In India, Google races to parry the rise of Facebook

SAN FRANCISCO/MUMBAI (Reuters) – Google retains only a slight lead over Facebook in the competition for digital ad dollars in the crucial India market, sources familiar with the figures say, even though the search giant has been in the country far longer and has avoided the controversies that have dogged its rival.

A woman walks past the logo of Google during an event in New Delhi, India, August 28, 2018. REUTERS/Adnan Abidi

Facebook’s success has shaken Alphabet Inc’s Google, led by an Indian-born CEO, Sundar Pichai, who has made developing markets a priority.

Google officials in India earlier this year were alarmed to learn that Facebook Inc was likely to generate about $980 million in revenue in the country in 2018, according to one of the sources. Google’s India revenues reached $1 billion only last year.

Facebook and Google declined to comment on Indian revenue figures or the competition between the two companies.

Google is now pushing back, attempting to lure customers with better ad-buying tools and more localized services. The revamped strategy mirrors initiatives that have succeeded in boosting the time Indian consumers spend with Google services.

The battle in India reflects an epic challenge for Google in developing markets around the world that are crucial to the company’s long-term growth – many consumers in those country’s are gravitating to Facebook and it’s siblings, Instagram and WhatsApp, at the expense of Google search and YouTube, and advertising dollars are quick to follow.

“Facebook is a far more user-friendly platform even though they haven’t created features specifically for Indian advertisers,” said Vikas Chawla, who runs a small ad-buying agency in India.

Facebook ads, compared with those on Google search or YouTube, tend to transcend language barriers more easily because they rely more on visual elements, said Narayan Murthy Ivaturi, vice president at FreakOut Pte Ltd, a Singapore-headquartered digital marketing firm. Pinpointing younger consumers and rural populations is easier with Facebook and its Instagram app, he and other ad buyers said.

And Facebook is succeeding in India, which boasts the fastest-growing digital ad market of any major economy, despite internal turmoil and political controversy. It has been without a country head for the last year, and has faced a series of incidents in which rumors circulating on Facebook and WhatsApp have prompted mob violence.

Facebook and Google between them took 68 percent of India’s digital ad market last year, according to advertising buyer Magna. Media agency GroupM estimates digital advertising spending will grow 30 percent in India this year.

The Facebook phenomenon is evident close to home for Google. During a recent lunch period, six out of 10 people who walked out of Google’s Bangalore offices while looking at their phones told Reuters they were checking WhatsApp. All 10 said they regularly used Whatsapp.

Eight Indian ad buyers interviewed by Reuters were divided on whether Facebook would overtake Google in Indian ad revenue. That such a question would even be debated explains why Pichai, Google’s chief executive, has pressed to flip the company’s approach to emerging markets.

“India is the most important market for the ‘Next Billion Users’ initiative,” Caesar Sengupta, the head of the effort, told Reuters on the sidelines of the annual “Google for India” event in New Delhi last week.

A man walks past a Google hashtag during an event in New Delhi, India, August 28, 2018. REUTERS/Adnan Abidi


For many years Google designed its services for early adopters of new technology, who tended to be in Silicon Valley, said Nelson Mattos, who oversaw Google’s Europe and Africa operations for several years. Great products would then find a broad global audience.

“Over time, as you saw the growth of Facebook, the importance of WhatsApp and other tools in these new markets, and not the same adoption of Google, the company started to realize that maybe they had to change that approach,” Mattos said.

Shortly after taking the helm three years ago, Pichai mapped a new strategy for places such as India: More services tailored to locals; more marketing on radio, billboards and TV; more local staff and start-up investment.

Google’s India workforce has more than doubled since to more than 4,000 employees, or about eight times Facebook’s presence, according to a tally of LinkedIn profiles and company statements.

Its products evolved too, becoming easier to use with low data plans. Smartphone apps such as Files Go and Tez – rebranded last week as Google Pay – were aimed at Indians.

“There’s definitely a sea change,” said Asif Baki, a user researcher at Google who oversees two-week “immersion trips” in developing markets for senior executives and staff.

The efforts are bearing fruit. Indian users during the first half of this year spent more time on Google services than on Facebook services, according to estimates from audience measurement firm Comscore. Over a similar period a year ago, Facebook came out on top.

Extending those gains to the ad business is a work in progress. A handful of Google executives, including leaders for display ads and small business advertisers, traveled to India earlier this year in a previously unreported trip to better understand the needs of Indian clients.

The visit spurred them to consider ideas such as enabling advertisers to reach users only in a particular Indian state, since language and literacy vary greatly around the country, according to a person familiar with the discussions.

At the New Delhi event, Google unveiled a plan to bring Indian newspaper content online, to increase the supply of search results – and ads – available in regional languages. 

Google still has to reckon with other issues. Small businesses in emerging markets are less likely to have websites, a foundation for Google ad campaigns but unnecessary for Facebook.

Executives met with one Indian merchant who recorded product videos on YouTube then messaged the links to potential customers on WhatsApp, said Kim Spalding, the company’s general manager and product lead for small business ads. 

    Facebook, meanwhile, is already on to commercializing such behavior. Just weeks ago, it began charging for text-based marketing features on WhatsApp, with video ads expected to launch next year.

Reporting by Paresh Dave and Sankalp Phartiyal; Additional reporting by Arjun Panchadar in Bangalore; Editing by Jonathan Weber and Alex Richardson

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Tesla, Software And Disruption

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Google Is Taking Down Tech Support Scammers

Google is taking action against the tech support scams that advertise on its platform.

The tech giant is making a commitment to removing misleading ads. Google told the Wall Street Journal it removed more than 100 ads every second for violating some part of its policies. Now, it’s also implementing a verification program to further combat bad actors.

The program is meant to ensure that only legitimate third-party tech support companies will be able to advertise on Google. The company announced it will also restrict the category globally in a blog post Friday.

