Financial services will dramatically evolve over the next ten years as millennials age and use more banking services compared to the last fifty, enabled by advancements in technology. No doubt traditional banks remain entrenched and there’s a plethora of regulatory hurtles standing in the way of this industry and new entrants. Numerous startups, however, have created more efficient, cost effective, and tech savvy versions of the verticals currently on offer. We tracked the “smart money” – Google Ventures, Andreessen Horowitz, Accel Partners, Index Ventures, Sequoia Capital and Kleiner Perkins Caufield & Byers, for example – and identified seven key themessurrounding their investments in Fintech with some examples of each, included below. (All data was derived from CrunchBase).
Money Transfer: Two dominant players include TransferWise and WorldRemit. The former – founded in London during 2010 – is “a peer-to-peer money transfer service allowing foreign students and businesses to transact money globally”. This firm has raised $90.4 million in 5 rounds thus far, most recently in a $58 million in Series C funding round in January 2015. Investors include Andreessen Horowitz, Richard Branson, Index Ventures, and IA Ventures, etc. Likewise, WorldRemit, headquartered in London and founded in 2010, is an “online money transfer business enabling migrants and expats to send money using a variety of payment options”. This startup received $147.7 million in seven rounds from three investors: Accel Partners, Technology Crossover Ventures, and Project A Ventures. It most recently garnered $100 million in Series B funding in February of this year.
Mobile Payments: Stripe is the success story in this space: “a set of unified APIs and tools that instantly enable businesses to accept and manage online payments.” The company has two acquisitions under its belt and partnerships with Apple Pay, Alibaba, Facebook, and Twitter. It has raised $190 million in 7 rounds – the latest taken place last month – from 18 investors including American Express, Kleiner Perkins Caufield & Byers, Sequoia Capital, Founders Fund, and Visa. Boku (founded in 2009) is another heavy hitter in mobile online payments and based in San Francisco. This startup has completed 4 acquisitions and earned $73 million in 5 rounds from 10 investors: New Enterprise Associates, Andreessen Horowitz, Benchmark, Index Ventures, for example.
Lastly, another opportunity in this arena presents itself across the Atlantic: Azimo is a “payment processing company providing internet and mobile based inter-country consumer money transfer services”. Headquartered in London and founded in 2012, the company most recently secured $20 million in Series B funding this past June, contributing to a total of $21.6 million from 4 rounds and eleven investors: Greycroft Partners, Frog Capital, Anthemis Group, and TA Ventures, for example.
Peer to Peer Lending: Public market investors know Lending Club and OnDeck, both of which IPO’ed in December 2014. But there are other opportunities in the pipeline attracting big VC players. For example, Index Ventures, Accel Partners, DST Global and BlackRock among others have invested an aggregate $273.2 million in Funding Circle (founded in 2009, London): “an online marketplace allowing individuals to lend money directly to small and medium-sized businesses in the UK”. Earnest (2013, San Francisco), “a merit based lender” received $32 million in two rounds – most recently $17 million in Series A funding in January 2015 – from Maveron, Andreessen Horowitz, and Atlas Venture, etc.
Lastly, Prosper (2006, San Francisco) – another peer to peer lending marketplace already acquired a company and received a whopping $354.9 million in 12 rounds from 26 investors.These investors include venture capital funds like Accel Partners, Benchmark, Dag Ventures, Sequoia Capital and financial services companies, such as BlackRock, Credit Suisse, BBVA Ventures, Neuberger Berman Group, SunTrust Bank, and USAA. This startup’s most recent funding round occurred in April of this year.
Personal Finance: Startups under this category range from helping people save money to accessing credit scores more cheaply. Expensify, founded in 2008 based in San Francisco, offers “an online expense management service for customers worldwide”. VC funds, including Redpoint Ventures, SV Angel, and OpenView Venture Partners have invested $27.2 million thus far, including $17 million in July 2015. Credit Karma (founded in 2007, San Francisco) provides “free access to credit reports and scores, personalized financial recommendations and educational resources”. This firm just raised $175 million in Series D funding in June, adding to its grand total of $368 million in 6 rounds from 12 investors: Tiger Global Management, Google Capital, Ribbit Capital, and 500 Startups, for example.
Cryptocurrency: There are a slew of fintech startups involved in cryptocurrency, or bitcoin in particular, but we’ll just highlight a couple. Payment processor for Bitcoin, BitPay (founded in 2011, Atlanta) raised $32.5 million in 3 rounds and 16 investors thus far, including Index Ventures, Founders Fund, and Richard Branson. Another example, Coinbase (2012, San Francisco), enables “any consumer to create a Bitcoin wallet and start buying/selling Bitcoin instantly by connecting their bank account”. This startup has completed two acquisitions and raised $106.7 million in total from 4 rounds and 21 investors; it received $75 million during its most recent round in January 2015. Investors include Andreessen Horowitz, BBVA Ventures, Ribbit Capital, and Y Combinator.
Trading & Robo Advisers: The advent of automated financial advisers is nothing new, but still serves as a notable example of startups encroaching on an industry by scooping up business at the low-end – straight out of Harvard Professor Clayton Christensen’s “Innovator’s Dilemma”. Wealthfront, for example, received $129.5 million in 5 rounds from 33 investors since it was founded in 2011 (headquartered in Palo Alto). Some investors include Index Ventures, DAG Ventures, Spark Capital, and Greylock Partners. Another interesting take on disrupting this space is the startup Robinhood: “a commission-free, mobile-first stock brokerage.” This online brokerage recently raised $50 million in Series B funding in May 2015, adding to a total of $66 million from 3 rounds and 20 investors since it was founded in 2013 (Palo Alto). Investors span from VC funds like New Enterprise Associates, Google Ventures, Andreessen Horowitz, and Index Ventures to celebrities, such as Snoop Dogg, Jared Leto, and Nasir Jones.
Student Loans: Huge amounts of money are flowing into startups addressing arguably the largest headwind for millennials: student loans. Sofi (founded in April 2011, San Francisco) has already originated +$2 billion in loans that “help early-stage professionals get ahead including student loan refinancing, low down-payment mortgages, mortgage refinancing, and personal loans.” This firm amassed $766.2 million in 10 rounds from 17 investors, including $200 million in Series D funding this past January. Investors include: Third Point Ventures, Institutional Venture Funds, Discovery Capital, Peter Thiel, and Baseline Ventures. A similar startup, Upstart (2012, Palo Alto), just took in $35 million in Series C Funding last month, adding to a total of $53.2 million from investors including Third Point Ventures, Google Ventures, Kleiner Perkins Caufield & Byers, Mark Cuban, and New Enterprise Associates.
So how are banks responding? Some are partnering or investing in their own fintech startups. For example, Goldman Sachs and JP Morgan are working with online broker Motif Investing. Others, including Barclays, UBS, Citi, Santander, Wells Fargo, Deutsche Bank, and BBVA Compass either support or have launched their own “accelerator programs”, or innovation labs in tech hubs around the world to improve their technological capabilities. How can fintech startups and banks really get along? One such synergy is the partnership between OnDeck and BBVA Compass, in which the subsidiary of Banco Bilbao Vizcaya Argentaria earns a referral fee by sending small-business customers who don’t fit their loan requirements to the online lender.
JPMorgan Chase CEO Jamie Dimon understands the crossroads that banks face. He addressed the challenge of competing with startups in areas, such as lending and payments, given their efficiency in his latest annual letter to shareholders. His takeaway: partner where it makes sense and learn from competitors to develop their own strategies. Either way, in Mr. Dimon’s own words to Wall Street: “Silicon Valley is coming”.
Here is the real reason why investors should love Google’s latest move. Watch.
