Alibaba: The Right Time To Buy

Alibaba (BABA), the Chinese tech giant connects businesses around the globe in an innovative way and upgrading the interaction between business players to reach a global presence. It provides the technological infrastructure and marketing fundamentals to help merchants leverage the use of the internet through e-payment services, shopping search engines and cloud computing services and engage with their customers on a user-friendly platform.

Alibaba has operations in more than 200 countries and is currently among the world’s largest retailers and e-commerce companies. Recently, short interest in the company increased which led the stock price to undervalued levels. The company is still a buy option for investors looking to add value to their medium to long-term portfolios and it is the right time to grab this opportunity.

The company is expected to release its second quarter profits on August 23rd and is estimated at $1.21 per share versus $1.16 during the same period last year.

The Pullback

Alibaba’s stock price decreased by almost 16% during the recent period and is currently trading at its lowest levels since last year. Investors are worried of the US-China trade war implications on companies’ operations and their going concern. However, if we dig into the financial numbers of Alibaba, we can clearly conclude that the major return of the company is mainly from international customers.

In fact, in its yearly report, Alibaba states that their operations are highly dependent on consumer spending and online commerce specifically. The revenue may be materially impacted by a slowdown in the Chinese economy since it represents a major part of the company’s revenues. According to the National Bureau of Statistics of China, Chinese economy growth has slowed in recent years compared to prior years. GDP growth rate reached 6.9% in 2015 compared to 6.7% and 6.9% in 2016 and 2017 respectively.

The bearish sentiment for the Chinese market has been ongoing since the beginning of 2018, caused mainly by the trade war news. The Shanghai Composite index has actually declined by 24% since January. However, selloffs due to trade war were emotionally-driven trades due to the fact that total traded value of goods between China and the rest of the world is very high relative to its traded value with the United States.

Source: Economist – IMF

Alibaba Cloud

In its last quarter financials, it was remarkable the growth in the Cloud Computing division, which reached a 103% year over year growth. Management is currently working on developing this division through an aggressive expansion on many levels.


Europe was Alibaba’s destination to expand its Cloud’s success outside China and Asia:

  • The company is in talks with BT Group (NYSE:BT) about a cloud services partnership.
  • A German partnership started with Vodafone (NASDAQ:VOD) in 2016 which allowed the telecommunications company to resell Alibaba’s services.
  • Last month, Alibaba Cloud agreed with Bollore (OTCPK:BOLRF) to develop projects in cloud services and Artificial Intelligence.
  • Alibaba group has acquired a stake of its Turkish counterpart Trendyol. This deal is expected to create new opportunities in e-commerce and online payments in Turkey.

Alibaba Cloud is the largest cloud service provider in China and is ranked as the third largest worldwide. It has 18 data center regions covering more than 70 countries with more than 1300 nodes. Alibaba Cloud replaces the traditional data transmission, centered on web servers, and distributes its user requests to the most suitable nodes around the globe allowing the fastest retrieval of requested content. On the blockchain side, Alibaba Cloud is encouraging users to try this new technology, which is expected to be improved and enriched on a continuous basis according to market requirements.

In addition, Alibaba Cloud launched recently a new set of products meeting the needs of retailers who are willing to digitize their operations under the New Retail concept by integrating online and offline shopping experience.

According to Alibaba’s Strategic M&A and Investments report, management is using their capital in the most efficient manner when taking investment decisions and focusing on four goals:

  1. Synergies with Alibaba.
  2. Innovation in products and services.
  3. Value creation.
  4. Binary outcomes.

Ant Financial

Ant Financial, previously known as Alipay, is the biggest player on the Chinese online payment market. It is believed to be one of the key growth drivers for Alibaba group, which currently owns 33% of this fin-tech company. It has a huge growth potential especially with its blockchain projects, in addition to its wealth management products.

The main competitive advantage of Ant Financial is that it has a very large user base that is increasing steadily and counting around 520 million active users in 2017. During the 2017 Investor day, Eric Jing, CEO of Ant Financial Services announced that the total number of e-wallets increased by 10 times between 2015 and 2017, and the daily number of transactions increased by 13 times during this period.

Ant’s revenues last year reached $8.9 billion with almost 600 million customers. Ant is expected to go public in the next two years and is currently valued by analysts at $150 billion. Ant does not disclose its financial statements and its $2.1 billion earnings are calculated from Alibaba’s disclosures.


Alibaba Valuation

In 2017, the company produced a gross profit margin of 30% and a net income margin of 28%. Based on the average analysts’ estimates, it is expected that the company will generate a revenue of $60 billion in 2019 and $83.5 billion in 2020.


We end up with an estimated net income of $16.8 billion in 2019 and $23.4 billion in 2020, leading to a $6.41 EPS in 2019 and $8.93 EPS in 2020.

And if we apply the current P/E ratio, despite being at its lowest levels: 46.2.


BABA PE Ratio (TTM) data by YCharts

We obtain a fair value of $296.14 for 2019 and $412.57 for 2020.

In addition, if we discount these prices at an estimated 15% required return per year. The fair value of Alibaba is estimated at $257 by the end of 2018. Thus, an upside potential of 50%.


Alibaba has significant growth potential in its long-term horizon whether in the Chinese market or on the international level. China has the world’s largest working force population with 800 million people, of which 770 million have access to the internet. Furthermore, Alibaba is aggressively working on expanding its presence overseas through investments and partnerships, with a growing international e-commerce operations platform. The cloud division and Ant Financial will be its main growth drivers in addition to innovation in blockchain technology.

Overall, the risks are currently overstated and trading in Chinese stocks is driven by emotional fear from the US-China trade war. For long-term investors, the pullback situation experienced during the recent period is triggering a suitable entry point at an undervalued price.

Therefore, Alibaba is currently a strong buy for the remaining period of 2018.


Disclosure: I am/we are long BABA.

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.

Chinese hackers targeted U.S. firms, govt after trade mission: researchers

WASHINGTON/LONDON (Reuters) – Hackers operating from an elite Chinese university probed American companies and government departments for espionage opportunities following a U.S. trade delegation visit to China earlier this year, security researchers told Reuters.

A man holds a laptop computer as cyber code is projected on him in this illustration picture taken on May 13, 2017. REUTERS/Kacper Pempel/Illustration

Cybersecurity firm Recorded Future said the group used computers at China’s Tsinghua University to target U.S. energy and communications companies, and the Alaskan state government, in the weeks before and after Alaska’s trade mission to China. Led by Governor Bill Walker, companies and economic development agencies spent a week in China in May.

Organizations involved in the trade mission were subject to focused attention from Chinese hackers, underscoring the tensions around an escalating tit-for-tat trade war between Washington and Beijing.

China was Alaska’s largest foreign trading partner in 2017 with over $1.32 billion in exports.

Recorded Future said in a report to be released later on Thursday that the websites of Alaskan internet service providers and government offices were closely inspected in May by university computers searching for security flaws, which can be used by hackers to break into normally locked and confidential systems.

The Alaskan government was again scanned for software vulnerabilities in June, just 24 hours after Walker said he would raise concerns in Washington about the economic damage caused by the U.S.-China trade dispute.

A Tsinghua University official, reached by telephone, said the allegations were false.

“This is baseless. I’ve never heard of this, so I have no way to give a response,” said the official, who declined to give his name.

Tsinghua University, known as “China’s MIT,” is closely connected to Tsinghua Holdings, a state-backed company focused on the development of various technologies, including artificial intelligence and robotics.

China’s Defense Ministry did not respond to a request for comment.

Recorded Future gave a copy of its report to law enforcement. The FBI declined to comment.

It is unclear whether the targeted systems were compromised, but the highly focused, extensive and peculiar scanning activity indicates a “serious interest” in hacking them, said Priscilla Moriuchi, director of strategic threat development at Recorded Future and former head of the National Security Agency’s East Asia and Pacific cyber threats office.

“The spike in scanning activity at the conclusion of trade discussions on related topics indicates that the activity was likely an attempt to gain insight into the Alaskan perspective on the trip and strategic advantage in the post-visit negotiations,” Recorded Future said in the report.

The targeted organizations included Alaska Communications Systems Group Inc (ALSK.O), Ensco Plc’s (ESV.N) Atwood Oceanics, the Alaska Department of Natural Resources, the Alaska governor’s office and regional internet service provider TelAlaska.

Alaska Communications declined to comment. The others did not respond to requests for comment.

U.S.-China trade tensions have escalated in recent months with both sides imposing a series of punitive tariffs and restrictions across multiple industries, and threatening more.

The economic conflict has also damaged cooperation in cyberspace following a 2015 agreement by Beijing and Washington to stop cyber-enabled industrial espionage, Moriuchi said.

“In the fall of 2015, cyber security cooperation was seen as a bright spot in the U.S.-China relationship,” she said.

“It was seen as a topic that the U.S. and China could actually have substantive discussions on. That’s not really the case anymore, especially with this trade war that both sides have vowed not to lose.”

Reporting by Christopher Bing in Washington and Jack Stubbs in London; Additional reporting by Gao Liangping and Ben Blanchard in Beijing; Editing by Lisa Shumaker

From blue lipstick to Facebook Live, home shopping networks refine their pitch

WEST CHESTER, Pa. (Reuters) – The Home Shopping Network is getting an image makeover.

A studio set is seen at the QVC Studio Park in West Chester, Pennsylvania, U.S., June 4, 2018. Picture taken June 4, 2018. REUTERS/Brendan McDermid.

A U.S. television network where shoppers can buy everything from electronics to kitchen gadgets, the Home Shopping Network is overhauling its lineup to offer more beauty products while adding streamed video content to win over shoppers without cable TV.

A division of Qurate Retail Group, the network is facing growing competition from Amazon Inc. and Evine Live Inc for consumers like 24-year old Erin Bounds, who regard buying products through TV shows a relic of the past.

“Someone who is 24 doesn’t have the time nor desire to watch an hour-long show about a piece of jewelry or a vacuum when they can get an answer and the product quicker and probably cheaper on Amazon,” said Bounds, a resident of Ellicott City, Maryland.

For decades, the main difference to shoppers between HSN and Qurate’s other shopping network, QVC, typically came down to variations in branding and merchandise, with HSN selling more electronics. Qurate acquired HSN in late 2017 for $2.1 billion so the two shopping networks could join forces to better compete against Amazon and its home-shopping-style online video promotions.

Qurate executives told Reuters they now are culling HSN’s core merchandise offerings to eliminate many higher-priced electronics and some home goods, such as vacuum cleaners and blenders.

Host Sloane Glass sells beauty products during a Facebook live event at the QVC Studio Park in West Chester, Pennsylvania, U.S., June 4, 2018. Picture taken June 4, 2018. REUTERS/Brendan McDermid

Instead, they are adding more niche cosmetic and apparel brands to help draw some distinction with QVC. They are also pushing both QVC and HSN to pursue younger shoppers with click-to-buy links on Instagram and Facebook Live for items such as earrings, shoes and Vince Camuto jeans, in a bid to spark a rebound in demand.

Second-quarter revenue at HSN declined 12 percent to $473 million from $533 million a year later the company announced Wednesday. Stock in the company, which counts media mogul John Malone as one of its largest investors, is down about 8 percent year to date, compared with a 14 percent increase for the Nasdaq index, and 64 percent increase for year to date.

“You’re seeing the impact of them digesting a large organization that is clearly not growing if you look at the numbers,” said Ben Claremon, partner and research analyst at investment firm Cove Street Capital, one of Qurate’s shareholders.

“There’s just not the degree of demand for home shopping products, and the desire to spend hours of the day watching them diminishes as you go down in age,” he said.


The new strategy is aimed at creating more distinction with the two cable channels after the merger, according to Rob Robillard, the new VP of Beauty Integration at Qurate.

In beauty, for example, one of HSN’s top selling products is Too Faced “Unicorn Tears” blue lipstick, which sells for roughly $22. One of QVC’s best products is the Doll 10 Nude lipstick with a price tag of around $25, noted Robillard.

Slideshow (20 Images)

“We were sort of hoping there would be this real big difference between HSN and QVC,” he said. “But the two are actually very similar.”

Qurate will partner with Robin Burns-McNeill, chairman of Batallure Beauty, a company specializing in brand strategy, product and package development, sourcing and manufacturing in the fragrance, cosmetics and skincare categories, to create a collection of proprietary beauty brands, the company told Reuters exclusively.

The first manufactured beauty products from this partnership are slated to launch in fall 2019 on, and, if all goes well, the company said they would likely tap on Burns-McNeill’s shoulder to create proprietary brands for HSN as well.

They have a tall order. Amazon is the top online destination for beauty and the fifth-most-popular retailer for skincare and cosmetics, according to Coresight Research, behind leaders Walmart, CVS Health, Target Corp and Walgreens. QVC and HSN do not rank on the list.

In March 2016, Amazon launched “Style Code Live,” a daily live fashion show which has since gone off-air.

This June, Amazon unveiled Prime Wardrobe in the United States, allowing Prime members to try on clothing, shoes, and accessories before purchase. Customers have up to seven days to try their clothes on at home, and are charged only for those items they choose to keep.

Celebrity-driven shows and videos on QVC still have their upside, according to vendors such as Xcel Brands Inc Chief Executive Robert D’Loren. A QVC apparel vendor for more than six years, D’Loren cites on-air appearances of fashion designer and QVC host Isaac Mizrahi – D’Loren’s largest, most successful brand on QVC – as strategic advantage for the home shopping network.

D’Loren thinks Qurate, which currently accounts for 60 percent of Xcel’s brand volume, is well-positioned to take on competitors and video retailer Evine, and that it’s “only a matter of time” before millennials like Bounds give Qurate’s QVC and HSN a shot.

“There is something to tuning in, watching, having product fully demonstrated to you that is unique and has great value, and I haven’t seen that anywhere else in the market,” he said.

Editing by Vanessa O’Connell and Edward Tobin

Australia plans law for tech firms to hand over encrypted private data

SYDNEY (Reuters) – Australia on Tuesday proposed a new law requiring technology firms such as Alphabet Inc’s Google, Facebook and Apple to give police access to private encrypted data linked to suspected illegal activities.

FILE PHOTO: A woman looks at the Facebook logo on an iPad in this photo illustration taken June 3, 2018. REUTERS/Regis Duvignau/File Photo

The measure, which targets platforms the Australian government says could be used for criminal activities or to plan a terror attack, would require police to get a court warrant to access the encrypted data.

It sets fines of up to A$10 million ($7.3 million) for institutions that do not comply, and jail time for individuals, but has yet to be presented in parliament and it was not clear when it could become law.

The measure will pull Australia’s security laws in line with new technology, said Angus Taylor, the minister for law enforcement and cybersecurity.

“Our legislation for telecommunication intercepts, being able to access data, in order to investigate and prosecute criminal activity, with a warrant, is no longer fit for purpose,” he told Reuters.

“Whether it’s pedophiles or terrorists or drug dealers, it makes sure we have legislation fit for purpose in a modern era,” he added, referring to the proposed measure.

FILE PHOTO: A logo is pictured at Google’s European Engineering Center in Zurich, Switzerland July 19, 2018 REUTERS/Arnd Wiegmann/File Photo

An industry group that includes Google, Twitter, Facebook, Yahoo! and Microsoft called for a “constructive and public dialogue” with the government as the Assistance and Access Bill 2018 goes through parliament.

“We work every day to help protect the privacy of people who use our services and strongly support the economic and social benefits of encryption technology,” said Nicole Buskiewicz, managing director of Digital Industry Group Inc.

“At the same time, we appreciate the hard work governments do to keep us safe,” she said in a statement.

Apple did not immediately respond to request for a comment.

Cybersecurity experts worried about a lack of judicial oversight, saying the policy was out of step with privacy laws elsewhere. 

“There appears to be a sense of chaos and confusion in the government as to how to reconcile privacy principles with legitimate enforcement interests,” said Greg Austin, a cybersecurity expert at the University of New South Wales in Canberra.

($1=1.3759 Australian dollars)

Reporting by Erin Cooper; Editing by Swati Pandey and Darren Schuettler

Tencent games revenue in focus after China blocks "Monster Hunter: World"

BEIJING/HONG KONG (Reuters) – China’s Tencent Holdings Ltd saw its stock tumble on Tuesday, wiping out around $15 billion in its market value, amid concern of a blow to its video game revenue after regulators blocked the sale of one of its blockbuster titles.

A Tencent sign is seen during the fourth World Internet Conference in Wuzhen, Zhejiang province, China, December 4, 2017. REUTERS/Aly Song

Analysts had widely expected “Monster Hunter: World” to be one of 2018’s biggest hits for Tencent, which licensed the game from Japan’s Capcom Co Ltd to sell on its WeGame platform.

However the game, where players hunt fearsome creatures, disappeared from the platform on Monday, days after its Aug. 8 release. Tencent in a statement said regulators had received a large number of complaints about the game, which has sold over eight million copies worldwide.

Shares in Tencent, which is set to report half-year earnings on Wednesday, closed down 3.4 percent, against a 0.7 percent fall in the benchmark Hang Seng share price index.

The stock has dropped more than 14 percent this year, losing around $160 billion in market value since peaking in January.

“People are very concerned about Tencent in the short-term,” said Douglas Morton, head of research, Asia, at Northern Trust Capital Markets.

He said the block follows concern over Tencent’s ability to monetize “PlayerUnknown Battleground” (PUBG). Tencent had to alter PUBG last year after the regulator deemed it too violent, but has yet to receive a license to sell the updated version.

Industry executives said many firms have been awaiting games sales licenses since March after the government earlier in the year reformed its content regulatory body and split up the State Administration of Press, Publication, Radio, Film & Television.

“The key here is, not only PUBG, but no games are able to get licenses now,” a person from Tencent told Reuters on Tuesday on condition of anonymity due to the sensitivity of the matter.

The person said staff were puzzled as to why sales of Monster Hunter: World had been blocked as it was less gory than other titles and had received its sales license before March.

“It’s not impossible that you could still be hit even after you pass the censors, in the same way a movie can be pulled after public screening,” the person said.

Tencent declined to comment beyond Tuesday’s statement. The Ministry of Culture and Tourism, which regulates the video games industry, did not respond to requests for comment.

Morton said he remained bullish on Tencent stock and that there is always regulatory risk in China versus the rest of the global gaming market.

“For us this (firm) is a medium-to-longer-term holding with a history of good investment,” Morton said. “I think the monetization (of the blocked games) will happen, it is just a matter of time.”

Tencent said customers who purchased Monster Hunter: World were entitled to a full refund until Aug. 20. It said they will be able continue playing the game but that the firm could not guarantee associated services would continue.

Reporting by Pei Li in BEIJING and Sijia Jiang and Meg Shen in HONG KONG; Writing by Brenda Goh in SHANGHAI; Editing by Michael Perry and Christopher Cushing

Two Chinese EV sharing platforms in $730 million push to fuel growth: sources

HONG KONG (Reuters) – Two electric vehicle-sharing platforms backed by powerful Chinese carmakers plan to seek external funding totaling almost $730 million to fuel their growth, people with direct knowledge of the plans said.

