Why BlackBerry Is A Better Investment Than Apple March 20, 2013Posted by Ishmael Chibvuri in Latest Articles!!!.
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Six years ago I paid $3,000 for a 42" flat screen TV. It was the latest technology, and sales were booming. Last year I bought a similar sized TV. It has lots of features that the first TV did not have, and I paid less than $1,000 for it. I didn’t care what brand it was because they all seemed to be the same. I made my selection based on price.
When the flat screen TV first hit the market, there was enough of a difference to make consumers give up their old cathode ray tube TVs and buy the new technology. The market has now matured, the new features are not sufficient to encourage consumers to ditch their old flat screens for a new one, and next year, worldwide sales are expected to fall for the first time. Many of the flat screen TV manufacturers are losing money.
At some time in the not too distant future, we will reach the same point in the development of the smartphone.
The last two new phones from Apple (AAPL), the 4s and 5, did not make any great technical advances, or provide any real reason to ditch the old phone and run to the store for a new one. The iPhone 6 is due out later this year. No doubt the launch will be accompanied by great fanfare, and a few Apple addicts will line up outside the store all night to be the first ones to have the latest gadget. However, it will still be a phone, just like dozens of others competing for the same customers.
Last week, with lots of publicity, Samsung (SSNLF.PK) launched their new offering, the Galaxy S4. It remains to be seen whether or not it will catch on with the phone buying public. Its new technical features such as auto-scrolling based on sensing the users eye movements seem destined to be more annoying than useful. The biggest impact on Samsung’s market share may well come, not from sales of the S4, but from a drop in price for the old S3.
Microsoft has entered the contest with Nokia and the Windows 8 operating system. The Nokia (NOK) phones have received some great reviews, but they don’t include any "must have" features that make them stand out from the competition.
Then we have LG, Sony, Huawei and several others, all chasing their own share of a growing but increasingly overcrowded market. All use Android based products that are hardly distinguishable from each other.
We are quickly reaching the point where all smartphones are essentially the same, and price will become the determining factor in consumer choice.
Smartphones retailing for less than $100 have already hit the market in Asia. How long will it be before we see no-name smartphones on sale at Walmart for $49.99? Quality won’t be a big issue, if the phone breaks, or if your wife drops it in the toilet (as mine did), you simply go out and buy another. Similar to what happened to the flat screen TV, price based competition will eventually squeeze most of the profits out of the smartphone business.
Apple is a company that has always prospered by being the first to market with great new products. In the early days of the PC, Apple was first to develop a mouse driven, drag and drop operating system. However, Microsoft won the PC operating system race because they allowed their software to be used by any manufacturer, and cheap PC clones flooded the market. Android will win the smartphone race for the same reason.
Apple’s real growth has always come from the development of new products. The iPod, iPad and iPhone have been tremendously successful because when Apple brought them to the market, they were trendy new products, and were better than anything on the market at that time. Apple’s profit margins are high, they manufacture cheaply in China and sell at American prices. They could compete in a lower price environment, but somehow I don’t think they will have the stomach for it. I see iPhone sales gradually declining in the face of intense competition, and Apple focusing its attention on the next big "must have" product. Apple shares have fallen from over $700 to around $450 in the last six months. That is a big drop, and the shares seem like a bargain. However, I won’t be buying, because I don’t think their profit margins are sustainable long term, and I don’t see the next big product on the horizon.
Samsung knows that the trend in smartphones, at least in the consumer segment, will be towards lower pricing, and is making a move to penetrate the enterprise market. However, its Knox security system, presumably named after Fort Knox, is still based on the Android operating system. It will be an uphill struggle to convince security conscious enterprise users to take the risk.
BlackBerry (BBRY), however, is one smartphone supplier that can differentiate itself from the pack and carve out a profitable niche market for itself. BlackBerry does not need to be a major player in the intensely competitive consumer sector. It can focus primarily on the business enterprise customers who value the extra security of the BB10 operating system. As long BlackBerry has a phone which is at least equal in features and performance to those of its competitors, it will be able to sell into the high end of the market. Based on comments from users, there is little doubt that the BB10 operating system is the best on the market right now. Sales of the new Z10 phone have exceeded expectations, and the phone is taking customers away from Apple and Android. The Z10 will no doubt contribute significantly to revenue and support the share price in the next few quarters.