Google is getting a new name. I’s called Alphabet and Google will be one of Alphabet’s many subsidiaries.
Why did Google do this?
So they can ditch assets that never worked and rev up ones that are working.
Investors love transparency. Did you know Google has a business called Calico that is trying to make your life longer? Probably not.
With the new structure, the fate of Google’s “side hustles” (now Alphabet’s side hustles) like Calico won’t be buried in the depths of Google’s ad revenue business, and investors love this.
In other words, Alphabet will be the new parent and will have several subsidiaries below it, including Google, so investors can clearly see which business lines are working, or not working.
Google will start hemorrhaging business lines (sell them or bury them) once it’s clear(er) to investors which ones “aren’t” working, and that’s good for you if you’re a Google investor. Who wants dead weight. eBay is doing that as we speak. Watch.
Tales About The Demise of The Stock Market Are Greatly Exaggerated
After a week like last week, I immediately reviewed all of my core beliefs to see if there were any changes to alter my investment outlook.
I heard all the pundits warning after the fact about China, the Fed, the Emerging Markets and oil with negative implications for stock prices while positive for bond yields. The stock market felt like it was in the capitalization phase as investors sold across the board without any differentiation between industries and companies. For example, energy companies were sold with poor fundamentals as well as drug stocks, consumer staples and utilities stocks with stable earnings and high/safe dividends. Remember, interest rates were falling as the strength of the global economy was in doubt so these stocks should have rallied. I was fortunate to have been short the Japanese and German stock indices as I mentioned previously due to the devaluation of the yuan; some ridiculously over valued stocks whose multiples I can not compute; and the the energy complex as I remain bearish on the price of oil.
I also reduced my exposure to financials and long dollars midweek after it became apparent that the Fed was on hold. Therefore I expected the yield curve would flatten and the euro and yen would rally. My funds declined less than half the indexes last week. But I hate losing any money, ever. My goal as a hedge fund manager is to outperform down markets and perform equal or better in up markets therefore significantly outperforming over market cycles. As you’ve heard me say before, I have done this successfully for over three decades and counting.
After my review, I maintain a positive view primarily toward the U.S. equity markets in general and certain stocks specifically that were unfairly hit in last week’s broad market decline.
Let’s take a look at each region to see what data is emerging and then check that evidence against our core beliefs.
1. Concerns about China clearly are the number one issue facing investors worldwide. The general consensus is that the Chinese economy is in worse shape today than generally thought, which, the view goes, is the reason for the recent devaluation to stimulate exports and to stem capital outflows. As I mentioned last week, the Chinese political and monetary authorities are acting in the same manner as our Fed, BOJ and ECB did by increasing the money supply, devaluing their currencies to stimulate exports and lowering interest rates. Give China a break and anticipate positive change from these moves as we did elsewhere.
It was just announced that the People’s Bank of China would significantly add to the country’s banking system with new liquidity to boost lending by cutting the deposits banks are required to hold in reserves and lowering interest rates. Clearly, a plus longer term.
An interesting stat is that the Chinese yuan has appreciated 56% against its trading partners and 33%, inflation adjusted, against the dollar since 2005. Both the IMF and I applaud the move to a more flexible currency to reflect market conditions than be fixed.
Clearly it will take time for all the measures introduced by the Chinese government to take hold. China continues to transition to more domestic growth from an emphasis on exports. The government takes a long-term view of things recognizing that change does not happen overnight. So do we.
2. The Fed minutes came out from the July 28-29th meeting and showed the Fed concerned by continuing low inflation and problems overseas, specifically China. It added that low commodity prices, due in large part to a slowdown in China, would keep downward pressure on inflation going forward. The minutes stated, “many officials continue to see downside risks arising from economic and financial developments abroad though the risks to the domestic outlook were nearly balanced.” Bottom line is that fears of a September rate increase evaporated. I found it interesting that the Fed staff members lowered their forecasts for economic growth and inflation for the remainder of the year and 2016.
The U.S economy is doing just fine: housing starts climbed to a six year high; builder confidence is at a 10 year high and consumer prices rose 0.1% from the prior month and up 1.8% year over year excluding food and energy. What deflation?! By the way, exports to China are less than 1% of GNP.
3. Growth in the ECB was moderate in the second quarter at around 0.3%. However the August PMI rose to 54.1 from 53.9 in the prior month indicating continued economic expansion albeit slow. Forecasts for the year were slightly reduced to 1.4% from a previous estimate of 1.5%. The yuan devaluation and the recovery in the Euro last week hit the European bourses hard and bond rallied to multi-month highs.
Greek Prime Minister Tsipras called for an early election in September in an attempt to strengthen his position and weaken the dissenters. The Greek deal is done but can the country live up to the terms remains my question.
4. Emerging market concerns was the real culprit in my opinion for the weak financial markets last week. Fears of competitive devaluations swept through the markets after Kazakhstan’s currency fell 22% in one day after being devalued. Who would be next? Add to that the added tension between North and South Korea and it is easy to understand a flight to safety. But not all countries or risks are alike. Risks exist in Brazil, Turkey Venezuela and Russia for sure. Could there be contagion? If so, I don’t think the impact would really hurt the Unites States and Europe much at all. Watch emerging market debt for signs of added stress in the system.
5. Oil prices broke beneath $40 per barrel on Friday only to settle slightly above that level. Let me repeat that this is a supply problem as demand is increasing. In addition weak economic data out of China has pressured prices, as China is the second largest consumer of oil in the world. As prices break beneath cash costs, some producers have to sustain production to generate cash to service its debts, which only increases the problem. We need more bankruptcies to occur and production to be shut down to bring supply and demand into balance.
Let me repeat that lower energy prices are a huge positive for the global economies as it reduces inflation and raises disposable personal income. If lower energy prices was caused by a drop in demand that is one thing but if it caused by an increase in supply that is something else. Demand is growing and so are the global economies, albeit slowly.
Now that we have looked at the major issues bothering the markets last week, let’s look at our core beliefs to see if we need to adjust.
1. Monetary policy remains easy virtually everywhere and the supply of funds exceed the demand for funds, which is favorable for financial assets. Now that China is easing further and the Fed is on hold, this belief is even further substantiated.
2. The dollar will remain the currency of choice, which may impede growth but will lower inflationary expectations. I expect a brief counter-trend rally in the euro and yen as the U.S yield curve flattens out. But longer term the dollar will remain strong, which is a huge positive. Think of the Swiss Franc.
3. The yield curve steepening has been postponed by further economic weakness overseas, lower than expected inflationary pressures, and a weakness in demand for funds. A steepening yield curve is good for financials so a change in view necessitated a reduction in financials in the portfolio. Yields will remain surprising low, which will help boost stock market multiples. The risk premium for stocks will benefit from reduced financial risk and a reduced demand for funds due to a conservative bias.
4. A new conservatism permeates governments, corporations and individuals. I believe it is thereason that economic growth has failed to recover as fast as many economists thought. Consumers have saved most of the energy savings and corporations are limiting capital spending to depreciation.
5. Profits will surprise on the upside, which occurred in the second quarter. Overall U.S corporate profits are still growing but are being held down by poor energy and commodity profits and a strong dollar. Corporations continue to generate free cash and are reducing debt, increasing their dividends and buying in stock. Buffett approves!
6. M&A activity will remain strong. No doubt as buyers and sellers are both winners! New high reached in M&A this year. More to come.
7. A Greek default will be contained. A new deal was reached kicking the can down the road for another year or two.
8. The Fed cannot begin raising rates until 2016. Could happen in December depending on continued growth here and an improvement overseas. Delayed for now.
9. The economic cycle will be extended with lower highs and higher lows. This belief is even more valid today than ever before.