The move comes after an investigation from the Wall Street Journal found fraudulent tech support ads masquerading as larger companies like Apple. Scammers would utilize Google’s advertising system to create misleading ads. The ads would display a link to Apple’s website, but the number in the ad would direct to a call center that the Wall Street Journal says “engages in tech-support scams.”

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China's Meituan Dianping sets HK IPO valuation at up to $55 billion: sources

SINGAPORE/HONG KONG (Reuters/IFR) – China’s Meituan Dianping, an online food delivery-to-ticketing services platform, has set an indicative price range of HK$60 to HK$72 ($7.64-$9.17) per share for its initial public offering (IPO) in Hong Kong, valuing itself at up to $55 billion, three people with direct knowledge of the matter said. Meituan, already one of China’s most valuable internet firms, could raise as much as $4 billion before the exercise of a “greenshoe” or over-allotment option, whereby additional shares are sold depending on demand.

Visitors look at a Meituan Autonomous Delivery (MAD) vehicle of Chinese food delivery platform Meituan-Dianping, at the first Smart China Expo in Chongqing, China August 23, 2018. Picture taken August 23, 2018. REUTERS/Stringer

The company is discussing a valuation of $46 billion to $55 billion with potential cornerstone investors including its main backer, gaming and social media company Tencent Holdings Ltd, for its float, the people said.

Meituan plans to secure about $1.5 billion from the cornerstone investors in the IPO, they added.

Meituan declined to comment when reached by Reuters. Tencent did not immediately respond to a request for comment outside regular business hours.

The Beijing-based firm filed plans for the city’s second multibillion-dollar tech float this year after smartphone maker Xiaomi Corp’s blockbuster IPO of nearly $5 billion.

Meituan is also – after Xiaomi – the latest company with a dual-class share structure to file for a Hong Kong listing, under the city’s new rules designed to attract tech companies.

However in late July Hong Kong Exchanges and Clearing (HKEX), the operator of Hong Kong exchange, said it would delay changes that would allow companies to hold shares with more voting rights, as more time was needed for investors to become accustomed to recent rule changes.

Meituan was valued at around $30 billion in a fundraising round late last year.

Xiaomi started trading in July after a closely watched but disappointing initial public offering that valued it at almost half the $100 billion that industry analysts had initially estimated.

Reporting by Julie Zhu in SINGAPORE, and FIONA LAU of IFR in HONG KONG; Writing by Anshuman Daga; Editing by Susan Fenton and Adrian Croft

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IBM's Unreasonable Price

Investment Thesis

There is plenty not to like about IBM (IBM). Nevertheless, because it is out of favor with investors, this is precisely why IBM is cheap. As value investors know, the only way to beat the market is by investing against the market. As such, I argue that IBM is now undervalued and presents a valuable investment opportunity.

Recent Developments

In my last IBM article, earlier this month I wrote:

I have been highly critical of IBM’s business prospects for some time. And while the issue which troubled me in the past continues to trouble me now, I am turning cautiously optimistic as I believe that at its present valuation, shareholders might have seen the worst of IBM already.

I stand firmly by those statements today. I believe that while IBM has not yet shown much in the way of the fruits of its labor, there are now some rays of light at the end of the tunnel, which leads me to believe that IBM’s operations have started to stabilize. Which, when taken together with IBM’s low valuation, I suspect that a lot of bad news with regards to its chronic underperformance has already been accounted for.

IBM’s Potential

Throughout my IBM articles, I have consistently highlighted my dissatisfaction with IBM’s management – this has still not changed. Notwithstanding this glaring blemish in my bullish thesis, I postulate that IBM’s performance has finally reached stability. This is not the same as concluding that a turnaround is in effect, not really, not yet.

But at the end of the day, IBM did post the best constant currency growth in seven years. Was this quarter a flash in the pan? Will IBM’s next quarter continue to build on this momentum? I do not know. But the beauty here, is that investing into a blue-chip fallen angel, while not having to pay much for it, leaves more which can ultimately go right than can actually go wrong.

Strategic Imperatives

Management makes analyzing IBM notoriously complicated by refusing to openly discuss its underperforming businesses. Having spent a great deal of time perusing through IBM’s SEC filings, I can conclusively state that IBM’s management has no interest in offering investors this information. On the contrary, IBM’s management puts a strong spotlight on its strategic imperatives – which are IBM’s cherry-picked business lines.

Nevertheless, in spite of much-craved details from investors, when all is said and done, IBM’s strategic imperatives now generate 50% of IBM’s consolidated revenue.

In more detail, IBM has 3 main operating segments, which generate close to 88% of total revenue. These are its Technology Services & Cloud Platforms (roughly 45% of total revenue), Cognitive Solutions (roughly 23% of total revenue) and Global Business Services (just shy of 22% of total revenue). Further, while IBM can press forward with the narrative that each one of its large segments generated year-over-year growth, when we drill down a little, we can see that is not actually the case:

Looking at our performance at constant currency. The revenue trajectory improved in both services segments and both returned to modest growth.

CFO Kavanaugh Q2 earnings call

However, once we exclude currency benefits of 2%, both IBM’s Technology Services and Global Business Services were actually flat year to year, adjusting for currency.

Source: Investor Presentation

Could The Cloud Be IBM’s Catalyst?

Next, there is no denying that IBM’s cloud is able to deliver solid revenue growth. For instance, IBM’s cloud was up in Q2 by 18% YoY (at const. currency) to $4.7 billion, while the cloud generated $18.5 billion over its trailing twelve months.

Thus, without any heroics, according to some commentators, this makes IBM’s cloud bigger than most other big-name players, such as Google (GOOGL) (NASDAQ:GOOG), Salesforce (CRM), Oracle (ORCL) as well as others.

In other words, IBM’s cloud is no pushover. As investors clamor to participate in this fast-expanding sector, while at the same time arguably overpaying for said participation in other stocks, IBM, conversely offers investors significant exposure to this fast-growing sector without currently asking investors to pay up for its shares.