Men look at an electric vehicle of Caocao Zhuanche, a chauffeur ride-hailing platform backed by Zhejiang Geely Holding Group, at a new energy vehicle (NEV) trade fair in Zhengzhou, Henan province, China September 23, 2016. REUTERS/Stringer

The moves come as Beijing continues its push into the new energy vehicle (NEV) sector as part of efforts to cut pollution and boost cutting-edge technology.

Caocao Zhuanche, a chauffeur ride-hailing platform backed by Zhejiang Geely Holding Group [GEELY.UL], is aiming raise up to 3 billion yuan ($437 million) in a new funding round, at a valuation of about $3 billion, three people said.

EvCard, an electric vehicle rental service under state-owned SAIC Motor Corp, is also considering raising some 2 billion yuan ($292 million) from external investors, according to a person with direct knowledge.

Both platforms claim that they are the first in China to offer such NEV car-sharing services. Caocao currently operates across 25 cities in China with a fleet of around 16,000 Geely-produced new energy vehicles, while EvCard has operations in 62 cities with over 27,000 cars in use, according to their websites.

Caocao could not be reached for comment via its customer service hotline. A Geely spokesman declined to comment.

EvCard and SAIC did not respond to requests for comment. The people could not be identified as the information is confidential.

China’s NEV sector is expanding rapidly with as many as 102 firms producing 355 different kinds of electric, hybrid and fuel-cell vehicles by the end of March, according to government data.

Start-up electric carmakers such as NIO, WM Motor Technology Co and Xpeng Motor have also raised funds totaling billions of dollars from heavyweight investors including Chinese tech giants Alibaba Group Holdings, Baidu Inc and Tencent Holdings.

China’s ride-hailing champion, Didi Chuxing, in February said it would set up an electric car-sharing service with 12 automakers including BYD Co Ltd, local partners of Ford Motor Co, the Renault-Nissan-Mitsubishi alliance and Geely.

Named after Cao Cao, a Chinese warlord during the period of the Three Kingdoms circa 220-280 AD, Geely’s platform employs its own chauffeurs and also offers business rides and same-city package delivery services, according to its website.

In January, the platform reached a valuation of 10 billion yuan ($1.5 billion) after a 1 billion yuan funding round.

EvCard, which rents out cars by the hour, tied up with BMW Group in December to launch a co-branded service in Southwestern China’s Chengdu.

Reporting by Kane Wu and Julie Zhu; Editing by Stephen Coates

The Creative Ways Your Boss Is Spying on You

Earlier this year, Amazon successfully patented an “ultrasonic tracker of a worker’s hands to monitor performance of assigned tasks.” Eerie, yes, but far from the only creative method of employee surveillance. Upwork watches freelancers through their webcams, and a UK railway company recently equipped workers with a wearable that measures their energy levels. By one study’s estimate, 94 percent of organizations currently monitor workers in some way. Regulations governing such conduct are lax; they haven’t changed since the 19th century.

The most common snooping techniques are relatively subtle. A system called Teramind—which lists BNP Paribas and the telecom giant Orange as customers on its website—sends pop-up warnings if it suspects employees are about to slack off or share confidential documents. Other companies rely on tools like Hubstaff to record the websites that workers are visiting and how much they’re typing.

Such software “solutions” pitch themselves as ways to enhance productivity. But trouble emerges, critics say, when employers invest too much significance in these metrics.

That’s because data has never been able to capture the finer points of creativity and the idiosyncratic nature of work. Where one account manager might do her best thinking behind a desk, another knows he’s sharpest on an afternoon stroll—a behavior that algorithms could blithely declare deviant. This then creates “a hidden layer of management,” says Jason Schultz, director of the NYU School of Law’s Technology Law & Policy Clinic. Those midday walkers might never find out why they’ve been passed over for a promotion. Once established, the image of the “ideal” employee sticks.

Try to hide from this all-seeing eye of corporate America—and you might make matters worse. Even the cleverest spoofing hacks can backfire. “The more workers try to be invisible, the more managers have a hard time figuring out what’s happening, and that justifies more surveillance,” says Michel Anteby, an associate professor of organizational behavior at Boston University. He calls it the “cycle of coercive surveillance.” Translation: lose/lose.

Unless you want to be spied on. In a recent study of Uber drivers, researchers found that a monitored employee can sometimes feel “more secure than the worker who … doesn’t know if her boss knows that she is working.” NYU’s Schultz admits that a degree of oversight can galvanize commitment, but he wants a law restricting its use to workplace tasks. Others insist data should be anonymized. One model is Humanyze, a “people analytics” service that provides clients not with individualized employee reports but rather with big-picture trends. Workers are then accountable to that big picture, each contributing modest brushstrokes. Don’t paint outside the lines.

This article appears in the August issue. Subscribe now.

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Big U.S. Stocks' Q2'18 Fundamentals

The mega-cap stocks that dominate the US markets are just finishing another monster earnings season. It wasn’t just profits that soared under Republicans’ big corporate tax cuts, but sales surged too. That’s no mean feat for massive mature companies, but sustained growth at this torrid pace is impossible. So peak-earnings fears continue to mount while valuations shoot even higher into dangerous bubble territory.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the US Securities and Exchange Commission, these 10-Qs contain the best fundamental data available to investors and speculators. They dispel all the sentimental distortions inevitably surrounding prevailing stock-price levels, revealing the underlying hard fundamental realities.

The deadline for filing 10-Qs for “large accelerated filers” is 40 days after fiscal quarter-ends. The SEC defines this as companies with market capitalizations over $700m. That currently includes every single stock in the flagship S&P 500 stock index, which includes the biggest and best American companies. As Q2’18 ended, the smallest SPX stock had a market cap of $4.1b which was 1/225th the size of leader Apple.

The middle of this week marked 39 days since the end of calendar Q2, so almost all of the big US stocks of the S&P 500 have reported. The exceptions are companies running fiscal quarters out of sync with calendar quarters. Walmart, Home Depot, Cisco, and NVIDIA have fiscal quarters ending a month after calendar ones, so their “Q2” results weren’t out yet as of this Wednesday. They’ll arrive in coming weeks.

The S&P 500 (SPX) is the world’s most-important stock index by far, weighting the best US companies by market capitalization. So not surprisingly the world’s largest and most-important ETF is the SPY SPDR S&P 500 ETF (SPY) which tracks the SPX. This week it had huge net assets of $271.3b! The IVV iShares Core S&P 500 ETF (IVV) and VOO Vanguard S&P 500 ETF (VOO) also track the SPX with $155.9b and $96.6b of net assets.

The vast majority of investors own the big US stocks of the SPX, as they are the top holdings of nearly all investment funds. So if you are in the US markets at all, including with retirement capital, the fortunes of the big US stocks are very important for your overall wealth. Thus once a quarter after earnings season it’s essential to check in to see how they are faring fundamentally. Their results also portend stock-price trends.

Unfortunately my small financial-research company lacks the manpower to analyze all 500 SPX stocks in SPY each quarter. Support our business with enough newsletter subscriptions, and I would gladly hire the people necessary to do it. For now we’re digging into the top 34 SPX/SPY components ranked by market capitalization. That’s an arbitrary number that fits neatly into the tables below, and a dominant sample.

As of the end of Q2’18 on June 29th, these 34 companies accounted for a staggering 42.6% of the total weighting in SPY and the SPX itself! These are the mightiest of American companies, the widely-held mega-cap stocks everyone knows and loves. For comparison, it took the bottom 431 SPX companies to match its top 34 stocks’ weighting! The entire stock markets greatly depend on how the big US stocks are doing.

Every quarter I wade through the 10-Q SEC filings of these top SPX companies for a ton of fundamental data I dump into a spreadsheet for analysis. The highlights make it into these tables below. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q2’18. That’s followed by the year-over-year change in each company’s market capitalization, a critical metric.

Major US corporations have been engaged in a wildly-unprecedented stock-buyback binge ever since the Fed forced interest rates to deep artificial lows during 2008’s stock panic. Thus the appreciation in their share prices also reflects shrinking shares outstanding. Looking at market-cap changes instead of just underlying share-price changes effectively normalizes out stock buybacks, offering purer views of value.

That’s followed by quarterly sales along with their YoY changes. Top-line revenues are one of the best indicators of businesses’ health. While profits can be easily manipulated quarter-to-quarter by playing with all kinds of accounting estimates, sales are tougher to artificially inflate. Ultimately sales growth is necessary for companies to expand, as bottom-line earnings growth driven by cost-cutting is inherently limited.

Operating cash flows are also important, showing how much capital companies’ businesses are actually generating. Using cash to make more cash is a core tenet of capitalism. Unfortunately most companies are now obscuring quarterly OCFs by reporting them in year-to-date terms, which lumps in multiple quarters together. So these tables only include Q2 operating cash flows if specifically broken out by companies.

Next are the actual hard quarterly earnings that must be reported to the SEC under Generally Accepted Accounting Principles. Late in bull markets, companies tend to use fake pro-forma earnings to downplay real GAAP results. These are derided as EBS earnings, Everything but the Bad Stuff! Companies often arbitrarily ignore certain expenses on a pro-forma basis to artificially boost their profits, which is very misleading.

While we’re also collecting the earnings-per-share data Wall Street loves, it’s more important to consider total profits. Stock buybacks are executed to manipulate EPS higher, because the shares-outstanding denominator of its calculation shrinks as shares are repurchased. Raw profits are a cleaner measure, again effectively neutralizing the impacts of stock buybacks. They better reflect underlying business performance.

Finally the trailing-twelve-month price-to-earnings ratio as of the end of Q2’18 is noted. TTM P/Es look at the last four reported quarters of actual GAAP profits compared to prevailing stock prices. They are the gold-standard metric for valuations. Wall Street often intentionally obscures these hard P/Es by using the fictional forward P/Es instead, which are literally mere guesses about future profits that often prove far too optimistic.

Not surprisingly in the second quarter under this new slashed-corporate-taxes regime, many of the mega-cap US stocks reported spectacular Q2’18 results. For the most part sales, OCFs, and earnings surged dramatically. The big problem is such blistering tax-cut-driven growth rates are impossible to sustain for long at the vast scales these huge companies operate at. Downside risks are serious with bubble valuations.

The elite market-darling mega tech stocks continue to dominate the US stock markets. Most famous are the FANG names, Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOGL) which used to be called Google. Apple (AAPL) and Microsoft (MSFT) should be added to those rarified beloved ranks. Together these half-dozen companies alone accounted for nearly 1/6th of the SPX’s entire market cap! That’s an incredible concentration of capital.

This highlights the extreme narrowing breadth behind this very-late-stage bull market. At the month-end just before Trump’s election victory in early November 2016, these same tech giants weighed in at 12.3% of the SPX weighting compared to 16.4% today. And if you go all the way back to this bull’s birth month of March 2009, MSFT, GOOGL, AAPL, and AMZN weighed in at 5.4%. FB and NFLX weren’t yet in the SPX.

Ever more capital is crowding into fewer and fewer stocks as fund managers chase the biggest winners and increasingly pile into them. And these 6 elite mega techs’ Q2’18 results show why they are widely adored. Their revenues rocketed 30.3% YoY on average, more than doubling the 14.0% growth in this entire top-34 list! Excluding these techs, the rest of the top 34 only grew their sales by 10.0% or a third as much.

That vast outperformance is reflected in their market-cap gains too, which again normalize out all the big stock buybacks. Overall these top SPY companies’ values surged 23.5% higher YoY, nearly doubling the 12.2% SPX gain from the ends of Q2’17 to Q2’18. But these top 6 tech stocks’ stellar average gains of 57.5% YoY dwarfed the rest of the top 34’s 16.2% annual appreciation! These stocks are loved for good reason.

The same is true on the profits front, with AAPL, AMZN, GOOGL, MSFT, FB, and NFLX trouncing the rest of these biggest US stocks. These 6 tech giants saw staggering average earnings growth of 289.1% YoY, compared to 30.9% for the rest of the top 34. That former number is heavily skewed by Amazon’s results though, as its profits skyrocketed an astounding 1186% from $197m in Q2’17 to $2534m in Q2’18.

Netflix had a similar enormous 484% YoY gain in earnings from a super-low level. Interestingly the rest of these big 6 tech stocks saw average growth of just 16.0% YoY, only about half that of the rest of the top 34. That proves the enormous surge in mega-cap-tech stock prices over this past year wasn’t driven by earnings as bulls often claim. Stock-price appreciation has far outstretched profits growth, an ominous sign.

In conservative hard trailing-twelve-month price-to-earnings-ratio terms, the big-6 tech giants sported an incredible average P/E of 107.3x earnings exiting Q2! That is deep into formal stock-bubble territory over 28x, which is itself double the century-and-a-quarter average fair value of 14x in the US stock markets. Again AMZN and NFLX are skewing this way higher though, with their insane 214.8x and 263.9x P/E ratios.

P/Es are the annual ratio of prevailing stock-price levels to underlying profits. So they can be viewed as the number of years it would take a company to earn back the price new investors today are paying for it. A stock bought at 200x earnings would take 200 years to merely recoup its purchase price through profits, assuming no growth of course. Buying at these heights is crazy given humans’ relatively-short investing lifespan.

Assuming people start investing young at 25 years old and retire at 65, that gives them about 40 years of prime investing time. So buying any stock above 40x implies a time horizon well beyond what anyone actually has. And provocatively even excluding the crazy P/Es of Amazon and Netflix, the rest of these big 6 tech stocks still average extremely-high 41.2x P/Es. And ominously that is right in line with market averages.

Without those elite tech leaders, the rest of these top 34 SPY stocks had average TTM P/Es of 41.0x when they exited Q2. History has proven countless times that buying stocks near such extreme bubble valuations has soon led to massive losses in the subsequent bear markets that always follow bulls. So these stock markets are extraordinarily risky at these valuations, truly an accident waiting to happen.

When stocks are exceedingly overvalued, the downside risks are radically greater than upside potential. After everyone is effectively all-in one of these universally-held mega tech stocks, there aren’t enough new buyers left to drive them higher no matter how good news happens to be. And these investors who bought in high and late can quickly become herd sellers when some bad news inevitably comes to pass.

Q2’18’s earnings season has already proven this in spades despite the extreme euphoria surrounding the stock markets and elite tech stocks in particular. Fully 3 of the 4 beloved FANG stocks showed just how overbought stocks react to news. The recent price action in Amazon, Netflix, and Facebook following their Q2 results is a serious cautionary tale for investors convinced mega tech stocks can rally indefinitely.

Everyone loves Amazon, but it is priced far beyond perfection. Its stock skyrocketed 75% YoY to leave Q2 with that ludicrous P/E of 214.8x. When any stock gets so radically overbought and overvalued, it has a tough time moving materially higher no matter what happens. Normally stocks shoot higher on blowout quarterly results as new investors flood into the strong company. But Amazon couldn’t find many buyers.

After the close on July 26th Amazon reported a monster blowout Q2. Its earnings per share of $5.07 was more than double analysts’ estimate of $2.50! Revenues, operating cash flows, and profits rocketed up an astounding 39.3%, 93.5%, and 1186.3% YoY. AMZN’s revenue guidance for Q3 at a midpoint running $55.8b also hit the low end of Wall Street expectations. Any normal stock would soar the next day on all that.

But while Amazon stock mustered a decent 4.0% gain at best the next day, that faded to a mere +0.5% close. AMZN was priced for perfection, so not even one of its best quarters ever was enough to bring in more buyers. Everyone already owns it, so who is left to deploy new capital? AMZN slumped 1.7% over the next several trading days, though it has since recovered to new record highs with the strong stock markets.

Netflix was the best-performing large US stock over the past year, skyrocketing 162% higher between the ends of Q2’17 to Q2’18! It had an absurd TTM P/E of 263.9x leaving Q2, more extreme than Amazon’s. But man, investors love Netflix with a quasi-religious fervor and believe it can do no wrong at any price. So Wall Street was eagerly anticipating NFLX’s Q2 results that came out after the close back on July 16th.

And they were really darned good. EPS of $0.85 beat the expectations of $0.79. On an absolute basis, sales and profits soared 40.3% and 484.3% YoY! Netflix did report negative operating cash flows, but it has been burning cash forever so that was no surprise. Yet despite these strong results this priced-for-perfection market-darling stock plunged 13%ish in after-hours trading! Good news wasn’t good enough.

Investors weren’t happy because subscriber growth was slowing. NFLX reported 5.2m net new streaming subscriptions in Q2, below the 6.3m expected and 7.4m in Q1. Netflix itself had provided earlier guidance of 1.2m US adds, but the actual was way short at 0.7m. So NFLX stock plummeted as much as 14.1% the next trading day before rebounding to a still-ugly -5.2% close. It couldn’t rally on great Q2 financial results.

And universally-held big stocks not responding favorably to quarterly results can quickly damage traders’ euphoric enthusiasm for them. The selling in Netflix’s stock gradually cascaded following that big hit on Q2 results. Over the next couple weeks, NFLX dropped 16.4% from its close just before that Q2 earnings release! The mega tech stocks aren’t invincible, and are very risky trading so high with everyone all-in.

With the possible exception of mighty Apple, Facebook was widely considered the least risky of the elite tech stocks as Q2 ended. Its 32.5x P/E was almost low by mega-tech standards, only bested by the 17.9x of Apple which is in a league of its own. FB reported after the close on July 25th, and shared great results led by a modest EPS beat of $1.74 compared to $1.72 expected. But the absolute gains were really big.

Facebook’s sales, operating cash flows, and profits soared 41.9%, 17.5%, and 31.1% YoY! That top-line revenue growth in particular was huge, nearly the best out of all these top 34 SPY stocks. And FB’s profits were growing so fast that it was the only elite mega-tech stock to see its TTM P/E actually decline YoY, retreating 14.2%. So FB looked much safer fundamentally than the other FANG stocks dominating the SPX.

But Facebook’s stock effectively crashed in after-hours trading immediately after those Q2 results, falling as much as 24%! The reason? It guided to slowing sales growth in Q3 and Q4 in the high single digits. FB was obviously priced for perfection and universally owned too, leaving nothing but herd sellers when anything finally disappointed. The next day FB stock plummeted a catastrophic 19.0%, stunning investors.

That wiped out an inconceivable $119.4b in market capitalization! That was the worst ever seen in one day by any single company in US stock-market history. More than ever investors and speculators need to realize that their beloved FANG stocks along with MSFT and AAPL aren’t magically exempt from serious selloffs. When any stocks are way overbought and wildly overvalued, it’s only a matter of time until selling hits.

Without these mega tech stocks, the US stock markets never would’ve gotten anywhere close to their current near-record heights. The flood of investment capital into Netflix over this past year was so huge it catapulted that company well into the ranks of the top 34. Its symbol is highlighted in light blue, along with a few other stocks, because it is new in the SPX’s top 34 in Q2. Outsized tech gains can’t happen forever.

Interestingly I found something else in their quarterly reports I haven’t yet seen discussed elsewhere. The total debt of these top 6 mega tech stocks soared an average of 36.5% higher YoY! That is way beyond the rest of the top 34 excluding the giant banks which have very-different balance sheets. Those other 18 top-34 SPY companies saw total debt only climb 6.0% YoY. Mega-tech debt is rocketing at 6.1x that rate!

