Buy Facebook, P&G's CEO told you to

Buy Facebook.  I don't care what the IPO price is.

Since Facebook informed us it was going public, and it's estimated IPO valuation was reported, debate has raged over whether the company could possibly be worth $75-$100B.  Almost nobody writes that Facebook is undervalued, but many question whether it is overvalued. 

If you are a trader, moving in and out of positions monthly and using options to leverage short-term price swings then this article is not for you.  But, if you are an investor, someone who holds most stock purchases for a year or longer, then Facebook's IPO may be undervalued.  The longer you can hold it, the more you'll likely make.  Buy it in your IRA if possible, then let it build you a nice nest egg.

About 85% of Facebook's nearly $4B revenues, which almost doubled in 2011, are from advertising.  So understanding advertising is critical to knowing why you want to buy, and hold, Facebook. 

Facebook has 28% of the on-line display ad market, but only 5% of all on-line advertising.  On-line advertising itself is generally predicted to grow at 16%/year.  But there is a tremendous case to be made that the market will grow a whole lot faster, and Facebook's share will become a whole lot larger.

At the end of January Proctor & Gamble's stock took a hit as earnings missed expectations, and the CEO projected a tough year going forward.  He announced 1,600 layoffs, many in marketing, as he admitted the ad budget was going to be "moderated" - code for cut.  While advertising had grown at 24%/year sales were only growing at 6%.  He then admitted that the "efficiency" of on-line advertising was demonstrating the ability to be much higher than traditional advertising.  In other words, he is planning to cut traditional marketing and advertising, such as coupon printing and ads in newspapers and television, and spend more on-line.

P&G spends about $10B/year on advertising.  2.5x the Facebook revenue.  Now, imagine if P&G moves 10% - or 25% - of its advertising from television (which is now a $250B market) on-line.  That is $1-$2.5B per year, from just one company!  Such a "marginal" move, by just one company, adds 1-3% to the total on-line market.  Now, magnify that across Unilever, Danon, Kimberly-Clark, Colgate, Avon, Coke, Pepsi ...... the 200 or 300 largest advertisers and it becomes a REALLY BIG number.

The trend is clear.  People spend less time watching TV and reading newspapers.  We all interact with information and entertainment more and more on computers and mobile devices.  Ad declines have already killed newspapers, and television is on the precipice of following its print brethren.  The market shift toward advertising on-line will continue, and the trend is bound to accelerate. 

Last year P&G launched an on-line marketing program for Old Spice.  The CEO singled out the 1.8 billion free impressions that received on-line.  When the CEO of one of the world's largest advertisers takes note, and says he's going to move that way, you can bet everyone is going to head that direction.  Especially as they recognize the poor "efficiency" of traditional media spending.

And don't forget the thousands of small businesses that have much smaller budgets.  Most of them rarely, or never, could afford traditional media.  On-line is not only more effective, but far cheaper.  Especially as mobile devices makes local marketing even more targeted and effective.  So as big companies shift to on-line we can expect small to medium sized businesses to shift as well, and new advertisers are being created which will expand the market even further.  This trend could lead to a much faster organic market growth rate beyond 16% - perhaps 25% or even more!

Which brings us back to Facebook, which will be the primary beneficiary of this market shift. 

Facebook is rapidly catching up with Google in the referral business.  850 million users is important, because it shows the ability Facebook has to bring people on-line, keep them on-line and then refer them somewhere.  The kind of thing that made Google famous, big and valuable with search a decade ago.  In fact, people spend much more time on Facebook than they do Google.  When advertisers want to reach their audience they go where the people are (and are being referred) and that is Facebook.  Nobody else is even close. 

The good thing about having a big user base, and one that shares information, is the ability to gather data.  Just like Google kept all those billions of searches to analyze and share data, increasingly Facebook is able to do the same.  Facebook will be able to tell advertisers how people interact, how they move between pages, what keeps them on a page and what leads to buying behavior.  Facebook uses this data to help users be more effective, just like Google does to help us do great searches.  But in the future Facebook can package and sell this data to advertisers, helping  them be more effective, and they can use it for selling, and placing, ads.

Facebook usage is dominant in social media, but becoming more dominant in all internet use.  Like how Windows became the dominant platform for PC users, Facebook is well on its way to being the platform for how we use the web.  Email will be less necessary as we communicate across Facebook with those we really want to know.  Information on topics of interest will stream to us through Facebook because we select them, or our friends refer them.  Solving problems will use referrals more, and searching less.  The platform will help us be much more efficient at using the internet, and that reinforces more usage and more users.  All the while attracting more advertisers.

The big losers will be traditional media.  We may watch sports live, but increasingly we'll be unwilling to watch streaming TV as the networks trained boomers.  Companies like NBC will suffer just as newspaper giants such as Tribune Corp., New York Times and Dow Jones.  Ad agencies will have a very tough time, as ad budgets drop their placement fees will decline concomittantly.  Lavish spending on big budget ads will also decline. 

Anyone in on-line advertising is likely to be a winner initially.  Linked-in, Twitter, Pinterest and Google will all benefit from the market shift.  But the biggest winner of all will be Facebook.

What if the on-line ad market grows 25%/year (think not possible? look at how fast the smartphone and tablet markets have grown while PC sales have stagnated last 2 years as that market shifted.  And don't forget that incremental amount could easily happen just by the top 50 CPG companies moving 10% of their budget!)?   That adds $20-$25B incrementally.  If Facebook's share shifts from 5% to 10% that would add $2-2.5B to Facebook first year; more than 50%! 

Blow those numbers up just a bit more.  Say double on-line advertising and give Facebook 20% share as people drop email and traditional search for Facebook - plus mobile device use continues escalating.  Facebook revenues could double up, or more, for several years as trends obsolete newspapers, magazines, televisions, radios, PCs and traditional thoughts about advertising.

If you missed out on AT&T in the 1950s, IBM in the 1960s, Microsoft in 1980, or Apple in 2000, don't miss this one.  Forget about all those spreadsheets and short-term analyst forecasts and buy the trend.  Buy Facebook.

Who's CEO of the Year? Bezo's (Amazon) or Page (Google)?

Turning over a new year inevitably leads to selections for "CEO of the Year."  Investor Business Daily selected Larry Page of Google 3 weeks ago, and last week Marketwatch.com selected Jeff Bezos of Amazon.  Comparing the two is worthwhile, because there is almost nothing similar about what the two have done - and one is almost sure to dramatically outperform the other.

