Twitter Q4 15A – Live torpedo.

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Periscope needs to dodge Facebook’s live video torpedo.

  • Twitter reported good results but the problem with its user growth (or lack of it) is continuing to hamper its long term prospects.
  • Q4 15A revenues / Adj-EPS were $710m / $0.16 compared to consensus at $710m / $0.12.
  • Although the GAAP numbers are all negative, Twitter is nicely cash generative and has generated around $100m per quarter in 2015A.
  • Furthermore, with $2.0bn of net cash and cash equivalents on the balance sheet, there is no question about Twitter’s financial stability.
  • All the problems are directly related to its ability to grow and here the company is facing real challenges.
  • Here, active users were flat QoQ at 320m and excluding SMS based users, the subscriber number fell by 0.7% QoQ to 305m.
  • This is significant because, the SMS users are not very revenue generative given the limitations they have with connectivity.
  • The logged-out audience who visit Twitter also remained flat at 500m users strongly indicating that Twitter’s niche service as it exists today has found the limit of its reach.
  • Consequently, guidance for Q1 16E was disappointing with revenues / adj-EBITDA of $595m-$610m / $160m-$170m forecast.
  • This was below consensus revenues of $634m but ahead on consensus adj-EBITDA of $149m.
  • In the last three months, Twitter has underperformed its rivals, Facebook, Linked in and Google all of whom have seen the size of their user base expand.
  • I think that the reason for this is Twitter’s very narrow focus (17% – see here) when it comes to Digital Life meaning that it can only appeal to a subset of the internet population.
  • This is why I continue to think that it is absolutely essential for Twitter to expand the services that it has beyond microblogging and instant messaging.
  • The first step in this process is Periscope which is a live video broadcast app that Twitter purchased in February 2015.
  • This is a priority for Twitter in 2016 and it clearly intends to develop this service into a go to place for watching live broadcasts.
  • If it can do this successfully, then it will be able to emerge as a competitor in the media consumption space which is where Facebook and Google are currently seeing strong revenue growth.
  • The problem is that Facebook is competing directly in this space and has far more resources upon which to rely to ensure that Periscope fails to really gain traction (see here).
  • Periscope is a long way from the kind of traction and breadth of offering to be a major force in video broadcast but that is clearly where it intends to go.
  • If it can make a success of this then its coverage of Digital Life would increase to 27% from 17% today and its addressable market would also increase allowing it to see revenue growth once again.
  • If it can become a go to place for live video, then I suspect that the user base would also, once again start growing.
  • This would have a big effect on both revenues and the valuation of the company but there remains a long way to go.
  • The media consumption space is already pretty crowded and Twitter is coming from way behind even though it is looking at the live broadcast niche.
  • I have long believed that sports is really the only type of content that users will pay for and hence I think that this is where Twitter must take Periscope if it is to succeed.
  • In the meantime, the outlook looks pretty tough and the stock is still very expensive for a company grappling with growth.
  • It could still go lower and I would not be surprised to see the shares break $10 per share.
  • It is way too early to start thinking about catching this falling knife.

Autonomous Autos – Tiny victory.

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Sending an algorithm to prison is pointless.

