Rovio – One trick bird.

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Angry birds fly the coop.

  • Rovio’s dependence on Angry Birds has been thrown into sharp relief as the fading popularity of the franchise triggered a dreadful profit warning that caused the shares to halve in value in just one trading session.
  • Q4 17 revenue / EBIT was EUR73.9m / EUR10.4m which was disappointing as investments in acquiring users have had to increase more than expected.
  • I see increasing user acquisition cost is a major red flag with regard to the strength of a franchise.
  • However, the real pain was felt in the 2018 guidance where revenues / EBIT margins are expected to be EUR260m – EUR300m (-12% – 0% YoY) / 9% – 11%.
  • This is 17% below consensus of EU337m and triggered real concern that the company’s best years are now behind it.
  • Angry investors felt that they had been misled by the company which had been communicating in a much more positive tone just a few months ago.
  • This, combined with a high valuation that clearly needed correction, was the main reason for the size of the sell off witnessed.
  • Rovio is not alone in its troubles as its much bigger compatriot, Supercell, is also having a difficult time as its core franchise ages and it struggles to refresh it (see here).
  • Furthermore, I see an overall weakening in the market for games on mobile phones as data from App Annie indicates that spending has switched away from gaming towards media consumption services like Netflix, Hulu and so on.
  • This, combined with a franchise that is quickly weakening following the surprise success of the Angry Birds movie in 2016, leads me to believe that there may be downside to even this very disappointing guidance.
  • The one place Rovio should now look is Asia as there are no signs of the games market on smartphones weakening there and this could provide the company with much needed support.
  • While this could provide some temporary relief, Rovio needs to address the issue of its flagging franchise if it wishes to remain a viable independent entity.
  • Of this there is no sign, and I suspect that things may worsen from here leading to further weakening of the valuation and an opportunistic bid from one of the big digital ecosystems.
  • Tencent would be top of my list but as it already has Supercell, its motivation to also own Rovio will be much more muted.
  • Rovio is no bargain even at these levels.

Spotify – Speaker’s corner

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A smart speaker makes no sense.

  • Job postings indicate that Spotify is jumping into hardware and, while I think that a smart speaker makes no sense at all, there may be something in a device that makes dumb speakers work really well with Spotify.
  • Spotify is recruiting operations and project managers for hardware in a move that indicates that it intends to move into production with a hardware product that, I assume, is deeply integrated with its music service.
  • Everyone is going to assume that Spotify is going to launch a smart speaker to compete with HomePod, but I think that this makes no sense at all.
  • There are two reason for this.
    • First, Digital assistant. Spotify has no digital assistant in any form.
    • This means that it will need to use one of the others from which Alexa, Google Assistant, SoundHound and Cortana are all viable choices.
    • This may be where SoundHound makes more sense as it has a passable digital assistant (called Hound) as well as a music recognition service like Shazam.
    • Although a music recognition service does not make a lot of sense in this setting, there is a strong and well developed music related AI domain in SoundHound that may compliment Spotify’s existing music AI nicely.
    • Furthermore, SoundHound and Cortana are the only two that do not have a competing music subscription business.
    • The fact that all smart speakers except the HomePod, allow Spotify to be set as the default music service pretty much obviates the point in making a smart speaker in my opinion.
    • Second, audio: While Spotify knows a lot about categorising and understanding music tastes, its know very little about the increasing complexities of making high quality speakers with intricate microphone arrays.
    • This means that any speaker that it makes is unlikely to be better than something from one of the established players like Sonos or Harman Kardon.
    • These speakers all have the ability to set Spotify as the default music service and so I fail to see what benefit there is for Spotify in creating a competing product.
  • However, there are already millions of Bluetooth enabled speakers present in the market today that are very dumb with no intelligence embedded.
  • Millions of Spotify users play music through these speakers on a daily basis and so there could be a benefit to be had from a device that makes these speakers smarter.
  • This could take the form of a plug-in module or Bluetooth streaming device that includes microphones and is integrated with one of the mainstream digital assistants that has been optimised to make the Spotify music experience better.
  • The Spotify user experience through both Amazon Alexa and Google Assistant is basic at best and so something that has been optimised to allow better voice control of the Spotify music service could improve user loyalty and stickiness.
  • This is the kind of product I expect Spotify to create as it makes far more sense a business perspective.
  • The streaming music market remains dominated the two major players and while Apple has gained some momentum recently, it does not appear to have made a meaningful dent in Spotify.
  • I expect music streaming to remain the only engine of growth in the music industry going forward.

