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Balaji Viswanathan
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I'm the co-founder of a financial startup At we are working to bring tools to search and analyze numbers and statistics related to your investments/ I have bachelors degree in engineering and Masters in Computer Science. For the past 6 years, I am an active investor in... More
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ZingFin Technologies
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Demystifying finance
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  • Microsoft Is Getting Sideswiped In The Battle For The Future.

    In the past few weeks, no other company has made as much news as Microsoft has made. It is going through some drastic change.

    1. Exit of CEO Ballmer: One of the most controversial leaders tech has announced his decision to step down, after a long stint at the helm. No one has a clue of who the successor will be. The employees are already celebrating Ballmer's exit though.

    2. An activist hedge fund has stormed into the board: On September 3, Microsoft announced that ValueAct that owns 0.8% of Microsoft will get a board seat. The $12 billion hedge fund has already started to call shots and might twist the hands of executives even more.

    3. Nokia purchase: On September 3, Microsoft also announced that it is going to acquire the erstwhile mobile giant, Nokia in a $7.2 billion deal.

    Besides this, there are news of steep losses in the tablet segment, massive reorganization, poorly made advertisements in response to Apple's phone debacles.

    Battle for the future

    I'm less worried about these and more worried about the fact that Microsoft is no longer setting the pace in technology. It is not the past, but the future that Microsoft (and its shareholders) should be most worried about right now. Tech companies are like sharks; they have to move and hunt aggressively to survive.

    As an ex-Microsoftie, nothing is more infuriating than the lost opportunities. Let us look at some of the major trends that is taking hold of the tech world. Microsoft has wasted its strong position in each of these.

    1. Wearable Computing. Apple, Samsung and Google are now trying to take computing to a whole new level, beyond just laptops and phones - into your sunglasses and watches. While Microsoft was the pioneer at this (with its Spot watches) it has no such trick up at its sleeve in the near future. A lot of promising wearable computing ideas have been internally crushed over the past 10 years of mismanagement.

    2. Battle for your TV. Years ago when I first joined Microsoft, senior execs were talking about owning your living room. In their imagination, Windows entertainment center would take over your TV. But, it did not happen. In fact, at a time when the battle for TV is heating up among Google, Apple and Sony, Microsoft has thrown its towel.

    3. Platform and Marketplaces. Microsoft was a pioneer in the app marketplace. Microsoft launched a marketplace for apps along with Windows Vista, back in 2006. Since, then it has been completely pushed out of the platform/marketplace battle. Amazon & Apple are vying for the book & music market place, Apple & Google are fighting for the app marketplace.

    Reduced importance of Microsoft tools

    As the cloud tools and smartphone apps are rapidly evolving, Office and Windows are becoming less critical to both consumers as well as enterprises. Most startup entrepreneurs I know, don't find a need for the Office or any other Microsoft tool. As these startups grow up to replace the incumbents, Microsoft technologies will gradually be pushed out.

    Upstarts such as Box & Zoho are gunning for cloud based document creation, while Google docs and iWork have already replaced a sizable chunk of the work we previously did with Microsoft Office. As the competitors are eating Microsoft's lunch in the core markets, Microsoft has to envision a future where these tools would no longer be the market leaders to claim a premium margin.

    While the big enterprises are still buying Microsoft's tools & servers, a disruption there might not be far along. It takes less than a decade to make a complete change in the enterprise market.

    The examples of DEC, SGI and Novell should warn Microsoft that a company can rest on past laurels for only so long even when it has big enterprises locked. In mid 1990s Microsoft pulled the Netware rug under Novell's feet (with its NT) when NOVL was busy focusing on Wordperfect & Borland. Microsoft's competitors in Office and Enterprise tools could pull the same trick now.

    A distracted Microsoft

    The problem with Microsoft is that it is too reactionary. Amidst all the distraction from Nokia acquisition, dividend setting and managing the activist investors, Microsoft is getting even more lost in its vision for the future. It gave up its lead on entertainment and games (with Xbox and Mediacenter) to make unsuccessful foray into search and tablets. It is being pushed to a footnote in the major tech battles. It is becoming irrelevant in the talk about future technologies.