  • Google has managed to get the National Highway Traffic Safety Administration (NHTSA) in the US to recognise the AI system of an autonomous vehicle as the driver.
  • This is well and good and represents a small step forward in fitting autonomous vehicles into the weighty regulatory environment, but it does nothing to solve the liability problem.
  • I think that liability is the biggest problem that faces autonomous driving as sending an algorithm to prison is not a practical option.
  • When an autonomous vehicle crashes (and they will), the question arises as to who is responsible for the crash.
  • There are many potential answers to this question including:
    • The driver: If the driver as was asleep at the time of the incident can he really be to blame?
    • The California department of motor vehicles (CDMV) response to this has been to propose a law that requires a person who is licensed to drive the vehicle to be present at all times while the vehicle is in motion.
    • The problem with this is that it would completely destroy the use case of a self-driving vehicle in a large number of use cases.
    • The promise of freedom for those that can’t drive, the promise of releasing parents who become taxi services for teenage children and any form of automated delivery service are instantly precluded.
    • The other issue is that other states tend to follow California’s lead when it comes to vehicle regulation meaning that autonomous driving could be hobbled before it even gets going.
    • The auto maker: This would instantly make the automotive industry one of the riskiest industries on the planet.
    • Furthermore, many automakers are very unlikely to create the entire system themselves.
    • Cameras, silicon chips, servo motors and so on will come from third parties and if they fail they have the potential to cause a crash.
    • Furthermore, for many automakers writing software means creating hugely detailed specifications against which suppliers bid with the lowest bid winning.
    • If part of the AI is written on the cheap and causes the car to crash, whose fault is it?
    • The supplier: If the liability is to fall upon the supplier, then it is almost certain to claim that the auto maker didn’t install the software or component properly or otherwise made modifications that caused it to fail.
    • This is one of the biggest problems when systems get complex is that there is a combinatory explosion of possible outcomes in any one scenario.
    • It is clear that in any one fatal incident, the blame game has the potential to go on for years and there are likely to be fatal incidents on a daily basis. (32,719 people died in 2013 in road vehicle crashes in the US)
  • This is only one reason why I continue to believe that the technology for autonomous driving will be ready many years before the market is ready to receive it.
  • Many automakers have set a deadline of 2020 by when they expect to have a commercial offering in the market but I think that it is doubtful that these vehicles will leave the factories at that time.
  • This is good news for the automotive industry which is notoriously slow to adapt to and implement new technology as it will have more time to defend its position against the new entrants.
  • With things taking much longer than expected to come to fruition, I can see lots of ventures struggling to keep the lights on and being acquired by the larger, slower moving companies.
  • I am sticking to my 2030 target for this becoming a real commercial reality.

 

Internet monetisation – The slow dawn.

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The realisation that free internet is a myth is slowly dawning.

  • Wired is the latest publication to insist that users either turn-off ad blocking software or pay a subscription to access its website.
  • Wired will charge $3.99 per month to users who block its ads which is very similar to the move taken by Axel Springer in October 2015.
  • Ad blocking occurs in about 1 out of 5 of Wired’s visitors, of which the vast majority are from desktops and not mobile.
  • Furthermore, research from Media Radar suggests that only 4% of large online publishers have moved to address ad. blocking as many are more worried about losing users rather than a portion of their revenues.
  • I have long believed that there has never been any such thing as free internet as users either pay with cash or with personal data / advertising.
  • The problem is that virtually all users who are paying with personal data do not realise that they are actually paying for the services that they consume.
  • Consequently, when they are then expected to pay cash for the same service it is seen as a huge price increase rather than paying for the service in a different way.
  • Because paying with personal data has been almost invisible to many users for many years, it has perpetuated the myth that the internet is free.
  • There are many legitimate and well respected businesses that depend on advertising to make a living, and the threat of having it cut off could put them out of business.
  • RFM’s ecosystem monetisation model sees three methods of monetisation for any digital ecosystem:
    • First: Own the hardware and keep the ecosystem or the service exclusive to that hardware and charge a premium for it.
    • This is what Apple does so effectively and where the Android makers are really struggling.
    • Second: Make the ecosystem or service available on as many devices as possible.
    • The experience is “free” but a return is earned by using users’ personal data to generate advertising or relevant marketing.
    • This is Google, Facebook, Twitter and so on.
    • Third: Charge the user a per month fee to get access to the service and keep it free of annoying advertising.
    • This is just beginning to emerge for ecosystems but individual services like Netflix, Spotify, Amazon Prime and Xbox Live are already well established.
  • The good news is that the combination of Apple’s move to allow ad blockers and the resulting publicity is resulting in increasing awareness of this issue.
  • All these companies are really saying is that users that don’t like method number 2 can choose to pay via method 3 instead.
  • This is why I remain comfortable that companies that use advertising will continue to earn their revenues one way or another.
  • In fact, I suspect that users faced with the choice of paying a few dollars a month for something that they thought that they previously got for free, will opt to turn off their ad blockers and the storm will be over.
  • I continue to see no threat to the revenues of Google, Facebook, Twitter and so on but continue to prefer Facebook over Google and Google over Twitter.