Focusing on the Future

What both share is a willingness to focus their companies on the future.  Both have introduced major new products, targeted at developing new markets and entirely new revenue streams for their companies.  Both have significantly sacrificed short-term profits seeking long-term strategic positioning for sustainable, higher future returns.  Both have, and continue to, spend vast sums of money in search of competitive advantage for their organizations.

And both have seen their stock value clobbered.  In 2011 Amazon rose from $150/share low to almost $250 before collapsing at year's end to about $175 - actually lower than it started the calendar year.  Google's stock dropped from $625/share to below $475 before recovering all the way to $670 - only to crater all the way to $585 last week.  Clearly the analysts awarding these CEOs were looking way beyond short-term investor returns when making their selections.  So it is more important than ever we understand what both have done, and are planning to do in the future, if we are to support either, or both, as award winners.  Or buy their stock.

Google participates in great growth markets

The good news for Google is its participation in high growth markets.  Search ads continue growing, supplying the bulk of revenues and profits for the company.  Its Android product gives Google great position in mobile devices, and supporting Chrome applications help clients move from traditional architectures and applications to cloud-based solutions at lower cost and frequently higher user satisfaction.  Additionally, Google is growing internet display ad sales, a fast growing market, by increasing participation in social networks. 

Because Google is in high growth markets, its revenues keep growing healthily.  But CEO Page's "focus" leadership has led to the killing of several products, retrenching from several markets, and remarkably huge bets in 2 markets where Google's revenues and profits lag dramatically - mobile devices and search.

Because Android produces no revenue Google bought near-bankrupt Motorola to enter the hardware and applications business becoming similar to Apple - a big bet using some old technology against what is the #1 technology company on the planet.  Whether this will be a market share winner for Google, and whether it will make or lose money, is far from certain. 

Simultaneously, the Google+ launch is an attempt to take on the King Kong of social - Facebook - which has 800million users and remarkable success.  The Google+ effort has been (and will continue to be) very expensive and far from convincing.  Its product efforts have even angered some people as Google tried steering social networkers rather heavy-handidly toward Google products - as it did with "Search plus Your World" recently.

Mr. Page has positioned Google as a gladiator in some serious "battles to the death" that are investment intensive.  Google must keep fighting the wounded, hurting and desperate Microsoft in search against Bing+Yahoo.  While Google is the clear winner, desperate but well funded competitors are known to behave suicidally, and Google will find the competition intensive.  Meanwhile, its offerings in mobile and social are not unique.  Google is going toe-to-toe with Apple and Facebook with products which show no great superiority.  And the market leaders are wildly profitable while continuously introducing new innovations.  It will be tough fighting in these markets, consuming lots of resources. 

Entering 3 gladiator battles simultaneously is ambitious, to say the least.  Whether Google can afford the cost, and can win, is debatable.  As a result it only takes a small miss, comparing actual results to analyst expectations, for investors to run - as they did last week.

 Amazon redefines competition in its markets

CEO Bezos' leadership at Amazon is very different.  Rather than gladiator wars, Amazon brings out products that are very different and avoids head-to-head competition.  Amazon expands new markets by meeting under- or unserved needs with products that change the way customers behave - and keeps competitors from attacking Amazon head-on:

• Amazon moved from simply selling books to selling a vast array of products on the web.  It changed retail buying not by competing directly with traditional retailers, but by offering better (and different) on-line solutions which traditional retailers ignored or adopted far too slowly.  Amazon was very early to offer web solutions for independent retailers to use the Amazon site, and was very early to offer a mobile interface making shopping from smartphones fast and easy.  Because it wasn't trying to defend and extend a traditional brick-and-mortar retail model, like Wal-Mart, Amazon has redefined retail and dramatically expanded shopping on-line.
• Amazon changed the book market with Kindle.  It utilized new technology to do what publishers, locked into traditional mindsets (and business models) would not do.  As the print market struggled, Amazon moved fast to take the lead in digital publishing and media sales, something nobody else was doing, producing fast revenue growth with higher margins.
• When retailers were loath to adopt tablets as a primary interface for shoppers, Amazon brought out Kindle Fire.  Cleverly the Kindle Fire is not directly positioned against the king of all tablets - iPad - but rather as a product that does less, but does things like published media and retail very well -- and at a significantly lower price.  It brings the new user on-line fast, if they've been an Amazon customer, and makes life simple and easy for them.  Perhaps even easier than the famously easy Apple products.

In all markets Amazon moves early and deftly to fulfill unmet needs at a very good price.  And then it captures more and more customers as the solution becomes more powerful.  Amazon finds ways to compete with giants, but not head-on, and thus rapidly grow revenues and market position while positioning itself as the long term winner.  Amazon has destroyed all the big booksellers - with the exception of Barnes & Noble which doesn't look too great - and one can only wonder what its impact in 5 years will be on traditional retailers like Kohl's, Penney's and even Wal-Mart.  Amazon doesn't have to "win" a battle with Apple's iPad to have a wildly successful, and profitable, Kindle offering.

The successful CEO's role is different than many expect

A recent RHR International poll of 83 mid-tier company CEOs (reported at Business Insider) discovered that while most felt prepared for the job, most simultaneously discovered the requirements were not what they expected.  In the past we used to think of a CEO as a steward, someone to be very careful with investor money.  And someone expected to know the business' core strengths, then be very selective to constantly reinforce those strengths without venturing into unknown businesses.

But today markets shift quickly.  Technology and global competition means all businesses are subject to market changes, with big moves in pricing, costs and customer expectations, very fast.  Caretaker CEOs are being crushed - look at Kodak, Hostess and Sears.  Successful CEOs have to guide their businesses away from investing in money-losing businesses, even if they are part of the company's history, and toward rapidly growing opportunities created by being part of the shift.  Disruptors are now leading the success curve, while followers are often sucking up a lot of profit-killing dust.

Amazon bears similarities to the Apple of a decade ago.  Introducing new products that are very different, and changing markets.  It is competing against traditional giants, but with very untraditional solutions.  It finds unmet needs, and fills them in unique ways to capture new customers - and creates market shifts.

Google, on the other hand, looks a lot like the lumbering Microsoft.  It has a near monopoly in a growing market, but its investments in new markets come late, and don't offer a lot of innovation.  Google's products end up competing directly, somewhat like xBox did with other game consoles, in very, very expensive - usually money-losing - competition that can go on for years. Google looks like a company trying to use money rather than innovation to topple an existing market leader, and killing a lot of good product ideas to keep pouring money into markets where it is late and not terribly creative.

Which CEO do you think will be the winner in 2015?  Into which company are you prepared to invest?  Both are in high growth markets, but they are being led very, very differently.  And their strategies could not be more different.  Which one you choose to own - as a product customer or investor - will have significant consequences for you (and them) in 3 years. 