While the elite tech stocks do have huge cash hoards, their spiraling debt is ominous. With the Fed deep into its latest rate-hike cycle, the carrying costs of debt are rising fast. With each passing month and each bond companies roll over, their interest expenses increase. At best those will cut into their profits, which will push their nosebleed P/Es even higher. They will have to slow debt growth and eventually pay back much.

We are talking huge amounts, $588.2b of total debt across Apple, Amazon, Google, Microsoft, Facebook, and Netflix alone! The main reason most of these companies are ramping their debt so fast is to finance massive stock buybacks propelling their share prices higher. They will have to really slow or even stop their huge buyback campaigns if their total debt or the carrying costs on it grow too large, a serious threat now.

These top 34 SPX stocks collectively had an extreme average trailing-twelve-month price-to-earnings ratio of 53.4x leaving Q2! That is nearly double historical bubble levels, exceedingly dangerous. There are far-higher odds the next major move in these hyper-expensive stock markets will be down rather than up. The next couple quarters face very different psychology and monetary winds than this rallying past year.

In both Q3 and Q4 last year, traders were ecstatic over the Republicans’ record corporate tax cuts that were excitingly nearing. In Q1 and Q2 this year, traders were dazzled by the incredible profits growth largely driven by sharply-lower taxes. While that will continue to some extent in Q3 and Q4 this year, the initial exuberance has mostly run its course. Big US stocks are facing tougher comparables going forward.

But the real threat to these bubblicious extreme stock markets is the Fed’s young quantitative-tightening campaign. It started imperceptibly in Q4’17 to begin unwinding the staggering $3625b of quantitative-easing money printing the Fed unleashed over 6.7 years starting in late 2008. Total QT in Q4’17 was just $30b. But it grew to another $60b in Q1’18 and then another $90b in Q2’18. And it is still getting bigger.

In this current Q3’18, another $120b of QE is going to be wiped out by QT. And finally in Q4’18, this new Fed QT will hit its terminal speed of $150b per quarter. That’s expected to last for some time. If the Fed merely wants to reverse just half of its extreme QE, it will have to run QT at that full-speed $50b-per-month pace for fully 2.5 years. That extreme monetary-destruction headwind is unprecedented in world history.

Today’s enormous stock bull grew so extreme because the Fed’s epic QE levitated stock markets, driving their valuations to nosebleed heights. What Fed QE giveth, Fed QT taketh away. At the same time the European Central Bank is tapering its own colossal QE campaign to nothing too. Between the Fed and ECB alone, 2018 will see $900b less central-bank liquidity than 2017! That’s certainly going to leave a mark.

The odds are very high that a major new bear market is awakening. Stock markets inexorably levitated by long years of extreme central-bank easing now face record tightening as that easing finally starts to be unwound. Thanks to that extreme QE as well as the Fed’s radically-unprecedented 7-year-long zero-interest-rate policy, this SPX bull extended to a monster 324.6% gain over 8.9 years as of its late-January peak!

That is nearly the second-largest and easily the second-longest stock bull in all of US history. Stock bulls always eventually peak in extreme euphoria, and then give way to subsequent proportional bears. With today’s valuations so deep into dangerous bubble territory, not even blowout earnings will be enough to keep stocks from sliding. Normal bear markets after normal bulls often maul stock markets down 50% off highs!

And after this epic QE-fueled largely-artificial monster stock bull, the inevitable bear to come is very likely to prove much bigger and meaner than normal. If the Fed’s QT doesn’t spawn it, peak earnings will. The past year’s extreme growth rates in sales and profits at the largest US companies from already-high base levels aren’t sustainable mathematically. Traders will freak out when they see growth slow or even reverse.

Investors really need to lighten up on their stock-heavy portfolios, or put stop losses in place, to protect themselves from the coming central-bank-tightening-triggered valuation mean reversion in the form of a major new stock bear. Cash is king in bear markets, as its buying power grows. Investors who hold cash during a 50% bear market can double their stock holdings at the bottom by buying back their stocks at half-price!

SPY put options can also be used to hedge downside risks. They are still relatively cheap now with complacency rampant, but their prices will surge quickly when stocks start selling off materially again. Even better than cash and SPY puts is gold, the anti-stock trade. Gold is a rare asset that tends to move counter to stock markets, leading to soaring investment demand for portfolio diversification when stocks fall.

Gold surged nearly 30% higher in the first half of 2016 in a new bull run that was initially sparked by the last major correction in stock markets early that year. If the stock markets indeed roll over into a new bear soon, gold’s coming gains should be much greater. And they will be dwarfed by those of the best gold miners’ stocks, whose profits leverage gold’s gains. Gold stocks skyrocketed 182% higher in 2016’s first half!

The bottom line is the big US stocks’ latest quarterly results again proved amazingly good. Sales and profits soared year-over-year on those record corporate tax cuts and the widespread optimism they fueled. But earnings are still way too low to justify today’s super-high stock prices, spawning dangerous bubble valuations. That portends far-weaker markets ahead, led by serious selling in market-darling mega techs.

These near-record-high stock markets are reaching buying exhaustion, when stocks can’t rally much on good news and plummet on bad news. Earnings are likely peaking with the corporate-tax-cut euphoria as well, with deteriorating profits growth ahead. As if that’s not worrisome enough for hyper-overvalued stocks, these priced-for-perfection markets face accelerating Fed QT in coming quarters. Talk about bearish!

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: I own SPY puts which have been recommended to our weekly-newsletter subscribers.

Treasury Snapshot: 10-Year Yield At 2.87%

By Jill Mislinski

Note: We’ve updated this commentary with data through market close on 8/10/18.

Let’s take a closer look at recent activity in US Treasuries. The yield on the 10-year note ended Friday at 2.87% and the 30-year bond closed at 3.03%. The 2-10 yield spread is now at 0.26%.

Here is a table showing the yields, highs and lows, and the FFR since 2007 as of Tuesday’s close.

The chart below shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since the pre-recession days of equity market peaks in 2007.

A Long-Term Look at the 10-Year Note Yield

A log-scale snapshot of the 10-year yield offers a more accurate view of the relative change over time. Here is a long look since 1965, starting well before the 1973 Oil Embargo that triggered the era of “stagflation” (economic stagnation with inflation). Note the 1987 closing high on the Friday before the notorious Black Monday market crash. The S&P 500 fell 5.16% that Friday and 20.47% on Black Monday.

The 30-Year Fixed Rate Mortgage

The latest Freddie Mac Weekly Primary Mortgage Market Survey puts the 30-year fixed at 4.59%. Here is a long look back, courtesy of a FRED graph, of the 30-year fixed rate mortgage average, which began in April of 1971.

Now let’s see the 10-year against the S&P 500 with some notes on Federal Reserve intervention. Fed policy has been a major influence on market behavior.

Original post

Netflix's 'House Of Cards' Is Crumbling

Several weeks ago Netflix (NFLX) plummeted in the wake of Q2 2018 earnings that showed positive subscriber growth and historic earnings but not at the levels Wall Street had expected.

Since then the stock has not recovered but rather slumped further, as a mix of bad Netflix Originals, increased hype and possibilities for Disney’s content streaming service as it continues to pull content from Netflix, and sudden competition from Roku (ROKU) and even Walmart (WMT) making it clear Netflix’s days as the only game really in town are over.

Netflix’s P/E ratio has shrunk enormously from its days of being over 200 and now sits at roughly 147, a historic low compared to recent years, as its stock price has remained slumped amid all of this past month’s announcements.


NFLX data by YCharts

As Netflix moves forward I believe the risks I’ve talked this past year about are starting to now fully materialize and the stock is going to face immense pressure from rapidly increasing competitors in the market, price pressure for subscriptions that seems downward rather than upward as it had hoped, and a content drought that is already causing worries for the company.

Even if Netflix is able to continue to grow revenue and subscribers, its P/E valuation will undoubtedly remain lower than its 200+ days as past hyped growth expectations simply are unreasonable. The question of how fast it can grow its earnings, if at all, compared to how fast its growth multiple shrinks as the content streaming market matures means that its investors may be in for days very different from past years.

Problem #1: Downward Price Pressure Derails Original Revenue Plan

For several years the content streaming market was really just Netflix, Amazon Prime (AMZN), and Hulu (FOXA). Under this market Netflix thrived, as many production companies flocked to Netflix, given its wide subscriber base, and seemingly all was well in the content creation and distribution pipeline. Netflix subscribers grew seemingly without end as the company’s stock rocketed up and its P/E valuation did too.

However even right now, in Summer 2018, the content streaming market is very different. Facebook Watch (FB) and YouTube Red (GOOGL) are gaining ground. Roku Channel, which launched last year and is based on ads (being called “free” by many) rather than subscriptions for its various movies and shows, is seeing immense interest after positive earnings and activity results.

Walmart, of all surprises, announced this month it is joining the fray as well by appealing to a “Middle America” market that it believes it knows and has a strong reputation with. Undoubtedly that may take a chunk out of Netflix’s U.S. base, or at least put pressure on Netflix to better justify its appeal to that market.

Furthermore, with Disney’s (DIS) acquisition of 21st Century Fox settled after Comcast’s (CMCSA) potential wrench in the machine earlier this summer we see what could be a huge content powerhouse once its streaming service is released and what combinations it may make with Disney’s soon-to-be asset Hulu.

Beyond that, subscriptions seem all the craze now as everything from ESPN+ gains ground to news services like Fox Nation, MSNBC’s upcoming subscription streaming service, and more.

The reasons this matters for Netflix are that it contradicts several long-standing assumptions that supported Netflix’s current growth trajectory to this point, specifically and importantly that Netflix always had pricing power up rather than down.

A major hope for Netflix’s future earnings and revenue was that it would be able to raise prices more for the core bulk of its users, which each $1 a month price jump equaling an increase in revenue of perhaps almost 10% and then bringing in real earnings as well.

However every sign seems to be pointing to a lower price point as the market basis for subscription prices. With consumers seemingly willing to utilize multiple subscription services to acquire their particular content needs, all-in-one services like Netflix are seeming misplaced as companies like Disney say they will price their service low, Walmart similar, and Roku even just shifting the model entirely to an ad-based one that gives Netflix-like content for free.

Problem #2: The Content Drought Begins For Netflix

The second major issue now facing Netflix is that it was always assumed Netflix would be a content king, whether because entertainment production giants would see them as the key distributor or because Netflix Originals would continue to be highly successful brands on their own.

However the latest Netflix Originals flop, “Insatiable,” is less of a surprise due to long-standing criticism of the bulk of Netflix Originals with praise for just a few, but now is a more prominent symptom of Netflix’s content crisis. In entertainment, brands are powerful and the intellectual property rights often command more money than any amount of actual production or distribution costs themselves.

Netflix for a long time benefited off of the immense variety of brands that found their home on it and the willingness of old and new brands to seek Netflix partnerships and funding. However this has changed, as Disney’s content powerhouse of brands is pulling completely away from the platform and major shows are turning down Netflix as offers from other platforms are more appealing, either in terms of money or in terms of building up the brand.

This puts Netflix in a difficult position, as it means it needs to either raise again already-immense and rising content costs or somehow find some kind of new series or “content universe” that is a hit with the public. The former is a crunch on Netflix’s originally optimistic dreams and the latter is extraordinarily difficult.


Netflix has blown past assumptions before but it is clear the market of mid-2018 is already vastly different from that of 2017, 2016, or prior, as now serious and targeted content streamers are clawing growth and maybe even eventually Netflix’s current base from the company.

As the content streaming market seemingly hits a far more mature level in 2019 with the entrance of Disney, Walmart, and more, Netflix will find itself needing to justify itself as one of the subscriptions people are willing to have. At the same time it will face downward price pressure combined with potentially increased content costs, leading to the original growth trajectory expected for the company to be derailed even further.

Even if the company continues to grow its revenues and earnings, even at a slower pace, rather than receding, the days of a 200+ P/E multiple are undoubtedly long over and the stock price seems to be beginning to now reflect that reality.

(Source: Complex)

Disclosure: I am/we are long FDN.

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.

Apple's mettle in India tested in squabble over anti-spam app

MUMBAI/NEW DELHI (Reuters) – In India, the world’s second-biggest smartphone market, Apple Inc’s (AAPL.O) normally deft management of government relations is being put to a fresh high-stakes test.

FILE PHOTO: Apple iPhone X mobile phones are seen at an Apple reseller store in Mumbai, India July 27, 2018. REUTERS/Francis Mascarenhas

For almost two years, Apple has battled India’s telecom regulator over a demand that it allow the use of the government’s anti-spam app. Non-compliance, the watchdog threatened last month, could result in phones being “derecognized” from the country’s networks, meaning they would no longer function.

It is just one of several headaches the Cupertino, California-based company is nursing in India – a market it calls a top priority but where it has just 1 percent share.

Apple has not gotten the tax breaks it has sought for suppliers to expand local manufacturing – key if it is to avoid steep import duties that have made its iPhones, already pricey for many Indian consumers, even more expensive.

Local content prerequisites have also stopped the U.S. tech giant from opening its own stores. The lack of direct sales channels has helped make it vulnerable to discounting and prompted it to recently embark on a major overhaul of its retail strategy.

At the heart of its latest tussle with the government is India’s pervasive problem with spam and nuisance calls – one the Telecom Regulatory Authority of India (TRAI) is trying to counter with an app that it wants all phone makers to install.

The app has been available on the Android store since 2016, but Apple in March told Reuters that TRAI’s app “as envisioned violates the privacy policy of the App Store.”  

The new version of its iPhone operating system, expected in autumn, will allow many of the app’s functions but not fully automatic spam filtering as that functionality could open the door to Apple users being tracked by third parties, Apple said in a letter to regulators.

Slideshow (2 Images)

TRAI, however, last month notified Indian telecom firms it could give them six months notice to “derecognize” devices from their networks if the devices do not support anti-spam apps that are approved by the government.

In the letter, dated June 18 and responding to a draft of the proposed notification, Apple asked for the clause about derecognition to be dropped.

“We look forward to working with TRAI to address the issue of unsolicited commercial communications, while simultaneously ensuring that we fully honor our commitment to protect the privacy and security of our users,” Apple’s head of public policy in India, Kulin Sanghvi, wrote in the letter which was seen by Reuters.

The Indian Cellular Association has also come out in opposition to the regulator’s move.

Asked by Reuters to respond to Apple’s request to drop the derecognition threat, TRAI Chairman R.S. Sharma said the notification could not be quashed or challenged by writing a letter.

“The most appropriate way to challenge this is in court,” he said.


Apple has also failed to find favor with Prime Minister Narendra Modi’s administration when it comes to tariffs. Championing policies that force overseas tech firms to manufacture locally, the government has imposed import duties.

A base model iPhoneX is now priced at nearly $1,400 in India – some 40 percent more than in the United States.

Apple, which currently assembles only two low-end iPhones in India, has said tariff-free imports are critical for smartphone component suppliers and essential to make local manufacturing practical.

But its pleas have gone unheeded and its competitors are not making the same arguments.

Samsung Electronics (005930.KS) builds all its Indian phones locally and last month opened the world’s biggest mobile manufacturing plant on the outskirts of New Delhi – which is slated to become an export hub. A key supplier for China’s Xiaomi (1810.HK), another major Apple rival, this week said it would spend $200 million to build a plant in southern India.

The steep tariffs are exacerbating sales woes for Apple in India, where it has to rely on a network of distributors to supply devices. Competition among retailers has led to rampant discounting, at both physical stores and online, and Apple’s policy to keep prices uniform within a single market has collapsed in India.

It has also often meant a desultory buying experience for the consumer.

Aiming to fix that, Apple appointed company veteran, Michel Coulomb, as its new India sales chief late last year and he has cut its national distributors from five to two. At a June meeting with around 20 of Apple’s key distribution channel partners, Coulomb outlined a new program aimed at eliminating discounting and improving the shopping experience, a source familiar with the matter said.

Other sources also said Apple aims to make financing plans that it offers in partnership with banks more attractive.

But Apple is still some time away from opening its flagship stores in the country due to the requirement that direct sales outlets have 30 percent local content, a separate source added.

The sources declined to be identified as they were not authorized to speak to media. Apple declined to comment on its sales and distribution strategy.

Until Apple successfully tackles its regulatory and sales hurdles, its higher-end iPhones are likely to remain too expensive for many Indian consumers while for its older models, rivals have matched many of Apple’s features at far lower prices.

“The traditional appeal of the iconic Apple logo is gradually being challenged by the wow factor of a feature-rich, premium Android smartphone with the fastest processor or the best camera,” said Tarun Pathak, an associate director at tech research firm Counterpoint.

Reporting by Sankalp Phartiyal and Aditya Kalra; Additional reporting by Stephen Nellis in San Francisco; Editing by Jonathan Weber and Edwina Gibbs

Inside Tesla's troubled New York solar factory

SAN FRANCISCO/LOS ANGELES (Reuters) – Tesla Inc’s production of solar roof tiles has been delayed by assembly-line problems at its new publicly subsidized factory and difficulties producing a product that satisfies the aesthetic demands of CEO Elon Musk, eight former and current employees of both companies told Reuters.

Flags fly over the Tesla Inc. Gigafactory 2, which is also known as RiverBend, a joint venture with Panasonic to produce solar panels and roof tiles in Buffalo, New York, U.S., August 2, 2018. REUTERS/Brendan McDermid

Repeated hold-ups since the Buffalo, New York plant opened last year have forced Tesla’s partner in the joint venture, Panasonic, to seek other buyers for the components it had built to sell to Tesla, according to a Panasonic employee, a former Panasonic employee and a former Tesla employee. The issues have also rattled the faith of state officials in Tesla’s ability to deliver on investment and employment promises it made in exchange for $750 million in state subsidies.

The production challenges add to doubts over Tesla’s cash-strapped solar operations as it focuses on boosting production of its better-known electric vehicles, which have also seen repeated production delays. Tesla acquired the solar business in 2016 in a controversial $2.6 billion purchase of SolarCity – a sales and installation company founded by two of Musk’s cousins – but the business has been shrinking ever since.

(For a graphic showing the decline in Tesla’s solar business, see: )

The “Solar Roof” produced at the New York factory is designed to look like a normal roof while generating electricity, a combination that has proved challenging.

“Aesthetic look is the key point that Elon is always not satisfied with,” said another former Tesla employee, who works in Fremont, California. “That’s the big issue.”

In a call with Tesla investors last week, Musk said “hundreds” of homes already had solar roofs, but the company clarified the estimate in its statement to Reuters, saying it included systems that had been partially installed or were “being scheduled for install.”

In California, the nation’s leading solar market, there were twelve Tesla roof systems connected to the grid as of May 31, all in Northern California, according to records from the state’s three investor-owned utilities. The cost per watt for those systems was listed at nearly $6, according to the records. That’s about double the national average for solar systems.

Tesla began accepting $1,000 deposits from customers for the Solar Roofs in May 2017, seven months after it unveiled a prototype.

Tesla confirmed in a statement to Reuters that it has been seeking to improve on its production process for the solar roof at the New York plant.

