Google vs. Amazon – Battle for the home pt. IV.

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Amazon increases its aggressive land grab. 

  • Not content to sit on 70% market share, Amazon is aggressively compensating for the lack of Alexa on smartphones by effectively giving the devices away and pushing e-commerce as hard as it can.
  • A land grab strategy makes complete sense because the more Amazon can drive Alexa usage, the more data it will generate and the better it can become.
  • Usage is the key to making all digital assistants better and this is the one area where Amazon has huge ground to make up compared to Google.
  • Amazon has launched yet another Alexa device which costs $20 but this is immediately credited back to the user when it is registered with an Amazon account making it effectively free.
  • The latest addition to the family is called the Amazon Dash Wand which can be used to scan bar codes or Alexa to order products from Amazon.
  • Alexa is present on the device and while this is clearly aimed at driving e-commerce, there is no reason why it can’t be used to answer inquiries or control the smart home.
  • The one thing it won’t do is play music or radio but when the whole device costs $20, it is obvious that the audio experience would not be worth the effort.
  • At the same time, Amazon is also offering $50 off the Amazon Tap reducing the price of the portable speaker to $79.99.
  • The two weaknesses of Amazon in the digital assistant space are that it is inferior to Google and that Google Assistant is present by default on every Android smartphone that ships.
  • This means that if Google can convince users to use their smartphones to access the digital assistant, then Amazon will be at a big disadvantage.
  • However, at the moment over 60% of all digital assistant usage occurs when the user’s hands are busy with another task which obviates smartphone usage as the device almost always has to be removed from a pocket to be activated.
  • This, combined with the fact that Google is still really struggling in the smart home (see here), is why Amazon still has the upper hand which it is showing no sign of losing.
  • This move is clearly aimed at seeding as much of the market as possible before Google can get its act together.
  • If a large number of households have Alexa which is working nicely with the other smart devices they have at home, it will be increasingly difficult for Google to win them back even with a superior product.
  • This is particularly relevant given that the market is still lowly penetrated in USA and is almost non-existent overseas.
  • Given Google’s very slow progress, I am increasingly of the opinion that we are witnessing a repeat of the VHS vs. Betamax battle.
  • I continue not to like either Alphabet or Amazon (even if it wins the smart home) on valuation grounds, preferring instead Tencent, Baidu and Microsoft.

Apple – Worst kept secrets.

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Face ID was the star of a show where everything had been leaked.

  • Apple launched its next series of products that brings its hardware into line with the best of Android but it is in the software where the differentiation will continue to be found.

iPhone X.

  • iPhone X brings Apple into line with Samsung in terms of screen design and quality (OLED) but I suspect it is in Face ID where the real leap in innovation lies.
  • Face ID uses a 3D depth sensor and infrared camera to map the user’s face and then compare that against a previously captured map.
  • Face ID promises to be fast and not fooled by photographs or even 3D models of the user’s face.
  • It will also continue to recognise the user when wearing a hat or glasses or should the user grow a beard.
  • This should be a big improvement on Samsung’s facial recognition which is slow and unreliable to the point where it is often easier and quicker to put in the PIN number.
  • Apple has also redesigned the home button press and multitasking commands into swipes that should be reasonably easy to adjust to.
  • Beyond that there are incremental advances in the camera and image processing but at the end of the day, this device is all about the new screen.
  • Apple has brought itself into line with the high-end of Android in terms of hardware specification meaning that the price premium will be all about the iOS ecosystem.
  • Pricing is in line with expectations at $999 for the 64GB version and I estimate $100 more for the 256GB version.
  • With Android struggling with endemic fragmentation and Samsung remaining very poor at software Apple remains at the head of the pack.

iPhone 8/8+.

  • Many of the improvements present in the iPhone X are also present in the iPhone 8 with the exception of the screen and FaceID.
  • It continues to use fingerprint recognition on the home button and has a slightly improved screen although it is in the old configuration and is not OLED.
  • It has the same photographic enhancements as the iPhone X and represents a steady upgrade to the iPhone 7 with pricing staying the same.

