Virtual Reality – Virtual standstill.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

VR seems only to be popular at trade shows.

  • After a very disappointing 2016, Virtual Reality looks set to have another disappointing year in 2017 while its proponents work out how to fix the issues that keep it from being a success.
  • The latest blow is the removal of 200 out of 500 of Oculus Rift demonstration stations as a result of poor performance within stores.
  • The idea has been that to get a user to buy VR, he has to try it but in some stores entire days have gone by without a single demo being given.
  • Best Buy will continue to range the Oculus Rift but the real estate given up will be re-used for products that produce better sales per square foot.
  • It appears that the only place where people queue for a demo is at trade shows with the regular user not really seeing the point of the technology.
  • This is a further indication that the limitations of VR continue to hamper its appeal.
  • These remain:
    • Price: Many of the devices cost several hundreds of dollars and also require a PC to run, further increasing the cost.
    • Clunky: VR and AR units are still large, clunky and uncomfortable to wear.
    • In many cases they also make the user feel foolish when wearing one.
    • Comfort and security: VR in cuts the user off from almost all sensory inputs from his immediate environment severely limiting the situations in which the user would feel comfortable using one.
    • Many units also cause feelings of nausea due to an imperfect replication of the real world compared to what the brain is expecting.
    • Cable: Many units require an HDMI cable which prevents the user from moving and also increases the risk of a fall should the user trip over the cable.
    • Content: Both games and content remain in short supply limiting the reasons for users to immediately adopt the platform.
    • The adult entertainment industry is a good yardstick for the adoption of new media types and even this has been slower than expected to jump in.
  • The net result is that I think 2017 will be a disappointing year for VR.
  • The one bright spot remains augmented reality (AR) to enterprise customers.
  • For the enterprise, it is productivity that really matters with the user experience being less important.
  • This is because in consumer, the users pay money for an experience but in the enterprise users are paid to use the technology.
  • Hence, enterprise users’ willingness to put up with a substandard user experience is much greater.
  • The AR user experience is still miles from where it needs to be but critically it does offer productivity improvements that have led to many companies trialling it particularly for employees in the field.
  • Hence, I think that AR in the enterprise should see both unit shipment growth as well as good growth in revenues from software and services in 2017.
  • Consequently, the companies to watch this year are those in this field like ODG, Microsoft HoloLens, Meta, Atheer Labs and of course Magic Leap.
  • Magic Leap is an exception is it has made incredibly bold promises around a consumer offering in AR, but it is questionable as to how close it really is in terms of having a working, commercial product (see here).
  • From an investment perspective, AR in the enterprise is the only place I would entertain putting money into this year unless it is something aimed at fixing the limitations I have listed above.

Facebook vs. Alphabet – Worlds apart

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Facebook and Alphabet are worlds apart when it comes to AI.

