Facebook’s Surge, Apple’s Slide and Chipotle’s Stall – It’s All About Growth

Facebook’s Surge, Apple’s Slide and Chipotle’s Stall – It’s All About Growth

Growth fixes a multitude of sins.  If you grow revenues enough (you don’t even need profits, as Amazon has proven) investors will look past a lot of things.  With revenue growth high enough, companies can offer employees free meals and massages. Executives and senior managers can fly around in private jets.  Companies can build colossal buildings as testaments to their brand, or pay to have thier names on  public buildings.  R&D budgets can soar, and product launches can fail. Acquisitions are made with no concerns for price. Bonuses can be huge.  All is accepted if revenues grow enough.

Just look at Facebook.  Today Facebook announced today that for the quarter ended March, 2016 revenues jumped to $5.4B from $3.5B a year ago.  Net income tripled to $1.5B from $500M.  And the company is basically making all its revenue – 82% – from 1 product, mobile ads.  In the last few years Facebook paid enormous premiums to buy WhatsApp and Instagram – but who cares when revenues grow this fast.

Anticipating good news, Facebook’s stock was up a touch today. But once the news came out, after-hours traders pumped the stock to over $118//share, a new all time high. That’s a price/earnings (p/e) multiple of something like 84.  With growth like that Facebook’s leadership can do anything it wants.

But, when revenues slide it can become a veritable poop puddle. As Apple found out.

Rumors had swirled that Apple was going to say sales were down.  And the stock had struggled to make gains from lows earlier in 2016. When the company’s CEO announced Tuesday that sales were down 13% versus a year ago the stock cratered after-hours, and opened this morning down 10%.  Breaking a streak of 51 straight quarters of revenue growth (since 2003) really sent investors fleeing.  From trading around $105/share the last 4 days, Apple closed today at ~$97.  $40B of equity value was wiped out in 1 day, and the stock trades at a p/e multiple of 10.

The new iPhone 6se outsold projections, iPads beat expectations.  First year Apple Watch sales exceeded first year iPhone sales.  Mac sales remain much stronger than any other PC manufacturer. Apple iBeacons and Apple Pay continue their march as major technologies in the IoT (Internet of Things) market. And Apple TV keeps growing.  There are about 13M users of Apple’s iMusic.  There are 1.5M apps on the iTunes store.  And the installed base keeps the iTunes store growing.  Share buybacks will grow, and the dividend was increased yet again.  But, none of that mattered when people heard sales growth had stopped.  Now many investors don’t think Apple’s leadership can do anything right.

Growth StallYet, that was just one quarter.  Many companies bounce back from a bad quarter.  There is no statistical evidence that one bad quarter is predictive of the next.  But we do know that if sales decline versus a year ago for 2 consecutive quarters that is a Growth Stall.  And companies that hit a Growth Stall rarely (93% of the time) find a consistent growth path ever again.  Regardless of the explanations, Growth Stalls are remarkable predictors of companies that are developing a gap between their offerings, and the marketplace.

Which leads us to Chipotle.  Chipotle announced that same store sales fell almost 30% in Q1, 2016.  That was after a 15% decline in Q4, 2015. And profits turned to losses for the quarter.  That is a growth stall.  Chipotle shares were $750/share back in early October. Now they are $417 – a drop of over 44%.

Customer illnesses have pointed to a company that grew fast, but apparently didn’t have its act together for safe sourcing of local ingredients, and safe food handling by employees.  What seemed like a tactical problem has plagued the company, as more customers became ill in March.

Whether that is all that’s wrong at Chipotle is less clear, however.  There is a lot more competition in the fast casual segment than 2 years ago when Chipotle seemed unable to do anything wrong.  And although the company stresses healthy food, the calorie count on most portions would add pounds to anyone other than an athlete or construction worker – not exactly in line with current trends toward dieting.  What frequently looks like a single problem when a company’s sales dip often turns out to have multiple origins, and regaining growth is nearly always a lot more difficult than leadership expects.

Growth is magical.  It allows companies to invest in new products and services, and buoy’s a stock’s value enhancing acquisition ability.  It allows for experimentation into new markets, and discovering other growth avenues.  But lack of growth is a vital predictor of future performance.  Companies without growth find themselves cost cutting and taking actions which often cause valuations to decline.

Right now Facebook is in a wonderful position.  Apple has investors rightly concerned.  Will next quarter signal a return to growth, or a Growth Stall?  And Chipotle has investors heading for the exits, as there is now ample reason to question whether the company will recover its luster of yore.

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?

 

Costolo Should NOT Have Been Fired – Twitter Investors Worry

Costolo Should NOT Have Been Fired – Twitter Investors Worry

Dick Costolo was let go from his role as CEO of Twitter, to be replaced by a former CEO that was also fired.  Unfortunately, it looks very strongly as if the Board made this decision for the wrong reasons.

