Archive for the ‘value investing’ Category

Several hours before the Hong Kong Stock Exchange opens for trading on Nov 10th, they announced that the Shanghai-Hong Kong Stock Connect program will officially launched on Nov 17 (Mon).

China’s $9 trillion of mainland stocks and bonds was relatively untapped by foreign investors. This program is going to change the scene and transform Chinese RMB from trading currency into investment currency.

A wave of China A-Share ETFs is going to hit the US market. I will discuss that in the second half of this post.

Shanghai-Hong Kong Stock Connect

Greatly anticipated since the plan was first announced earlier this year, the cross-border trading link between Hong Kong and Shanghai, or so-called “through-train” is a very special financial reform to allow mainland Chinese investors to buy stocks listed in Hong Kong while global investors in Hong Kong to buy Shanghai-listed companies A-shares (*see note at the bottom about A-Shares vs. H-Shares).

The originally hoped-for launch date in late October was postponed amid the pro-democracy protests in Hong Kong. Since the announcement of this program in April this year, the Shanghai A-Share Composite Index has booked the longest run – 23% increase (from 2000 to 2467), far better than many emerging market indexes.

You can read more details about the program in my previous blog post.

Shanghai - Hong Kong Connect

With this new program coming in next Monday, it is estimated that everyday a maximum US$2 billion worth of mainland stocks can be traded by Hong Kong investors; vice versa about US$1.5 billion of Hong Kong stocks by mainland investors.

This program will attract more foreign investors to invest into Chinese A-shares listed in Shanghai stock market (which used to be very restricted to mainland investors only). I think the Shanghai stock market will benefit more with larger Northbound traffic.

Speculation that relaxed capital controls will entice index providers including MSCI Inc. to incorporate China’s local shares into global gauges is also attracting investors. Many suspect that it will happen in 2015. If yes, China alone could comprise 30 to 50 % of the developing-nation gauge in the next decade.

Another reason for more bullish A-Share market is that H-Share is usually traded at a higher valuation in Hong Kong for the same company traded in A-Share. The gap can be as wide as 30% for certain stocks. With the open of the Connect program, the gap is expected to exploit by arbitrage traders to drive A-Share higher.

You can find other interesting articles about the program — Shanghai-Hong Kong Stock Connect information you need to know! and this Infographic. Also, my blog – 4 Reasons to Have Chinese Stocks in Your Portfolio)

(Risks: Keep in mind that not all Chinese A-Shares are available for trading in this first launch of the Shanghai-Hong Kong Stock Connect. The Shanghai Stock Exchange has different trading rules, such as a 10% price limit, different holidays between mainland China and Hong Kong. Please read this 90-page presentation to understand the risks involved).

A-Share ETFs To Hit Global Market

2014-11-10 Shanghai SE Index - 2467

Shanghai Composite Index — up 23% from bottom 2000

Large money managers from BlackRock to CSOP Asset Management registered 40 ETFs tracking China’s onshore equity and debt market with US regulators.

There are about twice as many filings for ETFs that would invest in China’s onshore stocks and bonds than there are for funds seeking to trade only overseas-listed securities, according to data compiled by Bloomberg. For example, the Deutsche X-trackers Harvest CSI 300 Index (ASHR), launched just about a year ago, has certainly done very well by raising $458 million asset under management.

If you are new beginners in investing in China ETFs. There is difference in investing in China ETFs which trade H-Share stocks in Hong Kong vs. A-Share in Shanghai. Investors can benefit most from investing in A-Share is the low 38% correlation to the S&P 500 (vs. 65% with MSCI China H Index).  Besides, A-Share provides better exposure to 13% more Chinese consumer-related stocks than H-Share. Volatility is about the same in both H-Share and A-Share market.

You can find 23 H-Share ETFs in US which are placed in the China Equities ETF ( The famous ones are FXI, MCHI, GXC, and KWEB.  These ETFs only invest in H-Shares in Hong Kong and exclude A, B-Shares traded in mainland China.

New China A-share ETFs: ASHR, PEK, ASHS, CNXT, CHNA, KBA

There are 2 ETFs traded in Hong Kong Stock Exchange which you can buy indirectly into a basket of 49-50 mainland listed A-Share stocks: iShares FTSE A50 China Index ETF (2823.HK) and CSOP A50 ETF (

*The China mainland equity market is comprised of A, B, H, Red chip and P chip share classes. A shares are incorporated in China and trade on the Shanghai and Shenzhen exchanges; they are quoted in local renminbi and entail foreign investment regulations (QFII). B shares are incorporated in China, and trade on the Shanghai and Shenzhen exchanges; they are quoted in foreign currencies (Shanghai USD, Shenzhen HKD) and are open to foreign investors. H shares are incorporated in China and trade on the Hong Kong exchange and other foreign exchanges. Red chips and P chips are incorporated outside of China and trade on the Hong Kong exchange. Red chips are usually controlled by the state or a province or municipality. P chips are Nonstate-owned Chinese companies incorporated outside the mainland and traded in Hong Kong.