Source: author’s calculations,

On the one hand, we cannot say that Amazon (AMZN), Alphabet or Microsoft (MSFT) are IBM’s peers. On the other hand, these companies are arguably trading at elevated multiples, in part, because of the narrative which these companies are spinning about their cloud operations and how their respective cloud platforms are growing at astonishing rates. And as we can see, on a P/Sales ratio, which I believe is nicely reflective of investor’s sentiment, we can observe that the 3 peers all trade more expensively than their own 5-year averages. Sometimes justifiably, but sometimes not so.

However, as the table above shows, IBM is the outlier in the group, with its P/Sales and P/Cash Flow multiples both trading cheaply relative to itself as well as relative to its peers.

Finally, given Kavanaugh’s continual reaffirming guidance that IBM would be able to generate approximately $12 billion of free cash flow in FY 2018, this puts IBM on less than 12X multiple to free cash flow – bargain.


I argue that there are plenty of reasons not to like an investment in IBM and that is why its shares are cheap. Simply put, I believe that given that IBM already trades for less than 12X free cash flow, a lot of bad news has already been more than priced into IBM’s shares.

Author’s note: The only favor I ask is that you click the “Follow” button so I can grow my Seeking Alpha friendships and our Deep Value network.

Disclaimer: Please do your own due diligence to reach your own conclusions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Apple: Big Red Flags

Apple’s (AAPL) ability to generate high earnings can take a hit due to the decline in its operating margin. On a year-on-year basis, Apple’s operating margin has fallen for 11 straight quarters. In the recent quarter, the operating margin came at 23.68% whereas it stood at 28.39% in the June quarter of 2015. There has been a cumulative decline of 471 basis points in the last three years which should reduce the long-term bullish sentiment.

As Apple prepares to launch its flagship iPhones in the next few weeks, all reports are pointing to a lower pricing for all the three models to be launched. Unless Apple is able to reduce its bill of material or BOM cost, we would see another year of falling margins. It would be difficult for Apple’s stock to continue with the current bullish run as these key metrics show a big decline.

Another quarter of operating margin decline

Fig: YOY operating margin decline shown by Apple. Source: Apple filings, Ycharts

March 2015: 31.51%, March 2016: 27.67%, March 2017: 26.65%, March 2018: 26.00%, Cumulative decline: (551 bps)

June 2015: 28.39%, June 2016: 23.86%, June 2017: 23.71%, June 2018: 23.68%, Cumulative decline: (471 bps)

Sep 2015:28.39%, Sep 2016: 25.10%, Sep 2017: 24.95%, Cumulative decline: (344 bps)

Dec 2014: 32.50%, Dec 2015: 31.86%, Dec 2016: 29.81%, Dec 2017: 29.76%, Cumulative decline: (274 bps)

This decline has continued in the recent iPhone cycle when we saw high price tags on all new models of iPhones. The higher pricing provided a good bump to the ASP but it also came at the cost of higher bill of material. Although iPhone X was sporting a very high price of $999, it also had one of the highest BOM. According to a teardown by IHS Markit, the $999 iPhone X had BOM of $370.25. Hence, the BOM of iPhone X was equal to 37.06% of the retail price.

On the other hand, a teardown of iPhone 7 showed that the BOM was $224.80 while the retail price was $649. In this case, the BOM comes to 34.63% of the retail price. We can clearly see that although iPhone X was sporting a higher price tag, it produced lower margins for Apple.

The growth of Services segment is often cited as a big reason for the long-term bullish case in Apple. However, faster-growing services like Apple Music would have a much lower margin than what Apple produces through its devices or App Store. Spotify (SPOT) reported a gross margin of 21%. Recent margin models by Macquarie Research estimate only 15% gross margin for Apple Music. A higher product mix towards services which deliver lower margins will inevitably lower the overall margins of the company.

Next iPhone cycle

Apple will be launching three models in the next iPhone cycle. There would be a successor to iPhone X with 5.8-inch screen and a plus-size model having 6.5-inch screen. However, most of the focus is on the cheaper LCD version of iPhone X, let’s call it iPhone 9, which will have 6.1 inch screen. Most of the analysts have estimated this iPhone 9 to have a sub-$700 price tag. This would be the main model which would drive the bulk of unit sales for Apple.

Unless Apple is able to show some very big improvement in lowering the BOM of this iPhone 9, it will see a big decline in margins. Last year, iPhone 8 had BOM of $247.51. If Apple manages to keep the cost inflation to 5%, it would see the BOM of iPhone 9 rise to $260. If the price tag remains at $699, this would have a BOM cost equal to 40% of the price tag. A lower retail price for iPhone 9 will further increase the percentage cost of BOM and reduce the margin for a model which could possibly show highest unit sales among new models and be the biggest contributor to revenue.

Hence, it looks highly unlikely that Apple would be able to break the margin decline in this iPhone cycle.

Other red flags

In my previous article on Apple, one of the comments pointed out that other metrics like EV/FCF should be given greater importance than margins. Even in this metric, Apple’s valuation is now at the highest level after the Great Recession.

Fig: EV to FCF is at the highest level while yield is at the lowest point since the first few hikes in dividend.

While in the early part of this decade, Apple could justify the higher valuation level due to rapid growth in iPhone segment, it does not have a similar revenue growth driver. Also, the revenue base was much smaller at that time which led to a much bigger impact due to iPhone growth. It would be harder to move the needle now when its trailing twelve month revenue is over $250 billion.

Services segment is showing good growth prospects but it is still quite small compared to revenues from devices. In the last quarter, Services segment had revenue of $9.5 billion, which was equal to 17.4% of the total revenue. Other Products segment had revenue of $3.7 billion, making a contribution of 6.9% to the total revenue. Together these two high growth segments contribute less than a quarter to the total revenue.

In this scenario, if the margins are declining while valuation levels are at record levels, it would inevitably lead to greater bearish sentiment towards the stock.

