Apple's spaceship and other designer HQs

It's been an interesting week in technology with Amazon and Google posting blowout earnings and Apple missing estimates. The three technology companies are also designing their own buildings with a case of headquarter (HQ) fever. As a general rule I tend to worry when a company designs their own HQ. It suggests management have too much time and money. It tends to mark a top in the stock. Apple is building what some are calling an Ispaceship/UFO. It will be the most expensive building ever constructed in the US housing over 13,000 employees. Like most Apple products everything will be curved no seams, gaps, paintbrush strokes or edges. It is estimated to have nearly 6 kilometers of glass. The cost has been an issue especially when Apple was not returning cash but with their large dividends and buybacks shareholders are less upset at the $5 billion spend on the campus. When you have a $200 billion cash balance like Apple what's $5 billion to them? The building will also house a 1,000 seat underground auditorium where Apple will likely showcase their new products. The "UFO" will be completed next year.

http://www.macworld.co.uk/feature/apple/apple-spaceship-campus-facts-pictures-video-info-3489704/

Amazon is also thinking big with plans for a biosphere in the city. Each bubble will offer five floors of flexible work spaces within 25-35 meter domed structures. The spheres will keep the temperature regulated between 20-22 degrees and will have a number of different botantical zones.

http://www.theguardian.com/cities/2014/may/22/amazon-futuristic-new-downtown-seattle-hq-microsoft-nintendo

Meanwhile Google's new campus seems downright plain but the buildings will act similar to Amazon's biosphere. The translucence canopies control the climate inside but still let in light and air. It is the roof of the future the translucent enclosure can blur what is inside and what is outside.

http://time.com/3905950/google-building-charleston-east/

I'm personally looking forward to taking off with the Apple spaceship when it is finished next year. While these designs are cool designer HQ's have been contrarian indicators in the past. We will see what happens but I still believe as stocks Google and Apple are too cheap given their growth prospects. 

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Apple (AAPL) and Google (GOOG) stock. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Google passes its toothbrush test

Google (GOOG) had one of the largest ever one day gains in terms of market value increasing by $65 billion last Friday. The GOOG co-founders Larry Page and Sergey Brin made more than $4 billion each on Friday. TGIF drinks are on them! The rise was nearly as much as their $70 billion cash balance making GOOG the second largest company in the world behind Apple. Youtube and the new CFO deserve credit for the rise. Wall street loves wall street. The addition of Ruth Porat (ex-CFO of Morgan Stanley) gave analysts the confidence that expenses will be more disciplined going forward (see historic margin declines below). She said exactly what the street wanted to hear balancing growth and investment discipline. The other reason was the reacceleration of growth in the phenomenon that is Youtube.

Youtube TV for the new generation
YouTube growth is re-accelerating. Watch time on Youtube is up 60% year on year the fastest growth in two years. Mobile watch time has more than doubled from a year ago. I personally spend a lot of time on the popular on YouTube Australia channel. The average mobile user is even more committed spending more than 40 minutes per session. The number of Youtuber's earning 6 figures is also up 50% on the year. Don't worry I won't be quitting my dayjob but if you're interested they have production facilities all around the world (see below) no need to bring your cat the facilities give videos are more professional feel. Youtube's user growth has been tremendous they will also have increasing pricing power as TV advertising moves online. GOOG's prices for ads that users don't skip on Youtube is currently lower than GOOG's desktop and mobile ads. It's a big opportunity I have to keep reminding myself that Youtube is still only 10 years old.

Source: https://www.youtube.com/yt/space/

Show me the money
With $70 billion in cash (15% of market cap) the new CFO hinted at a more efficient use of the balance sheet potentially taking on debt to buyback shares. She made it clear the priorities are capex, M&A and then potentially capital return. No clear announcement but the tone was constructive it seems like a similar situation to Apple before their capital return a year or two ago.

There has been concern that the smaller screens on mobile will make it more difficult for GOOG advertising especially as mobile searches now outpace desktop in 10 countries. It's true that there can't be as many ads but mobile ads seem to be more effective. Searches on mobile phones tend to happen when people are out in stores highly influencing in-store sales. GOOG is doing their best to get credit for these sales disclosing that Target found that one third of their paid mobile ads resulted in a user visiting a store.

Google passes its toothbrush test
GOOG CEO Larry Page is famous for conducting a toothbrush test for their investments. An investment has to be meaningful enough to be used once or twice a day like a toothbrush. GOOG has plenty of these investments Google search, Youtube, Android, Chrome and Google Maps I use these every day along with over 1 billion users. They also have up and coming products like Google Play, Nest and their cloud platform which hopefully will join the list. GOOG has been trading at an discount to the Nasdaq all year the rise in the past week means it is trading at 21.5x earnings not as cheap as it was but still attractive for a company that dominates a lot of our time.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a postion in Google (GOOG) stock.The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Paying with Paypal

The upcoming spin off of Paypal (PYPL) means the company is single once again splitting up with Ebay on the 20th of July. Being independent will allow PYPL to truly partner with retailers in digital commerce. PYPL is uniquely positioned in digital payments handling one in every six dollars spent in e-commerce. Separated from Ebay PYPL will be able to do more business with other retailers that have been concerned that PYPL is owned by a retail competitor in Ebay. PYPL is highly trusted by consumers over 50% of their transactions involve bank or PYPL balances the rest are credit cards. PYPL is a high growth yet highly profitable technology company with a decent 5% free cash flow yield. Spin-offs are always interesting as unlike IPOs sellers are not maximising the price. It's a rare site a technology company that actually throws off a lot of cash that is growing at a decent price. I doubt we would have this pricing if it was an IPO.

