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Sneha Shah
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I am Sneha Shah, the Editor-in-chief of Greenworldinvestor. A Chartered Accountant by profession, with interest in Finance,Green Industry, Economics and the Indian Market.
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  • Google Is Facing A Strong Threat To Its Core Digital Ad Market From Facebook

    Google (NASDAQ:GOOG) is no stranger to competition as it has faced tremendous competitive threats from much bigger competitors in the past. Microsoft and Yahoo poured billions of dollars into their Internet search, but failed to make a dent into Google's dominance in this market. Google has used the massive cash flows generated by Internet search to invest money into a wide variety of technology fields. Most of them have failed to become significant cash cows, however some of them have huge monetization capabilities (Google Maps, YouTube etc.). Some of its other initiatives are still in their infancy (Self driving cars, Home energy management, wearables). These spaces are quite huge in terms of potential revenues and if Google succeeds in even one of them, it could lead to a significant upside in the future.

    But in the meantime, Google will have to safeguard its dominance of the Internet search and the massive stream of ad dollars that it gets. Facebook (NASDAQ:FB) is the biggest challenge that the company is facing right now, though there are numerous competitors. Facebook has captured a large slice of the Internet advertisement spending in the last couple of years and that is set to increase over the coming years. Unlike other competitors, Facebook's origin lies in the Internet domain rather than software or hardware for other major technology companies. Facebook has been effectively monetizing the traffic it gets to its site and is luring major content publishers. Its game changing move of convincing major contract providers like New York Times, BBC etc. to directly publish on its site is a big blow to Google. It will not only get the content, but also provide ad exchange services to these news providers. I think that Google will need to up its game to counter Facebook's threat to its advertisement dominance.

    Google has failed in social media

    Google has failed in the social media domain, despite being one of the first large movers into the space with Orkut. The company failed to realize the importance of social media and let Orkut die due to negligence. Google once again tried to re-enter the space with Google +. But Google plus has also failed, as people hardly use the service and nobody spends much time on it. Google tried to use its search dominance to push Google plus but that too did not work out. Facebook on the other hand, has become the uncontested king of the social media sphere. Its Whatsapp acquisition was a masterstroke, though the initial price that FB paid made me cringe. Whatsapp has become the preferred mode of communication for vast sections of people around the globe. It is threatening the traditional modes of communication such as telecom and bulletin boards, as people find Whatsapp much more convenient and cheaper. Facebook's acquisition of Instagram has further solidified its position. The company now has billions of users actively engaging with its social media sites, giving it an unparalleled database of users and their behavior. Google used to be the master of Internet data as most traffic used to go through its search services. However, Facebook has changed the paradigm and nearly 25% of the global internet traffic is now controlled by Facebook. Google has almost no visibility on that 25%. Facebook on the other hand has a very granular understanding of the traffic, while Google still cannot identify the true users of its search that accurately.

    Facebook is becoming a powerful mobile force

    Facebook has managed to increase the time that people spend on its sites to such a level that almost 25% of all Internet traffic is now being monopolized by Facebook. The company is getting 37% of the mobile share display ads and its mobile ad revenues have doubled to ~$2.5 billion a quarter, as compared to last year. Facebook has managed to increase the price of the ad it displays, because of deep knowledge of the consumer it is serving. Advertisers are paying for the targeting value that Facebook brings to the table. Facebook is also copying Google by opening a mobile ad network. The company's marketshare of desktop has declined, but it is not a concern as the general move towards spending more time on smartphones and tablets is irreversible. PCs have become less relevant in consuming digital content. Facebook is becoming the gateway to Internet to a lot of people displacing Google. Consumers are using Facebook as the principal delivery mechanism for news, communication (Whatsapp, Facebook Messenger) and product reviews. This is an alarming thing for Google which used to be the principal Internet entry point for consumers. While a lot of people still use Google to get product reviews, information and news, Facebook is definitely threatening Google. Facebook is also threatening Google's dominance in the Internet video category, with a lot the people watching videos through Facebook.

    Thanks, Douglas. So with mobile phones really becoming such a primary way people search the net. Our goal is really to help people search, find the content that's not just relevant and timely but also really easy to read and interact with on these smaller devices and smaller screens. And it's important to note that this is just one of over 200 signals we use to evaluate the best results.

