Tag Archives: Battle

Elon Musk Says Tweeting Is Free Speech in His SEC Battle
March 12, 2019 6:00 am|Comments (0)

Elon Musk will not go quietly. On Monday night, lawyers representing the Tesla CEO submitted a filing to a federal judge in New York arguing that she should deny the Securities and Exchange Commission’s request to hold Musk in contempt of court for—what else?—a tweet. Musk’s legal team argued the SEC overreached in its request, and claimed the agency is trying to violate his First Amendment right to free speech.

If the judge, Alison Nathan of the Southern District Court of New York, does hold Musk in contempt of court, she would decide the penalty. “If the SEC prevails, there is a good likelihood that the District Court will fine Mr. Musk and that it will put him on a short leash, with a strong warning that further violations could result in Mr. Musk being banned for some period of time as an officer or director of a public company,” Peter Haveles, a trial lawyer with the law firm Pepper Hamilton, told WIRED last month.

This latest chapter in Musk’s ongoing legal spat with the SEC dates back to the evening of February 19, 7:15 pm Eastern Time to be exact, when Musk wrote on Twitter, “Tesla made 0 cars in 2011, but will make around 500k in 2019.” About four and a half hours later—at 11:41 pm ET—Musk corrected himself, tweeting, “Meant to say annualized production rate at the end of 2019 probably around 500k, i.e. 10k cars/week. Deliveries for the year still estimated to be around 400k.”

Musk is the head of a publicly traded company, so making a mistake about his business on Twitter—which investors treat as a valid source of news like any other—is already less than ideal. But Musk and Tesla also reached a settlement with the SEC in September over another tweet containing misinformation about the electric carmarker’s operations. That was after Musk tweeted that he planned on taking Tesla private, and that he had the “funding secured.” He soon revealed he did not have that funding secured, and Tesla announced it would stay public.

In the ensuing deal with the SEC, Musk gave up his role as Tesla’s chairman for at least three years. He and Tesla each paid a $ 20 million fine. And Musk and Tesla agreed that the CEO’s tweets about the carmaker would be truthful, and reviewed by a team of Tesla lawyers before sending. According to the filing, Tesla’s general counsel and an assigned “disclosure counsel” are in charge of approving Musk’s Tesla tweets. The lawyers write that “the disclosure counsel and other members of Tesla’s legal department have reviewed the updated controls and procedures with Musk on multiple occasions.”

In December, Musk said on CBS’s 60 Minutes that he does not respect the SEC, and that the only tweets of his that require pre-approval are those that can affect Tesla’s stock price. Asked how Tesla could know which tweets would do that, Musk said, “Well, I guess we might make some mistakes. Who knows?” The SEC cited that interview in its motion for a contempt of court charge, writing that “Musk has not made a diligent or good faith effort to comply” with the terms of his settlement.

Now, though, Musk and the SEC are debating what that “pre-approval” actually means. Tesla’s lawyers say nobody pre-approved the tweet in question, but that it shouldn’t matter, because it had already made public the information about those production numbers: in an earnings call, in end-of-year financial results, and in an SEC filing submitted on the day Musk sent out the tweets in question. Musk did not receive pre-approval before sending that tweet because it “was simply Musk’s shorthand gloss on and entirely consistent with prior public disclosures detailing Tesla’s anticipated production volume,” according to the filing.

Moreover, the Musk team argues, the SEC’s attempt to limit Musk’s tweeting is a violation of his First Amendment rights to free speech.

The Musk legal team also argues that the CEO has really worked very hard since the SEC settlement to be careful about his tweeting behavior. It wrote that Musk’s less frequent tweeting about Tesla “is a reflection of his commitment to adhering the Order and avoiding unnecessary disputes with the SEC.” In fact, it says the correction tweet, the one sent four-and-a-half hours later, “is precisely the kind of diligence that one would expect from someone who is endeavoring to comply with the Order.”