It's worth taking the time to decide which you think is the right leadership today.  And be sure you know what leadership principles you are adopting, and following in your organization.

Buy Into Trends - Buy Chipotle Sell McDonald's

Revenue growth is a wonderful thing.  It is so much more fun to work in a growing company than one that isn't.  And high growth is possible, even in this struggling economy, if leaders focus on trends.

Take for example Chipotle.  Whether you eat there or not, Chipotle has grown rather spectacularly.  From 16 units in 1998 it grew to 500 by 2005 and has 1,100 company owned and operated stores today.  Revenues have more than doubled since 2005, to about $2B, while sales/store increased almost 12% in 2010.  And investors have been well rewarded, with a market cap increase of 6x in the last 5 years!

Chart source Yahoo.com 12.12.11

Chipotle hit on a trend it called "Food with Integrity."  While that is far from explicit, Chipotle has made a practice of talking about being "natural."  Chipotle often buys local produce for its units, claims to use "natural" meat, presumably with fewer additives, and brags about having no hormones in its dairy products.  Such claims have tied into customer trends for better nutrition, higher food safety and improved taste.  This allows Chipotle to grow in the most intensely competitive of industries, even during a struggling economic time.

Compare this with McDonald's.  This is not a random selection, as McDonald's was a 1998 investor in Chipotle, and put around $360M into the chain fueling early growth.  McDonald's was handsomely rewarded for this, receiving around $1.5B (4x) return on its investment when selling Chipotle to the public in 2006.

At the time, McDonald's was in a horrible situation. It's stock had dropped from a high of $50 in 2000 to a low of $14 in 2004.  McDonald's took the money from the Chipotle sale and invested all of it in new capital expenditures to defend the McDonald franchise.  The good news was that "turnaround" worked and McDonald's has recaptured its value, roughly doubling market capitalization the last 5 years.

One could consider both of these success stories, unless you look deeper. 

Chipotle increased its valued by 6x, McDonald's by 2x - so investors in the former did fully 3x better than the latter.  And where Chipotle is expected to increase the number of its stores by at least another 1/3 in the next few years, McDonald's struggles to find growth markets. Clearly, investors that swapped their McDonald's stock for Chipotle's stock in 2006 did far better - and have prospects of continuing to do even better still with at least some analysts expecting Chipotle to hit $400/share within a year, for another 20% pop.

Source: Yahoo.com 12.12.11

McDonald's strategy was built on a 1960s trend for speed and consistency in food.  That trend served McDonald's well for 2 decades, but is far less interesting today.  In its effort to generate revenues recently McDonald's brought us a re-introduced 20 year old product called McRib this October - a product who's ingredients have people asking questions about health and safety (TheWeek.com "What's the McRib made of, anyway?) as we learn its mostly high fat pig innards and salt.  While McDonald's has recovered from 2004, is it a platform for growth?

Chipotle is using trends to find new products, new marketing themes, and even a new store concept, Shophouse Southeast Asian Grill, for organic growth.  Where McDonald's is fixated on defending its historical business irrespective of trends, Chipotle is busy investing in current trends.

One has to wonder, what if instead of selling Chipotle, McDonald's leadership had turned upside down?  What if all that management attention had gone into exploding Chipotle's footprint faster?  Introducing even more products? And what if McDonald's had accepted the trends propelling Chipotle growth and applied them to McDonald's to give that chain a different customer value proposition and real new products?

McDonald's could have acted more like Apple.  Where McDonald's has at its core fried meat sandwiches and deep fried potatoes, Apple had its "core" the Macintosh.  But instead of investing its resources into defending its core, Apple invested in new products and markets where the trend was more favorable.  As a result its market cap grew by 4.5x during the last 5 years, compared to the more subdued 2x at McDonalds - and Apple demonstrated that even very large market cap companies can grow at very high rates when they adopt growth strategies tied to trends.

Source: Yahoo.com 12.12.11

There are a lot of businesses struggling to grow today.  But most aren't really trying.  They keep doing more of what they've always done, and hoping for a better result! They don't accept that trends go in new directions, causing markets to shift.  When markets shift, those who follow the trends do far better than those stuck trying to defend their past strategies.  It's smart to act like, and invest in, Chipotle while avoiding the rut that is McDonald's.

 

Leadership Matters - Ballmer vs. Bezos

Not far from each other, in the area around Seattle, are two striking contrasts in leadership.  They provide significant insight to what creates success today.

Steve Ballmer leads Microsoft, America's largest software company.  Unfortunately, the value of Microsoft has gone nowhere for 10 years.  Steve Ballmer has steadfastly defended the Windows and Office products, telling anyone who will listen that he is confident Windows will be part of computing's future landscape.  Looking backward, he reminds people that Windows has had a 20 year run, and because of that past he is certain it will continue to dominate.

Unfortunately, far too many investors see things differently.  They recognize that nearly all areas of Microsoft are struggling to maintain sales.  It is quite clear that the shift to mobile devices and cloud architectures are reducing the need, and desire, for PCs in homes, offices and data centers.  Microsoft appears years late recognizing the market shift, and too often CEO Ballmer seems in denial it is happening - or at least that it is happening so quickly.  His fixation on past success appears to blind him to how people will use technology in 2014, and investors are seriously concerned that Microsoft could topple as quickly DEC., Sun, Palm and RIM. 

Comparatively, across town, Mr. Bezos leads the largest on-line retailer Amazon.  That company's value has skyrocketed to a near 90 times earnings!  Over the last decade, investors have captured an astounding 10x capital gain!  Contrary to Mr. Ballmer, Mr. Bezos talks rarely about the past, and almost almost exclusively about the future.  He regularly discusses how markets are shifting, and how Amazon is going to change the way people do things. 

Mr. Bezos' fixation on the future has created incredible growth for Amazon.  In its "core" book business, when publishers did not move quickly toward trends for digitization Amazon created and launched Kindle, forever altering publishing.  When large retailers did not address the trend toward on-line shopping Amazon expanded its retail presence far beyond books, including more products  and a small armyt of supplier/partners.  When large PC manufacturers did not capitalize on the trend toward mobility with tablets for daily use Amazon launched Kindle Fire, which is projected to sell as many as 12 million units next year (AllThingsD.com). 

Where Mr. Ballmer remains fixated on the past, constantly reinvesting  in defending and extending what worked 20 years ago for Microsoft, Mr. Bezos is investing heavily in the future.  Where Mr. Ballmer increasingly looks like a CEO in denial about market shift, Mr. Bezos has embraced the shifts and is pushing them forward. 