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Last Thursday , I attended the FOLEYTech Summit in Boston. Below are some key takeaways from a session by Robert Brown, MD and Co-President of North American, Lincoln International who led the discussion about the current state and trend of M&A in the small to middle market. This is an interesting topic which will lead to our next topic in this post:  Is Current Tech Valuations Too High?

2014-03-28 Global M&A

(p.s. the charts above and below are not part of the presentations in the FoleyTech Summit)

Deal-flow increasing, Valuation above pre-crisis, Seller’s market bloom but is it Peaked?

First, Robert acknowledged that since the beginning of US Fed’s QE, the market has been flooded with cash from all over the world which is a key driver for lots of M&A, PE activities in the past two years.  In the publicly traded market, this phenomenon is supported by ever-rising S&P 500 companies’ P/E multiples, and technology companies’ exuberant IPO valuations.

VC-funded hi-tech companies have been aggressively looking for deals and willing to pay extra premium to acquire smaller but more innovative companies to keep up growth momentum and eliminate future competitions. Example includes: Facebook’s $12B acquisition of Whatsapp. Proposed Time Warner $70B by Comcast or Yahoo rumored investment in Snapchat at $10B valuation. Perhaps, the Chinese eCommerce giant Alibaba’s $150B IPO kind of signaled the peak of the bull market.

Robert thinks the high multiple is mainly contributed by the fact that there are too many buyers but not many sellers. This is great market for sellers to demand higher valuation.  According to Brown, even for service – technology consulting type of companies, the EBITDA multiple can be as high as 8x in recent deals which he did (traditionally, service-oriented tech business averaged 3-4x only).

Other M&A reports indicated that most of the M&A deals are in the technology, energy, oil & gas sectors. Not surprisingly to see more deals driven by strategic than cheap valuation. More global acquirers from Asia, especially from China, show up in the chart.

One warning Brown gave is that the market valuation has peaked.  Towards the end of tapering, we should expect an increase of 0.5-0.75% to the interest rate in 2015, the overall valuation multiple will contract and shrink back to a median EBIDTA 7x to 8x instead of 10x at this moment. The number of M&A deals may still be growing next year but 2014 probably is the peak for high valuation.

2013 Global M&A Valuation Trends

Debating: Is Current Tech Valuations Too High?

“There’s too much capital and there’s very few places to invest it … risk is not being priced properly and so venture capitalists are taking high-risk, high-reward bets.” —  Randy Komisar, Kleiner Perkins

When we look into the specifics in the venture capital, angel investment market, we actually see the cycle has shifted from more seed investment (like in 2012-2013) to more Up Cycle for more Series B or beyond deals in 2014. You can see from the chart (source: “5 takeaways from US VC Q3 14” by Pitchbook) below, the # of VC Deals Closed dropped from 1,540 (2013 Q1) to 1,229 (2014 Q3) and the # of Seed/Angel Deals is slowing down significantly.

2014-10-23 PE-VC 2014 Q3 Deal Flow

However the bigger tech becomes bigger.  The number of U.S. tech startups receiving $1B+ valuations in their first financing round rose 133% Y/Y in 1H14, says CB Insights. Meanwhile, PriceWaterhouseCoopers estimates the amount of VC funding directed towards “software” companies (includes a lot of Internet-related funding) totaled $10.1B in 1H14, up from just $4.6B a year earlier. Uber’s $1.2B funding round (at a $17B valuation) helped boost PwC’s figure.

Many VCs are looking to boost the valuation for the ONE blockbuster successful company out of their 50 companies portfolio and hope for a exuberant exit. From the Pitchbook charts below, even though the number of exits has declined significantly but the pre-money series B valuation is getting higher.2014-10-23 US VC Exits by Quarter2014-10-23 PE-VC 2014 Q3 Series B Pre-Money Valuation by Sectors

The breakneck investment pace has led a slew of high-profile VCs to warn valuations have gotten stretched, if not suggest a fresh bubble is afoot. “No one’s fearful, everyone’s greedy, and it will eventually end,” declared Benchmark’s Bill Gurley in a recent WSJ interview. “I think that Silicon Valley as a whole or that the venture-capital community or start-up community is taking on an excessive amount of risk right now. Unprecedented since ‘’99.”

Marc Andreessen and Fred Wilson have warned startups to curb their spendthrift ways. Andreessen said: “When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co’s will VAPORIZE.”

Nevertheless, Menlo Ventures’ Venky Ganesan: “While we are in an up cycle, we are nowhere close to the top … There are pockets of irrational exuberance, but for the most part, I think it’s actually fine.”  As most investors say: “There is no tech bubble until the bubble is burst.”

The CB Insights article also interviewed few west coast angels. Some are actually investing in farmland and real estates in their portfolios to hedge against future downturn as we saw in 2011.  Scott Banister, an angel investor in Paypal, Uber said: “If I’m investing in technological change, I would like to have part of my portfolio invested in things that are resistant to value erosion due to technological change.”

To see more data and charts, you can download the “Five Takeaways from U.S. VC in 3Q” and charts from

You can also check out the aggregated investment dollars and # of deals from 1995 to 2014 on PwC Moneytree — link.

