Money with a dash of Funny: July 2016

Friday 29 July 2016

Alphabet. Breathtaking. Class.

"In conclusion, this is a company that really has a huge growth business as their core business and many more lines in the water. This is definitely a huge growth business. They are creating future revenue streams that we couldn't envisage now, encouraging staffers to be creative (certainly rewarding them for it) and making life easier each and every day."

To market to market to buy a fat pig Stocks started stronger in the morning on the local front and then slid away during the course of the afternoon. Central banks in focus, there is also the pesky idea that the SABMiller and AB InBev deal is not exactly on the rocks, it is sailing in choppy waters, however. There may be SABMiller minorities who are jostling for a higher Pound price, on account of their Dollar value looking weaker, that should not really concern the global beer giant headquartered across the English Channel now, should it? Belgium is a wonderful country, they just so happen to also use the Euro, now don't they? The deal will go ahead in the end, the options for SABMiller shareholders are to take the money and run, or to see a much lower share price if they pulled the plug.

Locally we saw some softer unemployment data in recent days, sadly more jobs have been shed. Eish, there is some sort of Indaba today in the rich part of Johannesburg to solve the unemployment problems. Better than not looking for any solutions at all, the EOH sponsored event includes all folks from all quarters and will deal with internships at businesses, the money is there from government and I certainly welcome this initiative. Resource stocks were up three-quarters of a percent, the rest was all down heavily.

Across the seas and far away on Wall Street, stocks rallied into the close, the Dow Jones Industrial Average still ended marginally in the red. Down a smidgen, off 0.09 percent by the close. The broader market S&P 500 and the nerds of NASDAQ were buoyed in part by another strong day by Apple, and well received results from Facebook too, both stocks coincidently up 1.35 percent. Earnings central continues to produce by far and away the busiest and most exciting time of the year for us. So, without further ado, let us jump head first (onto a trampoline) into these numbers released after-hours.

Company corner

Alphabet reported numbers last evening, this is for the second quarter to June 2016. The half year too, something that we are a little more accustomed to around these parts. Revenues for the quarter grew 21 percent over the comparable quarter in 2015, and 6 percent better than the previous quarter. Yowsers, that is some pretty exceptional growth. In constant currencies, as we still live in a world of relative Dollar strength to everything else, revenues increased 25 percent relative to the quarter this time last year. For comparisons sake to Facebook, who reported yesterday, Alphabet clocked revenues of 21.5 billion Dollars, more than three times that of Facebook.

Non-GAAP income bolted on another billion Dollars versus the prior quarter, clocking 5.864 billion US Dollars. On a per share basis that equals 8.42 Dollars. Reminder, the stock price is at 797 Dollars pre market (up half a percent in normal trade and another 4.1 percent after hours), the analyst community currently estimates that somewhere in the region of 33 and a half Dollars worth of earnings for the full year next year, and nearly 40 Dollars a share the year thereafter. Anyone can do that math, the stock trades on just less than 20 times earnings to the end of 2018. Got it? As we all know well, the company does not pay dividends yet, having embarked on a weird share buyback program for the first time, a very recent event.

The company may as well be called Google, if you see this table below you can see that the segment "other bets" generates paltry revenues of 185 million Dollars, relative to Google which generate 21.315 billion Dollars. And of course, with many of the "other bets" being in startup and ramp mode, they are going to suck a lot of cash, and obviously make a loss. It goes without saying. Ruth Porat (the CFO) said on the conference call that many of these "efforts" are pre-revenue. i.e. in development phase. Mostly Nest (the camera and home automation business), Fiber (you want more of that, right?) and Verily (healthcare and technology).

Cash on hand, at the end of the quarter swelled to 78.4 billion Dollars, again, a little over three times the cash that Facebook currently has. Added to the swelling cash balance is a swelling staff compliment, up to 66,575 Googlers. Err .... Alphabetters? The cost per click reduction rate seems to be levelling off, the rate of decline that is. This can be measured against ARPUs, where trends differ from geography to geography, emerging markets still finding their meeting, developed markets are possibly almost all data. Who calls anymore, right? Most of the new hires, according to Ruth Porat, the CFO, are engineers and product managers, to support (and I am almost copying and pasting from the earnings call) growth in priority areas like cloud and apps. Percentage wise much more at "other bets", numbers wise, still dominated by Google.

Talking of calls, the most juicy information that I find is almost always inside of the earnings call. The after the market get together when the analysts and the management get to present a few smart looking questions to impress their peers (in the case of equity analysts) and the answers from management to stick them on the straight and narrow. Everyone asking the questions and invited to participate wants to be Benjamin Graham. Here goes, sign up (for free) to read Alphabet (GOOG) Q2 2016 Results - Earnings Call Transcript.

So what does one learn here? YouTube (without giving an absolute number) revenues continue to grow "at a very significant rate". Strong growth in mobile search, use your own smartphone experiences to confirm that, it is clear that this is a strong growth engine right now. I couldn't quite figure this out, it seems that YouTube has been acquiring original content at a quicker click. Machine learnings and Artificial Intelligence spending will position the business well for the future said Google (the core business) CEO Sundar Pichai. That will build the engine to drive the future, he said. I really liked this line, I believe it with all my heart (dangerous when analysing businesses, I know), from Pichai: " ... building for everyone; since the Internet is one of the world's most powerful equalizers, we are committed to building technology and making information available for everyone, wherever they are." The ability to learn anything, no matter where you are in the world is an important step for humanity.

In conclusion, this is a company that really has a huge growth business as their core business and many more lines in the water. This is definitely a huge growth business. They are creating future revenue streams that we couldn't envisage now, encouraging staffers to be creative (certainly rewarding them for it) and making life easier each and every day. The company shares today the same vision that the founders created early on. We continue to buy, with a great deal of conviction, what is an incredible company with an amazing future. Own more, buy some for the first time. The stock traded as high as 810 Dollars a share (near an all time high) in the aftermarket, post the results release.

Amazon reported numbers after-hours yesterday. This is an incredible business too. The founder has pretty much tried everything, you may recall the infographic from the Visual Capitalist - How Jeff Bezos Built his Amazon Empire. There are tons of things that the fellow has started and failed at, it is better to have tried and failed rather than to have never tried at all, as they say in the classics. Straight into the new age retailer's results - Amazon.com Announces Second Quarter Sales up 31% to $30.4 Billion.

Just wow. Revenues up 31 percent year-on-year, 30 percent forex adjusted. Like with Alphabet, the forex translations are starting to unwind a little. In other words, relative Dollar strength is all that. Relative, and having been flatlining now for a full year, the comparable over the next two quarters should flatten. Sales at a geographical level are represented at 59 percent North America, Amazon Web Services at 8 percent (I suppose that has no boundaries, the internet) and the balance, 33 percent, one-third, is international. Delivered to places like Mzansi. I use them, do you?