Clearly, the latter is much better at producing revenue growth and higher valuation than the former.

As we look around, a number of companies need to heed the insight of this Seattle comparison:

• At AOL it is unclear that Mr. Armstrong has a clear view of how AOL will change markets to become a content powerhouse.  AOL's various investments are incoherent, and managers struggle to see a strong future for AOL.  On the other hand, Ms. Huffington does have a clear sense of the future, and the insight for an entirely different business model at AOL.  The Board would be well advised to consider handing the reigns to Ms. Huffington, and pushing AOL much more rapidly toward a different, and more competitive future.
• Dell's chronic inability to identify new products and markets has left it, at best, uninteresting.  It's supply chain focused strategy has been copied, leaving the company with practically no cost/price advantage.  Mr. Dell remains fixated on what worked for his initial launch 30 years ago, and offers no exciting description of how Dell will remain viable as PC sales diminish.  Unless new leadership takes the helm at Dell, the company's future  5 years hence looks bleak.
• HP's new CEO Meg Whitman is less than reassuring as she projects a terrible 2012 for HP, and a commitment to remaining in PCs - but with some amorphous pledge toward more internal innovation.  Lacking a clear sense of what Ms. Whitman thinks the world will look like in 2017, and how HP will be impactful, it's hard for investors, managers or customers to become excited about the company.  HP needs rapid acceleration toward shifting customer needs, not a relaxed, lethargic year of internal analysis while competitors continue moving demand further away from HP offerings.
• Groupon has had an explosive start.  But the company is attacked on all fronts by the media.  There is consistent questioning of how leadership will maintain growth as reports emerge about founders cashing out their shares, highly uneconomic deals offered by customers, lack of operating scale leverage, and increasing competition from more established management teams like Google and Amazon.  After having its IPO challenged by the press, the stock has performed poorly and now sells for less than the offering price.  Groupon desperately needs leadership that can explain what the markets of 2015 will look like, and how Groupon will remain successful.

What investors, customers, suppliers and employees want from leadership is clarity around what leaders see as the future markets and competition.  They want to know how the company is going to be successful in 2 or 5 years.  In today's rapidly shifting, global markets it is not enough to talk about historical results, and to exhibit confidence that what brought the company to this point will propel it forward successfully. And everyone recognizes that managing quarter to quarter will not create long term success.

Leaders must  demonstrate a keen eye for market shifts, and invest in opportunities to participate in game changers.  Leaders must recognize trends, be clear about how those trends are shaping future markets and competitors, and align investments with those trends.  Leadership is not about what the company did before, but is entirely about what their organization is going to do next. 

Update 30 Nov, 2011

In the latest defend & extend action at Microsoft Ballmer has decided to port Office onto the iPad (TheDaily.com).  Short term likely to increase revenue.  But clearly at the expense of long-term competitiveness in tablet platforms.  And, it misses the fact that people are already switching to cloud-based apps which obviate the need for Office.  This will extend the dying period for Office, but does not come close to being an innovative solution which will propel revenues over the next decade.

Gladiators get killed. Dump Wal-Mart; Buy Amazon

Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.)  Now that's a serious growth stall, which should worry all investors.  Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion.  Faster than most people think.

After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors.  Not just Target, that is almost as low price and has better merchandise.  Wal-Mart's monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots.  Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise.  Aldi beats Wal-Mart hands-down in groceries.  Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices.  And companies like Kohl's and J.C. Penney offer more fashionable goods at just slightly higher prices.  On all fronts, traditional retailers are chiseling away at Wal-Mart's #1 position - and at its margins!

Yet, the company has eschewed all opportunities to shift with the market.  It's primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com).  Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) - sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive - as shown by the last 9 quarters.

On top of this, the retail market is shifting pretty dramatically.  The big trend isn't the growth of discount retailing, which Wal-Mart rode to its great success.  Now the trend is toward on-line shopping.  MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:

• In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
• Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.

This trend has been emerging for over a decade.  The "retail revolution" was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt.  And that problem is worsening as the trend on-line keeps shrinking the traditional market.  Several retailers are expected to fail.  Entire categories of stores.  As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!

While Wal-Mart is huge, and won't die overnight, as sure as the dinosaurs failed when the earth's weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.

The winners will be on-line retailers, who like David versus Goliath use techology to change the competition.  And the clear winner at this, so far, is the one who's identified trends and invested heavily to bring customers what they want while changing the battlefield.  Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:

• Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
• Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
• Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
• Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
• Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
• Amazon built on the mobility trend when its suppliers, publishers, didn't respond by creating Kindle - which has revolutionized book sales.
• Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the "Wal-Mart Slayer"

 Each of these actions were directly related to identifying trends and offering new solutions.  Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy.  Just look at sales of Kindle books:

Source: BusinessInsider.com

Unlike Wal-Mart customers, Amazon's keep growing at double digit rates.  In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase.  Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to  80,000 per day unit sales for iPad2.  Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.

While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base.  Despite only a few month's experience, Amazon is bigger than Google Offers, and is growing at least 20% faster. 

After 1980 investors used to say that General Motors might not be run well, but it would never go broke.  It was considered a safe investment.  In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model.  Wal-Mart is an identical story, only it won't have 3 decades of slow decline.  The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete. 

Given that gladiators, at best, end up bloody - and most often dead - investing in one is not a good approach to wealth creation.  However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors.  Amazon today is a really good opportunity.

The Case for Buying Netflix. Really.

Reed Hastings, the CEO of Netflix, has long been considered a pretty good CEO.  In January, 2009 his approval ranking, from Glassdoor, was an astounding 93%.  In January, 2010 he was still on the top 25 list, with a 75% approval rating. And it's not surprising, given that he had happy employees, happy customers, and with Netflix's successful trashing of Blockbuster the company's stock had risen dramaticall,y leading to very happy investors.

But that was before Mr. Hastings made a series of changes in July and September.  First Netflix raised the price on DVD rentals, and on packages that had DVD rentals and streaming download, by about $$6/month.  Not a big increase in dollar terms, but it was a 60% jump, and it caught a lot of media attention (New York Times article).  Many customers were seriously upset, and in September Netflix let investors know it had lost about 4% of its streaming subscribers, and possibly as many as 5% of its DVD subscribers (Daily Mail). 

No investor wants that kind of customer news from a growth company, and the stock price went into a nosedive.  The decline was augmented when the CEO announced Netflix was splitting into 2 companies.  Netflix would focus on streaming video, and Quikster would focus on DVDs. Nobody understood the price changes - or why the company split - and investors quickly concluded Netflix was a company out of control and likely to flame out, ruined by its own tactics in competition with Amazon, et.al.