  • While Google is pushing the boundaries of artificial intelligence forward, Facebook is making excuses for its inability to control hate speech highlighting once again who is the leader and who the laggard in the field of AI.
  • Google has demonstrated a system that it has built that allows very poor digital photos to be enhanced to reveal details of the photograph that have been completely obliterated.
  • In a similar fashion to the way that Deep Mind built AlphaGo, Google has combined two neural networks to produce the algorithm capable of enhancing low resolution images.
  • One of these networks uses its knowledge of certain images to add details while the other effectively reverse engineers the process by which the image was compressed into its current form.
  • The result is quite startling but it is worth remembering that the machine knew what the original image was a face or a bedroom but no more than that.
  • Despite Google’s claim that this was an experiment only with no plans to put it to use, I think that the uses for this are endless.
  • This technology would be useful in upscaling video to high resolution screens as well as being highly applicable to law enforcement, security, military, medical and so and so forth.
  • Hence, I think that this technology or an off shoot of it is likely to find its way into Google’s products and services in the medium term.
  • To me this is another demonstration of how well Google leads the field of artificial intelligence and is the closest to using it to enhance the richness and quality of its Digital Life services.
  • This will be a huge benefit to Google as better services will drive more usage through its networks giving it a greater opportunity to monetise.
  • However, this is also the opportunity that Facebook is chasing but when it comes to making its Digital Life services deeper and richer with intelligence, I see it being miles behind.
  • The problems that it has had with fake news, idiotic bots and Facebook M, all support my view that when Facebook tries to automate its systems, things always go wrong.
  • The problem is not that Facebook does not have the right people but simply that it has not been working on artificial intelligence for nearly long enough.
  • RFM research has found that time is the single most important element when it comes to having a solid foundation of intelligent algorithms upon which to build intelligent services (see here).
  • In contrast, Google has been working on this for over 20 years and is still innovating as fast as it can.
  • Facebook’s most recent pronouncement by one of its lawyers that it is unable to control hate speech on its platform due to the scale of data that is posted every day, is just another data point highlighting the problem.
  • Facebook has to get this under control otherwise I fear that it will fail to really expand beyond social networking and instant messaging as the offerings from its rivals will be more useful and more fun.
  • Facebook has some time to get to grips with this problem but I still think it will have to resort to making a series of acquisitions in order to catch up with its rivals.
  • I remain uninterested in both Alphabet and Facebook at this time preferring Microsoft, Tencent and Baidu with Apple for income based investors.

Xiaomi & Huawei – Different strokes

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Xiaomi and Huawei go in different directions.

  • While commentators are absorbed with Apple’s (almost certainly temporary) No. 1 position in the smartphone market and Oppo’s ascendency in China, no-one seems to have noticed a good recovery at Huawei and that things are looking increasingly dicey at Xiaomi.
  • IDC has released its figures for the smartphone market in Q4 16 both globally and in China.
  • The market has shown some growth with 7% growth YoY globally and 9% YoY in China with the Chinese makers increasingly dominating the market both at home and overseas.
  • Apple has gained the No. 1 slot but is almost certain to lose this back to Samsung in Q1 17, due to the heavy seasonality of its handset business.
  • Both Oppo and Vivo make an entrance in the global top 5 with 7.3% and 5.8% share respectively, but I think that the real winner of the quarter was Huawei.
  • By the same token all does not appear to be well at Xiaomi which has fallen to No. 5 at home and is well out of the global top 5.
  • I have discussed these two in a bit more detail below.

Huawei

  • Huawei has had a torrid 2016 after spending big at Mobile World Congress and failing to make the market share gains that it badly needed to begin to fulfil its ambition to become the global No. 1.
  • I am pretty certain that the increase in spending in 2016 has pushed the handset business into loss making territory for the year.
  • Furthermore, I suspect that the business will be on a much tighter leash in 2017 which will mean that investments have to be very carefully targeted.
  • The good news is that it had a much better Q4 2016 gaining 1.8% points of global share to reach 10.6%, giving it a platform upon which to build in 2017.
  • I remain convinced that to really become No. 1, Huawei must become an adept of software and the user experience which is something with which it continues to struggle (see here).
  • I see 2017 as a year of focusing on profitability and steady gains rather than all-out assault upon the market.

Xiaomi

  • Everything seems to have gone wrong at Xiaomi during Q4 16 with a heavy market share loss and the departure of its international captain and tireless cheerleader, Hugo Barra.
  • Following its explosion into the market with a cool user experience and innovative sales channel in 2015, during Q4 16, Xiaomi fell to an ignominious No. 5 in the Chinese market with just 7.4% share down from the 15% it managed during 2015.
  • I suspect that overseas it has also struggled as RFM estimates that its global share has fallen to 3.1% down from 4.1% in Q3 16 and its peak of 5.1% in Q2 15.
  • The departure of Hugo Barra is a sign that all is not well with its international business where its Chinese ecosystem has no relevance leaving it stuck selling Google.
  • I think that this leaves Xiaomi struggling for relevance both at home at overseas, putting its ecosystem strategy at great risk.
  • Xiaomi has comfortably more than the 100m it needs for critical mass, but I am becoming increasing concerned that the engagement that it is able to generate is not nearly enough.
  • This is because on the Chinese Digital Life pie, not one of its services is the dominant offering in any segment, leaving it playing catch up with the much stronger and more aggressive BATmen. (see here).
  • I am sticking with my $5.0bn valuation for now but unless Xiaomi shows a new lease of life in 2017, this will be going south again.