    In the past 12 years, Microsoft stock has moved nowhere and that is a reflection of the capability of the management. The sad part is that the future doesn't look any better. None of the rumored potential CEO candidates have demonstrated an understanding of these evolving markets to help take Microsoft into the future.

    Bill Gates had a really strong vision of the future (a PC on every desktop). None of Ballmer's rumored successors have spelled out such a clear vision in their existing roles. They are predominantly managers and not leaders or visionaries.

    MSFT stock: 12 years of listlessness

    In the absence of big visionaries, Microsoft is no longer a player in our discussions of the future. This is the thing that Microsoft's shareholders have to really worry about. Valuations are not about dominating the past. It is about dominating the future. Unless Microsoft brings a radically different approach in its vision of the future, its stock would continue to stay as a laggard.

    Disclosure: I'm an ex-Microsoft employee and I grew my career there. Currently I have no open position in either Microsoft or its competitors.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Sep 18 5:50 AM | Link | Comment!
  • Great Tech Companies Don't Come In Isolation

    Great tech companies come in waves. The 5 great companies that entered the stock market between 1986 and 1988 are among the all time fastest growing stocks in history. These 5 young companies relying on PC - Microsoft, Dell, Adobe, Oracle and Intel became the investors delight of 1990s. In 1990-92 these people where joined by the networking giants Cisco and Qualcomm. The fortunes all peaked in 1999.

    1. Cisco. The company IPO'ed in 1990 and had had grown 1050 times during the decade peaking in 2000.
    2. Microsoft. The company IPO'ed in 1986 and by 1999 the stock had grown 750 times. If you had put $10,000 in Microsoft's IPO in 1986, you would have ended up with a cool $7.5 million in 1999. In the same period, its IPO buddies Adobe grew 200 times and Intel 171 times.
    3. Dell. Like Cisco and Microsoft, Dell had a great ride during the 1990s. From its IPO in 1988, it grew 570 times. In the same period, its IPO buddies Oracle grew 247 times and EMC grew 1000 times.
    4. For the mid-late 1990s, the dream stocks were Yahoo and Nokia growing 47 times and 24 times respective from 1995-99 riding on the mobile and web boom.
    5. For the early 2000s, the leader was RIM (the maker of Blackberry). Since IPO'ing at the worst point in 1999, the stock grew 24 times to peak in 2006.
    6. For the 2000s, the dream stocks are Google and Apple riding on the web and smartphone boom. Apple stock grew 100 times from 2003 to its peak in 2012. Google had a slightly modest grown, growing 6 times in the same period.

    All these companies are still making profits, but their fortunes are different.

    Moral 1: Great Companies don't Come Alone
    The moral of the story is that great companies seldom happen in isolation. Microsoft IPO'ed along with its complementary companies Intel and Adobe. The 3 big enterprise biggies - Dell, Oracle and EMC came in the next wave.

    Great companies come in waves and their stock fortunes depend on the wave for that period. It is extremely critical to understand the wave, as these are more important than their individual balance sheets.

    Moral 2: Fundamental Analysis is useless for tech companies.
    Microsoft's balancesheet is as stellar as it was in 1999. But, the stock has not grown in the past 14 years. Same for its IPO buddies and most other companies at the top. Oracle, Intel, Cisco, Microsoft, Adobe are still raking enormous profits, but their stocks have not recovered their late 90s peaks.

    When you are analyzing tech companies, financial analysis is generally useless. You can probably say which ones will fail, but the fundamental analysis cannot help you say which one will succeed.

    Moral 3: Look at the forest, not just individual trees
    Without understanding the wave, all your fundamental analysis would not have saved your investments in Microsoft, Oracle, Cisco and Intel. You need to understand the correlation and trends. You need to watch out for the patterns.

    Instead of getting lost on individual trees, look at the forest. Broader market trends dominate the fortunes of tech companies. These trends can reverse extremely quickly. Keep watching these trends.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Feb 15 11:30 AM | Link | Comment!
  • Why Is Apple Stock Falling Down Since October?

    If you have been following financial media over the past few weeks, you might have already heard the news that Apple stock has been falling down. In fact, a third of its stock value is gone since its peak in October.

