Is Microsoft Overvalued?

Summary

  • Microsoft stock has been on a nearly unimpeded rally over the past two years and has beaten the S&P by a wide margin.
  • But in this time, Microsoft’s earnings haven’t grown much at all. Earnings growth is weighed down by declining margins, the strong U.S. dollar, and slowing emerging market growth.
  • At 19 times forward earnings, Microsoft stock is valued at levels not seen in years. As hard as this is to say, I think Microsoft is overvalued right now.

Tech giant Microsoft (NASDAQ:MSFT) has traditionally been one of the cheapest blue chip tech stocks. For many years, Microsoft was dogged for its over-reliance on the personal computer, and this pervasive bearishness kept its valuation multiples at low levels, frequently in the low double-digits.

That is, until recently. Thanks to the advancements Microsoft has made in growth areas like the cloud, investors have rewarded the stock with a lofty valuation multiple.

After a prolonged period of trading in a relatively tight range, Microsoft stock is up 26% in the past year, while the S&P is down 5% in the same time. Investors have recently become very enthusiastic about the future growth possibilities, but the reality is that Microsoft’s earnings growth hasn’t kept up with rising expectations. The result is that at this point, Microsoft trades for a higher valuation than it has at any point in the past five years.

I wrote about Microsoft several times in the past year, including this article in April and this article in July, in which I advised investors to buy the stock because of how cheap it was. Microsoft has performed strongly since those recommendations. Now that the stock is at $52, it’s no longer cheap. I believe buying at this level will set up investors for only mediocre annualized returns going forward. I can’t believe I’m saying this – but Microsoft appears overvalued.

Earnings Aren’t Keeping Pace With The Stock Price

To be sure, Microsoft is no longer the same company that traded for a 10-12 forward P/E. It has made demonstrable progress in breaking away from the PC, and has made huge inroads into higher-growth areas. Due to the success of cloud-based platforms like Office 365 and Azure, Microsoft’s commercial cloud revenue soared 96% in the fourth quarter of fiscal 2015, and has now exceeded an $8 billion annual run rate. Microsoft’s revenue growth in recent years has been impressive: the company grew revenue by 7.8% in fiscal 2015, and by 11% in fiscal 2014.

The problem is that Microsoft has had to spend increasing amounts of money to obtain this revenue growth. This has weighed on Microsoft’s margins and the result has been weak, almost non-existent earnings growth. Even when excluding the billions in impairment charges taken against GAAP earnings in the past few years, Microsoft’s adjusted non-GAAP earnings have flat-lined. For example, Microsoft earned $2.62 per share in 2013, $2.64 per share in 2014, and $2.63 per share in 2015.

Microsoft hasn’t gotten off to the best start in fiscal 2016 either. Revenue declined 6%, while earnings grew just 3% in the first quarter, year over year. Microsoft is getting hit by many of the same headwinds that are causing other tech stocks to plummet – namely, the strengthening U.S. dollar – and slowing economic growth in emerging markets like China. But while most other tech stocks are declining to reflect these challenges, Microsoft shares keep rallying. That should be a concern to investors buying at these levels.

Microsoft has beaten the S&P 500 by 37 percentage points in the past two years, despite virtually no earnings growth in that time. That has elevated Microsoft’s valuation to levels not seen in years. At 19 times forward earnings, expectations are simply too high. The other adverse effect of Microsoft’s bloated valuation is that it has lowered the dividend yield, to 2.5%. In other words, investors aren’t getting a very good buying opportunity at this price, either from a value or income perspective.

Microsoft: Good Company, Not-So-Good Stock

What made Microsoft such a compelling buy in my previous articles – its dirt-cheap valuation and 3%-3.5% dividend yield are no longer there. Microsoft remains a highly profitable company. But there are many cases in which a strong company can amount to a poor investment if too high a price is paid for its future earnings growth.

The great thing about buying great companies when they’re cheap is that the future expectations are so low that the company doesn’t have to get everything right in order for investors to earn decent returns. That’s why Microsoft stock was a much better buy when I wrote about it in previous articles. Expectations were very low, and the dividend yield was much higher, which meant the future return potential was greater. However, the flip side of this dynamic is also true: Microsoft now has higher expectations than at any point in the past five years.