Google, Amazon and Apple – Battle for the smart home pt. VII

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Google’s race to lose.

  • Google appears to be catching Amazon more quickly than I expected when it comes to smart speaker share and I think that rapid commoditisation of answering simple questions will increasingly pass the advantage further to Google.
  • Recent research by Edison research and NPR (discussed here) found that Google had increased its share of smart speakers to 25% in Q4 17 from almost nothing a year ago.
  • In 2017, I was cautious on the Google Assistant because of its inability to really connect into the smart home but after its humiliation at CES in 2017, Google’s renewed efforts in this direction are starting to pay off.
  • Almost all smart device manufacturers are now supporting the Google Assistant or have it on their immediate roadmap and the same cannot be said for HomeKit.
  • This combined with the fact that Google Assistant generates far more traffic than Alexa, led me to reverse my position and forecast that this market will end up being dominated by Google.
  • I am no longer the only person who appears to have this view as Loup Ventures are forecasting that Google will gain share again in 2018 to 32% and will become the market leader by 2022.
  • By 2022, I think that neither Google or Amazon will be making the speakers, but that it will be the more traditional speaker manufacturers that are making the hardware while Google and Amazon supply the brains.
  • I also see that the simple answering of questions, which to date has been a good measure of a digital assistant, will rapidly become a commodity.
  • Recent tests across a range of categories with 781 questions revealed Google in the lead at 81% correct, Alexa in second place with 64%, Cortana third at 57% with Siri in last place on 52%.
  • In this instance, Siri was tested on the HomePod which runs a separate and distinct version of Siri which reviewers have found to be far less capable than the one resident on the iPhone.
  • This is just one example of the disadvantages of having Siri resident on the device which I have discussed in more detail here.
  • Hence, I think that this test is unfairly penalising Siri which and my own tests, I have found it to be broadly inline with Alexa.
  • Either way, I think that the simple answering of questions will soon become an obsolete way to test a digital assistant.
  • This is because although Google Assistant can get 81% of the questions right, it is still frustratingly stupid when it comes to getting stuff done.
  • This is why it is increasingly important for these assistants to understand more than just the words but to be able to get a sense of what the user is actually asking for.
  • Combining this with the ability to understand context and circumstance should enable a deeper, richer and more intuitive experience where the assistant saves time and is useful.
  • In all but the most simple use cases it is simpler, quicker and easier for the user to complete the action himself.
  • This is a very tricky AI problem to solve meaning that those with the best AI and the most data are likely to come out on top.
  • This leads straight to Google and Baidu who remain my No. 1 and No.2 globally, when it comes to excellence in AI.
  • In terms of investment, Baidu is just getting back on its feet after a very difficult 18 months and offers and attractive entry point into the AI theme although it is China only.

Baidu & Uber – Time to pivot

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Both need to change to fare well.

