S&P 500 Erases the Taper Rally

Back in December the stock market surprised most investors by jumping 1.7% on the day that the Fed announced it was scaling back its bond purchases.  Most people agree that the Fed’s purchases have been supporting the stock market over the last five years, so it was expected that stocks would fall when the Fed changed its policy.  Equities continued unfazed though, and in addition to the big jump, the market continued to rise by another 2% into year end.

Today, the Fed committed to taper its bond purchases by another $10 B and the market had a belated negative reaction.  After today the S&P is officially lower than it was when the Fed first announced that it was tapering in December.

The fact that the December-taper rally has been erased doesn’t really prove that tapering is bad, but it does help to confirm that December’s gain was less about the taper and more about the seasonal pressures that build up towards the end of a good year.  Portfolio managers were so scared about missing a further gain that any important news either good or bad caused them to rush into the market.  This was artificial demand driven by a calendar date, so it’s not surprising that the market has given back these price increases in the time since.  The artificial demand effectively created an air pocket for prices.  As of today this “air pocket” of price has been popped, and it remains to be seen whether the ground below lies here or still lower.

After the market surprised people by rallying post-December-taper, I read a fair amount of analysis trying to justify why tapering was actually a good thing.  It will still take some time to know if that analysis is valid, but it’s hard to see how it could be.  In the history of the Federal Reserve, tighter monetary policy has almost always been a negative force on equity markets.  Tapering is a step in a tighter direction.

S&P 500 Taper Rally

Illumina 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

40% of HiSeq demand from commercial and hospital markets

” Approximately 90% of HiSeqs ordered were 2500s, and many current customers remain capacity constrained. As a result, approximately 60% of the orders in the quarter were from existing HiSeq customers, as they scaled their facilities to undertake larger projects. Of the new customers, over 40% were from commercial and hospital markets.”

50% of MiSeq demand from commercial markets

“Non-academic customers again accounted for more than 50% of MiSeq orders in Q4, the vast majority of which were commercial, translational, and clinical customers.”

12,000 genomes sequenced

“This quarter saw orders for more than 12,000 genomes, another new record, which included the 10,000-whole-genome order from the University of Cambridge and Genomics England, Ltd. ”

Insatiable demand for whole-genome sequencing

“Interest in the HiSeq X10 continues to be exceptional. Last week the New York Genome Center purchase the fourth X10 to support their mission of offering state-of-the-art technology to accelerate life-saving discoveries. Today I’m pleased to announce that Decode Genetics, now owned by Amgen, has purchased the fifth X10 to focus on population-scale research into the understanding of genetics and disease.

In addition to NYGC and Decode, we’ve spoken with many additional customers who are interested in purchasing the system. We are evaluating the extent to which we can ramp our supply chain to provide more systems this year, and will provide more information to you over the next several quarters. The demand we’ve seen for the $1,000-genome reinforces our view that there is, as far out as we can see, an insatiable demand for whole-genome sequencing.”

Working through supply chain constraints

“Interest in the HiSeq X10 continues to be exceptional. Last week the New York Genome Center purchase the fourth X10 to support their mission of offering state-of-the-art technology to accelerate life-saving discoveries. Today I’m pleased to announce that Decode Genetics, now owned by Amgen, has purchased the fifth X10 to focus on population-scale research into the understanding of genetics and disease.

In addition to NYGC and Decode, we’ve spoken with many additional customers who are interested in purchasing the system. We are evaluating the extent to which we can ramp our supply chain to provide more systems this year, and will provide more information to you over the next several quarters. The demand we’ve seen for the $1,000-genome reinforces our view that there is, as far out as we can see, an insatiable demand for whole-genome sequencing.”

$10 million price tag

“I think it’s relatively safe to assume that customers aren’t going to pay $10 million for a system like this and then only use it half time. So we expect the utilization rates on average to be relatively high.”

Will the x 10 cannibalize other machines

“There could be a bit Doug. We don’t think it will be large. If you recall it in the X Ten, you can only run complete human genomes and if we look across all the samples that are run on our systems globally, we estimate that only 10% to maybe at most 15% of the samples run our whole human genomes. So most of the capacity on the 2500s is used for other applications and that will continue to be the case.”

Growth in the services business to slow because competitors buying X 10

“To be clear what we expect is we expect the growth rate in the services business to slowdown.”

