its report, and confirmed that across the International Association of Athletics Federation (IAAF) athletes were cheating.  And very frequently doing so under the supervision of those leading major sports operations at a national, and international level.

Quite simply, those responsible for the future of various sports were responsible for organizing and enabling the illegal doping of athletes.  This behavior is now so commonplace that corruption is embedded in the IAAF, making cheating by far the norm rather than the exception.

Wow, we all thought that after Lance Armstrong was found guilty of doping this had all passed.  Sounds like, to the contrary, Lance was just the poor guy who got caught.  Perhaps he was pilloried because he was an early doping innovator, at a time when few others lacked access.  As a result of his very visible take-down for doping, today’s competitors, their coaches and sponsors have become a lot more sophisticated about implementation and cover-ups.

Accusations of steroid use for superior performance have been around a long time.  Major league baseball held hearings, and accused several players of doping.  The long list of MLB players accused of cheating includes several thought destined for the Hall of Fame including Barry Bonds, Jose Conseco, Roger Clemens, Mark McGwire, Manny Ramirez, Alex Rodriguez, and Sammy Sosa. Even golf has had its doping accusations,  with at least one top player, Vijay Sing, locked in a multi-year legal battle due to admitting using deer antler spray to improve his performance.

The reason is, of course, obvious.  The stakes are, absolutely, so incredibly high.  If you are at the top the rewards are in the hundreds of millions of dollars (or euros.)  Due to not only enormously high salaries, but also the incredible sums paid by manufacturers for product endorsements, being at the top of all sports is worth 10 to 100 times as much as being second.

For example – name any other modern golfer besides Tiger Woods. Bet you even know his primary sponsor – Nike.  Yet, he didn’t even play much in 2015.  Name any other Tour de France rider other than Lance Armstrong. And he made the U.S. Postal Service recognizable as a brand.  I travel the world and people ask me, often in their native language or broken English, where I live.  When I say “Chicago” the #1 response – by a HUGE margin is “Michael Jordan.”  And everyone knows Air Nike.

We know today that some competitors are blessed with enormous genetic gifts.  Regardless of what you may have heard about practicing, in reality it is chromosomes that separate the natural athletes from those who are merely extremely good.  Practicing does not hurt, but as the good doctor described to Lance Armstrong, if he wanted to be great he had to overcome mother nature.  And that’s where drugs come in.  Regardless of the sport in which an athlete competes, greatness simply requires very good genes.

If the payoff is so huge why wouldn’t you cheat? If mother nature didn’t give you the perfect genes, why not alter them? It is not hard to imagine anyone realizing that they are very, very, very good – after years of competing from childhood through their early 20s – but not quite as good as the other guy.  The lifetime payoff between the other guy and you could be $1Billion.  A billion dollars!  If someone told you that they could help, and it might take a few years off your life some time in the distant future, would you really hesitate?  Would the daily pain of drugs be worse than the pain of constant training?

Gold-medal-Olympian-talks-contamination-and-doping-scandals_strict_xxlThe real question is, should we call it cheating?  If lots and lots of people are doing it, as the WADA report and multiple investigations tell us, is it really cheating?

After all, isn’t this a personal decision? Where should regulators draw the line?

We allow athletes to drink sports drinks. Once there was only Gatorade, and it was only available to Florida athletes.  Because they didn’t dehydrate as quickly as other teams these athletes performed better.  But obviously sports drinks were considered OK.  How many cups of coffee should be allowed?  How about taking vitamins?

Exactly who should make these decisions?  And why?  Why “outlaw” some products, and not others?  How do you draw the line?

After watching “The Program” about Lance Armstrong’s doping routine it was clear to me I would never do it, and I would hope those I love would never do it.  But I also hope they don’t smoke cigarettes, drink too much liquor or make a porno movie.  Yet, those are all personal decisions we allow.  And the first two can certainly lead to an early grave.  As painful as doping was to biker Armstrong and his team, it was their decision to do it.  As bad as it was, why isn’t it their decision?  Why is someone put in a position to say it is cheating?

After all, we love winners.  When Lance was winning the Tour de France he was very, very popular.  Even as allegations swirled around him fans, and sponsors, pretty much ignored them.  Even the reporter who chased the story was shunned by his colleagues, and degraded by his publisher, as he systematically built the undeniable case that Armstrong was cheating.  Nobody wanted to hear that Lance was cheating – even if he was.

Fans and sponsors really don’t care how athletes win, just that they win.  If athletes do something wrong fans pretty much just hope they don’t get caught.  Just look at how fans overwhelming supported Armstrong for years.  Or how football fans have overwhelming supported Patriots quarterback Tom Brady, and ridiculed the NFL’s commissioner Roger Goodall, over the Deflategate cheating charges and investigation.  Fans support a winner, regardless how they win.