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Many analysts talked about disruptions to the global payment industry brought by Apple Pay (my previous blog on Apple Pay) but less coverage is about Apple SIM. Like how Apple Pay virtualizes the credit cards inside smartphone, Apple SIM eliminates the need to store a carrier-specific identification in a SIM card. It revolutionizes the way consumers shop for carrier plan and consume data across devices, and even make financial metrics (like APRU) obsolete for carriers. Incumbent industry giants should be worried about their business models and strategies in near future.

Apple SIM — 10 Times Easier to Switch Carrier Without Changing Devices

A decade ago, for international travelers, carrying multiple phones was very common in order to make calls in different countries without expensive roaming fees.  Few years later a mobile phone, which is capable of storing multiple SIM cards, was invented. It became so successful and evolved into a standard for many mobile carriers, especially those price-sensitive market in SE Asia.

What’s different now is Apple last week revealed the iPad Air 2, and along with it a new way to handle SIM cards. According to Apple, the new Apple SIM, a nano SIM card that allows the cellular models to switch between multiple mobile carriers without changing the actual card.

You no longer need to choose which carrier model when you purchase iPad Air. This new card gives iPad Air 2 owners unprecedented flexibility when it comes to choosing an LTE (4G) service provider. “Whenever you need it, you can choose the plan that works best for you — with no long-term commitment,” explained Apple. ” And when you travel, you may also be able to choose a data plan from a local carrier for the duration of your trip.”

At launch the card supports AT&T, Sprint, T-Mobile, and UK carrier EE. No word on why Verizon isn’t on the list.  Given that the iPad Air 2 supports 20 different LTE bands, similar to the iPhone 6 and 6 Plus, we can expect more international carriers will sign on.

Apple SIM creates a future problem for carriers. Current Apple SIM technology is believed to store the SIM registration in carriers’ data servers, not on the device. Apple SIM can change the paradigm of existing carrier model. Future Apple devices can allow multiple users to log into a iPad and then sign up an 1-hour carrier data plan with a specific user id. It’s similar to the way we use desktop and make connection to WiFi.

Cut the Carriers Off Mobile Payments 

The mobile carriers have seen this episode back in 2006/2007 when Apple negotiated deals with the mobile operators to launch the iPhone. It granted periods of exclusivity in exchange for having the mobile operators invest massively in things that Apple wanted to do, such as marketing, control over subsidies and even a minimum order commitments (which costed Sprint a lot). By the time the exclusivity periods ended, Apple devices were wildly popular and Apple had amassed enough bargaining power to cut even better terms with those same carriers without giving them any ability to fight back.

Seven years later, when it was time for Apple to consider payments, the carriers were completely left alone in the dark and didn’t even have a seat at the table for discussions over Apple Pay. The carrier billing, carrier-backed Isis mobile payment system, and many other efforts effectively become long-gone dream, fruitless and irrelevant.

Pay-Per-Use Becomes Standard, Hard to Retain Subscribers By Carriers

Simplifying the product line instead of shipping carrier-specific versions of iPhones and iPads seems like a huge benefit for Apple.  Although this move is limited to iPad Air 2 and the iPad Mini 3, we would expect Apple will extend this Apple SIM to other Apple products, including iPhone. In theory, you can jump between carriers based on the one that’s offering the data plan for the price you want, and you never have to swap out the SIM card to do it.

For now, it’s LTE data-only. It may evolve into voice and text also. Even it’s just data, consumers are smart enough to make calls using data connection (like WiFi or Voice-over-LTE) which skips the restrictions on number of minutes completely.
What it means is that post-paid and carrier lock-in plan will becomes history.  Pay-per-use model (usage metering) will become the future standard.   This also means the future mobile carrier competition will become more intense.  New carriers or MVNO (like Virgin Mobile) may emerge to offer very competitive plan to persuade subscribers to switch carriers.  Carriers will has less incentives to offer subsidized phone plan.
Eventually, it’ll be a competition on best quality services and lowest prices based on locations.

Multi-User on iPad >> APRU Not A Right Performance Measure 

Average Revenue Per User (APRU) is a common acronym that carriers used internally and externally reported during each earning call.  APRU is used as one of the financial measures to see  how much money spent per connection (i.e. SIM card).

However, the APRU is declining quickly because the incremental revenue added by additional user to your family plan is less than the first basic subscription plan.   The  APRU decline phenomenon proliferates when you extend to friends, co-workers in the Shared Plan world and when you purchase bundled services with voice, TV, home phone, and security together.

Since APRU decline reflects trends at a SIM connection level rather than the ‘real’ average consumer spending, some carriers introduce new measures, such as APRS (subscriber) and APRA(account) to help evaluate performance. As indicated by the GSMA chart below, APRS is increasing while APRU is declining in the USA.

In the case of Apple SIM, carriers have to allow a subscriber access their data service across multiple devices or multiple users access their data service in a single device. This makes a SIM connection no longer the accurate identification of an unique subscriber or account.

All these aforementioned changes to APRU definitions and calculations require great attention from mobile carriers. Question for carriers: how to evaluate their business performances accurately in the context of their current business and forward-looking market trends.