“And we think that’s because there are going to be some service providers who by X10s. We think. And will have to watch who buys X10s and how fast we install them of course and whether we start offering broad service capabilities.

If they do that and depending upon what their markup look like, they would have the ability to sequence more cheaply than what we’re going to price our internal services at so that will I think re-invert the pricing model back to the way it should look and that’s clearly our hope here.”

The biggest surprise is how fast people could come up with $10 m

“I’d say there was one thing that surprised me, and that is how fast customers were able to come up with $10 million to buy X10s. We knew this was going to be a very potent product, and there would be tremendous demand, meaning people who would want to have access to it if they could. What surprised me is how fast people have actually been able to push the button and move forward with this, so that’s probably the standout part of this for me.”

Demand for X 10 still not really broadly commercial

“Yes. It’s coming from multiple segments of the market, so clearly we’ve had some academic labs. We have interest in sort of what we call the nations-type programs, where a country might buy it, or some representative of a country might buy it, to begin to sequence some subset of the population. We clearly have sparked some interest in the pharma and biotech industry”

The 1k price point is so important though, hoping for a second renaissance

“at $1,000 this has catalyzed the imagination of many of our customer types. Our hope is that we have sort of a second Renaissance in genomic discovery begin to happen on the back of the X10. I think it really has that potential broadly.”

We’ve just scratched the surface of understanding the genome. Need large sample sets. 1k genome accomplishes that

“One of the things we think is most important in the long run to opening up clinical sequencing and therefore the real world of personalized medicine is improving the clinical UTI utility of the genome. Today, after all the work we and everybody in the industry’s been doing over the last 15 years, we’ve still only scratched the surface about understanding what the genome really means. All of the analysis now that are done by the brilliant scientists in our field say that the way you break through that barrier is by sequencing very large sample sets, and by that, the numbers pencil out to be hundreds of thousands of samples.”

Tools have finally caught up to what scientists have been wanting to do for 10-15 years

“I think what you’re seeing in terms of the market reaction is a sense that there really is an opportunity now to redo the discovery programs that were done or attempted to be done 10 or 15 years ago, but now with a set of tools it’s up to the task. That’s really what it’s all about.”

This begins to push people towards whole genome sequencing, which is where the real benefit lies

“I think it begins to push people towards whole genome sequencing, which is where we think the market needs to go to get the full scientific benefit of what this technology can provide, and to have visibility into the entire genome without a hypothesis up front.”

Only a few years away from everyone with cancer getting tested genetically

“I think we’re only a few years away from the point where everyone who has cancer gets it tested genomically one way or another, with one kind of panel, or exome, or genome.”

AT&T 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

2013 was a transformative year

” 2013 was an interesting year for the industry and I would suggest you it’s probably a formative year. We saw all competitors take out new positions. We saw most of the players significantly changed the value proposition for their customers. And with smartphone penetration beginning to hit some impressive levels, we have seen new business models emerge around LTE in the cloud and our case that includes things like connected homes, connected cars, video and mobile business solutions.”

US Carriers investing heavily

“So from our view, the most important development that we are seeing is that the entire U.S. telecom industry is investing aggressively in advanced networks. Today in the U.S., four national carriers and dozens of regional providers are building out LTE and you just don’t see that happening anywhere else in the world. ”

Everyone is investing because regulatory environment is just right. Let’s keep it that way

“we think this speaks volumes about where the country’s public policy has landed concerning spectrum and the importance of light touch regulation. We think it’s very, very important to maintain that approach as we move forward.”

Connected cars

“We have a number of new services that we will begin to move the needle this year. We will Digital Life into a number of more markets. We have taken a leadership position and connected cars, we have already announced agreements with GM and Ford, Nissan, Audi, BMW, Tesla and there are more to come.”

Customer phone purchasing behavior shifting. Willing to pay more for phone and lower monthly bill

“what is probably most interesting to me as we look at what has played out in 2013 and carried into the first month of 2014 is the idea that our customers are demonstrating an interest desire even to put more of their money into the handset in exchange for lower monthly pricing. And that’s what you see happening in the marketplace right now. More and more customers are moving to the handset financing plans picking up more of the cost of the handset with the desire to have a lower monthly rate. And so we are seeing that play itself out.”