    How can this happen? Isn't Apple still the leader in technology and gadgets? Don't they still make great products and more importantly great profits? Why is the market then sending the stock down? In this post, I will deal into the the market psychology and factors that are working against Apple over the past 4 months.

    Apple stock falling down after revenue announcement.

    How is a company valued?
    The total value of the company, called the marketcap, is the product of all the shares in the company multiplied by the stock price. In theory, this is the money someone needs to buy the whole company off. Apple's marketcap is currently $450 billion (even after the fall).

    Investors look to see if Apple can really produce enough profits to justify the $450 billion. To arrive at the valuation, there are two dominant methods used:
    1. Discounted Cash Flow method.
    Here you project the company's profits into the future and then using the interest rates & risk analyze what should be the value of that stock using a standard formula. The DCF value of the stock is far more than its current value.

    2. Ratio comparison method
    Just like how real estate players value properties, stock investors look at the comparable in related companies. Here you take the key indicators of a company and compare it against industry competitors. In almost every metric of comparison, Apple is ranked high.

    See more in this article: Balaji Viswanathan's answer to How do you value a public company?

    How come Apple is going down even the valuations indicate that the stock is undervalued? There must be something more to it.

    Fact 1: Valuation is always about the future
    Your friend Tom comes to you and has an "irresistible" offer for you. He is selling a skyscraper in the New York to you at an unimaginable rate of $1 million. But, the catch is that the building will last only one day and will be torn the day after. Would you still buy that building?

    When an investor is buying a company, he/she is always looking to grow that investment by betting on a growing company. The future is the only thing that matters. Since the release of iPhone 5, the market has started to question the future of Apple as the world's leading innovator. All though Apple's products are still selling like hot cakes, the sales are trailing the estimates as Samsung has caught with Apple on quality & features. In 2007, iPhone was a mile ahead of its competitors. However, in 2013, there is only a sliver of difference between iPhone & its top competitors.

    For this purposes, it is less important if Apple has produced the iPod and the iPhone. The only thing that is important is, what is in the making?

    Fact 2: Fortunes of Tech companies can change overnight
    Technology sector is notoriously hard to predict. In 1980s DEC was at the top, but the brand is dead. Same with SGI that had a huge reputation in late 80s-90s but was bankrupt. Sun was taken over by Oracle and IBM had to substantially reinvent itself to stay relevant. Even in 2005, Microsoft appeared that invincible Goliath, but has now slipped below the media radar now. RIM (Blackberry maker) was the leader in early 2000s but is increasily irrelevant. You can also add the 1990s hotshots Palm, Yahoo! and AOL. Apple itself was close to bankruptcy in the mid 1990s.

    In short, it doesn't matter how great a company's past was. In the tech sector, if you don't live in the bleeding edge, you don't live long. Tech customers have notoriously short memories and will not take long to forget the market leader of yesterday. MySpace, anyone?

    Can Tim Cool continue to keep Apple in the bleeding edge? Can Apple continue to produce jaw-dropping stuff in the post-Jobs era? No one knows. CEO Cook has not yet proven himself yet.

    Fact 3: Higher the bar, higher are the expectations.
    For the past 10 years, Apple has been wowing its customers with ingenious products. iPad, iPhone, iPad... Customers wait in line, braving rain and snow to get their hands at Apple's products. However, the higher you grow, the bigger the expectations become.

    Just as the fans of an Olympian runner will not be content with their hero finishing the 100m line in 10 seconds, the fans of a company like Apple will not be content with anything short of the best. Tech companies have found it extremely hard to keep up with such expectations. Google learned the lessons hard though the launch of Google Wave, Knol and Google +. Market expectations keep shifting up and if you don't keep up with your own records, market will be quick to punish you.

    If a company of the caliber of Apple starts slowing down in innovation, customers start doubting the company's strengths. A lot of times this can send the company into a downward spiral in a sort of self-fulfilling prophesy. It has been 3 years since the last major innovation, iPad. For Apple fans that is eternity.