10. Speculation exists today in real estate, private equity and art. Still a valid belief.
My core beliefs remain intact.
While I believe that global economic growth will be somewhat weaker than earlier anticipated, earnings will continue to increase and the market multiple will benefit from low interest rates and a relatively low risk factor as capital ratios rise.
I am finding great value in this market. My total long portfolio is comprised of company’s going through positive strategic changes that will enhance earnings and returns on capital in the future selling at beneath market multiples and yielding over 2.75%. These stocks will be revalued over time. On other hand, I am short companies that are grossly overvalued on a discounted cash flow model and whose incremental rates of return are declining. I am currently 92% net long.
You need patience as change occurs over time. Investing is a marathon, not a sprint. My aim to double the value of my portfolio every 5 years with this approach. So far, I’m on track.
I wish that our first “virtual breakfast” were tomorrow as I have been fielding so many questions this week. Please keep them coming as it helps me get better by constantly questioning my core beliefs.
If ever there was a time to review all the facts, step back and reflect on them, pause once more and then do in-depth research, it’s now.
At last a technology company has grasped the essential difference between wearable and portable, between clothing and accessories, between artifice that seems like second nature and artifice that seems like a clunky cyborg upgrade. Surprisingly, that company is the same behemoth (though a different team) that peddled the aggressively unnatural Google Glass.
At last week’s developers’ conference, Google Inc.’s Advanced Technology and Projects group announced what it calls Project Jacquard, named for the early 19th-century looms that first used digital punchcards to program complex patterns. The project’s central innovation is a conductive yarn tough enough for industrial weaving and mass-market apparel and upholstery production. The threads can connect to chips that react to gestures, monitor heart rate or body temperature, or do whatever else a designer might come up with. Google hasn’t talked publicly about pricing, but it’s definitely going for scale. Its first design partner is Levi Strauss & Co.
Unlike existing conductive threads, Project Jacquard’s yarn works with many different fibers – wool, silk, polyester, cotton – and comes in a full range of colors. The regular fibers braid around a conductive metal alloy core. “It looks like just normal yarn,” said Shiho Fukuhara, the project’s textile development and partnership lead, in a video. “The only thing that’s different is it’s conductive.”
The goal is to allow electronics to disappear into the fabric of daily life, “getting the technology out of the way and making interactions more natural and more seamless,” explained João Wilbert, the creative technologist for Google Creative Lab in London, in the video.
Metaphors like “fabric of daily life” and “seamless” demonstrate why this approach is so promising. Textile references are woven into our language because cloth is integral to human life. It’s our second skin. Not everyone wears jewelry, but in many climates human beings can’t survive without clothes. So if you want to develop wearable electronics, threads and buttons are a much more powerful way to go than bracelets, watches, or weirdly asymmetrical eyewear.
Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.
The Macro Outlook:
It’s too early to claim victory, but there may be signs of economic improvement
“in terms of back-to-school, it’s way too early to claim victory, but we do feel good based on the early start” —Macys (Department Store)
Kohls saw some strength in back to school
“we have started see some strength in our back-to-school business as we have been through in August.” —Kohls (Department Store)
Even an industrial company noted positive progress
“if we look back at the quarter, I think month-to-month throughout the quarter, we saw modest positive progressions…It’s early in August, but we would see improvement” —Applied Industrial Technologies (Industrial Distributor)
Department store results were weak, but that may be because consumers are spending on other categories
“The overall growth in the economy is modest to best and we are seeing customers gravitating to restaurants, recreational services, healthcare and electronics rather than to traditional general merchandize apparel and furnishing category.” —Macys (Department Store)
Still, restauranteurs’ confidence may be slipping in the other direction
“Consumer confidence and the outlook of food service operators are at historically high levels, but have slipped somewhat in the summer months…Restaurant spend is up, but traffic is generally flat.” —Sysco (Food Distributor)
Quick Service Restaurants are bracing for increases in minimum wages
“the first labor increase will come in December. There’s no doubt it can take a toll on the entire industry.” —Shake Shack (QSR)
“It’s having a big impact. I will tell you one thing that people are all nervous about it…everybody is now, they know it’s reality and everybody’s trying to figure out a way of redesigning their kitchen.” —Middleby (Kitchen Equipment)
Higher medical costs are pressuring companies too
“the pressure of higher medical cost which I think is probably impacting most companies…we also expect a big increase in medical expense for the full year as well.” —Macys (Apparel)
The good news is that forex comps will start to get easier from here
“The overall economy didn’t do us any favors in the first half of the year. We look forward to the effects of the stronger dollar beginning to year around in the fourth quarter” —Macys (Apparel)
Construction markets are very slow outside of North America
“I think North America, particularly talking about North America, I think we know we can cover the other regions but again I think the main activity in a world right now, construction land is in North America. Europe is doing okay, but I think the relative strength that we are seeing around the world will be primarily in North America.” —Caterpillar (Industrial Equipment)
Adecco sees strength in Europe, especially in manufacturing sectors
“The overall trend in all businesses in Europe has continued to become more positive…what you see now, it’s again a pickup of this activity, automotive, but also aerospace, retail. And I don’t know if we have already mentioned it also in this call the construction sector, which was the biggest segment of this industry in France, went down dramatically and now has stabilized.” —Adecco (temp employment)
Nestle saw some growth in China, but was understandably cautious
“if you look at the last three months we were having mid-single-digit growth in China, which is good, which is satisfactory…That being said, I want to be careful. As you saw and as you read and as you heard over the last couple of days, there is a lot of volatility today in China. So we are satisfied with what we have seen…that being said, we are very careful about the outlook” —Nestle (Packaged Foods)
China was down 3% for Cisco, which was actually the best performance in eight quarters. Brazil was down 45%
“If we go through the five BRICM countries, Brazil actually was negative 45%. Russia was negative 38%. China was negative 3%, which actually was the best performance we’ve had in eight quarters. And we had some bright spots. India was plus 5%. Mexico was plus 26%, and Mexico had just a tremendous year in general.” —Cisco (Internet Infrastructure)
It sounds like Brazil is dealing with a pretty major recession
“I think the short-term for Brazil is a bit daunting…I think the political environment today is a bit rarified and we just have to live with that, as people worry about their jobs, they go out less… I think people in Brazil today are worried.” —Arcos Dorados (McDonald’s Franchisee)
South American economies may be weaker than in 2009
“we did not see as much weakness in 2009, we did not have the currency devaluation that we have seen right now, which are in some cases up to 30% and 35%. So we did not see that in 2009, there was uncertainty in 2009 but the economies were still growing, I don’t have all the figures on my mind right now, but the economies were still growing and actually 2010, 2011 were strong growth years for most of the economies in Latin America.” —Copa (Airline)
The Brazilian government is having to make tough decisions
“I believe that the Brazilian government is doing the right things at this time and taking some very brave decisions, including cutting spending, raising interest rates and that these will have good long-term effects, but certainly they’re very tough in the short-run, but I really commend their bravery” —AES (Power Generation)
Elections in Argentina could finally pave the way for a more positive environment in that country
“elections in October, the two leading candidates either one would be favorable. I think you’ll have a gradual return to market-based pricing and a lifting of the exchange controls…It is basically considerably developed country and quite wealthy. So, it’s again, I think it’s probably on the rebound at this stage.” —AES (Power Generation)
It’s tough to find acquisitions that make sense even for a strategic buyer
“it continues to be an unbelievably floppy market out there and it’s very hard to find the right value creating opportunity.” —ICU Medical(Medical Device)
A hiccup in natural foods? Organic and Almond milk growth has slowed
“organic milk volume growth at retail has decelerated the past five quarters. While the category is still experiencing positive growth, supply issues and retail prices appear to be capping at share of the category…like organic milk, the almond milk category has had similar deceleration in growth rates since early 2014. It also appears to us that almond milk maybe on its way to ending this growth cycle much sooner than soy.” —Dean Foods (Dairy)
For the first time ever consumers spent more money eating out than at grocery stores
“it’s the first time ever that sales, food sales at bars and restaurants surpassed sales at grocery stores according to the U.S. Department of Commerce. Big, big number for us, meaning people spending money eating out has now surpassed in actual dollars people buying food in grocery stores.” —Middleby (Kitchen Equipment)
For the first time Kohls will spend more money on digital advertising than print
“the fall season, for the first time we are going to be spending more money in digital than we are in print. That’s were our customers are doing their research, whether or not they purchase online from whatever device they are using, they are definitely using the research to make their purchasing decision. So that’s important.” —Kohls (Apparel)
Kohls sounds pretty satisfied with the performance of buy online, pickup in store
“BOPUS is the best thing that ever happened in e-commerce…you save the $5 to $6 per package that it costs to ship it to the house and we’re seeing attachment sales of about 20% to 25% depending on the time of the week” —Kohls (Apparel)
We live in an age of “promiscuity” and “disloyalty” towards content creators
“our advertisers can be confident that our readers have connection to our content that is particularly strong in its intensity and its affinity. Both of which are distinctive in an age of digital promiscuity and digital disloyalty.” —Newscorp (Media)
What does it mean for core Google that Larry Page would rather spend his time elsewhere?
