5 Reasons Why the Nasdaq is Different 15 Years After the Bubble
“The markets are the same now as they were five to ten years ago because they keep changing, just like they did then” Ed Seykota
As the Nasdaq Composite looks to make new all-time highs, some market participants just aren’t having it, throwing around the old “I guess this time it’s different.” Now given the fact that the index experienced a nearly eighty percent crash the last time we were at these levels, it’s understandable why some people are so anchored to those previous highs. But the truth of the matter is things are different this time, as they are every time. Let’s examine…
The Economic Landscape
In March 2000, the 10-year treasury was yielding 6.2%, inflation was running at 3.8% and the unemployment rate was at the lowest level in thirty years. Today, the 10-year yields around 2%, inflation is virtually nonexistent at 0.6% and the unemployment rate still has not fully recovered from pre-recession levels.
Performance leading up to the peak
In the seven years from 1991 through 1997, the index appreciated by nearly four hundred percent. And after that spectacular seven year run, it doubled in 1998. And then it doubled again in 1999.
During the dot-com bubble, the Nasdaq 100 went from 1,100 to 4,400 in just nineteen months. This time around it took seventy-two months.
Size and valuation
At its peak the Nasdaq Composite was trading at 500x earnings versus 31x today.
Shifting gears to the Nasdaq 100, which has more than $50 billion in ETFs tracking it, we see the index is now much more tilted to large cap stocks. The total market cap of the Nasdaq 100 (in billions) was $2,218 in 2000 and $4,822 as of December 2014. Furthermore, the smallest company in the index today has a market cap of $7 billion and the average market cap is $48 billion. For comparison, the average size of an S&P 500 company is $38 billion.
The actual construction of the index
At its peak, technology stocks represented 70% of the index, today they are 55%. Healthcare now makes up 15% of the index, up from just 5% in 2000. Today the dividend yield on the index is 1.1% which is one thousand percent higher than it was just a decade ago.
The individual components of the index
Kraft, Staples, American Airlines, Bed Bath and Beyond, Whole Foods and Tractor Supply, to name a few. These are not very reminiscent of the revenue-less high fliers from the dot com days.
If you’re trying to scare people, the parallels are striking. If you’re objective, well, they’re not. When Sir John Templeton said the four most expensive wordshe was referring to fear and greed and the constant nature in which investors behave. If he were alive today, what he would most certainly not have done is throw up a fifty year arithmetic chart, draw a line and scoff “I guess this time it’s different."
I’m sure the naysayers were saying the same things back in 1954 when stocks finally made new highs after twenty five years of zero returns. Spoiler, it was different that time and stocks never looked back.
According to the weekly, this stock has yet to confirm a breakout. Given the gap up and underperformance relative to the SPY, buying after a break of the $550 range seems to be a safer bet than jumping in beneath resistance.
The daily chart suggests that a retest of $520 marks solid support, and also confirms the resistance at $550. A break of $550 would be even stronger if accompanied by an expansion in volume and relative strength compared to the SPY.
The 60 min chart also confirms support at $520, but given the strength of this market, $GOOG may not fall that far before climbing higher.
I interviewed Mark Cuban for my podcast (found on itunes or stitcher) but I’m embedding it here in this post.
Mark was very interesting, not only because he described things I never heard his say before before about his sale to Yahoo, what he was doing the second he made his first billion, how he values the Dallas Mavericks, but also his thoughts on how we should reduce our Digital Footprints and what he’s doing about it.
I first encountered Mark 17 years ago, before the Broadcast IPO, when we were working together on the first live streaming of a TV show: the People’s Court with Judge Ed Koch. Since then we’ve kept in touch through the years. I like to think I paid a small part in him making his first billion but I’m basically just kidding around when I say that.
I’m always amazed at the “outrage porn” he tends to get from every corner and we discuss that a bit.
If he had not sold Broadcast.com I always wonder if it would’ve gotten bigger than Google’s YouTube.
Google: next step distributing its mega free cash flow?
I admit my initial casual reading of the Google numbers after the close Thursday had me worried. If you regard the combination of paid clicks minus cost-per-click as some kind of indicator to the company’s inherent growth rate than Q1′s level of a net +6% (13% paid clicks growth minus cost-per-click deflation of 7%) contrasted spectacularly poorly with the previous three quarterly metrics of +19% (Q2 14), +15% (Q3 14) and +11% (Q4 14).