More Great WIRED Stories

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Build it or Buy It: Will Amazon or Walmart Win the Retail Innovation Battle?
July 1, 2018 6:26 am|Comments (0)

Photographer: Bartek Sadowski/Bloomberg

Amazon’s recent news that it will be replacing more humans with yet another algorithmic solution is the latest example of the company’s thrust to innovate through self-built technology. 

With Amazon’s patent count rising again last year, it’s clear the company’s “build it” strategy is largely meant to out-invent, rather than outbid, the next big idea. Amazon received 1,963 patents in 2017 according to the latest data released by the IFI Claims office, and holds more patents than any other retailer in the industry (7,096). In fact, at $ 22.6 billion, Amazon spent more in R&D than any other U.S. company last year (up 41 percent from 2016), topping Microsoft, Intel, Facebook and even Apple according to a recent story in Recode.  

Amazon has a deep history of effectively chasing patents, which stems from lessons learned in the dot-com era. For example, Amazon’s patent for one-click shopping was issued in 1999 and set the norm for the entire retail industry.

Fast forward nearly twenty years. Today we have Amazon Prime and Amazon Marketplace, and the company is still three steps ahead, inventing what is possible by both shaping and anticipating the needs of consumers. According to a recent CNBC article, Amazon was issued patents last year for augmented reality mirrors that would enable users to try on clothes virtually by projecting different outfits onto the user. They’ve also patented a “smart” sensor-studded package delivery air vehicle, an option that would mute the Amazon Echo’s video mode for user privacy and even one that would detect hacked self-driving cars.  

Walmart, by comparison, currently holds only 349 patents, and the company has largely based its innovation strategy around buying the latest and greatest new ideas. 

According to a TechCrunch story late last year, the company considers acquisition core to its innovation model, particularly in the technology, retail and digital native brands categories. Marc Lore, CEO of Walmart eCommerce U.S, who founded Jet.com (bought by Walmart in 2016), noted in recent comments that in Walmart’s view, “specialist positioning is better than mass,” and that the acquisition spree will continue. Recent acquisitions include ShoeBuy, Moosejaw, Bonobos, Parcel, Hayneedle and ModCloth.

Walmart has also started its own incubator, Store No. 8, which aims to “nurture startup businesses,” allowing them to run just like other startups but be “ring-fenced by the rest of the organization and backed by the largest retailer in the world,” according to Lore. 

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Alibaba: The Battle Enters Decisive Point
May 27, 2018 6:09 pm|Comments (0)

Alibaba’s (BABA) Ant Financial plans to raise fresh funds at a valuation of $ 150 billion, but it faces a number of headwinds. Alibaba recently suffered a setback when Walmart (WMT) dropped Alipay from all its stores in Western China. This step could be followed by a nationwide rollout in which all the Walmart stores in China accept only Tencent’s Tenpay. Walmart has 443 stores in China which include 406 Supercenters, 18 Hypermarkets, and 19 Sam’s Clubs.

Both Walmart and Tencent have a big stake in JD.com (JD), which is Alibaba’s biggest competitor in China. As the Chinese retail ecosystem is being fought over by Alibaba and Tencent, both big and small retailers have had to choose between either of the two goliaths. Tencent has some major advantages in this market which it is using to increase its market share.

According to a recent disclosure, Ant Financial Services group’s wealth management business has Rmb 2.2 trillion or $ 385 billion of assets under management. It has 600 million users. This makes it the biggest customer wealth management platform in the world. There are other financial products which can be introduced by Alibaba to maximize the potential of its payments ecosystem. If Alibaba is able to retain its market share in this very important segment, we should see huge upside potential for the entire platform and the stock.

Tencent makes up for its late entry

Tencent was quite late in entering the payments market. Alibaba’s Alipay has been used since 2004. By early 2014, Alipay had a 70% market share in China’s online payment market. But this has changed significantly in the past few years. Recent estimates by Beijing-based consultancy iResearch show that Alipay has 53% market share where Tenpay is close on its heels with 40% share.

Source: WSJ

The stakes for both Alibaba and Tencent are quite high. China is seeing a rapid increase in transaction volume through mobile payment as customers move away from bank cards and other payment options.

