Tag Archives: News
If one raises checked bag fees, almost all the rest quickly follow suit. If one squeezes more passengers into basic economy, then most of the rest do as well.
Often, the only way an airline can stand out is to do the single, basic thing that they’re paid to do–but be better at it than competing airlines do. In other words, get you from point A to point B, safely and on time.
Thank God, the safety part of the equation has been near-perfect in the United States recently, with the single exception of a Southwest Airlines passenger who died in an in-flight incident last year.
That leaves only the race to be on time. It’s why American Airlines treats on-time departures as the number-1 metric by which employees are judged.
And it’s why Delta Air Lines must be absolutely thrilled with the news that the airline got this week. That’s because Flight Global released its list of the most on-time airlines in the world.
And for the second year in a row, Delta is number-1 on the list. It’s the only U.S. airline ever to earn the distinction, which is based on a year’s worth of analysis of 124,000 flights every day.
If a flight arrives within 15 minutes of its scheduled arrival time, it’s considered on-time according to Flight Global. By that standard, Delta gets an 89 percent on-time arrival rate.
Here’s the full list of 10:
- Qatar Airways
- KLM Royal Dutch Airlines
- United Airlines
- American Airlines
Not everything is rosy for Delta. If you’re an investor, you might be a little concerned about the financials Delta released this week, which dropped its stock and led to questions about the airline industry as a whole.
But if you’re a passenger, or if you’re an airline trying to improve this one metric because you think it’s one of the main remaining differences between you and many of your rivals, it’s welcome news indeed.
Published on: Jan 5, 2019
BEIJING/SHANGHAI (Reuters) – Cai Li, a janitor in Shanghai, developed a serious addiction to news app Qutoutiao, lured by gossipy articles about celebrities and the cash she gets from reading them.
A red packet giving out free cash for new users is seen on the news aggregator app Qutoutiao, on a mobile phone next to a Qutoutiao logo in this illustration picture taken November 26, 2018. REUTERS/Florence Lo/Illustration
Logging on during breaks at work and sometimes at night when she can’t sleep, the 63-year old has earned a few hundred yuan ($ 30-$ 40) over several months, which she says is useful to supplement her income.
With its unusual pay-your-user strategy, Tencent-backed Qutoutiao Inc (QTT.O) – pronounced “chew-tow-ti-ow” – has drawn in 20 million daily readers. A leaderboard shows the top-earning user has raked in more than $ 50,000.
Digital gold coins are earned by playing games that involve reading stories or by convincing others to join up. The current exchange rate is 1,600 coins for 1 yuan, with strong players receiving the title of ‘master’.
The payments are an extreme example of financial incentives from discounts to coupons employed by a new generation of Chinese internet firms as they seek to establish themselves in a market dominated by much bigger players.
“Acquiring new users if you’re competing with Alibaba, Baidu, Tencent and traditional mobile players, you need to come up with something new,” said Zhang Chenhao, Shanghai-based managing partner at technology-focused Prometheus Fund.
On one hand, it has worked. The news aggregator, which listed in the United States in September, tripled its number of daily users over the last year. Third-quarter revenue – nearly all of it from advertising – jumped more than six times from the same period a year earlier to just under 1 billion yuan ($ 145 million).
THE EYEBALL ECONOMY
But the strategy doesn’t come cheap, even if individual amounts paid to users are ‘trivial’ – a word it used to describe the payments in its IPO prospectus.
Qutoutiao spent over 1 billion yuan on marketing in the last quarter – more than its revenue, nearly the amount of its net loss and over seven times what it spent in the same period a year ago.
“It is getting more and more expensive to get traffic,” Chief Financial Officer Wang Jingbo told Reuters in an interview, but said the cash giveaways were a key hook and a long-term strategy.
“It’s the eyeball economy. Previously, people had to spend money to see content, but with the changing internet they no longer have to pay…Not only are they not paying – users now need to earn something as well.”
Since surging on its trading debut, its shares have lost three-quarters of their market value, hurt by a wider economic chill that has hit Chinese stocks and disappointing earnings. It is now worth around $ 1.3 billion.
Industry experts question how long firms like Qutoutiao can sustain cash-burning habits and how they will become profitable.
“It’s very messy. If you lower the amount of money, users will lose interest. But if you raise it, the cost is too high,” said Wei Wuhui, an academic and managing partner at tech-focused venture capital fund SkyChee Ventures.
More broadly, concerns are growing about how some Chinese tech firms, including household names, are generously using discounts and other means to subsidize customers while also taking on other costs in the pursuit of market share.
Meituan Dianping (3690.HK) – a ‘super-app’ whose services include food delivery, restaurant reservations and ride-hailing – saw its stock plunge last month after quarterly operating losses tripled amid a bruising price war with its main rival.
