Tag: Technology

On the overall tech industry from an investment perspective

Posted on by fqzhang

In this blog, I will focus on some of the recent trends in the tech industry and where I think it is headed to in the future.

  • Prospective future growth: there is still a lot of inefficiencies in different industries. For instance, the media industries, with bundled products, will face increasing challenges from pay-per-view medias. Internet will be applied to more and more company. We can save people a lot of time. Another area filled with inefficiencies is in healthcare; however, the risk in this category lies in government regulation.
  • The current tech boom: One key reason for the current boom is the result of Infrastructure costs have dramatically cut down. The bandwidth, processer, storage cost, down 25% each year. Fundamentally deflationary trend over time.
  • The competitive landscape: More competitor. The business models have all been working, unlike 1999, when so many business models do not work at all. Management team and competitive risks will be the most important as we go forward and analyze a company. This is also in part due to the lessening of the costs over time.
  • Buzzword of 2015, a “unicorn bubble”. Unicorns are defined as private companies valued at over $1 billion, and currently there are over 150 such companies in existence. The market has been generating tons of free cash flows.

 

Money generating models:

  • Ad, subscription, and retail models
    • The models are very important:

Who are the winners over the past few years?

  • The “FANGs” – Facebook , Amazon, Netflix, and Google

Who might be prospective buys in the future?

  • Top picks: Amazon, LinkedIn, Priceline , Expedia, Google
  • Negative outlooks: Twitter, Groupon, Yahoo

How to identify great value?

Successes:

  • Google and Facebook accounts for over 50% of all online advertising revenues around the world. Adverting model can be declining due to saturation. Can you come with a great advertising proposition for the company?
  • You have to catch the trend right. Google is like a tax on all internet usage, since searches are powered by Google. They need to get everything and anything they can put it online.
    • Strategic acquisitions and developments are important. Even though Motorola seemed odd, but it actually give Google significant patent protection. Google’s android development is great.
  • As identified before, we need to look at: advertising, retail, travel (revenue generating model).
  • Companies need to be willing to make long-term bets. Yahoo failed to make a long term bet while Google did. For instance, Yahoo did not jump on the train for mobile software, for social media, and a number of other things.
  • Study in failure: Ebay did not significantly innovate instead. Ebay, the only reason that the stock prices are staying high is because they are buying back shares and using other accounting tricks to boost their earnings (of course, this cannot last). Look at the company’s acquisition, Ebay made a certain number of acquisitions that are not related to its core business (they were owners of Skype at one point, what does Skype have to do with selling things online).
  • Amazon has super thin margins, but it is able to consistently generate growth to make itself bigger and more important. For Amazon, market share is key.

 

On Tesla specifically:

The unknowns about what a stock like tesla can do is enormous, and what the firm’s potentials are somewhat questionable. It generates a lot of optional value in the sense that we aren’t sure what they are doing. High volatility expected.

 

Companies that are not yet public but have interesting prospects:

  • Snapchat: key question is in how to expand snapchat, user base?
  • Airbnb: we are still looking at broad range of model.

 

Analyzing a company using the 4M framework:

  • Management team, (have to meet them face to face).
  • Business Model (social media is beautiful business model, 90% margin business).
  • Moats can also change over time (Ebay, competitive advantages are not very sustainable for too long, because they miss the next coming trend). Yahoo missed a lot of these new trends (video, social media). A lot of moats are based on the network effect. Network businesses can be undermined, but they can create a good moat for a couple of years. Are they global moats or are they local moats? Important to determine if they can be undermined.
  • Market opportunity. The greater the end opportunity the better it is. Google generated a large amount of TAMs (total addressable market). The market that Google enters contains huge amounts of end values.

