"Going forward there is going to be a bigger push to increase advertising, which is still small given the size of their user base. The danger of course is that as you increase adverts your user base starts to drop because adverts decreases the user experience. I don't think that they have to reinvent the wheel when it comes to advertising though because over the last few years we have seen how Facebook, Snapchat, Twitter and other big social network companies have been able to include adverts but not diminish the user experience."
To market, to market to buy a fat pig. Patient, impatient and confident are words which have probably never got as much attention as they have over the last 12 hours! The reason? Janet Yellen and the FED's statement following their policy meeting. The FED removing the word patient from their statement was such big news that I got an alert from the WSJ and CNBC on my phone. Yellen said,"Just because we removed the word patient from the statement doesn't mean that we're going to be impatient." They will only begin to raise rates when they are confident.
The basic message from the FED was that they will increase rates at a slower rate than previously forecast partly due to lower growth forecasts and very low inflation. There is a bit of a catch-22 when it comes to raising rates because of the dollars influence on the the US economy. As traders have been anticipating an increase in interest rates, they have been buying dollars and other US assets, the result is a stronger dollar. The dollar is up 27% against the Euro over the last year. The impact of a stronger dollar though is to keep inflation down, hurt exports and dampen growth. Low inflation and lower growth means that interest rates need to stay lower for longer. If you are a trader the news is important and trying to get every bit of information that you can from the FED statement counts. For us though as investors it inconsequential. In 10 years time the companies that you own will still be doing their thing and this FED statement, the dollar move and impact on stock prices will be a distant memory. The only annoying thing is that you will have to pay a bit more for some of the companies now.
Company corner snippets
Yesterday the big news on the company front was the 4Q and full year results from Tencent. Given the high multiple that the stock trades on the results always lead to big moves of the share price; it is always hard to price a company that grows at 50% a year and then try to forecast what the company will look like in one or two years time.
Here are the numbers: Revenue is up 31% YoY to U$ 12.899 billion (4Q up 24% to U$973), operating profit is up 59% YoY to U$ 4.991 billion (4Q up 51%) and margins grew YoY from 32% to 39%! These numbers are generated from their huge user base across their different platforms, QQ has 815 million Monthly Active users (MAU) up 1% YoY. The big growth for QQ came from a 33% increase in MAU on smartphones and tablets, these users are the "next generation" and are the users that you want. WeChat grew its MAU by 41% to 500 million and Q-zone grew its MAU by 5% to 654 million. All in, across those three platforms they have a whopping 1.969 billion users or customers! Granted there will be over laps between users but even if you have the same user across the 3 platforms, you still have them looking at their smartphone for 3 different apps (more eyeball time).
Tencent are an e-commerce company but their current revenue breakdown puts them more into the entertainment/ gaming category, with 82% of their revenue coming form online gaming and only 13% from advertising. The remaining 5% comes from other divisions like their mobile banking operations or online retail. In the 4Q their online gaming revenue grew by 41% mostly driven by smartphones, which shows the value in the growth from the smartphone user base. There was bigger growth from online advertising, with growth of 75% for the 4Q, showing the bigger push to get advertising to the current users.
Going forward there is going to be a bigger push to increase advertising, which is still small given the size of their user base. The danger of course is that as you increase adverts your user base starts to drop because adverts decreases the user experience. I don't think that they have to reinvent the wheel when it comes to advertising though because over the last few years we have seen how Facebook, Snapchat, Twitter and other big social network companies have been able to include adverts but not diminish the user experience. The company has huge growth potential and as long as the Chinese government keeps the likes of Facebook out of China, there will be very little competition.
This morning the company was up 5% on the results which puts their P/E at a solid 44. When a company is growing profit by 50%, I don't think that P/E is the correct measurement of the cost of the stock. Another year of 50% growth (which isn't hard to imagine) puts the P/E at 22 forward. Looking forward two years it is completely possible that the stock will have a P/E in the teens, using todays share price. As a Naspers shareholder you get access to the stock at a discount! An update on the value of Naspers stake in Tencent works out to around R 711 billion, which when compared to Naspers market cap of R753 billion, either values Naspers' other businesses at almost nothing or you get a discount on the Tencent share price! Either way I think that Naspers still has legs both from growth in Tencent and from the growth in their other businesses. Definitely still a buy as it crosses the R 1 800 mark this morning.
Another company making waves, Anchor Group Limited, released their results after the market closed yesterday. The company had a lot to live up to with the share price going from R4 in September (with their IPO at R2) to over R10. They didn't disappoint so to speak with their HEPS up 301% and assets under management up 207%. They still have a large amount of growing to do to fit into their share price. The market likes the results with the stock up 4% today. It is great to see small companies making waves!
We're reading this, you should too.
We focus regularly on solar energy and how it is booming - 2014 Was the Biggest Year For Solar Power Ever. Given that solar is still less than 1% of the power generated in the US, this is a huge growth sector.
This is another piece from one of my favourite bloggers. In this piece he talks about the problem of sitting on cash and waiting for the next correction - The Psychology of Sitting in Cash. The best way to get solid long term returns is to be always adding. By doing this you average your price in and you are less worried about what prices are going to do because you know that you will be adding next month as well.
Given how prevalent the interest rate topic is at the moment here is a view that is slightly off from the main stream view - The weird way people talk about zero interest rates.
Home again, home again, jiggety-jog. The market is flying this morning, up 1.9%. Thanks to dollar weakness the Rand/ dollar dropped from R12.40 to R12. Gold stocks are up 5.3%, Naspers is up 7% and Sasol is over the psychological R400 level. All in all, we live in a global village and when something big happens in the US the ripples are felt throughout the "village".
Sasha Naryshkine, Byron Lotter and Michael Treherne
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