At 19 times forward earnings, I believe the stock doesn’t offer much of a margin of safety. As a result, I’d wait for a decent pullback of 10%-20% – at least to a forward P/E multiple in the mid-teens – before jumping in.

Disclaimer: This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.

The above article originally appeared on Seeking Alpha, written by Bob Ciura.

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3 Acquisitions That Would Immediately Change Apple’s Valuation Debate

Summary

  • Despite pleading by analysts and Carl Icahn, investors aren’t going to suddenly start valuing AAPL differently.
  • But with ~$200 billion in cash, AAPL can force investors to view and value the company differently.
  • Acquire FIT to dominate the $70 billion wearables market.
  • Acquire PAY to vertically integrate and dominate the $210 billion U.S. mobile payment market.

Acquire WATT and Ossia (private) to dominate the IoT market.

Michael Santoli didn’t waste any time after our panel discussion on CNBC’s Closing Bell last week to chide Drexel Hamilton analyst Brian White – again – for suggesting investors need to “look at Apple (NASDAQ:AAPL) through a new lens” and value it appropriately.

I agree wholeheartedly and said so later in the segment.

You’ll recall, billionaire Carl Icahn peddled a similar line of reasoning to White’s in early 2015 to no avail. In an open letter to Twitter (NYSE:TWTR) followers, he wrote:

It seems to us that the market is somehow missing a very basic principle of valuation: When a company’s future earnings are expected to grow at a much faster rate than that of the S&P 500, the market should value that company at a higher P/E multiple.

On the surface, White and Icahn’s argument sound logical. The only problem? In Apple’s case, reality trumps logic.

Apple has grown earnings faster than the market for years. Yet the stock has seldom commanded a premium market multiple. In fact, since the end of 2011, it has actually traded at an average discount of 23% to the S&P 500 P/E ratio, based on Morningstar data. And if we strip out Apple’s cash, the discount is even more pronounced.

No matter how hard a sell-side analyst, and even a billionaire try, investors aren’t going to suddenly start valuing Apple differently. Not in its current form.

So what would it take?

Armed with over $200 billion in cash, I can think of at least three moves the company could make to change the narrative and in turn, the valuation.

Move #1: Acquire Fitbit (NYSE:FIT) to own the wearables market from top to bottom.

The wearables market is on fire. In the third quarter, unit sales increased almost 200% to 21 million, according to IDC. No doubt, fourth quarter numbers will be similarly strong, thanks to the holiday shopping season.

There’s no end in sight to the growth either. Gartner predicts the wearable tech market will expand at a compound annual growth rate of 49% through 2020. In terms of unit volumes, IDC estimates 72.1 million wearable devices will be shipped this year, rising to 155.7 million units in 2019.

Fitbit has benefited handsomely from this robust trend, commanding the majority of the market share. But let’s be fair. It’s done so because of a lack of any true competitors. That’s no longer the case. In fact, as I’ve argued before, Fitbit is in jeopardy of becoming the next one-product tech wonder, a la GoPro (NASDAQ:GPRO). It would be wise to sell out to Apple at this point.

It’s worth noting that Fitbit only sells basic wearables – a category that’s expected to lose share over the next few years, leaving Apple poised to become the next market leader for all wearables. – IDC

For Apple, the acquisition would allow the company to dominate the wearables market from top to bottom. (The only device cheaper would be the Mi Band fitness tracker from China’s Xiaomi).

Apple Fitbit Combined Product Lineup

Source: Company Websites

I know, I know. Apple is a stickler for design and Fitbit’s product lineup hardly fits into Jony Ive’s aesthetic. But that’s a design challenge I’m certain Apple could tackle in a couple of quarters, post-acquisition.

Even if Apple paid a princely sum of $10 billion for Fitbit, it would be worthwhile, given the wearables market is expected to ramp from $20 billion this year to almost $70 billion in 2025, according to IDTechEx. All told, the move could boost Apple’s top line growth by up to 10%, as the wearables market takes off.

