Merry Christmas! With more updates

Credits: www.care2.com

A few updates in the run-up to Christmas:

  • Dividends & buybacks
    • Following issues with its latest Galaxy Note, Samsung decided to support its share price by boosting its dividends to 50% of its free cash flow. Samsung is also facing pressure from activist fund Elliott.
  • Unicorns & valuations
    • Stripe joined the unicorn club last month after being valued at $9bn despite raising less than 2% of this amount.
    • Unicorns in need to add liquidity to their shares but not meeting (yet) public market requirements have increasingly relied on secondary markets to trade shares, despite the lack of transparency associated with these semi-private markets. $1.2bn worth of transactions are expected to take place in 2016 at a time where tech company IPOs are expected to reach their lowest level since 2009 and investors are becoming increasingly cautious about overvalued sectors, including on-demand delivery.
    • Uber reported a $800m third-quarter loss although it states it is now cash-flow positive in some mature markets. Consolidated profitability seems far away still.
    • The mayor of Barcelona fined Uber and HomeAway €600k each last month for not complying with local licensing requirements. In France, Airbnb committed to send tax data to French authorities automatically rather than leaving it up to individuals to declare as it used to be the case. Registration will be made compulsory for landlords willing to let their property more than 120 days a year.
  • Cybersecurity
    • Yahoo revealed that 1bn users were stolen personal data in 2013 in an attack dwarfing the one reported in 2014. Compromised datasets may include names, email addresses, telephone numbers, birth dates as well as poorly encrypted passwords. This security issue may thus create vulnerabilities for other websites, as users tend to recycle the same password for multiple websites, according to Lisa Pollack from the Financial Times.
    • Hackers targeted the SWIFT messaging network with the help of Bangladesh central bank officials, highlighting the vulnerability of IT systems to insider fraud.
    • A couple of weeks ago France unveiled its cybersecurity policy. The country aims to build defensive capabilities as well as an offensive arsenal, which could include traditional weapons.
    • Several hedge funds investors warned big data sellers that they were failing to properly hide personal information. Cross-referencing information enables recipients to waive the anonymity of the data.
  • Active & passive investing, bonds & equity
    • The passive investing frenzy seized bond markets, which now ‘host’ more than $600bn of fixed income ETFs, threatening the stability of the financial system, according to experts. The bubble around fixed income is expected to weaken in the coming months given the Fed’s willingness to raise interest rates three times next year – subprime borrowers have already started to feel the heat.
  • Blackberry, LinkedIn, Twitter, Apple
    • Blackberry raised its full-year profit outlook as its software & services business generated more than 50% of its sales over the last quarter. Management expects to bring the company back to profitability on an adjusted basis in the full year.
    • Russian authorities blocked access to LinkedIn for its 6 million users in the country as Russian legislation requires personal data of Russian citizens to be stored on Russian territory.
    • LinkedIn added a robot tool to its chat interface in order to trigger more numerous conversations between individuals and ultimately gathering more data on its users.
    • For its part Twitter suffered another executive departure as its chief technology officer Adam Messinger resigned after 3 years in the job.
    • Apple is the latest investor to express interest in Softbank’s $100bn planned tech fund.

I unfortunately doubt that I will have the time to publish another post before the end of the week, so I wish all readers a Merry Christmas and I look forward to publishing again in the New Year at the latest.

More updates…

We start the week with the latest news that have been shaking up some of the topics we have already covered in this blog.