The last four quarters rolling revenues are 120 billion Dollars. Phew, that is sizeable now. Net income clocked 857 million Dollars, we have massaged ourselves to expect very little in terms of profits from the company, so I guess this is going to morph from a "pleasant surprise" to a more regular occurrence is my sense. Earnings on a per share basis clocked 1.78 Dollars. Still, a share price at 768 Dollars after hours (up 2 percent after the earnings release) and 2.16 percent during regular trade, earnings look stretched. I suspect that quarterly profits will have to increase by a factor of three for the stock to trade on a reasonable multiple, relative to their peers. The trick is balance massive investment growth versus expectations of shareholders, you cannot have it all.

Web Services is a small and growing business (relative to the core US business), it is extremely profitable. The media part of the business is growing across the globe (including the US) at low double digits, the business is relatively mature, everyone knows music, books, movies can be downloaded very easily. Electronics and other general merchandise, those sales are growing like gangbusters, 32 percent in the US and 38 percent up year-on-year in the International segment. People want the things online nowadays, you see.

See Quartz and their take on it - Amazon's least sexy business now brings in $10 billion a year. As you can see, people talk about the cloud business of IBM and Microsoft, as well as Google, Amazon dominates, see graph below (thanks Quartz).

The quarter included a big launch in India, Prime (members get shipping free) was introduced with much aplomb into 100 cities, next day or the day after delivery. Which much be harder in India than in many other places, vast population, busy cities and inferior infrastructure to many other parts of the world. Well done for having taken on that amazing challenge. As you can see from the earnings release, follow the link in the first paragraph, the company is incredibly busy.

Churning out original content, AmazonFresh is going to grow like gangbusters (Whole Foods are piloting something similar, announced overnight), even something called Career Choice. Added to new initiatives, all the newer existing businesses are also doing well, the assistant hardware Echo and software Alexa is growing well. Cool product, not available here yet - Amazon Echo.

You are equally owning a part of the future with this company as with Google. This is the future and evolution of data, content and general retail.Buy it with fresh money, buy it if you are underweight the stock. The forecast is really interesting, the profit forecast is very wide (50 to 650 million Dollars operating income) on net sales guidance of 31 to 33.5 billion Dollars. Still ratcheting up really quickly.

Linkfest, lap it up

Sasha found this stat yesterday, there are around 400 trees for every person on earth - Five forest figures for the International Day of Forests

How would you spend 13 weeks if you got that as a summer holiday every year? Children are no longer needed for the harvest season, does the holiday still need to be that long? The children probably love the break, parents less so - School's Out For Summer

You will find more statistics at Statista

Being a Youtube star is a profession that wasn't around at the turn of the century, can you imagine growing up telling your parents that your career path is making videos for Youtube? - This YouTube star made $8 million last year

Home again, home again, jiggety-jog. It continues to be all about earnings for us. Japanese and other central banks may do what they need to or want to, for us we will get to all the stocks that are reporting right now. This includes Amgen too, we also owe you results from L'Oreal, the thesis for both is still intact. We will revert in the coming days, we certainly thus far have been very pleased at how earnings for the majority of the businesses that we own for clients has turned out, it has been good.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Thursday 28 July 2016

Giant blue thumbs up to Facebook

"It feels strange at an elevated share price of nearly 129 Dollars pre market to suggest that this company is just potentially scratching the surface. The company has tripled in price since their "disastrous" IPO in May 2012, which is not that long ago. I pity the fool (Mr. T) who sold the stock in August of 2012 at around 18 Dollars when they were not able to monetise mobile. Mark Zuckerberg is not finished. Heck, he in many senses has hardly started."

To market to market to buy a fat pig Markets in the city founded on gold (and of a twister) ended the session way off the mid afternoon highs, nonetheless, it was another day of gains. Up just short of one-quarter of a percent, stocks were reaching for that 54 thousand mark an hour before the session closed. It was not to be, resources added comfortably over a percent with industrials holding us back, ever so slightly. Hey, we will take it! Amplats and GoldFields were at the top of the pile, the #winners on the day so to speak, following hot on their tails was a big performance from Richemont and Shoprite.

AB InBev was having a horrible, no good day, that stock in Rand terms was off over two and a half percent. Aberdeen Asset Management is asking for more of the monies in the current deal, I suppose the execution risk as the deal drags on, heightens. In fairness to all Pound investors, their Dollar amounts have diminished, they have a point. AB InBev could even cough up another pound or two and the amount would not change from the beginning of the deal. The WSJ reports - SABMiller Pauses Integration Work With Anheuser-Busch InBev. It is not as if the deal is on the rocks, all the hard yards have been done and the finish line is in sight, the old adage that a deal is not a deal until the money is in the till is still one of my favourites. Bless his soul, the client that told me that many years ago. We watch it with interest.

Paul was on the wireless last evening, talking about the intricacies of the deal, and the hedging of the currency (seemingly in the wrong direction), see this article - Pound's fall threatens to can AB InBev takeover of SABMiller. It turns out that AB InBev hedged in the wrong direction. As far as we know, they may have a lot less wriggle room and that is the reason why the price is taking some hammering. Eish. I suspect that the deal will be done.

Stocks across the seas and far away in New York, New York closed the session mixed. The nerds of NASDAQ were boosted by a monster move in the Apple share price, up 6.5 percent by the end of the session. It has still lagged the broader market, the stock is down 2 percent year to date and down 17 percent since this time last year. Apple stock is interestingly up 83 percent over the last five years, not the kind of return that I would have expected to have seen, the ten year return is the one that really jumps out at you, over 1000 percent. On a less than 12 multiple and with a 2.2 percent dividend yield, the stock certainly looks very cheap. Still.

There was still the small matter of the Federal Reserve and their meeting finishing, which culminated in what we now see a questions and answers session. In the old days the Fed was more secretive, less releases from their members, fewer public appearances and definitely fewer access points. The WSJ reports - Fed Leaves Door Open to Move as Soon as September. At session end the Dow Jones Industrial Average lost a point and a half (which is not much nowadays), the S&P 500 ended the session down 0.12 percent. Results overnight from a whole slew of companies, we will cover the biggest below.

Company corner

Whoa! Facebook just blew the market away in such a huge way last evening with earnings that comfortably topped estimates. This has, in my opinion, become the most watched company in the world, possibly eclipsing Apple. We are living and learning as humans to deal with issues of privacy and what is acceptable and not on the internet, most especially social media. Whilst you can post whatever you want, you should think about it deeply.

The revenue number for the last quarter at Facebook is less than the profit number at Apple for the last quarter. As of the close last evening, the Facebook market cap was over half of that of Apple. You can't compare Apples and Facebooks, stop it, that is silly as the great Monty Python characters would say. Let us jump head first into the important numbers. The company recorded revenues of 6.436 billion Dollars for the quarter, an increase of 59 percent on the year prior. Not bad for a company with a disastrous IPO.

Advertising revenues were a whopping 63 percent higher when measured against the same quarter this time last year. Astonishing! Mobile advertising revenues represented 84 percent of advertising revenues, up from 76 percent from this time last year. Remember a time when the company was going to struggle to monetise mobile? They just owned it! Operating margins increased to 43 percent from 31 percent, cost control in place at the social network.