Move #2: Acquire VeriFone Systems (NYSE:PAY) to vertically integrate – and dominate – the mobile payment market.

According to a new forecast from eMarketer, mobile payments at point-of-sale (POS) terminals are set to explode from $9 billion this year to more than $27 billion in 2016. That’s a 200% year-over-year increase and represents an acceleration of the 125% growth rate expected this year. By 2019, mobile payment volumes are expected to eclipse the $210 billion mark – a 2,233% over current levels. And that’s just in the United States.

Source: eMarketer

I’ve long viewed Apple as a strong play on mobile payments. In fact, I predicted that the company would enter the market on CNBC’s Closing Bell in January 2014 – well ahead of the official October 2014 announcement. As expected, Apple Pay is off to a solid start.

Roughly, 20% of consumers with an iPhone that supports Apple Pay have used it, according to Trustev. Over time, usage is bound to increase because Apple Pay possesses the three main ingredients to captivate the masses – familiarity (i.e., brand recognition), simplicity, and security.

The switch to chip-and-pin technology (known as EMV) promises to provide a near-term bump in adoption, too. In short, the status quo is changing from a simple swipe of a credit card to a lengthy 15-second (or more) process. Suddenly, a motivation for consumers to make the switch to mobile payments en masse exists because it’s much quicker.

By acquiring VeriFone, Apple can accelerate its market penetration and assert its dominance by positioning itself on both the consumer side and retailer side of the mobile payment boom.

VeriFone is the global leader in secure electronic payment solutions. It makes the POS terminals, which support the new credit cards with chips, as well as NFC. At the end of 2014, around 28% of merchants worldwide used NFC-enabled POS terminals. But by 2020, Berg Insight estimates that the number will hit 70%. Put simply, the company represents a pure-play on the hardware side of the mobile payment boom, which is in the midst of a massive upgrade cycle.

Again, let’s assume Apple pays up for the acquisition. A purchase price of $5 billion, equal to a 60% premium, would conservatively add 7% to 10% to Apple’s top line growth, based on current revenue estimates for both companies.

Move #3: Acquire wireless charging companies Energous (NASDAQ:WATT) and Ossia (privately held) to solidify dominance in the mobile market and enable dominance of the Internet of Things (“IoT”) market.

In case you haven’t noticed, incremental innovations in smartphones don’t provide sustainable competitive advantages anymore. Within roughly one design cycle, whatever Apple rolls out (Force Touch, for instance), Samsung quickly follows (see here). And vice versa.

However, being able to ditch the power cord and charge mobile devices at a distance of 15 feet (or more) would be a true differentiator. That’s possible with the technologies being brought to market by Energous and Ossia. Although each company’s approach is different (pocket-forming vs. multipath calibration), both deliver wireless power over radio frequency (“RF”) waves. Yes, there are regulatory risks involved with transmitting power over RF. But who better to address and overcome those concerns with the FCC than Apple?

Obtaining wireless charging capabilities to cement its dominance in the mobile market should be viewed as a defensive move, as much as an offensive one for Apple. If it doesn’t acquire these companies, Samsung or Xiaomi easily could given the cheap valuations.

Beyond that, Apple should make a move to own wireless charging technology (and the intellectual property) to give it the opportunity to dominate the IoT market.

No matter what estimate you choose for the number of internet-connected devices expected – 21 billion (Gartner), 34 billion (BI Intelligence) or 500 Billion (John Chambers, former CEO of Cisco (NASDAQ:CSCO)) – it’s clear the IoT is arguably going to be the “Biggest Thing Ever.”

Before it becomes a reality, though, five barriers loom large (security, privacy, connectivity/interoperability, decipherability and electricity). I believe the most critical barrier to overcome is the last one. The prospect of regularly changing batteries on billions of devices is daunting and highly impractical as a permanent solution, to say the least. Hardwiring every IoT device isn’t feasible, either. As a result, all roads lead to wireless charging.

Energous is the closest to providing a solution to overcome this barrier. Not only has it already attracted a Tier 1 partner, rumored to be Samsung or possibly even Apple, it’s only a few months away from having a commercially ready chipset to be incorporated into wearables, IoT, and mobile devices.