“all players are introducing these kind of plans and our customers are loving it. You heard John talk about the take rates and now in December, 20% of all of our smartphone sales were on these types of arrangements.”

Net neutrality court decision doesn’t change much about the way they operate

“We did have this court order. From our standpoint David that changed really nothing. It doesn’t change anyway that we will operate, I really don’t believe it’s going to change much of what anybody in the industry will do.”

Some Thoughts on Apple: It’s Still Growing. A lot.

Apple’s stock is trading lower by about 8% today after the company reported earnings last night.  Revenue and earnings per share actually beat analyst estimates, but company commentary, guidance and lower than expected iPhone unit growth seems to be spooking shareholders.

In the eyes of many investors, the problem with $AAPL is that it is no longer a “growth company,” meaning that since the company’s revenue and earnings growth has slowed, it should trade at a lower earnings multiple.  It is true that all else equal a slower growing company should trade at a lower multiple than faster growing companies, but in Apple’s case, the company is trading at a significantly lower multiple than many slower growing companies.

The chart below shows Apple’s revenue growth rate compared to nine other blue chip, mega-cap, global companies.  Apple has the highest revenue growth rate of the group by far.  On average, the revenue growth of the other nine companies has actually been flat over the last 12 months.  Still, Apple has the lowest multiple of the bunch, again by a significant amount.  The average multiple of the group is 18.1x forward earnings.  If Apple sold at that multiple, its share price would be nearly $800.

Bears might argue that the reason Apple trades at a discount is that its business prospects are less stable than many of the companies on this list.  However, the other businesses on this list have long term headwinds too.  Apple may be losing some market share in the US, but so are soft drinks, processed foods, and junk foods in general, especially among trend-setting consumers.  That trend affects McDonalds, Coca-Cola and Pepsi.  Branded merchandise is also losing share to private label merchandise (Procter and Gamble, Kimberly Clark, General Mills, Colgate and Kraft all stand to lose from that trend).  And Wal-Mart is a “dying” brick and mortar retailer.

Most of these companies and their shareholders are focused internationally for growth, which is the same growth avenue that Apple is now focused on.  The fact that Apple is growing revenue at a faster rate than any of these other blue chips implies that it is executing better.  Yet inexplicably it trades at a lower multiple–and all that is before you even consider the company’s cash holdings.

Apple PE Multiple

Apple’s superior growth rate is even more impressive when you consider the fact that Apple already generates more revenue than all of these companies except for Walmart (Walmart has lower margins though).  That means that the same percentage growth is worth much more growth in dollars.

In Apple’s “disappointing” quarter, the company grew revenue by $3.3 B.  If you compare that revenue growth to some of the market’s hottest growth stocks, you can see that Apple really still grew by a staggering amount last quarter.

The chart below includes some of the hottest growth stocks in today’s market.  The only company which grew revenue by more dollars than Apple was Amazon (but again at much lower margins).  Google only grew revenue by half as much as Apple, Facebook only by one fourth as much.  In fact, Apple grew revenue by $700 m more than Priceline, Nike, Starbucks, Mastercard, Visa, Netflix, Whole Foods, Tesla, Chipotle, Twitter and Lululemon combined.

These are much smaller companies than Apple, so their revenue percentage growth rates are much higher, and so is their multiple.  But their market values are not much smaller in some instances.  Google and Apple now have nearly the same market value (backing out the cash).  This implies that the market believes that Google will eventually match or exceed Apple’s financial muscle.   Arithmetically it’s impossible to do that when you’re growing revenue at a lower dollar amount.  Google will have to maintain its revenue growth rate for a long time to match Apple’s current size.  That’s no easy task, even for a company growing at a rapid rate.

Empirically, Apple is still a growing company, although you wouldn’t be able to tell from today’s price drop.  The company may be growing at a slower rate than it once was, but it’s cash flows are also cheaper than many companies growing even slower and with similar prospects.

Apple Revenue Growth

 

*Data as of most recently reported quarter (3Q13 for many companies)

 

Apple 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Without some items clouding comparisons, revenue growth would have been 10%

“we’re especially pleased to have generated that record despite foreign exchange headwinds, the year over year decline in iPod sales, and the higher revenue deferral rates from iOS devices and Macs that we discussed last quarter.

These three factors negatively impacted revenue by about $2.5 billion, and without them, our year over year revenue growth would have been about 10%.”

