Alphabet’s Other Bets Are Costly But The Stock-Market Should Remain Supportive… For Now

Alphabet Inc, formerly known as Google has just presented its 2015 results. Pretty decent earnings, by the way. But the novelty is the broken out earnings segment, comprising Google’s other bets.

So, now we know that the Other Bets provided $458 Million in Revenue against $3.5 Billion operating loss. Let’s see how the stock-market will accommodate this information during the next weeks. The loss is not huge when compared with the company’s earnings but, nevertheless, it is significant.

Back in August, I warned that the Alphabet’s new reporting method could be a risk, if shareholders initiate a movement to pressure Google to get rid of some of the money sucking bets. I keep my opinion that this could be roadblock on Google’s huge innovation track-record.

However, on the short-term, Google’s performance, the ownership structure and the stock-market sympathy towards the company, should be enough to keep things going smoothly for a while. But let’s not forget that one thing is to invest in moonshots when no one is seeing, other thing is to invest in moonshots when you are being closely watched.

3D Systems Intention To Drop The Consumer Market Might Be Rather Bullish

3D Systems has just announced its intention to leave the consumer market for 3D printing. The company officials argue that this will only have a 2% impact on revenues and it will improve profits in the medium term.

Several analysts have expressed doubts about this course of action. They argue that this is the end of the rationale behind sky-high valuations supported on the explosion of the consumer market.

I believe this reasoning is wrong. I’ve stated in a previous article that:

The company that is able to profitably explore two or three market segments will be the one to get the funds to fuel R&D to keep developing the process and eventually spill over the tech to other market segments. (…) 3D Systems has not been able to avoid the seduction of addressing the mass market. I believe it’s too early to try to focus on the mass market of individual consumers.

Basically, if the present shift in focus means that the company will start focusing on 2 or 3 profitable market segments, then I believe this is a very good sign for the long term of the company.

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!