Source: WSJ

This means that over the next three years, we will not only see a doubling of total transaction volume but also a much higher share of mobile payments within the overall pie. Both the companies have realized the importance of this segment and are going full throttle in their expansion initiatives. Alibaba is at a minor disadvantage in this battle because all its competitors are moving under Tencent’s banner. Hence, even though Alibaba has a greater market share and a good growth runway due to its rapidly growing retail operations, it still needs to compete against a growing list of retailers that have started using Tenpay.

Tencent also has other advantages besides the fact that it is the only company which can challenge Alibaba. As the urban market gets saturated by payment options, both Alibaba and Tencent have started moving into rural areas. In these areas, Tencent already has a big customer base due to its WeChat application. Most of the potential customers for Tenpay would have already used WeChat and hence using the payment platform is a mere extension of the core app. On the other hand, the use of Alibaba’s e-commerce platform is not as widespread in rural parts as it is in urban areas.

Launch of new financial products

The payments market is just the beginning for Alibaba and Tencent. As they get greater customer data, they will be able to gauge the creditworthiness of a customer and provide tailor-made financial products using data mining. This can extend from loans and insurance to more exotic products. All these segments have much higher margins and significant growth potential within China. It must be noted that most of the customers in China skipped the entire credit card growth phase and have now settled with Alipay and Tenpay.

Source: FT

Alibaba formed Yu’e Bao in 2013 to manage the leftover cash from spending on its e-commerce platform. By 2017, this money market fund had amassed $ 165.6 billion under management. This number is now closer to $ 385 billion according to recent disclosure by the company. The rapid growth of this fund shows the future potential of Alibaba’s financial division and the innovative financial products it can bring to the market. The future growth in these products will closely follow the market share of Alibaba and Tencent within the payments ecosystem. Hence, it has become extremely important for Alibaba to defend its turf and build a strong moat.

The payments battle is not limited to China but extends in almost every part of the world. For example, Alibaba has a huge stake in Paytm which is the biggest payments player in India. This company has seen rapid growth in the last 30 months. It is highly possible that Alibaba is able to gain a decent footprint in the payments ecosystem of developed markets over the next few years. In order to avoid regulatory pushbacks, Alibaba is more likely to invest in unicorns and promising startups in developed countries instead of growing its own platform. A similar approach in India has allowed Alibaba gain a strong foothold through investments in Paytm and online grocer Big Basket.

What to expect in the next few quarters?

Alibaba’s “New Retail” initiative was a response to the expansion of Tencent/JD within offline retail. Alibaba has already made some big-ticket investments in brick and mortar stores. These include $ 2.9 billion investment in Sun Art, $ 2.6 billion in InTime and $ 4.6 billion in electronics retailer Suning. In February, Alibaba made RMB 5.45 billion or $ 867 million investment in Easyhome Furnishing for 15 percent stake. This pace of investments should continue for the next few quarters. Some of these are defensive purchases which are made to prevent future acquisition by Tencent.

We should also see a negative impact on the margins as more incentives are given to customers to lure them. When Tencent announced its recent earnings it mentioned that the company would “aggressively” invest in video and payment, which may hurt margins. This warning was enough to send the stock sliding down by 4.6% even though the net profit beat estimates.

A similar trend is possible within Alibaba which can lead to lower margins, even if the revenue growth is high. Alibaba also needs to make bigger investments in digital segment because it does not have a core social app like Tencent which can retain customers within its ecosystem.

Investor Takeaway

Alibaba has a decent lead over Tencent in the payments market. Also, Alibaba’s market share in payments is closely following the market share of the company within e-commerce. The penetration level of financial products in China is still quite low compared to U.S. and Western Europe. Alibaba can use its ecosystem to attract customers to new financial products and also use its market leadership to build a better moat against rivals.

Although we could see some margin contraction in the next few quarters, the long-term growth story for Alibaba is intact. Alibaba is a good buy-and-hold option for investors with long-term horizon.

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

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

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Battle Of The Cleaning Robots: iRobot Braava 380T Vs. Deebot Ozmo 601
May 25, 2018 6:00 am|Comments (0)

Ben Sin

The Deebot Ozmo 601 (left) next to the iRobot Braava (right).