(Source: Yahoo Finance 3 October, 2011)

This has to be about the worst company communication disaster by a market leader in a very, very long time.  TVWeek.com said Netflix, and Reed Hastings, exhibited the most self-destructive behavior in 2011 - beyond even the Charlie Sheen fiasco! With everything going its way, why, oh why, did the company raise prices and split?  Not even the vaunted New York Times could figure it out.

But let's take a moment to compare Netflix with another company having recent valuation troubles - Kodak. 

Kodak invented home photography, leading it to tremendous wealth as amature film sales soared for seveal decades.  But last week Kodak announced it was about out of cash, and was reaching into its revolving credit line for some $160million to pay bills.  This latest financial machination reinforced to investors that film sales aren't what they used to be, and Kodak is in big trouble - possibly facing bankruptcy.  Kodak's stock is down some 80% this year, from $6 to $1 - and quite a decline from the near $80 price it had in the late 1990s.

(Source: Yahoo Finance 10-3-2011)

Why Kodak declined was well described in Forbes.  Despite its cash flow and company strengths, Kodak never succeeded beyond its original camera film business.  Heck, Kodak invented digital photography, but licensed the technology to others as it rabidly pursued defending film sales.  Because Kodak couldn't adapt to the market shift, it now is probably going to fail.

And that is why it is worth revisiting Netflix.  Although things were poorly explained, and certainly customers were not handled well, last quarter's events are the right move for investors in the shifting at-home video entertainment business:

1. DVD sales are going the direction of CD's and audio cassettes.  Meaning down.  It is important Netflix reap the maximum value out of its strong DVD position in order to fund growth in new markets.  For the market leader to raise prices in low growth markets in order to maximize value is a classic strategic step.  Netflix should be lauded for taking action to maximize value, rather than trying to defend and extend a business that will most likely disappear faster than any of us anticipate - especially as smart TVs come along.
2. It is in Netflix's best interest to promote customer transition to streaming.  Netflix is the current leader in streaming, and the profits are better there.  Raising DVD prices helps promote customer shifting to the new technology, and is good for Netflix as long as customers don't change to a competitor.
3. Although Netflix is currently the leader in streaming it has serious competition from Hulu, Amazon, Apple and others.  It needs to build up its customer base rapidly, before people go to competitors, and it needs to fund its streaming business in order to obtain more content.  Not only to negotiate with more movie and TV suppliers, but to keep funding its exclusive content like the new Lillyhammer series (more at GigaOm.com).  Content is critical to maintaining leadership, and that requires both customers and cash.
4. Netflix cannot afford to muddy up its streaming strategy by trying to defend, and protect, its DVD business.  Splitting the two businesses allows leaders of each to undertake strategies to maximize sales and profits.  Quikster will be able to fight Wal-Mart and Redbox as hard as possible, and Netflix can focus attention on growing streaming.  Again, this is a great strategic move to make sure Netflix transitions from its old DVD business into streaming, and doesn't end up like an accelerated Kodak story.

Historically, companies that don't shift with markets end up in big trouble.  AB Dick and Multigraphics owned small offset printing, but were crushed when Xerox brought out xerography.  Then, afater inventing desktop publishing at Xerox PARC, Xerox was crushed by the market shift from copiers to desktop printers - a shift Xerox created. Pan Am, now receiving attention due to the much hyped TV series launch, failed when it could not make the shift to deregulation.  Digital Equipment could not make the shift to PCs.  Kodak missed the shift from film to digital.  Most failed companies are the result of management's inability to transition with a market shift.  Trying to defend and extend the old marketplace is guaranteed to fail.

Today markets shift incredibly fast.  The actions at Netflix were explained poorly, and perhaps taken so fast and early that leadership's intentions were hard for anyone to understand.  The resulting market cap decline is an unmitigated disaster, and the CEO should be ashamed of his performance.  Yet, the actions taken were necessary - and probably the smartest moves Netflix could take to position itself for long-term success. 

Perhaps Netflix will fall further.  Short-term price predictions are a suckers game.  But for long-term investors, now that the value has cratered, give Netflix strong consideration.  It is still the leader in DVD and streaming.  It has an enormous customer base, and looks like the exodus has stopped.  It is now well organized to compete effectively, and seek maximum future growth and value.  With a better PR firm, good advertising and ongoing content enhancements Netflix has the opportunity to pull out of this communication nightmare and produce stellar returns.

 

 

 

 

Grow like (the) Amazon to Succeed - Invest outside your "core"

"It's easier to succeed in the Amazon than on the polar tundra" Bruce Henderson, famed founder of The Boston Consulting Group, once told me.  "In the arctic resources are few, and there aren't many ways to compete.  You are constantly depleting resources in life-or-death struggles with competitors.  Contrarily, in the Amazon there are multiple opportunities to grow, and multiple ways to compete, dramatically increasing your chances for success.  You don't have to fight a battle of survival every day, so you can really grow."

Today, Amazon(.com) is the place to be.  As the financial markets droop, fearful about the economy and America's debt ceiling "crisis," Amazon is achieving its highest valuation ever.  While the economy, and most companies, struggle to grow, Amazon is hitting record growth:

Source: BusinessInsider.com

Sales are up 50% versus last year! The result of this impressive sales growth has been a remarkable valuation increase - comparable to Apple! 

• Since 2009, valuation is up 5.5x
• Over 5 years valuation is up 8x
• Over the last decade Amazon's value has risen 15x

How did Amazon do this?  Not by "sticking to its knitting" or being very careful to manage its "core."  In 2001 Amazon was still largely an on-line book seller.

The company's impressive growth has come by moving far from its "core" into new markets and new businesses - most far removed from its expertise.  Despite its "roots" and "DNA" being in U.S. books and retailing, the company has pioneered off-shore businesses and high-tech products that help customers take advantage of big trends.

Amazon's earnings release provided insight to its fantastic growth.  Almost 50% of revenues lie outside the U.S.  Traditional retailers such as WalMart, Target, Kohl's, Sears, etc. have struggled in foreign markets, and blamed poor performance on weak infrastructure and complex legal/tax issues.  But where competitors have seen obstacles, Amazon created opportunity to change the way customers buy, and change the industry using its game-changing technology and capabilities.  For its next move, according to Silicon Alley Insider, "Amazon is About to Invade India," a huge retail market, in an economy growing at over 7%/year, with rising affluence and spendable income - but almost universally overlooked by most retailers due to weak infrastructure and complex distribution.