News brought to you courtesy of Warren. Credits: Daily Mail.
News brought to you courtesy of Warren. Credits: Daily Mail.
  • Apple struggles to maintain its market share in China according to the company’s latest filings released last month. Although Apple’s revenues in the country are up 50% compared with 2014, local rivals such as Huawei, Vivo and Oppo have been offering cheaper although similarly powerful devices. The firm is supposedly eyeing towards India as its next revenue growth driver. In the meantime it launched its latest ‘product’, a retrospective book entitled ‘Designed by Apple in California’, and priced the Apple way: $199 to $299 depending on the edition.
  • Twitter has announced it would cut 9% of its workforce in order to keep costs down. This comes at a bad time for the firm which have been increasingly criticised for allowing cyberbullying, racism and misogyny to flourish on its platform and now has to find a new COO after the departure of Adam Bain. Twitter responded by suspending several accounts belonging to right-wing extremist groups, although it has for the moment ruled out ‘instant message moderation’. The idea that “good speech naturally wins out” is a fallacy, argues heather Brooks in the Financial Times.
  • The election of Donald Trump in the US caused a mini-stock market shock to tech values. Mr. Trump is indeed believed to ease the tax policy surrounding corporate earnings made overseas – currently those earnings are taxed at 35% and the rate could go down to as low as 10%. This explains why Microsoft, Apple and Google have been keeping billions of dollars offshore. This news could have been welcomed but are investors actually fearing what executives are going to do with this ‘idle’ money?
  • Notwithstanding this rumour Facebook announced earlier this week a $6bn share buyback aimed at curbing the negative share price impact of an expected growth slowdown expressed during its latest quarterly result presentation. This decision represents an archetype of buyback for ‘wrong’ reasons, as flagged in my post a few months ago. Facebook is not buying shares because it believes they are cheap but because it needs to satisfy its existing shareholders – a typical value-destroying move.
  • Microsoft’s acquisition of LinkedIn could trigger a wave of antitrust challenges, according to Marc Benioff, Salesforce’s CEO. LinkedIn’s data could indeed provide Microsoft with a unique competitive advantage especially in the field of CRM – hence Mr. Benioff’s ire. As a response Microsoft proposed to give rivals access to its software and offer hardware makers the option of installing other services.
  • SoftBank is entering the ‘tech unicorn’ investor market the big way, through the launch of a $100bn fund anchored by Saudi Arabia. The implied equity cheque size (up to $5bn according to its CEO) could provide a private exit door for a handful of existing unicorns reluctant to go through the ‘IPO gateway’.
  • Sigfox, the French ‘Internet of Things’ specialist, could soon join the unicorn club, being valued at €600m according to its latest fundraising round. The operation was relatively unique in the sense that it gathered public entities, private companies and VC funds around the same (investor) table.
  • Fitbit could conversely become the next ‘unicorpse’. The company’s share price has declined by 80% over the last 18 months as tech behemoths have been progressively entering the field of connected objects. On its side, Fitbit tried to put the blame on one of its suppliers to explain its recent supply chain disruptions – whereas analysts attribute this phenomenon to incorrect demand forecast.
  • Karhoo has already reached this status, filing for bankruptcy after just 6 months of activity. The start-up, which raised $250m and was employing 120 people despite only generating $1m of revenues in London. A very aggressive promotional policy, consisting of ‘thousands of pounds of vouchers’, alongside a “ludicrous lack of corporate governance”, led the company to ruin in a highly contested market.
  • Nutmeg managed to raise £30m from international investors despite posting pre-tax losses of £9m this year.
  • Snapshat could be the big IPO of 2017, hoping to raise additional equity at an implied valuation of $20bn to $25bn – although the exact amount still needs to be determined. The two founders will keep the control in any case through the use of preferred shares.
  • Uber faces legal challenges in the UK, where a court ruled that Uber drivers were not independent but actually salaried workers. In France the fact that some Uber drivers could under some circumstances be promised a minimum wage is also a cause for dispute.
  • The Airbnb business model is being challenged in an increasing number of cities. After New York and San Francisco, Berlin and London have joined the fight to prevent the firm from putting pressure on dwelling supply and subsequently pushing rents up in the most touristic areas. After relentlessly fighting all forms of regulatory resistance, the firm has changed its approach and is now intending to strike as many tax deals as possible with the cities it operates in – bringing the figure up from 200 to 700 and covering 90%+ of its revenues.

That is it for this week in terms of updates! Next post (hopefully later this week) will introduce the cybersecurity topic.

3 follow-up points from earlier articles

I have been covering an increasingly broad range of topics on this blog, some of which have been recently making the news:

  1. Credits: www.forbes.com
    Credits: www.forbes.com

    A loss-making Twitter has been wooed by a handful of high-tech companies including Google and Salesforce. The Financial Times debates the rationale for such an acquisition: unlike LinkedIn, which was recently acquired by Microsoft, the information published on the social network is fully public – and the ‘voice from the public’ is the only asset that Salesforce could leverage. Google, conversely, can use Twitter as an advertising vehicle – which makes the FT believe that Facebook could also represent a credible bidder. Twitter and Deutsche Bank both suffer from a wrong stance towards diversification (excessive in the case of Deutsche, too limited in the case of Twitter), argues John Gapper from the Financial Times – a view I personally subscribe to.