Easy to conclude Google is inherently slowing then?
Step forward the power of the conference call. In my view by far and away the most insightful comment from yesterday’s utterances by Google management representatives was this observation:
‘So many commentators are incorrectly assuming that the
growth trends in our sites, clicks, and CPCs (cost-per-click) are primarily due to difficulties
monetizing search on Mobile, but that’s in fact not the case…Excluding the impact of YouTube TrueView ads, growth in site
clicks would be lower, but still positive, and our CPCs would be healthy and
So it is all the fault of those ‘click to skip’ YouTube ads then?
The simple answer is ‘yes’…but it is a high quality problem to have. As the world gets more mobile and more visual YouTube becomes more central to our lives. Earlier this week it celebrated its tenth birthday. How much more do you think the world’s citizens will be using YouTube in another decade’s time?
The metrics announced yesterday agree as Google also noted that:
‘More and more, brands are seeing the value reaching
audiences on YouTube, with the number of TrueView advertisers growing by
45% in 2014′.
That is a very decent rate of growth.
Now if Google was getting crushed on its margins then its non-GAAP operating income would not have risen by 14% over the last year and - even more importantly - it would not have unveiled another record free cash flow generation level. If the ultimate requirement of a company is to generate free cash then Google is killing it at the moment - even whilst keeping capex up near record levels:
If the role of a company is to generate free cash flow then Google is happily running at a 4.5% free cash flow yield at the moment. The fabled land of a 5% free cash flow yield kicks in at around $500/share but frankly in my view it is going to take some generalised market weakness to get the shares back there now.
No, Google has a high quality problem: its bundle of net cash is growing and the introduction of a new CFO in a month’s time provides the opportunity for some new thinking.
In a year’s time Google is going to either be paying a dividend or buying back stock - or maybe both. And this is going to attract a whole new set of investors. It certainly has not been an evolution that has held back Apple’s stock over the last few quarters…
Google: omnipresent in most of our lives. Soon it may be joining the income generating world too. I remain a strong holder in anticipation of a share price in the deep $600s.
(all images via the Google corporate site and company presentation document)
Google Loon: The Most Underrated Project In The World
Google is building something remarkable. It’s called Google Loon and quite frankly not enough people are talking about it. Especially in the investment community.
Imagine hundreds, if not thousands, of giant balloons floating in the stratosphere above us transmitting WiFi to the entire world. That’s what Google Loon is.
The video above is a must-watch and it dives deep into the Google Loon project. You’ll quickly realize that if this is executed on, it will probably wreak havoc on Internet service providers everywhere. From Verizon to Orange to China Mobile. How will they defend themselves against balloons 65,000 feet above ground?
Google Blows Past Analysts' Expectations, Revenue Is Up 33%
Google reported just shy of $10 billion in revenue accrued last quarter, blowing past analysts’ expectations. The 13 year old company’s revenue is up 33 percent year-over-year.
Larry Page has brought a newfound focus to Google. In the last quarter alone, Google deadpooled over 20 products. This allowed Google to focus more heavily on its long-term strategy – to build a relationship with its users.
Google+ is part of Google’s long-term strategy. The business is still new, but it is growing very quickly. About 40 million users have signed up for an account, and the service has only been out of beta for a week. Another statistic, over 3.4 billion photos have been shared on Google+. So far, the service has shown exceptional growth. Google expects that this growth will carry into Q4 2011.
On the other hand, Google says they want to perfect Google Offers before they do a fullscale roll out. The service is offered in just 11 markets, which is much less than Groupon and Living Social. But Google likes the position they are in. Groupon has not been doing too well. In fact, Groupon’s current valuation is far less than what Google estimated when they were going to acquire Groupon last year. On the off chance that Groupon does implode, expect Google to pounce on the daily deals business.
Google ($GOOG) ended the trading day up 6.9 percent to close at $558.9. The stock carried that momentum into after-hours. At the time of this post, Google was up another 5 percent in after-hours trading.
It’s that time again. The Direxion iBillionaire Index ETF (IBLN), which follows the trading moves of billionaire investors, is doing its quarterly rebalancing. Eleven of the ETF’s 30 stock positions are getting the boot.
What’s in? Consumer discretionaries and tech, each of which will now make up 30% of IBLN’s portfolio.