Prometheus Fund’s Zhang noted venture capital funding was tightening due to the slowing economy, pressuring a key funding channel for tech firms.
“This (stage) is purely cash-burning to create a foundation. But in the end you have to deliver value and be profitable. If you don’t make profits, no-one will subsidize you and finance you forever.”
Qutoutiao – whose name means “fun headlines” – targets smaller cities and rural areas with content that ranges from cooking tips to videos on how to dance.
CFO Wang said he hopes to have 200 million monthly users at some point, getting towards the estimated 250 million currently commanded by rival news aggregator Jinri Toutiao. Qutoutiao had 49 million monthly active users as of July.
Bytedance-owned Jinri Toutiao recently launched a lite version of its app targeting rural markets and users with smaller phones that includes cash games, a sign it’s taking Qutoutiao’s threat seriously. It even offers 25 yuan for persuading another user to join, trumping Qutoutiao’s 8 yuan.
Several Qutoutiao users said their main interest in the app was the money, but complained it was becoming harder to earn.
Zhai Liyun, 45, a temp worker who lives on the outskirts of Beijing, said she read “clickbait” stories before bed but so far had only earned 20 yuan because most of her friends were already on the platform.
Cai, the janitor, said she was cutting back after her eyesight suffered and she lost weight from going on the app too much – prompting an intervention from her husband and daughter.
“I’ll play in the evening if I can’t sleep but I won’t lose sleep over Qutoutiao. I try not to think about it too much now,” she said.
($ 1 = 6.9437 Chinese yuan)
Reporting by Pei Li in Bejing and Adam Jourdan in Shanghai; Additional reporting by Shanghai newsroom, Sankalp Phartiyal and Euan Rocha in Mumbai; Editing by Edwina Gibbs
Absurdly Driven looks at the world of business with a skeptical eye and a firmly rooted tongue in cheek.
Even if it says so itself.
The airline just released some figures for July, and, at a cursory glance, they’re glowing.
Consolidated traffic (revenue passenger miles) increased 6.9 percent and consolidated capacity (available seat miles) increased 4.0 percent versus July 2017. UAL’s July 2018 consolidated load factor increased 2.4 points compared to July 2017.
Won’t you look at that?
This means the airline’s packing them in and making lots of money.
Dig a little deeper and you’ll find that domestic traffic rose by 9.1 percent in July. Compared to last July, that is.
And Lordy, the airline is doing wonderfully in the regions. There, traffic is up a pulsating 17.6 percent.
United’s also packing them in on each flight.
The so-called load factor (number of people who are actually paying) at home soared to 90.5 percent. That’s a 2.6 percent increase.
United was loaded internationally, too. A 2.2 percent increase to 87.8 percent.
People are paying to fly United and there are more flights to more places, which makes the United world a wonderful place.
Alright, if you read the headline at all — and if you didn’t, what are you doing here? — there’s a little bad news.
You see, when you pack more people onto your planes, it might take a little longer.
That’s what appears to be happening. All this success in selling tickets appears to be leading to a reduction in on-time departures, the beautifully named D0.
A mere 62.3 percent of mainline flights — that is, the non-regional variety — departed on time or even slightly early.
This is a 1 percent drop from this time last year.
This isn’t, of course, merely an inconvenience for passengers. When a plane departs late, cabin crew must explain themselves to their bosses.
Well, you see, it was like this. There were so many darned people. And have you seen all that stuff they bring on planes?
LONDON (Reuters) – London taxi drivers are drawing up a plan to sue mobile app Uber for over 1 billion pounds ($ 1.3 billion), Sky News reported on Tuesday citing unidentified sources, weeks after it was granted a temporary licence to operate in Britain’s capital.
FILE PHOTO: The logo of Uber is seen on an iPad, during a news conference to announce Uber resumes ride-hailing service, in Taipei, Taiwan April 13, 2017. REUTERS/Tyrone Siu/File Photo
Sky News said the Licensed Taxi Drivers’ Association (LTDA) was likely to argue that 25,000 black-cab drivers in London had suffered lost earnings averaging around 10,000 pounds for at least five years as a result of Uber’s failings, taking the overall possible bill to 1.25 billion pounds ($ 1.64 billion).
The report said it had engaged the law firm Mishcon de Reya to explore the options.
Uber won a probationary licence to operate in the city last month, after Transport for London (TfL) had refused to renew it last September for failings in its approach to reporting serious criminal offences and background checks on drivers.
The LTDA were not immediately available for comment. Uber declined to comment.
Reporting by Alistair Smout; editing by Kate Holton
People look for inspiration and happiness in a vast array of places. Some see school kids walking out of class across America to take a stand for gun control and find hope. Others note that 7-Eleven now has customizable tater tots and are filled with joy. What do they get when they look at the internet? All that and a lot of bickering and tweets about calzones. Here, dear friends, is what everyone was talking about online last week when they weren’t talking about the new Avengers: Infinity War trailer.
