Berkshire Hathaway raising its Apple AAPL stake, Cisco's CSCO earnings, Amazon AMZN becoming the 3rd largest U.S. company, Google Stories and WhatsApp payments in India were the top stories last week. Here are the details-
Warren Buffet Loves Apple
Apple’s fourth largest shareholder, Warren Buffett’s Berkshire Hathaway, has given its vote of confidence to Apple. The firm increased its stake by a whopping 23.3% to 165.3 million Apple shares, according to a 13F filing.
Apple has faced some bashing in recent days related to product delays, battery replacements and even security (wasn’t really a scare, but still). But its strong balance sheet, huge cash balance, considerable cash generation abilities and growing services business lend stability to its earnings and future growth prospects.
There was also the thumbs down to IBM because the firm went ahead and sold 94.5% of its remaining stake in the company, retaining just 2.05 million shares worth about $314 million. The IBM strategy is nothing new because Berkshire has been reducing its stake in the company since January of last year. Interesting though is the fact that IBM’s recent revenue growth, that increases confidence in its turnaround plan focused on analytics, cloud, mobile and security, doesn’t appear to have changed the sentiment.
As Jim Cramer said on Squawk on the Street, "Warren Buffett does not flee with the wind... He makes judgments." No wonder share prices are soaring.
Cisco’s revenue and earnings were both ahead of the Zacks Consensus Estimate, although it was a narrow beat on the top line. The transition to the subscription based model continues so there will be some negative impact from that in the near term. Positive impact from new products and growing prowess in security are points to note.
Topline guidance for the third quarter was encouraging, especially given that it was attributed to strong orders and improving traction of the subscription-based model.The $1.9 billion Broadsoft acquisition is also no doubt a positive, adding to its recurring revenue base.
As a result of the new tax law, Cisco will repatriate $67 billion of cash back to the U.S. during the third quarter, of which $44 billion will be returned to shareholders through share buybacks ($25 billion) and dividends ($13 billion). The current buyback authorization was thus increased by $25 billion to $31 billion, all of which will be used for buying back shares within the next 18 to 24 months.
Of course, this will also lower the share count significantly, with a corresponding positive impact on the EPS. Cisco hasn’t said what it will do with the rest of the cash, but it has shown appetite for acquisitions.
Amazon Third Largest U.S. Company
Amazon became the third largest company by market capitalization, when its shares rose 2.6% last Wednesday, lifting its market capitalization to $702.46 billion. The company moved past Microsoft in the process to take the spot behind Apple and Alphabet.
Amazon has long outgrown its image as the leading online retailer and today is known as a leading technology company as well, offering cloud infrastructure services, digital entertainment, voice controlled devices, logistics and shipping services, and what not. It has also displayed an uncanny ability to anticipate emerging market trends and capitalize on them long before other players. It only makes sense therefore that investors are willing to pay more while taking greater risk to get into the action.
Alphabet’s GOOGL Google is extending its Accelerated Mobile Pages (AMP) into a stories-like feature. So basically, tools to create image rich pages that load faster than normal text will be offered by the company so publishers can create easily swipable content that together tell a story.
The company’s eventual goal is to make these stories a part of searchable content that shows up on the search results page. It’s still in the very early days, so the partner list is relatively small: CNN, Conde Nast, Hearst, Mashable, Meredith, Mic, Vox Media and The Washington Post. Moreover, it is still working on ad support. Once that’s done, the format that was introduced by Snapchat and copied so well by Facebook’s Instagram, should become a roaring success Google as well.
WhatsApp Payments in India
Facebook’s FB WhatsApp is poised to leverage its largest daily active user base of over 200 million in India to launch a peer-to-peer payments service. The unified payment interface (UPI)-based service is now in beta, with most Indian banks already signed on. The goal is to test the service with a million users before a public launch.
The digital payments landscape in India is ripe for harvesting, according to a recent Credit Suisse report as quoted in Business Today: "Digital payments [in India] currently aggregate less than $200 billion, of which mobile is still at just $10 billion in financial year 2018 (estimated)" (the financial year ends in March). "Payment integration into popular apps in India will drive the digital payment market in India to $1 trillion over the next five years.”
That almost seems to point toward WhatsApp. Media reports indicate that Google’s Tez payments app has already become one of the leading payments processors in the few months since the launch. So WhatsApp payments should do equally as well.
Price Change Last Week
6-Month Price Change
Analysts Weigh in on Apple: According to various media reports, UBS analyst Steven Milunovich thinks that Apple will likely spend its billons by buying back shares or combining that with higher dividends to become cash neutral by 2023. In the first scenario, it buys back 10% of its shares each year, resulting in a 30% increase in the EPS by 2021. In the second, its spends $30-60 billion on share buybacks while increasing the dividend yield to 3% from 1.6%. The analyst doesn’t think there’s a big acquisition on the horizon.