It’s funny how the path of ascendance for Chinese tech upstarts seem to always involve competing with an American product with a lower-cased “I” in its name. In the smartphone world, Huawei, Xiaomi and Vivo are ultimately competing with the iPhone more than they are against each other; and in the world of robot cleaners, Suzhou-based Ecovacs Robotics’ rapid rise means its products are constantly being compared with those from Massachusetts-based iRobot.

During an online search for the best robot cleaners, iRobot and Ecovacs–respectively the number one and two in global sales–will almost certainly top most lists. In fact, the tech website Wirecutter (a Forbes partner) last year picked from a selection of top entry-level robot cleaners and Ecovacs’ Deebot N79 came out on top, with iRobot’s Roomba 690 as runner-up.

Since then, Ecovacs has released a new robot mopping machine–the Deebot Ozmo 601–that is meant to take on iRobot’s best-selling Braava 380T. Ecovacs loaned me a unit to review, but since my friend has raved about her Braava 380T for months, I opted for a comparison of both models.

Ecovacs

An official product rendering of the Deebot Ozmo 601.

Ben Sin

An official product rendering of the iRobot Braava 380T.

Looks

First, let’s look at the design. The Ozmo 601’s design follows Ecovacs’ previous robot cleaners, in that it’s a circular device measuring around 13-inches in diameter. It has a V-shaped brush and two rotating fan-like brushes at the bottom. iRobot’s Braava 380T, meanwhile, has a blocky design without the brushes — in fact, it only has wheels and the mop head on the bottom for a relatively simple base. It’s also a bit smaller in size.

Ben Sin

The size difference is noticeable.

The Braava requires a separate small box-shaped device which iRobot calls “NorthStar” navigation system to help the Braava scan and track the room. Meanwhile, Ozmo 601 uses a built-in infrared sensor to navigate its surroundings.

Ben Sin

The Braava 380T requires this secondary box to work.

Both units come with microfiber cloths for mopping, but the Braava has an advantage in that it can use third-party Swiffer-style cloths while the Ozmo can only use Ecovacs’ own line of clothes.

For the first test we purposely spilled some tea on dusty tile floors and set both machines loose. It’s worth noting that the Ozmo can be turned on and controlled with an app or the included remote control, while the Braava must be turned on manually by pressing a button on the machine’s body. Once on though, both machines soaked up the tea and wiped the dust considerably, though it’s worth noting that the Braava operates much quieter. The Ozomo wasn’t loud by any means — just not whisper quiet like the Braava.

Ben Sin

The Braava 380T’s spilled tea mop results.

Ben Sin

Here’s the Ozmo 601 doing a respectable job too — though it took longer.

Because the Braava has that dedicated room-mapping box, it was able to move more swiftly and knew exactly when and where to turn compared to the Ozomo which scans the room in real time and moves at a more deliberate pace. Both were able to reach under the couch, but neither are safe from getting tangled by cords and smartphone charging cables.

For the second test, we placed cracker crumbs with some dog hair on the floor, and this is where the Ozmo’s additional vacuuming feature makes the difference. As you can see in the video below, the Braava acted more like a plow truck than a cleaner, pushing crumbs into a corner. This is somewhat helpful, making it easy to scoop up the crumbs later, but the Ozmo managed to suck up the crumbs leaving much less manual work for the user. The Braava’s cloth also wasn’t too adept at picking up the stray dog hair. Perhaps this is why the Ecovacs insists we use the company’s own cloth.

Ben Sin

The Deebot Ozmo 601 managed to clean up crumbs a lot better than the iRobot Braava 380T.

Neither could clean the minor grout that has a tendency to occupy the space between floor tiles. These robot cleaners can help maintain cleanliness, but if you’re the type to walk around your house in shoes, you can’t expect either the Deebot or the Braava to work magic.

Overall, the Deebot Ozmo 601 is a more up-to-date robot cleaner that fits into the current IoT/Smart Home buzz — you can control the Ozmo 601 away from home via an app, and it can return to its charging dock automatically while the Braava cannot.