So, now we know performance enhancing drugs are endemic in professional sports.  Why do we still make them against the rules?  If they are common, should we be trying to change behavior, or change the rules?

Go back 150 years in sports and frequently the best were those born to upper middle class families.  They had the luck to receive good, healthy food.  They had time to actually practice.  So when these athletes were able to be paid for their play, we called them professionals.  As professionals we would not allow them to compete with the local amateurs.  Nor could they compete in international competitions, such as the Olympics.

Jim Thorpe won 2 Olympic gold medals in 1912, received a ticker-tape Broadway parade for his performance and was considered “the greatest athlete of all time.” He was also stripped years later of his medals because it was determined he had been paid to play in a couple of professional baseball games.  He was considered a cheater because he had the luxury of practicing, as a professional, while other Olympic athletes did not.  Today we consider this preposterous, as professional athletes compete freely in the Olympics.  But what really changed? Primarily the rules.

It is impossible to think that we will ever roll back the great rewards given to modern athletes.  Too many people love their top athletes, and relish in seeing them earn superstar incomes.  Too many people love to buy products these athletes endorse, and too many companies obtain brand advantage with those highly paid endorsements.  In other words, the huge prize will never go away.

What is next?  Genetic engineering, of course.  The good geneticists will continue to figure out how to build stronger bodies, and their results will be out there for athletes to use.  Splice a gorilla gene into a wrestler, or a gazelle gene into a long-distance runner.  It’s not pure fantasy.  This will likely be illegal.  But, over time, won’t those gene-altering programs become as common to professional athletes as steroids and human growth hormone are today?  Exactly when does anyone think performance enhancement will stop?

And if the drugs keep becoming better, and athletes have such a huge incentive to use them, how are we ever to think a line can be drawn — or ever enforced?

Thus, the effort to stop doping would appear, at best, Quixotic.

Instead, why not simply say that at the professional level, anything goes?  No more testing.  If you are a pro, you can do whatever you want to win.  “It’s your life brother and sister,” the decision is up to you.

If you are an amateur then you will be subjected to intense testing, and you will be caught.  Testing will go up dramatically, and you will be caught if you cross any line we draw.  And banned from competition for life.  If you want to go that extra mile, just go pro.

Of course, one could imagine that there could be 2 pro circuits.  One that allows all performance enhancing drugs, and one that does not.  But we all know that will fail.  Like minor league competition, nobody really cares about the second stringers.  Fans want to see real amateurs, often competing locally and reinforcing pride. And they like to see pros — the very best of the very best.  And in this latter category, the fans consistently tell us via their support and dollars, they don’t really care how those folks made it to the top.

So a difficult ethical dilemma now confronts sports fans – and those who monitor athletics:

1 – Do we pretend doping doesn’t exist and keep lying about it, but realize what we’re doing is a sham and waste of time?

2 – Do we spend millions of dollars in an upgraded “war on drugs” that is surely going to fail (and who will pay for this increased vigilance, by the way?)

3 – Do we realize that with the incentives that exist today, we need to change the rules on doping?  Allow it, educate about its use, but give up trying to stop it.  Just like pros now compete in the Olympics, enhancement drugs would no longer be banned.

This one’s above my pay grade.  What do you readers think?

The 5 Stocks You Should Buy This Week

The 5 Stocks You Should Buy This Week

Stocks are starting 2016 horribly.  To put it mildly.  From a Dow (DJIA or Dow Jones Industrial Average) at 18,000 in early November values of leading companies have fallen to under 16,000 – a decline of over 11%.  Worse, in many regards, has been the free-fall of 2016, with the Dow falling from end-of-year close 17,425 to Friday’s 15,988 – almost 8.5% – in just 10 trading days!

With the bottom apparently disappearing, it is easy to be fearful and not buy stocks.  After all, we’re clearly seeing that one can easily lose value in a short time owning equities.

But if you are a long-term investor, then none of this should really make any difference.  Because if you are a long-term investor you do not need to turn those equities into cash today – and thus their value today really isn’t important.  Instead, what care about is the value in the future when you do plan to sell those equities.

Investors, as opposed to traders, buy only equities of companies they think will go up in value, and thus don’t need to worry about short-term volatility created by headline news, short-term politics or rumors.  For investors the most important issue is the major trends which drive the revenues of those companies in which they invest.  If those trends have not changed, then there is no reason to sell, and every reason to keep buying.

(1) Buy Amazon

Take for example Amazon.  Amazon has fallen from its high of about $700/share to Friday’s close of $570/share in just a few weeks – an astonishing drop of over 18.5%.  Yet, there is really no change in the fundamental market situation facing Amazon.  Either (a) something dramatic has changed in the world of retail, or (b) investors are over-reacting to some largely irrelevant news and dumping Amazon shares.