GBH Insights analyst Dan Ives thinks that Apple’s popularity in China, its growing services business and war chest of cash would see the company through as the dust settles over fears of weak iPhone X demand and its impact on the March quarter guidance. With roughly 350 million iPhones that are “in the window of opportunity to upgrade over the next 12 to 18 months,” another 60-70 million Chinese phones also due for upgrade and three new devices expected to be released this year, the story doesn’t end with iPhone X. "In a nutshell, while this is a hand-holding period on the name, we believe near-term turbulence does not change our long-term bullish thesis on Apple," Ives wrote. [CNBC reports]
Raymond James' Chris Caso is less excited for three reasons. First, he thinks that while it’s true that earnings will increase as a result of share buybacks, there will be a reduction in the fiscal 2019 P/E that won’t be so attractive for investors. Moreover, it is already expected, or “well-known.” Second, there is near-term risk to iPhone ASP, as channel inventory of the X needs to be consumed. Third, the three new models won’t be available until the fall, so won’t have much impact in the near term.
"Net, after a strong run in the stock in anticipation of a supercycle that didn't occur, we think we have time to wait before reloading for another cycle," the analyst said.
Apple to Use Chinese NAND: The Nikkei reports that Apple is currently in conversation with Yangtze Memory of China to buy memory chips to be used in iPhones to be sold in the country. This could be the opening that China has been waiting for and could have been mandated by the Chinese government, which has been taking measures to get into the semiconductor market since it is the largest consumer of semiconductors. For Apple, this could be a way for it to lower cost as the supplier concentration in the memory market has resulted in rising prices.
Netflix Signs on Producer Ryan Murphy: After snapping up Grey's Anatomy and Scandal creator Shonda Rhimes, Orange is the New Black showrunner Jenji Kohan and Stranger Things producer Shawn Levy, Netflix NFLX showed it’s not done acquiring the necessary talent to remain a top production house. In an exclusive, five-year deal reportedly valued at $300 million, the streaming and production company has now added Ryan Murphy.
Murphy’s hit shows include Glee, Nip/Tuck, American Horror Story and Scream Queens. His contract with 21st Century Fox (to be acquired by Disney) expires soon, so he will operate in parallel for now. Netflix, which started offering original shows in 2012, expects to spend $8 billion on content this year.
Facebook Loses Belgian Case: A Belgian court has ruled that Facebook will be fined 250,000 euros a day or up to 100 million euros if it does not comply with privacy law in the country that forbids social networks to track people on third-party sites. Facebook said it would appeal the decision.
Facebook Privacy Settings Not Good Enough in Germany: Facebook’s default privacy settings and some of its terms and conditions breach German privacy laws, ruled a German court in a case lodged back in 2015 by a local consumer rights association, the vzbw. While Facebook has said that it will appeal this ruling as well, it’s worth noting that privacy law in the EU is set for a massive overhaul with the GDPR becoming operational this May.
IBM Suing Ex-Executive: IBM has sued its former diversity chief Lindsay-Rae McIntyre in a New York federal court for taking the same job at Microsoft. It is seeking enforcement of its non-competition agreement for a 12-month period and recover from her the equity compensation she has forfeited by "violating her contractual duties" to IBM IBM said that she was in possession of highly confidential and sensitive information about IBM's diversity strategies, hiring targets, technologies and innovations.
Moreover, the move constituted the violation of a one-year non-competitive agreement she had with IBM. Judge Vincent Briccetti temporarily barred McIntyre from moving to Microsoft. McIntyre moved the court, saying that after informing IBM of her decision to move in January, it was IBM that terminated her employment, that IBM had failed to prove any irreparable harm from any supposed misappropriation of IBM intellectual property and that IBM was covered by an ongoing non-disclosure agreement.
Waymo-Uber Lawsuit Update: Waymo took $245 million in Uber shares and a promise not to use Waymo technology in Uber self-driving car efforts to settle the trade secret theft lawsuit. It appears that the companies tried to settle earlier, but the billion dollars and demand for an independent monitor to ensure that Uber would not use Waymo technology were dismissed as non-starters in the negotiation.
Thereafter, Waymo asked for $500 million, which current CEO Dara Khosrowshahi presented before the board after which there was another round of negotiations. So it might seem like Waymo didn’t get a good deal, but the fact remains that it managed to punch a big hole in its competitors’ product strategy, while collecting the cost of litigation and putting the star engineer Levandowski, who Uber hired with such tremendous effort, out of commission. So it is really is a big win for Waymo.
Amazon Fined for Pesticide Sales: The U.S. Environmental Protection Agency has disclosed that Amazon will pay $1.2 million to settle nearly 4,000 alleged violations of U.S. law on harmful exposure to pesticides through illegal sales. Amazon also agreed to take measures to "significantly reduce the number of illegal pesticides available through the online marketplace."
Facebook Messenger Kids Challenged: Messenger Kids, a commercial-free service that allows children under 13 to message those that their parents approve of, launched on iOS in December, on Amazon devices in January and on Android last week. But things are getting complicated for Facebook because a recent report from Wired suggests that the expert advisory committee that okayed the service comprised people that were financially supported by the company.
There is also a certain amount of concern attached to exposing such small kids to a messaging service that they might get addicted to. Messenger Kids is yet to see a big uptake and meanwhile, nearly 100 independent experts joined together to bring pressure on Facebook to shut down the app. The app exists, regardless.