“We are steadily ramping up Solar Roof production in Buffalo and are also continuing to iterate on the product design and production process,” the company said in the statement. “We plan to ramp production more toward the end of 2018.”

The company did not detail its current production and did not comment on its component purchases from partner Panasonic, which shares space in the factory and plans to produce Tesla solar panels and photovoltaic cells for the roofs.

A sign is seen outside the Tesla Inc. Gigafactory 2, which is also known as RiverBend, a joint venture with Panasonic to produce solar panels and roof tiles in Buffalo, New York, U.S., August 2, 2018. REUTERS/Brendan McDermid

Panasonic has been selling some of the solar panels it produces in Buffalo under its own brand instead of selling them to Tesla, Panasonic said in a statement.

It has also been shipping a large volume of the photovoltaic cells it produces in Buffalo as samples to prospective buyers because of low demand from Tesla, according to the Panasonic employee and a former Tesla employee.

Panasonic declined to comment on the shipments of cell samples to other customers but said in a statement that it has not yet completed sales to buyers other than Tesla or signed alternate supply deals.

“We believe Tesla will use Panasonic cells when it mass-markets the Solar Roof,” the company said in a statement.

Some New York state lawmakers worry Tesla may fail to hold up its end of the bargain. The state provided $350 million to build the factory, along with $274.7 million for equipment and $125.3 million “for additional specified scope costs,” according to a Tesla filing with the Securities and Exchange Commission.

The subsidy package requires Tesla to employ 1,460 people in Buffalo, including 500 at the plant, within two years of the facility’s completion, and to spend $5 billion in the state over a decade.

Empire State Development, the state’s economic development arm, is overseeing the agreement. The agency believes Tesla is currently meeting its obligations, said spokeswoman Pamm Lent, adding that the company would face penalties of $41.2 million a year if it falters.

Republican New York state Assemblyman Ray Walter, who represents a district near the factory, said it concerned him that only a small portion of the plant appeared functional when he toured it in March.

“After investing $750 million of taxpayer money, we want it to work out,” he said. “It just does not look like it’s heading down that path.”

Tesla said in its statement that the facility now employs about 600 people and is on track to meet all of its commitments.

None of the Tesla sources could provide a production figure for the solar roof, saying only that output was low and frequently interrupted. They said only the textured black version of the solar roof had been produced so far, one of four varieties Tesla is marketing.

Several of the sources at the plant said Musk had never visited the site; Tesla declined to comment.

Slideshow (8 Images)


Panasonic recently produced about 1,900 conventional 325-watt solar panels per day at the plant, meant to be sold under the Tesla brand, and about 2,000 5.5-watt photovoltaic cells per day that were intended for the solar roof, according to two Panasonic sources, one who recently left the company.

That would put annualized production at about a quarter of Tesla’s target for the plant, which is 1 gigawatt per year by 2019. And Tesla isn’t buying most of the cells being produced, according to the Panasonic employee.

“We have been entertaining outside customers,” the employee said.

Tesla is also turning to other suppliers to deal with the aesthetic concerns, using cells from JA Solar because they reflect light differently, said a current Tesla employee and a former Tesla employee. The current employee said a similar Panasonic cell was now undergoing testing and would be used in future versions of the solar roof.

JA Solar declined to comment.

Panasonic started cell production at the factory in February, but recently shut down manufacturing to install new equipment on its production lines, the Panasonic employee said. Full production will restart in September, the employee said.

For now, wooden crates filled with unused equipment are sitting around the factory, according to the Panasonic employee and three other employees with knowledge of the plant operations. Some of that equipment has become obsolete over the past couple of years as technology has changed, two of the workers said.


One of the few customers that has taken delivery of the Solar Roof is Tri Huynh, 39, who works in business development in Silicon Valley. Huynh said he paid about $100,000 for the system, which included three Tesla Powerwall home batteries to store the power produced.

It took two weeks and a dozen workers to install, compared to a day for most traditional panel systems.

“It’s fantastic. I love it,” he said, adding he was saving hundreds of dollars a month in power costs. “I’m a tech guy, so I kind of wanted the latest technology.”

Warren Jason, a retired technology entrepreneur who is building an 11,000-square-foot house in the Hollywood Hills, is not so pleased.

He put down $1,000 to reserve a roof in early 2017 but it has not yet arrived, and he has been unable to get details to give to his architect and engineers.

“We’ve been begging Tesla for information,” he said. “It’s been extremely frustrating.”

Additional reporting by Makiko Yamazaki and Ritsuko Ando in Tokyo; Editing by Richard Valdmanis and Brian Thevenot

Elon Musk's Tesla buyout would reengineer take-private deals

(Reuters) – Billionaire investor Elon Musk has always done things his own way, from designing space rockets to manufacturing electric cars. Now the Tesla Inc CEO is looking to reengineer how a company can be taken private.

FILE PHOTO: Elon Musk, founder, CEO and lead designer at SpaceX and co-founder of Tesla, speaks at the International Space Station Research and Development Conference in Washington, U.S., July 19, 2017. REUTERS/Aaron P. Bernstein/File Photo

Musk announced on Twitter on Tuesday that he was considering taking Tesla private for $420 per share, or $72 billion, in what would be the biggest deal of this kind. He said the funding for the deal was secured, but did not provide details.

Tesla shares ended up 11 percent at $379.57, indicating investors gave some credence to the plan.

But investment bankers and analysts reacted with skepticism, telling Reuters it would be hard for Musk, whose net worth is pegged by Forbes at $22 billion, to raise the equity and debt financing needed for the deal given Tesla is not turning a profit.

“The company is cash-flow negative. How do you use any debt on a company that is cash-flow negative?” said Steven Kaplan, a University of Chicago professor who researches private equity.

Finding equity partners and bank financing is key to take-private deals. When Michael Dell took his eponymous computer maker private for $24.9 billion in 2013, for example, he brought in buyout firm Silver Lake that contributed $1.4 billion in equity, raised more than $10 billion in bank debt, and received a $2 billion loan from Microsoft Corp.

When a Twitter user commented on Musk’s proposed deal by posting “Just like Dell did. It saves a lot of headaches”, Musk responded by tweeting “Yes”.

Dell’s take-private deal, however, may not be possible to replicate with Tesla, which has a $10.9 billion debt pile, is losing money, and whose bonds are rated junk by credit ratings agencies. Without the ability to add more debt, Musk may have to turn to sources of capital that are less accustomed to using debt to juice returns in the way private equity firms are.


One option could be sovereign wealth funds, investment bankers said.

Saudi Arabia’s Public Investment Fund (PIF) has taken a stake of less than 5 percent in Tesla, a source familiar with the matter said on Tuesday. PIF did not respond to a request for comment on whether it would bankroll Musk’s take-private deal.

SoftBank Group Corp’s $93 billion Vision Fund, whose investors include the sovereign wealth funds of Saudi Arabia and Abu Dhabi, is seen as an obvious partner given its appetite for big technology investments, but was not contacted by Musk and is not interested in a deal given its investment in Tesla competitor Cruise, the self-driving car unit of General Motors Co, according to a source familiar with the matter. SoftBank declined to comment.

China’s Tencent Holdings, which took a 5 percent stake in Tesla last year, is another possible partner.

However foreign capital sources would be subject to scrutiny by the Committee on Foreign Investment in the United States, which reviews deals for potential national security risks. Any proposal for funding from Chinese firms could face even tougher checks amid mounting U.S.-China trade tensions.

Many attempts by founders and top executives to take their companies private have never come to fruition. In March, Qualcomm Inc Chairman Paul Jacobs stepped down from the board to pursue a long-shot take-private bid for the U.S. chip maker, which has a market capitalization of $93 billion. To date, this bid has not materialized.

U.S. department store operator Nordstrom Inc’s attempt to go private also failed earlier this year, after banks balked at providing the necessary financing to the founding family members seeking to put together the deal.


Musk has said he would be looking to keep his ownership of Tesla at around 20 percent and that a special purpose vehicle, like the one that exists at his aerospace company SpaceX, would allow Tesla shareholders to remain invested if they so choose, and then cash out when they wanted.

But sources familiar with SpaceX told Reuters it is not clear how Musk would apply it to Tesla. Fidelity Investments, the major backer of SpaceX, did not invest in it through a special purpose vehicle, according to the sources.

Fidelity declined to comment, while SpaceX and Tesla did not immediately respond to requests for comment.

SpaceX only has a limited number of shareholders, who often choose to sell on their shares in the private market.

By contrast, allowing thousands of Tesla shareholders to remain invested through a special purpose vehicle would essentially mean that shares in that new vehicle are publicly traded in some way.

Even if such a deal was cobbled together, it is not clear whether so-called “liquidity events”, that Musk said he organizes at SpaceX every six months, would be sufficient for all existing Tesla investors to cash out.

“To have a deal of this size, that’d be unprecedented as far as I can remember,” Kaplan said.

Reporting by Joshua Franklin in New York and Heather Somerville in San Francisco, Additional reporting by Liana B. Baker in New York; Editing by Greg Roumeliotis and Himani Sarkar

How Real Is the Race to 5G? A New Report Tries To Explain Why Winning Matters

China is winning the race against the United States to build a faster nationwide wireless network that uses 5G technology, billed as the mobile industry’s future. Unless the U.S. moves more quickly, it will be at a major disadvantage when comes to creating dominant new companies in the emerging space.

That’s the conclusion of Deloitte Consulting, a top industry consulting firm that released a report about 5G on Tuesday. It cited the benefits of what it called the “data-network effect,” in which early leadership in new markets translates into more users who generate more data that, in turn, helps improve services and attracts more users.

“Accordingly, countries that adopt 5G first are expected to experience disproportionate gains in macroeconomic impact compared to those that lag,” the report’s authors said.

It’s not clear how closely the claim matches history. The United States led in the development of the Internet and 4G wireless but Google is matched by Alibaba, Uber faces Didi Chuxing, and so on.

U.S. companies have been sounding the alarm over a purported race against China over 5G, perhaps playing to the fears and strategic desires of the Trump White House. Their hope is to get the federal government to speed things up by cutting local and state regulatory hurdles to getting approval for the hundreds of thousands of new, smaller cellular transmission stations that are necessary for 5G.

The mobile carriers’ industry association, CTIA, estimates the number of cell sites must more than double from about 325,000 to 800,000. In another sign of how important 5G is to businesses, T-Mobile (tmus) and Sprint (s) cited the need to speed up 5G deployment as a major rationale for merging.

But the industry also doesn’t want to oversell the stakes in the race to 5G because that might trigger more government intervention. For example, in February, Trump administration national security staffers proposed nationalizing wireless networks and building a federal 5G system that carriers could lease.

In fact, companies like AT&T (t) and Verizon (vz) through their trade association have strongly opposed nationalization. All four major carriers are rolling out their own 5G pilot programs, with 5G compatible phones arriving on the market as soon as next year.

The evidence Deloitte used to back up its claim of Chinese leadership in 5G is greater infrastructure spending resulting in more cell sites. China has about three times as many sites per person and 13 times the coverage calculated by sites per square mile, Deloitte said, noting lower equipment costs in China and easier permitting.

Deloitte towed the U.S. industry’s line when it came to concerns about excessive government intervention. Other countries may subsidize or nationalize their wireless networks, but “such interventions in the United States could risk disrupting a communications and technology ecosystem that has proven symbiotic and resilient over the past decade,” the authors wrote.

In what could be read as a warning sign for some of the U.S. industry’s 5G business promises, however, the consultants noted the history of current 4G LTE networks. Although widely used, it hasn’t been as big a profit center for mobile carriers as expected.

“Released commercially in the United States in 2010, carriers expected LTE to provide an immediate boost to smart cities, asset tracking, retail, manufacturing, health care, and many other industries,” the consultants said. “Many assumed that if carriers played an integral role shaping the ecosystems that comprised these use cases, then profits would follow. However, the promise of new revenue streams for carriers enabled by LTE has remained largely unfulfilled.”

In fact, strong competition has reduced prices. Average revenue per user for telecom companies declined nearly 15% over the past four years, the Deloitte report noted. The 4G networks still helped the carriers financially though. By increasing capacity, 4G dramatically lowered the cost of transmitting data, allowing the carriers to cut prices but maintain profit margins.

The same could happen with 5G.

What Is Snapchat Dysmorphia And How It May Lead To More Plastic Surgery

Model Lindsey Pelas (L) and rapper Danny Boy of HardNox take a selfie at the Sapphire Pool & Day Club. (Photo by Gabe Ginsberg/Getty Images)

Feeling too good about your looks? Think that you are just too darn hot? Worried that your sexiness and self-confidence will intimidate far too many people? Not spending enough time obsessing over your appearance? Well, there is always Snapchat, Instagram, or other photo-sharing platforms to take your self-esteem down a few pegs.

In fact, doctors are worried that the spread of photo-editing technology and photo-sharing can really screw up the way you view yourself. There is even an unofficial new term, Snapchat dysmorphia, to describe what may happen. The term is a riff on body dysmorphic disorder (BDD), a mental health condition where you have a very distorted view of your own appearance. You focus obsessively on what you perceive as flaws in your appearance and exhibit accompanying compulsive behaviors such as excessively checking yourself in the mirror, grooming, and asking others about your looks and even getting unnecessary plastic surgery. Snapchat dysmorphia is essentially some form of BDD triggered by seeing too many unrealistic pictures on social media. Of course, the problem is not Snapchat specific. One could also coin the terms “Instagram Ick” or Can’t Stand My Face On Facebook.”    

As Susruthi Rajanala, Mayra B. C. Maymone, MD, DSc, and Neelam A. Vashi, MD from Boston University explained in a recent JAMA Facial and Plastic Surgery opinion pieceit used to be that only models and actors could regularly have their faces and bodies altered by photo-editing technology. Not anymore. With the flood of such photo-altering apps and filters and photo sharing platforms, now you and practically anyone else can be like a celebrity, in that way, minus the fame and the money. Thus, you can now choose from many, many more people to make you feel bad about your looks.

This may have real, serious consequences. I’ve written previously for Forbes about how digitally altered photos may be leading to more eating disorders and emotional issues. Additionally, as the opinion piece indicated, improving appearance in selfies seems to be an increasing reason why people are seeking plastic surgery. The availability of filters and other digital editors allows more people to edit their own selfies and then show dermatologists and plastic surgeons what they “want” to look like. Of course, there is a big difference between editing your selfie on a smartphone and editing yourself with a knife and chemicals.

Nowadays, there is a plethora of photo editing and sharing apps to choose from on your smartphone. (Photo Illustration by Chesnot/Getty Images)

What then can be done about this growing problem? When it comes to photo-editing, the cat is already out of the bag and also being painted on people’s faces. (No, your friends probably don’t really have cat ears and noses.) Society will never return to a time where only analog photographs existed. Digital technologies will only get more and more advanced to the point where reality will harder and harder to discern.

Thus, the solution will be in the people and not the photos or technology. Our society has become way too obsessed with appearance and arbitrarily chosen standards for appearance. If you are like many others, you may be choosing whom you work with, whom you befriend, whom you date, and even whom you listen to based simply on superficial appearance. But unless you are a face mask manufacturer, chances are you are placing way too much emphasis on the wrong things.

Instead, try to focus on and develop real talents, abilities, and skills. To my knowledge, Snapchat and Instagram still don’t have filters that can add thinking ability, insight, compassion, and personality to people. As a general rule, if you can easily change something on Snapchat or Instagram, it probably wasn’t worth that much in the first place.

'NBA 2K19' Player Ratings: Deandre Ayton Render And Overall Rating Revealed

Phoenix Suns’ No. 1 overall pick Deandre Ayton will be rated a 79 overall in NBA 2K19 when the game is released on September 11 for PS4, Xbox One, PC and Nintendo Switch.

Deandre Ayton in NBA 2K19Credit: 2K

The Suns took the Arizona product with the top pick after an impressive freshman campaign. Ayton averaged 20.1 points, 11.6 rebounds, and 1.9 blocked shots. He also made 34 percent of his three-point attempts.

Deandre Ayton in NBA 2K19Credit: 2K

Unfortunately, Ayton and the Wildcats were eliminated from the NCAA Tournament in the first round. The 79 rating seems a little low for a top pick. Last year, the Philadelphia 76ers’ Markelle Fultz got an 80 rating out of the gate. Not only is Ayton rated beneath last year’s top pick, he has an equal overall rating as Luka Doncic who was drafted third.

The 79 overall rating is consistent with what the Philadelphia 76ers’ Ben Simmons got as the top pick coming out of the 2016 draft. With the Sacramento Kings’ Marvin Bagley only getting a 78 rating, it appears as though Doncic is the player with a mark that is above his draft slot.

Expect to hear arguments from both sides of the fence, even though the difference is just two overall points.

As we saw with the Boston Celtics’ Jayson Tatum last year, the No. 3 pick can outperform the two players drafted ahead of him when it counts. Ayton is the highest-rated rookie big man in the game since Anthony Davis started his career with a 79 overall rating in NBA 2K13. As the upcoming season progresses, it’ll be interesting to monitor which players trend up, down or stay even with their initial assessment.

I write about sports and video games. I began my career with Bleacher Report in 2010 and I’m now a Forbes Contributor as well as a YouTuber, Twitch streamer and co-host of The Fight Guys podcast, The SimHangout, and my own weekly Q&A AskMazique. I’ve been blessed to make…


Want to Turn Planes Around Faster? Delta, United, and Southwest Have Some Creative Ideas

We saw separately how Delta Air Lines customer service agents came up with an idea that shaves a couple of minutes off turnaround time for the airline’s jets at Hartsfield-Jackson Atlanta International Airport. 

I was curious whether other lines did the same or similar thing, so I reached out to all of the Big Four. Southwest and United replied, while Delta also responded with a couple of other ideas worthy of attention.

Turnaround time is a big deal. The FAA reported in 2010 that flight delays cost the U.S. economy roughly $32.9 billion a year. Andit’s one of the key metrics on which airlines  judge themeselves.

Here are some of the other things big airlines are doing to turn airplanes around more quickly.

45 degree pushback

This is the original idea that Delta customer service agents came up with. We’ll summarize it here: Instead of pushing an airplane straight back from the gate, then turning it 90 degrees and pushing it again, the idea is to push straight back at a 45 degree angle.

This simple change shaves about a minute or more off turnaround time, which really adds up over 1,000 or more flights a day. Delta does it at Atlanta and Detroit. And, United tells me they do a 45-degree pushback at some airports as well, “depending on a variety of factors including aircraft type and setup of gate.”

The Quick Turn Playbook

This one is all United. The airline has what it calls a “Quick Turn Playbook,” which is a proprietary document that it says outlines “how all departments work together to help reduce the amount of time it takes to service and turn an aircraft.”

“The playbook was developed with the help and input of United frontline employees,” a United spokesperson told me. “We continue to go back to employees to solicit feedback on how it can be continuously improved.”

Maybe it’s working: United ranked #1 among competitors during the Q2 of 2018 for on-time departures.

Open seating

Yes, this one is limited to only one big airline–Southwest–and they were quick to point it out when I asked about turnaround tactics. Letting passengers take any open seat “saves us valuable time and keeps our aircraft moving efficiently,” as a spokesperson put it.