Source: Paypal roadshow

Spin-off pluses
The promise of a separate company has helped attract Dan Schulman ex-Amex, Virgin Money and Priceline as the new CEO. In Silicon Valley the share price is all important employees and management prefer equity in a focused growth entity like PYPL rather than Ebay. The separate listing will give PYPL a more attractive acquisition currency. In PYPL's case there is another reason for the spin-off Ebay was beginning to hold back their business.

Independence for Paypal
Retailers have always been cautious about doing business with PYPL because it is owned by a retail competitor in Ebay. The spin off allows PYPL to revisit relationships with retailers that were concerned with funding a competitor and disclosing retail data to Ebay. In Q1 management commented that PYPL is accepted at only 74 of the top 100 internet retailers in the US. The spin off could serve as a catalyst to sign up companies that don't accept PYPL like Amazon, Alibaba, Staples and Macy's. They have also structured the spin-off to keep as many synergies as possible. PYPL and Ebay have a 5 year operating agreement for data sharing and Ebay will be incentivised to grow users and keep their PYPL penetration rates at 80%.

Part of the sharing economy
PYPL strengthened their mobile position acquiring Braintree in 2013. It was great timing as their technology enables commerce apps like Uber and Airbnb helping them to accept multiple types of currencies and different payments such as credit cards, Paypal, Apple pay and even Bitcoin. Braintree also brought in Venmo a peer to peer transaction service useful in splitting bills.

There are plenty of other opportunities PYPL just bought Xoom which competes with Western Union in the remittance market. There is also the opportunity to lend to customers and merchants. PYPL has a tremendous amount of data on their platform yet they only have $3.8 billion in credit receivables a small % of the $238 billion they transact on their platform. Their $6 billion in cash can be used to help fund loans.

Competition is fierce
PYPL's competitors are well known. The entrance of Apple Pay was covered all over the media. Fortunately Apple pay competes at the point of sale not online. Offline or point of sale transactions are only 2% of PYPL's payments PYPL is still mostly an online service. Stripe is more of a competitor online its hard to get information on how they're doing but fraud losses have been an issue. Fraud prevention is what PYPL excels at their loss rate is 0.31%.The average credit card loss rate is 2.98%. This is the key to their business anyone can accept money but having low fraud is what differentiates PYPL for its customers.

Paying with Paypal
I personally like to think about companies in terms of their market cap (see above). In this case PYPL is interesting as the valuation of competitors is high. PYPL's enterprise value is attractive deducting the cash balance of $6 billion (not including Xoom transaction) gets a value of $36 billion with free cash flow generation of $1.8 billion. A 5% free cash flow yield compares favourably to other payment processors like Visa and Mastercard. PYPL also has a real scarcity factor there are plenty of marketplaces Amazon, Alibaba and Mercadolibre but there is no other pure play investment in digital payments.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a postion in Paypal (PYPL) and Ebay (EBAY) stock.The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Venture capital is replacing IPOs

As Greece continues to make headlines I thought it might be worthwhile to take a step back and look at other market trends. The venture capital firm Andreesen Horowitz put together a slide pack about technology funding. One slide hit home about the value created in private versus public markets. As a growth investor I'm always looking for the next great company. Finding a company like Apple, Microsoft and Google is much easier said than done! But it is getting harder because of the money in private markets. A company can raise enough money in the private market that they're delaying going public. By the time they do go public its usually at a decent size because of previous private market valuations.

IPO's too late for stock investors

The ride sharing service Uber is worth $50 billion and Airbnb worth $24 billion all these transactions were conducted in the private markets. They are large valuations and we don't have much information on their financials to see if they make sense. But the issue is these companies don't have to go public to receive these investments. By the time a lot of these fast growing technology companies list most of the money has already been made. See below.

When Facebook conducted their IPO it was at a valuation of $104 billion Google at the time of their IPO was worth $23 billion. For Facebook to match Microsoft's public market returns it would need to be worth $45 trillion. Going forward its going to much harder to find the next Apple and Google because the company will have already made large gains due to private market funding.

As you can see above the majority of money is being raised privately rather than through the public IPO market. This is great for VC firms like Andreesen Horowitz (maybe they can list) but for the rest of us it makes it just makes it that little bit harder. You can find their great 53 slide chart pack at http://a16z.com/2015/06/15/u-s-tech-funding-whats-going-on/.

Jason

http://www.decisiveassetmanagement.com/

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.