The reason it makes sense for Apple to acquire Ossia, too, is simple – doing so allows the company to own all of the relevant IP for wireless charging at a distance via RF. Not to mention, Apple can do so on the cheap. Energous currently trades at a market cap of about $131 million and Ossia has only raised $24 million in financing, likely pegging its valuation at much less. That’s a pittance for the potential to dominate the IoT market.

Bottom Line

As the largest company in the world, Apple can’t afford to only be a leading player in its end markets. It needs to dominate every market it serves. And the only way to change the narrative and convince investors to start valuing the company differently is to start dominating more markets. That process can begin if Apple makes any or all of the noteworthy and logical acquisitions above.

Without any of the acquisitions, I’m still bullish on Apple, just not as bullish as before. I’ve been banging the table to buy since January 2014. Back then, the stock traded around $72 (split adjusted) and it’s up about 50% over that period. If the company can keep “blocking and tackling” in the iPhone business (upgrades, Android conversions and international expansion) – and deliver a better-than-expected holiday quarter now that analysts have universally lowered iPhone expectations – shares could reclaim their 52-week high in the year ahead, representing about a 25% upside to current prices.

The above article originally appeared on Seeking Alpha, written by Lou Basenese.

The Long Case For Nintendo

Summary

  • Nintendo is coiled like a spring ready to jump.
  • The market has underestimated the NX and mobile offerings.
  • Nintendo is not currently in vogue and now is the perfect time to buy.

Elevator Pitch

Nintendo (OTCPK:NTDOY) is extremely undervalued for the future potential contained within the Nintendo IP. Get in before the NX details are revealed in June and the stock spikes. Additionally, several big games are on the near-term horizon, including a new Zelda for the Wii U and the final reveal of the Nintendo DeNA mobile offering.

Thesis And Catalyst For Nintendo

Nintendo has long been thought of by the market as a company past its prime and headed for a dim future. I hope that this recap of the near-term horizon changes your mind.

While I agree that the past few years have not been kind to Nintendo with the missteps of the Wii U (an abysmal failure of a console due to shoddy marketing and poor timing), the future looks very bright. Nintendo has some of the most valuable and well-loved IP in the world tied up in its various franchises (Mario, Metroid, Donkey Kong, Smash Brothers).

The recent moves into mobile and the upcoming NX (new console) reveal scheduled for June/July will generate catalysts that have the potential to drive the stock price up based on hype alone. As a reference, the mere prospect of Nintendo entering the mobile space drove the share price from $14 up to $22 peaking in September at $25.

News on the first (underwhelming) mobile offering (Titled “Miitomo”) had many scratching their heads as the game seems to be more like a social network app than an actual “game”. Share price has steadily dropped since this news which you can see on the chart below.

NTDOY performance over last yearClick to enlarge

It is still not completely clear as to what Nintendo’s mobile game strategy is and it has been very tight lipped on details. I expect to see “freemium” or “free to try” offerings of a variety of games and potentially the opening up of the back catalog of Nintendo products from previous consoles. If Nintendo plays this hand correctly, it will be the top selling apps in a market that Nintendo had previously not touched.

The NX is also a bit of a mystery but I expect it will be a hybrid console/portable replacement for the 3DS and Wii U with more power and a “platform” of software that allows the same games to be played on the TV or remotely. There may even be some mobile integration which would further tie the NX as a true “Nintendo Cross” platform offering.

We should also see a new Zelda game in 2016 for the Wii U which will be a system seller building on the recent Wii U monster successes of Splatoon and Super Mario Maker. (Mario Maker is regarded by many critics as the best game of 2015)

Valuation

Nintendo is about to turn the corner and is poised to jump back into the lead in the console/video game market if the mobile offerings hit big and the NX delivers on the hype.

There are two ways to play Nintendo from my perspective. Buy the stock now and hold until the NX and mobile offering reveals (sell the news) or purchase for the long term with the expectation that Nintendo will regain much of its lost footing in the home console market.