 

Some specific things to be aware of when looking at these stocks:

  • Remember that each publication may have some sort of bias to them; for instance. Barron’s has more of a value bend to the articles they write, so they might exhibit bias against high growth tech companies.
  • Financial practices of companies: The management teams increasingly make up their own Adjusted Ebitda, rather than using standard GAAP measures
  • Specific example of a risk: Alibaba, it is possible that they are over-stating their numbers? Can we trust the financials? The average Alibaba user spends more with Alibaba than with the Amazon user spends with Amazon, even though incomes per person in China is about 1/3 of the US. Perhaps this goes back to the idea of the inefficiency in China? Perhaps there are simply no other choices (brick and mortar stores simply aren’t on par with online products)
  • We must also look at the industry in more detail as well:
    • Why is music a much more lousy business? There are only like 4 major labels, power is with the record labels. For instance, Pandora have gross margins of around 17%. Not much room to spend in r and d really.
    • Contrast this to the Netflix. Netflix faces significantly more players in the movie making landscape.

 

 

 

 

Agricultural innovations in Israel: reasons and impacts

Posted on by fqzhang

Israel is a land of many innovations and the birthplace of many progressive technologies. Here in this blog, I would like to discuss one of the areas that Israel has excelled: the agricultural sector. We often speak of necessity as the mother of all inventions and this is the absolutely true with regard to Israel. The nation is covered over 50% by desert, most of which is in the Negev desert to the south. The amount of land that is agriculturally productive is extremely limited, and whatever land that is suitable for growing crops faced the perennial problem of irrigation. Massive water projects in diverting the water from the Jordan River has been successful, but nevertheless, water conservation is key.

Many companies in Israel is currently working on developing new technologies that relates to water conservation. The most direct way to conserve water is to shorten the growing period for food crops. Many multinationals – Flextronics, Dupont, and even Google[1] – is interested in how to apply the Israeli technologies to market it to the world. The aim of these partnerships is to link up many Israeli startup firms with other large multinationals (most of which is based here in the US) and to leverage off the larger company’s capital, labor pools, counseling, coaching, etc, to develop the products or services that these Israeli companies need to market its product overseas and to ensure its survival in the face of global competition.

Many Israeli partnerships with firms in California is already very well known. The regions (the interiors of both California and Israel) both faces water shortages that disrupts the growing season, despite the strong amount of available sunshine and other factors that are conducive to productive agriculture. Israeli products found a strong demand in these regions of California. What is perhaps less known is the fact that many Israeli companies and technicians also involve themselves extensively with other countries around the world, such as China and India, which desires help to make its agriculture more productive. As world population increases and the amount of land available for crop growing decreases (due to urban sprawl, pollution, etc), there is now more of a demand for more efficient agriculture. Israel can capitalize on this trend of growing global demand and expand its market positions around the world.

We often speak of Israel as a startup nation that encourages innovation, in large part due to compensate for its lack of natural resources and other means of economic growth. While this is true to some extent, the impact of Israeli companies and their innovations are far more than simply economical. In many ways, it is also beneficial for Israel as a nation on the international stage. By encouraging partnerships between Israel and other nations in the form of business and technological exchanges, Israel can also inspire a feeling of goodwill from other nations around the world, which will benefit it diplomatically. In international diplomacy, we often speak of a “hard” versus “soft” power, and the combination of these two is what makes a nation strong. While Israel certainly already has plenty of “hard” power, defined as absolute military or economic clout, it can also increase its soft power, which is defined as cultural or scientific/technological prestige. Israel, through its networks of businesses that assist other nations around the world with their respective agricultural projects, can increase its global influence in areas that might never have anything else to do with Israel. This increase in Israel’s soft power will no doubt last longer in the long run, since respect for a country for what they are and what they do will outweigh any other form of diplomatic tools on the world stage.

As we can see from this discussion, something as small as having a small start-up focusing on agricultural innovations can go a long way in helping a nation to succeed on the international stage. The current path of encouraging innovation as pursued by the government and society of Israel will benefit the nation and the world in the long run.