Net income topped 2 billion Dollars (2.055bn USD), up 186 percent from this time last year. Non-Gaap diluted earnings per share clocked 97 US cents. Consensus for the full year has shifted beyond 4 Dollars a share, way higher than anyone estimated a couple of years ago. Like four times higher. Like. And like again. You CapeTonians and Durbanites invented "Like". Except you were too busy watching average rugby teams, that you forgot to patent it, some young geek in a study dorm was liking your like. Like shwow. Ouch, sorry, that was mean. The stuff about patents, not the rugby team.

On a users basis, this company stands heads and shoulders (and knees and toes) above the rest. Remembering that their core and first business is Facebook itself, the (very dumb purchases at the time, remember) other platforms, Instagram, WhatsApp and Messenger are all big hitters in their own capacities. As one stock analyst put it, Facebook has a product roadmap that has no peers. It really doesn't. And monetisation of the other major platforms have basically just scratched the surface. To think that 66 percent of all users of Facebook (monthly users - 1.712 billion) use it daily. And that mobile only monthly users (i.e. no desktop or laptop) is closing in on one billion, 967 million currently, having more than doubled in two years.

A few slides are worth taking from the presentation, firstly there is Daily Active Users by Geography, just to show the diversification of the business -

Half of Europe and half of the US and Canada (roughly) using Facebook daily. Which means that there are many others not using the service. Makes you think, not so? And then this graph, whilst there are many users all around the world, logging on daily to check the more awesome lives of their peers and friends, some spend more to advertise than others. It is not surprising that the US and Canada attract larger amounts of advertising than their European, Asian and rest of the world peers.

And then lastly, Average Revenue per User, which will beat home the idea that this definitely is a growth business. Note that this is the monthly income earned by the company per each user, in their respective territories. In the same way that the usage numbers for mobile phone companies is measured in ARPU's, the same applies here for Facebook, except it is the advertisers that are supplying the revenue and not the cell phone airtime buying.

It feels strange at an elevated share price of nearly 129 Dollars pre market to suggest that this company is just potentially scratching the surface. The company has tripled in price since their "disastrous" IPO in May 2012, which is not that long ago. I pity the fool (Mr. T) who sold the stock in August of 2012 at around 18 Dollars when they were not able to monetise mobile. Mark Zuckerberg is not finished. Heck, he in many senses has hardly started. He is a long, long away from being close to his vision. We need people like that. We continue to accumulate what is now a stock that is much cheaper than it was before they listed, even though the price has tripled. Capiche?

Linkfest, lap it up

Incredible. We know that the VW Beetle was an iconic product. So was that 80's toy thing, the Rubik's Cube. The iPhone blows them all away. Check this out from a blog you should follow, Horace Dediu from Asymco - The most popular product of all time. I am embarrassed to say that I don't know what a Honda Super Cub is, other than knowing (before I looked it up) that it is a mode of transport.

The age of the electric cars is well with us now. Car makers are trying to play catch up to Tesla, who are blazing a path for the vehicles - Porsche's Tesla rival on course for 2019. I took to Google to find out how the i8 sales have been, it seems that they have been a bit disappointing - The BMW i8 is a shining example of bait and switch car launch sales hype

Sticking with Tesla, this week is the grand opening of the Gigafactory. It is a very impressive building which will bring a new level of mass production to the alternative energy market - These 9 Slides Put the New Tesla Gigafactory in Perspective

I wonder how many people will book flights through Airbnb? If I wanted a flight, Airbnb would not be the first place I would look. It is a clever way to get noticed though - Lufthansa is selling seats on flights through Airbnb.

Home again, home again, jiggety-jog. Stocks are mixed across the globe. Stocks in Japan are down, stocks in Hong Kong are down, believe it (yes you do), stocks in Shanghai are up. Ha ha, I commented that Garmin was up over 11 percent yesterday, remember them. Twitter was dissed, down over 14 percent yesterday. I thought that in 2016 the results delivered by those respective companies would have delivered divergent reactions, obviously both sets of shareholders (and subsequently reactions) would have differed on the outlook. One of our other stocks reported yesterday, Amgen, and L'Oreal report today, we will keep covering these stocks in time and deliver the report back. Stand by!

I recall when watching cricket in Australia that the commentators where extremely one sided and most especially Bill Lawry. Richie Benaud, also an ex Australian Cricket captain and perhaps the man who made modern day commentary what it is today, was a firm favourite. He would often say, "Marvellous". One of my absolute favourites however was "And Glenn McGrath dismissed for two, just 98 runs short of his century." Poor McGrath. He had the last laugh and ended up with 563 test wickets, only making 641 runs. That is also 641 more test runs than I will ever get. It is a little like owning stocks and just commentating on them. It is easy to make throwaway comments like this one is useless, or that one is great, having actual money in harms way is what sets you apart. So start saving and make it a priority today. If you needed reminding of one of the greatest messages that has ever come out of this office, thanks Paul, from nearly a year ago - Why save? There, pep talk done.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Wednesday 27 July 2016

Apple meets and beats, buy it!

" ... the Apple chief is quoted as saying "People always doubted us. That's not a new thing and that ebbs and flows with the stock market, so we don't get too uptight about that." Don't get quarteritis. Own the company, a company that still has great prospects."

To market to market to buy a fat pig Stocks were higher through the day, better as the afternoon progressed and we closed strong into the bell. The Jozi all share index is working the way up to an all time high, stocks as a collective ended two-thirds higher in the city founded on gold. Whilst the JSE may have messed up on some flows numbers, nobody patted them on the back for the successful implementation of T+3. Well done chaps, a historical mess up on the aggregating of the flows, who cares in the end. The implementation of the shorter settlement times, no mishaps there and completely seamless. It is funny that when nothing happens, we expect that, when something bad (in this case not even "terrible"), we are quick to jump up and down. Who cares who owns what and who bought what. What data is not as important as we think it is. We all used to rely on emissions data from a certain German car manufacturer, we don't anymore. Does this correct information change your views on buying that brand now, probably not.

Stocks leading the charge at the top end of the leaderboard were the resources, Amplats, Sibanye, AngloGold Ashanti all up smartly. In the down column there was Richemont which sank in sympathy with LVMH (see - LVMH Profit Meets Estimates as Spirits Offset French Decline). Sasol sank as the oil price continues to come under pressure, I saw that the estimates are for Russian output to exceed the daily target achieved at the height of the Communist era. There certainly is this love/hate relationship with the Russians, their opinion of themselves and the option of them by others are certainly entertaining at best. Let us just say that in the crowded metro areas of the world you can spot the Russian.

And then the announcement that seemed like it meant something significant at face value, upon further inspection it meant very little. AB InBev announced that they were upping their price for SABMiller from 44 to 45 Pounds, that is Sterling to you and I. I mean Great British Pounds, which may or may not be great, depending on which side of the Brexit fence you sit. The original deal, when AB InBev approached SABMiller was 108 billion Dollars, this boost to 45 Pounds a share takes the absolute amount to a little over 103 Billion Dollars. Huh? What gives? No worries sports lovers, here is a graph of the Pound to the US Dollar over the last 12 months that explains it better than I could, thanks Bloomberg for the one year view - GBPUSD Spot Exchange Rate:

So there you go, more Dollars are less Pounds, which means that AB InBev can up their offer, without really upping their offer, if you know what I mean.