Everyone knows that the #1 retail trend is sales moving from brick-and-mortar stores to on-line.  And that trend is still clearly in place.  Black Friday sales in traditional retail stores declined in 2013, 2014 and 2015 – down 10.4% over the Thanksgiving Holiday weekend.  For all December, 2015 retail sales actually declined from 2014.  Due to this trend, mega-retailer Wal-Mart announced last week it is closing 269 stores.  Beleaguered KMart also announced more store closings as it, and parent Sears, continues the march to non-existence.  Nothing in traditional retail is on a growth trend.

However, on-line sales are on a serious growth trend. In what might well be the retail inflection point, the National Retail Federation reported that more people shopped on line Black Friday weekend than those who went to physical stores (and that counts shoppers in categories like autos and groceries which are almost entirely physical store based.)  In direct opposition to physical stores, on-line sales jumped 10.4% Black Friday.

And Amazon thoroughly dominated on-line retail sales this holiday season.  On Black Friday Amazon sales tripled versus 2014.  Amazon scored an amazing 35% market share in e-commerce, wildly outperforming number 2 Best Buy (8%) and ten-fold numbers 3 and 4 Macy’s and WalMart that accomplished just over 3% market share each.

Clearly the market trend toward on-line sales is intact.  Perhaps accelerating.  And Amazon is the huge leader.  Despite the recent route in value, had you bought Amazon one year ago you would still be up 97% (almost double your money.)  Reflecting market trends, Wal-Mart has declined 28.5% over the last year, while the Dow dropped 8.7%.

Amazon may not have bottomed in this recent swoon.  But, if you are a long-term investor, this drop is not important.  And, as a long-term investor you should be gratified that these prices offer an opportunity to buy Amazon at a valuation not available since October – before all that holiday good news happened.  If you have money to invest, the case is still quite clear to keep buying Amazon.

FANGs(2) Buy Facebook

The trend toward using social media has not abated, and Facebook continues to be the gorilla in the room.  Nobody comes close to matching the user base size, or marketing/advertising opportunities Facebook offers.  Facebook is down 13.5% from November highs, but is up 24.5% from where it was one year ago.  With the trend toward internet usage, and social media usage, growing at a phenomenal clip, the case to hold what you have – and add to your position – remains strong.  There is ample opportunity for Facebook to go up dramatically over the next few years for patient investors.

(3) Buy Netflix

When was the last time you bought a DVD?  Rented a DVD?  Streamed a movie?  How many movies or TV programs did you stream in 2015? In 2013?  Do you see any signs that the trend to streaming will revert?  Or even decelerate as more people in more countries have access to devices and high bandwidth?

Last week Netflix announced it is adding 130 new countries to its network in 2016, taking the total to 190 overall.  By 2017, about the only place in the world you won’t be able to access Netflix is China.  Go anywhere else, and you’ve got it.  Additionally, in 2016 Netflix will double the number of its original programs, to 31 from 16. Simultaneously keeping current customers in its network, while luring ever more demographics to the Netflix platform.

Netflix stock is known for its wild volatility, and that remains in force with the value down a whopping 21.8% from its November high.  Yet, had you bought 1 year ago even Friday’s close provided you a 109% gain, more than doubling your investment.  With all the trends continuing to go its way, and as Netflix holds onto its dominant position, investors should sleep well, and add to their position if funds are available.

(4) Buy Google

Ever since Google/Alphabet overwhelmed Yahoo, taking the lead in search and on-line advertising the company has never looked back.  Despite all attempts by competitors to catch up, Google continues to keep 2/3 of the search market.  Until the market for search starts declining, trends continue to support owning Google – which has amassed an enormous cash hoard it can use for dividends, share buybacks or growing new markets such as smart home electronics, expanded fiber-optic internet availability, sensing devices and analytics for public health, or autonomous cars (to name just a few.)

The Dow decline of 8.7% would be meaningless to a shareholder who bought one year ago, as GOOG is up 37% year-over year.  Given its knowledge of trends and its investment in new products, that Google is down 12% from its recent highs only presents the opportunity to buy more cheaply than one could 2 months ago.  There is no trend information that would warrant selling Google now.

(5) Buy Apple

Despite spending most of the last year outperforming the Dow, a one-year investor would today be down 10.7% in Apple vs. 8.7% for the Dow.  Apple is off 27.6% from its 52 week high.  With a P/E (price divided by earnings) ratio of 10.6 on historical earnings, and 9.3 based on forecasted earnings, Apple is selling at a lower valuation than WalMart (P/E – 13).  That is simply astounding given the discussion above about Wal-mart’s operations related to trends, and a difference in business model that has Apple producing revenues of over $2.1M/employee/year while Walmart only achieve $220K/employee/year.  Apple has a dividend yield of 2.3%, higher than Dow companies Home Depot, Goldman Sachs, American Express and Disney!