GoPro vs. Shenzhen – Forlorn hope

Reply to this post

RFM AvatarSmall

 

 

 

 

 

GoPro needs something special to fend off Shenzhen.

  • GoPro released another set of awful results highlighting how much damage its failure in execution and software has done to its long-term prospects.
  • The problem essentially is Shenzhen, which makes much cheaper cameras that are just as good and drones that are better.
  • Q4 16 revenues / Adj-EPS were $540m / $0.29 compared to consensus at $573m / $0.22 but guidance for Q1 17 was very disappointing.
  • Q1 17 revenues are expected to be in the range of $190m – $210m some 25% adrift of consensus at $268m.
  • The company tried to explain this away citing inventory overhangs and seasonality but I think underneath lies a weak market and vicious competition.
  • Competition is really hurting in two areas:
    • First: Cameras.
    • GoPro has by the strongest brand when it comes to small high quality cameras but competitors like Yi Technology make great, well rated products at half the price.
    • This is why it has been imperative for GoPro to develop software around its products that users love to prevent them moving away to cheaper, just as good alternatives.
    • It has made some progress here but user numbers of its Quik App and its Capture App are not nearly big enough to hit critical mass.
    • The fact that the numbers are growing very quickly but GoPro declined to the actual figures indicates that the numbers remain very small.
    • This means that the vast majority of GoPro owners are not really engaging with its software making them prime targets for cheaper alternatives.
    • This has to be GoPro’s number one priority this year as failure will leave it commoditised and fighting a losing battle with companies with a much lower cost base.
    • Second: Drones.
    • Here GoPro is already on the back foot and there is only one way that I can see it making an impact.
    • Its competitor DJI is based in Shenzhen, giving it a lower cost base for manufacturing and it is also making the best product.
    • The holy grail of drones is autonomy necessitating good software, something with which almost all Chinese companies have struggled with.
    • DJI is unique in that is a Chinese company that produces drones that have the best operating software available.
    • Consequently, in a head to head comparison of the Karma drone against the DJI Mavic Pro, I think there is no contest.
    • The Mavic Pro has some simple, fun and useful autonomous features that the Karma lacks, making it a better overall product although it is a little more expensive.
    • Combine this with the embarrassing recall due to a faulty battery compartment, leaves GoPro fighting for relevance in this space.
    • Its’ one hope is its modularity where the Karma Grip and the Hero 5 work together with the drone to produce a compete video capture package.
    • Consequently, anyone who already owns the Hero 5, has a strong incentive to purchase the Karma as opposed to anything else.
  • The net result is that GoPro really has its work cut out for it and I remain unconvinced that it is going to survive on its own.
  • I still think that both GoPro and Fitbit (see here) will make reasonable tuck in acquisitions (see here) for the larger ecosystems looking to extend their services or market position into new digital devices.
  • Hence, I think that there is further to fall before acquirers are flushed out into the open and I am not tempted to go bargain hunting.

Snap Inc. – Pain not gain

Reply to this post

RFM AvatarSmall

 

 

 

 

 

I see only pain for investors paying $22.5 at the IPO.

  • $20bn – $25bn is at least 32% too much to pay for investors who will also have no say whatsoever in how the company is run despite having significant skin in the game.
  • Snap Inc. has published its S-1 document allowing for a fundamental-(ish) based valuation to be made for the first time.
  • Given that Snap Inc. has no profits and no cash flow, only an analysis based on revenues and users is possible at this point.
  • At the end of Q4 16 Snap Inc. had 158m daily active users (DaU) from which it generated $166m in Q4 16 and $405m for the full year.
  • I think that the most applicable peers for Snap Inc. are Facebook which owns Snap Inc’s two biggest rivals, LINE which is very similar company based in Japan and Twitter which operates in a niche just as Snap Inc. does.