It’s hard to understand why other airlines don’t copy this–perhaps not on entire plans, but maybe by letting economy passengers board in order of how expensive their fares are?

Self-parking guidance systems

Both Delta and United told me they use laser-guided parking systems at some airports and gates. 

Instead of an employee standing on the ground and guiding the plane in with a couple of orange flags or lights, the laser system lets the pilot know how to inch the plane up to the gate, and when to stop. That means the employees can get ready to hook airplanes up to ground power and do other tasks more quickly.

Not charging for checked bags

Again, this is just Southwest, which doesn’t charge bag fees for any passengers. That’s in contrast to economy class passengers on United, American and Delta.

As a result, on any given Southwest flight there are likely fewer people carrying bags onto the plane and trying to put them in an overhead compartment to avoid a bag fee. That means less blocking of the aisles, and a faster process. 

The one they’re not doing

I found a few other interesting tactics. Ryanair, the low cost European carrier, says it cut turnaround time “dramatically” by removing seat back pockets, which means there’s no place for passengers to stick trash that has to be cleaned out. 

But the interesting one is a more complicated boarding dance called the Steffen Method, after the astrophysicist who came up with it in 2014. In summary, passengers would board from the outside in: window, then middle, and then aisle. And they’d board from the back, skipping every other row.

One drawback: Travelers flying together couldn’t board together if they were really strict about the process. Maybe that’s why it hasn’t really caught on.

WhatsApp Goes Full Facebook

(This is a guest post from Appilco Head of Platform and Modern Monopolies co-author Nicholas Johnson.)

RIP WhatsApp.

This week, the dream for what WhatsApp could have been was officially pronounced dead. What happened? Facebook announced a host of new business-oriented features that are coming to WhatsApp in a push to finally have its biggest acquisition generate meaningful revenue. Ads are included, contrary to the original vision for WhatsApp, whose founders once called advertising an “insult to your intelligence.”

As I’ve written previously, WhatsApp’s original direction presented an opportunity for a true Facebook competitor to emerge. But since Facebook’s $19 billion acquisition, it’s become increasingly clear that WhatsApp will inevitably end up looking like yet-another Facebook platform. That is to say, it will be driven by ads and the mass collection of user data, as required by Facebook’s main revenue model.

With the WhatsApp Business API, this transition has kicked into high gear.

Show Me the Money

WhatsApp’s business API will enable businesses to establish an official presence on WhatsApp, similar to how they exist on Facebook today. However, this doesn’t mean you’re suddenly going to start getting spammed by messages from companies, as customers still have to contact a business on WhatsApp first before the business can send them messages.

After that, using the API, businesses can respond to messages from customers. They can also send them updates such as order confirmations, delivery notices, appointment reminders and more. Many businesses will also use it for customer support, and the API will likely enable WhatsApp to plug into existing CRM solutions that businesses use for that purpose.

As for cost, the API will let businesses respond to customer inquiries for free within 24 hours. After that they will pay a fee per message sent of between half a penny to 9 cents, depending on the country. This framework will encourage businesses to respond to customer messages quickly. It also helps eliminate the incentive for businesses to spam customers after the initial outreach, as each message will cost them money. If that message doesn’t create real value for the customer, you won’t want to send it.

Additionally, WhatsApp will also be introducing ads, not all of which will appear within the WhatsApp app itself. How does that work? Business accounts on WhatsApp will soon be able to place ads on Facebook (and likely Instagram too) that let customers click to open up a WhatsApp message with that business. Additionally, WhatsApp will be adding advertisements to its Status platform, which is its version of Facebook’s many Snapchat Stories clones. Facebook has been testing these ads already with Instagram Stories, and WhatsApp Status ads will tie into the same Facebook ad system as Stories.

Facebook’s Stalling Revenue Engine

Taken together, these moves remove much of what made WhatsApp stand out from the rest of the Facebook ecosystem. Following the departure of WhatsApp’s founders, every new change makes WhatsApp more and more like Facebook.

At its core, Facebook, much like Google, is driven by a giant money-making advertising engine. Eventually, everything that Facebook touches gets pulled into its vortex. Now WhatsApp, despite promises to the contrary to both users and regulators, will be no different.

For Facebook, the shift comes on the back of a poor showing in its latest quarterly earnings and as increasing investments in safety and community monitoring are likely to compress its profit margins in the years ahead. Facebook appears to be moving decidedly out of growth mode and into profit-taking mode with all of its platforms. Now that WhatsApp is one of the largest messaging platforms in the world, it’s well positioned to turn into the monetization engine Facebook likely envisioned when it shelled out $19 billion.

eFootball's coming home; FIFA's virtual World Cup kicks off

LONDON (Reuters) – The 2018 World Cup is over and now for the FIFA eWorld Cup, a virtual tournament that kicked off in London on Thursday with goals galore and multiple Cristiano Ronaldos and Lionel Messis strutting their stuff on a digital stage.

The FIFA eWorld Grand Final trophy on display during the tournament at the O2 Arena in London, Britain August 2, 2018. REUTERS/Henry Nicholls

The three-day finals see 32 elite players, distilled from a global pool of 20 million starters worldwide, flexing thumbs and fingers for the prize of a shiny trophy and $250,000 to the winner.

England’s 21-year-old Spencer Ealing, the reigning champion who plays under the nickname ‘Gorilla’, is back ‘to defend what’s mine’.

Germany boasts eight finalists and Argentina just one but 18-year-old Nicolas ‘nicolas99fc’ Villalba — a man who eschews compatriot Messi for Ronaldo and Brazilians Neymar, Ronaldinho and Ronaldo Nazario in his team lineup — is a favorite.

Some have big name clubs behind them, such as Manchester City’s Kai ‘Deto’ Wollin or fellow-German and Bayer Leverkusen player Marvin ‘M4RV’ Hintz, but others are unaffiliated.

The group stages, with 16 playing the FIFA 18 game on Xbox One and the other 16 on PlayStation4, started with the audience online only until the doors are opened on Saturday at the O2 Arena in London’s docklands.

The group stages of the FIFA eWorld Grand Final get underway at the O2 Arena in London, Britain August 2, 2018. REUTERS/Henry Nicholls

The semi-finals and final will be on Saturday after group stages and knockout rounds, with most of the teams featuring the same top players in virtual form.


The tournament echoes the real World Cup played in Russia this year in other ways as well, including anti-doping urine tests and the monitoring of betting markets for suspicious activity.

Malta’s Kurt’kurt0411’ Fenech, a 23-year-old former odds compiler for a sports betting company who says he now earns far more from gaming, welcomed that.

“People might think ‘Oh, it doesn’t belong in esport’ but it 100 percent does,” he told reporters in a roped-off World Cup-style media mixed zone.

“We have to play a game which requires full concentration and I know that there’s stuff out there that can help you with that. So I’m really pleased there is an anti-doping. It’s needed in every sport and we are a sport now.

“The testing is really extreme, it’s like professional football.

Professional Xbox and Playstation players take their positions for the group stages of the FIFA eWorld Grand Final at the O2 Arena in London, Britain August 2, 2018. REUTERS/Henry Nicholls

“They’ve just picked three people randomly,” he added, gesturing towards the brightly lit ‘field of play’ where players and coaches sat in booths and stared intensely at screens.

Alexander ‘Alekzandur’ Garcia Betancourt, the only American in the finals, said Adderall was the drug most commonly mentioned.

“It’s normally for people with ADHD so if you don’t have that and you abuse it, it’s very easy to gain an advantage,” he said.

“It’s good that they are doing that now with the doping controls,” added the 19-year-old Kansas City native who has signed for his local MLS side.

“We follow the same WADA (World Anti-Doping Agency) regulations as normal athletes. We have to follow those rules, make sure we’re not taking anything we’re not supposed to.”

Fenech, who estimated his earnings were on a par with those of professional Maltese soccer players, felt he was also representing his country — whose team are ranked 184th in the world by FIFA , one place behind Bhutan and just ahead of Macau.

“If I can go on to win this I could become president,” he laughed.

“Our football is nowhere near where we should be and we do usually finish last so for me to compete with the best of the other countries – Germany, France, England – it’s definitely something for a country to be proud of.”

Editing by Peter Rutherford

Congress passes bill forcing tech companies to disclose foreign software probes

WASHINGTON (Reuters) – The U.S. Congress is sending President Donald Trump legislation that would force technology companies to disclose if they allowed countries like China and Russia to examine the inner workings of software sold to the U.S. military.

Senator Jeanne Shaheen (D-NH) speaks about U.S. President Donald Trump’s decision not to impose sanctions on Russia during a media briefing on Capitol Hill in Washington, U.S., January 30, 2018. REUTERS/Joshua Roberts

The legislation, part of the Pentagon’s spending bill, was drafted after a Reuters investigatihere last year found software makers allowed a Russian defense agency here to hunt for vulnerabilities in software used by some agencies of the U.S. government, including the Pentagon and intelligence services.

The final version of the bill was approved by the Senate in a 87-10 vote on Wednesday after passing the House last week. The spending bill is expected to be signed into law by Trump.

Security experts said allowing Russian authorities to probe the internal workings of software, known as source code, could help Moscow discover vulnerabilities they could exploit to more easily attack U.S. government systems.

The new rules were drafted by Democratic Senator Jeanne Shaheen of New Hampshire.

“This disclosure mandate is the first of its kind, and is necessary to close a critical security gap in our federal acquisition process,” Shaheen said in an emailed statement.

“The Department of Defense and other federal agencies must be aware of foreign source code exposure and other risky business practices that can make our national security systems vulnerable to adversaries,” she said.

The law would force U.S. and foreign technology companies to reveal to the Pentagon if they allowed cyber adversaries, like China or Russia, to probe software sold to the U.S. military.

Companies would be required to address any security risks posed by the foreign source code reviews to the satisfaction of the Pentagon, or lose the contract.

The legislation also creates a database, searchable by other government agencies, of which software was examined by foreign states that the Pentagon considers a cyber security risk.

It makes the database available to public records requests, an unusual step for a system likely to include proprietary company secrets.

Tommy Ross, a senior director for policy at the industry group The Software Alliance, said software companies had concerns that such legislation could force companies to choose between selling to the U.S. and foreign markets.

“We are seeing a worrying trend globally where companies are looking at cyber threats and deciding the best way to mitigate risk is to hunker down and close down to the outside world,” Ross told Reuters last week.

A Pentagon spokeswoman declined to comment on the legislation.

In order to sell in the Russian market, technology companies including Hewlett Packard Enterprise Co, SAP SE and McAfee have allowed a Russian defense agency to scour software source code for vulnerabilities, the Reuters investigation found here last year.

In many cases, Reuters found that the software companies had not informed U.S. agencies that Russian authorities had been allowed to conduct the source code reviews. In most cases, the U.S. military does not require comparable source code reviews before it buys software, procurement experts have told Reuters. (Graphic:

The companies had previously said the source code reviews were conducted by the Russians in company-controlled facilities, where the reviewer could not copy or alter the software. The companies said those steps ensured the process did not jeopardize the safety of their products.

McAfee announced last year that it no longer allows government source code reviews. Hewlett Packard Enterprise has said none of its current software has gone through the process.

SAP did not respond to requests for comment on the legislation. HPE and McAfee spokespeople declined further comment.

Reporting by Joel Schectman; Additional reporting by Jack Stubbs in Moscow

Everything but the voice: Britons' mobile calls fall for first time

LONDON (Reuters) – Britons are more attached to their mobile phones than ever before, but the amount of time they spend using them for their original purpose – talking to someone else – has fallen for the first time, Ofcom said on Thursday.

FILE PHOTO: A woman looks at her mobile phone as she passes a mural in Shoreditch, London, Britain October 5, 2016. REUTERS/Stefan Wermuth/File Photo

The regulator said the popularity of internet-based services such as WhatsApp, Skype and Snapchat, all of which can be used to make calls as well as send messages, had reduced the time spent on mobile voice networks.

Total outgoing mobile call volumes dropped by 2.5 billion minutes last year to 148.6 billion minutes, the first decrease since data collection started, Ofcom said.

FILE PHOTO: A man looks at his mobile phone in Shoreditch, London, Britain October 5, 2016. REUTERS/Stefan Wermuth/File Photo

Smartphones, which started to take off when Apple launched its first iPhone in 2007, have become essential to people’s lives, it said, with 78 percent of adults now owning one.

“Over the last decade, people’s lives have been transformed by the rise of the smartphone, together with better access to the internet and new services,” said Ian Macrae, Ofcom’s director of market intelligence.

“Whether it’s working flexibly, keeping up with current affairs or shopping online, we can do more on the move than ever before. But while people appreciate their smartphone as their constant companion, some are finding themselves feeling overloaded when online, or frustrated when they’re not.”

Three quarters of people said their smartphones helped keep them close to friends and family, Ofcom found.

Slideshow (2 Images)

But conversely 54 percent said connected devices interrupted face-to-face conversations with the same people, while more than two in five also admitted to spending too much time online.

Adult users spend an average 2 hours and 28 minutes a day online on a smartphone, Ofcom said. This rises to 3 hours and 14 minutes for 18-24 years olds.

Smartphones have also usurped television as the device that adults say they would miss the most.

Some 52 percent were most attached to their televisions in 2007, but by 2018 Ofcom said 48 percent favoured the smartphone, beating the 28 percent who saw the TV as their most important device.

Editing by Susan Fenton

Less Than 50 Years After Tuskegee, Can Trust In Our Health System Be Restored?

In this 1950’s photo released by the National Archives, a black man included in a syphilis study has blood drawn by a doctor in Tuskegee, Ala. For 40 years starting in 1932, medical workers in the segregated South withheld treatment for unsuspecting men infected with a sexually transmitted disease simply so doctors could track the ravages of the horrid illness and dissect their bodies afterward. Finally exposed in 1972, the study ended and the men sued, resulting in a $9 million settlement. (National Archives via AP)

Although almost no one recognizes it today, the end of July marks a very important milestone in U.S. black history, public health, science and bioethics. This week, 46 years ago, rocked the United States, leaving behind it decades of mistrust and devastation to faith in the health care system. Between July 25th and 31st in 1972, a whistleblower, leaked to the press what we now refer to as the Tuskegee Syphilis Experiment.

This horrific clinical study – conducted between 1932 and 1972 by the U.S. Public Health Service (PHS) – deceived 600 impoverished black men into thinking they were receiving medical care. Instead, they were lied to about their health, disease status and given placebos such as aspirin in lieu of treatments. All in the name of learning what happens as disease takes its course on the human body. The experiment, which was to last for six months, carried on for 40 years, even as funding for the work was lost and a treatment for syphilis (penicillin) was discovered.

After becoming employed by PHS, Peter Buxtun began to learn about the work that was being conducted at the prestigious Tuskegee Institute and Hospital in Macon County, Alabama. After securing proof of the unethical work, he attempted to halt the study on several occasions. Each time overruled by employers, and eventually threatened. Although not intimidated by the threats, Buxtun quit his job in 1967, later referring to PHS health research as using, “human substitutes for guinea pigs.” After concluding that nothing was going to be done by the U.S. government to stop the Tuskegee study, he took his evidence to reporters.

Within days, the entire world was aware of what the United States government and medical community had done to minority citizens.

Although Peter Buxtun is often left out of historical accounts like Jean Heller’s famous New York Times Tuskegee expose or the 1997 movie Miss Evers’ Boys, without him, medical ethics in America would not be what they are today. Neither would health policy. And while regulations and red tape often get in the way of medical advancement, we have to stop and consider that mandates around human ethics are in place for a reason. And usually that reason is because what would seem like an obvious moral boundary today, was crossed in a devastating and unacceptable way in the past.


Trust in the health care system, as well as trust in the U.S. government, varies by our personal experiences and context. And for our aging population, the legacy of Tuskegee is very much a part of their lived health experience.

It is also important to note that during the same time period, there were other experiments being conducted by the government that came to light, including the CIA’s MK-Ultra mind control and psychological torture projects and the University of Pennsylvania’s testing of toxic chemicals on prison inmates. Add in government scandals like Watergate and the My Lai massacre, and the 1970’s proved to upend trust in any public authority. Consequently, the U.S. population as a whole was confronted with various transgressions within a short period of time.

But the disgust and mistrust around the kinds of actions that target a single group of people, with attempts to justify it by some individuals in leadership, cannot be overstated or undone by government verbal commitments to do better. As Buxtun said of Tuskegee, “It was an autopsy-oriented study. They wanted these guys dead on a pathology table.” So, despite significant changes to regulations, scientific research protocols, and health policy as a result, that kind of unethical event changed the way an entire race viewed and interacted with the system – the repercussions of which are unquestionably and reasonably multi-generational.

But less than 50 years later, we often fail at instilling this knowledge into young health professionals. The cultural differences in perspectives and exchanges with the health system cannot be causally wrapped into a medical school course on “cultural sensitivity,” or reading blog posts about our aging population.

While in today’s health care system, many practitioners and providers acknowledge that cultural differences are important, and that they must meet the patient where they are, this is often applied to ethnic, religious, racial and gender identity differences in a way that forgets history. And in cases like the Tuskegee Experiment, very recent history.

Trust takes a long time to build in any relationship. And it is very difficult to re-build, especially once it has eroded away. In the book Bad Blood– which is what the Tuskegee Experiment staff told the men they had – author James H. Jones describes the, “anatomy of a long nightmare – a particularly American episode.” And because that is our history, the U.S. health system must continue to do better every single day. With every effort made to provide the most holistic and authentic care, with a constant awareness of how those who came before us shaped our interactions today.

How To Tell Which Probiotic Is Right For You

Non-Prescription Drug Store, Woman holding Bach flower capsules. (Photo by: BSIP/UIG via Getty Images)

It seems you can’t attend a group dinner or scroll through your Instagram feed without a candid discussion of digestion and probiotics. The reason? Over 60 million American currently suffer from some kind of gut condition, and 3.9 million people are currently using a probiotic, according to the National Center for Complementary and Integrative Health. That number is likely higher if you count the explosion of probiotic-infused consumer packaged goods products like chips, ice cream and even beer. With the glut of probiotics and probiotic-dosed foods and drink, combined with constant recommendations from non-scientists or doctors, it’s getting harder to navigate the options and find the right solution.

While taking the advice of a friend over dinner might not be dangerous, there are better ways to spend $60 than on a bottle of probiotics that will be neutralized as soon as it hits your stomach acid or is meant to treat an entirely different condition than what you intend. Microbiome researcher Dr. Brian McFarlin of University of Texas who oversees clinical trials of probiotics, shares that the challenges for consumers trying to locate the right probiotic for any particular gut condition is a lack of regulation and published research. Many companies do test them but don’t publish their findings.

“Some of the big companies have funded studies on probiotics they are selling into the market but have not published the findings either to prevent a competitor from seeing what they did and copying the product or because the product has been proven ineffective,” shares Dr. McFarlin. There is no way to know the difference. He points out that it gets even trickier with unregulated labeling, when bottles, “will say ‘university tested and approved’ which can be code for ‘we tested this product but did not find what we wanted to find.’ If they found what they had thought they were going to find, they might be promoting this instead.”