Apple has over $200B cash. That is $34.50/share.  Meaning the whole of Apple as an operating company is valued at only $62.50/share – for a remarkable 6 times earnings.  These are the kind of multiples historically reserved for “value companies” not expected to grow – like autos!  Even though Apple grew revenues by 26% in fyscal 2015, and at the compounded rate of 22%/year from 2011- 2015.

Apple has a very strong base market, as the world leader today in smartphones, tablets and wearables.  Additionally, while the PC market declined by over 10% in 2015, Apple’s Mac sales rose 3% – making Apple the only company to grow PC sales.  And Apple continues to move forward with new enterprise products for retail such as iBeacon and ApplePay.  Meanwhile, in 2016 there will be ongoing demand growth via new development partnerships with large companies such as IBM.

Unfortunately, Apple is now valued as if all bad news imaginable could occur, causing the company to dramatically lose revenues, sustain an enormous downfall in earnings and have its cash dissipated.  Yet, Apple rose to become America’s most valuable publicly traded company by not only understanding trends, but creating them, along with entirely new markets.  Apple’s ability to understand trends and generate profitable revenues from that ability seems to be completely discounted, making it a good long-term investment.

In August, 2015 I recommended FANG investing.  This remains the best opportunity for investors in 2016 – with the addition of Apple.  These companies are well positioned on long-term trends to grow revenues and create value for several additional years, thereby creating above-market returns for investors that overlook short-term market turbulence and invest for long-term gains.

Is Yahoo Doomed?  Probably

Is Yahoo Doomed? Probably

Marissa Mayer’s reign as head of Yahoo looks to be ending like her predecessors.  With a serious flop.  Only this may well be the last flop – and the end of the internet pioneer.

It didn’t have to happen this way, but an inability to manage Status Quo Risk doomed Ms. Mayer’s leadership – as it has too many others.  And once again bad leadership will see a lot of people – investors, employees and even customers – pay the price.

Yahoo was in big trouble when Ms. Mayer arrived.  Growth had stalled, and its market was being chopped up by Google and Facebook.  It’s very relevancy was questionable as people no longer needed news consolidation sites – which had ended AOL, for example – and search had long gone to Google.  The intense internet users were already clearly mobile social media fans, and Yahoo simply did not compete in that space.

In other words, Yahoo desperately needed a change of direction and an entirely new strategy the day Ms. Mayer showed up.  Only, unfortunately, she didn’t provide either.  Instead Ms. Meyer offered, at best, a series of fairly meaningless tactical actions.  Changing Yahoo’s home page layout, cancelling the company’s work-from-home policy and hiring Katie Couric, amidst a string of small and meaningless acquisitions, were the business equivalent of fiddling while Rome burned.  Tinkering with the tactics of an outdated success formula simply ignored the fact that Yahoo was already well on the road to irrelevancy and needed to change, dramatically, quickly.

The saving grace for Yahoo was when Alibaba went public.  Suddenly a long-ago decision to invest in the Chinese company created a vast valuation increase for Yahoo.  This was the opportunity of a lifetime to shift the business fast and hard into something new, different and much more relevant than the worn out Yahoo strategy.  But, unfortunately, Ms. Mayer used this as a curtain to hide the crumbling former internet leader.  She did nothing to make Yahoo relevant, as fights erupted over how to carve up the Alibaba windfall.

When it became public that Ms. Mayer had hired famed strategy firm McKinsey & Co. to decide what businesses to close in its next “restructuring” it lit up the internet with cries to possibly just get rid of the whole thing! After 3 years, and more than one layoff, it now appears that Ms. Mayer has no better idea for creating value out of Yahoo than doing another big layoff to, once again, improve “focus on core offerings.”  Additional layoffs, after 3 years of declining sales, is not the way to grow and increase shareholder value.

Analysts are pointing out that Yahoo’s core business today is valueless.  The company is valued at less than its remaining Alibaba stake.  And this is not outrageous, since in the ad world Yahoo has become close to irrelevant.  Nobody would build an on-line ad campaign ignoring Google or Facebook, and several other internet leaders.  But ignoring Yahoo as a media option is increasingly common.

Investors are rightly worried that the IRS will take much of the remaining Alibaba value as taxes in any spinoff, leaving them with far less money.  Giving up on the CEO, and its increasingly irrelevant “core business” they are asking if it wouldn’t be smarter to sell what we think of as Yahoo to Softbank so the Japanese company can obtain the rest of Yahoo Japan it does not already own.  Ostensibly then Yahoo as it is known in the USA could simply start to disappear – like AOL and all the other on-line news consolidators.