DaU based valuation.

  • For DaU, the only reliable comparison is Facebook as the other peers do not reliably disclose this metric.
  • Facebook has 1.2bn DaU and an enterprise value (EV) of $339bn giving EV / DaU of $283.
  • By comparison Snap Inc. at the IPO EV of $21.5bn looks cheap with an EV / DaU of just $136.
  • However, Facebook generates 6.6x more revenue from each of its users than Snap Inc. and therefore I think each Snap Inc. user has much lower value.
  • Furthermore, I remain concerned that Snapchat’s core user base of 12-24 year olds is not as interesting to advertisers as the older demographic groups.
  • This is because this age group does not have a lot of money to spend on products and therefore is of less value to advertise to.
  • This combined with the fact that Snap Inc. has only 14% coverage of the Digital Life pie compared to Facebook at 36% means that its long-term potential in its current business is much lower.
  • If I adjust Facebook’s EV / DaU to account for these factors, I find myself willing to pay around $80 per user giving me an EV estimate for Snap Inc. of $12.6bn.

EV/Sales based valuation.

  • The peer group of Facebook, Twitter and LINE Corp is trading on a forward EV/Sales multiple of 6.0x for 2017E and 5.0x for 2018E.
  • Given, Snap Inc.’s current growth rate and its medium-term potential (see here), I think that the company could conceivably generate revenues of $800m in 2017E and $1.2bn in 2018E.
  • Being generous to Snap Inc. and because it is growing much faster than the peer group I can give it a 300% premium to its peers giving an EV valuation of $12.0bn based on 2017E and $21.6bn based on 2018E.
  • The average of these two is $16.8bn with which I can be comfortable assuming flawless execution, continued rapid growth and a move into generating profits.

Corporate governance.

  • Very much like Facebook, Alibaba, Baidu and Google, the founders will continue to control the company with the new investors being sold non-voting shares and having no say in how the company is run.
  • While, this is an acceptable structure in early stage, private companies, I think it has no business being present in large capitalisation, publicly listed companies.
  • This is because history has shown that while things are going well, this is not a problem but when things go wrong, the problems tend to be much worse and last for much longer than they would otherwise if minority shareholders had a say in management and strategy change.
  • This happens because founders tend to be emotionally attached to their companies to the strategies that they have created and as a result they hold onto them for far longer than they should.
  • In my valuation of Snap Inc., I would normally take a 30% discount to my fair value in order to compensate investors for the extra risk taken but to be as generous as possible to Snap Inc., I have not included this here.

Take Home Value.

  • The result of this analysis is an enterprise value for Snap Inc. of between $12.0bn – $16.8bn with the midpoint at $14.4bn.
  • Adding back the $1.0bn of net cash the company has on its balance sheet gives me a fair value, in the best instance, for the equity of the company of $15.4bn.
  • This is some 32% below the midpoint of the range reinforcing my previous opinion (see here) that this is an IPO to be avoided at all costs.
  • I would rather own Microsoft, Tencent or Baidu.

Facebook Q4 16 – In focus

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Facebook intends to kill the YouTube star.