Acadine Technologies – The Walking Dead Pt II.

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H5OS likely to struggle against tried and tested native.

  • Acadine Technologies, a well-funded Chinese start-up is aiming to breathe new life into the zombie that was once Firefox OS.
  • Acadine Technologies is a Hong Kong based start-up that has received $100m in funding from Tsinghua Unigroup which is directly linked to Beijing based Tsinghua University.
  • Tsinghua Unigroup already owns chipmaker Spreadtrum and RDA Microelectronics and appears intent upon creating an integrated value chain encompassing semiconductors, devices, software and services.
  • Now that Firefox is officially discontinued (see here), Acadine can take on the mantle of leading the development of web software in mobile devices.
  • This is how Acadine and the new incarnation of Firefox OS (called H5OS) intends to get around the problem that there are no Digital Life services available for this OS.
  • By using HTML5 code, H5OS can access the wealth of developers that exist for the web and apply them to mobile, wearables and IoT with minimal effort.
  • The problem with this is that HTML5 on mobile devices does not run as efficiently as native code.
  • This means that a device running HTML5 will have less performance and a shorter battery life than a similar priced device running native code.
  • Back in 2013, when Mozilla launched Firefox OS it made what I called “The Vital Promise” (see here) which consisted of mid-high smartphone performance at mid to high feature phone prices.
  • Mozilla was unable to deliver on this promise which I am certain is the major reason why it failed.
  • If Acadine also wants to succeed it must also live up to this promise despite the fact that it is implicitly backed by the Chinese government.
  • The Chinese ecosystems are all busily engaged in looking for a software platform upon which to base their services as they are unwilling to be dependent on software controlled by Google.
  • This is why some of them are engaged in creating their own versions of Android (JunOS), while others are considering Sailfish, Ubuntu, Cyanogen and so on.
  • Consequently, I think that if Acadine can show that H5OS can at least offer performance at least as good as native, then it has a chance of being selected by one of the Chinese ecosystems.
  • This is easier said than done and every attempt to crack this problem to date has failed.
  • Acadine will need to do something radically different to succeed.
  • Unfortunately, I am not convinced that Acadine is doing something different and suspect that H5OS will remain within the stagger of zombies that continue to exist in open source.

Music Streaming – Temporary gravy pt. II.

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Music label largesse signals a weakening position.

  • Warner Brothers and Sony have both announced that they will share windfall profits that they earn from the streaming companies with artists.
  • This relates to the return that they make from their shareholdings in the streaming companies which many have taken in part payment for granting streaming rights.
  • They have not said how it will be calculated or shared among their artists, but the intent is clearly to improve their relationships with their artists.
  • This relationship has become increasingly strained and the labels have been more than happy to allow the streaming companies to take the blame for the poor returns artists earn from streaming.
  • All of the major streaming services (Pandora and Sirius are not streaming) are either privately held or buried inside much larger companies.
  • This is why artists have wrongly assumed for years that it is the streaming services who are cashing in and underpaying them for their content when in fact it is almost certainly the labels.
  • Both Apple and Spotify pay away at least 70% of their revenues to the labels who then share this money with the artists as per the terms of the contracts signed with their artists.
  • This is where the big question mark lies as how much the artists receive and how much the labels keep for themselves is a black box.
  • Given how much the artists appear to hate music streaming, I am thinking that the labels keep the vast majority of the revenue for themselves and give only a tiny fraction to the artists. (see here)
  • I suspect that when a lot of these contracts with the artists were negotiated, music streaming was a minor issue given that the vast majority of revenues were coming from album sales and digital downloads.
  • Hence, it would appear likely that the percentage of revenue paid to an artist of the revenue from a streamed track is orders of magnitude lower than that from an album sale or digital download.
  • This is now beginning to change as awareness among the artists is much higher and the labels have realised that they are in danger of becoming obsolete.
  • An artist goes to a label because the label can ensure that the music reaches as many people as possible and the artist can earn a better return even after giving the label a very large cut of the revenue.
  • However, the labels are weakening because with digital, the label is no longer the only way to distribute music.
  • The streaming services, Spotify in particular, know who their listeners are and what they like.
  • Consequently, once they have enough users and the algorithms are good enough, the label becomes obsolete.
  • An artist can easily go direct to the streaming service which can then market the music to millions of listeners who are likely to like the artist at almost zero cost.
  • I think that the labels have realised this and as Spotify passes 100m listeners the balance of power begins to shift in its favour.
  • The time is likely to soon come when the labels need the streaming services more than the streaming services need them.
  • Hence, I suspect that in the next round of negotiations, Spotify and Apple will be able to reduce the amount that they have to give to the labels.
  • This also moves power back into the hands of the artists as at the end of the day it is they that the users are paying for and they will soon have other options for distributing their music.
  • Just like PC and handset makers, the labels are in the middle of the supply chain and as their position crumbles, so too will their profitability.
  • I would not want to be holding the equity of any music label long-term.