PirateMarissaMayerIt really did not have to happen this way.  Yahoo’s troubles were clearly visible, and addressable.  But CEO Mayer simply chose to keep doing more of the same, making small improvements to Yahoo’s site and search tool.  By keeping Yahoo aligned with its historical Status Quo risk of irrelevance, obsolescence and failure grew quarter-by-quarter.

Now Status Quo Risk (the risk created by not adapting to shifting market needs) has most likely doomed Yahoo.  Investors are no longer interested in waiting for a turn-around.  They want their Alibaba valuation, and they could care less about Yahoo’s CEO, employees or customers.  Many have given up on Ms. Mayer, and simply want an exit strategy so they can move on.

Ms. Mayer’s leadership has shown us some important leadership lessons:

  • Hiring an executive from Google (or another tech company) does not magically mean success will emerge.  Like Ron Johnson from Apple to JCP, Ms. Mayer showed that even tech execs often lack an ability to understand market trends and the skills to adapt an organization.
  • It is incredibly easy for a new leader to buy into an historical success formula and keep tweaking it, rather than doing the hard work of creating a new strategy and adapting.  The lure of focusing on tactics and hoping the strategy will take care of itself is remarkably easy fall into.  But investors need to realize that tactics do not fix an outdated success formula.
  • Youth is not the answer.  Ms. Mayer was young, and identified with the youthfulness of Google and internet users.  But, in the end, she woefully lacked the strategy and leadership skills necessary to turn around the deeply troubled Yahoo.  Young, new and fresh is no substitute for critical thinking and knowing how to lead.
  • Boards give CEOs too much time to fail.  It was clear within months Ms. Mayer had no strategy for making Yahoo relevant.  Yet, the Board did not recognize its mistake and replace the CEOs.  There still are not sufficient safeguards to make sure Boards act when CEOs fail to lead effectively.
  • CEOs too often have too much hubris.  Ms. Mayer went from college to a rapid career acceleration in largely staff positions to CEO of Yahoo and a Board member of Wal-Mart.  It is easy to develop hubris, and an over-abundance of self-confidence.  Then it is easy to require your staff agree with you, and pledge so support you (as Ms. Mayer recently did.)  All of this indicates a leader running on hubris rather than critical thinking, open discourse and effective decision-making.  Hubris is not just a weakness of white male leaders.

Could there have been a different outcome.  Of course.  But for Yahoo’s employees, suppliers, customers and investors the company hired a string of CEOs that simply were not up to the job of redirecting the company into competitiveness.  Each one fell victim to trying to maintain the Status Quo. And, unfortunately, Ms. Mayer will be seen as the most recent – and possibly last – CEO to lead Yahoo into failure.  Ms. Mayer simply was not up to the job – and now a lot of people will pay the price.

 

Poor Microsoft – How Good Decisions, Made Too Late, Bode Poorly for the Future

Poor Microsoft – How Good Decisions, Made Too Late, Bode Poorly for the Future

Microsoft recently announced it was offering Windows 10 on xBox, thus unifying all its hardware products on a single operating system – PCs, mobile devices, gaming devices and 3D devices.  This means that application developers can create solutions that can run on all devices, with extensions that can take advantage of inherent special capabilities of each device.  Given the enormous base of PCs and xBox machines, plus sales of mobile devices, this is a great move that expands the Windows 10 platform.

Only it is probably too late to make much difference.  PC sales continue falling – quickly. Q3 PC sales were down over 10% versus a year ago. Q2 saw an 11% decline vs year ago. The PC market has been steadily shrinking since 2012In Q2 there were 68M PCs sold, and 66M iPhones.  Hope springs eternal for a PC turnaround – but that would seem increasingly unrealistic.

BallmerThe big market shift to mobile devices started back in 2007 when the iPhone began challenging Blackberry.  By 2010 when the iPad launched, the shift was in full swing.  And that’s when Microsoft’s current problems really began.  Previous CEO Steve Ballmer went “all-in” on trying to defend and extend the PC platform with Windows 8 which began development in 2010.  But by October, 2012 it was clear the design had so many trade-offs that it was destined to be an Edsel-like flop – a compromised product unable to please anyone.

By January, 2013 sales results were showing the abysmal failure of Windows 8 to slow the wholesale shift into mobile devices.  Ballmer had played “bet the company” on Windows 8 and the returns were not good.  It was the failure of Windows 8, and the ill-fated Surface tablet which became a notorious billion dollar write-off, that set the stage for the rapid demise of PCs.