[1] Google Shows Interest in Israeli Agritech Companies; http://www.israelagri.com/?CategoryID=482&ArticleID=1039

Investment Analysis: Struggling industries and prospective short-sell candidates

Posted on by fqzhang

As 2015 is starting, many in the investment circle are looking at what new industries and companies are presenting opportunities. While this is important, it is just as important to note what industries not to pick for this upcoming year. Here is my short list (no pun intended) of what industries are facing some significant headwinds and is good to avoid in this coming year. (If you are long (i.e expecting the value to go up), that is. But if you are looking for shorts (trying to profit by a falling in stock price), feel free to be as aggressive as you like; but be warned, as the great the economist John Maynard Keynes said, “The market can stay irrational longer than you can stay solvent”.)

  1. Small Oil and Gas companies with high fixed costs

Oil and gas are among the largest industries in the world (with an estimated 5 trillion dollars in revenue, rivaling the tech industry). Due in part to the massive stock market boom in the last few years, many small oil and gas companies emerges in the public markets. They range from extraction companies to oil exploration to small manufacturers of drilling equipment. With a falling oil price that is not likely to rise any time soon, these small producers with limited resources will likely falter. Moreover, natural resources extraction is a highly capital intensive industry and the firms will likely take on massive amounts of debts to finance its projects. It is estimated that drilling each oil well costs about 3 to 4 million dollars and small companies with a highly leveraged structure and few prospects for growth will be the likely victim in 2015. (Interested in Big Oil and corruption? click here For more on how the falling oil prices are affecting nations around the world, see here)

  1. Small tech companies that have no prospects of being bought up by the big guys

In this category, the companies that come to mind will be the small software development firms, such as app-makers that makes their business around a single app. For example, Zynga, the maker of the popular app game “Farmville”, is one such company. The company is involved in the social gaming category and have not expanded by much in the last couple of years, and are instead are trying to monetize its existing products. For a company involved in app-development, if no new apps are introduced continually, then the firm will simply wither away when demands for the current app disappears (as it most certainly will since consumer tastes are constantly changing). Monetization will be difficult, since a majority of the company’s revenue still comes from selling of advertising space and the market is increasingly saturated by the amount of advertisings out there, and increasing diminishing rates of return. Of course, the best that these tech companies can hope for is to be bought up by the larger players such as Facebook. However, with the proliferation of software companies, larger tech companies have more options to choose from and will take care to only add firms that adds value to the company’s operations.

  1. Small biotech or pharmaceuticals purporting to have “wonder drugs” or new “breakthrough technologies”

For those of you who subscribes to some form of investment newsletters (it doesn’t matter if they are free or charge you hundreds of dollars per year), you have no doubt saw a number of different promotions that talks about how a certain company is on the verge of growth. With a booming biotech sector, a lot of less credible companies have been swept up as well. These companies can have the following traits in common:

  1. Involving cancer-curing or purporting to cure multiple diseases at once with a single drug. These are often simply scientifically unsound, and investors should do some basic research on the subject and use common sense in sorting some of these issues out.
  2. Often in the early stages of the clinical trials, often Phase I and II. The early trials is to simply establish the safety of these medicines and their efficacy; these can often be subjected to statistical manipulation. (ex. in a trial for breast cancer treatment intended for women, the results show that no significant results have been found. However, the company claimed that the results work for a sub-group of that population. The population becomes much smaller and perhaps is simply the results of random chance.)
  3. Long clinical stages and delays in pushing forward to the next stage or toward FDA approval. If a company is a scam or have a drug that is on the verge of failure, the company will likely take as long as possible to “test” the drug. They will take their time for as long as possible in order to reap profits for insiders. Sometimes, some of these companies will even “retest” their drug once more for a certain stage, claiming insufficient data. This is a huge red flag, for a successful drug company will want to rush forward to start monetizing the drug by getting FDA approval. Delays to do so could suggest that the company is nothing but an elaborate promotion.