Lenovo FQ3 16A – Always uphill.

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Now comes the hard part for Lenovo.

  • Lenovo reported a difficult results where market conditions marred what was another quarter of solid execution.
  • FQ3 15A revenues / EBIT were $12.9bn / $379m behind consensus revenues of $13.3bn but nicely ahead of consensus EBIT of $360m.
  • The PC market did most of the damage with revenues down 8% YoY despite gaining market share to an all-time high of 21.6%.
  • However, margins held steady at 5.0% despite the revenue decline.
  • Mobile had a steady quarter shipping 20.2m units just short of RFM’s estimate of 20.7m but critically came within a hair’s breadth of breaking even with margins of -0.9%.
  • Most importantly of all $393m of cash was generated which allowed the cash balance to remain healthy at $2.5bn.
  • Lenovo has executed well and licked its businesses into shape but now it must decide what it is going to do with them.
  • The market outlook is difficult this year and in this environment Lenovo needs to take market share to see growth.
  • It has two options
    • First. Take so much market share that it is able to earn better margins than its peers despite selling commoditised product.
    • Create differentiation by making a contribution to the ecosystem.
    • This is easier said than done but Lenovo’s strong position in a number of device categories could be used to create cross device experiences that actually work.
  • Furthermore, I also see an opportunity for innovation around the use case of the PC to trigger a replacement cycle.
  • I have long believed that laptops offer a sub-standard and un-healthy experience by having the keyboard and mouse physically attached to the screen.
  • Therefore, I see the possibility for a PC in a tablet form factor to replace the laptop with a 4-5 year cycle.
  • This would kick the PC market back to growth once again albeit for a limited amount of time.
  • However, for this to happen, Intel, Microsoft and the PC makers have to demonstrate to users how much better this use case is but progress to date has been very poor.
  • Laptops have been around for over 30 years and that mind-set is deeply ingrained both with users and within the companies that make them.
  • Hence, this will require strong vision and a huge marketing effort by the entire supply chain and movement here has been very slow to date.
  • Consequently, I do not see this happening soon but I remain hopeful that it will eventually come to pass.
  • For Lenovo, the outlook remains tough but it has a solid base from which to start and it has already shown that it can execute when it needs to.
  • Lenovo’s valuation remains unchallenging making it the only PC maker worth considering when looking at a position.

Yahoo Q4 15A & Strategy – Road to nowhere.

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Yahoo’s strategy has McKinsey written all over it.