Apple Watch Series 3

  • Apple has recognised that almost all the usage this product is for fitness and is doubling down on this use case in the new version.
  • New functions have been added that improve the performance of the device for certain activities as well as adding some new less common activities.
  • The heart rate monitor has been improved to offer continual heart rate monitoring as well as resting and recovery heart rates thereby deepening its appeal to fitness.
  • At the same time, Apple is taking tentative steps into medical with the launch of a study that looks at alerting users to abnormal heart patterns that can lead to strokes.
  • This is a work in progress but Apple clearly intends to move deeper into this area as it is working closely with the FDA on this study.
  • Apple has also added a modem to one variant of the Apple Watch which I continue to believe is completely pointless (see here).
  • Apple has done enough to keep this category going but the real use case that will make everyone rush out and buy one remains glaringly absent.

Wireless Charging

  • Apple’s new iPhones have glass backs which enable wireless charging for the first time.
  • Apple has backed the Qi standard which is also used by Samsung which I suspect will now ensure that Qi becomes the single global standard.
  • Apple also discussed a proprietary product that enables multiple devices to charge on a single mat but as this is not in the standard it will only work with Apple products.
  • Apple is moving into line with everyone else on wireless charging as even the multiple devices on one mat is not a new idea.

Take Home Message

  • The endless leaks and speculation meant that Apple was not able to spring a single surprise on the audience this year.
  • That being said, I think it has done just enough to keep itself at the top of the industry for another year.
  • This is more about the Android camp struggling with software fragmentation and low profitability than Apple raising the bar for the gold standard in smartphones.
  • The one area where it has raised the bar is FaceID but this feature needs to tested in the wild to see just how good it really is.
  • Apple’s share has enjoyed a great rally this year meaning that the valuation argument for owning the stock long-term has evaporated.
  • With no real surprises coming this year there is a case to be made for taking some profits and looking elsewhere.
  • Tencent, Baidu and Microsoft spring to mind.

Xiaomi and Google – Race to the bottom.

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Android One will only ever benefit Google. 

  • Xiaomi and Google are resurrecting the Android One program but given what Xiaomi has launched, the original aim of Android One has clearly been completely abandoned.
  • The idea behind Android One was to provide a reference implementation of Android optimised for Google’s services that would be used by multiple manufacturers.
  • With multiple manufacturers on board and joint sourcing of components, the cost to make these devices would have been substantially reduced.
  • This is how Google capable devices could have been economically put in the hands of users at much lower prices which in turn would drive usage for Google, highlighting the whole point of the exercise.
  • However, handset makers need differentiation and so they all wanted to tweak the specification meaning that development costs would rise and that any volume discounts on components would be lost.
  • The results were devices that were no cheaper to produce than anything else rendering the program useless.
  • Xiaomi has resurrected the Android One brand but is completely ignoring the point of the program with the launch of the Xiaomi Mi A1: a dual 12mp camera with 5.5” 1080p screen selling for an incredibly reasonable INR14,999 or US$234.
  • The device abandons the MIUI user experience and ecosystem being pushed in China and goes soup to nuts Google.
  • This is almost as much a Google device as the Pixel is.
  • This is where the Xiaomi’s strategy comes unstuck as I have ong believed that the Android One program benefits Google and no one else.
  • While the Mi A1 is a nice-looking device, it is still competing on the basis of hardware only meaning that all Xiaomi is doing is further accelerating the race to the bottom.
  • Xiaomi’s strategy has been to sell hardware at cost and then generate profit through its ecosystem of software, services and connected devices.
  • By going fully Google, this strategy goes completely out of the window as Xiaomi has no way to make money from its ecosystem.
  • Consequently, unless it can outsell its closest rival by more than 2 to 1 (this would require beating Samsung) all it can really hope for is commodity margins at best.
  • This might help Xiaomi to grow market share and revenue in India but I think that it will do nothing for its profitability.
  • Xiaomi has staged a good volume comeback in 2017 but it is very far from a position where it can make good profits or offer a return to the long-suffering investors who put money in at $45bn.
  • I continue to believe that the only winner in Android (outside of Qualcomm, MediaTek and ARM) is Google but I think that this benefit remains fully priced into the shares and prefer to look elsewhere.

 

Google – Yellow brick road pt. II.