Investor Takeaway

Apple has reported operating margin decline for the past 11 quarters. At the same time, its EV/FCF ratio is close to 19, which is the highest level in this decade. There are several revenue streams like Apple Music in the services segment which will further push the margins down. It is unlikely that Apple will push the envelope in terms of pricing in this iPhone cycle. Keeping price hike at moderate levels can help Apple in increasing the unit sales but it will have a bigger negative impact on margins. For long-term investors looking for value, the margin decline is a strong signal about the future headwinds facing the company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Amazon: $2 Trillion By 2020?

I have always had a hard time making sense of Amazon (AMZN) as an investment vehicle. I continue to believe that talking about the company and the stock in terms of next quarter’s earnings or this year’s revenues is futile. After all, a forward P/E of 110x or an EV/sales of 4.0x (on razor-thin margins) could only lead to one logical conclusion: AMZN is an overpriced stock to avoid.

Credit: ABC 13 Eyewitness News

Roughly one year ago, I argued instead that investing in Amazon required “2020 vision”. That meant that, in my opinion, one must try and project the company’s results at least three years out in the future, ideally more, to decide whether buying the stock today makes sense.

To do so, I revisit my 2025 projections from back in the early part of 2017 and make adjustments given the developments of the past one and a half year. By doing so, I hope to answer (or at least take a stab at answering) a couple of key questions: does AMZN deserve its nearly $1 trillion valuation? And if so, can the stock continue to head up, perhaps at the same 44% per year pace that it has experienced in the past five years?

Deeper roots in North America

The North America segment represented a sizable 60% of Amazon’s total revenues in 2017, and its growth, surprising to some, has not shown any sign of slowing down. The company seems to have used a strategy of horizontal expansion to keep momentum going strongly – think, for example, of the Whole Foods acquisition that not many saw coming, or Amazon’s head-first dive into content creation and distribution with Prime Video. Despite the richer fulfillment, marketing, and content costs that the growth strategy demands, the North America segment has seen unadjusted operating profits rise by a factor of four YOY last quarter.

Last year, I believed Amazon could deliver what now seems like a very timid 20% revenue increase in 2018 that would slowly dwindle to the low single digits by 2025. Today, I recognize that my expectations have been set too conservatively: growth in the first half of 2018 has reached an impressive 45% already – although comps should get tougher by this year’s holiday season. I now do not expect the revenue increase to dip below 10% until 2025, with near-term prospects looking much rosier than I originally envisioned.

International expansion

This is perhaps Amazon’s least developed segment. After having transformed the retail landscape and disrupted other industries (like media) in the U.S. and neighboring markets, quite a bit more work is left to be done beyond the North American borders. Roughly 18 months ago, when international sales of $44 billion in 2016 had been growing at a 24% clip, the company’s CFO spoke of fulfillment expansion being more balanced between domestic and global in order to address the international opportunity.

Since then, international revenues have increased at an average 25% rate over the past six quarters, with the most recent holiday season (one of Amazon’s most impressive) experiencing robust growth of 29% that was followed by 1Q18’s even better 34%. Amazon seems to have a blank canvas in terms of what product or service initiatives it may choose to pursue in what countries – it seems to me that Prime and Alexa-enabled devices have been key priorities. Also very importantly, scale (of fulfillment infrastructure and marketing efforts, for example) is finally providing some lift to profitability, and GAAP operating loss has started to narrow.

In 2017, I foresaw international revenue growth landing at 30% in 2018 and declining steadily towards GDP-like growth within eight years. Today, I maintain my expectations for top-line growth in the near term but see it declining at a less steep trajectory in the coming years.

AWS execution

If I ever considered buying AMZN in the past, Web Services was likely a key reason to do so – I elaborated further in my two-year-old but still relevant 2016 article on the subject. The relatively small segment (12% of total revenues in 2Q18) is an able generator of op profits (55% of total company’s last quarter) and gains of scale here are likely to support Amazon’s margins going forward.

As it turns out, my mild fears over fierce competition and price pressures in the cloud storage, and computing spaces have proven to be a bit overdone. Amazon has been able to reignite growth in AWS in the past three to four quarters, as the graph below illustrates. This was probably enabled by a combination of the secular transition to cloud solutions, a strong macroeconomic environment that has encouraged digital infrastructure investments, and Amazon’s competence at providing a good product at a competitive price despite the success of competing services like those of peer Microsoft (MSFT).

I now expect cloud services growth to surpass the 40% mark in 2018, with the decline over the next eight years averaging about four percentage points per year. See historical trend in AWS revenues and top-line growth below.

Source: DM Martins Research, using data from company reports

Plugging in the numbers

As evidenced in the narrative above, Amazon has delivered well beyond my early 2017 expectations. Despite the size of the company, one of the largest in the world, there seems to be quite a lot of revenue and op profit growth opportunities yet to be realized, from horizontal expansion domestically to international penetration to gains of scale driving increased margins.

Looking at the near term first (i.e. next 12-18 months), I believe the Street’s expectations for 2019 revenue growth of 22% suggests to me a significant deceleration in Amazon’s footprint expansion – something that I find unlikely, absent a more severe deterioration in macroeconomic fundamentals. Therefore, I would not be surprised to see upward revisions in top-line estimates in the upcoming months, should Amazon continue to execute as well as it has over the past few years.

Switching to the long term (two to five years at least), I don’t find it unreasonable to project double-digit revenue growth through 2025 which, coupled with expanding margins, might conceivably produce what I estimate might be $40 in EPS by 2021 (roughly $20 billion in net income and 500 million shares outstanding) vs. $25/share projected for next year. Should Amazon be able to deliver against this aggressive growth benchmark, it is unlikely that its stock would suffer much in terms of multiple contractions. At a forward earnings multiple of 100x, EPS of $40 would imply $2 trillion in market cap by the end of 2020 – roughly 37% annualized share price appreciation that looks doable in the context of trailing five-year trends.

Those optimistic enough to believe that the Amazon story has barely begun may find today’s valuation justifiable and see an investment in the stock still enticing. To them, AMZN may have lost the race to $1 trillion in market cap to Apple (AAPL). But if all goes well, the stock could still rush ahead and beat its peer at becoming the first ever $2 trillion company.

