Twitter: Layoffs And A Comeback – Is This An Apple Déjà Vu?

While it was still a rumor, I wrote a small piece about the negative consequences of Twitter’s (NYSE:TWTR) layoff. Basically, my rationale is based on the idea that it could get harder for Twitter to use M&A as a way to get technology and human talent. Instantly, I was reminded by one reader that Apple (NASDAQ:AAPL) executed a layoff in 1997 and the company flourished ever since.

On another note, elaborated a profile on Jack Dorsey. After reading it, I couldn’t avoid thinking about a Steve Jobs 2.0 narrative. Readily, I questioned myself: “Is this a massive déjà vu worth considering?”

Photo credit: mkhmarketing

Apple’s layoff in 1997

So let’s take a good look at Apple’s layoffs. In February 1997, after one of the biggest quarterly losses in the company’s history, Apple announced a layoff. This decision was taken by Gil Amelio, Apple’s CEO at the time.

Let’s get the facts straight, when the acquisition of Next was concluded, in 9 February 1997, the layoffs had already been announced. Only then did Steve Jobs rejoined the company as an advisor.

Later, in July, Gil Amelio was ousted and Steve Jobs was brought back as interim CEO. This idea is important because having a CEO firing people and staying in the company is quite different from having a new CEO after a layoff program. Obviously, not having the guy who just fired 23% of the workforce around will help easing the tension.

In Apple’s case, we are dealing with two almost simultaneous events: a layoff that opened wounds among the workforce and a CEO that would prove to have a great vision for the company. In this case, the CEO impact outweighed the layoffs… but not by much.

Graph 1 – Apple vs the S&P 500 after Jobs return (July 1997) until February 2003

Looking at graph 1, we can see that during almost six years Apple just walked sideways. During the period, Apple performed just slightly better than the S&P 500 (NYSEARCA:SPY). The coming years would record a company capable of beating the market by a very wide margin. However, at the beginning of 2003 the market wasn’t so sure about it.

My point is: from 1997 to 2003, the company took a long time repairing and re-staffing in order to prepare for the huge growth spurt that would come. Graph 1 exhibits the struggle to stand out.

The discreet performance shown in graph 1 doesn’t support the idea that layoffs streamline a bloated company. Actually, I believe that layoffs severely damaged Apple as an organization, slowing down its progress for a long time. However, I am not implying that a company executing a layoff won’t be successful at a later stage. Companies like Apple have reemerged after painful layoffs, but as we saw it took a lot longer than expected.

Twitter’s layoff will affect around 8% of the work force. Additionally, it won’t happen right after the worst quarter of losses in the history of the company (which could ease the negative perception among the workforce). And finally, Jack Dorsey will be the man facing responsibility for the layoffs. This is a very different scenario from the one faced by Steve Jobs in 1997. Dorsey will be directly linked to the firings, Jobs wasn’t. Apple was in a very bad financial position, Twitter isn’t.

Bottom line is Twitter’s layoffs are a mistake that could have been avoided. The company did not need the financial savings from the jobs cut. This will only add attrition to a company that desperately needs to get its focus on the product.

Jack Dorsey and Steve Jobs

Several media outlets have been collating Dorsey to Jobs. In the end, I have to agree that both share some curious traits. For starters, both founded their own companies and then left in humiliation. After leaving, both created new companies. Dorsey is known for being a product guy and having a hard temper, just like Jobs. Finally, both returned to their original company riding a wave of hope and enthusiasm.

During the tenure of the previous CEO, the focus was on monetizing Twitter, now, the focus is back on adding and engaging users. Twitter’s stock market valuation seem to suggest that the company has an enormous potential to increase revenue. The industry is still looking for a service that disrupts the way content is aggregated and discovered.

Twitter seems to be on the right track in terms of content aggregation, but the main problem still rests on developing a product where the users are exposed to ads but not annoyed by them. Many industry experts consider Jack Dorsey to be the right guy to direct Twitter in solving this problem. Therefore, product development will be the key for Twitter and after Dorsey’s previous work at Twitter and Square it is hard to argue against his skills has a “product guy.”