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Another step to fully proprietary Android.

  • Android Auto and Wear are fully proprietary and I continue to see incremental moves by Google that lead inexorably towards fully proprietary Android on smartphones.
  • Following on from Project Treble (see here), Google is now starting to clamp down on kernel usage by Android smartphone makers.
  • The kernel is the small but critical software program in any computing system that has complete control over everything that forms part of that system.
  • It is the first piece of software that is loaded after the device is booted and the Android OS runs on top of it.
  • Because it has access to everything, the kernel is critical for security which is the reason that Google is has given for this action but it also has the convenient side effect of moving Google closer to a fully proprietary system.
  • To date, handset makers have been free to choose any Linux kernel they please (there are many) which has been a source of poor security and inconsistent performance of the same software on different systems.
  • However, from Android Oreo forward Google has mandated that the minimum kernel version on new devices must be 3.18 (to be revised upwards with time) or newer and must enable Project Treble.
  • These criteria are checked at the point of certification and again when the device software is upgraded over the air (OTA).
  • This will certainly make an improvement to the very poor security that plagues Android but it should also improve the endemic fragmentation which continues to hamper the Android user experience keeping it behind iOS.
  • I have long believed that fragmentation combined with the inability to update the vast majority of its devices (see here) are the biggest factors behind the inferior user experience on Android which in turn has led to lower usage, terrible security and low loyalty.
  • The effect of this can also be seen in Google’s financials where RFM calculates that, on average, Google still earns double the revenue from an iOS device running its services than from one of its own Google Ecosystem devices.
  • Consequently, there is substantial financial upside to improving the user experience on Android which I continue to believe will only be properly achieved by taking Android fully proprietary.
  • This remains a slow process but increasing control over the kernel is yet another step along the yellow brick road to Oz.
  • I continue to struggle with the valuation of Alphabet and hence still prefer Tencent, Baidu and Microsoft.

IFA 2017 – Absent friends

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Hardware still taking the back seat to software.

  • This year’s IFA is more about those that are providing the software that runs the products rather than the products themselves.
  • IFA has become Europe’s answer to CES and this year it is bigger and better than ever.
  • However, although there is a huge range of new products being launched, almost none of them are running their own software.
  • These days almost all of the money in consumer electronics has migrated to the ecosystem which necessitates having one’s own software in order to drive the differentiation required to make a decent margin.
  • Of all the products launched at IFA only wearable devices appear to be running their own software with almost everybody else using software from Google, Microsoft, Amazon or Steam.
  • Smartphones, smart speakers and portable computing are getting the most attention but not one of these products is able to offer a unique experience.
  • This is why all of the focus is on adding gimmicks at the edge of the core proposition in an attempt to drive differentiation.
  • Sony’s 3D capture function using the camera leads the field but there are plenty of others.
  • The problem with these gimmicks is that at the end of the day the users tend not to put any real value on them with their requirements remaining focused on Google and Apple for Digital Life and Microsoft for Digital Work.
  • Amazon Alexa is also to be found on many devices particularly smartphones and home speakers.
  • This puts Google, Microsoft and Amazon in the driving seat when it comes to defining the functionality that these devices will be able to offer as well as the point at which all the data will be collected.
  • In effect, almost all the value being derived from the huge usage of digital devices is accruing to the ecosystems not the hardware makers.
  • Consequently, as these hardware makers continue to slash each other’s throats to win a slice of market share, it is the big ecosystems that will benefit as the hardware that runs their experiences will be continually falling in price.
  • This leaves the hardware makers as little more than commodity box shifters likely to earn 2-4% EBIT margin in the best instance.
  • The one exception is Samsung because in smartphones it currently outsells its nearest rival by more than 2 to 1.
  • This gives it a scale advantage enabling it to earn 12-14% on the commodity products that it sells.
  • This is exactly the strategy that it employs to great effect in its semiconductor division where it dominates both the markets for commodity DRAM and flash memory.
  • Unfortunately, for everyone else the outlook remains pretty bleak despite the fact that the smartphone market is showing some signs of life once again.
  • Samsung and Apple are the only hardware makers I would consider but the valuation argument for both of these is no longer there following their excellent performance in 2017.
  • This leaves me preferring the ecosystems of Tencent, Baidu and Microsoft.