Disclosure: I am/we are long AAPL, MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may own AMZN indirectly through passive ETFs (exchange-traded funds).

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Apple Vs. Amazon: The Right Choice Is Simple

With each stock trading at all-time highs, both Apple (AAPL) and Amazon (AMZN) have performed well so far this year for investors. Both continue to be on a torrid growth path and have a similar enterprise value, but that’s where I see the similarities stop. I consider Apple to still be one of the best stocks on the market. Apple’s combination of operating performance, growth rate, balance sheet, and valuation make it an attractive stock. As an added bonus, Apple has begun returning significant amounts of capital back to shareholders in the form of dividends and share repurchases. Amazon’s revenue is growing at a faster rate, but it’s yet to result in meaningful operating margins, profits, or free cash flow. Right now, Amazon’s valuation is difficult to quantify from a fundamental approach. The stock price is more based on its potential, but I believe this is speculative and greatly increases the stock’s risk. For Amazon’s stock price to make sense, some pretty outrageous assumptions need to be made and it’s still unclear if or when the company can make those achievements.

Operating Performance – Winner: Apple

Amazon is growing its sales at a faster rate, but I consider Apple the superior performer given the rate at which its revenue is turned into real profits. Year-to-date, Apple has grown revenue by 15% compared to last year and is on pace for a record year across all major operating metrics. In my opinion, Amazon’s performance still falls a little flat with operating and profit margins that are still less than 5%.

Free Cash Flow – Winner: Apple

If there’s something to really pay attention to, it’s the free cash flow that Apple and Amazon produce. No company produces cash flow like Apple, which has been funding a massive share buyback program. This has amounted to $53.3 billion spent this year already. Amazon is valued almost as much as Apple, yet produces a fraction of the free cash flow. Just like operating performance, Amazon has yet to turn its large amount of revenue into meaningful free cash flow. I think that Amazon has the potential to reach the levels that Apple is currently at, but how long will this take? It could be 10 years from now and I believe that kind of speculation makes it a risky stock to bet on.

Balance Sheet – Winner: Apple

With a net cash balance of $129 billion, Apple is the true king of cash and has the far superior balance sheet. This level of cash provides a level of operating flexibility that no company can match in terms of investment and acquisition potential. Amazon has been taking on debt recently and actually has a negative net cash balance, which is a result of some of the things I’ve already pointed out (e.g. no meaningful profits yet). While its level of debt is still small compared to its enterprise value, I do think this is something to watch.

Valuation – Winner: Apple

Apple’s valuation is rooted in fundamental analysis and looks attractive across the board. I especially like Apple’s 18.7x EV/FCF ratio and a growth rate above 10%. Amazon’s valuation on the other hand is hard to make sense of from a fundamental perspective. As an example, Amazon’s price/sales ratio of 4.52x is extremely high for a company that has had profit margins of only 4% so far this year.

  • Forward P/E, Price/Sales, and PEG Ratio provided by Yahoo Finance.
  • EV/FCF provided by Ycharts
  • LT Growth Rate derived from Forward P/E and PEG Ratio
  • Averages for Forward P/E and EV/FCF do not include Amazon

Wall Street’s Opinion – Winner: Draw

Wall Street is considerably more bullish on Amazon than Apple. The majority of analysts recommend Amazon as a ‘Buy” and the average target price represents more upside potential. According to MarketWatch, the average target price for Apple is $214, which represents 2% downside based on the current share price of $219. The average target price for Amazon is $2,127, which represents 10% upside based on the current share price of $1,936.

Risk Profile

I’ve believed for a long time that there’s tremendous risk in Amazon’s valuation returning back to historical averages. A large percentage of the stock price increase has been a result of increasing price/sales multiples, which is now at 4.52x (a crazy number for an e-commerce company) and more than doubled over the last couple of years. For comparison, Walmart’s (NYSE:WMT) price/sales ratio is only 0.55x. Apple’s stock does not have this risk given its current price/sales, forward earnings, and EV/FCF are all very reasonable.

AMZN PS Ratio (TTM) data by YCharts

AAPL PE Ratio (TTM) data by YCharts


In my opinion, there’s a number of factors that make Apple look much more attractive when compared to Amazon:

  • Apple trades cheaper at every major valuation multiple. In particular, a significantly lower EV/FCF and PEG ratio are compelling.
  • Apple produces significantly more free cash flow, which has allowed it to amass a cash war chest, fund a dividend, and repurchase stock.
  • Apple’s stock price is a result of strong performance, which is identifiable through its valuation multiples.
  • Apple has tremendous untapped potential, but the stock is valued on today’s performance. Any untapped potential will likely yield additional upside in the stock.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Brussels loans Nokia €500m to fund European 5G research

Finnish networking and comms giant Nokia has been awarded a €500m (£453.6m) loan by the European Investment Bank (EIB) to further accelerate its research and development around the next-generation 5G mobile network standard.

Backed by the European Fund for Strategic Investments (EFSI), part of the European Commission’s (EC’s) Investment Plan for Europe, or Juncker Plan, the loan will provide much-needed support to Nokia as it develops its 5G proposition – an area where European firms are widely regarded as having fallen behind their counterparts in Asia and North America.

Nokia proposes to deliver an end-to-end 5G network proposition, from the radio access network (RAN) to internet protocol (IP), as well as optical and packet core networks, service platforms, and other software and services associated with 5G, making it capable of acting as a one-stop shop for mobile network operators (MNOs).

“We are pleased to land this financing commitment from the EIB, which shares our view of the revolutionary nature of 5G – and the realisation that this revolution is already under way,” said Nokia CFO Kristian Pullola.

“This financing bolsters our 5G research efforts and continues the broader momentum we have already seen this year in terms of customer wins and development firsts, supporting our relentless drive to be a true leader in 5G – end to end.”