That said, some probiotic companies are getting serious about testing their strains in clinical trials and sharing the findings with the public, despite the lack of FDA regulation or exposing their work to competitors. Dr. McFarlin recently oversaw a clinical trial at University of Texas that examined the efficacy of a new probiotic strain developed in Chicago by Just Thrive on leaky gut. Dr. McFarlin’s group found that the spore-based probiotic they tested was 42% effective in reducing the biomarkers indicative of leaky gut. While not 100% efficacy, this number is a major step forward in treating individual gut conditions with a specific probiotic protocol. The findings from which can be accessed by anyone.

So what should a smart consumer suffering from a gut condition do? First, Dr. McFarlin says, beware. “Because of the dietary supplement act, companies are not required to do any research at all; as long as they aren’t super specific with what they claim, they can do whatever they want.” Instead of taking marketing labels on the backs of bottles, read through original clinical trial write-ups, often found at the US National Library of Medicine or PubMed, to access real data on treatments before plunking down any money. And once you do find something that appears it could work for you, he suggests that you, “Try different things out and see what works.”

Buying The Latest AbbVie Sell-Off With Vigor


The mega-cap biotech AbbVie (ABBV) was spun off from Abbott (ABT) 5 1/2 years ago as the second step in ABT’s deconglomeration. It appears that it has returned roughly 22% per year since then. I believe that the stock is undervalued and that the combination of the Citron short sale recommendation and the general market sell-off Friday have left ABBV unduly depressed. Thus, it may be attractive for patient investors. My goal is mid-teens annual returns for some years to come. Please note that as stated elsewhere, I am not a financial adviser, so please do your own homework on this name and all other stocks I comment on.

One technical reason to consider ABBV of all biotechs is that only ABBV has broken well above of its 2014-5 trading range. Thinking back to the tech stock recovery after the 2000-3 Tech Wreck, very few leading names went to new highs. The only one that comes to my mind is Apple (AAPL), and it paid to buy AAPL on any sell-offs from 2003 onward (and earlier than that, of course).

Let’s look at ABBV vs. a large cap-oriented biotech ETF (IBB) as well as the S&P 500 (SPY) on a 5-year chart;


ABBV data by YCharts

That chart looks good to me in favor of ABBV.

In addition, ABBV has had much higher dividend pay-outs than the rest of IBB, so its outperformance is that much greater.

As I have opined many times, my key starting point for most stocks is whether they have strong, bottom left-to-top right chart patterns. The second question, of course, is whether investors have finally overestimated the company’s strengths and the stock should be avoided on a valuation basis.

In the rest of this article, I will present my point of the view that in the current situation, it is reasonable to invest as if past is prologue, and play it as if ABBV will continue to outperform the general market and possibly the biotech sector (though I believe that a sharp snapback for other leading biotechs is very possible).

The first reason involves simple arithmetic:

ABBV is a cheap stock and should not be so heavily discounted

In Q2, ABBV had a number of one-time expenses including a tax issue and a $500 MM payment into its partnership with an Alphabet-backed (GOOGL) pharma R&D company, Calico. So, this is one case where GAAP tends to obscure earnings power. More important is to take ABBV’s upgraded full-year non-GAAP forecast of around $7.80 EPS and subtract the completely valid amortization charges and some minor other charges. That gets me to around $7.00 EPS as a valid baseline to use when looking forward to 2019 and beyond. (Note, at some point the costs related to the Calico venture will have to stop being treated as special and will simply be general R&D costs.)

Using $7, then ABBV is around 13X full-year EPS, which translates to an earnings yield (reciprocal of the P/E) of 7.8%.

Because ABBV has about a 100% conversion of EPS to free cash flow, owners of the company have an attractive return from the start based on today’s interest rates and today’s lower earnings yield on the SPY as a whole. s

The next question is whether earnings can be sustained at this level and grow at least at a moderate pace. Here’s why I’m bullish on ABBV and bearish on Citron’s short-selling case.

The brilliance of ABBV’s life-cycle management of the Humira franchise; Part 1: Humira top-down considerations

I would urge anyone interested in this topic to think about the points that ABBV’s CEO Rick Gonzalez made more than once in Friday’s conference call. These points are supported and supplemented by an ABBV presentation from June regarding its plans to sustain and possibly grow its Humira franchise.

Big picture: ABBV is a Big Pharma, mature company that knows the patent game inside and out. So it knew that biosimilars were coming and when they were coming, and from Day 1 of its existence outside of the ABT umbrella, it was planning on both growing Humira sales and taking the expanding Humira franchise, protecting it as much as possible with patents in the US, and supplanting it globally with superior, next-generation products.

The plan has succeeded brilliantly to date. Humira sales annualized at almost $21 B in Q2 and are growing at a healthy pace, especially in the US, and finally essentially all from volume gains. ABBV has pointed out its view that given Humira’s numerous indications, it and other biologics are significantly under-used, not over-prescribed. So it has asserted, correctly so far, that the many newer biologic and oral potent entrants to the RA, psoriatic disease, and IBD markets would enlarge the market rather than lead to the Humira franchise shrinking.

What happens next is that biosimilars will enter in the EU in Q4. ABBV keeps saying that it has a very good plan to minimize the sales decline there, but it will share no details publicly (i.e., it won’t tip off its competitors). So I’m going to keep an open mind, and remember that selling prices in the EU are less than in the US, so profitability will be hurt less by loss of exclusivity in the EU than in the US.

Here, I expect sales to grow until late January 2023, when Amgen (AMGN) will enter with Amjevita. ABBV has made a patent-licensing deal with AMGN and two other biosim companies in which the licensees acknowledge the validity of the licensed patents and agree to pay ABBV an undisclosed royalty. This will likely lead to three biosim competitors entering the US market by July 2023. That’s the latest count, and presumably more will enter, but we do not know whether there will be litigation or whether other companies will also work out a deal with ABBV.

Assuming Humira keeps biosims at bay under the above scenario, US sales that annualized at $14.1 B in Q2 can keep growing. There may still be a few months left of a small royalty that ABBV owes to another company on Humira, but I seem to recall that if so, it will end by around year-end 2018. With Remicade subject to biosim competition and Enbrel fading, the prescribing community appears to be standardizing on Humira as the TNF inhibitor of choice. ABBV must be congratulated for this victory. The best molecule has won, and Humira is the leader in moderate-to-severe versions in all its indications. It took great science and great marketing to achieve this.

With ongoing management continuity, I consider this to be a valuable intangible that should allow ABBV to have a higher P/E.

So, what’s the Humira franchise worth? (Part 2)

It’s worth whatever ABBV can wring out of the EU, 4 1/2 years of biosim-free sales in the US, then an unknown pace of decline in the US, royalties on biosim sales, and sales from the rest of the world, including Japan and China.

I estimate matters this way, and note this is guesswork, not fact:

At year-end 2018, sales may annualize near $22 B. I multiply that by 4.5 years, ignoring the sales from the month of January 2023 before AMGN enters with its biosim. Then I assume that the drop-off in sales in the EU is matched by growth elsewhere, mostly in the US. So I multiply $22 B by the 4.5 years between Q3 2018 and Q4 2022, inclusive. That gives $99 B; call it $100 B.

Then I make the guess that if there were simply one Humira company with no other focus, the all-in after-tax profitability from these 4.5 years of operation will be 60%. This assumes a 20% tax rate. So that gives $60 B as profits from Humira up to US biosim entry. Whether one should adjust for the time value of money (present value discount), and if so at what rate, is up to each of us. Traditionally, Humira has needed none of that due to rampant price increases, but those days may be gone.

Moving on, the next question is what Humira will produce beginning in 2023. It’s a great unknown. I do estimate that sales will be around $20+ billion as a starter, and I use a matrix of possibilities. Focusing on the US, it is possible that biosims will be a relatively minor encroachment. Or, on the other end of the spectrum, perhaps they will act much more like generics and quickly do what generics did when they were only partly accepted by doctors and patients. In those days, perhaps the late 1980s or early 1990s if memory serves, a rule of thumb was that the brand would see sales drop 80% when generics appeared. Now, it is more like a 98-99% sales drop.

In this case, my mid-range scenario is that most patients who are stabilized on Humira are going to be sticky with Humira, but that new patient starts on Humira will drop off sharply. So I could see annual sales dropping as follows (exemplary, not a prediction):

  • $17.5 B in 2023
  • $15 B in 2024
  • $12.5 B in 2025
  • $10 B in 2026, etc.

Thus I think it’s reasonable to allot $20 B for the value of the Humira franchise from 2023 onward, including all territories and assuming a 50% after-tax profitability of the franchise, i.e. a present value of future sales of $40 B.

This analysis suggests Humira’s profit stream may come to $80 B.

But there’s more to Humira than just its sales. It provides a greeting card for planned, major product launches.

Here come “risa” and “upa” (Part 3)

ABBV has two very late-stage assets to advance beyond Humira – which represents 20th century technology – that it plans to develop into major profit centers soon. ABBV will go to the many Humira prescribers and develop a switch/start strategy that leads them from Humira to either risankizumab and/or upacitinib. The June presentation, slide 3, shows the strategy. Almost every Humira indication is expected to be replaced by one or both of those two drugs. In addition, the atopic dermatitis indication is in my view likely to be gained by upa, and Humira does not have an AD indication.

ABBV knows vast amounts of non-public details about the prescribing habits of many thousands of doctors. It will have a doctor-by-doctor marketing plan where appropriate (high prescribers), along with mass marketing technique. The details of the registrational studies for risa and upa, and supporting smaller studies, have been determined by a mixture of science and marketing. In addition, the choice to in-license risa from Boehringer Ingelheim and to develop upa in-house has been informed by extensive proprietary knowledge of autoimmune disease mechanisms.

These and other advantages are why ABBV is so optimistic about the future of its Humira franchise writ large, meaning Humira plus follow-on drugs beginning with risa and upa. For some meatiness, here are some of ABBV’s prepared remarks on the topic from the conference call, mixing CEO and CSO comments:

Upadacitinib has the potential to be best in class therapy in RA offering meaningful advantages over products on the market today or those we see in development… We’ve evaluated Upadacitinib in a comprehensive set of studies in patients with moderate-to-severe RA… and believe that it will offer meaningful advantages over products on the market today or in development… [including] the potential of Upadacitinib as first line monotherapy in methotrexate-naïve RA patients.

If upa can gain a first-line indication for RA, the sky is (metaphorically) the limit for its sales potential just in that indication. But ABBV is seeking 6 other indications for upa, almost all of them major opportunities to improve the standard of care and thus reap well-deserved significant financial rewards. So I believe that upa has major, mega-blockbuster potential.

Upa was either invented at ABBV or brought in-house very early, so I think that the only royalties or other fees ABBV will owe on sales of upa might be for its access to the controlled release technology that allows upa to be given once a day rather than twice daily. If such a deal was made, typically royalty rates would be small. So I see upa as having massive upside potential. Upa could reach the US market in Q4 2019.

As far as risa goes, 4 major indications are being sought for it. The CSO had this to say about it:

Moving now to our other late stage immunology asset, risankizumab. We recently submitted our US and European regulatory applications in psoriasis. Based on the very high and durable rates of skin clearance we saw in the registrational studies. We believe risankizumab has the potential to significantly improve upon current treatment options for both bio-naïve and TNF inadequate responder patients with moderate-to-severe psoriasis, while offering the convenience of quarterly dosing.

I agree. A top-notch clinical profile and an injection only every three months can allow risa to become a significant success.

I am modeling risa to reach the US market in Q2 2019.

Assuming timely approval of upa and risa, ABBV will have several years to build their franchises in conjunction with its life-cycle management of Humira. Success here will be a major achievement in this industry. Few companies have ever done this sort of thing, and the importance of success in this multi-year, carefully-planned effort explains some of the impatience that the CEO showed in some of his responses to questions from analysts about reimbursement issues of the day.

There is much more to ABBV, and…

Two young products each have major potential

Leaving Humira et al aside, ABBV may have mega-blockbusters from its cancer drug Venclexta and from Orilissa. Venclexta is shared in some fashion with Roche (OTCQX:RHHBY), but I have not seen detailed terms. My assumption, and it’s just an assumption, is that Venclexta profits will mostly accrue to ABBV. I think the drug bids fair to represent an important advance in the treatment of certain fairly common hematologic cancers, and I believe there is lengthy patent protection for it.

Orilissa (elagolix) was approved this month for endometriosis. Currently it can only be used for a limited time period, not for years and years, but ABBV has a program underway to limited the bone loss it causes. Success in this project could allow Orilissa to see very large sales. A second, also potentially major, indication, for uterine fibroids, is moving through Phase 3. Elagolix was invented by Neurocrine Biosciences (NBIX), but I have been unable to determine the royalty/milestone arrangement between NBIX and ABBV.

In any case, it’s important that both Venclexta and Orilissa are approved, not just pipeline possibilities, though especially for Venclexta, additional important indications are being sought.

I give these two drugs significant though as-yet undetermined value.

Then there’s all the rest of ABBV

ABBV has other major assets. These include its approximate half-share of profits from Imbruvica, Mavyret, Creon, Duodopa, Synagis, Synthroid and even Lupron.

This article is long enough, but in the future, I’d like to devote some time to explaining why part of why I have come to admire ABBV’s business savvy relates to what it has done with all these franchises.

Finally, there is all the rest of ABBV’s R&D effort. I actually do not think it’s ideal, as exemplified by its unusual overweighting of antibody-drug conjugates in its pipeline. But overall, ABBV’s product development track record speaks for itself.

Now, a word about the short selling attack that drove ABBV into the $80s.

Citron strikes again, but I bought the dip

The idea of shorting a massively profitable company that is on a product development roll, that routinely beats and raises expectations, and that costs a short seller the 4% dividend yield upfront in addition to financing the short sale, is strange. Even stranger, I thought, was the Citron thesis that ABBV is headed to $60 for the stated reason that it may be forced to charge full price rather than, say, half price to get on formularies (if I have their reasoning right).

In the real world, drug companies charge mostly wealthy foreigners list price, with rare exceptions, if the drugs list above $40,000 per year. The reasons for ubiquitous rebates come largely from the government. I found the Citron presentation thin rather than broad-based, and quite unpersuasive.

So I’m thinking that it’s nice to see a reason for a great company’s stock to fall so hard, and to be able to take a stand against the shorts.


In my very humble opinion, ABBV is less risky than the “average” stock, though it’s difficult to define what an average stock is. The company is committed to dividend increases, and with a current dividend a little above 4% and likely set to be increased again next year, numerous stockholders will see little reason to sell if the stock drops some more.

Please see the 10-K and other documents for ABBV’s list of its many risk factors.

Concluding remarks

ABBV appears to me to have emerged as an appealing combination of Big Pharma savvy with strong biotech science. Disappointments have been few lately, largely limited to the cost of the Stemcentrx deal, poor results so far from its PARP inhibitor veliparib, and the dismal failure of the MS drug Zinbryta (shared with Biogen (BIIB). There are no guarantees of success for ABBV’s grand plan to grow its autoimmune franchise through the Humira patent cliffs beginning in the EU this year and in the US apparently in early 2023. However, I would be satisfied if a drop-off occurs but was only mild. It turns out that as with Gilead (GILD) in 2010-1 and Lilly (LLY) around the same, very often pharma companies bottom when the Street worries a lot about patent cliffs. So long as ABBV continues to develop great products, whether in-licensed or invented in its own labs, I expect the Street to give a high P/E on Humira-related trough earnings.

Thus I began accumulating ABBV more seriously again on Friday and plan to do more of the same assuming it continues to trade in the low $90s or lower. ABBV has a stated market cap around $142 B based on diluted shares outstanding in Q2, and may have an enterprise value of $180 B or more. That’s a tad daunting, but I look at the ongoing and growing earnings stream, the numerous approved and late-stage pipeline growth drivers, and find that in the market we have, this looks like a superior stock. Clearly there are regulatory, legislative, and market risks, though.

My goal from ABBV is primarily capital gains, as well as income from dividend growth. My theme is for the stock to work higher, perhaps trading sustainably above $100 next year, then above $110 in 2020, and so on. This would provide somewhere around 15% annual total returns. Also, my base case is for ABBV to perform well versus household pharma names such as J&J (JNJ), Pfizer (PFE) and Merck (MRK) – though any stock can trade almost anywhere for almost any reason. So that’s not a prediction, just my own rationale for owning ABBV but not these other names (note, I do buy and flip PFE for small capital gains now and then).

Thanks for reading and sharing any comments you wish to contribute.

Submitted Sunday morning.

Disclosure: I am/we are long ABBV,RHHBY,GILD,AAPL.

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.

Additional disclosure: Not investment advice. I am not an investment adviser.

Cryptojacking Displaces Ransomware As Most Popular Cyberthreat

If you’re concerned about cybersecurity, and you’re not up to speed on illicit crypto mining, aka ‘cryptojacking,’ then it’s time to get with the program. Cryptojacking is now more prevalent than ransomware, 2017’s most popular cyberattack method.

As I explained in my March 2018 article Top Cyberthreat Of 2018: Illicit Cryptomining, cryptojacking is where an attacker surreptitiously installs cryptocurrency mining software on a target system. The software – which may not even technically be malware – consumes processor cycles and their requisite electricity to process cryptocurrency transactions, thus earning the attacker a commission, usually in the anonymous cryptocurrency Monero.

The fact that cryptojacking software doesn’t have to establish a command and control link to the attacker, combined with the fact that the victim is only losing processing cycles that may have gone idle anyway, contribute to cryptojacking’s surge in popularity among hackers. “If 2017 was the year of ransomware, 2018 looks likely to go down as the year of cryptominers,” explains the Vulnerability and Threat Trends 2018 Mid-Year Update by Skybox Security. “Cryptomining malware is often able to run undetected, making money for attackers all the while.”

Cryptojacking: Piracy on teh InterwebzS. Brickman

Cat-and-Mouse Game in the Browser

Early cryptojacking attempts largely targeted PCs and mobile devices running browsers via the cryptomining software from Coinhive. Coinhive developed this software ostensibly for on-the-level web companies to better monetize their sites, but criminals soon moved in, coopting Coinhive for illicit purposes.

A cat-and-mouse game soon followed, as antivirus vendors listed Coinhive as malware, only to drive innovation in cryptojacking software that would defeat the anti-malware tools.

Anti-malware vendor Malwarebytes uncovered one such innovation. “We have come across a technique that allows dubious website owners or attackers that have compromised sites to keep mining for Monero even after the browser window is closed,” says Jérôme Segura, Head of Investigations, Malware Intelligence, Malwarebytes Labs. “This type of pop-under is designed to bypass adblockers and is a lot harder to identify because of how cleverly it hides itself.”

Such ‘drive-by mining,’ in turn, elicits new prevention techniques. “Unscrupulous website owners and miscreants alike will no doubt continue to seek ways to deliver drive-by mining, and users will try to fight back by downloading more adblockers, extensions, and other tools to protect themselves,” Segura continues. “If malvertising wasn’t bad enough as is, now it has a new weapon that works on all platforms and browsers.”