Baidu

  • Baidu reported good Q4 17 results as it has put the tribulations of the 18 months squarely behind it and is now focused on becoming the preeminent supplier of AI in China.
  • Q4 17 revenues / EPS were RMB23.6bn ($3.74bn) / RMB15 ahead of consensus estimates at RMB23.1bn / RMB13.
  • With its new, more selective ad system in place, advertisers have returned to Baidu pushing mobile revenues to 76% of total revenues, an all time high.
  • 2017 has been a difficult year for Baidu and its strategy is now shifting away from being a fully fledged digital ecosystem to focusing on products and services that are entirely driven by AI.
  • This is why the loss making iQIYI has now filed for an IPO and I suspect that 2018 will see some movement around the ownership of its other loss-making e-commerce venture; Nuomi.
  • Baidu’s main AI assets are Apollo (autonomous cars) and Duer OS (digital assistant) and in both of these, it is far and away the leader in China.
  • How these will be directly monetised is less clear at this stage, but it is clear that:
    • First: AI will have a major impact on the ability of ecosystems to differentiate their digital life services over the next 10 years.
    • Second: Baidu is the undisputed leader in China with both Tencent and Alibaba miles adrift despite protestations to the contrary.
    • This puts Baidu in a very strong position to partner or licence to the have nots in Chinese AI (which I think is almost everyone).
  • Hence, with the core business now looking to be back on an even keel, I think Baidu represents a cheap entrance to what its likely to be the biggest investment theme of the next decade.

Uber

  • Uber reported headline figures for Q4 17 that showed some progress but, in my opinion, not nearly enough given its precarious position in the US market.
  • Q4 17 revenues and adj-net income were $2.2bn / LOSS $1.1bn compared to $2.01bn / LOSS $1.46bn in Q3 17.
  • This is good progress but given the sizes of the losses in Q3 17 and the fact that they increased meaningfully from Q2 17, I suspect that there was a lot of low hanging fruit.
  • Revenue growth remains strong at 66% YoY but all of the momentum at the moment remains with Lyft which I see as being on the cusp of causing Uber real problems.
  • Uber is still dominant in its home market (USA) with 66% share but this is substantially down from the 80% that it held at the beginning of 2017.
  • Ride hailing businesses are marketplaces and as such are subject to the rule of thumb that I described over two years ago which still seems to be holding firm.
  • This rule of thumb states that a company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit (see here).
  • Hence, I see 2018 as the time when Uber needs to begin looking at making some money and at the same time ensuring that Lyft bleeds badly just to stay in contention.
  • Uber needs to neuter Lyft now because when it comes to autonomous driving, Lyft is a long way ahead via its relationship with Waymo.
  • Should things stay the way they are, then Uber could be in real trouble once autonomous vehicles start making a real appearance in the market.
  • Fortunately, this is still some way off but the threat is there and 2018 needs to be a year where Uber re-establishes its dominance in the home market especially after embarrassing loss of both China and Russia.

Alibaba – Offline grab pt. II

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Alibaba adds an offline vertical and cleans house

  • Alibaba is yet again increasing its assault on the offline portion of the Chinese retail market with more investments that will help it to become the dominant player in retail both online and offline.
  • Alibaba is buying 15% investment in Beijing Easyhome Furnishing for $865m and 38% holding in Shiji Retail Information Technology Company for $486m.
  • Beijing Easyhome Furnishing has 239 stores in 29 provinces and, as the name suggests, is a player in furniture, DIY, building materials as well as home refurbishment design services.
  • This will expand Alibaba’s offline retail presence into a new retail vertical alongside hypermarkets, mall operators and electronics.
  • Offline retail in China is stalling, but still massive at $4.5tn per year.
  • This is despite the rapid expansion of e-commerce and it remains a great example of why online and mobile have been so successful in the Chinese market.
  • Chinese offline retail is a fragmented and frustrating experience where decent service and information with regards to inventory, product lines and so on is routinely not available.
  • Consequently, when an online offering appears where information is clear and one is able to easily purchase goods and know when they will be delivered, shoppers quickly adapt.
  • It is the terrible offline experience with regards to almost everything that has allowed so many other goods, services and activities in China to rapidly migrate from offline to mobile.
  • I think that Alibaba’s strategy with its offline retail investments is all about turning them into a high quality and efficient retailers using the technologies and logistics expertise that it has gained with the development of its e-commerce business.
  • This is why the investment in Shiji Retail Information Technology makes complete sense as this could become the backbone of the infrastructure that allows Alibaba to make the necessary improvements.
  • It is also highly relevant that this investment will take Alibaba over 50% and majority control as its Taobao subsidiary purchased at 15% stake in 2014.
  • However, it is worth noting that in 2014 Alibaba paid $446m for a 15% stake giving a valuation of $2.97bn whereas now it is paying $486m for a 38% stake giving an implied valuation of $1.28bn some 57% below where it was four years ago.
  • Hence, I suspect that Shiji has got itself into trouble along with the rest of offline retail in China, which has enabled Alibaba to take control at a greatly reduced valuation.
  • I suspect that Shiji’s technology will be rapidly migrated to Alibaba Cloud giving Alibaba the infrastructure to leverage its online knowledge into its offline investments.
  • Given that Chinese retail is such a vast market, steady market share gains here has the scope to keep growth going at Alibaba (albeit at lower margins) once e-commerce begins to slow down.
  • It also offers Alibaba the opportunity to move into other sectors of off line retail once it has licked its current holdings into shape.
  • Hence, I think this move makes complete sense for Alibaba as there is a very clear opportunity for it in China which is completely different to that being followed by Amazon.
  • I am warming up to Alibaba as it is beginning to understand the importance and opportunity presented by the data its digital assets generate.
  • While it is behind Tencent in Digital Life coverage, I am increasingly of the opinion that it is moving more quickly to understand the opportunity offered by the digital ecosystem.
  • Hence, when Tencent runs out of steam, I will be considering this one very carefully as a possible switch.

