Category Archives: Industry Analysis

Qualcomm (QCOM) and/vs. Apple (AAPL)

May 2, 2017 By in Apple, Qualcomm, Technology, Uncategorized Tags: , , , Leave a comment

QCOM and its IP

QCOM is a company that has its roots in early Defense Department mobile communication and encription technology.  As a public company, it manufactures mobile chips itself and licenses its proprietary technology to others in return for royalty payments.  The latter, which has always been the prime focus of investor interest, comprises the bulk of its profits.  QCOM’s operating income for fiscal 2016 (ended September 25th) amounted to $6.5 billion, net $5.7 billion.  On a non-GAAP basis, each figure would be about $1 billion higher.

royalty dispute with AAPL

Last week, QCOM announced that AAPL, whose phone designs (like almost everyone else’s) incorporate QCOM intellectual property and who had been complaining that royalty rates were too high, has decided to cease making any payments to QCOM while the dispute wends its way through the courts.

As I understand the situation–and I’d bet this is a simplification of a set of very complex deals–AAPL doesn’t pay QCOM directly.  It designs phones that use QCOM’s IP.  The phones are made by contract manufacturers, who purchase the IP from QCOM.  AAPL reimburses them.

with China, too

This isn’t QCOM’s first quarrel with a customer.  In 2015, pressured by the Chinese government, QCOM agreed to pay a $975 million fine and lower its royalty rate on older technology in phones made for sale in China by a third.

implications for AAPL and QCOM

My question:  why is AAPL bothering?   Yes, it’s a lot of money.  And maybe it’s just that it wants to have the same reduction on the IP affected by the China deal.  But I can’t believe that it doesn’t have that already.

Look at the magnitudes involved:

QCOM says its next quarter revenues (and operating income) will be $500 million lower than expected because of AAPL’s action.  Annualized, that amounts to $2 billion, or about a third of QCOM’s operating income in fiscal 2016.

For AAPL, in contrast, fiscal 2016 operating income was $60 billion.  Analysts are estimating 8% growth for the current fiscal year and a 15% advance the following one.

So cutting the QCOM royalty payments in half would only raise operating income by 1/60th, or 1.7%.

my take

One way of looking at this dispute is that AAPL believes it is running out of ways to make revenues grow and has to concentrate, for the moment at least, on cost control.  That’s the typical pattern.  It would also be more evidence that today’s model isn’t the Steve Jobs AAPL any more.

 

 

 

sovereign wealth funds and ETFs

April 26, 2017 By in Qatar Investment Authority, sovereign wealth funds, Uncategorized Tags: , , , , , Leave a comment

Monday’s Financial Times notes that the Qatar Investment Authority (QIA), the sovereign wealth fund of the Middle Eastern State of Qatar, is changing its investment strategy.  Qatar is a country of 2.2 million people and 15 billion barrels of oil (that we know about), making it one of the wealthiest places on earth.

Since its inception in 2005, the $335 billion QIA has focused on expensive “trophy” assets, like the Canary Wharf property development and Harrods in the UK and film company Miramax plus 13% of Tiffany in the US.  It owns high-end hotels and office buildings all over the place.

According to the FT, however, the QIA has now decided to shift its focus to index funds and ETFs, indicating to the newspaper that the world supply of new trophies waiting to be bought is running low.

Maybe this is true, although there is a much more obvious issue with the QIA’s holdings that neither it nor the FT allude to.

Such trophies are virtually impossible to sell, except maybe to other Middle Eastern sovereign wealth funds.

Hotel companies in the US, and latterly elsewhere, have spent the past two or three decades shedding their properties–while retaining management contracts–because the returns on ownership are so low.  Iconic office buildings are a much better return bet.  But, again, there are only a limited number of possible buyers of, say, a $5 billion project.  A sharp price discount would likely be in order to compensate for taking on an expensive, highly illiquid asset like this on short notice–doubly so if the buyer sensed the seller was having cash flow problems.

It seems to me that the QIA bought into the narrative of “peak oil,” meaning a looming shortage of crude, that has been the consensus among oilmen for the past couple of decades–up until the emergence of mammoth amounts of shale oil production from the US three years or so ago. that is.  So liquidity was never a consideration.

I think the QIA change of strategy is the prudent thing to do.  It’s odd, though, that the QIA is calling public attention to the shift.  This would seem to imply at least that it has no need to divest any of the trophies it now has on its shelves.

Of course, something deeper may be going on as well, since the unasked question is who else may be in worse shape and may want to offload illiquid assets before its cash squeeze becomes evident.

Surprise!  That train has just left the station.

 

 

failed shopping malls

April 21, 2017 By in Retail, shopping malls, Uncategorized Tags: , , , , 2 Comments

There was a local politician on Long Island a while ago who had an unusual campaign position on gun control.  He argued that guns don’t kill people; bullets do.   Therefore, we should not control the purchase or possession of firearms;  we should control the purchase/possession of bullets, the real culprits.  He lost–or at least I hope he did.

The Wall Street Journal ran an article yesterday, apparently based on a recent Wells Fargo research report on failed shopping malls.  Its conclusion:  dead shopping malls are being killed, not by online shopping, but by the proliferation of newer, larger, more glitzy, better-located other malls.

There is certainly something more to this argument than to the bullet one.  Commercial real estate is a boom and bust business.  Developers put up new structures with relentless fervor until the day the banks shut down their access to credit.  And that usually doesn’t happen until the first bankruptcies of failed projects begin to appear.  As the old banking adage goes, “You never get promoted by turning down a loan.”

So, yes, older, smaller, less well-located malls are losing out to newer ones.  And the loss of anchor stores is usually the signal that the party is over.

But if we do a little arithmetic with the Census Bureau data on retail sales in the US, we can conclude that although online retail sales represent less than 10% of the total, they account for half the overall growth in retail.  Bricks-and-mortar retail is advancing, if that’s the right word, at about 2% a year.  It may be that if we adjust for inflation, the movement of physical goods through the traditional retail chain is flat.  So because of the internet there is no need for any net new mall space in the US.

From a retail firm’s perspective, BAM revenue growth is probably only going to come by taking sales away from competitors.  In a mature environment like this, cost control becomes an increasingly important source of profit growth.  Both factors imply firms should have better control over floor space and adjust it frequently to be in the most attractive locations.

Who knows what mall developers actually do, but if it were me any new project would need to explicitly target aging malls in its vicinity.   Those would be the primary source of the revenues that would make the project viable.

Two conclusions:

–if half the growth in retail weren’t being siphoned off by the internet, I’d guess the tectonic plates of malldom wouldn’t be shifting as violently as they are now, and

–the idea that ownership of physical store premises is a hidden source of value for mature retail firms (think:  the attack on JC Penney) has passed its use-by date.

 

 

more trouble for active managers

April 11, 2017 By in Information for investors, Investment firms, research commissions, Trading, trading commissions, Uncategorized Tags: , , Leave a comment

When I started in the investment business in the late 1970s, fees of all types were, by today’s standards, almost incomprehensibly high.  Upfront sales charges for mutual funds, for example, were as high as 8.5% of the money placed in them.  And commissions paid even by institutional investors for trades could exceed 1% of the principal.

Competition from discount brokers like Fidelity offering no-load funds addressed the first issue.  The tripling of stocks in the 1980s fixed the second.  Managers reasoned that the brokers they were dealing with were neither providing better information nor handling trades with more finesse in 1989 than in 1980, yet the absolute amount of money paid to them for trading had tripled.  So buy-side institutions stopped paying a percentage and instead put caps on the absolute amount they would pay for a trade or for access to brokerage research.

All the while, however, management fees as a percentage of assets remained untouched.

 

That appears about to change, however.  The impetus comes from Europe, where fees are unusually high and where active management results have been, as I read them, unusually poor.

The argument is the same one active managers used in the 1980s in the US.  Stock markets have tripled from their 2009 lows and are up by 50% from their 2007 highs.  All this while investors have been getting the same weak relative performance, only now they’re paying 1.5x- 3x what they used to–simply because the markets have risen.

So let’s pay managers a fixed amount for the dubious services they provide rather than rewarding them for the fact that over time GDP has a tendency to rise, taking corporate profits–and thereby markets–with it.

The European proposal to decouple manager pay from asset size comes on the heels of one to force managers to make public the amount of customer money they use to purchase third-party research by allowing higher-than-normal trading commissions.  Most likely, customer outrage will put an end to this widespread practice.

Both changes will doubtless quickly migrate to the US, once they’re adopted elsewhere.

 

 

 

oil inventories: rising or falling?

April 10, 2017 By in algorithmic trading, oil, securities markets, shale oil, shale oil and gas, Uncategorized Tags: , , , , Leave a comment

The most commonly used industry statistics say “rising.”

However, an article in last Thursday’s Financial Times says the opposite.

The difference?

The FT’s assertion is that official statistics emphasize what’s happening in the US, because data there are plentiful.  And in the US, thanks to the resurgence of shale oil production, inventories are indeed rising.  On the other hand, the FT reports that it has data from a startup that tracks by satellite oil tanker movements around the world, which seem to demonstrate that the international flow of oil by tanker is down by at least 16% year on year during 1Q17.

Tankers move about 40% of the 90+million barrels of crude brought to the surface globally each day.  So the startup’s data implies that worldwide shipments are down by about 6 million daily barrels.  In other words, supply is now running about 4 million daily barrels below demand–but we can’t see that because the shortfall is mostly occurring in Asia, where publicly available data are poor.

If the startup information is correct, I see two investment implications (neither of which I’m ready to bet the farm on, though developments will be interesting to watch):

–the global crude oil supply/demand situation is slowly tightening, contrary to consensus beliefs, and

–in a world where few, if any, experienced oil industry securities analysts are working for brokers, and where instead algorithms parsing public data are becoming the norm, it may take a long time for the market to realize that tightening is going on.

It will be potentially important to monitor:  (1) whether what the FT is reporting proves to be correct; (2) if so, how long a lag there will be from FT publication last week to market awareness; and (3) whether the market reaction will be ho-hum or a powerful upward movement in oil stocks.  If this is indeed a non-consensus view, and I think it is< then the latter is more likely, I think, than the former.

This situation may shed some light not only on the oil market but also on how the discounting mechanism may be changing on Wall Street.