Using Common Sense And Perpetuities April 12, 2013Posted by Ishmael Chibvuri in Latest Articles!!!.
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Sometimes we try to make valuing stocks too difficult. If we like a company, and that is always a prerequisite, how do we know whether we are getting a margin of safety with our purchase? A lot of models generated by Wall Street research firms put painstaking effort into coming up with an exact earnings number. However, as investors, we should be comfortable with a range of outcomes because the value of our stock holdings will often deviate significantly from that company’s particular earnings power. One example, which I own shares in, is Aflac (AFL). We’ll return to that later.
I want to introduce the idea to those unfamiliar with it the notion of a perpetuity. A perpetuity is a constant stream of identical cash flows with no end. The formula for determining the present value of a perpetuity is as follows:
Basically, a perpetuity assumes an asset will generate the same earnings every year forever. So, to give an easy example, assume an asset generates $1 in earnings every year in perpetuity and as an investor you demand a 10% return. What is this asset worth to you? The answer should be $10, because $1/0.10 equals $10. So, let’s use the perpetuity formula on a couple of examples of stocks which I feel are undervalued today, and back out what rates of return we can expect from these stocks at current market prices.
Let’s return to AFL. According to Nadaq.com, AFL earned $6.11 last year. Aflac currently trades at ~$50. So, what rate of return could we expect if Aflac generated $6.11 in perpetuity (forever)? The answer is $6.11/.1225 = $49.88, approximately equal to Aflac’s current price. This means that we can expect a 12.25% (.1225) return from Aflac if it just keeps its earning constant for the foreseeable future. Many who have followed Aflac are aware it has demonstrated significantly higher than 0% earnings growth historically, and with even relatively conservative long-term growth rates factored in, Aflac should be worth much more in a few years than it is today.
Another company trading at low multiples with a good track record of growth is Cisco Systems (CSCO). According to Nadaq.com, its LTM EPS is $1.74 and trades for $20.96. Again, the expected rate of return is $1.74/.0825 = $21.09, approximately equal to its current trading price. This means that we can expect a 8.25% (.0825) return from Cisco if it just keeps its earning constant for the foreseeable future.
To provide some contrast, let’s look at a company I love to eat at, and which I believe will eventually become a strong dividend payer like McDonald’s (MCD). That company is Chipotle Mexican Grill (CMG). According to Nadaq.com, its LTM EPS is $8.75 and trades for $331.90. Again, the expected rate of return is $8.75/.026 = $336.53, approximately equal to its current trading price. This means that we can expect a 2.6%% (.026) return from Chipotle if it just keeps its earning constant for the foreseeable future.
Now, this case requires a caveat because Chipotle is growing so fast. Chipotle will certainly not have 0% earnings growth over the next 10-20 years, but what this number does tell us is that a significant portion of Chipotle’s "value" in the eyes of the market comes from its expected future growth. With companies growing as quickly as Chipotle, guessing what rate of growth makes sense is not a game I want to play.
I am content to look for companies similar to Cisco and Aflac, rather than Chipotle
6 Reasons To Buy Back Into Apple April 12, 2013Posted by Ishmael Chibvuri in Latest Articles!!!.
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"Apple computers? Aren’t those for artists and graphic-design nerds?" I asked the salesman demonstrating an early version of the Apple Macintosh desktop computer in the early 1990s. "I need a real computer, not something to paint pretty pictures on and design flowers with."
"You will understand one day, friend," he said with a smile.
Microsoft Has A Plan To Beat Apple, But Will It Happen? April 12, 2013Posted by Ishmael Chibvuri in Latest Articles!!!.
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In November 2012, CEO Steve Ballmer declared that Microsoft (MSFT) is now a devices and services company that develops its own end-to-end experience for consumers – no longer just a software company that licenses its operating system to PC makers to use as they please. Ballmer said Microsoft wants to maintain firm control over how its products are used, and has developed a new plan that could possibly threaten the former stock heavy-weight champ, properly known as Apple (AAPL); but is the proclamation "we have a strategy to beat Apple," maybe just a little too ambitious?