  • Yahoo reported another lacklustre set of results and its strategic update gave every indication of being written by McKinsey rather than Yahoo.
  • Q4 15A revenues-ex TAC / ADJ-EPS were $1.0bn / $0.13 a bit better than consensus at $948m / $0.12 but still represented a 15% decline YoY.
  • Mobile, Video, Native and Social (Mavens) Q4 15A revenue grew strongly to $472m but this went hand in hand with a 266% increase in traffic acquisition cost (TAC) implying that Yahoo has been buying market share.
  • Out of this, revenue from mobile devices was $291m, up 14.6% YoY, underperforming its peers Google and Facebook both in terms of absolute levels of revenue and growth.
  • Furthermore, Tumblr which has often been called out as an asset that is performing well, missed its monetisation target and was part of the thumping $4.5bn goodwill write down announced.
  • Yahoo also announced its new strategy for 2016 which comprises:
    • First. Focusing on search, mail and messaging, Tumblr and the content channels of news, sports, finance and lifestyle.
    • This will result in the discontinuation of some Digital Life services such as games and (I think) maps.
    • This will reduce Yahoo’s coverage of the RFM Digital Life pie from 75% to 41%.
    • Assets such as Flickr which just about pays its way will be continued but investments for growth will be curtailed.
    • Second. 5 regional offices will be closed and the workforce will be reduced by 15%.
    • This will result in the elimination of around 1,500 positions and with an annual saving of $400m
    • Most of this will be effected before the end of Q1 16, with the full effect in the operating results by Q4 16.
    • Third. The reverse spin (see here) of the core business into a separate vehicle will continue as planned leaving Yahoo’s stake in Alibaba in the current legal entity in order to avoid potential tax liabilities.
  • The net result of these changes is revenue guidance well adrift of expectations.
  • Q1 16E revenues ex-TAC / Adj-EBITDA are expected to be $820m-$860m / $100m-$120m compared to consensus at $915m / $189m
  • FY 16E revenues ex-TAC / Adj-EBITDA are expected to be $3.4bn-$3.6bn / $700m-$800m compared to consensus at $3.9bn / $851m.
  • This is very disappointing especially given the speed with which Yahoo intends to implement the cost savings which clearly are not going to flow to the bottom line.
  • However, the biggest problem of all is that I think that the conjunction of McKinsey and Yahoo has led to a misunderstanding of the market Yahoo is trying to address.
  • Yahoo stated time and again that mobile is its future but the shuttering of games and (I think) maps has massively reduced its long-term growth potential.
  • This is particularly the case because games is the one segment of Digital Life that no-one has conquered on mobile.
  • Consequently, it is wide open and this is what I think Activision’s acquisition of King Digital is all about (see here).
  • I think that Yahoo and McKinsey are looking at each asset or business on its own merits and not considering the bigger picture.
  • If Google was to think like this, then it would probably have shut YouTube and Maps which I think would kill a significant piece of its search revenue.
  • Google understands that the value of a portfolio of integrated services is orders of magnitude greater than a jumble of stand-alone offerings.
  • I have long believed that YouTube and Maps are hugely valuable assets to Google as it monetises them through search using the data that they collect.
  • As an ecosystem with a collection of integrated and delightful Digital Life services, Yahoo had the potential to quadruple its revenue base to around $4bn per quarter.
  • The strategic realignment reduces that potential to closer to $2bn per quarter and will be even harder to realise.
  • The cause of Yahoo’s problems is simple in that it remains unable to execute on integrating its assets to create a consistent and delightful ecosystem.
  • To give Marissa credit, I think she had the vision of what Yahoo needed to offer but has been unable to fulfil that dream.
  • The end result leaves Yahoo in the hands of McKinsey which will provide some short-term benefit in terms of cost savings but leaves Yahoo going nowhere in the long-term.
  • Yahoo’s valuation remains unchallenging as the shares are trading below the value of Yahoo’s holdings in Alibaba and Yahoo Japan.
  • Hence the theoretical value of the core business, which is profitable and generates cash, is less than zero.
  • Consequently, I see significant upside when it comes to break-up of the company but at the moment this has all the hallmarks of a classic value trap.

 

Alphabet Q4 15A – Apple of its eye.

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Great numbers, bad dependency on Apple.