“Sergey and I are seriously in the business of starting new things.” —Alphabet (Conglomerate)
The Alphabet announcement was also probably a signal that the company wont be returning capital to shareholders
“We will rigorously handle capital allocation…We also like that it means alpha-bet (Alpha is investment return above benchmark), which we strive for!” —Alphabet (Conglomerate)
As Alphabet diversifies away from data, old media companies like Newscorp are just showing up to the data party
“We are not simply a collection of unique powerful assets. We are a company with complementary platforms. And what makes our businesses, so complementary, is how much they have in common; namely, the uncommon power of the news and content and their data, data about customers, businesses and markets that is global in scale and precise in its targeting.” —Newscorp (Media)
By now companies have made mobile investments and can free capital for other projects
“I can’t be a pizza chain that I can’t have our customers order online or text message and be able to track where their pizza delivery is. And they had to invest in all those technologies. And I think we are at the end tail. Maybe it’s another quarter or two, but I’m looking forward to saying 2016 will be a big one for our Kitchen of the Future.” —Middleby (Kitchen Equipment)
Amazon and Microsoft appear to be emerging as the primary winners in cloud platforms
“Azure is a powerful platform…More than 3,000 large enterprise customers have added Azure to their contracts…We also see strong demand for managed services from customers who prefer the AWS cloud platform.” —Rackspace (Cloud Service Provider)
Fossil’s vision for the smart watch is something that looks like a regular watch but has a chip in it
“the third, and probably most significant long-term, is what we call smarter watches, which is just adding chips and additional functionality to existing watches. So we are launching that this year, which is to watch it looks just like a regular analog watch but does have a chip in it that gives measures, activity and sleep and also has notifications in it. So to a certain extent, you could say that what we are doing is moving towards we think someday every watch we make will have some type of technology in it.” —Fossil (Accessories/Apparel)
Materials, Industrials, Energy:
The Texas economy may finally be showing signs of slowing (could just be rain though)
“Texas and primarily the Houston market. I’m sure that’s not any different for most people with significant businesses down there. I spoke with our regional manager down there and I saw obviously some of the weather issues they have with all the rain they had this summer. It hurt a little bit, but that’s a market that’s been tougher for us this year, that’s for sure.” —Kohls (Apparel)
Caterpillar has worked through its oil and gas backlog and doesn’t have orders to replace it
“we had pretty good backlog of recip engines in the oil and gas application throughout about mid-year and so now we’re there right. So that back half of the year, that backlog is largely gone, has been delivered and we haven’t received orders to replace that. So that will be a factor in our sales and profit projection going forward.” —Caterpillar (Industrial Equipment)
Boeing doesn’t see a slowdown in the aerospace cycle, but they’re watching closely
“I look at the makeup of replacement versus growth again. It gives me much more confidence, and I’d say this cycle versus what I’ve seen prior. And obviously we continue to monitor it. But like I said, despite a lot of movement going on in the global marketplace, and we’re watching it, we’re not seeing a slowdown in demand for our products.” —Boeing (Aerospace)
The only way to generate sustainable returns as a commodity producer is to own tier one assets
“There’s no substitute for Tier 1 assets. Across our commodities, we have a portfolio of leading assets, providing robust margins and cash flows. Others who own or develop third or fourth-quartile assets on a highly-geared balance sheet may do okay when prices are high, but it’s extremely challenging for them in the long term, and particularly in today’s environment. Well-run Tier 1 assets backed by a sound balance sheet is the only strategy that can create sustainable shareholder returns” —Rio Tinto (Iron Ore)
Miscellaneous Nuggets of Wisdom:
In technology you have to be uncomfortable to stay relevant
“in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.” —Alphabet (the company formerly known as Google)
IPO hype can help drive real business for a while, but eventually fades
“next year we may not have IPO hype. We won’t have that IPO hype” —Shake Shack (QSR)
Don’t do things just to check boxes
“I’m not about ticking boxes. I’m not about doing something, because it’s on somebody’s list, or it’s been reported in the media, or whatever. I’ll do it, because it delivers shareholder value.” —Rio Tinto (Iron Ore)
People are talking about Google brands and products more often, and more positively than at any point in the last 12 months.
This is the same kind of pattern we saw on GPRO, which climbed over 20% after we put out a similar note. With markets getting hit today, and Google under $600… we think this could be a great time to pick up some shares.
— Andy Swan is the founder of LikeFolio, which searches all of Twitter for important shifts in consumer behavior around the brands owned by publicly-traded companies.
Chris Sacca is on one of the greatest streaks ever for a venture capital investor. He’s been an early-stage investor in companies such as Uber, Instagram, Twitter and Kickstarter. He’s come out of nowhere to become one of the most well-known VCs on the planet because of both his investing prowess and his brash style (he’s the guy that’s always wearing the gaudy cowboy shirts).
He recently sat down for a podcast with Tim Ferriss to discuss his career and the state of the venture industry. One of the most interesting aspects of this interview has to do with Sacca’s views on the current 2&20 fee structure that so many VC funds employ (2% management fee and 20% of profits). This was Sacca’s very honest assessment of the risk-reward trade-off for both investors and those running the funds (emphasis mine):
This is a rigged game, right? And I’m just looking to make it even more rigged. For those who don’t know, venture capital is totally unfair. I mean, people give me their money; I draw a management fee off it, so they pay me to take their money and invest it for them. If I make money, then I pay them back the management fee and then after that we split the profits and I get a really big chunk of the profits.
And if I lose money, that’s fine. It doesn’t come out of my pocket. I keep my fee and my investors lose money. That’s how this industry works. That’s bananas. And at some point, it’s gonna break. It’s just an unforgivably unfair, rigged game that’s in favor of the venture capitalist. You’re cash flow positive from day one when you start a venture fund and your downside is incredibly limited by the structure of the fund.
Sacca is known for being a very outspoken guy, but this is a refreshingly honest admission from an investor who’s so well-known in the industry. The majority of general partners would never admit this in public, even though they all understand the truth behind it. The standard company line from most who participate in the 2&20 fee structure is that, “we’re aligning our incentives with our investors.” They fail to mention that the reason things are done this way is pretty much because it’s the way things have always been done.
