Wednesday, July 29, 2015

Twitter Q2 Earnings: Users Growth Officially Over at Twitter

Even the executives at Twitter have finally acknowledged the companies' biggest issue: a lack of user growth. On the earnings call yesterday, Interim CEO Jack Dorsey spoke about how the current user growth numbers are unacceptable, while CFO Anthony Noto claimed any new increase in users would take "a considerable time". Clearly not something investors wanted to hear, the stock, which was up over 6% after hours, plummeted 12%, opening today around $32 a share. The only positive was a beat on revenue and EPS, though the company still has yet to turn a profit. As the executives seem to be taking a "long road" and focusing on monetization now and growth later, the company could be in some serious trouble. The focus for social media companies in particular, where being cool and hip is highly important, is to get as many users to join as quickly as possible and worry about monetizing their user base down the road. (I've been writing about the issue of user growth since February: Link Here). In my view, this was another terrible quarter for Twitter, a growth company shouldn't care about increasing revenue so soon, the focus should be on user growth, a number that has been slowing for months now. Finally, the executives mentioned the problem, but not in the right way. The rudderless ship looks sure to continue to drift. Below, we look further at the user growth problem.

Monthly Users were up 15% year over year, due to an increase in SMS based users.

User Growth Up? Not so fast.
The small increase that Twitter saw in user growth came from SMS users. So what exactly is an SMS User? Essentially, these are people who sign up for specific text message alerts of tweets they deem important. So a baseball fan may want a text when Derek Jeter tweets his return to the Yankees. These users DO NOT need a Twitter account to sign up for this service. SMS users do not even have to open the Twitter app to access these tweets, they will only receive it as a text. Twitter is happy to let these users fall to the wayside, why open the app at all? In the meantime, Snapchat/Facebook/Instagram and others will continue to build up real time news stories INSIDE their apps. Alternatives to what twitter does will grow everyday. Almost every other week Snapchat launches small tweaks to it's app, Twitter hasn't had any major product innovations at all. Twitter might also have to start worrying about a drop in the value of its network, as more people leave the service for other competitors, the less valuable it becomes for those left to have a twitter account. This is because people will find less of their social network, whether friends or professional, using the app, thus Twitter loses more of it's drive for users to continue using the app. This can snowball rather quickly, especially if users have alternatives and are flooding to another service (such as Snapchat or Instagram). For anyone who downplays the significance of this, think back to how quickly Blackberry fell from grace. At the end of the day, excluding these pretend SMS users, Twitter had no user growth. No one is joining the service anymore, because, why should they? 

More Executives Leaving

Not to mention, two executives are leaving the company, continuing the fast swinging door that has become the norm at Twitter. The head of GROWTH at Twitter announced he will be moving on to better things at YouTube (owned by Google). Additionally, a product director is also be jumping ship, heading over to Dropbox. Twitter has yet to find steady leadership, a troubling note. Looking around at other success stories, there is almost always a strong leader with a clear vision of the company. Tesla and Elon Musk, Apple and Steve Jobs, Microsoft and Bill Gates, Virgin and Richard Branson, Facebook and Mark Zuckerberg, . These names become synonymous with the company, Twitter lacks this vision and leadership, another troubling sign.

Wednesday, July 22, 2015

Apple Earnings: Investors sell on earnings beat

Apple is opening today down 6.5% at around $123, lower then yesterday's $130 pre-earnings close. Hearing this, one might think earnings were disappointing, yet the opposite was true. Revenue and earnings were higher than expected (Q3 earnings per share estimate was $1.81, Apple reported $1.85 , revenue estimate was $49.43 Billion and Apple reported $49.6 Billion) These were high expectations to begin with, with many analysts ratcheting up estimates in the lead up given Apple's record with earnings beats, and Apple still beat. This steep drop in stock value seems to be investors disappointed that Apple didn't beat by much more, which doesn't appear to be very rational. I will go over each product category and why I think that Apple is poised for more growth and is a buy after this current sell-off.

Everyone was focusing in on this product, would sales slow down from it's incredible speed. Apple sold almost 50 million Iphones in the quarter, with sales jumping by 35% year over year. This at a time when when many people might be holding off to buy the newer Iphone 7, which will be announced in September. Where is the problem? Numbers on the Iphone continue to impress, growth in China continues to impress, users continue to upgrade to the newer model, and Tim Cook claims this quarter had the most people switching from Android to Iphone ever. Consumers have chosen the Iphone as the prized mobile phone.

Apple Watch                          
Getty Images

This is one area where many investors are getting anxious for immediate results. Apple has yet to release sales data for the watch, though Tim Cook said that sales have "beat internal estimates". That sounds good to me, and before launch most investors were saying the watch had zero impact on the bottom line anyway. Now everyone is worried that the watch is not taking off. This is a product line that won't explode like the Iphone, it's an entirely new category with an entirely different objective. Though Tim Cook said sales of the watch were higher in June than in the previous two months, so the watch could already be gathering speed. Wearable technology will grow, albeit steadily. The apple watch will benefit from that growth, and at an average price of $600 per watch, this product line will have a sizable revenue in the future. Investors seem to be short sighted on this, wanting big gains now. Maybe people are spoiled from the massive success of the Iphone. Time will tell.

Mac Sales

Sales of the laptop grew by more than 9%, at a time when PC sales are falling around the world. Investors seem not to care about this, but this development shows that people are investing in the ecosystem. A phone, computer, watch, TV, all will go together. The cost of switching one or the other goes up the more Apple products you have. With Tim Cook speaking about android users switching to Iphone, it becomes a matter of time before they also ditch a windows computer for a Macbook.

Ipad Sales

Sales slumped here again. To me, this is a niche product, it's a convenience, especially with phone screen size increasing. If someone is invested in the ecosystem, they might purchase this for their daily commute or for work. Households may purchase an Ipad for their children, however Apple continues to push for businesses to adapt Ipads. This might continue, with some cash registers switching over to Ipad use. However, I don't see this category blowing out expectations anytime soon. That's just fine with me, with yearly improvements, the Ipad isn't going away, it just isn't going to grow like the Iphone.

Apple Pay

Barely even mentioned, Apple Pay has just launched in the UK. Another new innovation that more and more people will continue to adapt around the world. The ecosystem for Apple is growing, and the watch will make Apple Pay even more viable, allowing users to purchase items by just holding out their arm. It's just another reason to own the watch or Iphone. Small innovation can go a long way.

Investors also seem worried about growth in China given the recent stock market collapse there. Yet overall sales more than doubled in the region, and Tim Cook continued to be optimistic about further increases in sales, as the company plans to open more stores there. As the WSJ pointed out Iphone sales in greater China rose 87%. That hardly appears to be a slowdown. No one seems to speak about the network affect as well, as more people in China purchase an Iphone, it becomes more valuable and more wanted due to network effects.

Apple continues to print money from it's ecosystem, especially the Iphone. With over $200 Billion in cash, a stellar product line with continued innovations, the company is positioned well for future growth. Not to mention the stock is trading at a discount relative to the rest of the market with a P/E around 15. I recommend AAPL as a buy here, I see no major slowdowns in Iphone sales which worries many others. The watch will continue to catch on, along with improvements in the Apple TV and possibly even an Apple car ecosystem down the road, this company will continue it's dominant growth in the tech industry. Buy low, sell high. Now is the chance to get it low.