And that demise is clear in the ecosystem.  Microsoft has long depended on OEM manufacturers selling PCs as the driver of most sales.  But now Lenovo, formerly the #1 PC manufacturer, is losing money – lots of money – putting its future in jeopardy.  And Dell, one of the other top 3 manufacturers, recently pivoted from being a PC manufacturer into becoming a supplier of cloud storage by spending $67B to buy EMC. The other big PC manufacturer, HP, spun off its PC business so it could focus on non-PC growth markets.

Windows deadAnd, worse, the entire OEM market is collapsing.  For the largest 4 PC manufacturers sales last quarter were down 4.5%, while sales for the remaining smaller manufacturers dropped over 20%!  With fewer and fewer sales, consolidation is wiping out many companies, and leaving those remaining in margin killing to-the-death competition.

Which means for Microsoft to grow it desperately needs Windows 10 to succeed on devices other than PCs.  But here Microsoft struggles, because it long eschewed its “channel suppliers,” who create vertical market applications, as it relied on OEM box sales for revenue growth.  Microsoft did little to spur app development, and rather wanted its developers to focus on installing standard PC units with minor tweaks to fit vertical needs.

Today Apple and Google have both built very large, profitable developer networks.  Thus iOS offers 1.5M apps, and Google offers 1.6M. But Microsoft only has 500K apps largely because it entered the world of mobile too late, and without a commitment to success as it tried to defend and extend the PC.  Worse, Microsoft has quietly delayed Project Astoria which was to offer tools for easily porting Android apps into the Windows 10 market.

Microsoft realized it needed more developers all the way back in 2013 when it began offering bonuses of $100,000 and more to developers who would write for Windows.  But that had little success as developers were more keen to achieve long-term sales by building apps for all those iOS and Android devices now outselling PCs.  Today the situation is only exacerbated.

By summer of 2014 it was clear that leadership in the developer world was clearly not Microsoft.  Apple and IBM joined forces to build mobile enterprise apps on iOS, and eventually IBM shifted all its internal PCs from Windows to Macintosh.  Lacking a strong installed base of Windows mobile devices, Microsoft was without the cavalry to mount a strong fight for building a developer community.

In January, 2015 Microsoft started its release of Windows 10 – the product to unify all devices in one O/S.  But, largely, nobody cared.  Windows 10 is lots better than Win8, it has a great virtual assistant called Cortana, and it now links all those Microsoft devices.  But it is so incredibly late to market that there is little interest.

Although people keep talking about the huge installed base of PCs as some sort of valuable asset for Microsoft, it is clear that those are unlikely to be replaced by more PCs.  And in other devices, Microsoft’s decisions made years ago to put all its investment into Windows 8 are now showing up in complete apathy for Windows 10 – and the new hybrid devices being launched.

AM Multigraphics and ABDick once had printing presses in every company in America, and much of the world.  But when Xerox taught people how to “one click” print on a copier, the market for presses began to die.  Many people thought the installed base would keep these press companies profitable forever.  And it took 30 years for those machines to eventually disappear.  But by 2000 both companies went bankrupt and the market disappeared.

Those who focus on Windows 10 and “universal windows apps” are correct in their assessment of product features, functions and benefits.  But, it probably doesn’t matter.  When Microsoft’s leadership missed the mobile market a decade ago it set the stage for a long-term demise. Now that Apple dominates the platform space with its phones and tablets, followed by a group of manufacturers selling Android devices, developers see that future sales rely on having apps for those products.  And Windows 10 is not much more relevant than Blackberry.

As Goes Apple So Goes the Nation – The Rise of the Digital Service Economy

As Goes Apple So Goes the Nation – The Rise of the Digital Service Economy

“As goes GM, so goes the Nation” is attributed to Charles Wilson, CEO of GM, in Congressional hearings 1953.  His viewpoint was that GM was so big, and so important, that the country’s economic fortunes were inherently dependent on a robust General Motors.

And this was not so far fetched in the Industrial era.  1940s-1960s America was a manufacturing king.  Following WWII industrial products dominated the economy, and post-war U.S. manufacturers made products sold around the world as other economies rebuilt and recovered, or just started emerging.  With manufacturing the jobs and economic value creator, and GM the largest manufacturer and non-government employer of its time, what was good for GM was generally good for America.

But that tie has clearly broken.  GM filed bankruptcy in the summer of 2009.  From 2007 to 2009 American employment fell from 121.5M to just over 110M. Last month jobs rose by 271,000, pushing employment to a fully recovered 122M jobs.  However, GM and its manufacturing partners have struggled to recover, as this economic expansion has largely left them behind.