  • Facebook reported good results and highlighted that while 2017 would be much slower, video is the current priority to drive the next leg of growth.
  • Q4 16A revenues / Adj-EPS were $8.81bn / $1.41 nicely ahead of consensus at $8.51bn / $1.31.
  • Mobile was once again the main driver of revenues making up 81% of revenues and growing 61% YoY, echoing the strong numbers reported by Alphabet.
  • Facebook reiterated that growth in 2017 would slow markedly, as it has fully monetised the traffic that it already has, but it is well advanced in seeking other avenues.
  • In the next 3 years, the priority is clearly video and I can see Facebook evolving to become more like YouTube or Netflix.
  • These developments are already underway with the latest innovation being the addition of a tab at the bottom of the Facebook app that has top trending videos as well as recommendations for the user.
  • This makes Facebook video look far more like YouTube which I see as an encyclopaedia of video which Facebook clearly intends to emulate.
  • If Facebook can establish itself as a real rival to YouTube, this will bring its content consumption offering to maturity and I will be comfortable increasing its Digital Live coverage from 36% to 46%.
  • I think that it is still too early to call Facebook a real destination for video, but it is steadily moving in this direction.
  • In Gaming and Facebook M its efforts are far more nascent and I see these two appearing in Facebook’s 5 year strategic horizon.
  • While the long-term outlook for Facebook remains good in terms of Digital Life coverage, artificial intelligence remains a big concern.
  • Facebook has made some big hires in this area but its algorithms remain basic at best and deliver an awful user experience.
  • RFM research indicates that almost every time Facebook tries to use intelligent automation, things go badly wrong leaving Facebook having to fall back on humans.
  • While this is not a huge problem today, if Facebook continues to rely on humans to customise the user experience for its users, OPEX will start growing much more quickly than sales.
  • My concern is not that Facebook can’t fix it but that it will take it a very long time, leaving it still behind its rivals who are already miles ahead and investing heavily.
  • This is why I think that Facebook will end up having to make a lot of acquisitions in this space over the next 3 to 5 years.
  • With a slower outlook for 2017 and the share price back to its all-time high, I can not get excited about the stock as there are challenges that need to be overcome before the next leg of growth materialises.
  • I continue to prefer Microsoft, Tencent and Baidu for capital growth and Apple for income.

 

Apple FQ1 16 – One way street.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

iPhone benefits where Google could not.

  • Apple released excellent results highlighting that contrary to my previous view, iOS has been the main beneficiary of Samsung’s recent woes.
  • FQ1 17A revenues / Adj-EPS were $78.4bn / $3.36 compared to consensus at $77.3bn / $3.22.
  • iPhone was the main driver of the upside with 78.3m units shipped at an ASP of $695 beating expectations of 76.3m units at an ASP of $688.
  • In addition to the share gain, prices went up as the larger screen version of the iPhone saw its biggest contribution to the mix ever.
  • I think that has been primarily driven by Apple taking a good share of users that purchased the Note 7 and were left high and dry by the recall.
  • Users appear to have taken this opportunity to move from Android to iOS, a move which I think is pretty much a one-way street.
  • I find this surprising as the iPhone 6 is now in its third generation meaning that a large screen iOS device has been an option for users for 2.5 years.
  • This means that most high-end Android users have already purchased a new Android device despite a large screen iOS option being available.
  • This is what led me to believe that iOS would not benefit from Samsung’s Note 7 disaster but this logic appears not have been correct.
  • Instead it appears that the negative stigma surrounding the recall has been enough to encourage users to switch away from Android despite the fact that many apps will need to be repurchased.
  • I have estimated that around 2.5m users (see here) were affected by this incident of which I think around 2m have bought an iOS device and 0.5m a Google Pixel device.
  • This explains the strong performance of iPhone, the better mix towards the larger screen device (Note 7 is a large screen) and the geographic performance of Apple during calendar Q4 16.
  • It also explains Apple’s slightly cautious guidance for the coming quarter as this gain is likely to have been a one-off benefit.
  • FQ2 17E revenues / gross margin are expected to be $51.5bn – $53.5bn / 38% – 39% compared to consensus at $53.8bn / 38.7%.
  • This is bad news for Samsung as the crowd that bought the Galaxy Note 7 appear to have switched to iOS from whence they are unlikely to return.
  • Ironically, although Google has failed to win those users over to Pixel, it will still benefit as RFM research indicates that iOS users generate far more advertising revenues for Google than Android users in the same demographic groups.
  • These were good results but they do not herald the return to growth that the shares badly need if they are to see any real upward momentum.
  • I still think that the shares represent great value for income based investors but those looking for capital growth will remain better off with Microsoft, Baidu and Tencent.

Fitbit – Boredom bites.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

User indifference likely to drive further estimate cuts in 2017.