EC vice-president Jyrki Katainen, who is responsible for jobs, growth, investment and competitiveness, said: “Ensuring that Europe embraces and benefits from new technologies requires sustained investment. That is where the Investment Plan for Europe can play a crucial role.

“I am delighted that, with today’s agreement, the plan is contributing to Nokia’s research and development activities across multiple European countries to advance the development of 5G technology.”

Viavi vice-president of wireless, Li-Ke Huang, said: “The US, China and South Korea have invested early and heavily to try to establish a leadership position in the ‘5G race’. This investment from the EIB is a crucial show of 5G support in Europe, and a demonstration of the region’s commitment to developing next-generation networks.

“Sustained backing from private, public and governmental bodies is essential to ensuring that Europe continues to be a major player in cellular communications.

“In order to be granted enough spectrum and gain the necessary support from regulators and governments, operators and vendors in Europe need to demonstrate that 5G development can solve existing problems in today’s networks.”

Huang said that the strength of its mobile ecosystem through the likes of Nokia and Sweden’s Ericsson meant Europe was still in a strong position to drive development of 5G networks, with support from governments, universities, consultancies, R&D specialists and the wider industry.

“Continued financial investment, along with collaboration and knowledge-sharing, will help to promote 5G development across the continent,” he added.

Earlier in August 2018, Nokia revealed that it would charge a flat fee of €3 per device to license its 5G patents, substantially undercutting rivals such as Ericsson and Qualcomm. The move has been read as an attempt to reduce the chances of it getting into legal battles with smartphone manufacturers, as well as to increase the attractiveness of its 5G portfolio.

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Instagram Adds 2FA, Account Verification in Security Update

Social media platforms’ struggle with safety and security is like a game of Whac-A-Mole. One day, the threat is coordinated bot activity; the next, it’s SIM hijackers stealing the identities of regular users. In an effort to protect Instagram users from those and future threats, the company announced today a set of features designed make Instagram feel “safer,” including ways to protect your own account and to verify whether the accounts you follow are genuine or not.


First, all users will soon be able to use a more robust form of two-factor authentication to log into Instagram. Previously, Instagram offered two-factor authentication with a code sent via SMS—better than nothing, but insufficient to protect all Instagram users from having their accounts compromised. (Users with “valuable” handles may be more vulnerable to scams like SIM hijacking, where hackers access a person’s phone number and use it to log into their accounts and steal their usernames.) Now, the platform will allow integration with third-party authenticators, like DUO Mobile and Google Authenticator, which supply two-factor codes locally and provide an additional layer of security against account hacking.


To help users differentiate between real and fake accounts, Instagram will now make it easy to look up information about individual accounts, including the date the account was created, its country of origin, and a record of username changes over the past year. You’ll also be able to see any ads the account is running and similar accounts with shared followers. To surface this information, tap the three dots on an Instagram profile page and select the new tab, “About This Account.” The feature will roll out first to accounts with large followings—celebrities, public figures, influencers—and later to all Instagram accounts.

Lastly, accounts with large numbers of followers will now be able to request verification from Instagram. The platform already gives blue checkmarks to some celebrity users and brands—WIRED’s Instagram, for example, has one—but the verification process is mysterious, and Instagram hasn’t previously let users request verification. The new verification process involves a request form along with a place to upload a photo of a government-issued photo ID.

Post Mates

Instagram says the new changes are part of a roadmap to help the platform feel safe, and to empower users to follow genuine accounts over fake ones.

“Keeping people with bad intentions off our platform is incredibly important to me,” Instagram’s co-founder and CTO, Mike Krieger, wrote in a blog post today. “That means trying to make sure the people you follow and the accounts you interact with are who they say they are, and stopping bad actors before they cause harm.”

The platform is also hoping not to repeat the same mistakes of its parent company, Facebook, which has struggled to keep fake accounts, misinformation campaigns, and untrustworthy pages off its platform. In the past few weeks, Facebook has removed millions of fake accounts in the past year, and which are becoming harder to trace on the platform.

Instagram is, of course, a different beast. As it grows, it will have to face hard decisions about how to create community and trust on a global platform of over a billion users. Checkmarks and two-factor authentication aren’t the end of that story. But they’re a good place to start.

More Great WIRED Stories

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Tesla shares dip 3 percent after Musk abandons buyout

(Reuters) – Shares in Tesla Inc (TSLA.O) fell just over 3 percent on Monday after it abandoned a plan to take the electric carmaker private, with some analysts suggesting it should either replace Chief Executive Elon Musk or appoint another strong senior manager.

FILE PHOTO: Tesla superchargers are installed at the Quinte Mall in Belleville, Ontario, Canada, May 6, 2018. REUTERS/David Lucas/File Photo

The billionaire entrepreneur said in a blog post late on Friday that consultations, done with the help of Goldman Sachs and Morgan Stanley, had shown most of Tesla’s existing shareholders opposed the deal that he proposed on Twitter three weeks ago to widespread shock on Wall Street.

Tesla’s shares, already down nearly 15 percent from a peak on Aug. 7 when Musk tweeted that he had “funding secured” for a buyout at $420 a share, initially fell more than 5 percent in European and premarket trading in New York.

They recovered, however, to stand down just 3.4 percent lower at $312 by 7.40 e.t..

A series of notes from Wall Street analysts questioned Musk’s credibility going forward in the face of a possible investigation by the U.S. Securities and Exchange Commission into the factual accuracy of an Aug. 7 tweet that funding for the buyout deal was “secured”.

“Musk’s involvement in the company is critical, but now more than ever a solid #2 – someone with strong operational background that can help Tesla move from ideas to execution – is crucial,” analyst Joseph Spak from RBC Capital Markets wrote in a client note.

Tesla said on Sunday it was not searching for a chief operating officer.

“While we are always looking for highly talented executives (…) there is no active COO search,” a spokesman said by email.

With Musk’s idea for a buyout backed by Saudi Arabia’s sovereign wealth fund now off the table, attention was zeroing in on Tesla’s efforts to become profitable, its cash reserves and what steps Musk could take to raise fresh capital.