Facebook Smart Speakers: According to Digitimes, which doesn’t have such a good track record on these matters, Facebook is gearing up to launch a couple of smart speakers called Aloha and Fiona in July. At least one of these will have a 15-inch LG touchscreen. Other similar reports include one from Bloomberg, which reported last August that there were at least two separate speaker devices with Apple "Siri-style" voice assistants in the works, at least one of which will have a laptop-like screen. Business Insider mentioned the name Aloha. [CNBC reports]
Snap Map on the Web: The Snapchat feature that displays public stories on a map to give you a feel for what your friends are up to or public events in the area, is now making its way to the web. That means stories you’ve chosen to share publicly on Our Stories will now be visible to everyone, not just snapchatters on map.snapchat.com.
But while every story will be moderated and the company won’t share your location, it might take some time to get used to the idea. Sharing content to the web has come slowly at Snapchat as it tries to copy what Instagram has done successfully to date. Also, the maps feature hasn’t been hugely popular with just around 11% of snapchatters checking it daily. So taking it to the web may increase its popularity.
Collaborations & M&A
Apple Invests in Emagin: Emagin, which makes OLED miniature displays and says that " a key growth area for us is the consumer electronic OEM market for augmented reality (AR) and virtual reality (VR) hardware," and "Our potential channels to this market include licensing of our direct patterning technology and partnering for the mass production of microdisplays," has received a significant cash infusion.
Given their interest in acquiring these components, the $10.6 million it raised came from companies like Apple, LG, Valve, Immerex and Stillwater Holdings. Apple’s investment is interesting and could indicate that the company is getting closer to launching its own device. Even more interesting was a Bloomberg report saying that EMagin CFO Jeffrey Lucas said, in contradiction to a listing in a regulatory filing, that Apple didn’t invest in the AR display component maker.
Google Buys Xively: Google has bought Logmeln’s IoT division called Xively for $50 million as it races against Amazon and Microsoft to deliver all kinds of services in the cloud. Xively’s technology will expand Google’s cloud business as its dashboard, device management, messaging and data sharing capabilities will help it target companies dealing with a growing number of connected devices. Some of Xively's customers include Halo Smart Labs, Lutron and New England BioLabs. In 2017, it generated $3 million in revenue and $13 million in expenses. Around 45 Xively employees are joining Google.
Berkshire-Amazon-JP Morgan Alliance: Berkshire Hathaway, Amazon and J.P. Morgan have announced a healthcare alliance with a view to change the healthcare landscape over the long term. While details on the agreement aren’t available, the news was enough to send healthcare stocks down.
Alibaba Invests in Home Improvement: Alibaba BABA will invest around 5.45 billion yuan ($865 million) in Beijing Easyhome Furnishing Chain Store Group Co and also help it digitize its 223 stores. Getting the brick and mortar operation onto its cloud and logistics platforms is in line with its new retail strategy and will help the company deepen and expand its presence in the country.
Alibaba Invests in Theater Chain: Alibaba has acquired a 7.7% stake in Wanda Film Holding, a division of Dalian Wanda Group.Wanda recently bought top U.S. movie theater chain AMC Entertainment, which has over 1,000 theaters and 11,000 screens across the world. Alibaba has been an investor in the movie business for long, having bought in 2014 a 67% stake (now cut to 49.5%) in China Vision (now known as Alibaba Pictures).
This unit produces some content itself while also investing in overseas projects. While it isn’t significant at the moment, there might come a time when these theaters start using their cloud infrastructure services.
Apple Smartphone Market Share: According to Strategy Analytics, Apple garnered 51% ($61 billion) of smartphone revenue share in the fourth quarter of 2017, helped by its high end iPhone X. Samsung was in second position with a 15.7% share, followed by Huawei with 7%. All of the top three grew their market shares. The numbers show how the top smartphone companies have been able to increase smartphone prices even as shipments fell.
Apple HomePod BOM Costs: According to Bloomberg, which relied on analysis by TechInsights, Apple’s HomePod carries lower margins than its iPhone and Watch categories as well as competing products. The device’s BOM costs total $216, so its selling price of $349 gives a gross margin of 38%. The firm says that Google Home and Amazon Echo carry margins of 66% and 56%.
According to IHS Markit, the flagship iPhone X generates a 64% margin, while the $349 original Apple Watch from 2015 was estimated by IHS to cost only $84. Given its late entry and limited smarts, the pricing probably makes sense for now.
YouTube TV Price Hike: YouTube TV prices are going up from $35 a month to $40 a month, but now it will include nearly 60 channels and across 100 markets. For comparison, Sling TV's most basic offering of 30 channels costs $20 while Hulu's service with more than 50 channels costs $39.99 (you can also access its library of shows and movies for an additional $7.99).
YouTube is raising prices because it is in the process of adding Turner's channels, which include TNT, CNN and TBS. MLB Network and NBA TV are coming soon. YouTube’s focus on the sports channels are likely targeted at millennials and the company reportedly airs 96% of its YouTube TV commercials during sports events on TV to target those audiences.
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