 

Home vs. Echo – Battle of the Home pt. III.

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Google has everything to do.

  • Google is great at getting third parties to build hardware that uses its software, but needs to work on developers of smart home devices if it wants to trounce Amazon.
  • Following the general availability of the Google Assistant SDK that allows anyone to embed Google Assistant into almost anything, Google has also announced a series of third party devices which will be launched at IFA next month.
  • These include the Anker Zolo Mojo, the Panasonic GA10 and the TicHome Mini all of which will go on sale during Q4 17.
  • Amazon has followed suit but as of yet, there appears to be less traction with hardware makers.
  • Alexa is likely to power the next generation of Sonos speakers and may make an appearance in some VW cars but it looks like Google has more momentum when it comes to hardware.
  • This is likely to ensure a race to the bottom in terms of voice enabled smart speakers from which I think Google will be the only likely winner (just like Android).
  • It badly needs to close the gap on Amazon which has around 70% of the home speaker market and having a much wider selection of attractively priced products will be of great help.
  • What will further help Google is the fact that Google Assistant is a vastly superior product compared to Amazon Alexa.
  • This is because the AI that sits behind Google Assistant is the best available, meaning that Alexa answers fewer questions correctly and gets stuck much more often.
  • However, where Google comes completely unstuck is in the smart home.
  • Amazon has aggressively pursued developers and showered them with love and support meaning that almost every developer of anything that has a Bluetooth or WiFi radio can be controlled with Alexa.
  • The same cannot be said for Google Assistant which I think has been caused by Google’s surprising lack of support for developers of this type (see here).
  • I think that part of the reason for this is that Google Assistant has been brought to life by one part of Google (hardware) but was created and managed by another.
  • Google is addressing this by encouraging developers to write directly to the assistant meaning that any device be it a smartphone, speaker or thermostat can run the smart home but progress to date has been slow.
  • Amazon Alexa has over 15,000 skills which don’t work very well but importantly, there are there and do work with a little effort.
  • Google Assistant is hopeless by comparison and it is here that it is at real risk of suffering a Betamax-like defeat.
  • I think that Google needs to bring all of these devices together such that “OK Google, I am going to bed” results in the whole house shutting down rather than a long series of carefully constructed instructions to each device individually to go into night mode.
  • For many of Alexa’s skills, it is simply easier and quicker to perform the operation manually than to ask Alexa to do it.
  • Unfortunately, so far there is no sign of smart integration from Google meaning that the advantage remains with Amazon.
  • The market remains very lowly penetrated meaning that everything is still to play for but this won’t last forever.
  • Valuation keeps me from liking Alphabet and Amazon leaving Microsoft, Tencent and Baidu as my top choices.

 

Google vs. HERE – Perfect parking

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HERE has more potential but needs to execute.