What Sacca is really talking about here is the power of incentives on people’s actions, something that most people fail to appreciate. It’s obvious that people don’t always act in the most rational manner, but if you’re looking for the main reason why things are the way they are in the world of business you should always start with the incentive structure. This is especially relevant within the finance industry where incentives shape the way nearly every business and individual functions to some extent.
Sacca goes on to say that this type of fund structure allows him to take some risks that he likely would be unable to take if the deck wasn’t so stacked in his favor. He states that he can take more binary, all or nothing, bets on certain companies with the hopes of hitting it big, but the possibility of crashing and burning (although this is generally the premise of venture capital investing — many failures and a few home runs).
Essentially Sacca is saying that he is incentivized to swing for the fences because he doesn’t participate in any of the downside. Luckily, for him and his investors, this strategy has paid off handsomely for his funds. By his own admission, his current fund is probably the most successful venture capital fund in history from a return standpoint because of the early stage investments mentioned above.
It makes you wonder what’s going to have to happen to see changes in this incentive structure and make it break, as Sacca forecasts. I imagine it will probably involve the downside of swinging for the fences as many of these funds will strike out the further along we get in the cycle.
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.
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.
I visited Google a few weeks ago and, after almost getting arrested, my mind was blown.
First, Claudia wandered into the garage where they were actually making or fixing the driverless cars. When they finally realized she was wandering around, security had to escort her out.
We got scared and we thought we were going to get in trouble or thrown out.
Then we met with a friend high up at Google and learned some of the things Google was working on.
Nothing was related to search. Everything was related to curing cancer (a bracelet that can make all the cancer cells in your body move towards the bracelet), automating everything (cars just one of those things), Wi-Fi everywhere (Project Loon) and solving other “billion person problems”.
A problem wasn’t considered worthy unless it could solve a problem for a billion people.
So now Alphabet is aligning itself towards this strategy: a holding company that owns and invests in other companies that can solve billion person problems.
It’s not divided up by money. It’s divided up by mission.
I want to do this in my personal life also.
Just analyzing Larry Page’s quotes from the past ten years is a guidebook for “billion person success” and for personal success.
Here are some of his quotes (in bold):
“If you’re changing the world, you’re working on important things. You’re excited to get up in the morning.”
To have well-being in life you need three things: A) a feeling of competence or growth. B) good emotional relationships. C) freedom of choice.
Being able to wake up excited in the morning is an outcome of well-being.
Feeling like every day you are working on a billion-person problem will give you those three aspects of well-being.
At the very least, when I wake up I try to remember to ask: Who can I help today?
Because I’m a superhero and this is my secret identity.
“Especially in technology, we need revolutionary change, not incremental change.”
Too often we get stuck in “good enough”. If you build a business that supports your family and maybe provides for retirement then that is “good enough”.
If you write a book that sells 1000 copies then that is “good enough.”
You ever wonder why planes have gotten slower since 1965? The Dreamliner 787 is actually slower than the 747.
That’s ok. It’s good enough to get people across the world and save on fuel costs.
It’s only the people who push past the “good enough syndrome” that we hear about: Elon Musk building a space ship. Larry Page indexing all knowledge. Elizabeth Holmes potentially diagnosing all diseases with a pin prick.
Isaac Asimov wrote classic science fiction like “The Foundation Series” but it wasn’t good enough for him. He ended up writing 500 more books, writing more books than anyone in history.
Larry Page keeps pushing so that every day he wakes up knowing he’s going to go past “good enough” that day.
What does your “good enough” day look like. What’s one thing that moves you past that?
“My job as a leader is to make sure everybody in the company has great opportunities, and that they feel they’re having a meaningful impact and are contributing to the good of society.”
Whenever I’ve managed companies and have had the small opportunity to be a leader I’ve judged my success on only one thing:
Does the employee at night go home and call his or her parents and say, “guess what I did today!”
I’m not sure this always worked. But I do think Larry Page lifts all his employees to try to be better versions of themselves, to try to surpass him, to try and change the world.
If each employee can say, “who did I help today” and have an answer, then that is a good leader.
Empowering others, empowers you.
“Lots of companies don’t succeed over time. What do they fundamentally do wrong? They usually miss the future.”
The stock market is near all time highs. And yet every company in the original Dow Jones market index (except for GE) has gone out of business.
Even US Steel, which built every building in the country for an entire century, has gone bankrupt.
Never let the practical get in the way of the possible.
It’s practical to focus on what you can do right now.
But give yourself time in your life to wonder what is possible and to make even the slightest moves in that direction.
We’re at maybe 1% of what is possible. Despite the faster change, we’re still moving slow relative to the opportunities we have. I think a lot of that is because of the negativity… Every story I read is Google vs someone else. That’s boring. We should be focusing on building the things that don’t exist.
Sometimes I want to give up on whatever I’m working on. I’m not working on major billion person problems.
And sometimes I think I write too much about the same thing. Every day I try to think, “What new thing can I write today” and I actually get depressed when I can’t think of something totally new.
But I am working on things that I think can help people. And if you are out side of people’s comfort zones, if you are breaking the normal rules of society, people will try to pull you down.
Larry Page didn’t want to be defined by Google for his entire life. He wants to be defined by what he hasn’t yet done. What he might even be afraid to do.
I wonder what my life would be like if I started doing all the things I was afraid to do. If I started defining my life by all the things I have yet to do.
“Many leaders of big organizations, I think, don’t believe that change is possible. But if you look at history, things do change, and if your business is static, you’re likely to have issues.”
Guess which company had the original patent that ultimately Larry Page derived his own patent (that created google) from?
Go ahead. Think a second. Guess.
An employee of this company created the patent and tried to get them to use it to catalog information on the web.
So Robin Li, an employee of The Wall Street Journal, quit the newspaper of capitalism (who owned his patent), moved to China (a communist country), and created Baidu.
And Larry Page modified the patent, filed his own, and created Google.
And the Wall Street Journal got swallowed up by Rupert Murdoch and is dying a slow death.
“I think as technologists we should have some safe places where we can try out new things and figure out the effect on society.”
A friend of mine is writing a novel but is afraid to publish it. “Maybe it will be bad,” he told me.
Fortunately we live in a world where experimentation is easy. You can make a 30 page novel, publish it on Amazon for nothing, use an assumed name, and test to see if people like it.
Heck, I’ve done it. And it was fun.
Mac Lethal is a rapper who has gotten over 200 million views on his YouTube videos. Even Ellen had him on her show to demonstrate his skills.
I asked him, “do you get nervous if one of your videos gets less views than others?”
He told me valuable advice: “Nobody remembers your bad stuff. They only remember your good stuff.”
I live by that.
“If we were motivated by money, we would have sold the company a long time ago and ended up on a beach.”
Larry Page and Sergey Brin wanted to be academics. When they first patented Google, they tried to sell to Yahoo for $1 million (ONE MILLION DOLLARS).
When Yahoo laughed them out the door, they tried to sell to Excite for $750,000.
Excite laughed them out the door. Now an ex-employee of Google is the CEO of Yahoo. And the founder of Excite works at Google. Google dominates.
Money is a side effect of trying to help others. Trying to solve problems. Trying to move beyond the “good enough”.
So many people ask: “how do I get traffic?” That’s the wrong question.
If you ask every day, “How did I help people today?” then you will have more traffic and money than you could have imagined.
“Invention is not enough. Tesla invented the electric power we use, but he struggled to get it out to people. You have to combine both things: invention and innovation focus, plus the company that can commercialize things and get them to people.”
Everyone quotes the iconic story of Thomas Edison “failing” 10,000 times to get the electric lightbulb working.
