by Adam Hartung | Apr 30, 2015 | Current Affairs, Defend & Extend, In the Rapids, Innovation, Leadership, Web/Tech
Last week saw another slew of quarterly earnings releases. For long term investors, who hold stocks for years rather than months, these provide the opportunity to look at trends, then compare and contrast companies to determine what should be in their portfolio. It is worthwhile to compare the trends supporting the valuations of market leaders Google and Facebook.
Google once again reported higher sales and profits. And that is a good thing. But, once again, the price of Google’s primary product declined. Revenues increased because volume gains exceeded the price decline, which indicates that the market for internet ads keeps growing. But this makes 15 straight quarters of price declines for Google. Due to this long series of small declines, the average price of Google’s ads (cost per click) has declined 70%* since Q3 2011!
While this is a miraculous example of what economists call demand elasticity, one has to wonder how long growth will continue to outpace price degradation. At some point the marginal growth in demand may not equal the marginal decline in pricing. Should that happen, revenues will start going down rather than up.
Part of what drives this price/growth effect has been the creation of programmatic ad buying, which allows Google to place more ads in more specific locations for advertisers via such automated products as AdMob, AdExchange and DoubleClick Bid Manager. But such computerized ad buying relies on ever more content going onto the web, as well as ever more consumption by internet users.
Further, Google’s revenues are almost entirely search-based advertising, and Google dominates this category. But this is largely a PC-related sale. Today 67.5% of Google ad revenue is from PC searches, while only 32.5% is from mobile searches. Due to this revenue skew, and the fact that people do more mobile interaction via apps, messaging apps and social media than browser, search ad growth has fallen considerably. What was a 24% year over year growth rate in Q1 2012 has dropped to more like 15% for the last 8 quarters.
So while the market today is growing, and Google is making more money, it is possible to see that the growth is slowing. And Google’s efforts to create mobile ad sales outside of search has largely failed, as witnessed by the recent death of Google+ as competition for Twitter or Facebook. It is the market shift, to mobile, which creates the greatest threat to Google’s ability to grow; certainly at historical rates.
Simultaneously, Facebook’s announcements showed just how strongly it is continuing to dominate both social media and mobile, and thus generate higher revenues and profits with outstanding growth. The #1 site for social media and messenger apps is Facebook, by quite a large margin. But, Facebook’s 2014 acquisition of What’sApp is now #2. WhatsApp has doubled its monthly active users (MAUs) just since the acquisition, and now reaches 800million. Growth is clearly accelerating, as this is from a standing start in 2011.
Facebook Messenger at #3, just behind WhatsApp. And #5 is Instagram, another Facebook acquisition. Altogether 4 of the top 5 sites, and the ones with greatest growth on mobile, are Facebook. And they total over 3billion MAUs, growing at over 300million new MAUs/month. Thus Facebook has already emerged as the dominant force, with the most users, in the fast-growing, accelerating, mobile and app sectors. (Just as Google did in internet search a decade ago, beating out companies like Yahoo, Ask Jeeves, etc.)
Google is moving rapidly to monetize this user base. From nothing in early 2012, Facebook’s mobile revenue is now $2.5B/quarter and represents 67% of global revenue (the inverse of Google’s revenues.) Further, Facebook is now taking its own programmatic ad buying tool, Atlas, to advertisers in direct competition with Google. Only Atlas places ads on both social media and internet browser pages – a one-two marketing punch Google has not yet cracked.
Google’s $17.3B Q1 2015 revenue is 30 times the revenue of Facebook. There is no doubt Google is growing, and generating enormous profits. But, for long-term investors, growth is slowing and there is reason to be concerned about the long term growth prospects of Google as the market shifts toward more social and more mobile. Google has failed to build any substantial revenues outside of search, and has had some notable failures recently outside its core markets (Google + and Google Glass.) Just how long Google will continue growing, and just how fast the market will shift is unclear. Technology markets have shown the ability to shift a lot faster than many people expected, leaving some painful losers in their wake (Dell, HP, Sun Microsystems, Yahoo, etc.)