Key remarks

The Apple déjà vu idea is not that farfetched after all. The comeback of the legendary leader will offer a morale boost and most of all it will bring a clear vision back to the company. On the other hand, the layoff will be like throwing a monkey wrench in the works. Most likely, this will end up slowing down the progress of the company just like happened with Apple back in 1997.

Although representing a meaningful part of the workforce, the savings with the 336 workers won’t bring profitability overnight. According, a software engineer at Twitter earns on average around USD 130,000 yearly, using simple math we can estimate the yearly savings to be around USD 44 million give it or take it. Just to put this value in perspective, in 2014, Twitter presented losses around USD 577 million.

Even projecting for 2.7 billion in sales for Twitter in 2015, we will be facing a presently unprofitable company trading at more than 7 times revenues. More worrisome is the fact that the company still has to go through uncertain product development while competition is also trying to steal Twitter’s lunch. Additionally, layoffs won’t help much increasing the morale in the short term.

This might end up being just like Apple’s 1997 moment. The only problem is that it took Apple 6 years to get above average market returns in a consistent fashion.

Why Twitter Layoffs May Backfire… a Lot! published a rumor that Twitter (TWTR) may be readying a layoff plan. The rationale behind this move being the notion that the company’s headcount is bloated.

Recently, I’ve written an article about Caterpillar for seekingalpha where I dissected a lot of the negatives associated with layoffs from an investor’s perspective. Additionally, you can find a lot of the arguments behind my rationale in Dr. Edwards Deming books.

Photo credit: Andreas Eldh

However, the reason why I am writing this post is related with the fact that in the tech field there is one more negative driver for companies associated with layoffs. Acquisitions have played a very important role in Twitter’s strategy. Acquisitions have allowed the company to quickly build a set resources that, otherwise, would have taken a long time to assemble. More specifically, acquisitions have been an important source of human resources and human talent.

The fact that Twitter is now presenting itself as an impatient company towards its human resources may bring additional difficulties in closing future acquisitions. The M&A tech marketplace is very competitive. Sometimes, we might have several high profiled corporations competing to close the acquisition of a smaller company in order to get its patents and talented employees. Additionally, the owners of these smaller companies tend to be protective towards their venture, often, they demand guarantees that the employees and the company original purpose will be respected (among other things).

The fact that Twitter may be on the verge of firing lots of people (some hired through acquisitions) may deviate future acquisitions from the company. In the very competitive tech field, this move may prove very costly. Sellers may demand a higher price from Twitter or competitors may close the acquisition without having to top Twitter’s bid. Either way, if this rumor materializes I don’t think this will be good news for the company.

Tesla News: The Model X Is Here – Can It Support a 30 Billion Market Cap?

Tesla has just started to deliver the first batch of Model X units. As frequently happens in high level engineering endeavors, the Model X got around 2 years behind its original schedule.

For a common company, that time and again is struggling with liquidity issues, this could be a very bad sign. However, for a variety of reasons Tesla is not the common company and it was able to weather the 24 months delay without much trouble.

Design of some of the parts was one of the main causes for the delays. Fortunately, design is also responsible for some of the attractions in the Model X: the “falcon-wing” doors and a third row of seats.

Picture 1 – The Falcon Wings (Credit: Don McCullough)

Picture 2 – Third row seats (Credit: MotorBlog)

The goal behind these features is to facilitate the accommodation of children in the car and other typical family needs. Design has played an interesting role in Tesla. The company has given a refreshing new perspective to car design by introducing features (including technology) that other traditional constructors have been reluctant about. The end result is a very functional design coupled with refined aesthetics. Other interesting features include:

  1.  A panoramic windshield
  2.  Auto steering tech to steer the car away from an imminent side collision
  3.  Air filter that allows to compare the cabin to a hospital operating room
  4.  The top version of the Model X has performances comparable to sports cars, going from 0 to 60 mph in 3.2 seconds

In my view, the design and technological approach is providing Tesla with a slight edge over the competition. However, it doesn’t seem to be a moat wide enough to protect the company from the traditional problems of the auto industry.