But iRobot’s Braava 380T, at $ 299, is $ 100 cheaper than Deebot’s offering, and it takes up less space in the home, not just because it’s smaller but because it docks vertically.

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Uber CEO and transport boss had second meeting over London license battle
April 20, 2018 6:06 pm|Comments (0)

LONDON (Reuters) – London’s Transport Commissioner Mike Brown met Uber [UBER.UL]boss Dara Khosrowshahi in January, a freedom of information request revealed, as the Silicon Valley app fights to keep its cars on the streets of its most important European market.

FILE PHOTO – Dara Khosrowshahi, Chief Executive Officer of Uber Technologies, attends the World Economic Forum (WEF) annual meeting in Davos, Switzerland, January 23, 2018. REUTERS/Denis Balibouse/File Picture

Uber is battling a decision by the city’s transport regulator last September to strip it of its license after it was deemed unfit to run a taxi service, a ruling Uber is appealing.

Since then Uber has made a series of changes to its business model, responding to requests from regulators, including the introduction of 24/7 telephone support and the proactive reporting of serious incidents to London’s police.

Khosrowshahi flew to London in October for discussions with Brown after which Uber promised to make things right in the British capital city.

The pair had a second meeting in London in January, according to a response to a freedom of information request from Reuters.

“The Commissioner met with Dara Khosrowshahi on 3 October 2017 and 15 January 2018, both meetings took place in London,” Transport for London (TfL) said.

A TfL spokesman declined to provide an immediate comment on what was discussed at the meeting. Uber declined to comment.

Reuters had asked for a list of every meeting which had taken place between Uber and TfL’s private hire team and/or Brown since Sept. 22 but TfL declined to release such details.

“We are not obliged to supply the remainder of the information requested in relation to meetings as it … relates to information where disclosure would be likely to prejudice the exercise by any public authority of its functions ..,” it said.

A court hearing over Uber’s appeal is due this month before the substance of the appeal is heard in June.

Reporting by Costas Pitas; editing by Stephen Addison

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Electric Scooter Startups in Battle with San Francisco 
April 17, 2018 6:01 pm|Comments (0)

This is a guest post by Applico CTO and Principal Tri Tran. Prior to joining Applico, Tri was the co-founder and CEO of Munchery. 

After years of public battles with Uber, San Francisco has learned some valuable lessons. 

This time around, three electric scooter rental companies – Bird, Lime and Spin – are trying to roll out their service in downtown San Francisco. But the city is fighting back. As I happen to live in San Francisco and work in downtown, I’ve been able to witness this battle first hand.

Fast Rollout

As a startup entrepreneur, I quickly recognized the strategies that these three companies have taken to maximize business traction in as short a time as possible:

  • Flood a certain limited geography (such as downtown San Francisco) with a lot of scooters.
  • Get as many people as possible using them, very quickly. Once certain critical mass is reached, perhaps leverage them and their loyalty to fight off any regulations.
  • The default is seeking forgiveness afterward instead of seeking permission prior to operating. Let the city take any actions it needs to, assuming it’s historically very slow to react anyway.

I would not be surprised if these three companies also employ “fake” users and have them ride the scooters around town to create buzz, and thus word of mouth referral.

The City Fights Back

To my surprise, the city worked quickly and City Attorney Dennis Herrera issued cease-and-desist orders to all three companies.

The city wants the scooter companies to take actions to:

  1. Keep users from riding scooters on sidewalks
  2. Keep scooters from blocking sidewalks when parked
  3. Ensure that riders use helmets

It’s all in the name of public safety. Until then, the city will impound these scooters and may issues fines of a minimum of $ 125 for each violation. That is unless the companies can abate the problem within 30 days or prevail in an appeal hearing.