Snap Q4 17 – Free parking

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Snap’s problems parked for 9 months.

  • Snap has finally managed to reap the benefits of its efforts to turn around the company and while these will help it to fulfil its short-term potential, the long-term and its valuation remain issues.
  • Q4 17 revenues / adj-EPS were $285.7m / LOSS$0.13 which was nicely ahead of consensus at $252.8M / LOSS$0.16.
  • User numbers also continued their slow but steady increase growing to 187m up 18% YoY and ahead of estimates at 184m.
  • It is worth noting that this performance is still way below what was expected at the IPO, as FY17 revenues came in at $825m compared to over $1bn which was forecasted at the time of the IPO.
  • Despite the much lower bar, these results testify to Snap knuckling down under very tough conditions and producing some results.
  • This is particularly the case as Instagram has been aggressively copying all of Snap’s innovations and offering these features to its much larger and much more valuable network of users.
  • I have long believed that one of the reasons why Snap’s user base has been sluggish is that Instagram is now such a good service that users have little incentive to leave that network.
  • However, even with its current users and without expanding its coverage of the Digital Life pie, Snap does still have potential to grow its revenues in 2018.
  • Q4 17 saw Snap significantly improve the monetisation of the traffic that it already has which bodes well for YoY growth in Q1 – Q3 2018.
  • After that it is likely to return to the sector average which is where the trouble will begin as its valuation still implies that it will grow faster than its peers for a significantly greater period of time.
  • Hence, I think that the first three quarters of 2018 should see good growth giving Snap nine months to either grow its user base much more quickly or increase its coverage of the Digital Life Pie.
  • Failure to achieve either of these will once again lead to disappointment and the realisation that the problems that the market is hoping are now dispensed with have merely been parked for 9 months.
  • Snap still looks expensive despite the better short-term fundamentals and stragglers still holding onto the shares have been given an opportunity to mitigate some of their losses from the IPO.

 

Apple & Amazon – Mixed bag.

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Plusses and minuses in both reports.