Over the seas and far away, stocks in New York, New York were mixed at best. The Dow sank as McDonald's delivered a mixed set of numbers, it looked OK to me - McDonald's Reports Second Quarter 2016 Results. McDonald's sank over four percent, sending the Dow lower, down one-tenth of a percent. The results in China and Russia looked just fine, growing there, mainland US comparable sales were up 1.8 percent. The broader market S&P 500 added 0.03 percent, the nerds of NASDAQ added around one-quarter of a percent. 3M had results too, those looked good, the stock was marginally lower. Caterpillar beat on cost cutting, the stock rallied over five percent. More results today and tomorrow, exciting times friends. Apple results post market covered here below.

Whilst we (the broader community we) often are quick to "tell" management that they should do this, or that and perhaps try this or that, it is very worthwhile noting that there is a lot to be said for experience. And level heads. I captured this piece from the founder of Luxottica, Leonardo Del Vecchio, in his Letter to shareholders:

"My dream, as an entrepreneur, has always been to make the best eyewear in the world and see everyone wearing them. I have personally experienced, for over forty years, the passionate adventure of turning this vision into a reality with a strong and dynamic company like Luxottica. The pillars of our strategy have never changed: product quality, strong brands, efficient factories, widespread distribution and growing our direct relationship with the end consumer. They will not change now, but we will adapt them for the times."

His parents were so poor that his widowed mother handed him over to an orphanage. That did not deter him from being able to build one of the greatest businesses in that space. His point is well made. Too many people want action all of the time, ignoring the fact that it takes a very long period of time to build a business. What are you doing next quarter or next year or give me colour on x or y, or other stuff that analysts say on conference calls certainly keep management on their toes (and investors have a right to be demanding), equally, give management room to build a business and not focus on meeting market expectations. Shareholders come and go, often people who work for companies are lifers who steer the ship.

Company corner

It is that time of the year again, when the largest company by market capitalisation, Apple, reports numbers. I get the sense that it used to be the most hyped and anticipated set of numbers on Wall Street, I sense a shift to Facebook. There was very little expected from the maker of fine things, the maker of devices that you may, or may not have thought that you needed. Yet, once you had them, you wondered why you had not used it before. The other thing about Apple products is that they just work. My Mac is indispensable to me. People will spend hundreds of thousands of Rands and finance a vehicle over a period of time, to use the vehicle for five to ten percent of the day, yet a product that they are likely to use for 40 to 50 percent of the day, they just "need it to work". It is actually the same with a bed. Perhaps apply the same logic to a motor vehicle, get a better computer (get a Mac, really, you will thank me later) and a better bed, you spend more time with those two things.

You can read the numbers here - Apple Reports Third Quarter Results. The highlight was at the top of the pile, the annuity income, the services business grew revenue at 19 percent on last year. That business accounts for 14.1 percent of sales, and has generated sales of 23 billion Dollars for the last twelve months. According to Google finance, if that Apple services was a standalone business, it would have revenues equal to that of German Software giant SAP. Yes. That is how big iTunes, Apple Music, Apple Pay and the App store is. Bigger than you thought, right? Oracle, another giant of the Software world has annual revenues of 37 billion Dollars. With Apple services revenues growing at that rate, how long until that division eclipses Larry's empire? Tim Cook mentioned on the conference call that as a standalone business, the Services segment will be the size of a Fortune 100 company next year.

The flagship product however, the iPhone, saw sales fall to 40.399 million units, a 15 percent fall year-on-year in unit numbers and as a result of cheaper handsets, a 23 percent fall in revenues. How do the other divisions match up? iPad sales, at a units level fell 9 percent, at a revenue level increased by 7 percent year-on-year. Why? Obviously the higher priced iPad pro is having an impact. Half of the current iPad pro purchases are done for work purposes, intrenching their product as a business tool is important in this category. The Mac (on which I type this message), that fell too both at a revenue and unit level, indicating that broader PC weakness is across the market. Here, there and everywhere to borrow that literary genius Dr. Seuss.

From a geographical perspective there was weakness everywhere, apart from Japan. The Americas, meh, China, not good. To put those China metrics into a two year view, which Tim Cook suggested was important to do (he has just visited there and he is large and in charge), total revenue over two years from mainland China is up 55%. iPhone unit sales in China are also up sharply over the last two years, up 47 percent. When comparing the same numbers year on year, the numbers look less pretty, I get what he is saying though, a bit of perspective is needed at times. In another country he visited, and got to catch a little IPL if memory serves me correct, iPhone sales in India grew 51 percent year-on-year.

All the other metrics seemed to be against the maker of fine electronic things, gross margins lower at 38 percent (still more than just good). Cash on hand is still a whopping 231.5 billion Dollars. Total debt is equally eye popping, 72 billion Dollars. The company is 177 billion Dollars through their 250 billion capital return program, having delivered 13 billion in the last quarter alone through share buybacks and dividends. Cash is not a problem here. Whilst the sales were lower, profits were lower, they were better than people anticipated. On the earnings call after the market, Tim Cook said that "Today we're pleased to report third quarter results that reflect stronger customer demand and business performance than we anticipated just 90 days ago and include several encouraging signs."

The outlook was OK, I suspect better than analysts had expected. The cheaper handset has been well received. Tim Cook said that the demand had outstripped supply. Attracting more people into the ecosystem. What is interesting is that Tim Cook said that first time buyers and switchers represented the lion's share of buyers of the iPhone in this quarter. Why would that be the case? Of course everyone is waiting for the refresh, the new phone, the iPhone 7 coming later this year. Then next year, according to some of the analysts that I follow on this score, the phone may well change form. In other words, a dramatic refresh to celebrate the 10th year of iPhone. On the 'new and up coming' front, are all sorts of changes to the operating systems, the biggest refresh ever in the form of iOS 10, new operating system for the Mac, the Apple Watch, the TV too.

On the conference call Tim Cook gave some insight into how Apple Pay is currently working. According to the data he has, Apple Pay is used in 3 out of every four transactions at contactless ready locations across the US, the service has been launched in France, Switzerland and Hong Kong and in his own words, "Adoption outside the U.S. has been explosive, with over half of transaction volume now coming from non-U.S. markets." Nice.

Smartphone penetration across the globe is 42 percent. Not 82 percent. Not everyone can afford an Apple smartphone, even the 399 Dollar version, they are expensive. Ha ha, I was looking for the quote that Tim Cook made in the WSJ about growth, so I searched for the word growth in the earnings transcript, wonderfully transcribed by SeekingAlpha, and I found the word 15 times. And then I thought I recalled the quote had to do with worries around the share price performance and the doubters, so I searched for "worry". And there were zero results.

I think it is important to know that Tim Cook is aware that investors haven't had the best of times lately, I wouldn't be too concerned. The stock price is one thing, the company is another, the two reflect something in the middle. In the WSJ article titled Apple Earnings Fall on iPhone Slump, the Apple chief is quoted as saying "People always doubted us. That's not a new thing and that ebbs and flows with the stock market, so we don't get too uptight about that." Don't get quarteritis. Own the company, a company that still has great prospects. We maintain our buy recommendation on this company and continue to accumulate. The stock is mooted to open nearly 7 percent higher at 103.25 Dollars. Still, the one year performance has been less than breezy, all headwinds, at that level it would still be down mid teens. We are confident that the heavy lifting will happen.