However, 40% of BlackBerry revenue, and most of its net income comes from services and software, and this is where BlackBerry can make significant gains in the future. I wouldn’t be surprised to see a licensing deal which gives another company (Lenovo perhaps?) the rights to use the BB10 operating system in lower priced consumer oriented smartphones. At the same time BlackBerry would retain the high end enterprise business, and expand its services and software revenue. The recent announcement that BlackBerry will open its BES10 system to users of iOS and Android is further evidence of its intent to focus on services, rather than manufacturing. The price war in the smartphone market has not yet begun. It is not too late for BlackBerry to cash in on its new BB10 line of phones for a while, but services is where BlackBerry will generate most of its profits in the long term.
I am long BlackBerry, I believe higher than expected sales of the Z10 phone will support the share price in the medium term and revenue from services will provide a long term boost once all of the hoopla surrounding the launch of the new operating system has died down.
I am also long on BlackBerry call options for May, because I think there will be more upside surprises in the next few weeks, and a short squeeze is likely to cause a sharp increase in the share price in April.
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The reason Google worries about Samsung’s success, is that Samsung may become a de facto co-owner of Android. Android’s success lies in its openness. Having many OEMs compete over who makes the best hardware is crucial, as Google tries to make Android the standard OS for smart-phones.
Unfortunately, Google’s worries aren’t misplaced. After Google acquired Motorola Mobility in early 2012, Samsung decided to seriously transform its open source LiMo project into a full smart-phone OS called Tizen. With Tizen Samsung is trying to create an Android-like OS in case Google decides to stop giving Android for free and starts making its own phones with Motorola.
So far Samsung seems to have done a good job and the latest version Tizen 2.0, seems to be good enough to compete with Android. Although Tizen is still under development and doesn’t have a live ecosystem, we shouldn’t dismiss it because things could turn ugly for Google very quickly.
In particular Samsung has demonstrated popular android titles on Tizen and has designed it to offer cutting-edge HTML5 support, ensuring that it will run web apps efficiently.
Furthermore, Samsung seems to understand perfectly how important the ecosystem is for a mobile OS and with the release of Tizen 2.0 has tried to make developers’ work as easy as possible. Last but not least it has already enlisted support by many big carriers like Vodafone, Orange, Sprint and others.
If Samsung continues to conquer market share and builds a good Android app emulator (like BlackBerry (BBRY) did) for its OS, then Android’s dethronement would be a highly probable outcome.
Of course Google doesn’t just sits sucking its thumb. Rumor has it that it is rapidly creating a flagship smart-phone along with Motorola, that is intended to bring Samsung’s market share down.
The new "X-Phone" (as it is known now) is expected to be unveiled in Google’s I/O conference in May 15 and become available by July 8. This won’t be part of the Nexus line which means that Google may be following in Apple’s (AAPL) footsteps and starts to build its own phones in-house.
As it seems Google and Samsung are going for a break up soon, unless both Google’s "X-Phone" and Samsung’s Tizen prove to be mediocre products and fail to gain traction with consumers.
If their products do well though, each of them will probably follow its own way and I believe that both will suffer at least in the short-term. Google will lose its largest and more popular Android OEM and it will take some time to fill that gap and regain those who went to Tizen.
On the other hand, Samsung in the beginning will have fewer sales than those it has now with Android. This is because many people will either choose to stay with their current and familiar platform or the may decide to go to a more mature one like Apple’s iOS of Microsoft’s (MSFT) Windows Phone 8.
On a bigger scale, this fight will fragment the smart-phone market increasing the competition and lowering the barriers of entry. Those who are more likely to benefit in this environment are those that have a differentiated product in the eyes of the consumers. Probably Apple, Microsoft, Nokia (NOK) and perhaps BlackBerry.
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A few months ago we learned that Microsoft’s (MSFT) Windows Phone 8 is the fastest growing OS in the smart-phone market. Adding to that just a couple of days ago, PC Magazine gave Windows Phone 8 the "Readers’ Choice Award" for 2013. The award is given based on a survey for user satisfaction among smart-phone OSes, and in this one Windows Phone 8 was the clear winner.
Lets take a look at this survey and see what we can take and use for our investments.