Apple FQ1 18 – relief rally

  • Apple reported good results where a 14.5% increase in iPhone ASPs allowed revenues to remain strong despite weakness in volume shipments.
  • FQ1 18 revenues / EPS were $88.3bn / $3.89 beating expectations of $87.6bn / $3.85.
  • The main driver was once again the iPhone which shipped 77.3m units missing expectations of 80.2m units by 4%.
  • This was more than made up by a 14.5% increase in ASPs to $796 which is what drove revenues to beat the bullish expectations set before weakness in iPhone X shipments become apparent.
  • This effect however will not carry through into FQ2 18 as Apple is forecasting revenues of $60bn-$62bn some 7% below expectations of $65.6bn.
  • Apple also said that in FQ2 18 that iPhone revenues would increase by at least 10% in an attempt to sooth fears with regards to iPhone X demand.
  • I think that this is a statement of the obvious as Apple has a 15% YoY increase in ASPs to play with meaning that shipments can still decline YoY in order to make this guidance.
  • iPhone X demand clearly been softer than expected mostly due to the very high price being demanded for the product and I think that this form factor will fare much better once Apple pushes it into its cheaper products and works out how to get rid of the notch.
  • With these results and the outlook for FY 2018, I think that Apple has done enough to qualm the fears of long-term holders but at the same time, I don’t see new money rushing into the company.
  • Hence, I think this one will perform broadly in line with the sector this year.

Amazon Q4 17

  • Amazon reported another mighty quarter and one in which it managed to make some money despite its very aggressive push into India.
  • Q4 17 revenues / adj-EPS were $60.5bn / $2.19 compared to consensus at $59.8bn / $1.83.
  • AWS was once again the powerhouse of profit generation with growth at 45% and margins holding steady at 26%.
  • It is worth noting that Microsoft is closing some of the gap on Amazon, as it managed to grow 98% YoY in the last 12 months albeit from a much lower base.
  • I suspect that it is this pressure that is preventing AWS from making the most of its scale and increasing its profitability as its revenues expand.
  • Most of AWS’ profits were consumed by the very aggressive market grab going on overseas and particularly in India.
  • Losses were approximately the same in Q4 17 at $919m (-5%) as they were in Q3 17 $936m (-7%) where I estimate that India is losing roughly $700m per quarter.
  • However, the domestic business generated $1.7bn in EBIT which allowed Amazon to report better than expected profits company wide.
  • Amazon is also clearly feeling the heat from Google which pulled out all the stops at CES and backed that up with a big jump in support from makers of smart home devices.
  • The result is that Amazon will be ramping up investments in the Alexa voice platform, but money alone will not buy the brain power needed to keep Google at bay.
  • I have recently reversed my position on the battle for the smart home (see here and here) with Google Assistant now looking like it will eventually win.
  • Pressure on AWS and Alexa is one thing, but the core business is going from strength to strength and there seems to be very little to challenge Amazon in e-commerce in developed markets.
  • That being said, I still struggle with the valuation of Amazon given its distain for making money and consequently it is still not a story I want to get involved in long-term.
  • If push came to shove, I would have Apple over Amazon.

Microsoft & Facebook – 2 good runs.

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2 good runs could come to an end in 2018.

Microsoft FQ2 18.

  • Microsoft reported good FQ2 18 results, but the shares have been so strong recently that all the good news for the current year looks already priced into the shares.
  • FQ2 18 revenues / adj-EPS were $28.9bn / $0.96 nicely ahead of expectations at $28.4bn / $0.86.
  • Azure was once again the star of the show putting in 98% YoY growth with Office365 recording a very healthy 41% YoY.
  • This was supported by steady performance in its server infrastructure products which also saw double digit revenue performance.
  • This offset by Microsoft’s consumer facing businesses where gaming grew by 8% YoY and Surface hardware was flat.
  • This has been the tone for some time with enterprise going great guns and consumer underperforming the average.
  • The outlook for the rest of the year is more of same and consequently, Microsoft increased its revenue and profit forecasts for the full year.
  • However, the shares failed to react to the continuing good news giving me the distinct impression that its 15% rally in Q4 17 has already taken this into account.
  • Microsoft’s PER ratio is now above 25x, a level it has not seen since 2004, and well above its 10-year average.
  • I am comfortable that this is a different company and one deserving of a much better multiple than at the end of the Balmer era but expanding much beyond current levels looks challenging.
  • Consequently, I think that the multiple-expansion contribution to price performance is now in the rear-view mirror leading to a more pedestrian outlook from here.
  • Microsoft has been a favourite of mine since 2014 but it could be time to start thinking about taking some profits on what has been a fantastic run.