We’ve seen a wild shift in the country’s economic base.  In 1900 America was an agrarian economy.  Over half the population lived on farms.  Fully 9 out of 10 working people had a job related to agriculture and food production.  But automation changed this dramatically.  By 2010, fewer than 1 in 100 people worked in farming or agriculture.  Farm incomes are at a 9 year low, and the future direction is downward.  Rural towns have disappeared as people moved to cities, concentrating over half the nation’s wealth in just its 20 largest cities.

WWII marked the shift from an agrarian to an industrial economy for America.  It was the industrial economy that pulled America out of the1930s Great Depression.  The industrial revolution ushered in all kinds of mechanical automation, and it was applied to doing everything as labor shortages forced innovation to meet rising defense challenges.   And it was the industrial economy that pushed America to the top.  It was the industrial economy which trained most of today’s business leaders.

service-jobsBut we’re no longer an industrial economy.  Just as the agrarian economy vanished, so too is the manufacturing economy.  Manufacturing jobs have been declining since 1970, and by 2010 they represent only 13% of workers and 15% of the country’s GDP (Gross Domestic Product).

By 2000 we had started the shift from an industrial to an information economy.  Digital bits replaced machines as the source of wealth creation.  By 2010 it was services, and the huge growth in digital services, that caused the jobs recovery.  Services now represent 84% of all jobs, and 82% of the economy.  (Economic statistics from FTPress division of Pearson Publishing.)

comic-new-information-economyToday the 3 most valuable companies in America are Apple, Google and Microsoft.  Number 6 is Facebook.  Their value (and in the case of Apple, Google and Facebook rather rapid value explosion) has been due to understanding how to maximize the value of information.  They don’t so much “make things” as they make life better through products which are purely ethereal – rather than something tangible.

Today’s #1 valued retailer is Amazon, now worth more than Wal-mart.  Amazon is largely a technology company, building its revenues by knowing more about the customer and what she wants, then matching that with the right products.  All in a virtual shopping arena.  No stores, salespeople and often no inventory needed.  Its technology skills became so good the company has become the #1 provider of cloud services.

Tesla has done something everyone thought impossible.  It has created a new auto company where many others failed (recall the DeLorean used in “Back to the Future”?  Or the Bricklin?)  But Tesla did this by building an entirely different car, one that is based on all new electric technology, that has far fewer moving parts, needs far less service, has better operating performance and actually bears little resemblance to the autos – or auto companies – of the past.  Tesla is far more a technology company, designed for the information era, than what we would think of as a “car company.”

The ramifications of this are dramatic.  Working class middle age white people are dying faster than any other demographic in America.  Their death rates are up 22%, and continuing to increase precipitously. Cause: suicide, drugs and alcohol.  This is the group that once found good paying jobs working machines in manufacturing.  Now, untrained for the information era, they are unable to find work – even though demand for trained labor is outstripping supply.

Today’s growth companies, those powering the American economic engine, are filled with intellectual assets rather than physical assets.  Apple, Google and Facebook (et.al.) are creating intellectual capital, and they need employees able to add to that capital base.  it is not enough for job candidates to have a college degree any longer.  Today’s job hunter has to be information savvy, digital savvy, tech savvy.

In the 1960s the gap widened dramatically between those in manufacturing and those in farming.  By the 1970s farms were closing by the hundreds as value shifted out of agrarian production to industrial production.  It was devastating to farm communities and farm families.

Today the gap is widening between those skilled in manufacturing or general knowledge and those with information-based skills.  The former are seeing their dreams slip away, while the latter are making incomes at a young age that are hard to fathom.  Cities like Detroit are crumbling, while San Francisco cannot supply enough housing for its workers.  The shift to an information economy is fully in force, and change is accelerating.  For those who make the shift much is to be gained, for those who do not there is much to lose.

Do Not Follow the Herd – Sell McDonald’s and Microsoft

Do Not Follow the Herd – Sell McDonald’s and Microsoft

This week McDonald’s and Microsoft both reported earnings that were higher than analysts expected. After these surprise announcements, the equities of both companies had big jumps.  But, unfortunately, both companies are in a Growth Stall and unlikely to sustain higher valuations.

Growth Stall primary slide

McDonald’s profits rose 23%.  But revenues were down 5.3%.  Leadership touted a higher same store sales number, but that is completely misleading.

McDonald’s leadership has undertaken a back to basics program.  This has been used to eliminate menu items and close “underperforming stores.”  With fewer stores, loyal customers were forced to eat in nearby stores – something not hard to do given the proliferation of McDonald’s sites.  But some customers will go to competitors. By cutting stores and products from the menu McDonald’s may lower cost, but it also lowers the available revenue capacity.   This means that stores open a year or longer could increase revenue, even though total revenues are going down.