Linkfest, lap it up

A great read (mostly pictures) about road tripping with a Tesla. The one aspect that I forget as a person using a petrol powered car is that recharging a Tesla takes over an hour, not the 5 min we are used to - We took a Tesla Model S on a road trip and learned the hard way how it's different from every other car

As statistics show that global wealth inequality is growing, the counter argument is that life quality for all is also growing. This blog hints that one of societies problems is that no-one is content or satisfied with what they have, made worse by how amazing peoples lives look on social media - Are we consuming too much?. The one stat that shocked me was: "In 2013, the median financial asset balance of middle-earning Americans (including retirement savings accounts) was only $5,500."

Want a return that is uncorrelated to the sentiment of the market? Byron found this very interesting and fun read about using sport betting as an asset class - Sports betting as a new asset class: Can a sports trader beat hedge fund managers from 2010- 2016?. Long term investing the odds are in your favour, with betting the odds are in the favour of the house.

Home again, home again, jiggety-jog. Twitter also reported after-hours, the stock has taken a beating for guiding lower. I actually continue to think that the metrics are all moving in the right direction, even if user adoption has plateaued. Sales are up, it is just taking too long for Mr. Market's liking I am afraid. We will cover that and more in the coming days, including Under Armour, that company had their results poorly received, they continue to make great progress however in their respective space, we like that!

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Monday 25 July 2016

Stores for Days

Sports lovers, why haven't you watched latest Blunders video yet? Why? Don't worry, you can do it now - Blunders - Episode 23. This week: IMF gives SA a zero forecast, Melania Trump's dress, Uber for dogs**t and Joy Air fails to launch.

"The reason to own Starbucks is due to their very powerful brand. Thanks to the very strong global brand they are able to open new stores with almost no limit. Currently there are 24 395 stores in 74 countries."

To market to market to buy a fat pig We squeaked into the green here locally on Friday, stocks rose marginally to be above 53 thousand points. Just. A smidgen. I was interested to note that Shoprite had made another 52 week high and was closing in on 200 ZAR, a level last reached at the beginning of 2013. All this in the environment where the Reserve Bank expects zip (nil) growth, or as close to that as possible in the medium term outlook hardly looks rosy. Shoprite of course have done some heavy lifting and continue to make progress in a stodgy growth environment. If you needed another reminder that the stock market is not the economy and the economy is not the stock market, look no further than the recent price action of Shoprite.

Resources sank over a percent, the rest was up a little which saw us marginally up on the day. The Rand remains strong, gosh, it must be as a result of great electioneering, right? It must be as a result of all the politicians saying such wonderful things, right? No. It always turns out that nobody says the reverse. The reason for strength across all emerging markets is as a result of the global push for yield once again. Higher yielding government bonds, on the brink of junk or not, as long as the currency risk can be neutralised, will be sought after. I found a graph the other day which I tweeted (of course we read each others tweets all of the time), which showed why South African bonds would be attractive. Most especially recently.

So what does that graph show you? Mostly that Russia and Greece one year ago were finished and now they are a little better. Russia in part as a result of being a little more on a stable footing, Greece having come through their Oxi (No) vote and told, we hear you however ..... this is how it is going to be. South Africa, Colombia and Portugal? Would they, in a time of lower global inflation, be riskier on a relative basis? Notice that notwithstanding the turmoil in Brazil, their debt is marginally more attractive over the year. It doesn't tell a full story, what it mainly tells you is that in a world where most yields went down over 12 months, ours didn't. Perhaps with things having settled a little, the fact that there seems to be NO yield in Europe or the US for some time to come, we should benefit. I am guessing that we have seen flows recently, it will be confirmed in due course. Inflation should be lower, and ZA inc. stocks will benefit again. That is why the Rand has been strong.

OK, off to markets on the other side of the world, stocks in New York, New York found their footing after lunch time. Once again it was earnings that dictated to Mr. Market, there was another closing high for the S&P 500, if not quite for the other indices. The Dow Jones Industrial got close, the General Electric results at face value looked decent enough. Mr. Market always expects a little more, the stock sank over a percent and a half. Visa had a good day after the results that they had produced in the session prior, up nearly a percent and a half, closing in on that all time high. Not too far to go in that regard.

This is another big earnings week, Luxoticca reports today, Apple tomorrow night after the bell, McDonald's before and I think in terms of the reporting cycle, Caterpillar before too. BP Plc reporting in the UK too tomorrow. Facebook, Coca-Cola and Amgen on Wednesday, Glaxo and Boeing also reporting on humpday! Boeing having a tough time of late, Facebook are always primed for perfection. All speeds up on Thursday, there is no slowing into the end of the week, it will be the holding parent company for Google, Alphabet reporting on Thursday. Amongst our stocks, there is also Amazon and in terms of stocks of interest there will be British American Tobacco too, as well as MasterCard. Easing into Friday, AB InBev as well as a whole host of pharma companies, Merck, Sanofi and AbbVie. UPS also on Friday, they are always a good barometer for the health of the US economy. Big week sports lovers.

Company corner

At the end of last week we had 3Q numbers from Starbucks, which missed some analyst estimates. To say that they missed estimates is not to say they had a poor quarter, they still grew revenues by 7.3% to $5.24 billion and grew EPS by 24% (not too shabby hey nige).

They missed analysts estimates on same store sales. In the USA they had growth in same-store sales of 4%, the first time it was under 5% in 26 quarters. There was very strong growth out of China, where same store sales were up 7%. There are currently 2 300 stores in China with the goal to have 3 400 by 2019. The expectation for China is that it will be a bigger region for Starbucks than the USA over the long term. Currently Revenue from 'America' is $3.6 billion for this quarter and the 'China/ Asia Pacific' region is much smaller on 768 million, so it has to more than quadruple to be at the current figure.

The reason to own Starbucks is due to their very powerful brand. Thanks to the very strong global brand they are able to open new stores with almost no limit. Currently there are 24 395 stores in 74 countries. They opened 1 876 stores over the last 12 months, just over 5 new stores a day! To put that into perspective, Famous Brands "only" has 2 614 stores globally. In the USA they are much closer to saturation point, where they won't be able to open new stores but in the global market we are still very far away from that mark.

The brand is also a status symbol, their products are not at the cheap end of the consumables segment. When visiting Bangkok last year, the Starbucks there had queues out of the door even though the cost of a drink was well over 3 times what you would pay 100m down the road. South Africa is another prime example of how powerful the brand is, there were long queues for weeks after opening.

The strong brand and huge store growth means that the stock is not cheap, currently sitting in the low 30s on a P/E basis. The company has stated a goal to grow EPS at a minimum of 15% per annum which means going forward the P/E unwinds rather quickly. As long as the brand commands a premium in the markets that they operate in and particularly those markets where they are rolling out new stores like 'gangbusters', the stock is a buy.

Linkfest, lap it up

How many consumer brands do you think the top 10 companies own? Probably more than you thought - The Illusion of Choice in Consumer Brands.