What Happened: President Trump announced Rex Tillerson was being replaced as secretary of state on Twitter.
What Really Happened: Folks like to make jokes about Donald Trump running America via Twitter, but last week he announced an executive decision on the platform that was definitely not funny—at least not to the head of the State Department.
Yes, the change in Secretary of State—one of the most important, if not the most important, cabinet positions—was announced via social media, as if Trump was every parody of himself imaginable. For those who wanted more than just a tweet of notice about the new state of affairs, that was forthcoming … also via Twitter, of course.
Those around Tillerson, who had just arrived back in the country, were surprised by the news, suggesting that Tillerson himself wasn’t entirely prepared for what had just happened.
There might, it turns out, have been a reason for that, if one response from the State Department is to be believed.
OK, perhaps it was a little disingenuous to say that no one saw this coming, as some pointed out.
Unsurprisingly, the White House has a different take on the way everything went down.
Except, it turned out, chief of staff John Kelly’s message might not have been entirely clear.
There really is something to be said about Twitter’s role in all of this, isn’t there? Still, things couldn’t have been that bad, because Tillerson did make an appearance later that day to talk about his firing and smooth everything over.
This is worth noting, as well. The State Department aide who put out the earlier statement saying that Tillerson didn’t know why he’d been fired? Yeah, there was a price to pay for saying that.
The Takeaway: Quick, we need a catchy way of talking about former Exxon CEO Tillerson now that he’s been ousted!
Move Along, Nothing to See Here
What Happened: House Republicans announced they were closing their investigation into collusion between the Trump campaign and Russia during the 2016 election, saying there was no evidence of such actions.
What Really Happened: Last week, with little warning, the House Intelligence Committee’s investigation into Russian interference in the 2016 election just … stopped.
“Case closed”? Sure, if you say so. And, it turns out, they really did say so.
There are others who might disagree with that take, of course…
That would be a yes, then. And, sure, it seems suspicious to say the least that the Republicans just shut down the investigation unfinished with so much still out there unanswered, but surely the Democrats on the committee were given adequate warning that the investigation was being closed, right?
OK, but at least all the Republicans are agreed that this move was the smart one?
Well, fine, yes, that’s a little awkward. Still, at least one of the leading Republicans on the committee didn’t disagree.
Oh, come on. As the week continued, it eventually started to become clear even to the Republicans that this had been a mistake, with this headline putting it best: “Republicans Fear They Botched Russia Report Rollout.” Gee, you think?
The Takeaway: In what could only be described as a spectacular piece of timing, the Republicans announced that there was nothing Russians had done in regards to the 2016 election in the same week that the Trump administration finally signed sanctions into law against 16 Russians for their efforts to interfere with the 2016 election. There’s nothing like being consistent.
Meanwhile, Over at the Department of Justice…
What Happened: Special counsel Robert Mueller’s investigation took aim at the Trump Organization.
What Really Happened: Meanwhile, you might be thinking, “I wonder how special council Robert Mueller’s Russia collusion investigation is going? I’m sure that, if the House Republicans were right and there’s certainly nothing going on, he’ll be wrapping everything up too, right?” Funny story: He’s not wrapping everything up.
Yes, in what is pretty much the opposite of wrapping things up, Mueller is subpoenaing the Trump Organization’s records, which is … kind of a big deal, to say the least. Certainly, that’s what people on social media seemed to think.
But what could it all mean? Some people had theories.
And how is this going down with those targeted?
Somewhere, Devin Nunes is wandering around the halls of Congress, muttering to himself, “But I said nothing happened…!”
The Takeaway: It’s worth pointing out that the Mueller news dropped on March 15, which amused certain people online.
What Happened: Forget “Commander in Chief,” perhaps President Trump’s title could be “Gaslighter in Chief.” Or, maybe, “Man Who Should Perhaps Never Talk in Front of a Tape Recorder Ever.”
What Really Happened: This might sound like the kind of old-fashioned, unnecessary posturing of people stuck in the past, but once upon a time it was widely expected that the President of the United States wouldn’t be the kind of person who would boast about lying to the head of state of a friendly nation.
Those days, dear readers, are long gone.
Yes, the Washington Post obtained audio from a fundraising speech in which Trump boasted that he’d made up information that he used in an argument with Canadian Prime Minister Justin Trudeau over whether or not the US runs a trade deficit with Trudeau’s country. (It doesn’t.) “I had no idea,” Trump can be heard to say on the tape. “I just said, ‘You’re wrong.’ You know why? Because we’re so stupid.” As you might expect, people were thrilled about this display of, uh, political maneuvering? Sure, let’s go with that.