What Will Happen Next

It is not clear what these companies would do next, but here’s my take:

  • These three companies don’t have the operations to meet the city’s demand for the above described points
  • Limiting riders from sidewalks and ensuring unused scooters not block sidewalks is too tall of an order

Technically, it’s entirely possible to track riders on where they ride and whether they had left the scooters on sidewalks. They can even issue fines to riders who disobey such rules. But these rules would be a direct conflict to the convenience of ride-wherever and park-wherever, and thus would greatly reduce the attractiveness of using their scooters in the first place.

So what should they do? San Francisco has clearly established that it can move fast to regulate AND has created a repeatable process to impound these scooters.

Not complying will simply be too costly. More importantly, San Francisco also provides a model for all other cities to copy if/whenever the service rolls out to their cities. That’s bad news for Bird, Lime and Spin.

Ultimately, the service that these scooter companies provide is convenient, but not nearly as convenient as Uber was when it first arrived and replaced the painful taxi experience.

Additionally, the immediate public disruption of a horde of unfamiliar vehicles taking over sidewalks is much more apparent. Scootering on the streets has its own dangers as well when mixed with automobile traffic. The bike accident rate in San Francisco hasn’t changed much in the past few years. Relatively few people will brave their lives for that convenience.

Thus, these scooter companies will not have similar leverage nor political power from their small user bases to what Uber had when it fought against regulation attempts.

Based on the above, my prediction is that this service will go down into history as a fail, at least in major U.S. cities. It’s not necessarily a bad thing as these entrepreneurs will have learned a lot from the experience. They may find better, more sustainable businesses as a result. Cities are still grappling with what the future of transportation looks like, as are entrepreneurs. Scooters may not be it.

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Momo Vs. YY, The Battle Of The Chinese Live Streaming Platforms
December 16, 2017 12:46 pm|Comments (0)

Here we compare two of the (more or less) pure plays in the hot Chinese live streaming sector, Momo (NASDAQ:MOMO) and YY (NASDAQ:YY). The fortunes of their share prices have skyrocketed in a hardly fathomable way the last five years.

While YY’s shares haven’t exactly done badly with a five-year return of over 600%, earlier this year MOMO was up a stunning 22,500% or so and that in a mere 3.5 years. However, lately the going hasn’t been so good and YY has basically taken back some lost terrain.

At the minimum, these graphs show that stocks in social media can make fortunes, but given Momo’s travails of late, things can also go south. We sort of warned about this in the article we wrote about this name at the end of August.

Social Platform Economics

But let’s concentrate first on the potential upside, which lies in the business model of platform economics in general, and social platform economics in particular:

  1. Social platforms (platforms in general) have powerful network effects.
  2. Social platforms have little content cost.
  3. Social platforms (platforms in general) have large economies of scope.
  4. Social platforms + machine learning creates powerful increasing returns.

Let’s discuss these briefly. A platform is more useful when others use it, setting off network effects and a scramble to appropriate the first-user advantage.

However, the streaming media platforms like Momo and YY have low barriers to entry, hence a multiple of these have emerged. A Chinese crackdown has served as a significant cull (as we described in our article about YY), and others are likely to have failed anyway unable to obtain a minimum viable scale. This isn’t surprising, given the significant upfront investments required.

Yet, multiple platforms still exist, like those of Momo and YY (but also Tencent (OTCPK:TCEHY) and others). So this is not a winner-take-all market, the network effects are not all consuming like other social platforms, most notably Facebook (FB).

Indeed, there is little in the way of content cost, but these streaming media platforms have other significant cost to contain, stemming from the fact that the network effects are not all consuming and no real dominant player has emerged. This sets the platforms in competition against one another, and this involves a lot of cost:

  • Marketing and sales cost, the cost to entice new users to your platform, instead of competing platforms.
  • Revenue sharing to incentivize top contributors to stay.
  • R&D: The cost to improve the possibilities of the platform for users and open up different revenue streams for them so they’ll contribute to your platform rather than the competition.
  • Development cost, the cost to help contributors to improve (in theory this is win-win, at least if successful).

These are just the most obvious costs, and we’re sure there are more.

The history of these platforms is a nice illustration of the economies of scope. Momo started as a dating site. YY started as an online gaming site. Both morphed into something else, as once you have a lot of eyeballs accumulated, a platform simply provides you the opportunity to add new functions, bells and whistles.