Amazon's remarkable growth has occurred even though its "core" business of books has been declining - rather dramatically - the last decade.  Book readership declines have driven most independents, and large chains such as B. Dalton and more recently Borders, out of business. But rather than use this as an excuse for weak results, Amazon invested heavily in the trends toward digitization and mobility to launch the wildly successful Kindle e-Reader.  Today about half of all Amazon book sales are digital, creating growth where most competitors (hell-bent on trying to defend the old business) have dealt with stagnation and decline. 

Amazon did this without a background as a technology company, an electronics company, or a consumer goods company.  Additionally, Amazon invested in Kindle - and is now developing a tablet - even as these products cannibalized the historically "core" paper-based book sales.  And Amazon has pursued these market shifts, even though these new products create a significant threat to Amazon's largest traditional suppliers - book publishers. 

Rather than trying to defend its old core business, Amazon has invested heavily in trends - even when these investments were in areas where Amazon had no history, capability or expertise!

Amazon has now followed the trends into a leading position delivering profitable "cloud" services.  Amazon Web Services (AWS) generated $500M revenue last year, is reportedly up 50% to $750M this year, and will likely hit $1B or more before next year.  In addition to simple data storage Amazon offers cloud-based Oracle database services, and even ERP (enterprise resource planning) solutions from SAP.  In cloud computing services Amazon now leads historically dominant IT services companies like Accenture, CSC, HP and Dell.  By offering solutions that fulfill the emerging trends, rather than competing head-to-head in traditional service areas, Amazon is growing dramatically and avoiding a gladiator war.  And capturing big sales and profits as the marketplace explodes.

Amazon created 5,300 U.S. jobs last quarter.  Organic revenue growth was 44%.  Cash flow increased 25%.  All because the company continued expanding into new markets, including not only new retail markets, and digital publishing, but video downloads and television streaming - including making a deal to deliver CBS shows and archive. 

Amazon's willingness to go beyond conventional wisdom has been critical to its success.  GeekWire.com gives insight into how Amazon makes these critical resource decisions in "Jeff Bezos on Innovation" (taken from comments at a shareholder meeting June 7, 2011):

• "you just have to place a bet.  If you place enough of those bets, and if you place them early enough, none of them are ever betting the company"
• "By the time you are betting the company, it means you haven't invented for too long"
• "If you invent frequently and are willing to fail, then you never get to the point where you really need to bet the whole company"
• "We are planting more seeds...everything we do will not work...I am never concerned about that"
• "my mind never lets me get in a place where I think we can't afford to take these bets"
• "A big piece of the story we tell ourselves about who we are, is that we are willing to invent"
  

If you want to succeed, there are ample lessons at Amazon.  Be willing to enter new markets, be willing to experiment and learn, don't play "bet the company" by waiting too long, and be willing to invest in trends - especially when existing competitors (and suppliers) are hesitant.

Invest in Trends, Cannibalize to Grow - Sell Yahoo, Buy Apple

"Buy Low, Sell High" was an industrial era investor expression.  Before we shifted into an information economy, investors were admonished to invest along with economic cycles, buying during recessions, selling during booms.

In today's information economy it's not nearly so simple.  While growth occurs, companies falter and disappear (Sun Microsystems and Silicon Graphics, for example.) Meanwhile, during bad economic periods there are flourishing growth companies. 

Company performance today has much more to do with whether the company's products and services are aligned with trends, and market shifts created by trends, than the overall economy.  When revenues first show signs fo faltering, often the company fails completely, unable to react to market shifts. Competitors quickly steal customers,  revenue and precious cash flow.  Investors frequently have little warning, or time,  before company value slides into the oblivion, leaving them with negative returns.

So now it's more important to look at trends in where product and service markets are headed than overall economic conditions.  The economy won't save a company that's against the trend - or hurt a company that's delivering the market trend.

Yahoo caught the early trend toward internet usage.  In the early years people didn't quite know what to do on the internet, so content providers, aggregators, and ability to search were valuable. People like Yahoo because it gave them what they wanted, and the company flourished as it became the home page for over 80% of internet users.  Advertisers loved the user base, so they bought ads.

Then the market shifted.  Users gained more experience, and didn't need the aggregation function Yahoo provided. Increasingly they wanted to find answers themselves, making the quality of search more important than content.  A white page with a simple box (Google) that did great searching across the entire web overtook Yahoo's content. And, as time progressed people started using the internet as a primary location for socially connecting with friends and colleagues, making the content aggregation even less valuable.  Time spent on Yahoo as a percent of time on-line began dropping:

Source: Business Insider

But although this trend began in 2009, and was clear in 2010, Yahoo's CEO kept pushing the same business model.  She missed the trend. 

The market kept right on shifting, and by 2011, Yahoo is in a very bad competitive position:

Source:  Business Insider

So, nobody should be surprised that revenue would fall - correct?  It's not that the folks at Yahoo are wasteful, or not working hard.  They simply are becoming out of step with the market trend.  The result one would expect is worsening results in the old, "core" business - and that's exactly what is happening:

Source: Business Insider

Meanwhile, where the eyeballs go is where the display ad revenues go as well.  And with the trends, that means we would expect display ad revenu growth to move away from Yahoo - as it has done:

Source: Business Insider

So yesterday when Yahoo announced sales and earnings, it was a disappointment. What increase Yahoo had in fast growing display ads (5%) was insufficient to cover the decline in search ads (down 15%).  Clearly, Yahoo missed the market shift.  But, the CEO did not admit that the business model was ineffective (as results indicate.)  Rather, she said the company needed more salespeople! 

This proclivity to look inward, as if working harder, faster and better would "fix" Yahoo, defies the reality that the company is no longer competitive given where the market is headed.  Ms. Bartz can't succeed by trying to defend and extend the traditional Yahoo business model.  Yahoo doesn't need more salespeople, it needs an entirely different business! 

Source: Business Insider

Alternatively, Apple exemplifies the other side of this coin.  I have been an unabashed bull on Apple for months.  Why?  Because it does create solutions tightly linked to market trends.  People, as consumers or in business, demand more mobility.  And Apple's products deliver that mobility more seamlessly and effectively than any other solution provider. 

Apple could well have kept itself focused on Mac sales.  Had it done so, it would likely be out of business today.  Instead, Apple focused the bulk of its development on delivering products that fulfilled trends.  The result has been expansion into new markets, which have delivered massive revenue gains. 

Source: Business Insider

 Last quarter Apple sold more iPhones and even more iPad tablets (9.25million units, $6.1B) than it sold Macs (~4 million units, $5.1B.)  The old business has been replaced (cannibalized) by new, growing businesses that support the market trend.  iPads are now 11% of the PC business overall, and growing fast as they obsolete PCs.  Combined, iPads and Macs sold 13.25 million "computing devices" which would make it second in the world, behind only HP (15.3million PCs.)  Bigger than Dell, for example, that has stuck to its "core" PC business.