As the Amazon share price continues to rise so does the fortunes of its founder - Amazon CEO Jeff Bezos just passed Warren Buffett to become the 3rd-richest man in the world. Amazon reports numbers on Thursday and in true Amazon fashion expect a large sharp price move either up or down.

London in terms of economic value is huge for Britain, I didn't realise how important it was - London's total dominance of the UK economy, charted. London is the same as the next 37 cities combined!

Home again, home again, jiggety-jog. Nintendo, the maker of Pokemon Go stock is down over 17 percent this morning. Still, over a single month, since the hysteria has gripped nerds who have seen the sun for the first time in half a decade, the stock is up a whopping 68 percent. Over ten years, what has been your Yen return? 13.2 percent. And a yield that is next to nothing, better than negative Japanese Bonds however. The stock is still a long way away from the all time highs, down nearly two-thirds of the go-go days of late 2007. Those were the days my friends, of faxes and business cards. Oh wait, those things still exist in Japan. Stocks across Asia are a little mixed, in Japan about flat, slightly down in Hong Kong.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Friday 22 July 2016

Stryke while the price is down

"As you know, we really like the sector, it is changing, growing and getting exceptionally better as we speak. Our job is to find the best companies who are spearheading this change. Stryker is certainly one of them, we reiterate our buy rating."

To market to market to buy a fat pig Oh no, the little steam engine of the Dow Jones variety did not make it to the top of the hill. There is an enormous amount of company related news that we have to deal with, we should definitely bounce directly into these events immediately. As we say, we do companies and not economies and announcements from governments. And global bodies and their predictions. Besides, who remembers what the last one was, or the one from five years ago? Or what it is likely to be in five years time? You don't know what is going to transpire, I don't know, collectively we can work towards what we think is reasonable.

Before we do a quick scoreboard check, there was a rates decision locally yesterday. The trajectory for inflation was lowered in the long run (out of the band in the short term), that is a good thing. What is not good is that the trajectory for growth was also lowered. To flat. Eish, it is tough out there chaps. It certainly doesn't always feel like it in the big bad Jozi, things are always going on. Whilst this lovely province off ours hustles and bustles and is filled with economic activity that is ahead of the rest of the country in terms of the contribution, it does not represent all of South Africa. Don't make that mistake, the cranes in Sandton might represent what is happening in the most powerful economic hub across the continent, it certainly isn't the lived reality of many ordinary South Africans.

That said, we should be grateful that we are not Turkey, or Russia, it hardly looks that encouraging politically in those parts of the world. We have elections in a couple of weeks, if not national ones, perhaps the more important bread and butter issues around municipalities. At the end of the day, all people want is accountability. If we deliver you consistently poor returns, no matter what we say, you are going to pull money.

The same is true for Bill Ackman, the hedge fund manager according to Yahoo! finance made his conference call sound like a victory lap, after getting "stomped". He may well be right on Herbalife, the market always has deeper pockets than you. Remember that. That almost buried Michael Burry, he was right in the end. The eccentric drum playing fund manager, who could have been a full time neurologist, was wrong forever during a time the market flew. He ended up being very right. If you haven't read the Big Short or watched the movie, definitely read up about the weird antics and his ability to crunch the numbers better, and to hustle. Strangely, last I read of him is that he advocated growing food and sending it across to places with less water. Yip.

Scoreboard check quickly, the Dow Jones fell for the first time in over 8 sessions, down over four-tenths of a percent by the end of the session. The nerds of NASDAQ lost just over one-third of a percent and the broader market S&P 500 was somewhere in-between the two. Well, records are there to be broken, earnings are going to continue to drive share prices and broader markets. Financials, in a very tough environment have been able to stay extremely profitable. Intel was weaker during the session, the stock has been completely flat since the beginning of the year, over the last 12 months the stock has returned a little over 16 percent, that sounds pretty darn good. The last two years have been a slog however, most chip makers in the PC and server space have struggled. The Internet of Things is likely to change that.

Talking of which, on the local front Vodacom reported subscriber numbers that were good, having gained market share here in South Africa. As we saw however from that Cisco report about the internet of things the other day when we covered the MTN trading update - 6 month trading update - swing to loss, there will be 1.5 devices connected per person by 2020. If you think that is a lot, just look around at your phone, your computer, perhaps an iPad and even a fitness device. There, you account for four already, comfortably ahead of the rest.

Locally stocks slid off the highs into the close, we did still however manage to end the day in the green, up just a smidgen over one-quarter of a percent by the time all was said and done. Industrials lower, resources much (much) higher on the session. Financials up the same amount as the market. Vodacom was the biggest loser on the day, down two and one-quarter of a percent, Amplats soared over six percent, whilst Glencore added over four. Shoprite gave a little back after a magic day in the session prior (up over ten percent), the stock is still flirting with multi month highs. And with the inflation outlook improving, perhaps they would be the first beneficiaries. The market is telling you exactly this, Pikwik, Massmart and Pick n Pay all clocking new 12 month highs during the session. Into company news sports lovers, dive below the line to find it.

Company corner

Discovery made an announcement yesterday that needed closer and further inspection. The headline reads Discovery to introduce Vitality to Japan. Japan of course is a country with over 125 million people, where the average age is around 45 and is possibly one of (if not the) most sophisticated societies on the planet. Organisational skills and attention to detail is not lacking.

OK, so how do discovery plan to do all of this? Simple, at least if you read it at face value - "a strategic partnership with Sumitomo Life Insurance Co. (Sumitomo Life) and SoftBank Corporation (SoftBank) that will see shared value insurance introduced to the Japanese life insurance market through the joint development of insurance products incorporated with Vitality, Discovery's globally recognised wellness programme."

Sumitomo is an insurer that is over 100 years old, it produces profits in excess of 3 billion Dollars per annum, it is headquartered in Osaka (my aunt used to live there), employs over 42 thousand people and most impressive, has policies in place in excess of 1.1 trillion Dollars. Individual life insurance is where their business is at, from their website:

If the Vitality program can boost the company profitability by making those with life insurance eke out a few more years (by having healthier habits) then the payout ratio is extended. Life insurance is a what if I die before I have accumulated enough assets purchase, before I pay down my debt. It is designed to give the remaining behind people, if you happen to die before the actuarial calculations say you will, the same life style that they would have afforded you in the past. There are different forms of life insurance that are also designed to act as investment products, obviously the costs increase as you get older, none of us are Benjamin Button.

For companies such as Sumitomo, it makes sense to use the tried and tested Vitality model. The model is not too dissimilar to the Tesla one, each and every day that data is being sent back to the databases to be crunched by Vitality, the better the systems become. By being healthy, eating right, most importantly exercising and generally being responsible, the company is able to get a better idea of your risk to them. Doing it slightly differently is Discovery, eking out small percentages on giant amounts makes these companies a LOT more profitable and subsequently, the savings are shared as spoils, this is where you benefit as a Discovery shareholder. Softbank, you may recognise that company, they are real operators and I suspect a great partner to be introduced to for the Discovery team. A net positive, the share price rallied one and a half percent on the day.