Meanwhile, Facebook is squarely positioned as the leader, without much competition, in the next wave of market growth. Facebook is monetizing all things social and mobile at a rapid clip, and wisely using acquisitions to increase its strength. As these markets continue on their well established trends it is hard to be anything other than significantly optimistic for Facebook long-term.
* 1x .93 x .88 x .84 x .85 x .94 x .96 x .94 x .93 x .89 x .91 x .94 x .98 x .97 x .95 x .93 = .295
by Adam Hartung | May 16, 2014 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle, Web/Tech
IBM had a tough week this week. After announcing earnings on Wednesday IBM fell 2%, dragging the Dow down over 100 points. And as the Dow reversed course to end up 2% on the week, IBM continued to drag, ending down almost 3% for the week.
Of course, one bad week – even one bad earnings announcement – is no reason to dump a good company’s stock. The short term vicissitudes of short-term stock trading should not greatly influence long-term investors. But in IBM’s case, we now have 8 straight quarters of weaker revenues. And that HAS to be disconcerting. Managing earnings upward, such as the previous quarter, looks increasingly to be a short-term action, intended to overcome long-term revenues declines which portend much worse problems.
This revenue weakness roughly coincides with the tenure of CEO Virginia Rometty. And in interviews she increasingly is defending her leadership, and promising that a revenue turnaround will soon be happening. That it hasn’t, despite a raft of substantial acquisitions, indicates that the revenue growth problems are a lot deeper than she indicates.
CEO Rometty uses high-brow language to describe the growth problem, calling herself a company steward who is thinking long-term. But as the famous economist John Maynard Keynes pointed out in 1923, “in the long run we are all dead.” Today CEO Rometty takes great pride in the company’s legacy, pointing out that “Planes don’t fly, trains don’t run, banks don’t operate without much of what IBM does.”
But powerful as that legacy has been, in markets that move as fast as digital technology any company can be displaced very fast. Just ask the leadership at Sun Microsystems that once owned the telecom and enterprise markets for servers – before almost disappearing and being swallowed by Oracle in just 5 years (after losing $200B in market value.) Or ask former CEO Steve Ballmer at Microsoft, who’s delays at entering mobile have left the company struggling for relevancy as PC sales flounder and Windows 8 fails to recharge historical markets.
CEO Rometty may take pride in her earnings management. But we all know that came from large divestitures of the China business, and selling the PC and server business. As well as significant employee layoffs. All of which had short-term earnings benefits at the expense of long-term revenue growth. Literally $6B of revenues sold off just during her leadership.
Which in and of itself might be OK – if there was something to replace those lost sales. (Even if they didn’t have any profits – because at least we have faith in Amazon creating future profits as revenues zoom.)
What really worries me about IBM are two things that are public, but not discussed much behind the hoopla of earnings, acquisitions, divestitures and all the talk, talk, talk regarding a new future.
CNBC reported (again, this week,) that 121 companies in the S&P 500 (27.5%) cut R&D in the first quarter. And guess who was on the list? IBM, once an inveterate leader in R&D has been reducing R&D spending. The short-term impact? Better quarterly earnings. Long term impact????
The Washington Post reported this week about the huge sums of money pouring out of corporations into stock buybacks rather than investing in R&D, new products, new capacity, enhanced marketing, sales growth, etc. $500B in buybacks this year, 34% more than last year’s blistering buyback pace, flowed out of growth projects. To make matters worse, this isn’t just internal cash flow going for buybacks, but companies are actually borrowing money, increasing their debt levels, in order to buy their own stock!
And the Post labels as the “poster child” for this leveraged stock-propping behavior…. IBM. IBM
“in the first quarter bought back more than $8 billion of its own stock, almost all of it paid for by borrowing. By reducing the number of outstanding shares, IBM has been able to maintain its earnings per share and prop up its stock price even as sales and operating profits fall.