The first glimpse of how this plan might come together was unveiled two weeks ago, and was termed the codename "Blue," – a plan promising to roll out more frequent and more incremental updates of Windows, Windows Phone, Office and Xbox software. More than that, those updates will be coordinated across Microsoft’s multiple platforms, to get all customers’ "devices, apps and services working together."
Sounds fancy, right?
Despite the rumors that Microsoft will merge the Windows and Windows Phone platforms, making "Blue" a potentially huge deal, there hasn’t been much validation behind these anecdotal conjectures. Dissolving the barrier between mobile and desktop would be nothing short of impressive, but one must ask: is this really an attainable goal for Microsoft?
In the past, the company was not structured to address a challenge like this. To even be in a position to attempt to break down the walls between mobile and PCs, Microsoft needed the ability to do a few important things. First, it had to exert tight control over the third-party apps that run on its devices. With the inception of Windows 8 in October 2012, Microsoft successfully checked that item off the list.
Second, Microsoft had to establish specific hardware guidelines for partners looking to build Windows and Windows Phone products. In 2011, Nokia (NOK) and Microsoft announced plans to form a broad strategic partnership that would use their complementary strengths and expertise to create a new global mobile ecosystem. The intention was to ultimately create a market-leading mobile product designed to offer consumers, operators and developers unrivaled choice and opportunity. The result in subsequent years has been more than a reciprocal advantage for both companies, as Nokia’s Lumia 920 was recently named the best-selling Windows phone to date. The company also announced in its Q4 2012 financial results that 4.4 million Lumia devices were sold in its recent quarter- up from the 2.9 million Lumia devices shipped in the 3rd quarter of 2012. Not only that, but Nokia revealed that its North American devices and services volumes were up 40% from the same quarter a year ago to 700,000 in total.
The Windows phone and the development of a partnership with Nokia has been an interesting venture to watch over the last couple of years. The Windows phone continues to exponentially gain international exposure and presence, and shows promising signs of further globalization in the future, but is that enough to eventually pass Apple?
While Microsoft still has 90% of the PC market in its corner, and the ability to move towards mobile-PC convergence from its strong base of more than 1 billion loyal customers, it is still is going to need to think far outside the box to pass Apple anytime soon. It’s been no secret that Apple has taken one of the largest dives in market history – going from a high of $705/share in September of 2012, to a dismal current price of $435.69/share. The tech-giant has been the subject of much disparagement in recent months on worries that consumers aren’t taking to the last iPhone, and that the company needs the "next big thing" to show that it still has innovation left in the tank. While this stunning reversal has been spiteful for Apple investors, and has many worried that the company is just riding the aftershock of Steve Jobs’ successes, there are many things to look forward to.
Recently, rumors have spilled about the possibility of Apple partnering with Yahoo, in hope of developing a plan that would allow the two companies to collaborate on the iPhone and iPad devices. Yahoo chief executive Marissa Mayer recently met with Eddy Cue, Apple’s senior vice-president of internet services, to explore ways Yahoo can be more deeply integrated into the software that runs on the iPhone and iPad.
Yahoo already provides data for Apple’s weather and stocks applications, and the companies forged closer last year when Yahoo’s sports information was integrated with Apple’s Siri voice-recognition software. But clearly, the two believe there is still room to grow. Essentially, the new partnership would permit Yahoo to get its services and products onto mobile phones and tablets, while Apple gets a services provider that isn’t named Google (GOOG). Apple has been looking to partner with companies to help reduce its reliance on Google’s mobile services – a desire that is currently at the top of the priority list. In 2012, Apple ended partnerships with Google over maps and video, and has explored breaking up on search for many years. Its representatives recently met with companies that have search expertise, particularly Yahoo. No deal is imminent, said people with direct knowledge of the companies’ relationship, but the fact that negotiations are taking place should excite investors on both sides of the spectrum.