There is, also, a surreal second story to this audio of Trump that has nothing to do with lying to Justin Trudeau. Instead, it had to do with the “bowling ball test.”
The Takeaway: There’s really only response to this entire exchange, isn’t there?
Space Force? Space Force!
What Happened: When it comes to America’s manifest destiny, there’s only one direction left to go: To infinity… and beyond?
What Really Happened: With all the bad news going around the the White House, you can’t blame the president for wanting to change the narrative somehow. And you only get to do that, he knows, by thinking big and reaching for the stars. Last week, Trump gave a speech that showed just how literally he took that advice.
Sure, going to Mars is definitely thinking big, but is it thinking big enough? Not to worry, however; Trump was right there with the next big thing.
Space Force! Just the very idea got the media excited, and asking questions like, “For real?” and “What does that even mean?”, not to mention “Do we have to?” Sure, not every outlet took the idea seriously, but that’s the lamestream media for you. Everyone else was into the idea, or calling the president a laughingstock. It’s hard to be a leader. But at least Twitter understood the potential of Space Force.
The Takeaway: Make no mistake, people may joke now, but Space Force is the future.
By Valuentum analysts
Image Source: Hasbro
There’s nothing like the announcement of a customer’s possible liquidation to send shares of suppliers tumbling. That’s what happened when Toys ‘R’ Us announced that it may have to cease operations as nobody appears to be coming to the rescue. Hasbro (HAS), Mattel (MAT), and JAKKS Pacific (JAKK) may feel some near-term operational discomfort, but we’re not overreacting.
If a rescue deal doesn’t happen for Toys ‘R’ Us, online verticals and big box retailers such as Walmart (WMT) and Target (TGT) may easily fill the void. Target CEO Brian Cornell noted, in particular, that his company is “playing to win in toys.” Though we’re viewing the Toys ‘R’ Us announcement as more ‘headline noise’ than anything that may impact the toy makers over the long haul, readers may expect forward near-term guidance to now have a more cautious bent, and that may disappoint some investors.
Rumors of a deal between Hasbro and Mattel haven’t let up from what we can tell, and we think the Toys ‘R’ Us possible liquidation could grease the wheels for further talks, as anti-trust interference may not be that fierce given end market troubles and concentrated online distributor power through the likes of Amazon (AMZN) and eBay (EBAY). We continue to like Hasbro the most out of the toy makers, but we caution management against the temptation to overpay for Mattel’s assets, as the Barbie franchise could very well be in terminal decline, given Disney’s (DIS) Frozen success. We also like that Hasbro continues to pull a variety of levers, the latest an agreement with Netflix (NFLX) to create toys and games from the Super Monsters animated kids series. This follows the Hasbro-Netflix’s joint effort to bring a collection of games to Stranger Things fans.
We wrote about Hasbro’s fourth-quarter report, released February 7, and at the time, we highlighted that management had pointed “to slower consumer demand for both the company and its industry in November and December,” but we also said that we think management is confident that its innovative lines and digital initiatives will deliver in 2018. What we’re watching closely at Hasbro is the long-term trajectory of its ‘Entertainment and Licensing’ business line, where on a full-year basis, operating profit in the segment nearly doubled, to $ 96.4 million on just ~8% revenue expansion (the division posted a near-34% operating margin). This segment may hold the keys to Hasbro’s future, but even so, Hasbro was able to still drive revenues nearly $ 1 billion higher during the past 5 years. Physical toy sales are under pressure, but by no means, dead.
Hasbro’s equity has advanced considerably during the past 5 years, and its 10%+ dividend increase, to a quarterly payout of $ 0.63, on February 7, means shares now have a forward yield of 2.8%. We’re not overreacting to the Toys ‘R’ Us announcement by any stretch, with our discounted cash-flow-derived fair value estimate of Hasbro hovering in the high-$ 80s at the time of this writing. For more information on our thoughts on Hasbro, in particular, and our assumptions behind our fair value estimate, please download Hasbro’s 16-page valuation report from Valuentum here (pdf).
Image: The first page of Valuentum’s 16-page report.
This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice.
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. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Hasbro is included in Valuentum’s simulated Dividend Growth Newsletter portfolio.
Editor’s Note: This article covers one or more stocks trading at less than $ 1 per share and/or with less than a $ 100 million market cap. Please be aware of the risks associated with these stocks.