The fresh look on design and the bold decisions regarding technology choices have given Tesla a first mover advantage over the traditional car constructors. However, companies like Audi, BMW and Porsche are starting to bring very competitive offerings to the market. Additionally, Tesla has offered the view that it could challenge the economics of the industry. But so far, it has been a struggle to achieve the break-even point. The company projected to share 60% of the parts with the older Model S during the first stages of development, however, now that the car is on production it only shares around 30% of the parts. This can’t be good news for a company trying to change the economics of the sector.

The expenses on R&D and plant tooling for the Model X had a considerable negative impact on Tesla’s results during the past 24 months. Now, the company can start diluting those costs over the units produced. Only time will tell if the simultaneous production of the Model S and Model X will bring Tesla to profitability because, right now, I find it hard to justify a Market Cap around USD 30 billion.

Stock Market Hysteria: Headline Trading

Financial markets have been acting like crazy. During the past few weeks, the ups and downs of the Street could be seen as symptoms of bipolar behavior from the standpoint of any psychologist. We have seen multiple established companies with swings in the stock price ranging 20%. This is sheer madness!

Analysts blame China and a soon-to-be hard landing of the Asian giant. Most likely, this errant behavior has been amplified by the algo trading so common these days. It’s hard to say if the unwinding of US’s QE is also having an impact but I believe so.  Shifts in the monetary fluxes cannot be disregarded as sources of stock marketing scares.

However, the presented reasons are just noise. Predicting a stock market downturn is no easy task and thinking that we can identify one main single driver that has the power to tell us the future, is just arrogance. Remember, the last crisis started with an overlooked mortgage system that ended up contaminating the whole system. Don’t go after big headlines, usually, the important things are happening under our noses. The trick has been the same since ever: find good stocks and keep them!

The Pros And Cons About Google’s Alphabet

The creation of the new holding company will have profound effects on Google (GOOG). The current structure, mixing organic initiatives with a kind of venture capital, has allowed for the emergence of interesting new services like Android and Chrome, that have strengthened Google’s position. However, it has also masked a lot of underperforming experiments.


(photo: Karen Horton)

Although, this might not be the currently accepted mainstream management philosophy, I believe that the current structure was good in terms of managing an innovative organization. It allowed for young initiatives to grow under the protection of Google’s cloak. Unfortunately, it also created a conglomerate discount on the company stock price.

So, the biggest advantage of this transformation lies on the fact that Google as a standalone business unit will have much cleaner financials. Investor can look at the search engine as the fillet mignon and value the company through sum of the parts. On the medium term, financial exercises striping Alphabet of all the money absorbing activities will become a common exercise between analysts. This is Wall Street’s dream.

Cooperation or Competition?

However, this new structure might create new obstacles to innovation within Alphabet. Firstly, will the usual freedom for employees to invest time in new projects be maintained? The creation of new cost centers might raise incentives to each business unit to compete between them, removing the possibility of employees allocated in a given unit to participate in new ventures elsewhere. Employees are considered a cost in the companies where they belong, therefore, to have them working for other units for free is helping others at the cost of our own budget. You can extrapolate the previous example to other types of resources. This myopic view is very common when the management allow silos within the organization.

You can’t handle the truth!

Secondly, disclosing detailed financials for incubated ventures might trigger a reaction from activist investors demanding for the management to get rid of the underperforming units. Obviously, this could meant the death of projects like the self-driving car, the Google Glass and Google fiber among others. Allowing investors to know where the money is going might not be the wisest thing to do in companies that bet so much in an uncertain variable like innovation.

No vision, no hope

Finally, the company might lose its purpose and unifying vision. Although, many of Google’s projects don’t seem to have much to do with search engines, the truth is several of the high profile projects respect the company’s main activity: creating audiences for ads.

Yes, creating audiences is Google’s main activity. The indexation of online information and development of a way to find it easily through something commonly known as search engine was the first step to dominate the online ad market. So, when the internet started to become a reality in mobile phones, Google was already working on an operating system. As the search market spread to mobile phones, Google was effectively working on increasing its audience.