Tesla had $2.78 billion in cash at the end of the second quarter, after a record $718 million loss.

In early August, before the buyout plan was made public, Tesla reiterated a forecast that it would achieve a profit in the third and fourth quarters, under normal accounting rules, and Musk said the company would not need to raise more cash.

A Tesla spokesman on Sunday referred to those previous comments.

“With its long term mission intact but short term growth shaky, serious gaps in execution skills and a board under pressure for not assuming its duties, now may be the time for third parties to get involved, be it from technology or even oil,” Jefferies analyst Philippe Houchois told clients.

One of Tesla’s biggest challenges is ramping up production of its latest vehicle, the Model 3, which is critical to its profitability goals.

Monday’s fall would still leave shares in the company 27 percent above a low of $244.59 hit on April 2, a day before the electric carmaker released its production and Model 3 deliveries report for the first quarter.


Investors in Tesla’s bonds and convertible debt had also already shown skepticism that the tens of billions of dollars needed for the buyout would materialize, unconvinced by Musk’s tweet or subsequent blog post in which he could only make the case for going private and not list clear backing.

Analysts have suggested a capital raise may be required soon to boost investor confidence but investment bankers who are not working for the company said over the weekend it would also contradict Musk’s promise that Tesla is adequately funded.

This week would also be an inopportune time for a capital raising, given that many bankers and investors are away ahead of the Sept. 3 Labor Day holiday. 

“We see the company raising $2 billion in 4Q18, through convertible debt, which may prove a challenge if there still is an ongoing SEC case open,” Cowen and Co analyst Jeffrey Osborne wrote in a client note.

The high price investors have put on Tesla’s shares has allowed Musk to expand U.S. production, invest in building out a vehicle charging network and start work on new models including a small sport utility vehicle, a new Roadster and a semi-truck even as the company burned cash.

Tesla earlier this year announced plans to build a battery and vehicle assembly complex in China. Musk said earlier this month that the company’s “default plan” would be to fund that expansion by borrowing money from Chinese banks.

Additional reporting by Helen Reid, writing by Joseph White and Patrick Graham; editing by Paul Simao and Jan Harvey

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Peter Schiff: The Fed Is Going To Have To Give

By SchiffGold

We are now officially in the longest bull market in the US stock market history. Yesterday took out the record set in the 1990s. As Peter Schiff pointed out in his most recent podcast, the old record run ended in 2000.

“And we all know how badly it ended. It ended with a 50% collapse, an 80% collapse in the Nasdaq, and the Federal Reserve had to slash interest rates to 1% and inflate a housing bubble in order to prop the market back up.”

Peter said he believes this bull market will meet a similar if not worse fate.

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“In fact, I think that the coming bear market … will be the worst bear market in US history, not probably in a nominal sense, but a real sense. Meaning how much value the US stock market loses if you want to price it in gold.”

Pres. Donald Trump continues to take credit for the bull market, despite the fact that the vast majority of it happened before he ever took office. Of course, as a candidate, Trump called the market a “big, fat, ugly bubble.” He was right then, but as the saying goes, he’s forgotten where he came from.

“Of course, now that it’s his big, fat, ugly bubble, it’s no longer ugly, it’s no longer a bubble, it’s probably no longer fat either. It is just a record-setting bull market that he wants to claim credit for.”

The Federal Reserve released its August minutes yesterday. It didn’t reveal anything new and had little impact on the markets. The central bank appears on pace for another rate uptick in September and then again in December. But there was a little dovish sentiment buried in the minutes as a number of the FOMC members expressed concern about the trade war, and indicated they could slow the pace of hiking if it continues to heat up.

The Fed also acknowledged some weakness in the housing sector. Peter said he thinks they are actually understating it. Existing home sales numbers released yesterday showed the fourth straight monthly decrease. As Peter noted, that hasn’t happened in five years.

“I think we’re going to get another declined next month, and if the Federal Reserve is concerned a bit about weakness in the housing market, why would they want to continue to raise interest rates? Because part of the problem for the housing market are the interest rates that are making homeownership more expensive.”

The Fed also mentioned concern about emerging markets. Some analysts fear the currency crisis in Turkey could spread to other emerging economies. The expectation that the dollar will continue to strengthen is the real problem for emerging markets.

“And the main reason that everybody believes the US dollar is going to continue to strengthen is because they believe the Fed is going to keep raising rates and shrinking its balance sheet. So, the longer the Fed is going to keep up the pretense that it’s going to raise rates and shrink its balance sheet, then it continues to put pressure on emerging markets and it continues to put pressure on the housing markets. So, ultimately, the Federal Reserve is going to have to give, and what the markets are going to have to start anticipating is the end of the cycle. Because even though the Fed is still talking about removing the monetary combination, there’s not much left that they can remove without the whole thing coming toppling down. In fact, the evidence is already there that the economy is weak, despite the refusal of the markets to acknowledge that. And clearly, Donald Trump wants to continue to pretend that the economy is strong.”

Peter said talking up the economy is really the only thing the president has left to take public attention away from the political mess that’s unfolding.

Peter goes on to talk about the political turmoil Trump now finds himself embroiled in. He said that the president’s denial of the obvious compounds his mistakes. Listen to the whole podcast to get Peter’s take on Trump’s troubles and what it could mean down the road.

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The Most Potent Gen-Z Entrepreneurial Panel Assembled

As an organizational psychologist, one of the topics I study is generational differences. Each generation is different from the last for multiple reasons. The vast changes from one generation to another weren’t as apparent when the world was more local and linear. However, now that the world is global and exponential, each generation has a new world to adapt to from the last. 

Gen Z kids are digital natives who have never lived in a world without the Internet, smartphones and social media. Their technological skills are intuitive and exceed those of their parents, says Don Tapscott.“This is the first time in history when children are an authority about something really important.” Gen Z kids are innately savvy at technology and innovation; it’s in their blood.