  • Google is upping the ante in the race to provide value-added services on top of digital maps, but with the right execution, HERE should be able to provide a much better service.
  • In January Google launched its parking difficulty icon on Android Maps which give the user an idea of how difficult it will be to park at the user’s destination.
  • This was initially launched in 25 US cities but this has been: 1) extended to another 25 locations (Canada, Europe and Brazil), and 2) expanded to offer parking suggestions in the area.
  • This service is based on historical parking data as well as data gathered from smartphones using Google services within a certain location to ascertain how busy that location is.
  • This is similar to the popular times and visit duration data that Google provides for businesses and will give the user an idea of how long he should expect to spend looking for a place to park.
  • While this will be a useful addition to Google Maps, I think that HERE should be able to offer a service that is vastly superior.
  • This is for two reasons:
    • First, data quality: While Google’s service is based on estimates and AI, HERE’s service should be based on much more specific data.
    • This is because HERE has access to automotive sensor data while Google does not.
    • For example, when HERE’s location platform detects an ignition start, it can be almost certain that the space occupied by that vehicle is about to be vacated.
    • It will also know from ignition switch-off which spaces are occupied and which are not.
    • This gives it a highly accurate, real time picture of the parking environment meaning that it’s HERE ON-Street Parking service should be much more accurate than Google.
    • Second, positioning. Vehicle positioning is often much more accurate than that offered by mobile phones as the antennas are larger and are almost always open to the sky.
    • This means that HERE should have a more accurate real-time picture of exactly where the devices connected to its platform are.
    • Combining this with the highly granular data it gets directly from the vehicle, should allow HERE to provide its users with a more accurate and relevant parking service than Google Maps.
  • This is exactly the kind of differentiation that HERE needs to win the attention of users but there are caveats.
  • Google is present on almost every smartphone in the market (except China) meaning that although its data set is much less accurate, it has a much fuller picture of the environment.
  • HERE by comparison is at a very early stage in getting devices connected to its location platform meaning that its lacks the visibility of the environment to make its service work really well.
  • This allows Google to offer a workable service today, while HERE is still at the stage of building out its network of data collecting devices.
  • Furthermore, should Google manage to get access to the sensor data generated by vehicles (Android Auto offers no access), then HERE’s key advantage will be lost.
  • However, most automakers have recognised that Google represents a meaningful long-term threat and are keen to keep their sensor data to themselves.
  • Google has done a deal with Volvo and Audi but whether it has managed to gain access to sensor data is still unclear.
  • The net result is that HERE has an opportunity to roll-out a much better service and win over users, but it needs to quickly achieve scale or risk being swamped by Google should it gain access to sensor data.

Wearables – No show

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Adding LTE to Apple Watch is pointless.

  • The problem with wearables that I described nearly 4 years ago (see here) of a solution looking for a problem continues to plague wearables with Fitbit struggling along, sector consolidation and even Apple seems out of ideas.
  • If the rumour machine citing endless anonymous sources is to believed Apple’s next version of the Apple Watch will feature a LTE modem.
  • This will give the device independence from the iPhone, meaning that the user won’t have to have the iPhone in immediate proximity for the device to work.
  • I think that putting a LTE modem is pointless and could even harm what little appeal the product has.
  • This is for two reasons:
    • First: In the US (I suspect Europe is similar) users are now glued to their smartphones for an average of 300 minutes per day (Flurry).
    • This essentially means that users keep their smartphones in their immediate vicinity at all times and will go to great inconvenience to ensure that that remains the case.
    • As a result, there is only a tiny period (if any) of time when the smartphone is out of Bluetooth range of the user and hence any wearable that he has on him.
    • Therefore, the inclusion of a cellular modem will be able to improve the functionality of the Apple Watch for only a tiny percentage of the user’s day.
    • This renders it effectively useless in my opinion.
    • Second: A LTE modem (even with a soft SIM) is going to cost money, take up space that could be something used for something else and will be a net drain on the battery.
    • Battery life is a major issue for all wearables (including the Apple Watch) and the addition of a modem will place a further drain on already very limited resources.
    • Hence, I think that a modem will cause deterioration of the user experience for no perceptible improvement.
  • What Apple should really be working on is a use case or function for this product that makes it a must have causing everyone to rush out and buy it.
  • This is the genius for which Apple has been known in the past but of which there has not been much sign over the last few years and certainly not with this product.
  • Consequently, I hope that like the large screen TV and the vehicle, this product never sees the light of day.
  • Instead, I am looking for a use case that can really kick start the wearable market as without this spark of genius, it is likely to continue bumbling along with little real interest or volume.

Apple FQ3 17A – No pause here.

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Solid base for new product launches.