In the overall satisfaction score Windows Phone 8 was almost half a point ahead of Apple’s (AAPL) iOS and almost a whole point ahead of Google’s (GOOG) Android. Furthermore, Windows Phone 8 was equally satisfying to its users regardless of the age of their phone. Both iOS and Android were more satisfying in newer phones.
The following chart provides a look into consumer motives for buying their phone. Here we can see two clear trends, one for Apple and one for Microsoft.
Apple’s ecosystem has been a strong competitive advantage since 57% of iPhone users bought their iPhone for this reason. It has also formed a core group of satisfied recurrent buyers.
However, the biggest winner here is clearly Microsoft. With Windows Phone 8 it has obviously met a lot of people’s needs and created a loyal user base that consider important to have Windows Phone 8 on their phones. Almost all Windows Phone 8 users stated that the OS played a great part in choosing their phone.
For any new product to go viral, the first step is to build a core fan base that will spread the word about how great the product is and introduce it to the wider audience. Microsoft seems to have accomplished this goal.
Moreover this preference is a great selling point to smart-phone OEMs. If people are considering Windows Phone 8 as a motivating factor for buying a phone, every OEM will want to offer at least one model that runs this OS. And the same motivation applies to app developers, creating a virtuous cycle that grows the Windows Phone ecosystem.
Finally, in the following table we see two metrics that confirm the existence of a core user base for Windows Phone 8. WP8 has the highest score (9.2) in the "Likelihood to Recommend" category and the higher "Netpromoters Score" which measures customer loyalty.
Before we can accept the results of this survey though, we must examine the method that was used. Below is the way PC Mag does this survey every year:
We email survey invitations to PCMag.com community members, specifically subscribers to our Readers’ Choice Survey eblast mailing list. The surveys are hosted by Equation Research, which also performs our data collection.
Respondents are asked only to rate products and services that they actually use. The respondents are asked several questions about their overall satisfaction with the products and their reliability, as well as experiences with technical support and repairs within the past 12 months.
In all cases, the overall ratings are not based on averages of other scores in the table; they are based on reader answers to the question, "Overall, how satisfied are you with your device?"
As expected the survey data represent only PC Magazine readers that have subscribed to its mailing list. According to its corporate website this is its users’ demographic profile:
PC Mag’s reader are tech savvy, have plenty of money to buy the latest gadget and are opinion leaders to friend and family. Essentially these people are trend-setters in the technology world and hearing what they have to say may give us an early warning about emerging trends.
However we should always bear in mind that this is not a scientific survey and we should take its results with more than just a grain of salt.
Having said that, there are two data points I believe we could safely use.
- The OS played a great part for those who bought a Windows 8 phone.
- Almost all of them are likely to recommend it to others.
Microsoft seems to have finally got it right in the smart-phone space and has managed to create a core fan base around its Windows Phone 8 OS. This is great news for this company that struggles for many years in the fringe of the smart-phone world.
Windows Phone 8 seems to be a success further promoting Microsoft’s push for a universal platform across all devices. Microsoft’s moat is definitely growing as it adds more and more smart-phone users to its Windows ecosystem, leading to increasing revenue and profits.
Facebook Hash Tags Could Be Its Savior March 19, 2013Posted by Ishmael Chibvuri in Latest Articles!!!.
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I think that it is kind of amusing to see Facebook (FB) adopt a strategy that is similar to twitter in that it will provide hash tagging. It seems like technology companies are all about trying to be more similar to each other rather than trying to be different from one another. Eventually, maybe the only difference between one technology driven product and another is the brands and not the values of the product. Last time I checked, I found fairly similar features between all the mid-sized sedans when it came down to selecting the car I wanted to purchase.
Facebook will secure more of a competitive advantage by providing hash tagging to its users. According to Justin Lloyd-Miller:
Facebook is working to introduce the hash tag system to its program, the same system that made Twitter huge in the first place. The hash tag allows Twitter users to associate their posts under a common theme or keyword. The hash tag would not be the first export from Twitter to Facebook, who also adapted a subscriber tool for its users, largely based on the Twitter model.
The hash tagging system that Facebook is trying to adopt from Twitter could result in two things.