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September 9 2014 is the biggest day in Apple’s history — the announcement of new iPhone 6, 6 Plus, Apple Pay, Apple Watch, iOS 8, iHealth apps, and many new features and apps. People even comments the Apple Watch is the next big thing after iPhone.   If you miss it, you can watch recap here – link.

2014-09-09 iphone 6 pic

3 Important Moments For Investors

As a professional investor, I bought Apple stocks multiple times when its post-stock-split price hovered about $57-$78 a share and sold it multiple times as well after each peak. What interests me most is the supply chain impact because of Apple’s products.

Investors usually “buy the rumors (hype) and sell the news (event)”. Ahead of the big event there are those who are flashing back 2012 when Apple shares sprinted higher ahead of the release of the original iPhone 5. Apple shares peaked on almost exactly the day of the release then collapsed by almost half over the next six months. Even today the market cap of Apple is lower than those heady days (though the stock price is higher… buybacks make up the difference).

This trading pattern manifests itself in these 3 important moments from Apple (1) new iPhone announcement, (2) iPhone pre-order number news, and (3) when we receive iPhone in our hands. On the last step, companies like iFixit would normally fly to Australia to get their hands on new iPhone, tear it down (disassemble) into pieces to check which suppliers are used in the new iPhone. Speculative investors would pay to get the first hand information.

2014-09-09 iFixit iphone 5s teardown

Nowadays, leaked information flows faster than ever, many reporters had shown and written about mobile payment, health, fitness app and Apple Watch a week or even months earlier than the new iPhone announcement.  For example, 3 days before the Sept 9th official announcement, Techcrunch reported (link) that China Telecom might violate the contract to put a iPhone 6 pre-order page on their website. I guess that’s why Apple pulled China out at the last minute from the list of countries in the first launch.

2014-09-09 AAPL China telecom leak

Winners in the Supply Chain

Apple continues to demonstrate its unparalleled control of product ecosystem. Apple launched the first payment truly leveraging its hardware (NFC + Fingerprint). This is really a negative news for Square, EBAY’s PAYPAL, and other mobile payments startups.

In terms of winners, iPhone 6′ 5.5-inch optical image stabilization comes from the Japanese listed company 6770.tyo (ALPS), NFC chips are NXP Semiconductors (NXP). Both are iPhone’s new suppliers.

The stealth winner is InvenSense (INVN) which provides all the tracking software, accelerometers and gyroscopes in the iPhone 6.  The market rumor started last year from iPhone 5S but INVN was excluded in the final time trial production. This year iPhone6 ​​and Apple Watch, iPad, iPad mini will at least boost a hundred million to the INVN new shipments. INVN is also a supplier to Samsung phones that use optical image stabilization. INVN successfully breakthroughs in several markets simultaneously.

Broadcom (BRCM) draws roughly 28% of their mobile revenue from selling Wi-Fi chips and touch controllers to Apple. High chance that Apple will switch from 802.11n chip to a little bit more expensive 802.11ac chip in iPhone 6. (yet to see at tear-down)

Apple’s “A-series” chips (application processors), baseband inside iPhone 5 is done by Samsung since 2012.  It’s addictive not to think that Apple will transition to Taiwan Semiconductor (TSM) for the manufacture of its application processors. Risk is that Samsung has more mature and advanced 14-nanometer manufacturing technology (i.e. thinner/smaller). If not, TSM will gain significant share with iPhone 6

GT Advanced (GTAT) disappointed many investors that it will only supply sapphire glass display for Apple Watch but not on the 5.5 inch iPhone 6. Its share price plunged 12% on Sept 9th. The drop attributes to the fact that Watch release date is postponed until next year. Initial shipment is expected around 3M to 5M for Watch in 2015 Q1.  Also, online heated debate between Corning’s Gorilla Glass vs. GTAT’s Sapphire Glass pined down the net benefits of using sapphire (link).  IMO, GTAT sell-off is overdone especially because Apple has already invested $500M in GTAT to build 200 furnaces to produce sapphire. Even though the Apple Watch initial shipment is small and delayed, GTAT should be a “hold” given that it is a major supplier of sapphire and the volume is expected to increase due to higher demand of Watch.

Apple Watch Creates New Ecosystem

2014-09-09 AAPL iWatch

The new Apple Watch platform, the new big data is many entrepreneurs’ paradise. Once again, Apple creates a new ecosystem.  It opens up lots of possibilities, a new entry to mobile data for app developers to explore new applications among social, personal location, and healthcare. For example, emergence of Apple Watch is very positive for search service provider such as Google, Baidu (search, maps), YELP, Twitter, public comment and apps based on mobile end personal location service provider. My only concern is the battery standby time.

Apple Watch is a real threat to many emerging wearable bracelet manufacturers and to many $ 400 or higher watches manufacturers. Apple Watch appeared to prove that the era of wearable smart devices coming true. The Watch also plays the role of industry standards. Apple has ecosystem advantage that will give a two-year lead time for Apple to beat Google and Samsung.

Should You Buy Apple Stock Now?