The result: What was once the bluest of blue-chip companies now has a debt-to-equity ratio that is the highest in its history. As Zero Hedge put it, IBM has embarked on a strategy to “postpone the day of income statement reckoning by unleashing record amounts of debt on what was once upon a time a pristine balance sheet.”
In the case of IBM, looking beyond the short-term trees at the long-term forest should give investors little faith in the CEO or the company’s future growth prospects. Much is being hidden in the morass of financial machinations surrounding acquisitions, divestitures, debt assumption and stock buybacks. Meanwhile, revenues are declining, and investments in R&D are falling. This cannot bode well for the company’s long-term investor prospects, regardless of the well scripted talking points offered last week.
by Adam Hartung | Sep 10, 2012 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
It's been two very different stories for Amazon and Facebook this summer. Amazon's market cap has risen about 20%, while Facebook lost about 50% of its market value.
Chart source: Yahoo Finance
Why this has happened was somewhat encapsulated in each company's headlines last week.
Amazon announced it was releasing 2 new eReaders under the Paperwhite name requiring no external light source starting at $119. Additionally, Kindles for $69 will be available this week. These actions expand the market for eReaders, already dominated by Amazon, providing for additional growth and lowering a kaboom on the Barnes & Noble Nook which is partnered with Microsoft.
Offering more functionality and lower prices gives Amazon an even larger lead in the ereader market while simultaneously expanding demand for digital reading giving Amazon more strength versus traditional publishers and the printed book market. Despite a "nosebleed" high historical price/earnings multiple close to 300, investors, like customers, were charged up to see the opportunities for ongoing growth from new products.
On the other hand, Facebook spent last week explaining to investors a set of decisions being made to prop up the stock price. The CEO promised not to sell any stock for several months, and explained that the company would not sell more stock to cover taxes on stock-based compensation – even though that was the original plan. He even tried to promote the avoided transaction as some kind of stock buyback, although there was no stock buyback.
Facebook was focused on financial machinations – which have nothing to do with growing the company's revenues or profits. That the company avoided selling more stock at its deflated prices does help earnings per share, but what's more important is the fact that now $2B will be taken out of cash reserves to pay those taxes. $2B which won't be spent on new product development, or other activities oriented toward growth.
Although I am very bullish on Facebook, last week was not a good sign. A young CEO is clearly feeling heat over the stock value, even though he has control of the company regardless of share price. It gave the indication that he wanted to mollify investors rather than focus on producing better results – which is what Facebook has to do if it really wants to make investors happy. Rather than doing what he always promised to do, which was make the world's best network offering users the best experience, his attention was diverted to issues that have absolutely no long-term value, and in the short term reduce resources for fulfilling the long-term mission.
Given the choice between
- a company talking about how it plans to grow revenues and profits, and maintain market domination while outflanking the introduction of new Microsoft products, or
- a company apologetic about its IPO, fixated on its declining stock price and apparently diverting focus away from markets and solutions toward financial machinations
which would you choose? Both may have gone up in value last week – but clearly Mr. Bezos showed he was leading his company, while Mr. Zuckerberg came off looking like he was floundering.
As you look at the announcements from your company, over the last year and anticipate going forward, what do you see? Are there lots of announcements about new technology applications and product advancements that open new markets for growing revenue while warding off (and making outdated) competitors? Or is more time spent talking about layoffs, cost cutting efforts, price adjustments to maintain market share, stock buybacks intended to prop up the value, stock (or company) splits, asset (or division) sales, expense reductions, reorganizations or adjustments intended to improve earnings per share?
If its the former, congratulations! You're acting like Amazon. You're talking about how you are whupping competitors and creating growth for investors, employees and suppliers. But if it's the latter perhaps you understand why your equity value isn't rising, employees are disgruntled and suppliers are worried.