  2. Large supermarkets have been squeezed between decreasing traffic and food prices and increasing rents. This ‘scissor’ phenomenon has led food retailers to try to diversify their revenue streams; Sainsburry’s has for instance added Argos in-store concessions in some of its largest formats.
  3. Instead of perceiving start-ups as overvalued threats to incumbent tech titans, could we imagine a win-win partnership? This is the question asked by Ludovic Ulrich in TechCrunch. A successful relationship with an established brand name gives credibility to the start-up (and its valuation) and grants immediate access to a much wider audience, while helping the big corporate handle the rapid pace of change. This comes at a time when the IPO window is narrowing, although Takeaway.com managed to list itself last week without any reported quarterly profit yet.

‘Proper’ posts back later this week (hopefully).

Press review – A few updates

Recent economic news have provided further substance to some of the topics we covered earlier this year. Selected examples include:

  • Apple revealed earlier this week declining yoy iPhone sales. The decline was however in the higher end of analysts’ expectations and resulted in a share price appreciation. Furthermore the company unveiled a strong increase in R&D spending (now reaching 6% of turnover), highlighting the hunt for the ‘next big thing’ to alleviate the still heavy reliance on iPhone which represents 2/3 of revenues.
  • Twitter’s results, on the other hand, disappointed investors which let the share price drop by 11% after the announcement. User base seems to have reached a plateau and the company has not found a way to profitability yet.
  • ‘Active’ investing is still haemorrhaging money while investors favour low-cost passive strategies.

Twitter or swansong?

Twitter released last week its results for the financial year 2015. The event offered mixed news, the significant increase in revenues (from $1.4bn in FY14 to $2.2bn in FY2015) being offset by the stagnation of the monthly active user base to 320m over the last 2 quarters of the year.

By judging at the share price evolution over the next trading day, stock markets were clearly not expecting such an outcome. Share price dropped by as much as 14% before recovering and closing the day with a limited loss of 1.9% – although no new data had been released in the meantime.

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Black or white swan?

This behaviour illustrates the difficulty analysts and investors have to value many of the ‘2.0’ companies. LinkedIn learnt it the hard way, giving up half of its market capitalisation in one day after announcing its 2015 results a couple of weeks ago. Other companies such as Google, Facebook or Amazon also had their own fights against the stock market but now offer relative steadiness in an industry known for dramatic and disruptive change.

SP evolution
Indexed share price evolution of Twitter, LinkedIn, Facebook and Google compared with the S&P500 (index 100 as of January 2014). Source: CapitalIQ.

Twitter is even more of a ‘tough beast’ since, contrary to the three other companies listed above, it keeps bleeding cash. Lots of cash. As much as $580m in 2015. The situation is not hopeless though. In one hand, the company’s operating cash flow (i.e. the cash generated by ‘day-to-day’ activities) increased significantly, from $82m in 2014 to $383m in 2015. On the other hand, over the last couple of years, the company spent an average of $1bn per year in investing activities. Investors are now trying to assess whether Twitter’s survival goes through colossal investment needs and, if so, whether Twitter will be able to generate sufficient operating cash flows to offset these costs.

Part of the answer lies in the purpose and the business model of Twitter. Both of which are not very clear and distinctive. We use Facebook primarily to interact with friends, LinkedIn is our professional ‘shop window’, Google provides services making our life easier (including email). Conversely, the ‘raison d’etre’ of Twitter’s 140-sign messages is far from obvious – and the way to monetise them is even less so. By judging at the relative variance in analysts’ target share prices, this questioning seems widely shared.

Rebased distribution of analysts' target share prices as of 16/02 for Twitter, LinkedIn, Facebook and Google (100 = share price as of 15/02). Source: Author research.
Rebased distribution of analysts’ target share prices as of 16/02 for Twitter, LinkedIn, Facebook and Google (100 = share price as of 15/02).
Source: Author research.

Last but not least, the Twitter case also embodies the shortcomings of EBITDA as a meaningful financial aggregate. Despite the Enterprise Value / EBITDA ratio being widely used by investors, the EBITDA aggregate is in this case meaningless and even more when it is ‘adjusted’ as per Twitter accounts. Losing $580m of cash is indeed not incompatible with the fact of reporting a highly positive adjusted EBITDA – $558m to be precise. The main reason is that the large investments Twitter agrees to today are by definition capitalised and amortised and therefore accounted for in the ‘Depreciation & Amortisation’ line of the P&L (that is to say, below EBITDA). As written earlier, disregarding these investment needs when valuing the company would be careless.