    Source - Google transcript

    GOOGL Chart

    What Google can do to stave off this threat

    Google does not have the social media skills as repeated failures have shown. Google is using Internet search to provide more information and services to consumers. It is starting to give real time flight information and phone numbers of merchants. It is even planning to allow users to directly buy from its internet search results. But I think that these incremental changes will not help. The company needs to acquire social media skills. Buying other major social media players such as Twitter or LinkedIn is one option. These companies have the skills that Google lacks and will help in creating a social media presence, which can leverage its other services such as email, search and video.

    Google's Stock Price Performance and Valuation

    Google's stock price has stagnated over the last one year and it has underperformed the broader market. The company's revenue and earnings growth has not been that good and its new initiatives such as Google Glass, Driverless cars etc. have not positively impacted the bottom-line. With tepid growth expectations the valuation has also come down substantially and is becoming more in line with large technology companies such as Microsoft, Apple and others. The company's forward P/E is 16.5x while its 5 year growth expectations is at 14.5%, which gives it a PEG ratio of ~1.1x.


    Google is no stranger to competition, given that in its short operating history it has succeeded in driving off major technology companies like Microsoft through the sheer superiority of its products. However, Google has remained a one trick pony with Internet search continuing to drive most of its products and revenues. Internet search is becoming less relevant with the increasing popularity of smartphones and apps. A lot of consumers are skipping Google to directly interact with other company's apps. Facebook has become a dominant Internet force, with American consumers spending almost 42 minutes daily on Facebook using their smartphones. As a result, Facebook is capturing an increasing share of digital ad dollars. It is being able to serve much deeper insights into consumer behavior, as compared to other publishers. Google is facing a threat to its core business segment. I think Google needs to react quickly to stave off this threat. The stock valuation is not expensive, but the growth is tapering down.

    May 29 1:22 AM | Link | Comment!
  • IBM – Continues Its Journey Downhill

    IBM (NYSE:IBM) continues to perform poorly as the growth declines and margin increases have come to a halt. The company has failed to grow over the last 10 years, as cheaper and nimbler competitors from India such as Infosys (NYSE:INFY), Cognizant (NASDAQ:CTSH) etc. have taken away marketshare in IT services. The company continued to show increased earnings shares by massive buybacks and by hiring low cost workers in India. It's divestment of the low margin hardware division also helped the company increase its overall profitability. The company now faces a huge growth challenge, as most of its cash flow generating levers have been exhausted. IBM also has a higher debt equity ratio compared to other large technology companies. The software industry is also at an inflection point as increased automation and cloud computing is changing the dynamics of the industry. New competitors such as Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) etc. have started entering IBM's area of providing IT software. The company is making belated attempt to catch up to the newer technology areas such as Social Media, Analytics, Mobile computing, however it is late to the party. At best, it will be another competitor in a crowded field. I have been consistently negative on IBM for some time and its current quarterly results have not changed my views. The stock has heavily underperformed the NASDAQ, as investors look towards faster growing companies.

    Another quarter of falling revenues

    IBM kept up its dismal track record of declining revenues for the 12th consecutive quarter. This shows that the company is in a serious long term decline. It needs some serious turnaround measures and a radical change in its business strategy and focus. The technology industry is extremely dynamic and trends change rapidly. Companies which cannot adapt and stay ahead of the curve, can rapidly become irrelevant at best and extinct at worst. IBM's strategy of focusing on software and services is long past its sale by value. Other technology companies such as Xerox (NYSE:XRX), Hewlett Packard (NYSE:HPQ) and Dell have adopted similar strategies. There is increasing competition in this space and it will be tough for IBM to increase its revenues and profits in a more crowded segment. The company has forecast earnings of ~$15 with flat free cash flow generation. This means more stagnation for investors.

    Most geographic segments and business divisions declined

    IBM's revenue decline in almost all geographic regions shows that the company's overall competitiveness continues to decline. I could understand revenues falling in one or two regions, but IBM has managed to show declines in all regions. The management has defended itself by saying that declines came in divisions which have been sold off, otherwise they would have been flat. But flat is not good enough for investors. Revenues fell by 12% y/y to $19.6 billion. Technology services fell by 10%, business services by 13% and software by 8%.

    Falling behind competitors

    IBM has failed to compete with major IT services players both over the short and long term. Despite imitating Indian IT companies in hiring cheap India software workers, IBM has failed to match their high double digit growth rates. Even as the Indian industry is forecasting growth of 12-14% this year, IBM will be struggling to grow at all. Even US based competitors such as Accenture (NYSE:ACN) have performed much better than IBM. Some analysts support IBM because of its presence in providing high end services such as business consulting to clients. However, IBM cannot compete with large consultancies such as Accenture, PWC etc. and is known mostly for providing IT consulting services.