Because Apple is all about delivering on trends, there's really no reason to think revenues, and profits, won't continue growing.  The shift to mobility has just taken hold, and there are legions of people still without an apps-powerful smartphone (lots of Blackberry customers out there to shift.)  The shift to tablets has just started.  As these trends continue, Apple is continuing to develop new solutions that keep it ahead of competitors. 

Where Yahoo's CEO wants to add more salespeople, in hopes she can push outdated products, Mr. Jobs said in the earnings call yesterday "Right now we're very focused and excited about bringing iOS5 and iCloud to our users this fall."  Yahoo is trying to do more of what it always did, as the market moves away.  While Apple keeps its collective management eyes on the future - and where the market is headed - to constantly bring new solutions that deliver on the trends.

Sell Yahoo, if you haven't already.  And buy Apple.  It's all about investing with the trends.

Note: update on "Is Cisco a Value Stock? Skip It." In the month since publishing that blog (6/23/11) Cisco has demonstrated that it is running headlong from the rapids of growth into the swamp of stagnation.  Not only has it been killing off new products, but as it announced weak results the CEO has taken to a massive cutback.  11,500 employees are being laid off, or sent off to work for other companies as facilities are being sold to a Chinese company. 

Worse, the CEO is now stooping to financial machinations in order to make the future look better.  According to HuffingtonPost.com Cisco is taking a massive $1.3B charge. This allows Cisco to write off various costs that are old, current and even future to the current P&L.  This will inflate future earnings, regardless of actual performance, while deflating current results.  The net impact is P&L manipulation designed to make the company - quarter over quarter or year over year - look better than it is actually performing.  Transparency is being intentionally muddled, to hide the company's inability to provide solutions delivering on market trends.

Cisco shows all the signs of a company in a growth stall.  Unable to shift with market trends, it is now shedding products, employees and assets in an effort to pad the P&L.  It is "reorganizing" the company, rather than linking to market needs. Remember that fewer than 7% of companies that slip into a growth stall ever successfully maintain an ongoing 2% growth rate.  Because they are focused on internal issues, and financial management - rather being clearly focused market trends.

Don't just skip buying Cisco - if you are a shareholder, SELL! 

And buy Apple.

How Harry Potter predicts Success for AOL

Evolution doesn't happen like we think.  It's not slow and gradual (like line A, below.)  Things don't go from one level of performance slowly to the next level in a nice continuous way.  Rather, evolutionary change happens brutally fast.  Usually the potential for change is building for a long time, but then there is some event - some environmental shift (visually depcted as B, below) - and the old is made obsolete while the new grows aggressively.  Economists call this "punctuated equilibrium."  Everyone was on an old equilibrium, then they quickly shift to something new establishing a new equilibrium.

Momentum has been building for change in publishing for several years.  Books are heavy, a pain to carry and often a pain to buy.  Now eReaders, tablets and web downloads have changed the environment.  And in June  J.K. Rowling, author of those famous Harry Potter books, opened her new web site as the location to exclusively sell Harry Potter e-books (see TheWeek.com "How Pottermore Will Revolutionized Publishing.") 

Ms. Rowling has realized that the market has shifted, the old equilibrium is gone, and she can be part of the new one.  She'll let the dinosaur-ish publisher handle physical books, especially since Amazon has already shown us that physical books are a smaller market than ebooks.  Going forward she doesn't need the publisher, or the bookstore (not even Amazon) to capture the value of her series.  She's jumping to the new equilibrium.

And that's why I'm encouraged about AOL these days.  Since acquiring The Huffington Post company, things are changing at AOL.  According to Forbes writer Jeff Bercovici, in "AOL After the Honeymoon," AOL's big slide down in users has begun to reverse direction.  Many were surprised to learn, as the FinancialPost.com recently headlined, "Huffington Post Outstrips NYT Web Traffic in May."
Source: BusinessInsider.com

The old equilibrium in news publishing is obsolete.  Those trying to maintain it keep failing, as recently headlined on PaidContent.org "Citing Weak Economy, Gannett Turns to Job Cuts, Furloughs." Nobody should own a traditional publisher, that business is not viable.

But Forbes reports that Ms. Huffington has been given real White Space at AOL.  She has permission to do what she needs to do to succeed, unbridled by past AOL business practices.  That has included hiring a stable of the best talent in editing, at high pay packages, during this time when everyone else is cutting jobs and pay for journalists.  This sort of behavior is anethema to the historically metric-driven "AOL Way," which was very industrial management.  That sort of permission is rarely given to an acquisition, but key to making it an engine for turn-around. 

And HuffPo is being given the resources to implement a new model.  Where HuffPo was something like 70 journalists, AOL is now cranking out content from some 2,000 journalists and editors!  More than The Washington Post or The Wall Street Journal.  Ms. Huffington, as the new leader, is less about "managing for results" looking at history, and more about identifying market needs then filling them.  By giving people what they want Huffington Post is accumulating readers - which leads to display ad revenue.  Which, as my last blog reported, is the fastest growing area in on-line advertising

Where the people are, you can find advertsing.  As people are shift away from newspapers, toward the web, advertising dollars are following.  Internet now trails only television for ad dollars - and is likely to be #1 soon:

Chart source: Business Insider

So now we can see a route for AOL to succeed.  As traditional AOL subscribers disappear - which is likely to accelerate - AOL is building out an on-line publishing environment which can generate ad revenue.  And that's how AOL can survive the market shift.  To use an old marketing term, AOL can "jump the curve" from its declining business to a growing one.

This is by no means a given to succeed.  AOL has to move very quickly to create the new revenues.  Subscribers and traditional AOL ad revenues are falling precipitously.

Source: Forbes.com

But, HuffPo is the engine that can take AOL from its dying business to a new one.  Just like we want Harry Potter digitally, and are happy to obtain it from Ms. Rowlings directly, we want information digitally - and free - and from someone who can get it to us.  HuffPo is now winning the battle for on-line readers against traditional media companies. And it is expanding, announced just this week on MediaPost.com "HuffPo Debuts in the UK."  Just as the News Corp UK tabloid, News of the World,  dies (The Guardian - "James Murdoch's News of the World Closure is the Shrewdest of Surrenders.")