If you own Apple stocks, you should stick with AAPL despite a potential sell-on-the-news reaction.  iPhone 6 is a big jump from iPhone 5 with its new hardware and features. Optimism around the iPhone 6 is running high given Apple’s user loyalty and installed base of more than 300 million iPhones, which could drive a big upgrade cycle. The larger screen size may also help to regain lost market share to Android.

2014-09-09 AAPL stock chart

If history hold truth, Apple stock price peaked roughly on iPhone 5 debut in 2012 and fell in the next 6-9 months. 5S and 5C launch was perceived to be a disaster. However I believe this time is different. Both iPhone 6 and Watch are big game changers. Some believe that these may bring lots of would-be Samsung fans to switch to the newest and cool stuff on the earth.

What have announced at the launch event yesterday (Sept 9th) is tracking what we expected from the leaked information. So if you haven’t bought any Apple stock, it’s wise to wait until we see the pre-order number news. If there is a lot of surprises on the upside, Apple stock price will definitely move to a new high around $120 level. You can still make a good 5-10% profit by riding the tide from current closing price of $98 .

Bonus: Interesting Fact — iPhone 6’s Impact on China GDP

Economists predict that because of iPhone 6, China’s GDP will increase by 1% this year and Taiwan’s GDP will increase by 2%. Almost 30% of the parts inside an iPhone are sourced from Taiwan suppliers and shipped it to Foxconn assembly plants in China mainland. In terms of economic $ value created by iPhone for China is about US$6-7 (net of import/export) and in Taiwan, $24-28.

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Major US indices were down around 2.5% after reaching the peak on April 4th. The “scary chart”, which I mentioned in my Accel Value March newsletter, kind of predicted this current market correction.

The 2 questions I got asked most recently are: How to hedge my portfolio risks? Shall I sell or hold my existing investments and buy at the dip?

[What is risk?]

Before I answer the questions, let’s define “risk”. Beta is a measure of volatility, how likely the stock price will move up or down. It’s not a true measure of risk. In fact, high volatility stock sometimes offer us greatly discounted price to enter a position.

I use Price-to-Value ratio (P-V) as a measure of risk instead of Beta.  When P-V of my individual stock or total portfolio gets too large, e.g. close to 90%, it becomes too risky for me to own the stock because the downside risk is much larger than upside reward.

[How to hedge my portfolio risks?]

Unless you can time the market perfectly, using call/put options will increase your costs and reduce your potential returns.  My approach to risk management is to get into a position with incredibly large margin of safety and control your bet size.  Large margin of safety (price << intrinsic value) helps limit your downside risk.  Your bet size calculation takes into account of multiple factors, including but not limited to: portfolio’s liquidity, company’s P/V ratio and enterprise value relative to that of existing holdings.


[Shall I sell or hold my existing investments and buy others at the dip?]

Simple answer to the above question is “it depends”. It depends on what’s right for you, considering consider your risk tolerance, investment objectives, time horizon and available capital.

Second part is: Do you have other investment opportunities better than your existing holdings?

If you do have, you need to compare and contrast them using fundamental analysis. You can refer to the example I gave in my blog – “Why Goldman calls Microsoft a sell at $29 a share”  and understand why I would recommend booking profit on Microsoft at $40 and buying Apple at $530 or other inexpensive dividend-paying stocks.

2014-3-24 MSFT comparsion to IBM AAPL INTC CSCO

Many individual investors are proud of our own stock picking skills. We like to tell people which one we bought after it went up 30, 50%… Picking the right stock indeed is very important but the more important thing is portfolio allocation – how much cash you allocate to the positions in your portfolio.

For example, my friend told me he has made 15% on holding on Yahoo and Microsoft so far this year. It is great paper profit yet realized. But other than these 2 good picks, the rest of his portfolio, about 2/3, is flat or down 15%.  Overall, his portfolio under performs indices regardless of the good picks’ performance.

Another scenario is: investor likes to hold on a dividend-paying stock when the stock keeps going up.  It seems making lots of sense but he forgets that the stock price (P) is rising close to the fair value (V) and its dividend yield (d/P) is declining.  What I would like to suggest is: when P converges with V, investor shall consider selling part of the position to book the profit and use the cash to buy other cheaper stocks.

[“Value-Weight” Portfolio]

Creating an optimal portfolio allocation requires experience and time and it also depends on your investment strategy.  I developed my own allocation formulation with a blend of Market Capitalization and Value-Weighted methodology and I also re-balance my portfolio weekly and whenever special events happen.

Some of you may hear Joel Greenblatt‘s Magic Formula Weighted Index. Joel is a professor at Columbia and founder of Gotham Capital and Formula Investing. There’re books and many blog discussion on Joel’s research and rationale. His basic rationale in terms of generating alpha is: Market Capitalization Weight < Equal Weight < Fundamental Weight < “Value Weight” (Greenblatt’s Magic Formula Weight).

I won’t go into too much details here but I would recommend you to read this post by Tobias Carlisle — “Why Does an Equal-Weighted Portfolio Outperform Market Capitalization- and Price-Weighted Portfolios?”.   After this reading, I hope you would understand why professional portfolio manager spends equal amount of time in stock picking/research vs. portfolio allocation.