Getting kicked to the curb are energy and financial stocks. After the rebalancing, energy will make up just 7% of the portfolio, and financials will not be represented at all.
While I would never recommend blindly following the moves of other investors, I’m a big fan of guru-following strategies and consider them a great starting point for further research.
The brains at iBillionaire have their own unique take on guru following. They start with narrowing their pool of gurus to the 10 billionaire investors whose public, S&P 500-listed stock positions have generated the highest returns over the past three years. They then build a portfolio of the 30 “highest conviction” S&P 500 stocks owned by these 10 billionaires and rebalance quarterly.
This makes IBLN a high-quality subset of the S&P 500. And, unlike most guru ETFs, which are often invested in small and mid-cap stocks, the S&P 500 is actually the appropriate benchmark. Year-to-date, IBLN is up about 2.7%, keeping pace with the S&P 500.
With no further ado, let’s take a look at five hot stocks the masters of the universe are buying.
Apple Inc (AAPL) has been an IBLN holding for a long time, due in no small part to Carl Icahn’s massive, high-conviction investment in the company. But now archrival Google Inc (GOOGL) joins the portfolio too, due mostly to a high-conviction buy by David Tepper.
Tepper runs a concentrated portfolio of 28 stocks at Appaloosa Management, of which Google is one of the largest. Tepper owns both the A shares (GOOGL), which have voting rights, and the C shares (GOOG), which do not. Between the two share classes, Google is Tepper’s second-largest holding. Only General Motors (GM) — which is also an IBLN holding — has a larger allocation.
I’ve never been the biggest fan of Google, as the company is notorious for burning shareholder money on quixotic projects that rarely pan out. I prefer Apple and Microsoft (MSFT), both of which have evolved into disciplined, shareholder-friendly companies over the past decade. But given his conviction, Mr. Tepper clearly sees value here.
Also joining the portfolio is Yahoo! Inc (YHOO), a company that has really struggled to compete in recent years with search rival Google. Value investors have long been attracted to Yahoo’s large cash position and its stake in Alibaba Group Holding Ltd (BABA). Yet the question remains open as to what Yahoo intends to do with its Alibaba windfall.
Yahoo makes the cut due to high-conviction buying by David Einhorn of Greenlight Capital. Einhorn made a major new purchase of Yahoo last quarter, and Yahoo now makes up about 1.4% of his portfolio.
Einhorn has 42 publicly-traded hot stocks in his portfolio, 56% of which is in the tech sector. Like Icahn, Einhorn also owns a lot of Apple, which makes up about 13% of his portfolio.
Time Warner Inc
Another recent Einhorn pick is Time Warner Inc (TWX). This pick surprises me, as I see paid TV as a sector ripe for upheaval. I expect Dish Network’s (DISH) introduction of Sling TV, an internet-based “Netflix-like” cable service, to be a major disruptor in the coming years, encouraging cord cutting and pushing down the prices paid to all content providers. Yet Einhorn clearly sees value here, as Time Warner has quickly become his sixth-largest portfolio holding.
And he’s not alone. Leon Cooperman and Steve Cohen were also busily buying shares last quarter.
I should point out that Time Warner Inc. is a media company, not a cable company — the cable company is Time Warner Cable (TWC). TWX owns, among other properties, HBO, Cinemax, CNN, TBS and TNT. And the successful introduction of HBO GO as a standalone paid service could very well be the catalyst that sends this stock higher. (Interestingly, TNT, TBS and CNN are all included in Dish’s basic Sling TV package.)
Whether all of this compensates for the slow decline in cable news and marginal, non-premium cable channels remains to be seen.
Mohawk Industries, Inc
Americans will put some of the money they’re saving on gas into improving their homes. At least that seems to be the rationale for flooring manufacturer Mohawk Industries’ (MHK) addition to the IBLN portfolio. Brazilian billionaire Jorge Lemann has been a high-conviction buyer of Mohawk.
You might not be familiar with Lemann, but you should be. He’s the wealthiest man in Brazil and is ranked by Forbesas the 34thrichest person on the planet. Bloomberg also called him “the World’s Most Interesting Billionaire,” in a tongue-in-cheek comparison to the “Most Interest Man in World” of Dos Equis beer commercial fame.