51 million iPhones is 7% growth

“Despite supply constraints on iPhone 5S, we sold 51 million iPhones compared to 47.8 million in the year ago quarter. That’s an increase of over 3 million phones, or 7%, and a new quarterly record.”

41% iPhone market share in US

” In the U.S. market, Apple remains the leading smartphone manufacturer, with iPhone accounting for 41% of smartphone subscribers in the three-month period ending in November, according to ComScore.”

Reasons for weak revenue guidance

“We expect four factors to negatively impact the year over year revenue comparison by over $2 billion. These are channel inventory increases in the year ago quarter that we don’t expect to repeat: lower iPod sales, a stronger U.S. dollar against a number of currencies, particularly the yen and the Australian dollar, and the higher per unit deferral for Mac and iOS devices that I talked about in my prepared remarks.”

China mobile deal ramping through the end of the year

“at this moment, we’re just selling in 16 cities with China Mobile, and as Peter alluded to, this number is projected to be over 300 cities by the end of this year. And so we’ve got quite the ramp in front of us, and we’re incredibly excited.”

Intrigued by mobile payments, part of the reason for touch ID

“The mobile payments area in general is one that we’ve been intrigued with, and that was one of the thoughts behind Touch ID. But we’re not limiting ourselves just to that. So I don’t have anything specific to announce today, but you can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it’s a big opportunity”

North America iPhone we did not do as well, partially because misestimated 5s demand, also some carriers changed upgrade policies

“In North America, we did not do as well, and this weighed our results. Our North American business contracted somewhat year over year. And if you look at the reason for this, one was that as we entered the quarter, and forecasted our iPhone sales, where we achieved what we thought, we actually sold more iPhone 5Ss than we projected.”

“The other thing that happened in North America specifically was that some carriers changed their upgrade policies. And this affected last quarter, and will have some effect on the current quarter.”

Upgrade policy effect should wash through after 3 to 6 months

“I think part of what’s happening in North America is a short term effect because of these upgrade policy changes. This affects the period of time, three to six months, I would think, and then it washes through. ”

We are still confident in growth

“I think it’s important to listen to what Peter said about the guidance, and about the compares year over year, and the point that he made that the underlying sell through, that we’re very confident of growth year over year. And that is the way we look at it. Some people just look at the numbers on a piece of paper, but the way I’d look at the business is our business from a sell through point of view”

I guess Tim Cook isn’t a price sensitive investor

“we’re a big believer in buying back the stock, and that doesn’t change today, whether the stock goes up or down.”

Side stepping a simple question about what are the plans for the 5c

“I’ll sidestep the last question, of course, because it’s about future products.”

Innovation deeply embedded

“I would just say, innovation is deeply embedded in everybody here, and there’s still so much of the world that is full of very complex products, etc. We have zero issue coming up with things we want to do that we think we can disrupt in a major way. The challenge is always to focus to the very few that deserve all of our energy. And we’ve always done that, and we’re continuing to do that.”

Caterpillar 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Sales in China up 20% y/y

“speaking of China, our total sales and revenues there in 2013 were about $3.5 billion, and that was up more than 20% from 2012.”

Encouraging economic signs

“There are encouraging signs in the world economy, and we’re seeing some in our own business, and that gives us optimism for sales in our construction and power systems segments, and we think they’ll each be up about 5% in 2014.”

Mine production good, equipment sales not–unsustainable

“mine production has generally been up and improved in 2013, and we think it will likely be up again in 2014. The bad news is that orders for new equipment remain pretty low. But we don’t think that can go on indefinitely, and we remain positive on our long term view of mining.”

Not meeting replacement demand

“Based on the size and age of existing equipment fleets, we believe that miners are buying new equipment at a rate that’s well below the average replacement level they’ll need going forward. As an example, we think that our sales of large mining trucks in 2014 will be around half the long term replacement level. That should be a positive for sales in the future.”

At some point there is going to be a lot of pent up demand

I have met, in the last 60 to 90 days…The feedback is fairly consistent…what they all have cautioned us on is that at some point in the future, because we’re extending cycles, duty cycles, because we’ve cut back on new acquisitions and even some parts in some cases, be ready for us at some point in the future. None of them can predict when that is, and I can’t either. but this is sort of typical with what we hear through these deep cycles. When it’s over, it tends to come back fairly quickly.