The Real Pot of Gold

As this back-and-forth plays itself out, cryptojackers are increasingly eyeing a more valuable prize: servers. Running in corporate and cloud data centers, servers are both vast in number and far more powerful than PCs and mobile devices, presenting forming a fertile field for planting cryptojacking software.

Given the state of corporate cybersecurity, however, targeting servers requires a more sophisticated attack vector than ‘pop-under’ browser windows. The weak spot: Windows remote administration tools like Windows Management Instrumentation (WMI).

Cybersecurity vendor Kaspersky Lab recently uncovered WMI-based cryptojacking malware. “The malware, which we dubbed PowerGhost, is capable of stealthily establishing itself in a system and spreading across large corporate networks infecting both workstations and servers,” explain Vladas Bulavas, malware analyst, and Anatoly Kazantsev, Chief Solutions Architect, both at Kaspersky Lab. “This type of hidden consolidation is typical of miners: the more machines that get infected and the longer they remain that way, the greater the attacker’s profits.”

As a result of PowerGhost and other cyberthreats targeting corporate servers, the enterprise threat landscape has shifted its emphasis from ransomware to cryptojacking. “Corporate users bore the brunt of the attack,” Bulavas and Kazantsev continue. “it’s easier for PowerGhost to spread within a company’s local area network.”

The Skybox Security report confirms this trend. “Notably, cryptominers had the highest increase in the number of new malware attacks, from seven percent of reported attacks in the second half of 2017 to 32 percent in the first half of 2018,” the report says. “At the same time, ransomware — the darling of cybercriminals in years past — saw a decline in attacks, essentially swapping market share with cryptominers. While ransomware and the other malware families are still a concern, malicious cryptomining has simply proved too attractive in terms of return on investment.”

Cryptojacking can no longer operate under the covers. Every CISO must understand the significance of this threat, and rank cryptojacking among the top cyberthreats facing the enterprise. Complacency is no excuse – especially as cryptojacking spreads to the point that the entire corporate IT environment collapses under its weight. The time to take action is now.

Intellyx publishes the Agile Digital Transformation Roadmap poster, advises companies on their digital transformation initiatives, and helps vendors communicate their agility stories. As of the time of writing, none of the organizations mentioned in this article are Intellyx customers. Image credit: S. Brickman.

Michael Cohen's Secret Tapes Top This Week's Internet News

If it’s summer, California must be on fire. And if that’s not enough dystopia for you, there’s always the fact that DNA-testing service 23AndMe is selling clients’ information to drug manufacturers, or the emergence of mutated HIV strains that cause illness quicker than others, not to mention the president apparently threatening war with Iran for no immediately discernible reason. Yes, the world keeps on turning towards the very worst incarnation of itself, it seems, but it’s not all bad; at least there’s a new Mission: Impossible out this weekend. And until you can get yourself to a fine purveyor of popcorn-fueled escapism, please do enjoy this primer on what the internet has been discussing over the past seven days or so.

Michael Cohen’s Basement Tapes

What Happened: Cohen, a man who had previously announced that he would take a bullet for Donald Trump, has apparently reconsidered his position.

What Really Happened: Remember when people were wondering if Trump’s personal attorney being under criminal investigation meant he might turn on Trump? As it turns out, the answer is definitely yes.

How willing, exactly? This week provided a clue, when Cohen released one of the tapes to CNN.

The recording—one of many, apparently—was a big deal on a couple of fronts. First off, it apparently confirms that Trump knew about Cohen’s secret payments, which raises questions about whether he’s complicit in campaign finance violations. And then there’s the mention in the tape that Trump Organization CFO Allen Weisselberg knew more than people had suspected, which could open up an entirely different front on investigations into Trump’s business. (Since the tape’s release, it has since emerged that Weisselberg has been subpoenaed to testify by federal investigators, deepening the idea that this tape could potentially be a game changer.) Not that any of that was enough to convince everyone of the tape’s importance:

Still, it’s not as if Cohen had any other beans to spill, right? …Right?

Surely this’ll go well.

The Takeaway: Tantalizingly enough, this seems to be only the beginning of the revelations.

We Have Always Been at War With the Fake News Media

What Happened: All those “Big Brother” jokes began to seem even less funny when President Trump appeared to adopt the language and posturing of George Orwell’s 1984 during a speech this week.

What Really Happened: Traditionally, presidents don’t engage in politics while speaking at events for veterans. Then again, the sitting president is a walking “don’t.”

Well, the National Convention for the Veterans of Foreign Wars sounds entirely reasonable. Surely, the president couldn’t do anything utterly outrageous while there!

That last line in particular drew some comparisons to some famous literature on Twitter:

Actually, it wasn’t just Twitter that noticed. Remember when, around the time of Trump’s inauguration, sales of 1984 jumped? Let’s consider those people market leaders.

As Trump’s comments gained a lot of attention, it should be noted that the VFW was a little stunned itself.

Reports from those on the ground suggested a more complicated response than might have come across, however:

Well, at least the president got to impart some important information that wasn’t just about the media being the enemy of the people to all the veterans.

The Takeaway: You know what? Maybe we’re being too unkind, and the President was thinking on a scale the rest of us rarely consider.

You Come For One, You Come For All

What Happened: It’s unsurprising that the White House is at war with the press. Slightly more surprising, however, was the response of the press.

What Really Happened: While we’re talking about President Trump’s dislike of the media…

That’s CNN’s White House reporter Kaitlan Collins on Wednesday, making passing comment about questions she’d asked during a presidential appearance that morning that Trump had ignored entirely. It was a snarky comment, sure, but also one that accepted the reality: Reporters ask questions, and presidents get to ignore them. That’s how things work. Later that day, however, it was revealed that the White House really wasn’t a fan of those questions:

It’s perhaps worth noting that the White House’s dislike of Collins might have as much to do with the fact that, a day earlier, she had broken the story that the White House would no longer be releasing public summaries of calls between the president and other world leaders. Nonetheless, as the media started reporting the story, journalists from other outlets closed ranks around Collins.

How bad did this look? Bad enough that one of the president’s closest advisors turned against him on this particular topic.

Well, if Fox was against it, surely the president would change his mind!

The Takeaway: Does the White House understand how journalism works? Actually, no; don’t answer that. Anyone who’s been paying attention already knows the answer.

Sometimes, You Can Try to Punch Too Far Up

What Happened: Turns out, not everyone wants to get into a fight with the deputy attorney general of the United States.

What Really Happened: You know what Republicans really can’t stand, it seems? Someone trying to do their job in law enforcement. We’ve had the president fire an FBI boss, and this week, Republican members of Congress decided it was time to take down the deputy attorney general.

Yes, GOP lawmakers introduced articles of impeachment against the man in charge of the Russia investigation. This definitely seemed like a big deal:

That said, some Democratic lawmakers weren’t impressed by the effort.

Neither was a former deputy attorney general, as it turned out…

…nor the current attorney general.

Still, at least House Speaker Paul Ryan was in favor of the move. No, wait a minute…

With this kind of response, it’s no surprise that the effort stalled out within 24 hours:

The Takeaway: With this move off the table, Jim Jordan—who not only co-sponsored the bill, but is also ignoring the sexual abuse scandal he’s involved in from his days at Ohio State—announced that he was running for Speaker of the House. Because of course he is. This just in: Shameless terrible people are shameless, terrible.

There Has To Be a Shadowfax Pun Here Somewhere

What Happened: President Trump really wants to get to the bottom of the latest abuse of power by the smug elite. Unfortunately, it’s not real.

What Really Happened: Hey, kids! Have you heard the news about the hot new trend?

Yes, shadow banning is back—and this time, it’s not for sex workers forced off Twitter because the platform is afraid of SESTA. Actually, I shouldn’t be that sarcastic; sex workers actually are being impacted by changes in search and notifications on Twitter, and conservatives… aren’t. But it’s easy for them to believe otherwise, especially when combining their natural paranoia and a story from Vice that told them they were being shadow banned on Twitter. Sure, Vice isn’t normally one of the right wing’s preferred information sources, but things are different when they’re saying you definitely are being oppressed.

As the story began to gain traction elsewhere in the media—including this very organ—something started to become clear: Twitter wasn’t shadow banning conservatives. Instead, as the original piece Vice’s story drew from made clear, the platform was apparently demoting controversial material in search, with even that being inconsistent to the point of it seeming more like a bug than a feature—something that the company admitted when pressed on the issue. Some on Twitter wondered if “shadow banning” could be a new explanation for something else.

The Takeaway: Oddly enough, while this was going on—or not going on, as the case may be—there was far less outcry about the fact that Alex Jones, the performative paranoiac behind Info Wars who threatened to shoot Robert Mueller this week, was temporarily suspended on both YouTube and Facebook Thursday. Perhaps even conservatives are glad to see him shut up, even if it’s only for 30 days.

More Great WIRED Stories

New Senior Is Getting Old

I recently sold my position in SNR after as disappointing ride up and then down on several occasions. With further downside probable, I’m staying away from this stock for awhile.

After researching some of the trends in healthcare REITs it was evident that many are diversifying away from Skilled Nursing Facilities and into other types of healthcare assets. I recently wrote a report on Sabra’s focus on increasing its Senior Housing assets through acquisition. Knowing we had New Senior Investment Group (SNR) in our portfolio and in light of the company’s recent announcement of a Strategic Review, I thought it prudent to take a closer look – and in fact – SNR was due for an update anyway.

Company Profile and Strategy

New Senior Investment Group is a publicly-traded pure-play senior housing (SH) REIT with a geographically diversified portfolio of SH properties across 37 states in the US. SNR’s portfolio comprises 133 properties including independent living (IL) facilities, assisted living/memory care, and a continuing care retirement community, of which a third are located in California, Florida, and Texas. These three states account for a third of total annualized net operating income (NOI) and it wouldn’t be surprising to me that at least Florida and Texas continue to grow as more and more baby boomers need senior housing and especially after the recent tax law changes make it much more attractive to live in low tax states.

Source: SNR Investor Presentation 1Q 2018

The properties, governed by either property management agreements or triple net (NNN) leases, roll up to the company’s two reportable business segments: Managed Properties – comprising the managed portfolio, and Triple Net Lease Properties comprising the NNN portfolio. The managed portfolio, composed of 51 IL and 30 AL/MC facilities, makes up about 61% of total investments made, generates 76% of annualized revenue, and contributes 49% to annualized NOI. Meanwhile, the NNN portfolio, composed of 51 IL facilities and one continuing care retirement community (CCRC) makes up the other 39% of investments, generates 24% of revenue, and contributes 51% to annualized NOI.

Source: SNR Investor Presentation 1Q 2018

Under NNN agreements, the operator is SNR’s tenant and is therefore obligated to make rental payments for use of SNR’s owned properties. The operator is responsible for day-to-day operations and expenses (e.g. related to property maintenance, insurance, capital improvements, and property-level staff-related costs) and generates its own revenue through the facilities’ operations. Because SNR does not have any direct responsibility for operating expenses, which fall on the operator, it is imperative that they closely monitor their operator’s performance for any signs of deteriorating fundamentals.

On the other hand, under property management agreements, the property manager is responsible for day-to-day operations and are paid a management fee for their services. The fee ranges from 3% to 7% of a property’s gross revenues, and in some cases, may include an incentive fee based on the properties’ performance.

SNR generates revenue from resident and service fees in the managed portfolio, and from rent in the NNN portfolio. The company’s ability to grow revenue is largely dependent on occupancy rates, contractual rate escalators, the effective administration of the properties by the operators/property managers, and appropriate operating cost controls in the case of operators. Currently, a single operator/manager, Holiday Retirement, accounts for 82% of total annualized NOI and controls 77% of the properties in aggregate belonging to both NNN and managed portfolios. While Holiday is a strong operator, the high level of concentration should be noted as a potential risk.

Source: SNR Investor Presentation 1Q 2018

Strategy and Objectives

SNR’s objective is to maximize shareholder value by optimizing investment opportunities in the IL and AL/MC segments within the senior healthcare market, where demand is strong due to significant increases in the senior citizen population, moderate levels of new construction, highly fragmented ownership, and the viability of operational improvements, which are attributed to the economies of scale enabled and enjoyed by its largest operator/manager, Holiday. SNR believes its focus on IL and AL/MC allows its investors to maximize market opportunities with lesser risk than that associated with higher acuity types of healthcare real estate.

SNR launched a strategic review in February 2018 with the aim of identifying strategic alternatives to maximize shareholder value. To date, the only announced outcome of the review is the decision to terminate the NNN leases with Holiday and to subsequently reposition the associated NNN properties into Holiday’s managed portfolio. On the surface, this move undoes the almost 50-50 property distribution between the NNN and managed portfolios, without impacting pay and operator/manager mix.

Source: SNR Investor Presentation 1Q 2018

The move is believed to benefit SNR by providing an upside of $116 million from termination fees and retained security deposits, allowing for the elimination of underperforming NNN properties, improving Holiday’s performance through new property management agreements with a variable performance/incentive scheme, and potentially increasing yield from 7.7% to ~8%. Beyond these ROI improvements, the greater benefit SNR sees is the flexibility a managed portfolio affords compared to NNN, in terms of accessing less cumbersome debt options and moving assets around among operators/managers – although there are no plans to do the latter at the moment. In any case, the flexibility to change operators is a key driver of minimizing the concentration risk even if, at least initially, the same percentage of properties will be managed by Holiday.

1 st Quarter Results and Update on the Strategic Reviews

SNR reported declines across key financial metrics in the first quarter. Net operating income (NOI) was $47.1 million, down by 15% from the same period last year and representing a net loss of $13.3 million. Normalized funds from operations (Normalized FFO) was $0.21 compared to $0.30/0.29 for the same period last year and adjusted funds from operations (AFFO) was $0.20 from 0.27. The declines were attributed to the sale of 19 properties in 2017 and decreased occupancy in the first quarter.

Source: 1 st Quarter Supplemental Information

Decreased occupancy was observed more in the managed portfolio, where occupancy dropped to 84.7% from 86.1% for the same period last year and 85.8% in the previous quarter. It was primarily attributed to competition from other senior housing developments and the seasonal flu. Meanwhile, NNN occupancy was flattish from 87.5% in the same period last year and 87.7% last quarter to 87.4%. Between IL and AL/MC, the former was observed to be more resilient to headwinds.

During the earnings call, a question was raised about the comparative impact of new supply versus the flu season as causes of occupancy decline. SNR CEO Susan Givens’ responded by saying it is not really possible to precisely point out which factor affected occupancy more and by how much. She remarked however that, based on operators’ feedback, this recent flu season presented more of a setback than in previous years. Further, implying that occupancy declines are seasonal and manageable, she mentioned that in the past year, substantial upticks in occupancy were noted in the 3rd quarter leading into the 4th quarter, particularly in the portfolio of Holiday after model changes were implemented. There was no indication that the company expected the same to happen this year, although the comments might suggest that that is the case.

There were no concerns raised about the quality of the company’s assets or any particular operator/managers’ performance during the earnings call. This could be taken as an indication that SNR’s portfolio and relationships are sound within the current framework of the business. What can be surmised from questions that attempted to tease out more details about the strategic reviews and SNR CEO’s reply is that the reviews and recently announced repositioning are meant to address issues of a structural nature, to ensure the right level of returns flow to investors and shareholders.

According to Givens:

We still feel good about the industry but the steps we are taking right now are really more focused on kind of our structure and making sure that we can create a good platform structurally that will enhance shareholder value. And so, I think the assets are sound some of the structural elements or kind of what we’re really focused on kind of really make sure that investors and shareholders get the value they should.

Asked about the timing of the conclusion of the reviews, Givens’ response was that no specific timelines have been announced, but that all parties involved (i.e. every single board member, the special committee, and others such as herself) are actively engaged in the exercise. She also emphasized that everyone’s goal is for the process not to be long drawn out.

The glaring risk readily gleaned from the earnings call is the uncertainty surrounding the strategic reviews, especially without specifics on the motivation and target agenda. On a related note, while SNR discussed the benefits expected from the termination of Holiday’s NNN leases and the repositioning of the associated properties into the managed portfolio of the same operator/manager, there is also little certainty around what the next actions for the newly configured portfolio will be. This is in light of Givens’ comments that the refinancing for the managed portfolio will be shorter term and with a costless pre-termination option, and that the management agreements would allow a level of flexibility to move properties to other operators – both features the NNN leases did not permit. Whether management has some doubts about Holiday are uncertain and they didn’t let on during the call that there was anything amiss. Still, I wonder why the big structural move to increase flexibility to move assets to other operators unless there was a legitimate concern. That, or management’s realization that not having the flexibility to move assets in light of the concentration issues, was a big risk.

Outlook for 2018

With Givens qualifying occupancy declines as an effect of seasonal and manageable factors, there was a sentiment that business will eventually pick up as the year progresses, in spite of overall underperformance in the first quarter. This sentiment, however, was overshadowed by the sense of uncertainty due to the ongoing strategic reviews, for which details have not been communicated to the public, and to a lesser extent, the outcome of NNN termination and repositioning activities, with the latter inviting questions on the company’s longer term plans, for example as regards to diversification from operator/manager and property-type standpoints.

While the currently high concentration on Holiday and IL may be viewed as a sign of the company’s high esteem in this operator/manager and property type, it may also be seen as a kind of provisional or transitional state, pending the conclusion of the strategic reviews. This notion is not unlikely, given SNR CEO’s multiple remarks on the company’s need for flexibility as the rationale, and also a benefit of the NNN lease termination and repositioning.

Valuation and Dividend Sustainability

SNR is down 24% over the last year and currently pays a 13% dividend. On a Price/AFFO basis, it’s difficult to determine a relative valuation because the stock lacks a long enough history to evaluate its long-term trading range. That’s important because although price/AFFO ranges can change for most stocks, they tend to stay consistent on a relative basis versus peers for a long-time. Some stocks always trade at a premium to their peers in the same industry either because of more predictable revenue streams, a more robust business model, name-brand recognition, or a number of other factors. We just don’t have enough history with SNH to determine that at the moment.

That said, many investors may have bought the stock not for its potential price appreciation but its hefty dividend. After recent results in which AFFO was $0.21 per share while dividends paid were $0.26 per share, I question whether the dividend is sustainable. The company does have plenty of cash on hand, but the last thing you want as an investor is for a company to dip into cash, or worse, raise capital to fund a dividend.

Our fair value estimate of the stock is around $7.50 and is driven by a decrease in next year’s AFFO, as well as a high level of uncertainty that warranted using a higher discount rate. Despite the stock looking fairly valued, however, there is considerable risk to the downside and in particular since there is no finalization of its Strategic Review.


I bought SNR on several occasions over the last 10 months and added to my initial position. On several occasions over that period I have rebalanced the position and bought and sold on several occasions generating a slight loss in the process – at least on a price return basis . Since I initially bought the stock, it has been down 8% on a total return basis, although my losses were lower. I did collect on the dividends and currently have an unrealized gain on the position in the portfolio, but it’s time to cut loose this sweet dividend until there is more clarity on the horizon.

As I wrote about last week, I believe Sabra Healthcare (SBRA) is a good candidate to replace SNR, particularly that it is now moving to diversify its portfolio by investing in Senior Housing assets.

Disclaimer: Please note, this article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It is intended only to provide information to interested parties. Readers should carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances.