Ultimately, Microsoft will continue to develop its Windows phone presence both, internationally and domestically, and will eventually make a mobile phone and PC that are analogous in function , but the two aforementioned developments could not, and will not, allow Microsoft to pass Apple. Despite the precipitous decline over the last several months, Apple continues to lead the forefront of modernization and will continue to for many years to come. The tech-giant is merely too big for Microsoft to ever surpass them, and with strong growth initiatives in the making, I certainly wouldn’t count Apple out just yet.
Could Mozilla Firefox OS Upset The Mobile ‘Apple Cart’? April 10, 2013Posted by Ishmael Chibvuri in Latest Articles!!!.
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Apple and Android rule the roost
The mobile device operating system market is currently dominated by Google’s (GOOG) Android and Apple’s (AAPL) iOS. Android currently holds a ~70% market share of the smartphone market and over 40% of the tablet market. iOS on the other hand holds a ~21% market share of the smartphone market and ~50% of the tablet market. The other players in the market such as BlackBerry (BBRY) and Microsoft (MSFT) are too small to count as major players (see table below). Though BB10 and Windows 8 are expected to gain market share, nobody expects them to come even close to the market leaders. The recent sharp fall in Apple’s stock price has made me change my stance towards Apple. The valuation seems compelling and the market is not factoring in possible catalysts like the new iPhone 5S, smaller and cheaper iPhone, iWatch and iTV. Google on the other hand is reporting impressive growth numbers due to its near total dominance in the Internet Search market. While I am positive about the Google stock in the long term, I am a bit concerned about the stock in the short term.
Mozilla could disrupt the mobile apple cart
I had discussed how Android is coming under multiple attacks from different sources and it is only a matter of time before it cedes market share to other operating systems. iOS is also set to lose its No.1 position in the tablet OS market to Android according to IDC. However, one operating system that nobody is currently factoring in their calculations is Mozilla’s new Firefox operating system for mobile devices. This OS has the potential to completely change the mobile OS pecking order. Telecom carriers, mobile device makers and app developers have a big interest in breaking the Android-iOS duopoly in the mobile OS market. Firefox OS provides a credible alternative to both ecosystems. Mozilla has already managed to find some big heavyweight backers such as Qualcomm (QCOM), Deutsche Telekom (DTEGY.PK) etc. If Mozilla’s new phones are successful, then more players will join the Firefox bandwagon, putting pressure on the current leaders.
Top Five Smartphone Operating Systems, Shipments, and Market Share, 4Q12 (Units in Millions)
|Operating System||4Q12 Unit Shipments||4Q12 Market Share||4Q11 Unit Shipments||4Q11 Market Share||Year over Year Change|
|Windows Phone/ Windows Mobile||6.0||2.6%||2.4||1.5%||150.0%|
Mozilla set to launch Firefox OS for mobile phones
Mozilla announced the launch of Firefox OS for mobile phones during the Barcelona Mobile World Congress. The company has signed deals with a number of Asian mobile phone companies such as LG, TCL, ZTE and Huawei to launch cheap smartphones using the new OS. Mozilla has also managed to rope in telecom carriers to promote its mobile phones. According to Mozilla, 18 phone networks are backing the venture.
Firefox OS advantages over existing mobile OS
1) Use of open standards – Firefox OS will use open standards such as HTML 5 for its operating system which will not have proprietary extensions. This will make it easier for developers to code for the new OS.
Firefox OS smartphones are the first built entirely to open Web standards, enabling every feature to be developed as an HTML5 application. Web apps access every underlying capability of the device, bypassing the typical hindrances of HTML5 on mobile to deliver substantial performance. The platform’s flexibility allows carriers to easily tailor the interface and develop localized services that match the unique needs of their customer base.