These kids care about big and small things going on in the world. They are highly motivated to create solutions to the world’s problems. This deep interest in social issues was not learned in their classrooms. Rather, research has found that global news consumed via the Internet has motivated Generation Z to become more socially conscious than previous generations.

“I think our generation is socially conscious, environmentally friendly and they are global thinkers,” says Linda Manziaris, a 14-year-old jewelry entrepreneur who gives half of her income to a charity created by her 16-year-old sister.

Generation Z Panel At Genius Network

This post represents Part 1 of a several part series detailing my investigation into what will likely be, one of the most potent and comprehensive Gen-Z entrepreneurial panels yet to be assembled. 

In November of this year, 2018, the Genius Network Annual Event will occur. For many of the top entrepreneurs in the world, this event represents the zenith. Tony Robins, Peter Diamandis, members of Shark Tank, and many other high profile entrepreneurs are often found in attendance. This year, one of the events within the Annual Event will be Joe Polish interviewing a stacked panel of famous Gen-Z entrepreneurs. 

With full disclosure, I myself am a member of Genius Network, but am under no contract to write about them. As a psychologist as well as an entrepreneur, I’m simply fascinated by all that I’m learning and observing in this unique environment and am passionate to report what I’m seeing. I prefer real-world experience or “field” research to just reading books.

In the next few weeks, I’ll be interviewing members of this Generation Z panel and will be providing several more articles with key insights, strategies, and stories. But for now, I am going to provide the line-up (which at this point is subject to change):

Jesse Kay:

Currently, Jesse Kay is a 17-year-old high schooler, podcaster, speaker, and entrepreneur from NJ. Jesse started his first business in 2009 at nine years old flipping shoes on eBay. In his junior year of high school, Jesse began his podcast, 20 Under the 20s, in his high school business class. After sending over 350 daily emails while launching the podcast to get guests, Jesse has interviewed dozens of leaders including Jack Dorsey, Gary Vaynerchuk, Grant Cardone, Paul Rodriguez and others to over 100,000 listeners.  Jesse is focused on sharing practical lessons and stories from some of the best minds on the planet to help inspire young men and women to become tomorrow’s entrepreneurs. Jesse has been featured in a variety of global publications including HuffPost, Entrepreneur, Adweek, and Business Insider. Along with hosting his podcast, Jesse has spoken across North America and runs a digital consulting agency helping Fortune 500 brands including the NY Knicks, NY Rangers, Madison Square Garden and influencers (over 5M followers+) connect with their youth customers and fans via social media and digital marketing strategies.

Connor Blakley: 

Connor Blakley, 18, is a keynote speaker, and founder of Youthlogic, a marketing consultancy that helps Fortune 1000s better understand today’s youth. Connor has been quoted and published in both national and international media outlets including Forbes, MIC, Business Insider, Inc, Entrepreneur, Mashable and the BBC for his unique perspective and understanding of Generation Z. 

Brennan Agranoff: 

Brennan Agranoff is a 17-year-old entrepreneur who founded his company HoopSwagg, a leader in the athletic sock industry when he was only 13 years old. Since founding HoopSwagg four years ago, he has grown the company to over $1,000,000 in annual sales and employed more than 40 people. Agranoff has been featured in major media outlets around the world including CNN, Forbes, ABC, Associated Press, Dailymail, NBC, U.S. News & World Report, and Galileo TV (Germany). With its nearly half a million fans and followers on social media, HoopSwagg is poised to continue its speedy ascent to the top of the billion-dollar sock market.

Jonah Stillman:

Jonah Stillman is an author, professional speaker, and entrepreneur. He is the co-author of Gen Z @ Work and has already shared his insights with a variety of companies and industries as well as contributed to stories about Gen Z with MSNBC, CBS, and Fast Company. Jonah is a nationally ranked alpine snowboarder and has served as an ambassador for the international nonprofit WE, traveling to Kenya and Ecuador to build schools. He is also the Gen Z Ambassador to the NFL and Minnesota Vikings. Jonah and a team of peers conducted one of the first national surveys about Gen Z’s attitudes towards the workplace. The eye-opening results ignited Jonah’s interest in keeping the dialogue going. He is excited to be the voice of his generation and offer companies and organizations a heads-up about our next generation gaps.

Noa Mintz: 

Noa Mintz is the 18-year old founder of Nannies By Noa, a leading nanny placement service based in New York City. With its large network of highly experienced sitters and nannies that possess a passion for children, Nannies by Noa is the leading destination for reliable, engaging, and educated childcare providers. 

Like many entrepreneurs, Noa experienced first-hand an issue that needed improvement – caregiver accountability; her parents wanted to trust, and assurance and she and her siblings wanted a “city-savvy” babysitter who was fun and interactive. By the time she was 12, she had successfully secured caregivers for her own family and had begun recruiting for other families in New York City. At age 12 ½, Noa launched Nannies By Noa which was built around her innovative approach to matching families and caregivers. Along with her talented team, Noa raises the bar of what to expect from a caregiver, making it standard practice for her nannies to be active and engaged participants in the lives of the children they care for.

Noa has been interviewed on national television shows including NBC “Today Show,” CNBC “Squawk Box,” “Money with Melissa Francis,” and her entrepreneurial story has been shared by the likes of CNN Money, The New York Post, Teen Vogue, Buzzfeed, Mashable, and many others. Celebrities such as Ashton Kutcher, Lil Wayne, nd Zoe Deschanel have also shared Noa’s story via social media.

Allan Maman:

Allan Maman, 18, is a serial entrepreneur who has founded many successful companies. He is best known for helping create the Fidget Spinner Trend when he was only a senior in High School. Through his main company Fidget360, he has generated hundreds of thousands of dollars in revenue, got live coverage on national television through CNBC in front of millions, featured in Forbes, Inc, TIME, Business Insider & more. This was all done in an 8 month span. After this, Allan has continued to move onto numerous companies that have generated hundreds of thousands of dollars.

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