Personally, I intend to hold until the NX/Mobile reveals and have set a sale target price of $26 based on levels seen previously when the news of Nintendo IP going to mobile was first published.

If the stock does not achieve that level in June/July, I intend to hold long term if I agree with the technical direction and business strategy that Nintendo reveals.

Variant View

What could go wrong?

If the NX or mobile game offerings are VERY underwhelming, expect the market to mostly yawn and keep the NTDOY share price in the range of $12-16 with an upside of maybe $19-20.

The above article originally appeared on Seeking Alpha, written by Jimmy Lamz.

Beware… This Tech Darling Is Due a Big Fall

The River of No Returns

The Dow shed another 365 points on Wednesday – for a more than 2% fall.

“Stocks take a beating as alarm grows,” announced a Wall Street Journal headline. Between just two companies – Amazon and Google (now called Alphabet) – $100 billion of fantasy capital has been lost since the beginning of the year.

Fifteen years ago, we tagged Amazon as the “river of no returns.” Since then, the share price has soared. The company has flourished… and we have looked like an idiot.

AMZN

Every AMZN bear has been made to look like an idiot – but that may soon change. As David Stockman recently pointed out, those who actually take the time to properly analyze its slippery accounting and business model (not the dead fish employed by the sell-side, obviously) cannot help but conclude that it is a giant Ponzi scheme – and the danger that this realization will penetrate the “market mind” is increasing. It remains a “river of no returns” – although consumers have every reason to love it. Investors buying it today pay 830 times net earnings for the stock – and said net earnings actually look somewhat dubious upon closer inspection – click to enlarge.

On paper, the company is worth a fortune. CEO Jeff Bezos has shown the world what a genius he is. He has constantly reinvested Amazon’s cash flow to gain market share and garner headlines.

But wait… The bankruptcy courts are full of geniuses. And being able to sell the public your story is not the same as being able to sell a product at a profit and return earnings to the shareholders.

Despite all the water under the bridge, as near as we can tell, Amazon is still the river of no returns.

Where’s the Money?

In a bull market, investors are content with hope, hype and earnings tomorrow. They are patient and don’t ask too many questions. But in bear market, hope goes into hiding, patience fades… and the question marks come out in the open.

“Where’s the money?” they ask. Investors want cash in hand, now. They want dividends. They want protection from tides and full disclosure of the risks. Even after a 16% haircut over the last two and a half weeks, Amazon is still trading at over 830 times net income.

And this is no “latest technology” play headed by a tech wizard. Jeff Bezos only had limited exposure to tech before founding Amazon. And he has no real background in retailing either. He is a Wall Street man. And Amazon is no technology play. It’s a financial play.

Bezos worked for banks, investments firms, and hedge funds before launching into e-commerce. He started Amazon in 1994. The company was founded on technology and market conditions as they existed back then. The old river has been silting up ever since.

960-jeff-bezos-lost-74-billion-in-value-last-year
Photo credit: amazon.com

Jeff Bezos is indeed a genius. He runs a company that has produced practically no earnings over its entire lifetime (on the basis of sound accounting principles, that is). And yet, he himself is nowadays worth well north of $50 billion.

Let’s see… Amazon says it made $328 million last year. It’s valued in the stock market at $495 billion. The stock sold for $581 on Wednesday.

Hmmm… As a mature company, it should be valued at about 15 times earnings. Since Bezos is such a genius, we’ll stretch and give him a price-to-earnings ratio of 20. That makes the company worth about $6.5 billion and gives us a target price per share of about $14.

About 10 years ago, we guessed that Amazon was a “decent $10 stock.” The numbers say we were just about right. But it all depends on where you are when you find out.

If you are comfortably in gold, cash, and real estate, you can look on Wall Street’s decline like a neighbor watching a police raid on a noisy party. But if your portfolio is full of Amazon shares, we advise you to duck out the back door.