  • Alphabet reported very strong results as high end users shifting to the iPhone improved Google’s ability to monetise its services.
  • Q4 15A revenues-ex TAC / EPS were $17.2bn / $7.06 compared to consensus at $16.9bn / $6.56 and RFM at $16.2bn / $8.42.
  • Alphabet split out what it calls “Other Bets” which make up Fiber, Verily. Calico, Nest, autonomous vehicles and other long term investments.
  • This piece generated $151m in revenues and $1.1bn in operating losses in Q4 15A with most of the revenues coming from Nest and Fiber.
  • Stripping out the “Other Bets” shows just how well Google has been faring over the last 12 months.
  • EBIT margins have risen to 37.9% in Q4 15A up from 35.0% in Q4 14A.
  • While some of this benefit has come from increasing scale, I suspect that most of it is the direct and ironical result of Android losing market share at the high end.
  • The greater usability of the iOS user experience when compared to that of Android means that an iOS device generates around double the traffic of an Android device at the same price point.
  • Consequently, there is far more opportunity in iOS to target users with marketing resulting in meaningfully higher revenues.
  • RFM estimates that Google’s revenue per user on iOS is more than double that on Android.
  • Consequently, when the user shifts from Android to iOS, Google benefits in the short-term.
  • The iPhone 6 product cycle has resulted in a meaningful share gain for iOS in the high end of developed markets and Google’s strong numbers since Q2 15A, are almost certainly a direct result of this trend.
  • The problem with this is that Apple and Google are fierce competitors and Apple has been taking as many steps as it dares to remove Google from its ecosystem.
  • This is a very delicate balancing act as the one thing that would make an iOS user consider switching to Android would be if Google services were no longer available.
  • Apple Maps, ad-blockers and so on are all attempts to remove Google but so far none of them have really worked.
  • For Google, this growing dependency is a major problem because if Apple ever gets into a position where it can safely boot Google from its ecosystem, it is very likely to do so.
  • The effect on Google would be at least a $13bn hit to annual revenues and a collapse in its valuation.
  • Furthermore, iOS is going to grow much more slowly now that the share shift is largely over, putting the emphasis back on Android as the engine of growth.
  • Google appears to be unable to control the endemic software fragmentation that hampers the user experience which is why I think that it will end up taking complete control of the software.
  • With the user experience under control, Google will be able to improve it to compete more closely with iOS as well as be able to distribute its software in a timely manner.
  • However, this is going to take some time meaning that it remains heavily exposed to iOS in the short-term for which I think that 2016 will be a much slower year.
  • With expectations for 2016E, now certain to move up, I am increasingly concerned that the shares have overshot fair value.
  • I prefer Samsung, Microsoft, Facebook or even Apple to Alphabet.

Alibaba FQ3 15A – Law of large numbers

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A slowdown at Alibaba is inevitable.

  • Alibaba reported good FQ3 15A results but there are signs that the outlook going forward will be somewhat slower than the market would like.
  • FQ3 15A revenues / Adj-EPS were RMB 35.5bn (US$5.3bn) / RMB 6.43 (US$ 0.99) comfortably ahead of consensus at RMB 33.0bn / RMB 5.84.
  • Active buyers increased to 407m in China of which 393m are active on mobile devices on a monthly basis.
  • Gross Merchandise Value (GMV) was RMB964bn up 23% YoY of which 65% was transacted via a mobile device up 30% 12 months ago.
  • This was mainly driven by a combination of 10.5% retail growth in the Chinese economy and increasing online transactions which accounted for 12.9% of retail compared to 10.6% a year ago.
  • Despite the indubitably excellent results, the focus remained on the fact that GMV is continuing to slow.
  • 23% YoY growth this quarter has slowed from 34% 6 months ago and 49% in FQ3 14A.
  • The sensitivity of this issue is clear as management’s answers to questions concerning GMV growth were weak and the slide that shows its progression has been removed from the normal results deck.
  • GMV growth is also slowing because Alibaba has been cleaning house and removing businesses that deal in counterfeit goods and so on.
  • However, the net result is that the Chinese economy is slowing and Alibaba will inevitably slow with it.
  • This is exacerbated by the fact that Alibaba is now a very large company and large companies almost always grow more slowly than small ones.
  • The other option is for Alibaba to grow internationally and while it is getting some traction from Chinese users buying goods from overseas, its appeal to non-Chinese users remains muted.
  • Without a sudden break-through in international businesses growth is going to continue slowing in 2016.
  • At the same time Alibaba is also investing in creating a digital ecosystem beyond e-commerce but it is still very early days.
  • Its Digital Life portfolio remains quite limited, its Android software is not fully developed, and it has yet to really create a delightful and cohesive user experience on mobile.
  • In the long-term there remain big opportunities ahead for Alibaba but, much like Facebook, it has a lot of work to do before it can expect to really monetise them.
  • Despite this, compared to Amazon, I think Alibaba is faring well.
  • It makes a good profits, its thinking around the ecosystem is far clearer and it is easy to see how the investments it makes further that ambition.
  • Furthermore, its shares are far cheaper than those of Amazon making a choice between investing in these two not very difficult.
  • Alibaba has a tough year ahead but the long-term outlook is for it to remain one of the Chinese giants.