I put failing in quotes because he was doing what any scientist does. He does many experiments until one works.
But what he did that was truly remarkable was convince New York City a few weeks later to light up their downtown using his lights.
The first time ever a city was lit up at night with electricity.
That’s innovation. That’s how the entire world got lit up.
“If you say you want to automate cars and save people’s lives, the skills you need for that aren’t taught in any particular discipline. I know - I was interested in working on automating cars when I was a Ph.D. student in 1995.”
Too often we get labeled by our degree and our job titles. Larry Page and Elon Musk were computer science majors. Now they build cars and space ships.
David Chang was a competitive golfer as a kid, majored in religious studies in college, and then had random gopher jobs in his 20s.
The gopher jobs all happened to be in restaurants so he became familiar with how the business was run.
Then he started probably the most popular restaurant in NYC, momofoku. A dozen or so restaurants later, he is one of the most successful restauranteurs in history.
Peter Thiel worked as a lawyer in one of the top law firms in NY. When he quit in order to become an entrepreneur, he told me that many of his colleagues came up to him and said, “I can’t believe you are escaping”.
Escaping the labels and titles and hopes that everyone else has for us is one of the first steps in Choosing Ourselves for the success we are meant to have.
We define our lives from our imagination and the things we create with our hands.
“It really matters whether people are working on generating clean energy or improving transportation or making the Internet work better and all those things. And small groups of people can have a really huge impact.”
What I love about this quote is that he combines big problems with small groups.
A small group of people created Google. Not Procter & Gamble. Or AT&T.
Even at Apple, when Steve Jobs wanted to create the Macintosh, he moved his small group to a separate building so they wouldn’t get bogged down in the big corporate bureaucracy that Apple was becoming.
Ultimately, they fired him for being too far from the corporate message.
Years later, when Apple was failing, they brought him back. What did he do? He cut most of the products and put people into small groups to solve big problems.
Before his death he revolutionized the movie industry, the computer industry, the music industry, TVs, and now even watches (watch sales have plummeted after the release of the Apple Watch).
All of this from a guy who finished one semester of studying calligraphy in college before dropping out.
Studying the history of Apple is like studying a microcosm of the history of how to create big ideas. Larry Page is recreating this with his new corporate structure.
“We don’t have as many managers as we should, but we would rather have too few than too many.”
The 20th century was the century of middle-class corporatism. It even became a “law” called “The Peter Principle” - everyone rises to their level of incompetence.
One of the problems society is having now is that the entire middle layer of management is being demoted, outsourced, replaced by technology, and fired.
This is not a bad or a good thing (although it’s scary). But it’s a return to the role of masters and apprentices without bureaucracy and paperwork in the middle.
It’s how things get done. When ideas go from the head into action with few barriers in the middle.
To be a successful employee, you have to align your interests with those of the company, come up with ideas that further help the customers, and have the mandate to act on those ideas, whether they work or not.
That’s why the employee who wrote much of the code inside the Google search engine, Craig Silverstein, is now a billionaire.
Where is he now? He’s an employee at online education company, The Khan Academy.
“If you ask an economist what’s driven economic growth, it’s been major advances in things that mattered - the mechanization of farming, mass manufacturing, things like that. The problem is, our society is not organized around doing that.”
Google is now making advances in driverless cars, delivery drones, and other methods of automation.
Everyone gets worried that this will cost jobs. But just look at history. Cars didn’t ruin the horse industry. Everyone simply adjusted.
TV didn’t replace books. Everything adjusted. The VCR didn’t shut down movies.
The Internet didn’t replace face to face communication (well, the jury is still out).
“What is the one sentence summary of how you change the world? Always work hard on something uncomfortably exciting!”
Not everyone wants to create a driverless car. Or clean energy. Or solve a billion person problem.
But I have a list of things that are uncomfortably exciting to me.
They are small, stupid things. Like I’d like to write a novel. Or perform standup comedy. Or maybe start another business based on my ideas for helping people.
Every day I wake up a tiny bit afraid. But I also try to push myself a little closer in those directions. I know then that’s how I learn and grow.
Sometimes I push forward. Sometimes I don’t. I want to get more comfortable with being uncomfortable.
“I do think there is an important artistic component in what we do. As a technology company I’ve tried to really stress that.”
Nobody knows what the definition of Art is.
How about: something that doesn’t exist except in the imagination, that you then bring out into the real world that has some mix of entertainment, enlightenment, and betterment.
I don’t know. Something like that.
Certainly the iPad is a work of art. And the iPad has created works of art. And when I first saw a driverless car I thought, “that’s beautiful”.
I’m going to try and put my fingerprint on something today. And maybe it will be art.
“The idea that everyone should slavishly work so they do something inefficiently so they keep their job – that just doesn’t make any sense to me. That can’t be the right answer.”
We’ve been hypnotized into thinking that the “normal life” is a “working life”.
If you don’t “go to work” then you must be sick or on the tiny bit of vacation allotted to you each year.
What if everything you did you can inject a little bit of leisure, a little bit of fun into it.
I have fun writing, except when I think I have to meet a deadline (work). I have fun making a business that people actually use except when I think about money too much (work).
When you are at the crossroads and your heart loves one path and doesn’t love the other, forget about which path has the money and the work, take the path you love.
“We want to build technology that everybody loves using, and that affects everyone. We want to create beautiful, intuitive services and technologies that are so incredibly useful that people use them twice a day. Like they use a toothbrush. There aren’t that many things people use twice a day.”
What a great idea for a list of the day!
What are ten things that can be invented that people would use twice a day?
“You need to invent things and you need to get them to people. You need to commercialize those inventions. Obviously, the best way we’ve come up with doing that is through companies.”
I was speaking to Naveen Jain, who made his billions on an early search engine, InfoSpace.
He just started a company to mine rare earth minerals on the Moon.
But his real goal is extra-planetary colonization.
Somehow we got around to the question of why have a company in the middle of that. He has billions. He can just go straight for the colonization part.
He said, “Every idea has to be sustainable. Profitability is proof that an idea is sustainable.”
“You may think using Google’s great, but I still think it’s terrible.”
K. Anders Ericsson made famous the “10,000 hour rule” popularized later by Malcom Gladwell.
The rule is: if you practice WITH INTENT for 10,000 hours then you will be world-class.
He then wondered why typists would often reach a certain speed level and then never improve no matter how many hours.
After doing research, its because they forgot the “With intent” part. They were satisfied with “good enough”.
You have to constantly come up with new metrics to measure yourself, to compete against yourself, to better the last plateau you reached.
Google is great. But it can be better. Having this mindset always forces you to push beyond the comfort zone.
Once they changed the way typists viewed their skills (by recreating the feeling of “beginner’s mind”) the typists continued to get faster.
“We have a mantra: don’t be evil, which is to do the best things we know how for our users, for our customers, for everyone. So I think if we were known for that, it would be a wonderful thing.”
Many people argue whether or not Google has succeeded at this. That’s not the point.
The point is: Values before Money.
A business is a group of people with a goal to solve a problem. Values might be: we want to solve a problem, we want the customer to be happy, we want employees to feel like they have upward mobility, etc.
Once you lose your values, you’ll lost the money as well. This why family-run businesses often die by the third generation (“Shirt sleeves to shirt sleeves in three generations).
The values of the founder got diluted through his descendants until the company failed.
I spoke to Dick Yuengling about this (CEO of the largest independent beer maker and a fifth generation business).
His family found an interesting way to solve the problem. The business is not inherited. Each generation has to BUY the business from the generation before it.
To do that, each generation needs its own values, its new way of doing things that keeps the brand fresh and ongoing.