 

Nasdaq and SOX from 1997-2002
Charts by: StockCharts

A little reminder from the not-too-distant past: the technology bubble of the late 90s. This shows the Nasdaq Composite and the SOX (semiconductor index) from 1997 to 2002. Eventually, the entire bubble gain was wiped out. We still remember debating true believers right near the top in early 2000. Nearly all of them thought prices would keep rising, even when confronted with what were by then almost impossible to refute arguments. It was clear that the growth rates reported by tech companies at the time could not possibly continue – it was simply a mathematical impossibility – click to enlarge.

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

The Downside Of Facebook

Summary

  • Notify is presenting itself as unpopular and lacking a value add component.
  • A continued lack of monetization is frustrating as the company tries to perfect WhatsApp and Messenger.
  • High expectations for growth could backfire on the company’s stock come future earnings seasons.

We can only speculate so far on Marc Andreessen’s recent selling of 73% of his shares in Facebook (NASDAQ:FB). If you were look at this company on January 1, 2015, you saw the stock struggling around the $80 level with no clear future direction. Had you taken a gamble and bet on the company surpassing even its own expectations, you would’ve seen the stock perform exceptionally YTD, up some 35.32%. The question is, as we move through Q4 and into 2016, are we sitting on the small plateau of another strong 10-month trend? I’d argue yes, and you can view my bullish cases here and here. However, I believe there are certain things significantly holding the company from reaching its true potential.

(click to enlarge)Click to enlarge

Source: Forbes

Increasing Expectations

Despite Facebook’s all-around tremendous growth in the last few years, visible in both the top and bottom lines, as well as improved cash flows, the company has begun to set a high bar for itself. For example:

  • Ad revenue growth up 45% YOY, 57% on a constant-currency basis
  • Total MAU growth up 14% YOY now at 1.55 billion
  • Mobile MAUs up 23% YOY
  • Mobile DAUs up 27% YOY
  • EPS up to $0.31 on net income of $896 million

It’s going to be difficult for the analyst community to gauge how these numbers begin to level off. The speculation will draw to a viable range, but even then the company could miss wide or surpass for a few more quarters. If the latter is the case, we’ll likely see a run up in the stock like we saw this year. However, if we see the former, we have a situation like what’s going on at Apple (NASDAQ:AAPL). Despite the company still on track to sell tens of millions, the growth is beginning to level off.

Herein lies a caveat. While the stock will retreat on decreased growth versus 2015 comps, the stock will find its fair value to be much lower. The company will face easier comps the year prior and averaging into a position at that lower level will be lucrative for the quarters following. It’s an expectation game and I believe Facebook’s numbers are beginning to top out, increasing the likelihood of earnings misses this upcoming year.

Continued Lack of Monetization

As each quarter goes by, what does Facebook miss out on in terms of ad revenue from WhatsApp and Messenger? Well, let’s try and think of this in terms of what Instagram generates in revenue per year.

Instagram has 400 million MAUs and climbing and is on track to do $600 million in ad revenue this year. If we scaled those to WhatsApp and Messenger, having 900 million and 700 million MAUs, respectively, the company is missing out on $1.35 billion and $1.05 billion, respectively, in annual revenue. That’s substantial and they need to recover the $20 billion price tag of WhatsApp, which has been the subject of much criticism. Additionally, Instagram is projected to increase revenue from ads by 2.5x next year to $1.5 billion. That’s a multiple that could be presently applied to both WhatsApp and Messenger, but instead Zuckerberg has made it clear that until these products are refined to the maximum, ad revenue will be on the back burner.

Facebook is concerned that if they try and monetize these apps too soon while they’re still growing at a high rate that users will withdraw. If we think about the company’s game plan after the Q2 report, management stated that they wanted to “get people organically interacting with businesses before you let companies pay to reach customers.” The fact of the matter is that the timeline has to be sped up before shareholders become too dissatisfied.

Monetizing these two apps is a challenge as they are text-focused applications. Thus, that’s where businesses come in and Zuckerberg’s push for Facebook to be an e-commerce one-click buy hub comes in to play. Businesses will be able to contact individual shoppers directly, send extensive messages about new products, much like an e-mail offering, but with the well-curated benefit of push notifications and more personalization.