Trump Tax Plan’s Effect on Inflation and Interest Rates
As everyone now knows, President Trump got his corporate tax reduction bill passed in late December, lowering the tax rate on domestic business from 35% to 21%. Thus far, most investors and pundits have focused on how the lower corporate rate is a boon to big companies nationwide. Obviously, lower taxes should lead to higher profits, all else remaining equal. However, what has received a bit less attention is the effect that the tax plan will have on future interest rates and inflation. According to the Congressional Budget Office, the tax plan will add an additional $ 1.4 trillion (yes, that’s $ 14 followed by 11 zeros – or, if one prefers, 1,400 stacks of $ 1,000,000,000 each) to the federal debt over the next decade. Clearly, with the economy already strong and with debt levels already high, the tax bill should almost certainly result in higher levels of future inflation and, hence, higher future interest rates.
Indeed, it took only a month and a half after the tax plan’s passage for investors to feel the first jolts from higher inflation, as CNN reported on February 6th:
Be careful what you wish for.
Wall Street partied hard while President Trump pushed for huge business tax cuts that the economy didn’t really need. Tax cut euphoria carried the Dow a breathtaking 8,000 points to levels never seen before.
Now comes the hangover. Investors are remembering that giving lots of medicine to an already healthy economy can have side effects, namely inflation.
Those inflation fears are suddenly rocking Wall Street. They sent the Dow plummeting 1,800 points in just two trading days. The losses wiped out a quarter of the gains since Trump’s election.
For months, investors basically ignored the threat that the tax cuts might backfire, causing bond yields to spike and raising the likelihood that the Federal Reserve will have to raise interest rates faster to fight inflation.
“We have an infinite capacity for self-delusion as investors,” said Bruce McCain, chief investment strategist at Key Private Bank. “When we feel good, we don’t want to be bothered by reality.”
How Inflation Swindles the Equity Investor
So, what does all this mean for shareholders? Back in May 1977, Warren Buffett wrote an article for Fortune magazine (full article linked here) entitled “How Inflation Swindles the Equity Investor”. Given that we now appear to be heading into an era of higher inflation, it pays to take a look back at Buffett’s thoughts on the subject from nearly 41 years ago. How does Buffett describe the relationship between inflation and equities in the Fortune article? First, he refutes the previously accepted view that equities act as an effective hedge against inflation:
There is no mystery at all about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn’t going to be a big winner. You hardly need a Ph.D. in economics to figure that one out. It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms, let the politicians print money as they might. And why didn’t it turn out that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds. I know that this belief will seem eccentric to many investors. They will immediately observe that the return on a bond (the coupon) is fixed, while the return on an equity investment (the company’s earnings) can vary substantially from one year to another. True enough. But anyone who examines the aggregate returns that have been earned by companies during the postwar years will discover something extraordinary: the returns on equity have in fact not varied much at all.
Basically, Buffett takes the view that equities are disguised bonds that pay around 12% on par value (i.e., book value, or shareholders’ equity). Thus, stocks are hurt just as much as bonds when inflation rises because the price-to-book ratio (and, consequently, price-to-earnings and price-to-sales ratios) for stocks must necessarily decrease just as a bond’s price decreases in inflationary times. Conversely, the lower the relative level of inflation, the higher bond prices rise and the more P/B, P/E, and P/S multiples for stock expand (all other things being equal).
Buffett goes on to identify a key additional characteristic of low inflationary environments: they favor companies that reinvest their earnings (versus paying them out via dividends). Why? Because when stocks are trading at 3.4X book value, as they are today, every $ 1 of cash from operations that gets reinvested in said book value should translate into an incremental $ 3.40 in market value for the shareholder (versus worth just $ 1 when paid out as a dividend, or even less after payment of taxes thereon). Buffett explains further:
This characteristic of stocks – the reinvestment of part of the coupon – can be good or bad news, depending on the relative attractiveness of that 12%. The news was very good indeed in the 1950s and early 1960s. With bonds yielding only 3 or 4%, the right to reinvest automatically a portion of the equity coupon at 12% was of enormous value. Note that investors could not just invest their own money and get that 12% return. Stock prices in this period ranged far above book value, and investors were prevented by the premium prices they had to pay from directly extracting out of the underlying corporate universe whatever rate that universe was earning. You can’t pay far above par for a 12% bond and earn 12% for yourself.
But on their retained earnings, investors could earn 12%. In effect, earnings retention allowed investors to buy at book value part of an enterprise that, in the economic environment then existing, was worth a great deal more than book value.
It was a situation that left very little to be said for cash dividends and a lot to be said for earnings retention. Indeed, the more money that investors thought likely to be reinvested at the 12% rate, the more valuable they considered their reinvestment privilege, and the more they were willing to pay for it. In the early 1960s, investors eagerly paid top-scale prices for electric utilities situated in growth areas, knowing that these companies had the ability to re-invest very large proportions of their earnings. Utilities whose operating environment dictated a larger cash payout rated lower prices.