In a Janaury 2012 paper Why Does an Equal-Weighted Portfolio Outperform Value- and Price-Weighted Portfolios? Yuliya Plyakha, Raman Uppal and Grigory Vilkov examine the performance of equal-, value-, and price-weighted portfolios of stocks in the major U.S. equity indices over the last four decades (note that here “value” weight is used in the academic sense, meaning “market capitalization weight”).


They seem to agree with Greenblatt when they find that the higher alpha of the equal-weighted portfolio arises from the monthly rebalancing required to maintain equal weights, which is a “contrarian strategy that exploits reversal and idiosyncratic volatility of the stock returns; thus, alpha depends only on the monthly rebalancing and not on the choice of initial weights.”



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Back in Feb, everyone chatted about Is Facebook Paying Too Much for Whatsapp?  I also posted an article 2 days before the acquisition announcement was made to discuss how Amazon, FB, and Google alike can learn from Alibaba and Tencent’s model of combining mobile commerce, banking and mobile communications.

Financially, Whatsapp would need to earn US$49 per user to justify a hefty valuation of $19B.  While WhatsApp has so far kept its messaging service simple and free of advertisements, rival apps like Line, Kakao Talk and WeChat have been scrambling to find ways to make money through additional services. Whatspp’s revenue stood at $20 million last year. The company says it charges a $1 annual subscription fee after one year of service and plans to offer voice-calling service later this year.

In this article, I will discuss 5 possible models Facebook can use to monetize Whatsapp in the future.  A lot of those have been proven by other messaging apps.

2014 Major Players in Messaging Apps

1. Brand Advertising

Businesses and celebrities can open an official accounts and pay fees to send a set number of promotional messages to the people who voluntarily add (“subscribe”) that business or celebrity to its contact list.   It’s similar to Facebook’s “fan” page or Twitter’s “follow” feature.  (In my opinion, if Whatsapp can implement this correctly, not to compromise user experience, it can easily eat into Twitter’s ad market share by a big chunk.)

Line, which is popular in Japan, Taiwan, and Thailand, has been advising corporate and celebrity to design messaging campaign, to keep message short and avoid sending them too often.  Line discontinued the traditional display & commercial ads model because it’s too disturbing and undermines their appeal as social messaging tool.

Kakao Talk, which is famous in South Korea, also use similar strategy by letting brands and celebrities like “Gangnam Style” singer Psy send messages and updates to their subscribers.

Likewise, WeChat (known as Weixin in China) has positioned itself as a service tool instead of an active marketing channel.  Many business users are advocates of WeChat marketing for customer service in order to highlight its value in consumer conversation, brand awareness and Social CRM instead of media coverage and sale conversion.

WeChat Subscriptions

WeChat – Subscriptions Account

2. Mobile Wallet and Commerce

Extension to the subscriptions mentioned above, big brands as well as local merchants can set up “stores” inside the messaging platform.

For example, WeChat separated services account from subscriptions account, in which services account can offer more complicated marketing campaigns, flash sales/promotions, and enable transaction all the way through payments.   WeChat last year added an electronic payment feature to the popular app – a step toward making money with small handling fees for transactions made within their messaging app.

In WeChat’s 5.0 update from 2013, Tencent already added a function that allows users to bind a bank card to their WeChat account for online and offline purchases. Since then, WeChat has let its users pay for taxi fares, movie tickets, lottery tickets, bill-splitting, and a few other goods and services.

Line and Kakao also try to explore the peer-to-peer transfer market by letting user send gifts (like a Starbuck coffee) to each other.   Further discovery services can be implemented in future within the messaging platform, for example a map search service for restaurants, post-offices, gas stations, etc. based on geo-location of your mobile phone.

This is not an imagination, you will see the convergence of online, offline commerce, and mobile messaging.  Perhaps, Amazon and Walmart will buy one of these messaging apps in near future.

WeChat services

WeChat Services Account

WeChat-Xiaomi 3 Flash Sales Promotion

WeChat-Xiaomi 3 Flash Sales Promotion

3. Mobile Banking / Financial Services

In addition to mobile commerce, one interesting trend set by the biggest 3 Internet giants (Baidu, Alibaba, and Tencent) in China is to let users set up online banking and investment brokerage accounts.

The new way to Bank

The new way to Bank

In 2013, Baidu, Alibaba, and Tencent have all launched wealth management products, hoping to cross-sell consumers in a country with sky-high savings rates on investment vehicles that deliver much higher returns than those provided by state-owned banks.

Baidu, after the wealth management platform,  is now heading a partnership that’s applying for a private banking license.  Alibaba’s Yu’e Bao platform has been especially successful, attracting 81M users who have collectively deposited nearly RMB500B ($81B).

Chinese Premier Li Keqiang, who has pushed for a slew of financial reforms, says he supports the “healthy development” of Internet banking services.  The possibility of Whatsapp offering financial services may be just a dream in the USA given the regulatory hurdle and market dominance of those Too-Big-To-Fail banks.