Facebook Q4 17.

  • Facebook reported good Q4 17 results as the planned changes have yet to meaningfully impact financial performance meaning that the outlook for 2018 is likely to be one of underperformance relative to its peers.
  • Q4 17A revenues / adj-EPS was $13.0bn / $2.21 comfortably ahead of expectations of $12.6bn / $1.95.
  • This was driven by continued growth of usage on mobile devices as the measures to increase the quality of engagement (see here) have not yet been in force for a full quarter.
  • This move to put its users ahead of its shareholder’s is not born from altruism, but instead reflects the need to maintain user loyalty as it transitions to becoming a fully-fledged ecosystem.
  • Consequently, I expect that Sheryl Sandberg’s cash register will be able to fully monetise this increased loyalty in due time, resulting in a pause rather than a curtailment of Facebook’s long-term prospects.
  • However, in the short-term the outlook remains difficult as Facebook is curtailing revenue growth while at the same time continuing to ramp up both OPEX and Capex.
  • Consequently, I think that in 2018 revenues could grow somewhere between 10% – 20% while OPEX has been guided to grow 45%-60%.
  • This is going to have a meaningful and deleterious impact on financial performance that I not convinced the market has fully digested with a PER 2018 ratio of 34x.
  • This is largely a result of Facebook’s weak position in AI.
  • I have long held the view that Facebook’s AI is not good enough to spot offensive content before it has been widely seen and as a result it is hiring 10,000 humans to do the machines’ job.
  • I also hold the view that humans are not fast enough to spot offensive content in time and as a result, I think that the improvement that Facebook is looking for will not be as good as expected.
  • The net result is likely to be continued problems with content on its service as well as a steep decline in profitability this year.
  • RFM research has shown that progress in AI is much slower than people in the field will have us believe and hence, I think it will be a long time before Facebook sees real improvements in AI impacting its bottom line.
  • This, combined with the fact that its ecosystem remains a work in progress, leads me to think that there is space for a lot of profit taking.
  • I would prefer Tencent or Baidu.

Music Streaming – Wrong villain.

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The music labels strike back.

  • It looks to me like intense lobbying by the music labels has resulted in the Copyright Royalty Board unfairly penalising the music streaming services when all along it is the labels that are mostly responsible for the “poverty” of the artists.
  • The Copyright Royalty Board of the U.S. Library of Congress has issued a written decision that will require the streaming services to increase their pay-out to artists to 15.1% from the current 10.5%.
  • On the surface, this ruling makes very little sense as, all of the streaming services already pay away far more than 50% of their revenues to the rights holders.
  • Furthermore, almost all of them are unprofitable as they either lack the scale to gain operating leverage or they have a free pricing tier supported by advertising.
  • If this decision is applied directly to the streaming companies, then I would expect to see a decline of 4.6% points on their gross margins and a deepening of their losses.
  • If the artists are not making good money from the streaming of their content and the streaming services are not hugely profitable then the only other place to point the finger at is the labels themselves.
  • Consequently, I have long believed that it is the labels that are making the most money from music streaming and it is they that are mostly responsible for the poor pay-out to artists from music streaming.
  • Interestingly, the announcement of this ruling was made by the National Music Publishers Association (NMPA) which may have had a hand in influencing the decision by the Copyright Royalty Board.
  • In its own words the “NMPA promotes, protects and advances the interests of music publishers and songwriters in matters relating to domestic and global protection of copyrights”.
  • To me this means that when some of its members are grumbling about not making enough money, it will seek restitution from outside of its ranks.
  • I have long believed that the music labels are at severe risk of becoming obsolete in the long-term.
  • This is because as more and more music goes digital, it is possible to recreate the historical function of the music labels (promoting and distrusting music to fans) can be more easily and effectively done with algorithms.
  • Consequently, in the long run I see artists going directly to Spotify and Apple Music and getting far more lucrative deals than they have today as the music labels will no longer taking a big share of the pie.
  • I think that the music labels are well aware of this threat and are doing everything that they can to prevent this scenario from playing out.
  • Lobbying the Copyright Royalty Board to worsen the economics for the streaming companies will help clip streaming’s wings and keep the labels in business for longer.
  • If this ruling goes into force, it is clearly bad news in the short-term for the streaming companies but the balance of power s rapidly shifting in their direction.
  • There are already signs of this as the deals that Spotify has most recently signed with the labels have shown an improvement in the economics in Spotify’s favour.
  • Hence, I still think that the long-term picture is still rosy for music streaming and that the labels will eventually be removed from the sale and distribution of music, but the economics will worsen in the short-term as the labels fight back.
  • This may put a small dent in Spotify’s IPO plans but its long -term path to a profitable, music-label free future remains intact.