Microsoft & Amazon – Different days

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Microsoft and Amazon have a very different day.

Microsoft FQ2 16A.

  • Microsoft reported steady results as Office 365 and cloud services more than offset the weakness in the PC market.
  • FQ2 16A revenues / Adj-EPS were $25.7bn / $0.78 compared to consensus at $25.3bn / $0.71 and RFM at $26.5bn / $0.71.
  • Adoption of Windows 10 continues at a better pace than Windows 7, with 200m active devices and usage of those devices also showing encouraging signs.
  • Bing reported some progress in gaining 1% point of share to 21% in the US Search market but 30% of Bing’s search revenue now comes from Windows 10 devices.
  • Given that Windows 10 makes up less than 15% of Windows devices in the market, this implies that the usability improvements are encouraging users to interact with Microsoft’s services to a greater degree. .
  • This bodes well for the adoption of Microsoft as the go to ecosystem for Digital Work but the questions marks around Digital Life remain.
  • Both Office 365 and Azure grew far faster than the corporate average and it was these two businesses that drove stronger than expected revenues.
  • Guidance for Q3 16E was in line with expectations with revenues of $21.6bn – $22.2bn just shy of consensus at $22.2bn but further progress on expenses and optimism on the cloud won the day.
  • I suspect that there was also considerable relief that the outlook for the coming quarter was less impacted by economic volatility than many had feared.
  • The net results was 4% rally in the shares in after-hours trading.
  • Microsoft’s stock has had a difficult start to 2016 but these results indicate that it is likely to weather difficult times better than average.
  • Microsoft’s progress on the consumer ecosystem remains slow and hesitant but fortunately the valuation demands no success at all.
  • Hence, there remains plenty of upside if it gets it right but still some upside even if it does not.
  • This is why I continue to like the stock going into 2016.

Amazon Q4 15A

  • I consider Amazon to be a true unicorn but one that has a habit of stabbing itself with its horn.
  • Amazon once again dashed the market’s hopes by returning once again to investment mode at the expense of profits.
  • The result of this slip was a 13.4% decline in the share price I after hours trading.
  • Q4 15A revenues / net income were $35.7bn / $743m well short of consensus at $36.0bn / $1.3bn.
  • The revenue miss was almost entirely due to the strength of the US$ but the real problem was profits which missed expectations by 43%.
  • Amazon’s continued push into faster fulfilment as well as technology and content investments did the damage as both of these saw increases as a percentage of revenues.
  • Amazon Web Services put in a mighty performance growing 69% YoY to $2.4bn with operating margins of 28%, but seeing as this is still a very small part of revenues its positive impact was minimal.
  • Q1 16E guidance was also soft with revenues / EBIT of $26.5bn – $29.0bn / $100m – $700m well short of consensus at $27.7bn / $800m.
  • Amazon has two truly mighty machines: its retail offering and Amazon Web Services and both of these are doing very nicely.
  • However, it is the other areas that need urgent attention.
  • The profits from these two power houses are being spent on a haphazard series of experiments and futuristic thinking for which there are virtually no results no date.
  • For these experiments to pay off, Amazon has to think about how to put these investments together in a way that creates a cohesive, integrated and delightful experience for users outside of online shopping.
  • This means that Amazon needs to understand the importance of the Digital Life ecosystem and of this there is no sign.
  • Consequently, I think that Amazon’s outlook remains as haphazard as its strategy making for more wild swings on results days.
  • At 110x 2016E PER, there is absolutely no room for error making this a stock to avoid this year.
  • Apple’s earnings are far more reliable and are more than 90% cheaper making it the obvious choice when choosing between these two.