WeChat - user can deposit up to RMB 1 million in a new monetary fund

WeChat – user can deposit up to RMB 1 million in a new monetary fund

4. Mobile Gaming, Virtual Goods & Stickers

Offering mobile games and in-message stickers (emoticons) are  the most common ways to generate revenue on the messaging app.  Line, Kakao Talk, and WeChat all have game centers on their apps to offer free-to-play video games that make money from in-game purchases of virtual items and other services. Users can also purchase stickers (like emoticons, featuring cartoon characters) and send those as messages to their friends.

Line raised eyebrows in May 2013 when it revealed that it made $17 million from selling stickers during the first quarter of 2013.  Last July, Kakao Talk revealed that titles on its games platform generated 348 billion Won ($311 million) in revenue during the first half of 2013, up an impressive 194 percent from the final quarter of 2012.

Virtual Stickers on Whatsapp

5. Other Value-added Services with Partners — Music/Movie Downloads

Like WeChat, Whatsapp can charge fees for each transaction user initiated from various merchant services in a marketplace format.  Besides, there’re numerous opportunities for the messaging platform to white label any 3rd-party services and offer it as a valued-added service within the app.   Games center and financial services are already great examples. Whatsapp can also introduce a section/tab for “Music” for people to trial listen and pay to download songs; a “TV/Movie” for people to pay to watch shows.

Line's Partner Services

Line’s Partner Services

Final Words

The appeal of social messaging apps is open-ended. It allows you to gain millions of users, in different parts of the world, who are addicted to sending messages, sharing information, and even ordering convenience services via mobile device. The popularity of the applications is costing many mobile operators who will lose $32.5B in texting fees due to the trend.  Companies like Vodafone, America Movil, Verizon and other tech giants, such as Microsoft, Google, Softbank are forced to re-think their strategies, including buying these applications.

For sure, $19B is worth a lot of money, one day Whatsapp will be worth a lot more.

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Since Microsoft (MSFT) broke the news about its CEO replacement (Satya Nadella) around Jan 31st 2014, its share price enjoyed a ~18% rise from $34 a share to $40 as of March 21st. I am no better analyst than anyone to judge and value MSFT. But in my view, MSFT is getting way ahead of itself.    At this price level ($40 a share),  we have already priced in the hope (or illusion) that the new CEO would sail the giant cruise ship “direction-ally positive” in the future, ignorant of its past failed initiatives. In the following analysis, we find more downside risks than upside rewards owning MSFT at $40 a share. At the current price level, we could also find a few better alternative dividend-paying investments than MSFT.

2014-3-24 MSFT wants you to pay $100 for Office every year

Source: Microsoft

Goldman calls MSFT $29 a share

On Feb 24th, almost a month after Satya became CEO, Goldman Sachs reiterated a Sell rating on Microsoft with a price target of $29 a share.  Here’s an excerpt of its comments follow the report:

“We see MSFT’s price aggressive tactics as unsurprising as the company works to establish a more meaningful footprint in consumer compute. MSFT has been a laggard in tablets with 3% share in CY13, while the PC market has been in decline (-10% yoy in CY13 and -4% yoy in CY12), partly due to the rise of mobile computing. We note that both the PC and tablet categories are expected to see ongoing pricing pressure in the years to come, given changing demand dynamics and also new form factors.,” said analyst Heather Bellini.

“Ultimately, we see pressure to Windows pricing as presenting a challenge over time to MSFT’s overall gross margins for D&C Licensing (GSe: 91% in FY14, and contributing 28% of MSFT’s total gross profit) as price points on PCs and tablets continue to fall. We model total Microsoft gross margins of 69.6% in FY14 (Street: 69.7%) vs. 68.4% in FY15 (Street: 70.0%),” she added.

In a nutshell, Goldman thinks MSFT has not been able to turnaround and establish a significant market share in the mobile and cloud computing trends (since the beginning of iPhone and Amazon Web Services launches) while still facing huge price cutting pressure and declining revenue in the PC market.

Is Office iPad app a real killer to justify $40 a share?

Not surprisingly, many investors think bullishly about the Office iPad app launch reported on March 27th.  Office remains Microsoft’s biggest money-maker: Before changing up its reporting, Office has 1 billion users around the world. Last year, the company’s Business Division (dominated by Office) had FY13 op. income of $16.2B, well above the $9.5B produced by the Windows unit and the $8.2B produced by Server & Tools.  Both sales and profit grew 7% even though the latest version of Office was already two years old.

Source: Microsoft

The apps will require an Office 365 subscription, much like the Office iPhone and Android apps released last year. Since the release of those apps, Google has made its Quickoffice productivity suite free, and Apple has made its iWork suite free to buyers of new iDevices.

In a move viewed by some as a prelude to an iPad launch, Microsoft recently rolled out a Personal edition of Office 365 that goes for only $70/year, 30% less than Office Home Premium (supports up to 5 PCs). The real sales discounts to enterprise users would be much higher than 30%.  Basically MSFT needs to sacrifice profit margin to catch up with Apple and Google to gain market share in tablet and cloud computing market respectively.