The title is deserved on two counts. Not only is Lemann a fascinating man of the world — a five-time national tennis champion who splits his time between Brazil and Switzerland — he’s also in the beer business. Lemann and his partners at 3G Capital dominate Anheuser-Busch Inbev SA’s (BUD) Board of Directors.
Ironically, Dos Equis is not a BUD product; it is owned by rival Heineken (HEINY)
Goodyear Tire & Rubber Co
And finally, we have one last consumer discretionary pick from David Tepper, Goodyear Tire & Rubber Co (GT). Goodyear joins General Motors as a play on falling gasoline prices leading to more spending and more driving by American consumers.
We’ll see if the American consumer comes through; I’m personally a little skeptical on that front. Still, Goodyear trades at a very reasonable 13.5 times earnings and 0.4 times sales.
Goodyear has seen better days; its per share revenues have been declining for years, even while its debt burden has continued to grow. Still, Tepper seems to see something in the company he likes. Tepper owns a 3.7% stake in the company that accounts for fully 7.2% of his assets under management.
Most new technology devices have expiration dates. Buy a laptop today and see it functions properly at the turn of decade. People upgrade their smartphones every two years for a reason. Whether it’s the graphics, speed, need of additional memory, ports etc. the rate of change is as fast as ever.
Apple ($AAPL) has actually taken advantage of this phenomenon in a major way. Unlike Google’s ($GOOGL) Android, where phone users are on so many different versions of the platform, when Apple upgrades its operating system, it’s only a short time before almost all of their users upgrade to the latest version.
Newer software and applications are the primary causes of hardware depreciation. If I had the same software and applications, I would be still be able to use the hardware casing my windows 3.1 PC. When an iPhone 4 tries running the latest version of iOS, with all its new features and processing needs, it’s no wonder the phone runs slower and needs to be recharged more often.
Enter the Apple Watch. I can see many people buying the Apple Watch Sport or the Apple Watch whose starting prices are $349 and $549 respectively. What I don’t get however, is why Apple thinks anybody would buy the Apple Watch Edition with a starting price of $10,000 (customizable up to $17,000). Most people that buy watches for that type of money expect the watch to maintain its value and in many cases increase as time goes by.
I don’t know how much Gold is inside Apple’s watch, or what its sapphire crystal can sell for, but there’s no doubt in my mind, that unless Apple is willing to offer free exchanges or somehow swap out and upgrade the hardware when the next version comes out, these watches will become unusable.
Think about the watch bull case - my friend @conorsen wrote this great piece last week - you’re talking about the watch becoming your keys, running your home applications, tracking your location, much more complex fitness applications etc. There is no way the current watch’s hardware will be able to run the apps and software of future versions. People are complaining about 18 hour battery life now, imagine trying to run apps and software that is.
I assume Apple knows this, and I’m pretty sure they are looking at the Watch Edition more as a novelty luxury item, but I think it’s a risky move. The upside is that they may create so few of them, that they’ll be worth tons of money like the vintage Apple 1 that sold for $905,000 last year. The risk however is that they’ll become virtually worthless.
People trust Apple’s brand - probably more than any brand in the world right now - the last thing they need is their best customers plunking down $10,000 dollars on an item which they’ll need to scrap for its gold in a few years.
The good news is that Main Street has now gained a toehold in the new national pastime, throwing money at software programmers as they seek to disrupt every industry under the sun and roll out essential new services we can’t imagine living without (It’s like Uber, but for twisting the cap back on your Poland Spring bottle for you). Retail investors can thank the mutual funds who have become the new financiers of Silicon Valley early- and late-stage funding rounds. The democratization of insane wealth creation has finally come to your IRA.
The even better news is that Fidelity, T. Rowe Price et al are getting mom and pop into these deals right at the ground floor – before they become the Facebooks and the Instagrams of tomorrow. And there are probably another twenty or thirty Facebooks just waiting in the wings for a little bit of walking-around capital.
Some pull quotes from a mind-blowing Bloomberg article that’s so chock-full of nuggets that it could pretty much serve as a digital time capsule for the current moment:
Hedge funds and mutual funds that once shunned venture-style deals are flocking to the market’s hottest corner, paying 15 to 18 times projected sales for the year ahead in recent private-funding rounds, according to three people with knowledge of the matter. That compares with 10 to 12 times five years ago for the priciest companies, one said.
Companies now valued at 16 times future revenue could easily lose a third of their value in a market pullback that Weber and others say may occur in the next three years. The other people asked not to be named because they didn’t want to be seen criticizing competitors’ deals.
LOL, throwing shade anonymously – sounds like someone got left out of the last jackpot deal! What else?
Mutual funds and hedge funds have elbowed into late rounds, both to boost returns and to ensure they can buy blocks of shares in IPOs as competition for tech offerings intensifies. Mutual-fund giants Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management Co….took part in at least 37 pre-IPO funding rounds totaling $5.55 billion from 2012 to 2014
Is that a lot of money?
“Mutual- and hedge-fund dollars coming is one of the main things driving these higher valuations and larger deal sizes…You didn’t used to see that before. The trend is accelerating.”
Investors of all stripes poured $59 billion into U.S. startups last year…Late-stage companies received two-thirds of it, with a record 62 firms raising money at valuations of $1 billion or more, almost three times as many as in 2013. About half the investors weren’t venture-capital firms.
Oh. Oh wow. Half of the investors in startups are amateur startup investors. Well, they’re not virgins anymore.
I have to admit, I’m a bit torn here. Part of me knows how this is going to end. The other part of me says: Well, it’s not the growth mutual funds’ faults that startups are going public much later. In another era, these would have been public market investments in early stage growth companies and their inclusions into these funds would have been perfectly normal.
And by the way, who could blame a company like Fidelity, which the article says led a financing round for Uber at a $17 billion valuation (yes, they led it). If a fund makes money from something like this, it counts as 100%, pure, unadulterated alpha! The Uber IPO, like the Alibaba IPO before it, won’t appear in any indexes. Pure alpha has become nearly impossible to come by in this day and age. Less than 15% of domestic stock funds managed to keep up with, let alone beat, their respective benchmarks last year – alpha like this is a glass of water in the desert.
So I get it, and I’m not hating. Opportunity is knocking and people with capital and ambition are answering the call. The mutual funds are simply joining in on a huge parade of folks headed West – this morning we found out that Morgan Stanley’s CFO is leaving to join Google. The news item was echoed widely among the growing cacophony of former business journalists who have become tech reporters out in the Valley in recent months.
This is quite a moment we’re having. It seems like a lot of fun, I hope it lasts forever.
OMG! Google Rigs Its Search Results…Cue The Feigned Shock and Disgust
Those who are familiar with Google’s history know that their self-proclaimed prime directive is, “Don’t be Evil.” But in the best Clintonian tradition, it turns out that their definition of “evil” is open to interpretation.
According to a newly discovered 160-page report, authored by the Federal Trade Commission in 2012, Google has been systematically gaming it’s search results to—now hold on to your hats—refer consumers to their own services to the detriment of their competitors.
Here’s the Wall Street Journal:
In a lengthy investigation, staffers in the FTC’s bureau of competition found evidence that Google boosted its own services for shopping, travel and local businesses by altering its ranking criteria and “scraping” content from other sites. It also deliberately demoted rivals.
The reaction among the public was swift. “I’m totally blown away by this type of deceit coming from Google,” said a blind man without a cane, currently living under a rock in a cave.
But to be fair, opinions were mixed, and some brave individuals dared to challenge the government’s claims, including Kent Walker, Google’s General Counsel, who said Thursday afternoon, probably in high-pitched, whiny voice;
“After an exhaustive 19-month review, covering nine million pages of documents and many hours of testimony, the FTC staff and all five FTC Commissioners agreed that there was no need to take action on how we rank and display search results. We regularly change our search algorithms and make over 500 changes a year to help our users get the information they want,” We created search for users, not websites—and that focus has driven our improvements over the last decade.”
God bless the lawyers!
Those of us who write for a living know that Google is particularly sensitive to the use of copied content, going so far as to penalize sites that plagiarize others and even warning bloggers—with an implied threat of adverse search rankings–against using too much quoted material. But apparently those rules don’t apply the ‘Big G” itself.
Again from the Journal:
To bolster its own listings, Google sometimes copied, or “scraped,” information from rival sites. According to the FTC report, Google copied Amazon’s rankings of how well products were selling, then used that information to rank its results for product searches. Amazon declined to comment.
The report also contained a staff recommendation that the FTC bring suit against Google for numerous anti-trust issues, potentially creating one of their highest profile cases since suing Microsoft in the 90’s.
Ultimately though, the FTC’s commissioners took the highly unusual action of contradicting their own staff’s recommendation and voted unanimously in 2013 to end the investigation against Google after the company agreed to voluntarily change some of its practices.
Experts say, the fact that Google was the second largest donor to President Obama’s re-election campaign and that its top executives are regular visitors to the White House, had no bearing on the FTC’s decision, though none of them could say it with a straight face.
I, for one, have always assumed that Google, despite its desire to convince us of its deep-seated corporate altruism, knowingly skews search results to their benefit. I just figured it was the price of admission.
The revelations in this report, which was only released in error due to a Freedom of Information Act request, will hopefully put to rest the naïve view that corporate policies fall on either side of the political landscape or public interest. As I have always said, corporations are neither good or bad, nor red or blue. The only color that matters to them is green.
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The Google Cloud Platform, now synonymous with Google Compute Engine, is the biggest deal in IT since Amazon launched EC2 and will completely alter the cloud market in at least two fundamental ways:
• We now have a utility market
• We now have true competition
The first will cause an explosion in adoption, especially by enterprise customers. You want to build a 99.99%+ availability system on top of something that has 99.9% availability? Well, you better have more than one, and now you do. Here comes the hockey stick!
What self-driving carmakers can learn from the smartphone wars
main lesson is to be proactive in managing patent risk. Several factors
may reduce the exposure the auto companies face but won’t eliminate it.
by David Marcus
The driverless car has gone from dream to near-reality. Google Inc. (GOOGL) has been testing such vehicles for the last few years. Elon Musk, CEO of Tesla Motors Inc., expects to produce one within the next decade. And the ambition isn’t limited to Silicon Valley. Mark Fields, CEO of Ford Motor Co. (F), hopes to re-imagine the Detroit carmaker as an information services company. The transformation involves the incorporation of existing semiconductor, mobile and other technologies into cars, which in turn will force companies to grapple with the legal challenges raised by the use of those technologies-ones covered by thousands of patents held by a broad array of entities.
The rise of smartphones posed a similar problem at the beginning of the decade, and its resolution was dramatic and expensive. Apple Inc. (AAPL) led a group of tech companies that paid $4.5 billion Nortel Networks Inc. for 6,000 patents in 2011, and a few months later Google responded by agreeing to buy Motorola Mobility Inc. for $13 billion. Apple, Google, and other large industry players complained loudly about the actions of Intellectual Ventures and other non-practicing entities or trolls, which buy patents not to support an operating business but to assert the intellectual property against “real companies.” That effort led to the passage of the American Invents Act in 2011 and to the development of patent case law in ways that have modestly reduced the scope of patents and the ability of patent owners to use them to extract value from infringers.
Perhaps the most important lesson of the smartphone wars for companies that hope to be a part of the switch to driverless cars is the need to be proactive in managing patent risk. Earlier this year, Ford took licenses from both Intellectual Ventures and RPX Corp., which buys patents and licenses them to more than 200 companies. Ford was the first carmaker to take that step, but it won’t be the last. Rivals such as General Motors Corp. will follow suit, as will automotive component manufacturers. That represents a new revenue stream for both IV, which has suffered a difficult last several years, and for RPX, which in contrast has become stronger and thus more able to buy patents as they come onto the market. Many car companies have strong patent portfolios related to their core technologies, but they don’t have patents on the wireless technology that is already being integrated into cars and will need to buy access to it just as Google and Apple did in 2011.
But three factors may help reduce the intensity of patent battles in the development of driverless cars. First is the need for technological standards that govern patents related to navigation and vehicle safety. Such standard-essential patents must be licensed on fair, reasonable and non-discriminatory terms (FRAND). That’s true for many patent-intensive products, including smartphones, but the political pressure to make driverless vehicles as safe as possible will be intense, which could lead to more aggressive definitions by standard-setting bodies of what constitutes a standard-essential patents. Car companies will also play the safety card in litigation brought against them by non-practicing entities, which could help to drive down the settlement value of such cases.
Second, open-source technology may be more appealing for the car industry than it was for smartphone companies and, before them, semiconductor companies. Tesla has tried to promote an open-source approach by promising to allow other companies to use its patents in good faith. In January, Toyota Motor Corp. took the same stem with its hydrogen fuel cell patents. In 2011, AutoHarvest Foundation was formed as a non-profit intellectual property exchange for the automotive industry. Patent litigation between operating companies is brutally expensive, and at least among chip and smartphone companies it has led to cross-licensing. Car companies have generally had far lower profit margins than many tech companies and may well want to avoid prolonged patent litigation if at all possible; indeed, according to one survey, the eight largest car manufacturers in the U.S. brought a total of seven patent lawsuits between 2010 and 2014. Open-source technology and industry cooperation are two ways to minimize intra-industry patent litigation.
Finally, the patent reexamination procedures that were part of the America Invents Act have allowed companies to more easily challenge patents asserted against them in litigation in so-called inter partes reviews, or IPRs. Ford and Toyota have been particularly aggressive about resorting to IPRs, which allow the defendant company to raise the cost of litigation and therefore lower the return on nuisance litigation brought by holders of dubious patents.
Those three factors may reduce the patent exposure that car companies face but won’t eliminate it, as Ford’s decision to buy licenses from IV and RPX shows. And just as the automotive industry has learned from the smartphone experience with patents, other sectors will look to car companies in navigating the legal challenges posed by becoming part of the internet of things.
As a fundamental investor, I believe asset prices fluctuate based primarily on two factors. The fundamentals - revenues, earnings, cash flows etc. and the multiple investors are wiling to pay for those fundamentals.
In 2013, the operating earnings of the S&P 500 rose by 10.8%, easily explaining part of the S&P’s strong year. The actual index rose 29.6% however, which can only be explained by “multiple expansion” - where on December 31st of 2013 investors were willing to pay 2.5 turns more per dollar of earnings than at the start of the year.
Understanding these two drivers of asset prices is critical to every investment. Fundamentals are typically more steady, stable, and easier to model. Unfortunately, shorter term swings have much more to do with sentiment and are way harder to predict.
Ideally, stocks should be purchased and sold when both the fundamentals and market sentiment are at a turning point. Not only will the investor benefit (if going long) from growth in revenues and earnings, but also by the amount other investors are willing to pay for those set of fundamentals. Vice versa if going short or selling.
Apple Inc. ($AAPL) at $400 (or in the high $50’s post split) last year was a perfect example. As you can see from the following chart, Apple’s TTM (trailing twelve months) earnings started drifting lower in January of 2013 and bottomed a little after the stock hit its lows in the 3rd quarter of the year.
While Apple’s earnings did bounce around 14% since the lows on a TTM basis, on its own that does not justify a double in its stock price (or a little less than a double after its recent pullback). Most of Apple’s gains must be attributed to the willingness of investors to pay more for the given level of earnings. This is perfectly depicted by this next chart.
As you can see, since the beginning of 2012 there has been almost a perfect correlation of Apple’s stock price and its P/E ratio. At the 2013 lows, investors were only willing to pay around 9.5 times for each dollar of Apple’s earnings (less than 7 times if you exclude their cash). Fast forward to a few weeks ago, the same market place was clearing a price which equated to more than 18 times for the same company’s earnings.
This brings me to Google Inc. ($GOOGL $GOOG). I don’t know if we are at - or even close - to a turning point like Apple was, but it’s definitely getting interesting.
As the third heaviest weight in the PowerShares QQQ index ($QQQ), Google is the only one of the top six companies in the index that is negative so far this year. The other five companies - Apple, Microsoft Corp ($MSFT), Intel Corp ($INTC), Facebook Inc ($FB), and Gilead Sciences Inc ($GILD) - are up an average of 37% so far year-to-date. Thirty seven percent! Google on the other hand is down 8%.
As my friend Conor Sen tweeted yesterday, in Google’s 10 year history it has made only fifteen 52-week lows. Thirteen of them were in 2008, the other two were Monday and Tuesday this week. I think it’s safe to say that sentiment has rarely been so negative.
Fundamentally, while earnings expectations have been coming down, Google is still expected to grow over 18% this year followed by 17% in 2015. Their forward P/E ratio is a tad over 16 and that’s excluding the $60 billion of cash they have on their balance sheet.
I have yet to do much work on Google, and from what I’ve read, even after lots of work, there’s much about them that isn’t disclosed therefore making it hard to fully comprehend.
Having said that, the fundamentals seem to be there, their business model and moat that they have built is to die for, if sentiment were to turn, we might very well have another “Apple at $400” on our hands.