Notify

If you go onto the App Store, the 11th review on Facebook’s new news application, Notify, is “What’s the point of this app?” It’s not even in the top 150 downloaded free apps. You can see for yourself in just a quick tap or view the trend here.

Ventures like this question whether or not Facebook is trying to diversify too quickly. While I’ve made it known that I like the growth potential in the diversification into the product space via the Oculus Rift, I’m not so keen on Notify. Yes, it’s a chance for the company to rival Twitter (NYSE:TWTR) and arguably diminishes Twitter’s value-add component if Facebook can re-invent the platform so quick but I don’t think this app is the next big thing Facebook is looking for. Further complaints show that it uses up too much data and that the news sources it has contracted are incredibly limited in scope. Thus, Twitter still remains a better source for quick news as virtually every major network/source has its own page with real-time updates.

Furthermore, the app attempts to take on Apple News, which is already directly integrated with every new iPhone model. Trying to adopt a following amid heavy competition is a challenge all its own.

Source: USA Today

The app is currently not available for Android devices, which limits its user base. And who knows, maybe the app would have more success on that platform as Apple News isn’t present there. Furthermore, users are currently complaining about location services and continual prompts on Apple devices, so a bug fix could certainly tune the product. We currently do not have any figures on how many downloads the app has received and likely won’t until the Q4 earnings call.

The development costs could be better spent speeding up the perfection process for the WhatsApp and Messenger platforms. Notify could likely turn into another scenario where shareholders are disappointed that an app isn’t monetized.

A Stagnant Chart

We’re really seeing Facebook having a hard time gaining a clear trend line and breaking the $107.50 level since the Q3 earnings report. This company is well past its 50 and 200 DMAs, is close to perfectly neutral on the RSI, is seeing lower, more stable volumes, and really has a solid technical basis to pop up. Below you can see the some of the more flat trends and as an added focus take a look at the October to November run up and just how substantial that growth period was. The stagnation post earnings is really what makes me questions this stock’s ability, especially if in a future quarter the company fails to live up to expectations.

(click to enlarge)Click to enlarge

Source: StockCharts

Conclusion

In terms of other downward catalysts, one could argue that the lack of transparency on their expansion into Africa is concerning (after all, the word “Africa” is only mentioned once on their Q3 10-Q), and that the tech premium that places the stock at a P/E of 106.06 is a target for when the broader market begins to experience a downturn. I will be covering these concerns in Part II.

All downside considered, I’m long Facebook because I believe in management, the core product, the growth initiatives in other areas like Oculus, and a continued emphasis on innovation.

The above article originally appeared on Seeking Alpha, written by Brandon Dempster.

The Blue-Chip Tech Stock That Should Be in Everyone’s Portfolio

I hear these words a lot: “I just don’t get it, how can Amazon keep going up when it loses money every year?”

That’s a reasonable question to ask.

Amazon is an extraordinary business, but perhaps not for the reasons you might think. Yes, you can order just about anything you might need, and have it shipped to you just about anywhere in the world.

In some major cities, you can receive your package in less than 24 hours. Where I live, in Tokyo, if I order something at 8 a.m. it arrives usually by 5 p.m. the same day. While impressive, that’s not what makes Amazon special.

The company is so unique because it has never strayed from its core operating principle. Build scale… Be ruthless on operating expenses. Deliver a fantastic customer experience… Plow any earnings right back into the business… Continue to innovate…

Amazon has never allowed itself to get caught up in the quarterly earnings game on Wall Street. CEO Jeff Bezos understood from the beginning that as long as the company stayed true to its principles, the stock price would take care of itself. He most certainly has been right.

That last piece of Amazon’s operating principle – continue to innovate – is what drives the company’s success as a business and an investment.

What many people don’t know about Amazon is that it is more than the world’s e-commerce site. It is also the largest cloud service provider in the world.

The company’s Amazon Web Services (AWS) division rents out computing power, data storage, and servers to people and companies that want to deliver a service or application in the cloud. Companies that use AWS benefit greatly as they do not have to build out and manage their own data centers. Instead, they can simply lease AWS services for a fraction of the cost.