We see this in business platforms all the time, where the likes of Workday (WDAY), Tableau (DATA) and Ellie Mae (ELLI) are adding features all the time.

All this potentially gets to a whole new level when machine learning is added. What machine learning does is tailor content to individual users. These users will become more engaged that way and contribute even more.

By contributing even more, they produce more data for the machine learning, enabling even better tailoring, creating a virtuous cycle. But the same virtuous cycle works with advertising (or, as we have seen with Facebook where the lines between content and advertisement are blurred, with political propaganda).

So in theory these are very powerful business models, especially with the addition of machine learning. And indeed Momo has been improving the algorithms that drive what content get maximum exposure (from the Q2CC):

The higher the content quality is the greater level of user exposure that piece of content can get on the platform… Regarding the question about personalized recommendation logic and content tagging logic, I think our system is pretty much based on what is called collaborative filtering. This is a rather complicated and sophisticated mechanism. To put it simple, the system will assign different interest tax to users according to their respective interest graph and then what you are going to see – what you are more likely going to see on the platform is largely determined by the type of content that other users with similar interest tied to you gravitate toward, and that gravitation is further defined by user actions such as clicking through liking or other type of engagement.

We haven’t found a similar quote from YY, but we’re pretty sure it’s doing something similar. It wouldn’t be able to survive for long without it.

Diverging fortunes?

As SA contributor Justin Giles explained, Momo’s shares sold off despite a solid top and bottom line beat in Q3 because of softer Q4 guidance and this:

However, for the second consecutive quarter, live paying users remained stagnant at 4.1 million. If Momo cannot get more users to start spending money on its platforms, it will be tougher for the company to remain a growth story as investors start looking at it from more of a value side.

Curiously enough, we ventilated our skepticism about the staying power of paying customers in our YY article published earlier in the week. Justin also noted the following:

On the flip side, while live paying users remained unchanged at 4.1 million, average revenues from those users jumped. Total paying users from value-added services also increased from 4.5 to 4.8 million with the Company seeing an increase in the average revenues per paying user.

The company’s cash position continues to climb jumping more than $ 100M from the second quarter. As of September 30, 2017, Momo’s cash, cash equivalents and term deposits totaled $ 949.7 million, compared to $ 846.3 in the second quarter and $ 651.3M from a year ago.

The shares of Momo are off from their highs by a great deal whilst YY’s haven’t suffered from a similar bout of investor angst, at least not yet. Is the skepticism towards Momo justified (in relation to YY)?

Growth

While YY is still selling 30%+ more, Momo is actually catching up. Indeed, revenues have grown way faster the last five years.

And Momo is still growing four times(!) as fast this year.

Margins

At first sight, one would argue a resounding no.

While Momo’s (GAAP) margins are trending down, they are still substantially higher compared to those of YY.

Other finances

As you can see below, Momo has almost caught up with YY in terms of EBITDA on an absolute basis, but considering YY’s larger revenues (and market capitalization) it has already caught up with YY on a relative basis.

And here is another telling figure, Momo is generating way more cash, and the difference is widening rapidly.

Neither company has debt, and both companies are mildly diluting (YY embarked on a substantial $ 442.2M secondary offering earlier in the year).

Valuation

The following figures are GAAP figures and backwards looking:

But they show that YY, despite growing much slower, has closed its earnings valuation gap and even overtaken Momo, as it has with the other valuation metrics.

Conclusion

The selloff of Momo is not easy to explain in isolation, but compared to one of its rivals, YY, it becomes harder still. Momo is doing better on a raft of metrics like growth, cash generation, and margins, often substantially so.

Yet the valuation gap has continued to narrow, and the selloff in Momo has been such that YY has even overtaken Momo on a valuation basis. It really is difficult to argue that Momo’s shares are expensive.

While we have some reservations about the sector (it could be a bit of a fad, and part of the earnings stream seems to be fairly uncertain to us), if you don’t have these qualms like we do, then the choice is pretty clear.

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

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

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