- More user interaction. Higher amounts of user-to-user interaction could go against Facebook policy of only interacting with people you actually know. The only problem with FB’s strategy to limit social networking interaction with smaller and specifically defined networks (close friends and family) is that it limits the amount of time Facebook users spend on the social network. This could result in an increase the amount of time spent on Facebook by Facebook users. This could improve the amount of advertising revenue generated.
- Facebook could charge Facebook pages for hash tagging. If the hash tag system is similar to Instagram or Twitter, then the tags will directly link back to the original person who used the hash tag. This is a particularly useful tool for companies, not-for-profits, or groups who want to spread the word. This leads to additional web-traffic for any company. Facebook could charge companies and organizations for using the hash-tagging feature on Facebook pages but leave the hash-tag feature completely free for normal Facebook users. This will result in Facebook being able to balance its profit incentive while being able to maintain an open and free social network.
While the hash tagging system is not exactly rocket science, I sure hope Facebook has something more up its sleeve. Facebook has been spending a lot of cash on research and development. I certainly hope the research and development dollars spent can result in more than just some basic changes made to the Facebook platform. The figure below illustrates this.
Facebook has ramped up its spending on research and development. It increased its spending from $388 million in 2011 all the way up to $1.399B in 2012. I compared this to both Google (GOOG) and Yahoo (YHOO) to make some basic assumptions. First, Yahoo has been spending less and less on research and development in order to manage costs better, whereas Google is ramping up its spending on research and development.
Both Yahoo and Google provide a lot of web based services. My experience has been that the underlying web platforms that these companies have operated over the past ten years have improved, but not by leaps and bounds. Yahoo is cutting back spending and Google is expanding its R&D expenditures. The struggle the two companies are facing comes down to managing growth and investing capital. Clearly Google is extremely good at that, whereas Yahoo has to find its own niche in what is becoming more and more of a crowded market place.
Facebook and Google are both similar in that both dominate their own market. Facebook is the largest social network with Google being the largest search engine. I think that the media is hyping Facebook’s expansion of its capital expenditure along with its R&D. Bloomberg even dedicated a video to how much Facebook is spending in terms of money on R&D and capital expenditure. I think it is crucial for a company to manage its costs, but I also believe especially in the technology space, that companies invest aggressively into identifying and exploiting unique market opportunities as they arise.
The company’s cash from operations (cash generated by its primary business) has stagnated a little between 2011 and 2012. Facebook needs to identify and exploit actionable opportunities or identify ways to derive added profit from its pre-existing activities. This will result in sustained growth from its operations. I am not anticipating the "next social network" that will replace Facebook. What I am merely suggesting is that Facebook needs to find a better way to leverage its media platform in order to generate added profit for shareholders. Hash tags seem to be a good start, but there could be other things Facebook may have planned for its product road map which is why Facebook is spending so much on R&D related expenses.
Investors could find the recent declines in the price of the stock worrisome. The stock is trading below the 20- and 50- Day Moving Average which could be indicative of future losses in the price of the stock. The stock will recover so as long as analyst expectations is met and the company’s management grows cash flows year over year.
Analysts on a consensus basis are anticipating earnings per share figures at around 0.57. This is substantially better than the 0.02 EPS figure for fiscal year 2012. The EPS figures for 2012 were extremely low because of the share based compensation expense based on the below picture.
In the second quarter of 2012, the company’s share-based-compensation expense jumped to $1.1 billion. The effects on EPS are likely to be temporary. With 2012 being a special case year for fiscal performance, it would be wiser to focus on the cash from operations which remained relatively flat.
The bigger concern is whether or not the company will be able to generate substantial improvements in cash flow. I anticipate that the company will eventually be able to generate improvements in the bottom and top line performance. I believe that Facebook’s management is capable of identifying and exploiting opportunities in the market place that could improve profits. Furthermore, I believe that Facebook will be able to derive added efficiencies from its operations, which would generate higher profit margins going forward. Based on those two assumptions I am willing to maintain a price target of around 30.83 to 42.18 for 2013 and 2014.
Overall I remain optimistic on the future performance of the stock, and I anticipate the stock to trade at a higher valuation so as long as the company is able to execute upon practical and reasonable growth opportunities in its competitive and product environment.