    Fact 4: Cash is a pain, if not managed well
    Eating food is good, but in excess it leads to obesity. Same for every good stuff known to humanity. For Apple, the obesity is from its bulging cash reserve. Companies maintain cash reserves to pay for inventories, new factories and as a buffer on rainy days. Tech companies keep a little more cash, as the sector is uncertain and new innovation is often expensive.

    However, Apple keeps a whopping $135 billion in cash. It sounds sweet if you are a naive investors. But, if you are a shrewd investors you should question the rationale. After all, you didn't invest in a bank. Why is Apple using your investment to just save in bank deposits earning 2%? Of course, some of the cash is in overseas locations (from sales there) that can't be brought back immediately. But, the rest of the cash should be returned to the investors through dividends and buy backs. In a sort of belated recognition of this, Apple has announced some buybacks now. Apple weighs dividend boost, stock buyback to appease investors

    Stock Market is the World's biggest guessing game
    No one has a perfect view of the future. The stock market is the world' biggest "treasure hunt game" where all the participants collectively try to predict the future using various clues. The clues come from various news sources and investors constantly take various news to predict the future of a company. This is why you see the stocks of major companies constantly wobbling.

    The stock market typically works like this:

    • Competitor introduces a new product. Stock down.
    • Economic indicator shows more customer purchase. Stock up.
    • Strike or fire in a major plant. Stock down.
    • Hired a new hot-shot executive. Stock up.

    In Apple's case, plenty of recent news have turned less than ideal:

    1. No new product announcements. Since iPad launch 3 years ago, Apple is yet to make a major announcement that would significantly change the paradigm. There are no major rumors for any game-changing future products from the company.
    2. Half of Apple's profits come from the iPhone. However, the competition has caught up. Samsung Galaxy SIII is in fact ahead of Apple in features & quality. Customers are also responding positively to the bigger screen size (forcing Apple to finally change its screen size in the last release, proving the popularity of the bigger screen).

      In fact, S3 is now the world's largest selling smartphone, overtaking iPhone 4S. That is a scary prospect for iPhone. If iPhone continues to give up leadership (barely held by adding iPhone 5 stats), the company can be pushed into a spiral like many of its predecessors. Tech is often winner-take-all.

    3. Product line complexity. In November Apple surprised the market with the launch of iPad mini. For a company that was built on carefully chosen, but small set of options, this is a sort of aberration. For the first time, customers have to decide which type of Apple product to buy. More importantly, different screen sizes are also a source of trouble for app developers, on which Apple primarily relies. The Trouble With Apple's iPad mini - Forbes
    4. Post-Steve Jobs leadership. Since the demise of Steve Jobs, the company's leadership has not given the confidence that they can run a $500 billion company. The failure of Apple maps and the leadership shuffle (the exits of Scott Forstall and John Browett) could be an indication of interior rifts. Microsoft has been going through its internal warlord era since the exit of Bill Gates. Apple executive shakeup: Scott Forstall and John Browett are leaving the company
    5. Weakness in key markets such as India and China. iPhone has always been an also-ran in the world's two biggest mobile markets - India and China. The absence of great support for non-English speakers (Siri is pretty useless if you don't speak English well), high price point has always kept it a small portion in these markets. US & Europe gave them big enough space to grow so far. However, the developed market is already saturated and Apple must find a way to penetrate these two big markets. Samsung (and Nokia!!) lead in these markets. Apple has belatedly started to focus on China, although other BRICs are still not on the radar. While Apple focuses on China, everyone forgot about India | ZDNet

    Apple is a great company and in almost all financial metrics it is stellar. However, there is uncertainty over its future as the leader in the phone industry. Samsung and others have caught up with Apple in mobile technology. It is just a matter of time before more quality apps are developed for Android to tip the network effects advantage. Tech industry is often winner-take-all, and if you are not the one, you are the none.

    A decade ago Nokia, Motorola and Sony-Ercisson were the leaders. Moto Razr was the hottest selling phone in the US. Sony was the indisputable leader in Consumer Electronics. Where are those companies now? Consumers are very, very fickle and the industry moves on very quickly.

    No analyst could survive betting against Mr. Jobs. However, now that Jobs is no more, market is getting bolder betting against Tim Cook. Can he disprove the market?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 09 9:19 PM | Link | Comment!
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