  • Fitbit issued a horrible profit warning as users appear to be becoming bored with fitness tracking despite Fitbit’s efforts to drive engagement through the ecosystem.
  • Q4 16A revenues / Adj.EPS will be $572m – $580m / LOSS$0.51 – LOSS$0.56 compared to previous guidance of $725m – $750m / $0.14 – $0.18.
  • The new revenue estimate is 22% below where the company thought demand would be in Q4 16 and 27% below the consensus estimate of $736m.
  • The company also took the knife to its 2017 estimates with revenues / Adj-EPS of $1.5bn – $1.7bn / LOSS$0.22 – LOSS$0.44 compared with consensus at $2.38bn / $0.43.
  • The company blamed market softness for the shortfall and promised a recovery in H2 2017 but only because the year over year comparisons are much easier given the awful H2 2016 the company has had.
  • I think that Fitbit has three major problems:
    • First: It’s sensors are not accurate enough to be of any use beyond recreational health.
    • I believe that all health trackers suffer from this problem and until these devices are far more accurate, they will all have difficulty in expanding into the huge opportunity represented by health monitoring.
    • Phillips makes some bold claims in this area but I have yet to see hard evidence that its products are meaningfully more accurate than anyone else’s.
    • Second: The issue with wearables being a solution looking for a problem (see here) appears to be getting worse.
    • This is because the health tracking that these devices offer is simply not good enough and hence many devices end up gathering dust in a drawer after a couple of months.
    • Fitbit does far better than most but with only 23.2m active users of its devices, there are still a large number of devices out there that are no longer on the wrists of users.
    • Furthermore, from an ecosystem perspective, Fitbit is still miles adrift of the 100m active users that RFM estimates are needed for an ecosystem to hit critical mass.
    • Third: Fitbit is being eroded from both ends with Apple Watch at the top of the market and cheap Chinese health trackers at the bottom.
    • This issue is exacerbated by the fact that Fitbit has offered no real innovation in health tracking for some considerable time which has meant that the cheaper Chinese versions are just as good in terms of generating raw data.
    • If Fitbit was able to reliably track calorie consumption, blood pressure or blood sugar, then this would give it something with which to fight back against commoditisation, but of this there is no sign.
  • On top of the warning, Fitbit has also pledged to cut $200m of OPEX in 2017 with way less than 10% of this coming from headcount.
  • This means that certain aspects of sales and marketing and some research and development projects are also going to be cut.
  • This will make it even harder for Fitbit to come up with a winning innovation with which to restore its gross margins.
  • Consequently, the outlook for Fitbit in 2017 looks very difficult and I suspect that it may be taking the knife to its estimates yet again in 2017.
  • Just like GoPro, Fitbit remains one to be assiduously avoided in 2017 as both have further to fall leaving them open for acquisition (see here).

Google Enterprise – No G man.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

G Suite and Chromebook upgrades are too little too late.