Google Chrome and Chrome OS are also initiatives pursuing the goal of consolidating a loyal audience. From here on I am merely speculating, but I believe that the Google Glass, the self-driving car, the Google Fiber, and the Project Loon (internet balloons) are also projects respecting the pursuit of a broader audience. The Google Glass could expand Google’s dominance to augmented reality, which could mean increasing a lot the number of hours that each user passes using Google services (i.e., being part of the audience). The self-driving car could allow users to free up commute time that they can use to access the internet. Project Loon is about bringing the internet to remote areas thus increasing the audience. Even Calico could be seen by as a way to extend the life of its loyal audience (maybe too much Machiavelli on this one though).


Obviously, effective results will depend a lot on how this new structure is implemented in practice. Alphabet might end up being the best move that Google’s management has ever done to avoid becoming another dull corporation but it just seems to be the other way around. Wall Street is clearly euphoric with the idea of having detailed numbers for each unit, however, a conglomerate of individual units means raising walls within the company – which is exactly what decadent corporations do.

Google has beaten the broad market (SPY) by a heavy margin since the IPO. The secret sauce has been applied innovation. The new structure indicates that Google wants to become a conglomerate of diversified innovative business units. Although, this might seem interesting in theory, I think this might create a destructive competition within the company. For instance, I am not seeing Apple (AAPL) dividing its operations in standalone business units. We won’t see Apple creating a company for the Macintosh and other for the tablets. The Macintosh business unit would have never allowed the rise of the tablet unit knowing that it would end up cannibalizing the Mac sales. The tablets were allowed to grow and thrive thanks to a vision of a greater good for the whole company.

A Game of Thrones: Greece and the European Equities Decline

The Greek case shows that Europe has a laggard vision

Once again, the Greek government sold the Greek people. Paradoxically, it’s a defeat for Greece and for Europe. But above all, it’s a bad service to democracy. It seems like it doesn’t matter which side is governing a given country, the outcome will always be the one chosen in Brussels.

The old aristocracy reigns in Europe, they’ve left the common people have a taste of the purchasing power of the Euro. But now common folks are enslaved, bended by the very same Euro. Europe is building a laggard society to serve the old aristocracy.

My point focuses on the fact that the old grocery store math doesn’t work anymore. Economic systems resemble biology. They grow, evolve, adapt and mutate which makes them unpredictable. That is why the gold standard failed and any system that it’s based on a zero-sum philosophy will fail. However, the Neo-classic economy philosophy that rules Europe just can’t deal with this fact. They will keep screaming that the Sun circles the earth. Obviously, this won’t do us any good.

Without a vision of progress, Europe risks to repeat the errors of the past

They just can’t let go. It’s better to die in a world that they’ve always known than to let others pave the way to the future.

I once wrote these same words to describe the end of the Roman Republic. Look how closely this resembles to our reality. It’s not that farfetched to believe that the Euro zone might share the same destiny as the old Roman Republic.

But above all, the Greek government did a bad service to democracy. It will take a long time before any country will have the courage to empower an anti-establishment party. However, we have learned one important lesson: no one can try to negotiate with Europe holding a mere bluff. The next rogue government that tries to pull a trick against the EU must have an executable plan to leave the Euro (meaning Foreign Currency Reserves). Without that, the ECB will always pick the winner. And that is why I believe the Euro zone has started its decline. It might pass a long time before anyone tries to defy the EU, but when they do, they will be ready to break it. And by the Murphy’s Law, if something bad can happen, it will happen – it just didn’t happen this time.

The negative vision on the European society is a bad sign for European equities

Going forward, there can’t be much hope in any kind of long term outperformance by the European equity markets. The European retrograde elites are running the European companies based on a laggard set of management principles. This explains why, for example, Finland now a troubled country, lost Nokia (NOK) and Europe lost its jewel of the crown in the tech sector. Obviously, the old aristocrats don’t know much about smartphones and mundane stuff like that so in their perspective it was probably better to just get rid of it.

The United States with all its defects (and congress deadlocks) has by far a much better set of principles ruling the country. This is the main reason why, after I’ve started this blog to identify undervalued companies in Europe, I have been mostly identifying opportunities in the US. Europe is in decline and usually there aren’t that many opportunities in a context of slow death.

Going forward, European Jewels will just be a name. I’ll keep it but I could just call it Investment Jewels. It would probably do more justice to the blog, since I believe most of the opportunities are in the US (SPY), not in the decadent Europe.