Visa takes you places. Visa will be in your face over the coming weeks as a Worldwide Olympic Partner, those are two weeks away sports lovers. An amazing thing really, the Olympic Games, this one will of course be no exception. Equally, Visa is an amazing company. Their ability to run a network that will switch your transaction in a single swipe, regardless of whether you are in any of the major cities of the world and regardless of where your bank is. The fact that there can be guaranteed payment to the merchant, no cash ever exchanges hands and your risks are greatly reduced, that part you just take for granted. We don't even bat an eye.

Yet payment methods continue to evolve to the point where no physical card will be produced, you can with your thumbprint exercise your right to acquire the goods. Just like that. Remember travellers cheques? I remember going on Honeymoon with a whole lot (back then a kings ransom) of them, changing them, fees and all. Visa, along with all the switching networks will be at the forefront of the new technologies, nobody wants to reinvent the wheel just yet. Apple Pay still requires your "card", even if in the future you won't ever produce the physical. If you know your card verification value (the last three digits on the back) in many cases you can complete an online transaction without ever having to see your card again.

Visa numbers from last evening quickly, this was for their third quarter. The meet on the revenue line was also met with a beat on earnings, slightly ahead of Wall Street expectations. The company has also made the share buyback larger, to 7.3 billion Dollars. The market cap last evening was 189 billion Dollars, this represents a really large amount, shareholders only feel the impact much later. Fewer shares in issue with incrementally increasing earnings.

Volumes continue to increase in the low double digits, as consumers and governments are encouraged to do more digitally. We often point out that many transactions are still cash in Europe, the more done with cards, the cheaper it gets eventually for everyone. Visa Europe was integrated into the company, the total consideration remember was upfront 12.2 billion Euros, plus an extra Pref share issuance of 5.3 billion Euros and a closing 1 billion plus 4 percent per annum in interest on the third anniversary of closing. In total around 21 and a half billion Dollars. A truly big deal! Part of the buyback is to minimise the impact of the prefs issued here.

The stock has always looked perpetually expensive. Now is no exception either. Even with guidance given of high single digit revenue growth, margins to die for and the ability to generate free cash of 7 billion Dollars per annum, the market always has high expectations. There are an astonishing 2.5 billion cards out there. According to this report from competitor MasterCard, "cash still accounts for 85% of all consumer transactions throughout the world." A non-cash (i.e. Electronic and Card) payment transactions are understandably at a much lower percentage in developing countries than developed countries. Still, there is plenty of room for growth, as you can see -

We suspect that Visa and the others who operate the networks for switching will continue to benefit from all the switching away from cash. I am pretty sure that cash as we know it is living on borrowed time, at least in more developed societies. The carrying costs are too high, it needs to be guarded and buried in a hole in the ground. Sounds like gold. We continue to accumulate what is a very well positioned business that benefits from globalisation and changing consumer patterns. The stock price is flat after-hours.

Sometimes markets work in mysterious ways. Last night Stryker beat earnings estimates, but lowered expectations for next quarter. The stock is down 4% premarket. The reason I am perplexed is because they actually raised estimates for the full year. Estimates for the year increased, but the market is only focussing on next quarter. Sounds like an opportunity to me. Long term shareholders will not be too upset however, the stock is up nearly 30% year to date and it is the best performing stock in the Vestact portfolio so far this year. Let us look at the numbers.

When reporting sales the medical devices business splits their sales into 3 categories. Net sales for the group grew 16.8% to $2.8bn, 6.6% if you exclude acquisitions. The image below not only shows you these three categories but it further details the divisions.

As you can see, the acquisition of Sage Products and Physio Control International had a strong impact on the MedSurg division. If you click on the links and browse through the websites it is pretty impressive seeing all the new products and devices they are coming up with to improve our standard of living. Your body is your greatest tool, these are the devices that will fix it. What bigger priority can you have than the physical well being of yourself and your loved ones? Back to the numbers.

This growth in sales resulted in a 15.8% increase in earnings to $1.39 for the quarter. That is excluding the costs and intangible write downs form the acquisitions. Gross margins are a whopping 66.2% and operating income margin came in at 24.8%. They sure do charge you for these high end products. It is an incredibly profitable business. 10% of these gross profits goes back into Research and Development. Trading at $118 a share and expecting full year earnings of $5.75 the stock trades just above 20 times. Slightly above the S&P500 forward average of 17, and current trailing 19.3 times.

When you look at the quality of the business, I am not surprised. The majority of doctors we speak to rave about their products. If you work in healthcare and have some extra insights please let us know what you think of Stryker products. Having said that, 72% of their sales comes from the US (although they seem to have a decent presence in SA). This presents a good opportunity for global expansion.

Another exciting prospect could come from further acquisitions. There is a huge amount of innovation in the healthcare sector and products are being created all the time independently. Stryker has a market cap of $46bn and is sitting on $3bn in cash. I am sure there are lots of consolidation opportunities.

As you know, we really like the sector, it is changing, growing and getting exceptionally better as we speak. Our job is to find the best companies who are spearheading this change. Stryker is certainly one of them, we reiterate our buy rating.

Linkfest, lap it up

Two of our US holding are teaming up to help save students money (and grow their market share) - Amazon and Wells Fargo Team Up to Offer Cheaper Student Loans

Following on from our Tesla piece yesterday, batteries are a very big factor as to whether Elon Musk's dreams will come true - Our Energy Problem: Putting the Battery in Context. As you can see batteries still have a very long way to go until they are in the leagues of other energy sources.

Streaming has already won the music wars, who will win the streaming wars is the next question. Who wins the streaming wars will also impact how artists will be paid for their content going forward - Apple wants a 'simpler and more transparent' royalty scheme for music that would also seriously hurt Spotify.

The more people I speak to about finances, the more you realise that it is an area where society does not understand enough - Nearly two-thirds of Americans can't pass a basic 5-question financial literacy test, can you?. I was apprehensive to take the test but glad to say that I managed to get 6 out of 6.

Home again, home again, jiggety-jog. Stocks across the globe are lower, we are off the best levels, I am guessing that we shouldn't complain now should we. So far on the earnings front there haven't been too many disappointments and I am sure in the coming months we are going to see a return to normality. Whatever Mario Draghi and his team, and Janet Yellen and her team do, they will do. That goes without saying, they definitely are given stick, yet everyone equally wants their comfort blankey from the central banks.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Thursday 21 July 2016

The Netflix Fix

"The model is pretty simple. Movies and series on demand, as and when you want to watch them, you pay one monthly fee. The company has also evolved from other peoples content to their own original content, some pretty awesome series too."

To market to market to buy a fat pig The BusinessInsider graph of the day suggested that the Dow Jones Industrial Average has a chance to do something that it (it being the index) has only done 6 times since 1980. And that is to close up nine days in a row. I wonder if closing up nine days in a row and setting new all time highs every day would make it unique? Whilst the post Brexit rally continues, we are up around 8 odd percent since (we are told) the most earth shattering thing to happen in Europe since the fall of the Berlin Wall. I suspect that the conversion to a new currency across the length and breadth of Europe was a better thing, not so? That was more earth shattering.

Still, as Michael pointed out yesterday, Americans don't like stocks (subscription only) from Barron's - The U.S. Has a Misguided Faith in Real Estate. Americans, ordinary ones, don't like stocks. They have been burned twice, in 2000 and in 2008, and enough is enough. In order, according to the Barron's article, it goes House and Real Estate, then cash and CD's, stocks are as good as gold investments. True story. Well, that should make things pretty interesting when (if) the average Joe ever decides to come back to the stock market.