  • Functionality upgrades to the mobile version of G Suite (Office-like apps) and enhancements the Chromebook proposition are not likely to alter the downward trajectory that I see for Google in the enterprise.
  • Google has announced upgrades to the iOS and Android versions of Docs and Sheets that include more advanced editing and formatting.
  • It has also moved forward with its intention to enable Android apps on Chromebooks by stating that all Chromebooks launched in 2017 will be able to run Android apps (although not all of them will be able to do so right away).
  • In theory both of these moves could help to enhance the appeal of using Google for Digital Work as well as Digital Life but I see a number of problems.
    • First: Ever since Microsoft released free Office 365 apps for iOS and Android, I feel that Google has been losing the Digital Work game.
    • I think that this is because Office 365 with basic editing being free on iOS and Android obviates the reason to use G Suite at all.
    • I think that the same goes for the other Office alternatives such as Libra Office and so on.
    • Office is by far the leader when it comes to functionality and compatibility and now that it is free in simple user cases, it makes very little sense to use anything else.
    • Second: I do not think that adding Android apps to Chromebooks will do very much to enhance their appeal.
    • This is because the vast majority of Android apps are designed to be used with a device that uses touch as its input mechanism rather than a keyboard and mouse.
    • It is also worth noting that enabling Android apps on Chromebooks will have the side effect of bringing Office 365 onto the platform.
    • Consequently, I think that the user experience of Android apps on Chromebooks will be substandard, pushing users back to their smartphones and tablets to use them.
    • Furthermore, I think that the keyboard and mouse input system is increasingly the domain of the content creator with content consumers overwhelmingly finding touch based devices cheaper and easier to fulfil their requirements.
  • Consequently, I do not see either of these actions improving the appeal of Chromebooks nor increasing the use of Google Docs by content creator users.
  • I see content creators preferring Windows or Mac OSX with a keyboard and mouse and content consumers sticking to iOS and Android on a touch based device.
  • I think that the combination of Office 365’s superior functionality and the free basic functions have obviated the reason to use anything else which will lead to a long-term decline in G Suite.
  • One area where Google has a chance with the enterprise is in the cloud, but there it is already very far behind both Amazon and Microsoft and will also have to contend with Alibaba’s clear intention to take AliCloud international.
  • The net result is that I continue to see almost all of Google’s growth remaining in consumer where mobile and YouTube are still growing very nicely.
  • Finally, I think that this growth is already fully priced into the shares leaving me still preferring Microsoft, Baidu or Tencent over Alphabet.

GOOG, MSFT & INTC – Cloud party.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Cloud and mobile drive 3 for 3.

 Alphabet Q4 16.

  • Alphabet reported excellent results driven once again by mobile advertising but was somewhat marred by a one-off tax payment.
  • Q4 16A revenue-ex TAC / Adj-EPS was $21.2bn / $9.36 compared to consensus at $20.6bn / $9.63.
  • If the one off tax payment is removed, Q4 16 Adj-EPS was $10.13, comfortably ahead of expectations.
  • Alphabet stressed on the call that it was focusing on cloud and the enterprise but I think that this strategy will not work.
  • This is because both Amazon and Microsoft are already far ahead and with a simple version of Office 365 now being free on phones and tablets, there is very little incentive to use Google’s office apps.
  • Furthermore, Alibaba is aggressively expanding its AliCloud offering and has a very strong base in China upon which to base its international investments.
  • Hence, I see Alphabet being driven by its consumer offerings which I do expect to slow somewhat in 2017.
  • I continue to see all the growth as being already priced into Alphabet’s share price.

Microsoft FQ2 17.

  • Microsoft reported good results as the legacy PC-based businesses held steady allowing very rapid cloud growth to show through in the numbers.
  • FQ2 17 revenues / Adj-EPS were $25.8bn / $0.84 compared to consensus at $25.3bn and $0.79.
  • Azure was once again the star of the show with revenues more than doubling YoY together with the prospect of much better gross margins as Azure begins to hit real scale.
  • While Microsoft is going from strength to strength with regard to offering services for enterprise customers and prosumers, its consumer ecosystem continues to whither on the vine.
  • As these businesses continue to be neglected, I can see a growing case for divesting Xbox, Mojang and even Internet Explorer as they could be worth more to someone prepared to really make something of them rather than just let them chug along.
  • I still like Microsoft as these results show that there is still upside to be had from the perspective of offering services to enterprises and prosumers.

Intel Q4 16

  • Intel reported reasonable results as the PC market declined by less than expected allowing chip sales in the data centre to boost revenues.
  • Q4 16 revenues / EPS were $16.4bn / $0.73 compared to consensus at $15.8bn / $0.75.
  • Lower profitability was largely driven by gross margins which have declines to 63.1% from 64.8% a year ago.
  • Intel is under assault on all fronts as chip makers who are willing to accept much lower gross margins are working on creating data centre processors as well having another go at running Windows.
  • Furthermore, almost everybody that is working on Artificial Intelligence is using NVIDIA processors to train their algorithms rather than Intel.
  • In the data centre I still think that Intel is safe as using other processors requires all legacy software to be rewritten but I see risk in both AI and PCs.
  • I think Intel has some time to address those threats but the time to step up is now.