We note here that the 30-year Treasury bond yield has jumped up recently, appreciating about 45 bps over the past six months to the ~3.20% level (source):
Granted, we are not even remotely close today to the ~15% level of the early 1980s, however, for equity investors, we currently appear to be moving in the “wrong” direction, at least if one buys into Buffett’s thesis. Indeed, looking at the very long view, it appears that the ~35-year bond bull market may finally be ending (source):
Now, we know why investors have been in love with so-called “growth” companies (especially big tech companies) during the recent moderate growth, low interest rate, and low inflation environment. These tend not to pay dividends but rather reinvest all their cash flows into existing or new operating businesses. Consider Amazon (AMZN) for a moment. All operating cash flow is plowed back by Jeff Bezos either into the existing retail business or in newer businesses such as Amazon Web Services. Unfortunately, the higher interest rates rise, the lower the relative benefit of the reinvested dollar for shareholders, and the less attractive “growth” stocks look compared to stodgy dividend payers like AT&T (T) or General Motors (GM) (again, other things being equal).
Buffett notes that a “reversal” phenomenon took hold in the mid-to-late 1960s just after major institutional investors had stampeded into growth stocks at nosebleed valuations:
This heaven-on-earth situation [regarding the superiority of growth stocks in low interest rate environments] finally was “discovered” in the mid-1960s by many major investing institutions. But just as these financial elephants began trampling on one another in their rush to equities, we entered an era of accelerating inflation and higher interest rates. Quite logically, the marking-up process began to reverse itself. Rising interest rates ruthlessly reduced the value of all existing fixed-coupon investments. And as long-term corporate bond rates began moving up (eventually reaching the 10% area), both the equity return of 12% and the reinvestment “privilege” began to look different.
Are we on the precipice of a new downward revaluation of stocks, given looming inflation? Today, stocks trade around 3.4X book value, compared to 2.0X book value in 2009 and just 1X book value in 1980. Let’s take an extreme scenario where interest rates are rising significantly and investors are only willing to pay book value for the S&P 500 again, as they did at the conclusion of the last bond bear market. Obviously, a growth company that trades today at 10X book value pays no dividends and earns 15% return on equity has much more potential downside than a dividend payer trading at 1.5X book value also earning 15% return on equity, since, even if the former were to trade at a consistent 3X the market multiple of book value (as it does now), it would still lose 70% of its value in the adverse scenario (i.e., its valuation would be reduced from 10X book to 3X book). In comparison, the dividend payer now trading at 1.5X book value might trade down to 1X book in the adverse scenario, meaning it would only have 33% downside, or less than half that of the growth stock.
Wither Tech Stocks Post-Trump Tax Reform?
So, how do some recent market darlings trade versus book value? Below are 5-year price-to-book charts for Amazon, Tesla (TSLA), and Netflix (NFLX):
We find that Amazon trades at 26X, Tesla trades at 14X, and Netflix trades at 34X book, or an average for the three of about 25X book value. This represents a multiple of over 7X the overall market’s (already historically high) P/B ratio. Moreover, none of these companies pays a dividend, so they receive maximum credit from investors for the fact that all cash (including cash sourced from incremental debt) gets reinvested in the underlying business at book value. As interest rates have relentlessly fallen during the current 9-year bull market, investors have logically marked up the equity valuations of these three to higher and higher multiples of book value. If Buffett is correct, however, these will be the very companies whose valuations contract the most when inflation and interest rates rise, as should occur in an era of higher and higher government spending and deficits.
Moreover, the likes of Amazon, Tesla, and Netflix are also the type of companies helped the least by the Trump tax cuts. For one thing, they are either unprofitable or marginally profitable, so cutting their tax rate yields minimal to no gain for them in terms of immediate earnings and cash flow. Second, the value of any deferred tax assets on their balance sheets is lower, since going forward, the amount of taxes they will be able to offset with their DTAs will be lower under a 21% tax regime than a 35% tax regime (for example, Tesla had $ 2.4 billion in DTAs on its balance sheet as of the end of 2017). Finally, the current market valuation for all three companies is largely based on investors’ expectations of massive profits many years down the line (under typical sell-side analyst DCF analyses, near-term profits for these companies remains subdued to nonexistent and then explodes to the upside in the out years, similar to a hockey stick effect). Yet if the tax cuts lead to higher interest rates, the present value of these out-year profits will necessarily be less, as the discount factor applied to them will be higher. Thus, we find that the Trump tax cut has a triple negative effect on companies such as Amazon, Tesla, and Netflix.
Indeed, media outlets noted the initial negative tech investor reaction to the tax bill:
Of course, certain highly profitable large-cap tech players such as Apple (AAPL), Google (GOOG) (NASDAQ:GOOGL), and Microsoft (MSFT) should benefit from the Trump tax plan, as their cash taxes should decrease significantly going forward. In addition, they will be able to repatriate billions of overseas profits at favorable rates. Thus, not all tech companies should be put into the same boat.
