Earnings season started last week as Google, Microsoft, Chipolte, and IBM, among others, reported their financial results for the most recently ended quarter. In looking at the most high profile companies, the one theme which is becoming more prominent is companies are not going to be rewarded for minimal growth. In most instances, profits are being looked at very closely to see if each enterprise is positioned to take advantage of long term trends, or not. The best example would be the divergence of how investors see Google versus how they perceive Microsoft.
Google is seen as perfectly placed to take advantage of the long term trends of mobility, video, search, and innovation in high tech areas. Microsoft is viewed as being far too exposed to the slowly declining PC market. Google's results were impacted by a lower revenue per search figure because of the growth in mobile queries. Microsoft had to take a $900 million dollar charge against earnings because of the lack of sales in the tablet market with their first entrant, the Surface. Investor's gave Google the benefit of the doubt because of their market share with Android, and the strength of YouTube and search advertising. Microsoft still generates enormous profits, nearly $6 billion worth in 3 months, but their weakness in mobile and tablets is their Achilles heel until they prove otherwise.
Today, McDonald's posted numbers which were weaker than the market expected. They also reported the rest of the year would be a struggle as well. I have long believed McDonald's, and the same can be said for Microsoft, are not innovative companies. Looking at the competitive environment and seeing how others create new products and then applying those concepts to your product portfolio is a very lazy approach to innovation. I believe that for many years, both Microsoft and McDonald's have employed this strategy, and now they have to live with the results. There are many other businesses who actually try to create new ideas, products, and services, and have them fail. In fact, in happens quite often. Still, let's not confuse genuine innovation with being attentive to your opposition's new product lines.
Yahoo is a company which also reported earnings last week and the results were not highly thought of. Marissa Meyer is trying to overhaul the long sleeping internet content giant and has made quite a few moves which shows how a forward thinking management can try and reposition a business. The larger the enterprise, the longer it takes to transform all of the different aspects of an organization. Yahoo's stock has performed very well over the last year, and last week it jumped because of reports that Alibaba would get taken public relatively soon. Yahoo has a large position in Alibaba, which could come to the public markets at a $100 billion valuation. The efforts taken by management to change the marketing of their content, become a stronger player in mobile by acquiring Tumblr, and look for stronger relationships across the internet are reasons why investors are giving Yahoo the benefit of the doubt. In many cases, if people see the change in a company, they will buy in if they agree with the direction it is headed.
Another aspect of business which I have been paying quite a bit of attention to is merchandising, or how a company displays its wares. Creating and developing great products is obviously crucial for any business, but how something appears to a buyer is in many cases the difference between generating revenue and having unsold inventory. My wife is a very good cook, but she really does a great job in showcasing her food. She has a saying, "People eat with their eyes." The same holds true with nearly any product. On the internet or on a mobile device, if something looks attractive, neat, clean, unique, fun, and interesting, chances are there is an opportunity for a sale. On the other hand, anything which is seen as yesterday's idea, old, tired, not relevant, or not pertinent, gets discarded instantly. Maybe, like, uh, PC's?
The rest of the week will be interesting as Apple, Starbucks, and a whole host of other companies report their earnings. You can bet Wall Street, myself, and millions of other investors will be watching.
If ever there was an elegant woman, the Duchess of Cambridge (Kate Middleton) has to be considered as graceful as anybody the public has ever come across. She gave birth today and I am sure that the UK is thrilled! http://www.bloomberg.com/news/2013-07-22/kate-gives-birth-to-boy-who-ll-be-third-in-line-to-u-k-throne.html
Making animated films is not easy, although Disney certainly makes it look pretty simple. Dreamworks had disappointing results with their most recent effort-http://www.bloomberg.com/news/2013-07-22/dreamworks-declines-on-forecast-of-turbo-writedown.html
Netflix is a company I certainly missed on and boy was it a big miss. I still believe they are going to run into trouble unless their efforts to develop original content probe successful. Here is a look at their most recent quarter and other efforts-http://techcrunch.com/2013/07/22/netflixs-original-content-plans-go-beyond-tv-shows-to-include-stand-up-comedy-and-documentaries/
Thank you for reading the most recent blog post! If you have any comments, thoughts, or questions about it, please share them!! Have a relaxing and enjoyable summer week!
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.