India e-commerce – Last man standing

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Flipkart looks close to keeping Amazon out.

  • Jasper Infotech which owns online marketplace Snapdeal has reported dreadful revenue performance that almost certainly materially worsened in the last 9 months.
  • This has rendered Snapdeal to an irrelevance leaving Flipkart as the only company with a chance of keeping Amazon out of its home market.
  • For the year ending March 2017 revenues where INR 904 crore (US$142m) down 38% YoY which predates the ending of the merger talks with Flipkart (see here).
  • It was Snapdeal that ended merger discussions with Flipkart in a decision that is showing every sign of having triggered its complete collapse.
  • I suspect that Snapdeal walked away as it did not like the valuation that Flipkart had offered, but given that its revenues were falling precipitously despite the market growing rapidly, I think that it could be argued that Flipkart was being generous at any price.
  • Instead, Snapdeal walked away and decided to focus on becoming a niche player triggering the resignation of one of its earliest investors.
  • The result has almost certainly been an acceleration of its decline and I would not be surprised to see its revenues for the year to March 2018 fall by another 50% or so.
  • This would take its market share to less than 2% down from 25% in 2015 meaning that it is now an irrelevance in the battle for the e-commerce market in India.
  • However, the good news for India is that much of this share appears to have gone to Flipkart rather than Amazon as its shareholders are now claiming that it has reached 70% of the e-commerce market in India.
  • This is crucial because this would take Flipkart comfortably over the critical level that it needs to keep Amazon at bay.
  • Flipkart, Snapdeal and Amazon are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
  • 2 years ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rival to begin really making profit (see here).
  • If Flipkart’s estimates are correct, then its 48% growth in GMV has put it in a position to be able to survive Amazon’s predations without being crushed.
  • However, Amazon disputes Flipkart’s numbers and is stating that its net revenue grew by over 80%.
  • However, I think that it is share of GMV is that really matters.
  • This is because when one becomes the go to place to transact (>60% share), competitive pressure eases and monetisation and cash flow becomes much easier.
  • Third party (Kantar IMRB) research disputes Naspers’ claim putting Flipkart’s share of GMV at 58% with Amazon on 42% which makes some sense given that it is now a two-horse race.
  • This also explains the need for the $2bn cash injection that Softbank made into Flipkart as well as Amazon’s increasing losses in India during Q3 2017 (see here).
  • With these figures, both will still be haemorrhaging money in their fight for supremacy in the Indian market.
  • Despite its’ smaller overall size, Flipkart is nearing the magic 60% and as long it can keep its momentum going it has a good chance making it to the point where it can keep Amazon at bay without consuming vast amounts of cash.
  • I have previously held the view that Softbank was unwise to invest more money in Flipkart as I thought that the collapse of the merger would hand the initiative to Amazon.
  • That appears not to have been the case and exemplary execution from Flipkart has enabled to it gobble up almost all the volume that Snapdeal relinquished.
  • Should this continue, placing Flipkart in safe territory, then this will have proven to be an excellent investment from Softbank and a great victory for David over Goliath.
  • I would hesitate to count Amazon out just yet as it is absolutely determined to spend whatever it takes to win India following its ignominious defeat in China but the momentum is clearly with the home player at the moment.