AWS was established in August 2006, but Amazon didn’t start breaking out the segment’s revenues until 2014. What the market learned at that time was extraordinary. AWS revenues were already at $1 billion a quarter. Today, they’re more than $2 billion… and still growing (see chart below).

What is even more significant than the rapid revenue growth is the amount of operating income that AWS generates. AWS accounts for about 8% of Amazon’s revenue… but 52% of the company’s operating income.

With all that momentum, AWS is now the fastest growing enterprise technology company ever. It is currently valued at about $160 billion, more than half of Amazon’s total value of $312 billion. That makes it the profit engine that allows Amazon to continue to invest in growing its e-commerce business, which runs at extremely low margins. And that e-commerce business continues to lead the market, growing strong double digits year after year.

Amazon’s dominance in e-commerce is hard to overestimate. In the United States, 7% of the total retail market is now conducted via e-commerce… and that number is growing every year.

By 2016, Amazon will have more than 15% of that market, or about $52 billion.

Part of that growth is thanks to Amazon’s knack for introducing new ways to reach its customers.

Amazon recently released “Echo,” an Internet-connected device – it looks like a sound speaker – that will transform the way people shop. Simply say, “Alexa,” and Echo comes to life, asking you how it can help. It can search the Internet for you, play you a song, or order a book through your Amazon account.

The company also introduced the “Dash” button. This is a physical, Internet-connected button you’d place somewhere in your house. And each time you push it, it automatically re-orders a specific product for you. For example, you’d stick a laundry detergent Dash button next to your washing machine. Now, whenever you’re low on detergent, you simply press the button and your order will be at your door in no time.

Amazon is also doing some futuristic things with transportation. For suburban and rural areas, Amazon has already announced its Amazon Prime Air service. The goal is to deliver packages in 30 minutes or less. The delivery vehicles are unmanned aerial vehicles, otherwise known as drones. I can tell you, the technology is very real, and Amazon is already testing its second generation of delivery drone technology.

Furthermore, it is expected that the Federal Aviation Administration will approve regulations permitting drone delivery services by June 2016. So certain areas of the U.S. could begin seeing Amazon Prime Air service before the end of next year.

To help reach that goal, Amazon has added 21 new logistics facilities around the world in the last 12 months. This is an increase of 14% from the previous year. In total, Amazon has 173 global logistics facilities, 104 of which are in North America.

Amazon’s logistics goal is incredible actually. In dense, urban areas where there are a lot of Amazon Prime members, the goal is to be able to deliver packages within a day and for certain items within an hour.

The strategic play by Amazon is easy to see. By deploying its own delivery services in urban areas and rural areas, it is able to remove the middleman. This will help expand Amazon’s profit margins and free cash flow, and it gives even more flexibility to reinvest and innovate.

The bigger and potentially more interesting story is Amazon’s challenge to UPS, FedEx, DHL, and the U.S. Postal Service.

Amazon had a fantastic 2015, more than doubling its stock price from around $300 to about $650. But it’s not done yet…

Amazon’s e-commerce and AWS divisions are slated for continued growth. And it continues to innovate in new business areas, specifically transportation and logistics. That makes it a stock every serious technology investor should own.

It’s not an investment that’s going to double in the next 12 months. But as a long-term holding, Amazon is an absolute must-own large-cap technology stock.

And for investors who want those quick, triple-digit wins, you’ll need to look at small-cap tech stocks. That’s where you’ll find the homerun investments that can make your year with one big win.

Those are the kinds of investments that I’m focused on finding. And in my new research advisory, Exponential Tech Investor, I’m introducing readers to companies that have the same growth potential that Amazon had.

I have a unique approach for identifying small-capitalization technology companies that make exponential technology (i.e., technologies that transform, or even create, entire industries) the foundation of their products. These are companies that have the potential for triple-digit returns in less than 12 months. And with today’s technologies pushing us toward some truly revolutionary advances, we’re about to see more great investment opportunities than we’ve seen in over 50 years. But separating the winners from the losers is going to be a serious challenge.

In a recent presentation, I explain the strategy I’ve been successfully using for decades to find the next Amazons. And you can watch it free here.

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners.