Category Archives: internet

online shopping continues to evolve

October 27, 2014 By in economics, Industry Analysis, internet, Retail Tags: , , , , , , 1 Comment

Three studies reported in the press this year about the behavior of online merchants have caught my eye.  They all call into question what I think is the consensus belief that online shopping is not only faster and simpler than going to a bricks-and-mortar store, but that it’s cheaper as well.

–the first concluded that the price Staples showed to an online customer varied with that customer’s location.  More specifically, price depended on how close the physical stores of rival office supplies companies were.

–the second concluded that Amazon has been raising its prices  this year, to the point where for some things AMZN is now 10% more expensive than Wal-Mart and 5% more than Target.

–the third, covering 16 popular online merchants and noted last week in the Wall Street Journal, found that:

—–Travelocity charged users of Apple mobile devices to access its site $15 a night less for hotel rooms than everyone else

—–Home Depot showed cheaper items to shoppers using a desktop than those coming to its site via laptop, tablet or phone.  The difference averaged about $100.

—–Cheaptickets and Orbitz charged on average $12 less to customers who logged into their sites than those who didn’t, without alerting people to the savings.

—–some sites seemingly experimented with pricing by randomly offering customers higher or lower quotes.

my take

Some of this is a little weird–like why an iPhone user should get a discount (I would have thought the pricing would go in the other direction).  A lot parallels the traditional practices of bricks-and-mortar retailing.  Using a phone or tablet is apparently the equivalent of driving up to a sore in a limo and expecting a bargain.

The emergence of the same in online retailing signals a significant maturing of the medium.  We’ve left the early days where to make profits grow it’s enough just to get more traffic.  The game is now all about finding the highest price that will convert browsers to buyers, thereby maximizing the profit per transaction.

We all know some variable pricing happens, both in online and bricks-and-mortar retailing.  But as potential customers become more aware that it occurs a lot more online than they had thought, and as they learn the signals they need to send to get a lower price, the tricks merchants now employ will become less effective.

A so-so economy will accelerate this adjustment process, with negative implications for online-only retailers, I think.

 

ARK Investment Management and its ETFs

October 13, 2014 By in Autos, cloud services, ETFs Vs. Mutual Funds, growth vs value, Industry Analysis, internet, Investment firms, robots, semiconductor manufacturing, software, Technology, Wireless Tags: , , , , , , , , Leave a comment

ARK

I was listening to Bloomberg Radio (again!?!) earlier this month and heard an interview of Cathie Wood, the CEO/CIO of recently formed ARK Investment Management.  I don’t know Ms. Wood, although we both worked at Jennison Associates, a growth-oriented equity manager with a very strong record, during different time periods.  Just before ARK, she had been CIO of Global Thematic Strategies for twelve years at value investor AllianceBernstein.  (As a portfolio manager I was a big fan of Bernstein’s equity research but I’m not familiar with her Bernstein output.)  She’s been  endorsed by Arthur Laffer of Laffer Curve fame, who sits on her board.

ARK is all about finding and benefiting from “disruptive innovation that will change the world.”

Ms. Wood was promoting two actively managed ETFs that ARK launched at the beginning of the month, one focused on industrial innovation (ARKQ) and another the internet (ARKW).  Two more are in the works, one for genomics (ARKG) and the last (ARKK) an umbrella innovation portfolio which will apparently hold what it considers the best of the other three portfolios.

What really caught my ear in the interview was Ms. Wood’s discussion of the domestic automobile market (summary research available on the ARK website).  Most cars lie around doing nothing during the day.  What happens if either ride-sharing services like Uber or the Google self-driven car, which make more constant use of autos, catch on as substitutes?  According to Ms. Wood, until these innovations reach 2.5% of total miles driven (based on the idea that on a per mile basis ride-sharing costs half what owning a car does), there’s little effect.  But at 5% penetration, the bottom falls out of the new car market.  New car sales get cut in half!

Who knows whether this is correct or whether it will happen or not   …but I find this a very interesting idea.

about the ETFs

The top holdings of ARKW are:  athenahealth, Apple, Facebook, Salesforce.com and Twitter.  These comprise just under 25% of the portfolio.

For ARKQ, the top five are:  Google, Autodesk, Tesla, Monsanto and Fanuc.  They make up just over 24% of the portfolio.

Both will likely be high β portfolios.  Both have performed roughly in line with the NASDAQ Composite since their debut.

The perennial question about thematic investors (I consider myself one) is whether the high-level concepts are backed up by meticulous company by company financial research.  This is essential.  In addition, it’s important, to me anyway, that the holdings be arranged so that they’re not all dependent on a single theme–the continuing success of the Apple ecosystem, for instance.

I’m not familiar with Ms. Wood’s work, so I can’t say one way or another (Fanuc and ABB strike me as kind of weird holding for ARKQ, though).  But I think her research is worth reading and her ETFs worth at least monitoring.  For us as investors, the ultimate question will be whether Ms. Wood can outperform an appropriate index.  The NASDAQ Composite would be my initial choice.

 

 

 

 

 

internet pricing

August 7, 2014 By in Industry Analysis, internet, Retail Tags: , , , , , , Leave a comment

Just thinking out loud…

Years ago, I was looking at a chain of convenience stores that had free-standing urban outlets as well as suburban/rural ones linked to gasoline stations.  The chain was beginning to implement variable, or dynamic, pricing.  It had installed electronic price signs on its shelves and had a wireless system it could use to change prices from one time to another during the day–either item by item or store by store, or across the entire chain.  The idea was to sell a carton of milk for $2 at noon  $3 at 7 pm and $4 a midnight.

As it turned out, the system never got off the ground.  There were technical legal issues, like whether you could use an electronic sign or whether a price had to be marked on each item.  But the main thing was that customers were outraged by the whole scheme.  They thought it was an incredible ripoff and stopped patronizing the chain.  Chagrined management apologized and shut the whole variable pricing effort down.

My guess is the same thing would happen today.

On the other hand, we all kind of know and accept that airplane seats and hotel rooms have been variable priced for years.  Hotels in college towns may triple room rates on graduation weekend.  Airlines raise their prices around traditional travelling high points.  Both routinely raise prices as the day its space will be used, based on computer analysis of demand and space availability.

No one minds.  In fact, through membership in rewards programs and with affinity credit cards, we flood hotel and airline companies with information about ourselves and our buying habits!

Then there’s e-commerce, ex travel.

For most publicly traded consumer companies this is not a big profit issue yet.  But it will be soon.  And for companies like Staples it already is.

We (sort of) know that websites practice variable intraday pricing.  We know that people in different zip codes get offered different prices, and that the distance to the nearest brick-and-mortar store that likely carries the item counts, too.  We know that if I’m thought to be a potential good customer, I’ll get different prices than if I’m perceived as not worth having.  We know that after browsing and returning to a site, the price we get may depend on whether we’ve closed/reopened our browser or not.  We also know that retailers don’t want to call attention to how much information they have about customers for fear of frightening them away.  (That said, I’ve recently noticed that if I leave an item unbought in a shopping basket, it follows me around in a semi-creepy way in subsequent browsing.)

Two potentially important things we don’t know:

–how much extra profit dynamic pricing brings internet retailers.  I have no idea.  If there were some way to make a small bet with a large payoff, I’d say that for a Wal-Mart or a Staples, it amounts to 5% -10% of internet revenue and 10%  – 20% of internet operating profit.

–when people become more familiar with what’s happening, will they react like the customers of my convenience store chain above, or like frequent fliers/stayers?  My guess is that it will be more the firmer than the latter.

Investment implications?   Two, I think:  for mixed bricks-and-mortar plus internet retailers, the internet business will be surprisingly strong; if I’m correct that consumers will see dynamic pricing as an abuse of trust, the negative reaction could be severs as/when its use is make evident (other than a huge journalistic investigation, I don’t see how).

 

 

 

 

Amazon’s no-show profits

July 29, 2014 By in Amazon, Current Market Thoughts, earnings conference calls, Industry Analysis, internet, Stock ideas Tags: , , , , , , 2 Comments

Amazon’s 2Q14 results

When Amazon (AMZN) reported 2Q14 results last Thursday, not only did the company post a bigger operating loss than anticipated but it said that the 3Q14 red ink would dwarf the 2Q14 actuals.

The news came as a surprise  …and not one that Wall Street took favorably.  The stock dropped 11% in Friday trading.

At the same time, the news media were filled with red-faced portfolio managers and analysts complaining that Jeff Bezos should be more sensitive to their need for more robust profits, which–allegedly–would make the stock go up.

To me, this is a case of being careful what you wish for.

Let’s do some back of the envelope calculations to see why…

is AMZN’s valuation reasonable?

The analyst consensus is that AMZN will earn around $2 a share in 2015.  That’s a forward PE of 160x.  How could anyone pay that price to own a share of any company?  For someone who holds AMZN, he must be thinking something like this:

–the company consists of a US business that makes a considerable profit and a foreign one that is flirting with breakeven.  If we assume that foreign operations can equal the US in size and profits at some point, then that $2 a share will sooner or later become $4 a share at some point.  On this basis, the multiple is “only” 80x.

–the company spends a lot of money on computer software.  In a very real sense, this is capital spending.  That is to say, as is the case with any capital asset, the expenditure on software should arguably be registered on the balance sheet and written off bit by bit against revenue over the lifetime of the programs.  Because of past accounting abuses, however, programming costs are recognized as expenses immediately, even though the programs may last a long time.  This depresses current income.

AMZN also writes off startup expenses for new ventures right away. This is a conservative approach, but it also depresses current income.

To pluck a figure out of the air, if AMZN were less conservative and if it could treat software costs as capital items, $4 would be $8–and the future PE multiple is a “mere” 40x.  That’s too rich for my blood, but it’s not absolutely crazy, provided AMZN continues to grow.

what will likely happen if/when AMZN’s profits start to surge

What would it mean if AMZN began to show large amounts of current income?

The most likely scenario–and the one pms and analysts are calling for–would be that the company is no longer incurring software creation expense and  hefty startup costs for new ventures.

…in other words, it would imply that AMZN had run out of growth opportunities!  Surging profits imply AMZN is going ex-growth.

In my experience, there are few things worse, in stock market terms, than holding a growth stock that has suddenly gone ex growth.

In my judgment, a +30% increase in earnings by AMZN would be accompanied by a gigantic price earnings multiple contraction.  A halving of the PE would be my best guess.  If that’s anywhere near correct, the end result would be a loss of a third of AMZN’s market value.

As I said above, be careful what you wish for.  It also strikes me that the Wall Street complainers have no clue about the kind of stock they’re dealing with.

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Kindle Unlimited: publishers as collateral damage?

July 25, 2014 By in Amazon, e-readers, Industry Analysis, internet, Publishing, Retail Tags: , , , , , , , 2 Comments

At one time there was only the Kindle.

Then came the Kindle Fire and Amazon Prime.  Now there’s the Fire phone and Kindle Unlimited–all five programs (along with a bunch of smaller ones) launched by Amazon (AMZN) to bind customers ever closer to the shopping service and get them to buy more stuff through it.

For AMZN, it’s not that important that any of these be moneymakers straight out of the box.  That can always be straightened out later, when the customer has been transformed from a buyer of X who happens to use AMZN to an AMZN customer who happens to want to buy X.

Kindle Unlimited, the just introduced subscription service for e-books and audio-books, is a particularly interesting instance.  That’s because it may end up being the tipping point in AMZN’s favor in its long-running battle with the five big publishing houses for control of the English-language book reader.

Another intriguing aspect of Kindle Unlimited is that AMZN has more relevant information, I think, than any other party at the table–but it isn’t talking.  So analysts, both the Wall Street kind and the planners inside the publishing companies, have less than normal to work from as they create their castles in the air.

Here’s how I view the situation:

1.  For $9.99 a month–about $120 a year–Kindle Unlimited lets subscribers read as many e-books as they want, from a collection of over 600,000, as well as to listen to as many Audible audiobooks, from a list of “thousands.”

No titles from the big five publishing houses are included, although, for example, all the Harry Potter books are.

The rollout of KU suggests that the very public spat between AMZN and Hachette, the smallest of the big five, may have been aimed at persuading Hachette to take part.

2.  Most industries exhibit a “heavy half.”   The idea is that, say, 20% of the purchasers buy a huge amount, usually put at 80%, of the stuff.  For e-books, only AMZN knows what the exact proportions are.  My guess is that heavy users easily spend $50 a month ($100+?) on e-books.  For them, signing up for KU is a no-brainer.

3.  It seems to me that KU users will dig deeper into “free” content in the 600,000 titles instead of buying expensive bestsellers launched by the big five.  Presumably, AMZN has surveyed the heavy half, and maybe even run small tests to figure out what will likely happen.  Certainly AMZN must believe that KU will redirect a lot of e-book use away from the big five and toward AMZN self-published content, or content from smaller presses that may sign up.

4.  Until yesterday, I hadn’t looked at AMZN’s financials for years.  From my perusal, I’ve decided, for no particularly good reason, that AMZN makes $60 million in operating profit per quarter from e-books in the US.  The company could easily let that drop to zero, as sales of high-priced best sellers wane. However, AMZN seems to be indicating–who knows whether bluster or not–that it is willing to go deep into the red to get KU off the ground (remember, AMZN is generates about $5 billion in yearly cash flow, so it can afford to lose money on KU for a l-o-o-ng time).  Last night it guided to a possible operating loss of over $800 million for the coming quarter.

5.  The big five could be squeezed in a number of ways.  KU users switch away from them, constricting their cash flow.  Fewer pre-orders from KU users would mean new titles fall off the bestseller lists, hurting sales further.  Authors complain about diminished royalty payments and ponder self-publishing through AMZN themselves, where, for sales in the US, the author receives 70% of the sales price vs. 25% from the big five.

6.  AMZN has lots of customer information; the publishers probably have much less.  Therefore, this negative money cycle may end up being much larger than the big five anticipate.  One or more may break ranks.

It will be interesting to see how this plays out.