2) Support from telecom carriers – Major telecom carriers are supporting the Mozilla effort because it is in their interest to reduce the vice-like grip of Apple and Google over the mobile ecosystem. American Movil, Deutche Telekom and Telenor plan to launch Firefox OS based phones in 2013.
3) Support from Qualcomm and handset companies – Firefox OS has roped in a number of major mobile hardware companies like Qualcomm, TCL, ZTE and others to support its new OS. Hardware support is quite crucial for Firefox OS to succeed and the company has managed to attract strong partners.
4) Wider acceptance from the coding community – One of the main selling points for the new OS is that it allows more developers to develop applications. The reason is that there are few developers who are familiar with the Android and iOS APIs, while HTML 5 is well understood by millions of developers.
Firefox browser is one of the most successful open source products
The Firefox browser is the 2nd most popular web browser globally with a ~20% market share. Firefox was the first browser to give MSFT’s ubiquitous Internet Explorer serious competition after Netscape was decimated by MSFT. Firefox managed to win a cult following, thanks to innovative features that Mozilla introduced for the first time. The ability to open multiple tabs in a single window, use of extensions etc. put Firefox far ahead of IE. Microsoft made major upgrades to IE after Google’s Chrome O/S started to gain serious market share.
How Mozilla could hurt Apple
Mozilla is trying to break the "walled garden" approach of the mobile ecosystems through its new OS. iOS is the biggest "walled garden" and therefore the main target of Firefox OS. The Mozilla foundation is a non-profit organization which means that it would be more acceptable to hardware vendors than Android or iOS. Apple does not license iOS to outside vendors and uses it exclusively for its own iPhone, iPad and Mac products. However, that may not hold true in the future when software becomes the key differentiator amongst mobile devices. Apple might find it more profitable to sell the OS and its associated software. BlackBerry management has been talking about getting out of the hardware business and into licensing of software. While Apple currently makes massive profits by selling its hardware products, it may not hold true in the future. If the new Firefox OS catches on, then Apple will face a big unexpected threat.
How Mozilla could hurt Google
Android is installed in smartphones sold by hundreds of vendors. These vendors have to follow the Google diktat with regard to version changes and compatibility. They also have to integrate Google services which they may not want to. Google is also not finding Android to be a big money spinner, despite its dominance in the mobile devices market. The reason for the success of Android is also the reason why Google is not making any money. The Android OS is based on Linux and is sold under an open source license. This means that Android is free and anybody can modify the OS to suit his own needs. Amazon (AMZN) has completely hijacked the Android OS to add its own ecosystem on top. It has replaced Google’s app store with its own store and Google has been able to do nothing about it. Mozilla will be more attractive to the third party vendors because their dependence on Google will be reduced further. Major mobile companies such as Lenovo, Samsung and Acer could completely switch over as they don’t like to be dependent on Google. Samsung could make the new Firefox OS an instant success by embracing it. Samsung is the world’s biggest smartphone seller and is currently experimenting with an in-house OS called Tizen. Firefox will allow Samsung to escape the clutches of western OS companies once and for all.
Mozilla is based on the same Linux OS roots as Android and is more developer friendly than Android. The biggest advantage of Firefox is that it will not be under the influence or control of any commercial enterprise. Recently, Alibaba was not able to launch an Android derived OS due to pressure put by Google on Acer. However, companies like Alibaba, Amazon and Facebook (which are coming out with their own smartphones) will have a huge incentive to switch to Mozilla. App developers will also find it easier to code for Firefox OS as it is built using open standards. The learning curve for HTML 5 is non-existent for most web developers.