News Corp. once had a shot at jumping the curve with its big investment in MySpace.  But leadership wouldn't give MySpace permission and resources to do whatever it needed to do to grow.  Instead, by applying "professional management" it limited MySpace's future and allowed Facebook to end-run it.  Too much energy was spent on maintaining old practices - which led to disaster.  And that's the risk at AOL - will it really keep giving HuffPo permission to do what it needs to do, and the resources to make it happen?  Will it stick to letting Ms. Huffington build her empire, and focus on the product and its market fit rather than short-term revenues?  If so, this really could be a great story for investors. 

So far, it's looking very good indeed. 

 

 

 

Why Apple is worth more than Wal-Mart - it's about the future, not the past

Apple's market value has struggled in 2011.  When I ask people why, the overwhelming top 3 responses are:

• How can a company nearly bankrupt 10 years ago become the second most valuable company on the equity market?
• Apple has had a long run, isn't it about to end?
• How can Apple be worth so much, when it has no "real" assets?

I'm struck by how these questions are based on looking backward, rather than looking into the future.

Firstly, it doesn't matter where you start, but rather how well you run the race.  What happened in the past is just that, the past.  Changing technologies, products, solutions, customers, business practices, economic conditions and competitors cause markets to shift.  When they shift, competitor positions change.  The strong can remain strong, but it's also possible for company's fortunes to change drastically. Apple has taken advantage of market shifts - even created them - in order to change its fortunes.  What investors should care about is the future.

Which leads to the second question; and the answer that there's no reason to think Apple's growth run will end any time soon.  Perhaps Apple won't maintain 100% annual growth forever, but it doesn't have to grow at that rate to be a very valuable investment.  And worth a lot more than the current value.  That Apple can grow at 20% (or a lot more) for another several years is a very high probability bet:

1. Apple's growth markets are young, and the markets themselves are growing fast.  Apple is not in a gladiator war to maintain old customers, but instead is creating new customers for digital/mobile entertainment, smartphones and mobile tablets.  Because it is in high growth markets it's odds of maintaining company growth are very good.  Just look at the recent performance of iPad tablet sales, a market most analysts predicted would struggle against cheaper netbooks.  Quarterly sales are blowing past early 2010 estimates of annual sales, and are 250% over last year (chart source Silicon Alley Insider):
2. Apple's products continue to improve.  Apple is not resting upon its past success, but rather keeps adding new capability to its old offerings in order to migrate customers to its new platforms.  At the recent developer's conference,for example, Apple described how it was adding Twitter integration for enhanced social media to its platforms and introducing its own messenger service, bypassing 3rd party services (like SMS) and replacing competitive products like RIM's BBM. 
3. Further, Apple is introducing new solutions like iCloud (TechStuffs.net "Apple iCloud Key Features and Price)  offering free wireless synching between Apple platforms, free and seamless back-ups, and the ability to operate without a PC (even Mac flavor) if you want to be mobile-only ("The 10 Huge Things Apple Just Revealed" BusinessInsider.com).  These solutions keep expanding the market for Apple sales into new markets -  such as small businesses (Entrepreneur.com "What Lion Means for Small Business") as it solves unmet needs ignored by historically powerful solutions providers, or offered at far too high a price.

Thirdly, investors wonder how a company can be worth so much without much in the way of "real" assets.  The answer lies in understanding how the business world has shifted.  In an industrial economy real assets - like land, building, machinery - was greatly valued.  They were the means of production, and wealth generation.  But we have transitioned to the information economy.  Now the information around a business, and providing digital solutions, are worth considerably more than "real" assets. 

How many closed manufacturing plants, retail stores or restaurants have you seen?  How many real estate developers have shuttered?  Contrarily, what's the value of customer lists and customer access at companies like Amazon.com, GroupOn, Linked-In, Twitter and Facebook in today's information economy?  What's the demand for printed books, and what's the demand for ebooks (such as Kindle?)  "Real" asset values are tumbling because they are easy to obtain, and owning them produces precious little value, or profit, in today's globally competitive economy. 

This same week that Apple announced a barrage of revenue-generating upgrades and new products asset rich Wal-Mart made an announcement as well.  After a decade in which Apple's value skyrocketed to over $330B (More than Microsoft and Intel Combined by the way), Wal-Mart's value has gone nowhere, mired around $185B. Wal-Mart's answer is to buy back it's shares.  The Board has authorized continuing and expanding a massive share buyback program of literally 1 million shares/day - 10% of all shares traded daily!  The amount allocated is 1/6th the entire market cap! At this rate 24x7WallStreet.com headlined "Wal-Mart's Buyback Plan Grows & Grows.. Could Take Itself Private by 2025." 

Share buybacks produce NO VALUE.  They don't produce any revenue, or profit.  All they do is take company cash, and spend it to buy company shares.  The asset (cash) is spent (removed) in the process of buying shares, which are then removed from the company's equity.  The company actually gets smaller, because it has less assets and less equity. (Compared to LInked-In, for example, that grew larger by selling shares and increasing its cash assets.)  Over time the cash disappears, and the equity disappears.  Eventually, you have no company left!  Stock buybacks are an end of lifecycle investment, and should trigger great fear in investors as they demonstrate management has lost the ability to identify high-yield growth opportunities.

Wal-Mart is steeped in assets. It has land, buildings, stores, shelves, warehouses, trucks, huge computer systems.  But these assets simply don't produce a lot of profit, as competitors are squeezing margins every year.  And there's not much growth, because doing more of what it always did isn't really wanted by a lot more people.  So it has gobs of assets.  So what?  The assets simply aren't worth a lot when the market doesn't need any more retail stores; especially boring ones with limited product selection, limited imagination and nothing but "low price." 

Assets aren't the "store of value" analysts gave them in an industrial economy, and it's time we realize investing in "assets" is fraught with risk.  Assets, like homes and autos have shown us, can go down in value even easier and faster than they can go up.  Global competitors can match the assets, and drive down prices using cheap labor and operating by less onerous standards. In today's market, assets are as likely to be an anchor on value as an asset.

I started 2011 saying Apple was a screaming buy.  Today that's even more true than it was then.  Apple's revenues, profits and cash flow are up.  Sales in existing lines are still profitably growing at double (or triple) digit rates, and enhancements keep Apple in front of competitors.   Meanwhile Apple is entering new markets every quarter, with solutions meeting existing, unmet needs.  Because value has been stagnant, the value (price) to revenue, earnings and cash flow have all declined, making Apple cheaper than ever.  It's time to invest based on looking to the future, and not the past.  Doing so means you buy Apple today, and start dumping asset intensive stocks like Wal-mart.

Update 12 June, 2011 - Chart from SeekingAlpha.com.  Apple's cash hoard grows faster than its valuation.  When a company can grow cash flow and profits faster than revenues - and it's doubling revenues - that's a screaming buy!