Profits can go up for a raft of reasons having nothing to do with long-term growth and sustainability.  Changing accounting for depreciation, inventory, real estate holdings, revenue recognition, new product launches, product cancellations, marketing investments — the list is endless.  Further, charges in a previous quarter (or previous year) could have brought forward costs into an earlier report, making the comparative quarter look worse while making the current quarter look better.

Confusing?  That’s why accounting changes are often called “financial machinations.”  Lots of moving numbers around, but not necessarily indicating the direction of the business.

McDonald’s asked its “core” customers what they wanted, and based on their responses began offering all-day breakfast.  Interpretation – because they can’t attract new customers, McDonald’s wants to obtain more revenue from existing customers by selling them more of an existing product; specifically breakfast items later in the day.

Sounds smart, but in reality McDonald’s is admitting it is not finding new ways to grow its customer base, or sales.  The old products weren’t bringing in new customers, and new products weren’t either.  As customer counts are declining, leadership is trying to pull more money out of its declining “core.”  This can work short-term, but not long-term.  Long-term growth requires expanding the sales base with new products and new customers.

Perhaps there is future value in spinning off McDonald’s real estate holdings in a REIT.  At best this would be a one-time value improvement for investors, at the cost of another long-term revenue stream. (Sort of like Chicago selling all its future parking meter revenues for a one-time payment to bail out its bankrupt school system.)  But if we look at the Sears Holdings REIT spin-off, which ostensibly was going to create enormous value for investors, we can see there were serious limits on the effectiveness of that tactic as well.

MIcrosoft also beat analysts quarterly earnings estimate.  But it’s profits were up a mere 2%.  And revenues declined 12% versus a year ago – proving its Growth Stall continues as well.  Although leadership trumpeted an increase in cloud-based revenue, that was only an 8% improvement and obviously not enough to offset significant weakness in other markets:

It is a struggle to see the good news here.  Office 365 revenues were up, but they are cannibalizing traditional Office revenues – and not fast enough to replace customers being lost to competitive products like Google OfficeSuite, etc.

Azure sales were up, but not fast enough to replace declining Windows sales.  Further, Azure competes with Amazon AWS, which had remarkable results in the latest quarter.  After adding 530 new features, AWS sales increased 15% vs. the previous quarter, and 78% versus the previous year.  Margins also increased from 21.4% to 25% over the last year.  Azure is in a growth market, but it faces very stiff competition from market leader Amazon.

We build our companies, jobs and lives around successful products and services.  We want these providers to succeed because it makes our lives much easier.  We don’t like to hear about large market leaders losing their strength, because it signals potentially difficult change.  We want these companies to improve, and we will clutch at any sign of improvement.

As investors we behave similarly.  We were told large companies have vast customer bases, strong asset bases, well known brands, high switching costs,  deep pockets – all things Michael Porter told us in the 1980s created “moats” protecting the business, keeping it protected from market shifts that could hurt sales and profits.  As investors we want to believe that even though the giant company may slip, it won’t fall.  Time and size is on its side we choose to believe, so we should simply “hang on” and “ride it out.”  In the future, the company will do better and value will rise.

As a result we see that Growth Stall companies show a common valuation pattern.  After achieving high valuation, their equity value stagnates.  Then, hopes for a turn-around and recovery to new growth is stimulated by a few pieces of good news and the value jumps again.  Only after a few years the short-term tactics are used up and the underlying business weakness is fully exposed.  Then value crumbles, frequently faster than remaining investors anticipated.

McDonald’s valuation rose from $62/share in 2008 to reach record $100/share highs in 2011.  But valuation then stagnated.  It is only this last jump that has caused it to reach new highs.  But realize, this is on a smaller number of stores, fewer products and declining revenues.  These are not factors justifying sustainable value improvement.

Microsoft traded around $25/share from March, 2003 through November, 2011 – 8.5 years.  When the CEO was changed value jumped to $48/share by October, 2014.  After dipping, now, a year later Microsoft stock is again reaching that previous valuation ($50/share).  Microsoft is now valued where it was in December, 2002 (which is half its all-time high.)

The jump in value of McDonald’s and Microsoft happened on short-term news regarding beating analysts earnings expectations for one quarter.  The underlying businesses, however, are still suffering declining revenue.  They remain in Growth Stalls, and the odds are overwhelming that their values will decline, rather than continue increasing.

 

 

Will Jack Dorsey “Get It” At Twitter?

Will Jack Dorsey “Get It” At Twitter?

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?

Twitter DorseyAnyway, 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?

 

F.A.N.G Investing Makes Sense – Facebook, Amazon, Netflix, Google

F.A.N.G Investing Makes Sense – Facebook, Amazon, Netflix, Google

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.

tesla-facebook-netflix-amazon-google-twitter100-_pd-1414591845697_v-z-a-par-a-lCoined 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.