  • Apple reported good results and guided strongly for the coming quarter stoking speculation with regards to the possible strength of the coming upgrade cycle with the new iPhones expected to be launched next month.
  • FQ3 17A revenues / adj-EPS were $45.4bn / $1.67 slightly ahead of consensus of $45.0bn / $1.57.
  • While iPhone held steady it was Services that really underpinned the results with YoY growth of 22% to $7.3bn.
    • iPhone shipments were 41m which included a 3.3m inventory reduction ahead of the new launches.
    • iPad shipments were 11.4m up 15% YoY driven mostly by the product refresh that saw a new iPad and the smaller version of the iPad Pro launch in March 2017.
    • Mac shipments were 4.3m units driven mostly by the new MacBook Pro.
  • Services was the star of the show where the Apple App Store is the main driver generating almost double the revenue of its nearest rival Google Play.
  • This was despite the fact that Android devices appear to have closed some of the monetisation gap on iPhone especially at the high end (see here).
  • Guidance was surprisingly strong with revenues / EBIT expected at $49bn – $52bn ($50.5bn) / $11.7bn – $13.0bn ($12.4bn) broadly in line with consensus at $50.4bn / $12.4bn.
  • The result was a relief rally as fears of a pause in performance ahead of the new product launches now looks unlikely to occur.
  • Consequently, all eyes are now on product launches where a major product refresh is hoped to trigger another replacement cycle.
  • Bezel-less devices are now all the rage and if Apple can replace fingerprint ID with an excellent facial recognition system, the iPhone 8 could end up triggering a good cycle of upgrades.
  • Samsung has a wealth of biometric ID systems but none of them work particularly well as the fingerprint sensor is on the back of the device and the facial recognition is not nearly as reliable as it should be.
  • I don’t think that Apple will see a cycle as strong as the iPhone 6 but there is potential for the iPhone 8 to meaningfully outperform the 6s and the 7.
  • That being said, I continue to think that much of this good news is already in the stock and the valuation argument for long term investors has long since evaporated.
  • I remain pretty indifferent to the shares.

iOS vs. Android – Catch-up

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Android is snapping at Apple’s heels.

  • Android is showing signs of catching up with iOS in terms of user spending at the high-end, but further down the pricing tiers and in mobile advertising, I think that iOS remains miles ahead.
  • A recent study of the habits of 1.4m USA based users during the month of June 2017 was carried out by DeltaDNA, an analytics firm.
  • The study only measured gaming but this is already well known to be by far the biggest revenue generator from any Digital Life segment.
  • Almost all games these days are free to play and have in-app purchases for monetisation.
  • It is these that the survey measured and I have expressed these as ARPU $ / month.
    • Samsung Galaxy s8 / s8+: $6.30 / $16.20
    • Google Pixel / XL: $6.30 / $9.60
    • iPhone 7 / 7+: $8.40 / $10.80
    • Other US Android devices: $6.00
  • From this I conclude:
    • First: Screen size and quality is a big determinate in game monetisation.
    • The Samsung Galaxy s8+ which has by far the best screen (and the best audio in my opinion) available on the market today, is clearly making a difference to game play with the observed results.
    • Second: On normal screens, iPhone is still comfortably ahead of both the s8 and the Pixel but the gap is closing.
    • Third: Both the s8 and the Pixel are not meaningfully better than other Android devices implying the that user experience on the s8+ and Pixel XL has nothing to do with their better monetisation.
  • Although these models are clearly closing the gap on the iPhone, when it comes to total revenue generated there still remains a vast chasm in terms of total revenues generated.
  • In Q1 17A, Apple generated $7.04bn in revenues from services while Google other revenues were $3.10bn ($3.09bn in Q2 17A).
  • These figures are not direct comparisons as there are other businesses also included in these figures, but I think it is pretty safe to say that Apple App Store is easily generating double the revenue of Google Play.
  • A large part of this will be because in the high-end segment Apple has much higher share but also because Apple does still clearly offer a higher quality apps and services experience as the data for the regular sized phones indicates.
  • Furthermore, I have not seen a shift in the mobile advertising metrics and so I still believe that an iOS device generates double the advertising revenues of an Android device.
  • This data should send a warning shot across Apple’s bows as the better Android devices are certainly snapping at its heels.
  • Should they finally catch up, Apple may find it starts to feel the dreaded pricing pressure that will hurt profitability.
  • This is why I continue to believe that Apple needs to make its ecosystem sticky in areas other than its App Store which is what I think its strategy around HomeKit, HealthKit and Apple Pay are centred around.
  • However, to date, not a huge amount of sustainable traction has been generated by any of these services and so Apple has to radically improve them or think of something else.
  • This is one reason why the iPhone 8 is so important as once again it has slipped too far behind the hardware curve and needs to catch up.
  • With the rally that we have seen in 2017, the valuation argument for holding Apple has long since evaporated which is why I would prefer to hold Tencent, Baidu or Microsoft for this year.