Office and Windows OS made up 95% of the company stock price in 2012 and unfortunately this picture has changed in 2014.  The Trefis’ chart below shows the entice group of new products (search, phone, and games) are contributing less than 7% to the stock price.

Maybe MSFT would be worth $40 a share in 2016 however unless CEO Satya had a magic wand to build a new company without too much reliance on old product suite, I have doubt in any huge success in a year or two.

2014-3-24 Trefis MSFT product mix

Source: Trefis

The question is who is buying $100 a year subscription for Office 365 on iPad?

Office 2013 and Office 365 are a clear improvement over previous iterations. But there’s a larger question here about who Microsoft Office 2013 and Office 365 are really for.  For small businesses, it’s worth paying $1000 or more having all users on a standard, shared apps suite with free upgrade. However for simple tasks, online services like the very good (and very free) Google Docs work just fine.  For most of us, an existing copy of Microsoft Office — even one that’s years out of date — will also get the job done.  That means a growing number of Office customers are staying with the same version for five, six or even seven years, according to consultancy ITIC.  That doesn’t put money in MSFT’s pocket.

How about on the growing tablet market?   Well, how many of us need all the bells and whistles on a tablet — rich formatting options, plug-ins and cloud services, etc?  Not for the $140 price tag (for Office 2013’s most basic version) or $100 a year subscription fee (for Office 365) that Microsoft is charging.

MSFT hopes that subscription pricing will create more sticky, cheaper entry point and more predictable, fixed sales stream it can count on yearly. Well, this would be an upgrade most of us can afford to skip.

Should you book your gain for MSFT and invest in Apple?

I remember I studied MSFT case study in my MBA Value Investing class (probably a famous and commonly used case in many MBA schools).  Value investors were attracted to MSFT’s cash balance (~US$3B), about 4% dividend yield, and most importantly a “moat” which is its Windows OS and Microsoft Office software.   The case has been studies million times.   In a decade, MSFT share price never went up higher than $40,  a level it last saw in July 2000.   Therefore, crossing $40 is a big psychological win for lots of investors.  Question is always whether you shall value MSFT like a hi-growth technology stock or slow-growth dividend-paying traditional value stock?

2000-2014 MSFT stock performance

Wanted to leverage some findings and data points used in a Seekingalpha article to address the issues for declining yield, high R&D capex, and non-innovative product mix.

  • Declining Yield: MSFT’s technically trading at 15 P/E ratio, above its 5-year PE average at 13.18. Current dividend yield is declining from 4% range to 3% range. Even though Microsoft’s dividend growth so far has been impressive, other old tech names like Intel Corporation and Cisco Systems yield a lot more right now.
  • Ineffective  R&D Capex vs. Apple and Google: based on recent CNN article, Apple gets more bang for its R&D spend than most other companies do, in terms of sales increases. It’s easy to believe MSFT needs to spend lots of money creating innovation organically or via M&As in order to catch up with Apple and Google in both consumer and enterprise tablet and cloud computing market.
2014-3-24 MSFT spent way more than Apple in R&D

Source: CNN

  • Expensive to buy growth: MSFT’s PEG ratio (PE / growth) will be > 2.0, way higher than many of its peers.  If MSFT share price continues to rise in 40s, it’s hard to justify why you should invest in MSFT but not Apple.  I used data from Yahoo! Finance on March 24th to illustrate the comparison. 
    2014-3-24 MSFT comparsion to IBM AAPL INTC CSCO

*I don’t bring up Blackberry here as a comparison to MSFT because some people see Blackberry as a very risky bet.  But apparently both CEOs are selling turnaround stories. One is a first-time CEO (Satya Nadella) with lots of cash on hand, low risk to fail. Another is an experienced turnaround CEO (John Chen) who has limited time and cash to fight for survival. Probably it’s worth another blog post to compare and contrast. Who will have higher chance to surprise investors on the upside?

  • Over-Valuation: Today, Barron’s analyst Jack Hough exudes praise for Apple’s “hardware-as-a-service” business model, and thinks shares could rise 20% to $635, or 13.6x C2015E EPS, next year, given Microsoft currently goes for 14.4x C2014E EPS.  There is high chance that the price will go higher later at MSFT’s conference in San Francisco on 27th where CEO Satya will make his debut to talk about future strategy.  However to provide a market view for price target of MSFT, it’s though to convince value investors that $40 a share is very cheap buy-in.
    • 25 analysts on Yahoo Finance have an average price target of $38.84, 4% below the current share price.
    • 38 analysts on have an average price target of $39.4, 2% below the current share price.
    • Only has a price target above the market price and that too represents just a 5% upside.


As a value investor, Microsoft is still a great technology company to own with 2-3% dividend yield. A new CEO and iPad app brings a stream of hopes and optimism to pump the share price to historical high. How much imagination you could get from new CEO transformation story?  Instead of betting on any surprises to propel the share price higher, it makes more sense to look at MSFT’s fundamental and long history of slow to no growth. When there is high market euphoria on MSFT, it is easy to convince yourself you can better use your cash somewhere else.

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