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Disclosure: I am/we are long SBRA.

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Stocks To Watch: Apple, Harley And Tesla On The Marquee

Welcome to Seeking Alpha’s Stocks to Watch – a preview of key events scheduled for the next week. Follow this account and turn the e-mail alert on to receive this article in your inbox every Saturday morning.

Will Apple (NASDAQ:AAPL) percolate right along after earnings unlike the tracks of Facebook, Netflix and Twitter? Investors find out on July 31 as Apple cruises into the report to expectations of revenue of $52.3B, EPS of $2.23 and iPhone shipments of 41.6M units. The iPhone X impact on ASP and margins will be on display again. Looking ahead to FY19, Loup Ventures analyst Gene Munster predicts iPhone unit growth of 3% to top the flat unit growth forecast by the Street. It’s time to hear from the Labor Department on jobs, with the Employment Situation report due out on August 3. Economists expect nonfarm payrolls to drop to 195K from 213K a month ago and for the unemployment to dip to 3.9% from 4.0%. Average hourly earnings are forecast to be up 0.3% M/M and 2.7% Y/Y. While labor inflation hits certain sectors harder than others and can impact corporate profits, analysts note that the +75% YTD increase in corporate buybacks this year adds at least a little political pressure for wage growth to track higher. Also, don’t sleep on those China PMI numbers due out on July 31. The CNY/USD gyrations have been a popular topic with execs on Q2 earnings calls explaining away their guidance updates.

Notable earnings reports: Caterpillar (NYSE:CAT), Seagate Technology (NASDAQ:STX), Illumina (NASDAQ:ILMN) and Transocean (NYSE:RIG) report on July 30; Apple, Baidu (NASDAQ:BIDU), Pandora (NYSE:P), Pfizer (NYSE:PFE), Akamai Technologies (NASDAQ:AKAM), Procter & Gamble (NYSE:PG) and BP (NYSE:BP) are scheduled for July 31; Tesla, Fitbit (NYSE:FIT), Zynga (NASDAQ:ZNGA), Wynn Resorts (NASDAQ:WYNN) and Square (NYSE:SQ) spill numbers on August 1; Alibaba (NYSE:BABA), GoPro (NASDAQ:GPRO), Activision Blizzard (NASDAQ:ATVI), MGM Resorts (NYSE:MGM), Yum Brands (NYSE:YUM), CBS(NYSE:CBS) just days after the Moonves allegations, Take-Two Interactive Software (NASDAQ:TTWO) and DowDuPont (NYSE:DWDP) step up on August 2; and Berkshire Hathaway (BRK.A, BRK.B) and Kraft Heinz (NASDAQ:KHC) are the headliners on August 3. See Seeking Alpha’s Earnings Calendar for the complete list of earnings reporters.

Spotlight on Tesla: The EV automaker is in line to spill earnings on August 1. Once again, the company’s updates on the Model 3 ramp and full-year S/X/3 production guidance will steal the headlines from the quarterly numbers, although the non-GAAP automotive margin rate and average selling prices are starting to become more significant as the company scales up. There’s no question that Tesla’s (NASDAQ:TSLA) conference call is a must-hear event. Check out Seeking Alpha’s live blog on the twists and turns of the Q&A – no matter if you are a Tesla advocate or a skeptic.

IPOs expected to price: Cushman & Wakefield (CWK) and Sonos (SONO) on August 1; Arlo Technologies (ARLO) on August 2.

IPO lockup expirations: Corp America Airports (NYSE:CAAP), Hudson (NYSE:HUD), Sol-Gel Technologies (NASDAQ:SLGL), One Stop Systems (NASDAQ:OSS) and Central Puerto (NYSE:CEPU) on July 31; FTS International (NYSE:FTSI) on August 1.

Central banks spotlight: The FOMC meets on July 31-August 1 amid expectations that it will confirm its plan to stay on a path of gradual rate hikes. BNP Paribas anticipates some slight marking up of the Fed’s language will be the extent of the action until a rate hike is fired off by the policy-making committee in September. There won’t be too much drama with the Bank of Japan meeting on July 30-31, although some finetuning of market operations is likely to tweak the ultra-loose policy. BNP also sees the potential for the BOJ to modify the composition of ETF buying. Meanwhile, a “dovish” 25 basis point rate increase is expected out of the Bank of England when it meets on August 1-2.

Projected dividend increases: Cboe (NASDAQ:CBOE) to $0.30 from $0.27, Dover (NYSE:DOV) to $0.50 from $0.47, Federal Realty (NYSE:FRT) to $1.03 from $1.00, Illinois Tool (NYSE:ITW) to $0.97 from $0.78, Kraft Heinz (KHC) to $0.65 from $0.625, MSCI (NYSE:MSCI) to $0.50 from $0.38, ResMed (NYSE:RMD) to $0.38 from $0.35, Simon Property (NYSE:SPG) to $2.00 from $1.95, American States Water (NYSE:AWR) to $0.275 from $0.255, Cheesecake Factory (NASDAQ:CAKE) to $0.33c from $0.29, Cogent Comms (NASDAQ:CCOI) to $0.54 from $0.52, Cognex (NASDAQ:CGNX) to $0.050 from $0.045, Chemed (NYSE:CHE) to $0.30 from $0.28, Jack in the Box (NASDAQ:JACK) to $0.45 from $0.40, Littelfuse (NASDAQ:LFUS) to $0.41 from $0.37, Resources Connection (NASDAQ:RECN) to $0.13 from $0.12, Sturm Ruger (NYSE:RGR) to $0.33 from $0.32, Scotts Miracle-Gro (NYSE:SMG) to $0.55 from $0.53.

Motorcyle magic: Harley-Davidson (NYSE:HOG) plans to update investors on its “accelerated” business strategy. The information release will include ways Harley expects to unlock new markets and segments (electric update?) and create broader access to customers. Of course, Harley is one of the poster companies for trade-related pain. Last week, Harley CFO John Olin said steel and aluminum tariffs will cost the company $15M to $20M and EU tariffs will impact it negatively by $30M to $35M. Harley execs are working with the Trump Administration and European government officials to try to find relief. HOG shares have cut into their YTD loss, now showing as down about 13%. Harley’s update could be of interest to traders of other recreational vehicle-related stocks such as Polaris (NYSE:PII), Textron (NYSE:TXT), Arcimoto (NASDAQ:FUV), LKQ (NASDAQ:LKQ) and Winnebago (NYSE:WGO) depending upon which way it goes.

Upcoming stock splits: The payable date for a 3-for-1 stock split by PSB Holdings (OTCPK:PSBQ) is on July 31. After the split, PSB will have about 4.5M shares outstanding.

Long Island shade: Bernstein has a look ahead on the U.S. airlines sector in a report amusingly titled Why the group is catching a bid (and why you shouldn’t take your airline shorts to the Hamptons. “We continue to expect the industry to manage for profit over share or other considerations in the face of higher oil prices, and see further room for sentiment to improve,” writes analyst David Vernon. Bernstein is Overweight the U.S. airlines sector as a whole and ranks (in order) Delta Air Lines (NYSE:DAL), American Airlines Group (NASDAQ:AAL), Southwest Airlines (NYSE:LUV) and United Continental (NYSE:UAL) as top picks.

Analyst/investor meetings: Cardiovascular Systems (NASDAQ:CSII) on July 31.

Focus on community banks: Keefe, Bruyette & Woods’ nineteenth Annual Community Bank Investor Conference is scheduled for July 31-August 1 in New York City. The meeting of community bank execs includes participation from First Internet Bank (NASDAQ:INBK), QCR Holdings (NASDAQ:QCRH), Bank of Marin Bancorp (NASDAQ:BMRC), Byline Bancorp (NYSE:BY), Capital City Bank Group (NASDAQ:CCBG), Hanmi Financial (NASDAQ:HAFC), United Community Financial Corp. (NASDAQ:UCFC), MVB Financial Corp. (NASDAQ:MVBF), MutualFirst Financial (NASDAQ:MFSF) and Midland State Bancorp (NASDAQ:MSBI). The conference arrives with the community bank sector buzzing with M&A activity.

FDA Watch: Pdufa dates are on the calendar for Progenics Pharmaceuticals (NASDAQ:PGNX) with its Azedra NDA and United Therapeutics (NASDAQ:UTHR) for its resubmitted NDA for RemoSynch. July 31 is the decision date on Mylan’s (NASDAQ:MYL) generic to Allergan’s (NYSE:AGN) Restasis for dry eyes.

M&A watch: The merger of Capella Education (NASDAQ:CPLA) and Strayer Education (NASDAQ:STRA) is expected to close on August 1 after the companies get past the walk date of July 31. The final extension date on the called off Sparton (NYSE:SPA) – Ultra Electronics (OTCPK:UEHPY) merger arrives this week.

Energizing stuff: It’s a busier week than normal setting up in the energy sector as a number of data reads are due to arrive on top of earnings reports. Releases include a forecast of Cushing crude inventory, the API weekly report on U.S. oil inventory, EIA’s monthly crude/natural gas report, the Baker Hughes rig count and a Bloomberg OPEC production survey and monthly tanker tracking estimate. LNG stocks could also be volatile as President Trump’s goal of seeing Europe buy “massive” amounts of the fuel either gains steam or loses momentum. Cheniere Energy (NYSEMKT:LNG), NextDecade (NASDAQ:NEXT), Gazprom (OTCPK:OGZPY), Tellurian (NASDAQ:TELL), Cabot Oil & Gas (NYSE:COG), EOG Resources (NYSE:EOG) and Devon Energy (NYSE:DVN) are some of the companies that could be impacted by new LNG developments.

U.S. auto sales: Manufacturers report on U.S. sales on August 1. Edmunds expects U.S. auto sales to fall back 2.3% Y/Y in July to 1.378M units. The research firm estimates a seasonally adjusted annual rate of 16.7M for the month. “With market factors such as rising interest rates keeping shoppers at bay, we expect to see a continued slowdown of the vigorous sales pace that the industry experienced in the first half of the year,” says Edmunds analyst Jeremy Acevedo. July forecast by automaker – General Motors (NYSE:GM) -1.0% to 224K, Toyota (NYSE:TM) -7.0% to 207K, Ford (NYSE:F) -1.5% to 196K, Fiat Chrysler (NYSE:FCAU) +2.7% to 166K, Honda (NYSE:HMC) -6.8% to 141K, Nissan (OTCPK:NSANY) -5.0% to 122K, Hyundai/Kia (OTCPK:HYMLF) -1.3% at 109K, Volkswagen (OTCPK:VLKAY) +4.5% to 48K.

Macau: Gross gaming revenue numbers for July are due out sometime during the week. Analysts expect GGR growth to come in between +10% to +12% for the month, based off channel checks that indicated a VIP hold rate lower than normal. Revised full-year GGR forecasts from research firms following the release could move Wynn Macau (OTCPK:WYNMF, OTCPK:WYNMY, WYNN), Sands China (OTCPK:SCHYY, OTCPK:SCHYF, LVS), MGM China (OTCPK:MCHVF, OTCPK:MCHVY, MGM), Galaxy Entertainment (OTCPK:GXYEF), SJM Holdings (OTCPK:SJMHF, OTCPK:SJMHY) and Melco Resorts & Entertainment (NASDAQ:MLCO).

National Avocado Day: Chipotle (NYSE:CMG) is offering free guacamole as part of an online/app-only marketing promotion on July 31. Shares of Chipotle are already celebrating the event, up 6% since the restaurant company reported Q2 earnings.

Box office: Ethan Hunt is back and he’s not fooling around, with Paramount’s (NYSE:VIA) Mission: Impossible – Fallout debuting in a staggering 4,386 theaters. The theater tally marks the seventh largest U.S. opening of all-time, according to Box Office Mojo. The latest Mission Impossible installment is expected to bring in +$50M during the weekend to easily outpace the $18M seen being delivered by Universal’s (NASDAQ:CMCSA) Mamma Mia! Here We Go Again and $16M from the debuting Teen Titans Go! To the Movies from Warner Bros. (NYSE:TWX).

Barron’s mentions: Triton International (NYSE:TRTN) is trotted out as a shipping play that looks like a winner and yields close to 7%. The publication is sticking with its bullish view on Facebook (NASDAQ:FB) after the monster slide. “Outside of technology, it’s hard to find big companies with similar growth and valuations to Facebook and Alphabet,” wrote Andrew Bary. Fiat Chrysler, GM, XPO Logistics (NYSEMKT:XPO) and First Republic (NYSE:FRC) are also mentioned in the issue as undervalued, while Pioneer Natural Resources (NYSE:PXD), Medicines Co. (NASDAQ:MDCO), Cooper (NYSE:COO) and Idexx Laboratories (NASDAQ:IDXX) are called stocks that could help reduce portfolio risk and boost growth.

Sources: EDGAR, Bloomberg, Financial Post and Reuters.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Twitter to prioritize fixing platform over user growth, shares plunge

SAN FRANCISCO (Reuters) – Twitter Inc (TWTR.N) on Friday reported fewer monthly active users than analysts expected and warned that the closely-watched figure could keep falling as it deletes phony accounts, sending shares sharply lower in early trading.

FILE PHOTO: People holding mobile phones are silhouetted against a backdrop projected with the Twitter logo in this illustration picture taken September 27, 2013. REUTERS/Kacper Pempel/Illustration/File Photo

The company said the work it was doing to clean up Twitter by purging automated and spam accounts had some impact on its user metrics in the second quarter, and that it would prioritize work to improve suspicious accounts and reduce hate speech and other abusive content over projects that could attract more users.

Monthly active users fell by 1 million in the second quarter from the first to 335 million. Analysts had expected a gain of 1 million users, and the results could harden concerns that Twitter lacks a clear strategy to grapple with various platform problems and grow usage and revenue together.

Twitter said the decline in the third quarter would be in the mid-single-digit millions, suggesting a sequential decline to around 330 million users. Analysts, on average, had expected 340 million monthly active users in the third quarter, according to Thomson Reuters I/B/E/S.

Twitter shares fell 16 percent in pre-market trading.

Twitter, like bigger rival Facebook Inc (FB.O), has been under pressure from regulators in several countries to weed out hate speech, abusive content and misinformation, better protect user data and boost transparency on political ad spending.

“We are making active decisions to prioritize health initiatives over near-term product improvements that may drive more usage of Twitter as a daily utility,” the company said in a shareholder letter accompanying the results.

Chief Executive Jack Dorsey said in a statement that daily users grew 11 percent compared to a year ago, saying this showed that addressing “problem behaviors” was turning the service into a daily utility.

The company did not reveal the number of daily users.

Twitter had said earlier in July that deleting phony accounts would not have much impact on monthly users, since the purge focused on inactive accounts, a key metric for investors and advertisers. Twitter’s relations with advertisers have been strained by concerns about phony accounts bought by users to boost their following.

Revenue of $711 million, mostly from advertising and up 24 percent from last year, exceeded the average estimate of $696 million among analyst research aggregated by Thomson Reuters.

Twitter said it benefited from two weeks of the FIFA World Cup in the second quarter, with ads tied to the soccer tournament generating $30 million in revenue.

Profit was $100 million, with a $42 million boost due to a tax accounting move. Twitter turned its first-ever profit in the fourth quarter of 2017 and has been profitable ever since, but warned last quarter revenue growth would slow this year and costs would rise.

Earnings excluding items were 17 cents per share, in-line with analyst estimates.

Twitter has said increased video programming, including news shows and live sports, and investing in technology that automatically surfaces interesting content with limited user intervention should make the service appealing to first-timers.

Twitter said it lost some users due to the introduction of the General Data Protection Regulation in Europe in May but it did not note any revenue impact.

Twitter also saw usage fall after saying it would not subsidize users who accessed its application through text messages without paying messaging fees to wireless carriers.

The company increased its capital expenditures forecast for the year to between $450 million and $500 million, from $375 million to $450 million, as it expands and upgrades the computer infrastructure underlying its service.

Costs related to licensing video and powering automated analysis of user data increased overall expenses 10 percent to $631 million in the second quarter compared with a year ago.

Reporting by Paresh Dave; Writing by Meredith Mazzilli; Editing by Peter Henderson, Edmund Blair and Nick Zieminski

3 Ways to Create a Thriving Startup Culture

By Tom Petit, Co-Founder of Landis Technologies.

Bean bag chairs, basketball hoops, T-shirts and jeans; signs that say “Keep Exploring”; glass walls that partition the open space — it’s easy to mistake all the glossy shine as “startup culture,” since, well, the basketball hoop is so readily apparent when you first walk into the office. But is it enough to sustain the creativity, ambition and drive to make a startup successful?

People First

Most companies focus their interviews on the candidate’s educational background and professional experience. So when you interview with Landis, you might be surprised by one of the first questions we ask, “What do you like to do when you have a spare afternoon?” We ask this question because we want to know the real you. We want to know what drives you. We want to know that you’ll be comfortable bringing your whole self to work and participating in shaping our culture.

For early-stage companies, first hires are particularly crucial. They set the cultural tone moving forward. After the first 10 people, it becomes more difficult for founders to directly influence the office culture and they have to rely on early employees to perpetuate the startup’s values. Look for people who are grounded, enthusiastic, ambitious and passionate about your mission. Make it a point to take your prospective hires out to lunch and spend hours with them in the office to really get to know them. We learned over sushi that Devika, one of our first hires and a big country music fan, was learning to use chopsticks for her upcoming trip to China. We became excited to work with her and get to know her even better. She’s now a great part of the team.

Diversity of Thought

We’ve all heard this before: be intentional about diversity. But diversity can embody different things. In some workplaces, diversity means ignoring differences and remaining strictly politically correct at all times. In others, it can mean being accepting of backgrounds and experiences different from yours.

Early-stage companies take time to redefine what diversity means to them and why their version of diversity is important. Ask yourselves:

  • Which perspectives are important to build our company?
  • How do we want teammates to feel in the office?

At Landis, we eschew political correctness and don’t hesitate to make fun of each other. My co-founder is French, after all. But what we do value above all else is diversity of thought. We strive to create a space where people can be authentic, bring their experiences to the table and express strong contrarian opinions. (One of our employees has tattoos on half his body that have prompted incredible conversations about his experience in special operation forces!)

When we disagree, we remove egos and converse freely to attack a problem from all angles. Having diverse people in the room is necessary but it’s not enough. Diversity works best when it becomes fully part of the conversation.

Founders’ Role: Walking the Walk

At Landis, Cyril and I decided on a set of six values that were most important to us and the company. When we onboarded our first employee, we walked her through these values and what they meant to us.

But we quickly realized that we needed to do more than simply put our values up on the office wall. We have the biggest impact when we embody these values, when we refer to them in meetings and when we use them explicitly in making decisions. One of our six values is to have an action bias and “embrace failure.” When we started openly high-fiving and celebrating a mistake we made with a contract that cost us $6,000, our team felt empowered to take risks as well.

Another one of our values is to have fun and eat chocolate. We do our best to walk that walk too. So nowadays, when the office runs out of chocolate, teammates voice out that we’re not living up to our values. Cyril and I couldn’t be prouder of that.

Devika Kumar contributed to this article.