JPMorgan Chase: Just Ignore The Media March 19, 2013Posted by Ishmael Chibvuri in Latest Articles!!!.
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I can not believe the media is still touting the London Whale event over at JPMorgan Chase (JPM). I think the media is overly exaggerating the negative consequences of the derivative losses that were made by JP Morgan and Chase. One example of this is Kate Kelly from CNBC:
"London Whale" trade, as the series of corporate-credit derivative trades that led to at least $6.2 billion in losses last year have come to be called, "provides a startling and instructive case history of how synthetic credit derivatives have become a multibillion-dollar source of risk within the U.S. banking system."
I understand the error in judgment the bank’s traders made at the prop-trading desks and that $6.2 billion is a large loss for a bank of JPMorgan’s scale to absorb. However, I also believe that these losses should be put in perspective so as not to cause any unnecessary concern for stakeholders. This can be backed by the large cash flow the company is still able to generate from current operations.
The company has been able to, consistently improve its cash from operations which can be shown by the upwards sloping trend line. The cash from operations was $25.08B in fiscal year 2012. Meaning that the business is still able to generate profits from its operations despite all the negative speculation over the London Whale losses and how it may affect the company going forward. There are many reasons for why investors should remain optimistic on the long-term prospects of the company going forward.
- Declining loan losses, believe it or not the company has set aside less capital in anticipate of future loan losses. This means that the whole "shadow inventory" scare is really coming to a close as loan loss allowances declined from 5.04% in 2009 down to 3.84% in 2011. This trend is likely to sustain itself, and it should be a positive indication of future growth going forward.
- The economics backing banking is becoming better. The American population continues to grow by 3 million people each year, remember, more people need to buy homes in order to leave their current household. Household formation is expected to go up, and with only 845,000 houses being built annually per year, there is a huge housing shortage. The difference between the 845,000 houses being built versus household formation that are projected to be at 1,200,000 according to economist estimates. This means further lending opportunities for Chase bank.
- Chase relies heavily on cross-selling financial products. Almost every financial product can be bought from Chase. Research, analysis, asset management, credit cards, debit cards, loans, and etc. The bank is emphasizing improved customer service in order to increase the profitability of the bank. This strategy makes sense because banking and financial services have an elasticity rating of 0.56. Meaning that customers are less price sensitive. Putting this in perspective, very few customers go out and shop for the highest interest rate on CD’s, the lowest interest rate on a mortgage or look for the lowest fees charged by a bank. Customers buy financial products based on preference, which is why banks can increase prices by 10% and anticipate a decline in demand of 4.4%. This could allow Chase to further maximize profits through price increases.
The SPDRs Select Sector Financial ETF (XLF) has been on a continuous up-trend. The asset management’s sector allocation strategy seems to aim towards the financials and less towards other sectors of the economy. The underpinning economics, plus the cross-selling opportunities banks have to further leverage their pre-existing sales force, seems to be one of the main reasons for why investors invest into banks.
The XLF has broke above the symmetrical trend line implying that the whole financial sector may be long over-due for a longer-term up-trend. I believe the banks are a great place for investors to park their capital.
The recent decline in JPMorgan’s stock price is likely to be temporary. As the media over-played the possibility of additional fines on the bank. Even, if fines were levered against the bank, it would not have substantial reputational damage as I can assure you every major bank on wall street hasn’t escaped regulatory scrutiny/class actions law suits whatsoever. It’s a matter of comparing one bad apple versus the other, not a matter of which one looks the best among the batch. That being the case I anticipate the stock to continue to rally after the momentary media hysteria which caused a sudden decline in the price of the stock.
According to Kate Kelly JPMorgan could be hit by some regulatory heat:
Levin and other subcommittee members will gather at 9:30am ET Friday on Capitol Hill to question JPMorgan executives as part of a day-long hearing on the London Whale debacle. Drew will be a star attraction, along with Braunstein and Thomas Curry, the Comptroller of the Currency.
I really have to put this in perspective and say, so what. It does not matter whether people go to jail on this one, the media have overplayed all the mistrust Main Street should have at Wall Street that the investment community plainly doesn’t care anymore. Investors are chasing yields, and the financials are still providing them. Overall I remain highly optimistic on JPMorgan Chase despite the repeated pretense the media puts up over the regulatory issues banks continue to face.