Even though investors have been unhappy with Twitter’s share price, as CEO Mr. Costolo was doing a decent job of growing the company and improving profits.  And even though analysts keep offering reasons why he was fired, it looks mostly as if this was a political decision in a company with a “soap opera” executive culture.  Investors should be worried.

Let’s compare Mr. Costolo to CEO Zuckerberg’s performance at Facebook, and Mr. Bezos’ performance at Amazon.  The latter two have been widely heralded for their leadership, so it sets a pretty good bar.

None of these three companies have enough earnings to matter. If you aren’t a growth investor, and you always value a company on earnings, then none of these are your cup of tea. All are evaluated on revenue and user metrics.

Slide1As you can see, Twitter’s revenue growth exceeds its comparators.  Yes, its decline has been more dramatic, but we are comparing Twitter to companies that are much older and bigger.  The net is to understand that revenues are growing, and at a better clip than Facebook and Amazon.

Slide2Next we should look at active monthly users.  Again, these numbers are growing at all 3.  And some analysts have said it is the deceleration in the rate of new user growth that doomed Mr. Costolo.  But this defies logic given that during his tenure Twitter has dramatically outperformed its competition.

Lastly, let’s look at the “quality” of users.  We can measure this by calculating the revenue per user.  If this goes up, then the company is growing it top line by gaining more revenue per user – it is not “discounting” its way to higher volume.  Instead,we can expect profits to improve based upon growth in this metric.

Slide3And here we can see that Twitter has wildly outperformed Facebook and Amazon.  Twitter has grown its revenue per user by over 9-fold in the last 4 years, an excellent 75% per year compounded.  Facebook, by comparison, roughly tripled its revenue/user (still very good) creating a 25%/year growth (certainly not to be sneezed at.)  Amazon’s growth per user across the full 4 years was 25% – or about 4%/year.

It isn’t hard to see that Mr. Costolo has been doing a pretty good job leading Twitter.

But Twitter has had a very checkered past when it comes to leaders.  Several articles have been written about the revolving door on the CEO office, with founders back-stabbing each other as money is raised and efforts are made to improve company performance technologically and financially.

The Board has shown a proclivity to spend too much time listening to rumors, and previous CEOs.  Rather than focusing on exactly how many users are coming aboard, and how much revenue is generated on those users.

The returning CEO was  himself previously replaced.  And during his tenure there were many technical problems.  Why he would be inserted, and the best performing CEO in company history shunted aside is completely unclear.  But for investors, employees, users (of which I am one) and customers this change in leadership looks to be poorly conceived, and quite concerning.  Mr. Costolo was doing a pretty good job.

Data on revenues came from Marketwatch for Twitter, Facebook and Amazon.  Data on users (in Amazon’s case customers) came from Statista.com for Twitter, Facebook and Amazon. Charts were created by Adam Hartung (C).

The Smart Leadership Lessons from Facebook’s WhatsApp Acquisition

The Smart Leadership Lessons from Facebook’s WhatsApp Acquisition

Facebook is acquiring WhatsApp, a company with at most $300M revenues, and 55 employees, for $19billion.  That’s billion – with a “b.” An astonishing figure that is second only to HP’s acquisition of market leader Compaq, which had substantial revenues and profits, as tech acquisitions.  $19B is 13 times Facebook’s (not WhatsApp’s) entire 2013 net income – and almost 2.5 times Facebook’s (again, not WhatsApp’s) 2013 gross revenues!

On the mere face of it this valuation should make the most dispassionate analyst swoon.  In today’s world very established, successful companies sell for far, far lower valuations.  Apple is valued at about 13 times earnings.  Microsoft about 14 times earnings.  Google 33 times.  These are small fractions of the nearly infinite P/E placed on WhatsApp.

But there is a leadership lesson offered here by CEO Zuckerberg’s team that is well worth learning.

Irrelevancy can happen remarkably quickly.  True in any industry, but especially in digital technology. Examples: Research-in-Motion/Blackberry.  Motorola.  Dell.  HP all lost relevancy in months and are struggling.  (For those who want non-tech examples think of Circuit City, Best Buy, Sears, JCPenney, Abercrombie and Fitch.)  Each of these companies was an industry leader that lust its luster, most of its customers, a big chunk of its employees and much of its market valuation in months when the company missed a market shift.

Although leadership knew what it had historically done to sell products profitably, in a very short time market trends reduced the value of the company’s historical success formula leaving investors, as well as management, wondering how it was going to compete.

Facebook is not immune to changing market trends.  Although it has been the benchmark for social media, it only achieved that goal after annihilating early leader MySpace.  And although Facebook was built by youthful folks, trends away from using laptops and toward mobile devices have challenged the Facebook platform.  Simultaneously, changing communication requirements have altered the use, and impact, of things like images, photos, charts and text.  All of these have the potential impact of slowly (or not so slowly) eroding the value (which is noticably lofty) of Facebook.