"I think it is often easier to make progress on mega-ambitious dreams. Since no one else is crazy enough to do it, you have little competition. In fact, there are so few people this crazy that I feel like I know them all by first name.”
Our parents have our best interests at heart and tell us how to be good adults.
Our schools have our best interests.
Our friends, colleagues, sometimes our bosses, sometimes government, think they have our best interests.
But it’s only when everyone thinks you are crazy that you know you are going to create something that surprises everyone and really makes your own unique handprint on the world.
And because you went out of the comfort zone, you’re only competing against the few other people as crazy as you are.
“You know what it’s like to wake up in the middle of the night with a vivid dream? And you know that if you don’t have a pencil and pad by the bed, it will be completely gone by the next morning. Sometimes it’s important to wake up and stop dreaming. When a really great dream shows up, grab it.”
For every article I’ve ever written, there’s at least ten more I left behind in the middle of the night thinking I would remember in the morning.
I have to beat myself in the head. I . Will. Not. Remember….Must. Write. Down.
It’s hard to wake up. And that’s the only thing worth remembering. It’s hard to wake up.
“I have always believed that technology should do the hard work - discovery, organization, communication - so users can do what makes them happiest: living and loving, not messing with annoying computers! That means making our products work together seamlessly.”
This is a deep question - who are you? If you have a mechanical hand, is that “you”?
Conversely, if you lose a hand, did you lose a part of you. Are you no longer a complete person? The complete you?
If an implant is put into your brain to access Google, does that effect who you view your self to be?
When books were invented, memory suffered. We no longer had to remember as much, because we can look things up.
Does that make our brains less human?
I bet memory has suffered with the rise of Google. Does this mean our consciousness has suffered?
When we created fire, we outsourced part of our digestion to this new invention. Did this make our stomachs less human?
With technology taking care of the basic tasks of our brain and body, it allows us to achieve things we couldn’t previously dream possible.
It allows us to learn and explore and to create past the current comfort zone. It allows us to find the happiness, freedom, and well-being we deserve.
“Over time, our emerging high-usage products will likely generate significant new revenue streams for Google as well as for our partners, just as search does today.”
This is it. This is why Larry Page has re-oriented Google into Alphabet.
Don’t waste your most productive energies solving a problem that now only has incremental improvements.
Re-focus the best energies on solving harder and harder problems.
Always keeping the value of “how can I help a billion people” will keep Google from becoming a Borders bookstore (which went out of business after outsourcing all of their sales to Amazon).
How does this apply to the personal?
Instead of being a cog in the machine for some corporation, come up with ways to automate greater abundance.
Always understand that coming up with multiple ways to help people is ultimately the way to create the biggest impact.
Impact then creates health, friendship, competence, abundance, and freedom.
Oh my god, this answer is too long. And believe it or not, I cut it in half.
If I can just wake up every day and remind myself of these quotes by Larry Page I know I will have a better life.
But this is also why he created Alphabet and put Google underneath it.
TubeMogul’s Explosive Potential and Risk is Upon Us
➜ TUBE generates $0.97 in revenue for every $1 in expense, which is an operating loss and considerably below the sector average of $1.07.
➜ TUBE generates $275,000 in revenue per employee which is below the sector average of $346,000.
TUBE crushed earnings on August 10th, beating both revenue and EPS consensus estimates, handily.
The company provides self-serve software that allows advertisers to plan, buy and measure the effectiveness of video ads. The company website reads, “TubeMogul’s advertising solution is powered by the company’s unprecedented data platform that tracks billions of video streams every month from the Internet’s top publishers. This unique technology enables TubeMogul to help advertisers find consumers who want to watch their videos – and watch them longer.”
A report just like this one is available for any company for free on CMLviz.com. No e-mail. No login. Free. Forever. Period.
TUBE is innovating in an advertising space that is booming. Let us not forget that Google (GOOGL) reported in summer of 2015 that watch time for YouTube rose 60% in the second quarter and the video service had more viewers aged 18-49 on mobile alone than any U.S. cable network. So, video is a huge segment for advertising growth. The bearish thesis for TUBE surrounds competition from many firms, first and foremost, from Google (GOOGL), which has already taken a large client from TUBE.
TUBE’s revenue (TTM) has risen for more than five consecutive quarters. One year ago the firm reported $86 million
in revenue. For the most recent year it reported $139 million, good for a 62% one-year rise.
But, TUBE only generates $0.97 in revenue for every $1 in expense, has negative net income (a loss) and negative free cash flow. The firm is spending on R&D, which is easily (and I believe, rightfully) spun as good news, and in fact the company is at all-time highs in R&D expense.
The average estimate for next quarter’s revenue of $47.8 million is above last quarter’s $45 million.
Now let’s examine the visualizations of the critical financial measures.
This is the good news and most compelling part of TUBE’s story. Revenue (TTM) has increased for at least five consecutive quarters which triggers a “trend” (in this case it’s seven consecutive quarters). When a company grows revenue 62.4% year-over-year, we must recognize the added importance of top-line growth, perhaps even above and beyond earnings, free cash flow and margins. Regardless of the low 2 fundamental (star) rating, if revenues continue to explode, everything could follow suit for TUBE.
What do all these numbers mean?
TUBE’s fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive. Finally, the five+ consecutive quarters of an upward trend in revenue benefited the fundamental (star) rating.
Let’s look at Revenue (TTM US$ Millions) in the chart below.
This ratio (which simply represents how much revenue is generated per one dollar of expense) must be at a minimum above 1.0 in order for a company to turn an operating profit. For the latest quarter TUBE showed a ratio of 0.97. That $0.97 of revenue for every $1 of expense is actually up from last quarter’s number of just $0.84, so the most recent earnings report did show a substantial improvement quarter-over-quarter. But, a year ago the company was generating $1.06 for every $1 in expense, so year-over-year we see a rather substantial decline.
What do all these numbers mean?
One year ago Operating Revenues/Operating Expense was 1.06. In the last year we can see operating margins are decreasing and less than 1.0 for the most recent quarter (below the critical level).
TUBE’s fundamental rating was affected from the operating margin numbers in the following ways:
1. The current value is below the critical 1.0 level (the firm generates an operating loss).
2. The one-year change was negative (lowers the rating).
Let’s look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.
Net Income (after tax profit) over the trailing twelve months (TTM) for TUBE is falling and is negative. The $14 million loss over the last year is in fact an all-time low for TUBE, although the quarterly number ticked up in the latest earnings report.
In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the orange line.
Note the falling bars from a year ago (four quarters ago) and the up tick in the most recent quarter in the orange line.
Normally we look at free cash flow, but it would be a bit of the hitting the same beat a few too many times. Suffice it to say, free cash flow is negative for TUBE, like earnings.
Let’s turn to Research and Development (US$ Millions), which trending higher meaning that for at least five consecutive quarters it’s been rising (in this case it’s been ten consecutive quarters). There is a tendency for some firms to slip stock based compensation expense into R&D which can be quite misleading.
R&D in the most recent quarter for TUBE was $10 million, which is a 92% increase from last year’s value and nearly 240% higher than two-years ago.
Interestingly, if we look over a period of one year, we see that R&D per dollar of revenue is also increasing.
R&D per dollar of revenue for the latest quarter is $0.21. Last year this measure was $0.17 (it’s also rising).
In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the orange line.
rising bars from one-year ago.
TUBE has seen explosive revenue growth, breaking all-time highs (TTM) for every quarter it has been public. The company is also pouring money into R&D, breaking an all-time high for ten consecutive quarters. The video advertising segment is gigantic and may in fact be the most compelling part of the advertising segment in general. That’s the good news.