    Margins have flattened out

    IBM has been able to offset the decline in revenues over the years with increase in margins. However, the rate of margin growth has started to flatten out, as most of the levers such as outsourcing and selling the hardware portions of the business have played out. I don't think the margins can increase much further from here. Combined with flattening revenues, this means that earnings will also stagnate.

    Other troubling issues

    IBM has a huge amount of debt (more than $38 billion), which the company has mainly used to fund dividends in the past. This means that the company's options in terms of doing a large acquisition or investing in new areas is limited. They will also be hard pressed to use their low valued stock to buy other companies. The company is also getting hurt by the stronger dollar. I don't think that the dollar will become weak anytime, given the major structural issues with China, Europe and Japan.

    Upsides Risks

    a) Valuations are not expensive - IBM has been stuck in the $150-200 range for some time now, even as the other bigger technology companies have seen their stock prices go up substantially with a rally in the broader markets. Without the low interest rate environment, I would have expected IBM to be much lower than what it is today. The company's valuation is not expensive, with a forward P/E of around 10x and a dividend yield of ~3%. On the downside, the company has a lot of debt with a debt equity ratio of 2.8x compared to 1x for the industry. IBM has funded a lot of buybacks and dividends in the past through debt. I don't think a utility investor is going to invest in IBM. The technology industry is much more volatile than utilities, where investors look for stability of cash flows and dividends. Growth investors will also look to avoid IBM for its complete lack of growth.

    b) Getting traction in the cloud business - IBM reported that its cloud business has grown substantially to a $3.8 bb annual business. IBM has been really late to the cloud party and allowed non-services companies to become big players in this area. IBM is managing to grow the cloud business because of the overall high growth of the industry. Microsoft (NASDAQ:MSFT), Amazon and others are all growing their cloud divisions rapidly due to the inherent advantages of cloud computing (lower costs, faster upgrades, less inventory). But cloud computing is still less than 5% of IBM's total revenues and it is difficult to see how cloud computing can alone pull IBM out of the morass that it has gotten into.


    IBM has been a dead investment for a while and the stock price has stagnated in a range. Given the company's deteriorating fundamentals, the probability of the stock falling below the range is greater than breaking the range on the upside. The company's revenues continue to decline, margins have flattened out and it is losing market share to competition. There is some progress in new technology areas, but all major companies are managing to grow their cloud computing divisions. The valuation is not high as per traditional valuation metrics, but given its poor growth prospects it is probably on the higher side. I don't see the management making any major changes to its strategy to get out of its predicament. The company raised its dividend, but that was at the cost of buybacks. The company's strategy of squeezing wages by outsourcing workers has no more legs. I think IBM remains a high conviction sell candidate.

    Tags: IBM
    May 22 12:44 AM | Link | Comment!
  • Hanergy Set To Challenge Solar Frontier As The CIGs Leader After Gobbling Global Energy

    Hanergy the Chinese solar giant is all set to become the world's leader in CIGs solar panel technology as it acquired a 3rd distressed CIGs startup Global Energy. Hanergy has been a little late to the solar energy game compared to the other Chinese solar panel makers such as Yingli Green Energy (NYSE:YGE), Trina Solar (NYSE:TSL) and others. However, the company is using its large resources to acquire strategically important companies at extremely cheap prices. Many of these companies have seen investments of upto 10 times their sale prices.

    Read reviews on Hanergy Solar panels and its thin film technology.

    Hanergy first bought bankrupt German giant Q-Cells CIGs subsidiary to enter into the thin film solar panel industry. It followed this acquisition by buying the world's technology leader in CIGs - Miasole. For readers who do not know, Miasole had got a lot of VC interest and its technology was all set for the big time before the solar panel industry hit its biggest downturn. With solar panel prices ruling below costs, a startup had almost no chance. Miasole investors saw the writing on the wall and sold off to Hanergy for a pathetic $30 million.

    Now Hanergy has bought another leading US CIGs company Global Energy to further bolster its technology leadership. It remains to be seen whether the Chinese company can harness 3 disparate products and teams to become an effective leader in the CIGs field. Note Solar Frontier is the leading CIGs solar panel provider with around 500 MW of shipments last year. TSMC has also been heavily investing in this technology as CIGs is said to have the best potential for efficiency improvements and cost reduction amongst all thin film solar film technologies.

    Also read on GWI List of Top 15 Global Solar Thin Film Companies.

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

    Tags: Solar
    Aug 12 4:33 AM | Link | 1 Comment
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