Most leaders address these kinds of challenges by launching new products to leverage the trend.  And Facebook did just that.  Facebook not only worked on making the platform more mobile friendly, but developed its own platform apps for photos and texting and all kinds of new features.

But, and this is critical, external companies did a better job.  Two years ago Instagram emerged as a leader in image sharing.  And WhatsApp has developed a superior answer for messaging.

Historically leadership usually said “we need to find a way to beat these new guys.” They would make it hard to integrate new solutions with their dominant platform in an effort to block growth.  They would spend huge amounts on marketing and branding to try overcoming the emerging leader.  Often they filed intellectual property litigation in an effort to cause short-term business interuption and threaten viability.  They might even try hiring the emerging company’s tech leader away to stop development.

All of these actions were efforts to defend & extend the early leader’s market position.  Even though the market is shifting, and trends are developing externally from the company, leadership will tend to look inside for an answer.  It will often ignore the trend, disparage the competition, keep promising improvements to its historical products and services and blanket the media with PR as to its stated superiority.

But, as that list (above) of companies that lost relevancy demonstrates, this rarely works.  In a highly interconnected, fast-paced, globally competitive marketplace customers go where they want.  Quickly.  Often leaving the early leader with a management team (and Board of Directors) scratching its head and wondering how it lost so much market position, and value, so quickly.

Hand it to Mr. Zuckerberg’s team.  Instead of ignoring trends in its effort to defend & extend its early lead, they reached out and brought the leader to them.  $1B for Instagram was a big investment, especially so close to launching an IPO.  But, it kept Facebook relevant in mobile platforms and imaging.

And making a nosebleed-creating $19B deal for WhatsApp focuses on maintaining relevancy as well.  WhatsApp already processes almost as many messages as the entire telecom industry.  It has 450million users with 70% active daily, which is already 60% the size of Facebook’s daily user community (550million.)  By bringing these people into the Facebook corporate family it assures the company of continued relevancy as the market shifts.  It doesn’t matter if these are the same people, or different people.  The issue is that it keeps Facebook relevant, rather than losing relevance to a competitor.

How will this all be monetized into $19B?  The second brilliant leadership call by Facebook is to not answer that question.

Facebook didn’t know how to monetize its early leadership in users, but management knew it had to find a way.  Now the company has grown from almost no revenues in 2008 to almost $8B in just 5 years.  (Does your company have a plan to add $8B/year of organic revenue growth by 2019?)

So just as Facebook had to find its revenue model (which it is still exploring,) Zuckerberg’s team allows the leadership of Instagram and WhatsApp to remain independent, operating in their own White Space, to grow their user base and learn how to monetize what is an extraordinarily large group of happy folks.  When looking to grow in new markets, and you find a team with the skills to understand the trends, it is independence rather than integration that makes the most sense organizationally.

Thirdly, back to that valuation issue.  $19B is a huge amount of money.  Unless you don’t really spend $19B.  Facebook has the blessed ability to print its own.  Private money that it can use for such acquisitions.  As long as Facebook has a very high market valuation it can make acquisitions with shares, rather than real money.

In the case of both Instagram and WhatsApp the acquisition is being made in a mix of cash, Facebook stock and restricted Facebook stock for employees.  The latter two of these three items are not real money.  They are simply pieces of paper giving claims to ownership of Facebook, which itself is valued at 22 times 2013 revenue and 116 times 2013 earnings.  The price of those shares are all based on expectations; expectations which now require the performance of Instagram and WhatsApp to make happen.

By making acquisitions with Facebook shares the leadership team is able to link the newly acquired managers to the same overall goals as Facebook, while offering an extremely high price but without actually having to raise any money – or spend all that money.

All companies risk of becoming irrelevant.  New technologies, customer behavior patterns, regulations, inventions and innovations constantly challenge old success formulas.  Most leaders fall into a pattern of trying to defend & extend their old business in the face of market shifts, hastening the fall into irrelevancy.  Or they try to acquire a new business, then integrate it into the old business which strips away the new business value and leads, inevitably, to irrelevancy.

The leaders of Facebook are giving us a lesson in an alternative approach.  (1) Recognize the market shift.  Accept it.  If there is a better solution, rush toward it rather than ignoring it.  (2) Bring it into the company, and leave it independent.  Eschew integration and efforts to find “synergy.”  (You never know, in 3 years the company may need to be renamed WhatsApp to reflect a new market paradigm.)  (3) And as long as you can convince investors that you are maintaining your relevancy use your highly valued stock as currency to keep the company moving forward.

These are 3 great lessons for all leadership teams.  And I continue to think Facebook is the one stock to own in 2014.

 

How Amazon Whupped Facebook Last Week

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
FB v AMZN 9.10.12

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

  1.  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
  2. 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.