The bad news surrounds mounting losses and negative free cash flow, as well as an operating margin that is below 1. We should take note of the quarterly increase in operating margins, wh9ch has the firm right on the edge of turning an operating profit. This is a compelling company, in a young and exploding segment. The risk sits squarely in execution and of course, competition.
I was out and about all over Long Island / Manhattan this weekend – barbecues, kids’ birthdays, hair salon, restaurants, etc. Everywhere I go, people are asking me one question: What the happened with Google on Friday?
It’s been awhile since this many civilians were so interested in the move being made by one stock. I’ve gotten this question five or six times over the weekend from friends and strangers who know me from the TV show. People look at me funny when I say “I don’t know,” so I try to say something.
My best guess as to what happened is this:
1. Google’s been really spotty on earnings reports over the last few quarters so expectations were really muted going into the release. When the company exceeded prior guidance and then talked about an acceleration in key metrics from Q1 to Q2, the narrative shifted overnight from “Google’s done” to “Google’s got its momentum back!”
2. People are desperately in search of a megacap tech stock they can buy that has a non-laughable valuation – “Just give me a reason.” Google just gave you lots of reasons.
3. Youtube is on fire, regardless of the media’s recent infatuation with Facebook’s video platform. At the end of the day, Youtube is the de facto host to virtually all quality video content online and it’s gotten better and better at monetization. In addition, cost-per-click, which had been declining in recent quarters, may have finally bottomed out. Combine this with enough growth in mobile ads to offset the feared slowdown in desktop search and there was very little to dislike here.
4. It was a summer Friday. Not a lot of people were trading and Google gave them some action to be a part of. Whippy action in individual stocks is one of the hallmarks of this time of year. The phrase “never short a dull market” was probably coined during the July 4th – Labor Day period.
5. CFO Ruth Porat, whom Google recruited out of Morgan Stanley to get the company’s expenses under control, led a flawless conference call. This is an executive who knows her Wall Street analyst and buyside audience very well and understands the expectation game better than Larry Page and Eric Schmidt. “Confidence has been restored,” says the peanut gallery.
6. Google is now expected to earn over $30 dollars next year. The stock opened for trading just under 700 and hung around that level pretty much into the close. It’s not an accident – that’s a 20x forward price to earnings ratio – elevated vs the S&P, but with a higher growth rate than the overall market. Google selling for 20x 2016 numbers “just feels right.”
7. Google said it now has about $70 billion in cash on its balance sheet – or roughly $100 per share – and yet Porat declined to make any promises about returning any to shareholders. The Street seems to be happy to allow the company to spend on M&A and R&D provided there is an increase in discipline and better communication around what shareholders should expect in the area of expenses. Should the company decide to make like Apple and start returning some of this ocean of cash, it would represent yet another catalyst for upside.
Whether or not Google’s results were “enough” to have added $55 billion in market cap in a single day is a subjective issue. The fact is, expectations were low, the stock had been underperforming its peers and the company delivered a great quarter out of the blue. This was the recipe for a monster day.
In volatile, fast-moving markets, it is imperative to have a plan put together for entry into new positions. Typically, we recommend putting new positions on during periods of extreme volatility and holding (without reacting) existing positions for exits during calmer times.
In order to be able to take advantage of crazy 1000 point moves like we saw yesterday, you need a plan. A buy list with ideal prices.
Constructing a WILL-BUY LIST
Here we want to focus on companies that have very solid metrics on Main Street. A list of companies who make products that consumers love, who are likely to continue selling their product at a growing rate regardless of macroeconomic news.
Fitbit is another company that’s getting major traction on Main Street – We know this because its social data is growing in volume (close to cracking the LikeFolio Top50) and sentiment is extremely high at 95% positive… and an almost evangelical customer base:
GoPro is another example of a company that is absolutely killing it in social. Unbelievably positive sentiment, an obsessed customer base, and social volume that is getting a niche company into the Top50 is pretty incredible.
That’s a pretty good list for now: GPRO, FIT and GOOG
Setting your “WILL BUY” Price
Then, for each of those, we’d have a “must buy price” that we are willing to pay in the scariest of market conditions– when others are running scared, and we are ready to step in and take some short-term risk.
For some of you, that’s a 5% drop… for others it might be 10 or even 15%…the important thing is to know where it is, and the criteria that will make you pull the trigger.
We strongly advise NOT buying on a major drop that is effecting just that company or its sector. Instead, these are situations where something external to the U.S. market is causing a general market panic, widespread across all stocks like we saw yesterday.
The power of social-data is understanding what real consumers on Main St. are doing… and using that knowledge to take advantage of opportunities that Wall St. hands us. A solid buy list based on consumer enthusiasm for brands is a great way to capitalize on rare, but big opportunities in winning names.
–Andy Swan is the founder of LikeFolio, which searches all of Twitter for important shifts in consumer behavior around the brands owned by publicly-traded companies.
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.
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.
Note to Google: Stop Being Such a Baby and Pay a Dividend
Note to Google (GOOGL): It’s time grow up, wear your big-boy pants, and start paying a dividend.
You’re a $374 billion company, for crying out loud, and your biggest rivals, Apple (AAPL) and Microsoft (MSFT), are among the most generous dividend payers and dividend raisers in the world. For a company that used to pride itself on its “Don’t be evil” motto, your stinginess to your long-suffering shareholders seems a little…well…evil.
Is a Google dividend really too much to ask? Let’s look at the numbers. Companies with consistent and reliable cash flows make the best dividend payers. Remember, investors who buy for dividends tend to be conservative. They hate surprises, and lumpy earnings make for an erratic dividend.
So, Google, how do your earnings stack up?
Pretty well, actually. Over the past ten years, earnings per share have grown at a nice clip with no real interruptions. Free cash flow per share, which is the more appropriate measure for gauging cash available to be paid as a dividend, has been a little lumpier as capital expenditures vary a little from year to year. But overall, you are a case study in a steadily growing business, Google.
And let’s not forget about your money in the bank. You have $65 billion in cash just sitting around. That’s about 17% of your entire market cap. Seriously, what are you going to spend it on, driverless cars? Well, your $65 billion in the bank is roughly twice the entire market cap of leading auto innovator Tesla Motors (TSLA). You could buy Tesla outright and still have plenty of cash left over for at least a modest dividend.
What would a Google dividend look like?
Let’s take baby steps and start with a 10% dividend payout. You earned $14.5 billion over the trailing twelve months. A $1.5 billion initial annual dividend wouldn’t make a dent in your cash hoard.
And don’t think that paying a dividend will completely negate your ability to throw money away on silly acquisitions that add no value to shareholders. Being a generous dividend payer certainly didn’t keep Microsoft from blowing $2.5 billion buying the maker of Minecraft last year.
I know, I know. It’s hard to admit you’re no longer a Silicon Valley startup. I get it. But you can still let your employees wear togas to work…or sit in beanbag chairs…or whatever it is you free-thinking types do over there.
You’re a big boy now. And it’s time to start paying a dividend like one.
And don’t think I’ve forgotten about you, Facebook (FB). Yes, Google has been doing this a lot longer and is a more mature company. But you’re a big boy too, and unlike your struggling rival Twitter (TWTR), you actually have a profitable business model in place.
A Facebook dividend would be a very pleasant surprise, and it would assuage investors’ biggest fear: That you are burning far too much of your cash on capital spending with no guarantee of benefit.
Your expenses jumped by 83% last quarter.
Hey, I get it. You’re investing in the future, and your revenues are growing at a 40% clip. Companies at this hypergrowth stage can’t be bothered with paying a dividend. But if you did, your investors might be willing to give you the benefit of the doubt and stop complaining about your ballooning expenses. A dividend would symbolize that you’re a mature company and one that can be trusted to manage shareholder money responsibly.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.