The passage of the Trump tax plan looks to be a major negative for companies like Amazon, Tesla, and Netflix. Not only do they fail to benefit immediately from the lower corporate tax rate (since they generate minimal to no profits), the present value of their future profits is less if higher government deficits lead to higher long-term interest rates (a process which seems to be already well underway). Not only that, but if Warren Buffett’s analysis is to be believed, higher rates will necessarily cause price-to-book multiples to contract market-wide from the current (historically high) 3.4X level. As a group Amazon, Tesla, and Netflix trade at a massive 7X the overall market’s P/B ratio, indicating that the downside risk from such a contraction could be significant. To be sure, the valuation of any individual company depends on many variables, including the quality of management and products, revenue versus expense growth, market share dynamics, etc. However, the truly scary thing for Amazon, Tesla, and Netflix shareholders about the Trump tax bill is that the negative knock-on effects for these companies, as outlined in this article, are completely outside their and their company managements’ collective control.
Disclosure: I am/we are long GM, AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are also short TSLA and NFLX.
Is there anything more satisfying than finder a quicker way to your destination? You might be in a car, or on foot, or you’re building a software product or a company culture and suddenly—Jeez, that was easier.
Sometimes, it works. As transportation editor Alex Davies reported this week, companies building self-driving cars have found that it’s important—necessary, even—to use remote drivers, sitting behind screens miles away, if they want to get their less-than-perfect tech on the road. Sweet. Alex also took a look at Nuro, a brand new self-driving mini-truck startup that wants to deliver your snacks to you, so you never have to leave your block again. Also sweet.
Sometimes, however, shortcuts are a bad idea. Uber bought an ex-Waymo engineer’s autonomous truck startup because it thought the engineer’s company could give it a tech boost. But Waymo sued, and the two tech giants are set to face off in court next week. State governments thought they could go green quickly by buying “recycled” pavement—but they might not be saving money, or the environment, in the long run. Pick your timesavers carefully, kiddos.
Plus, news about an Alphabet company’s new effort to organize cities’ travel data, a Pax Britannica among tech companies for the purpose of building safer streets (and protecting their business models), and a place to find everything you have ever wanted to know about autonomous vehicles. Let’s get you caught up.
Stories you might have missed from WIRED this week
A blockbuster trade secrets lawsuit between Waymo and Uber is set to kick off Monday. Here’s what you need to know about the self-driving tech dispute—and why you really, really must pay attention.
Alex uncovers a secret fact about the growing autonomous vehicle sector: Almost every tech developer is leaning on remote drivers, who can guide cars through problem spots from miles away. Self-driving…to a point. For safety’s sake, of course.
Ford looks out into the horizon and sees the sunset of the personal automobile—in cities, at least. So it’s building a cloud platform, an operating system for the city of the future.
Sidewalk Labs, Alphabet’s urban solutions company, is doing something similar, trying to put all public and private city transportation data in one, accessible, shareable space. Say hello to its new spin-off company, Coord.
Fifteen tech companies came together to sign onto ten new, very nice-sounding “commandments” for livable cities. They include open data, equity, and a zero-emission future. But don’t give anyone too much credit. Those companies still have to make actual changes to the way cities operate, writer Jack Stewart warns.
A new report suggests American public transit needs to adapt to meet the future—and can’t blame all its problems, or pin all its hopes, on mobility companies like Uber and Lyft.
In a vague-ish announcement, Waymo says it’s purchasing “thousands” of new Chrysler Pacificas that will operate without a driver at the wheel.
Hello to Nuro, a new self-driving delivery truck startup from fancy Google alums. The company is betting it can deliver stuff sans humans in three to five years.
I take a deep dive into the science of “green” pavement. If done wrong, pavement could hurt the local ecosystem; if done right, that black and grey stuff beneath your feet could do its part to save the world.
Need to get up to speed on what self-driving cars even mean? Check out WIRED’s new guide, a constantly updated deep dive.
Car-Table Hybrid of the Week
The world is a wide and wondrous place, so of course you can plunk down some undetermined sum of money to buy a car frozen into a table, à la Han Solo Chez Jabba. The specially commissioned, 10-car/table collection is from the chrome nerds at Discommon.
News from elsewhere on the internet.
- Because Uber and Waymo shouldn’t have all the fun, this week the beseiged electric car company Faraday Future filed suit against its former CFO’s new startup—for trade secret theft.
- Joby Aviation, which has raised $ 130 million in funding, unveils its new flying car cough electric plane-drone hybrid cough. The company wants to operate its own airborne ride-hailing service.
- Self-driving vehicle startup Phantom AI gets into a scary crash while operating semiautonomous features—and while TechCrunch reporters were inside.