The market is not currently giving too much attention to the new Firefox OS. Big companies and countries want to escape the clutches of Google and Apple. Firefox OS gives them the perfect opportunity to do so. China is already promoting a version of Ubuntu Linux to reduce Android influence. Mozilla has a long history of successful development using open standards. I feel that Google will be hurt much more by Firefox OS than Apple. The reason is that Firefox OS is targeting the low to mid-end of the smartphone market which is dominated by Google. Also Apple buyers will not be converted to Firefox OS easily, given the tight integration of hardware and software in Apple products. The switching costs from Android are much lower in my opinion. The Linux root of both Android and Firefox OS also poses a bigger threat to Android. I think that Google stock may come under pressure from Firefox OS, however, Apple should remain relatively insulated
ARM High; Intel Low – What Does The Market Know? April 10, 2013Posted by Ishmael Chibvuri in Latest Articles!!!.
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The cohort of pro-Intel (INTC) and technically knowledgeable posters prevalent on SA is using arguments that seem to hold no sway over Mr Market. Much reliance is placed on Intel’s ability to stage a big come back with the next great SoC hope based on a step change in manufacturing technologies and better performance in terms of power consumption per CPU cycle. Mr Market usually knows best and waits until there is some believable proof of new capability before breaking a long-held trend. Meanwhile ARM (ARMH) ploughs on innovating in its own strange collaborative way. For example the release by Cadence on April 4, is significant :
"Fulfilling the promise of performance and power scaling at 16 nanometers, ARM (LSE: ARM; Nasdaq: ARMH) and Cadence (NASDAQ: CDNS) today announced details behind their collaboration to implement the first ARM® Cortex®-A57 processor on TSMC’s 16-nanometer (NM) FinFET manufacturing process. The test chip was implemented using the complete Cadence® RTL-to-signoff flow, Cadence Virtuoso® custom design platform, ARM Artisan® standard cell libraries and TSMC’s memory macros."
The whole article is here
Now I am quite sure that Ashraf will tell us that it wont reach the market for years and anyway it won’t be good enough to power Mickey Mouse’s wristwatch (just kidding Ashraf) but to me it says that Intel’s still yet to be deployed and much vaunted superior manufacturing process and technical lead will be pulled back somewhat quicker than is stated and believed on SA.
In addition newer markets are opening up.
Renesas SoC targets high-end automotive nav and infotainment
Full Renesas article can be read here
Now I should not be labeled as an ARM diehard as I now hold Intel too in the form of long Call Options and I believe there is room for both companies to be highly successful but there is some naivety about the changes in the market that have not been taken on board.
We generally know when something has "Intel Inside" as Intel likes us to know. However, it is not so easy with ARM. I counted and researched the Intel devices in my home. I have one Intel powered iMac from 2007. I then counted the ARM powered devices in our home. It is not easy since it does not say "ARM Inside" on any device but quite often it is inside! The results :
1 iPad, 2 iPods, 3 Android smartphones (HTC, Samsung and Sony Xperia), 1 YouView TV recorder device, 2 Wireless routers, 1 fancy Blu Ray player, 2 TVs Samsung, 3 Digital cameras (don’t ask), 2 Sat-Navs.
Now there may be others that I failed to uncover but I make that 17 known devices. Now it is highly likely that in your own homes a similar story would be repeated if you can be bothered to do the research. It is a real world measure of ARM’s penetration into some existing and high-volume markets that we are all aware of and an indicative measure of ARM’s potential for gains in future markets. It is also a measure that Mr Market can see and relate to.
Whilst the consequent revenue to ARM is far less per device than that which goes to Intel, one should remember there is little capital cost for ARM and no product cost hence the high GPM in the business model.
Mr Market ignores bluster and BS in the same way that the rest of the world does not believe that North Korea can launch anything that would reach the USA in spite of laughably alarmist language. I suspect similar reasoning explains why Intel remains mired at the $21 level in spite of all the noise about new SoC releases yet to appear this year and that Mr Market quietly awaits some real evidence with explosive implications from Intel. Until that time material SP gains will be non existent or small.
Come on Intel! It is time to show us that Haswell and other new SoCs will be more effective than a North Korean Nuke! The market wants evidence, let us see some.
Additional disclosure: I await a lower dip in the ARM SP before reinvesting but retain a token holding. I hold some Jan 2014 Intel calls