What a week

Volatility is back. Stocks corrected for the first time in a number of years. The volatility caused so much concern that the CEO of Starbucks Howard Schultz sent out a memo to employees telling them to be extra nice to customers.

"Our customers are likely to experience an increased level of anxiety and concern. Please recognise this and as you always have remember that our success is not an entitlement but something we need to earn, every day". Howard Schultz.

Starbucks stock itself fell 20% before recovering to end slightly down. Maybe a free cup of coffee to shareholders might have calmed the nerves!

The past week has been interesting with some large moves in stocks but if you hadn't looked you wouldn't have known what happened as they snapped back just as quickly. GE the only original surviving member of the S&P500 plunged over 20% intraday before recovering to end down only 3%. We don't own GE but it's now yielding nearly 4% twice the rate you get from lending to the US government for ten years.

Volatility can be a friend or worst enemy it's really up to you. A lot of of the information in the market is noise, it isn't necessarily helpful or useful. What has changed is the fact that China is slowing more than expected. At Decisive we have added to or bought positions in stocks that have very little to do with China. Facebook for example isn't even allowed to operate there. As the dust settles down we can focus on the positives. Oil at $40 is great for the consumer it's a massive tax cut for the global economy, there is very little inflation keeping interest rates low and the US housing market remains strong.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Starbucks (SBUX) and Facebook (FB).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.

What does your favourite restaurant chain make?

GE comes out with a yearly review of restaurant chains. It's a good little update to see how much each store makes. I'm sure you've all dreamed of having your own little franchise somewhere. GE has done the work for you here's how they stack up.

 http://gerestaurantreview.com/top-100/

McDonald's is still the king for all the talk of their demise their market share has stayed pretty even over the last 5 years. For me the big surprise is KFC they have lost a lot of share to Chick-fil-A. Starbucks also continues to dominate too bad they don't franchise.

 http://gerestaurantreview.com/top-100/

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Starbucks (SBUX).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.

Gaming is the new sport?

Gaming as a sport it's a controversial statement. I believe it's more of a competition similar to chess rather than sport. That said the lines are blurring gamers are now being subjected to drug tests similar to sports. Online video channels like Youtube and Twitch have made gaming the world's largest unofficial sports league. Game developers like Activision Blizzard (ATVI) are really pushing sport comparisons and competitions because its good for their business. The amount of time spent on gaming is exploding (see below) with engagement levels even higher than sports.

Source: Activision Blizzard 10K

Gaming is sports in Asia
ATVI's CEO Bobby Kotak believes gaming is the sport of a new generation (see comments above). When you compare time spent its more than sports. Its a great analogy for ATVI as sports leagues make a ton of money. If they can monetise their franchises through tournaments they can generate broadcasting, licensing and merchandising revenue. It's an interesting way to think about the business. In the second quarter the amount of time gamers spent with ATVI grew by 25% year-over-year. Last quarter gamers logged nearly 3.5 billion hours of game play with ATVI's Heroes of the Storm, Hearthstone, World of Warcraft, Diablo, StarCraft, Skylanders, Destiny, and Call of Duty. Note this doesn't include the amount of time spent watching people play games on sites like Youtube.

ATVI is making steps towards its sports goals holding a Grand Final event for their Heroes of the Storm game on ESPN2. It created a lot of controversy at the time. So far it has been a flop with a 0.1 Nielsen rating meaning 0.1% of people watching TV at that time tuned in. While it was a flop for ESPN they are keeping up their commitment as younger generations are sticking with gaming rather than sport as they get older. In Asia gaming is massive Seoul's World Cup Stadium is consistently sold out with 40,000 fans (see below). The winning team took home $1million. Korea is truly the home of gaming with two television channels dedicated to the 'sport'.

Digital direct to the gamer
Digital sales have been a driver of the game developer's out performance of the market. Digital downloads are 46% of ATVI's revenue cutting out the retail middleman and giving ATVI the opportunity to increase the selling cycle of games. The downloadable content like extra maps and weapons increases sales at a high margin. Each game is producing more revenue per player than ever before. 

ATVI's annual report one of the best
ATVI puts together one of the more interesting annual letters to shareholders. Bobby Kotack the CEO models Buffet's annual report as an inspiration mentioning what went well and what could have been done better it's a refreshing read. ATVI operates in a tough industry gaming companies need to keep developing hit games every year ATVI's has had the most consistent track record similar to Disney's track record in films. Since 1991 the book value on their stock has increased from $0.01 to $9.76 a 37% compound annual return. ATVI has built some of the most successful franchises in gaming. Their latest franchise Destiny has active players spending more than 3 hours playing the game each day. Their three largest franchises Call of Duty, World of Warcraft and Skylanders accounted for 67% of revenues. Like Disney ATVI is making the most of their franchises with increasing digital sales and potential merchandising and broadcasting revenue. Gaming is not a sport but they do have in common high fan engagement. As gaming gets more popular on Youtube and Twitch it's likely that gaming revenue might become very similar to sports as we know it.

Jason

http://www.decisiveassetmanagement.com/

Decisive has no position in Activision Blizzard (ATVI).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.

Digital ordering comes to Starbucks

A lesson that I’ve learnt as an investor and consumer is the power of digital ordering. The restaurant industry has benefited from smart phones allowing us to order on the go. The innovator in Australia has been Domino’s pizza. Their mobile application is a better customer experience compared to ordering over the phone. You can order on the way home, track the progress of your order and driver and once downloaded you were likely to keep reordering with Domino’s.

I see a similar opportunity in Starbucks as they roll out digital ordering this year in their 13,000 US stores. It’s great ordering coffee ahead of time there’s no waiting in line and you save time in the morning rush. The app will ask whether you’re driving or walking to better estimate when your coffee will be ready at the closest store. The introduction of drive thru at Starbucks grew revenue incrementally by 50%.

Digital ordering will have a significant impact decreasing wait lines while increasing sales at peak hour. Like Domino's once Starbucks's app is downloaded you’ve customised and saved your order that will likely be the coffee application on your phone. It’s a win for the customer and the company.

Starbucks is also trialing coffee e-commerce. Testing coffee delivery straight to your desk at the Empire State building. It's likely to be only available in major cities but it really is e-commerce on "caffeine"!

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Starbucks (SBUX) 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.

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.