- Uber teams up with electric bicycle-sharing company Jump for a San Francisco pilot project. Users will be able to track down a bike and and pay for a ride within Uber’s app.
- California startup Udelv staged an autonomous vehicle grocery delivery in the Bay Area this week. It wants dozens more of its orange robots on the roads soon.
- If you’re the type of car nerd who watches the Super Bowl for the commercials, here’s everything you need to know before the game.
- Is this German man a hero or a villain?
In the Rearview
Essential Stories from WIRED’s canon
India’s Silicon Valley nearly doubled in population in less than two decades. But it turns out you can’t take shortcuts to economic development without caring for the natural resources. Last May, Samanth Subramanian explored why Bangalore, once land of hundreds of lakes, is now dying of thirst.
Mark Zuckerberg promised to spend 2018 fixing Facebook. Last week, he addressed Facebook making you feel bad. Now he’s onto fake news.
Late Friday, Facebook buried another major announcement at the end of the week: How to make sure that users see high-quality news on Facebook. Facebook’s solution? Let its users decide what to trust. On the difficult problem of fixing fake news, Zuckerberg took the path with the least responsibility for Facebook, but described it as the most objective.
“We could try to make that decision ourselves, but that’s not something we’re comfortable with,” Zuckerberg wrote on his Facebook page. “We considered asking outside experts, which would take the decision out of our hands but would likely not solve the objectivity problem. We decided that having the community determine which sources are broadly trusted would be most objective.”
The vetting process will happen through Facebook’s ongoing quality surveys — the same surveys it uses to ask whether Facebook is a force for good in the world and whether the company seems to care about its users. Now, Facebook will ask users if they are familiar with a news source and, if so, whether they trust the source.
According to Zuckerberg, these surveys will help the truth about trustworthiness rise to the top: “The idea is that some news organizations are only trusted by their readers or watchers, and others are broadly trusted across society even by those who don’t follow them directly.”
It’s tempting to read a lot into Zuckerberg’s words, especially when the missive was so short on details. The perils are evident: Bad actors can game the survey! This only increases filter bubbles! After the year Facebook just had, how can you possibly think the masses can be objective?
Relying on users “lets them sidestep allegations of bias and take steps to fix it without directly becoming the dreaded ‘arbiter of truth,'” says researcher Renee DiResta, a technologist who has been studying the manipulation of social-media platforms.
Facebook did not immediately return a request for comment. There’s a good chance the new policy could cause as many problems as it solves. For the best known media brands, the survey could be a leg up. But what about niche publications that have narrow, but credible readerships? Does this mean that National Review or Slate are deemed untrustworthy because they have definitive points of view? Do they get put in the same bucket as Fox and MSNBC? What about BuzzFeed, where fun distractions and deep investigations all show up under the same URL?
Jason Kint, CEO of Digital Content Next, a trade association representing content companies, likes the idea of using brands as a proxy for trust. “But the details are really important,” he says. “What matters most is how this is being messaged. Facebook is clearly scrambling as the industry, Washington and the global community are losing trust in them. There is nothing worse to a company long-term.”
Zuckerberg also seemed to be in scramble mode last week when Facebook said it is reorienting the newsfeed to show users “meaningful interactions.” Only Friday, eight days later, did Zuckerberg explain the scope of that change for news publishers: the percentage of news on Facebook’s newsfeed will drop to 4 percent, from 5 percent.
This isn’t Facebook’s first attempt to address fake news. It’s previous effort flopped a few weeks ago. Facebook thought putting “disputed” flags on fake news stories would help out, but people only clicked more. Despite Zuckerberg’s reluctance to work with outsiders, experts probably could have warned him about human nature.
The survey strategy may fall prey to the same misunderstanding of people. Chris Tolles, the CEO of the media site Topix, is familiar with the problem. “As a news aggregator, we wrestled with this,” he says. “People who actually share news, news is a weapon, it’s not to inform, it’s to injure. It’s a social-justice identitarian, a person with an ax to grind, or it’s a journalist. They are not sharing news to inform, they are trying to convince you of something. It comes with a point of view.”
The root of the problem, according to Tolles: Trust is not objective. The interpretation of objectivity varies wildly between Democrats and Republicans and internet users themselves may not be a trustworthy bunch. Zuckerberg’s post also mentioned refocusing on “local” news, which Tolles says is just as fraught. “It’s vicious all the way down to the local crime report. I think that they’ve got an impossible task.”
Last week the company said it was stepping away from news. “This week, they said we’re going to try to do the hardest thing in the world, which is to try to decide which narrative is true,” says Tolles.
Each weekend we round up the news stories that we didn’t break or cover in depth but that still deserve your attention. The post Security News This Week: Hoo-Boy, Mar-a-Lago’s Internet Is Insecure appeared first on WIRED.