Note, I am not suggesting the biotech sector as a whole will do poorly this year; after all, the biotech sector, as measured by NASDAQ Biotechnology Index (ETF), is up around 30% from over a year ago and there is no reason to think such a trend will not continue, albeit at a slower pace.

  1. Restaurants and related services that are heavily dependent on consumer cyclical spending

Last year, several newly IPOed restaurants have taken a hit following the miss in expected earnings (ex. Potbelly’s, El Pollo Loco). The struggles in the restaurant industry is not lost upon many professional investors; in fact, some of the most heavily shorted stocks (as measured by short interests) in the US are in the restaurant sector. Restaurants in general are low-margin, with high fixed costs, with tremendous competition, and susceptible to variances in consumer sentiments. All of these makes them good companies to avoid investing in at any given time. But in 2015, there are macroeconomic factors at play here as well. Even though the US economy have outperformed its peers in the developed economies, consumer disposable incomes have not risen appreciably over the past year or so. Americans simply aren’t spending as much on restaurants as before, and the growing competition for healthy food options left many traditional restaurant chains and fast-food restaurants little options but to change what they are offering to clients. These changes will take a long time to implement, and will be extremely costly, even if they are successful at all. (McDonald’s recent advertising campaign is a good example of a restaurant trying to reshape their brand image).

Then there are these companies that have certain characteristics that makes them a bad investment in any scenario, but especially so with the bull market that we have been having for the past few years.

Among many economists, the longer the bull market runs, the more likely the crash in the market will be severe. Therefore, the companies that have been swept up in the bull market ride will be the first ones to fall.

  1. Companies in industries with low barriers to entry and no competitive edge that cannot be replicated

A name that comes to mind in this case is GoPro. The company essentially does one thing, which is to produce cameras that are frequently used by outdoorsman. This sole area of operation is inherently risky in itself. However, with the passage of time if the business is successful, there is no reason to suspect why larger companies with significantly more resources will not pursue a similar line of business and crush the competition. Companies that are reliant upon a single product or service are extremely vulnerable.

  1. Foreign based companies with obscure operations

The stock market boom not only attracted bad domestic companies to IPO. Many foreign companies are also taking notice of the market and want to raise money as well. Some of these companies may indeed have good intentions of raising money to fund their operations. Or they may simply be a fraud and simply want a piece of the actions in the market and enrich themselves. These companies can have names that sound grand, invoking their national titles and inflate their own importance. (They may have a naming structure like “‘name of country’ – ‘industry’ corporation”. i.e. Sino-Forest Corporation). Many of these companies claimed that they have great growth potential in their respective home country and it is next to impossible to ascertain what they are saying is true. A few years back, there was a huge wave of Chinese reverse mergers (i.e. a private company is taken public by purchasing a public shell company) that IPOed in the United States. Many of these companies banked on the investing public’s optimism in the economic growth of China and cooked their books to paint a rosy picture for themselves. Eventually, the frauds were eventually exposed. Many of these companies have complicate structures with unclear relationships with their parent company or its subsidiaries. Sometimes, it is also unclear how the companies make their money or the level of their debt obligations (often disguised as other business segments).

One of the things you might have noticed is how many times I have used the word “small” in the preceding passages. This is key. Smaller companies in all the industries mentioned have a much higher chance of going bad or simply being fraudulent that the large ones. I believe that the market is efficient for the large-cap companies that have been carefully scrutinized, and the prices are likely where they should be. (Of course, there are cases like Enron, but in that case, the business is so indecipherable that it is bad idea to be even thinking about it). So when investing, remember to keep the company’s size in mind.

Note: The above article expresses solely my personal opinion. This is a blog, after all. Please do not utilize the articles as investment advices; or if you do (I will be sincerely flattered that you would listen to a sophomore in college), please do your own due diligence before investing. I do not hold any stocks or any form of investments whatsoever.