I did find, via the same platform (Barron's) that it is the eleventh time that the Dow Industrials had cracked 7 straight all time closing highs since 1925. There are now strategists, whose job it is to make big bold and non accountable predictions year in and year out, who are scrambling and looking at their targets again. Setting targets tells me all you need to know about that person, they are only looking out for this year or next. I expect that innovative and well run businesses with compelling products and services that humanity needs and wants will continue to print earnings higher and higher (if not consistently each and every year) for the next decade and beyond. The market will continue to rate those particular companies with higher valuations than their peer grouping. I found this very funny, it was a graph that Paul sent us the other day, titled "The history of this is the top" on the Dow Industrials from 1900 to present.

There are always going to be moments to worry about equity market investing. That may be today, that may be next week, next year, in the next decade. You may think that the European Union is a failure, I may think that it is going from strength to strength. As ever in markets, one can always agree to disagree. Every seller needs a buyer, every buyer needs a seller. There are divergent views each and every day, pension funds have obligations to meet for older retirees, younger people with gainful employment are saving for the future, their pension fund (or themselves) are buying the same shares. Conclusion? Don't worry about the headlines. Read them, enjoy them, you are an investor, not a trader.

Company corner

That person who doesn't have consensus. Elon Musk. And perhaps that is a very good thing. If your number 1 priority is to change the world, and to really, really change the world, then best you deliver on your promises/forecasts/plans. Best you do that. Last evening the fellow reminded us of the original Masterplan from ten years ago - The Secret Tesla Motors Master Plan (just between you and me). As you could imagine, he does admit to flying by the seat of his pants, as all great inventors do.

The reminder is ahead of the next stage in the company and their next ten year plan, which he introduced - Master Plan, Part Deux. Again, in the introduction part he points to the milestones. It is interesting that he says, in talking about the plan to make an expensive car that "I thought our chances of success were so low that I didn't want to risk anyone's funds in the beginning but my own." This was the first bunch of plans:

Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options
Don't tell anyone.

In unveiling the next leg, he says that the Tesla and SolarCity tie up must happen. He also said that they would build a bus and a truck - "In addition to consumer vehicles, there are two other types of electric vehicles needed: heavy-duty trucks and high passenger-density urban transport. Both are in the early stages of development at Tesla and should be ready for unveiling next year.". He also spoke about ride sharing - "In cities where demand exceeds the supply of customer-owned cars, Tesla will operate its own fleet, ensuring you can always hail a ride from us no matter where you are.". In short, like when he unveiled the first plan, the goals are ambitious, he keeps it very simple however:

Create stunning solar roofs with seamlessly integrated battery storage
Expand the electric vehicle product line to address all major segments
Develop a self-driving capability that is 10X safer than manual via massive fleet learning
Enable your car to make money for you when you aren't using it

I still think that the biggest risk to Tesla is not running out of money, I suspect that people will always back Elon Musk. He eats elephants. He hurdles the Burj Khalifa. I am not going to bet against him. The share price and the valuation of Tesla may well be another talking point altogether, you are never going to time this one properly. The biggest risk to Tesla is without a doubt something happening to Elon Musk. I know that there are other people who work there and share his vision, unlike at Apple which is much older and more established, Tesla is still pretty much an entrepreneurial "feeling" business. I suspect that all the people who work there may tell me otherwise, they (and all humanity) are in the same boat. For the sake of all of us, the kids now and those born in half a century time, I hope Elon Musk is very right.

Another company that has morphed along the way, and is older than you think is a business called Netflix. You may already be a big fan, provided that you have the streaming capabilities here in South Africa. Like the providers of smartphones, you are only as good as your service provider. Netflix will be 20 years old next year at the end of August, the company is the same era as the Amazons of the world, listing at a less opportune time in 2002 after the tech bubble had popped already. It is hard to believe that Netflix has been listed longer than Google. With the advent of high speed broadband, the company was able to change from a simple mail and pickup of DVDs (remember those) to a streaming service. It is so big that the company accounts for one-quarter to one-third of all US internet traffic.

The model is pretty simple. Movies and series on demand, as and when you want to watch them, you pay one monthly fee. The company has also evolved from other peoples content to their own original content, some pretty awesome series too. "Orange is the New Black" and of course "House of Cards". The original of the originals. My watching patterns are erratic at best, sport mostly outside of business TV. That always needs to be watched live and always needs to be watched. There are plenty of people looking for different entertainment, and so far, not only have Netflix been able to deliver, they are a leader. Plus, importantly, you can watch the content across all hardware platforms. PC, Apple TV, Xbox, most set top boxes.

The company announced their numbers post the market two evenings back - Netflix Releases Second-Quarter 2016 Financial Results. Their subscriber base growth for the quarter missed expectations. As they said "We are growing, but not as fast as we would like or have been. Disrupting a big market can be bumpy, but the opportunity ahead is as big as ever and we continue to improve every aspect of our business." Personally, I don't like the word don't and neither do I like the word but. There is lots of competition, they are right. From Amazon, from Hulu, heck, even from YouTube. In fact, YouTube is the biggest streaming service provider in the world, untouchable currently.

Their non-US (what they term international) business is growing like gangbusters. Their core business revenues are growing, perhaps not as much as they would want. And they admit that they are not growing subscribers by the amount that they need and want. Reed Hastings suggests on the conference call that every household in the US may have the service in the coming decades. As ever, the only thing that matters is content, whether it is good or not. Live sports events such as the Olympics are going to disrupt their subscription numbers in the current quarter. These are all the Netflix numbers that you will need, as you can see, the company is profitable, not by too much.

As you can imagine, it matters not whether you have one million or 1000 million (that is a billion) customers, what matters is your ability to be able to continue to grow profits relative to the market valuation. Netflix is NOT going to be a company to own for everyone, there are many questions to answer over the coming years, I am sure they will answer most. The ride is going to be very volatile. Reed Hastings, the founder who stuck in 2,5 million Dollars of his own money at the start (he is now worth over 1.1 billion Dollars). Good work Reed, good work.

Linkfest, lap it up

It is amazing the advances that we make in technology every year. Healthcare advances are the ones that I am most pleased about, if we are going to live close to 100 I would want to be in a functional body - The Top 10 Emerging Technologies of 2016. All these advancements are made possible due to computers but also in part due to our large global population. Our large population means that there are more researchers working on new technologies and more consumers.

Another company joined the unicorn club - Unilever Buys Dollar Shave Club for $1 Billion. It is amazing that selling razor blades for $2.50 can be worth so much, the company only has 3 million customers at the moment. If you have 1 mins 33 sec then watch this great advert from Dollar Shave (Our Blades Are F***ing Great)

Here is a great example of striking while the iron is hot - The world's first 'Pokemon Go' dating service has launched. How many weeks/months do you think the Pokemon Go fad will last?

Home again, home again, jiggety-jog. Stocks are mixed, a little lower actually to begin with. The Dow futures are flat. C'mon there earnings, boost this one higher!

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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