It will either happen this year or next

I’m not making that prediction here today. I hope it’s in 2014. I know it will happen in 2014 or 2015, but that’s kind of the quandary we’re in as well, trying to judge from our customers when they feel comfortable kicking back in with new purchases.

Most of CAT’s inputs not commodities, it’s value added parts

“most of what we buy is not commodities, believe it or not. It’s components that have a lot of value added in it. And based on what we’ve negotiated with suppliers, the changes that we’ve made, we’re looking for overall material costs to be lower. And again, the bulk of what we buy is not commodities, it includes somebody else’s value added.”

No sign that anything has fallen apart in China in the last several days

“The market reaction has really occurred over the past week or 10 days or so. I think in our business, it’s been pretty positive. We’ve seen not just our sales but kind of the overall construction equipment group sales in the industry ticking up year over year, over the past few months. And we saw that again in December. So I think what we’ve seen has been pretty good. We’ve done better than the market there as well. Our sales in China were up more than 20% this year. They were up in the quarter. So you know, it’s not been a big negative for us.”

Looking at Levels

There are a few different varieties of stock market sell-offs: 3%, 5%, 10%, 20% and 30%+.  Three percent declines, like we’ve seen over the last few days, occur very frequently and are a healthy part of a bull market.  Five and ten percent declines are also typical of bull markets–even in a bull market, a 10% decline happens about once every 20 months. A 20% decline usually marks the line of a bear market, which can easily spill into the 30%+ decline range.

It’s impossible to know whether the current 3% decline will become a larger decline, but it’s not too difficult to do the arithmetic to see how far the market would fall if it hypothetically dropped by any of these percentages (the math is below).

Since all declines eventually end when prices are reached that are attractive to buyers, I also included the P/E multiple that the S&P 500 would be selling for at those levels.  I used the forward analyst estimate of $122 in earnings for 2014.  This is generous to the bulls.

I would argue that most value investors like to earn at least an 8% return on investment, which is roughly equivalent to paying about 12.5x earnings for a company.  That level would be reached somewhere between a 10% and 20% decline from the peak.  If value investors are on the sidelines until then, it means that momentum focused investors need to carry the rally to avoid a steep decline. Momentum investors can be bulls one day and bears the next though, so if the bull trend starts to be compromised, there’s a greater chance of a large decline today than at any other time in this bull market.

S&P Decline from Peak

Company Notes Digest 1.24.14

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

Retail investors are making their way back into the market:

“With less uncertainty in Washington, an improving macroeconomic environment and the beginning of Fed tapering, retail investors are making their way back to the markets, leaving us with a lot to feel good about.” ($AMTD)

Less uncertainty makes retail investors more comfortable:

“there is less uncertainty for investors to worry about, and as we all know, investors do not like uncertainty. As a result, the trading environment has improved. Our broader base of investors has re-engaged, boosting trading activity and contributing to the strength of our quarter” ($AMTD)

Their investment advisors are bullish too:

“If you went to the RIA side, they have been fully invested all the way through. They’re very low—they’re sort of the lowest client cash—allocation to client cash that we’ve seen, and again they would be fairly bullish on equities.” ($AMTD)

But caveat emptor, retail investor, there may not be many attractively priced companies to buy:

“I feel more constrained by what I view as a not terribly robust set of opportunities or valuations. I’m always vigilant for opportunities for the company but they’ve got to be good fits strategically and they’ve got to be good valuations.” ($ABT)

Individuals were buying stocks, but it doesn’t appear they spent any time at brick and mortar in 4Q:

“I’ve seen one research firm describe as the worst seasonally-adjusted holiday performance period in the last 10 years, obviously, excluding 2008.” ($CSH)

Howard Schultz, Starbucks’ CEO, thinks that 4Q13 was a turning point in retail:

“Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. Customers research, compare prices and then bought the brands and items they wanted online, frequently using a mobile device to do so…traditional brick and mortar retailing is at an inflection point…Navigating the seismic shift will continue to be very, very difficult” ($SBUX)

Cash America thinks the low end consumer is about to hit a positive inflection point though:

“I’ve been doing this an extraordinarily long period of time and intuitively, I still believe that this customer will be back and will be back with the traditional behaviors that we had seen through most of the 30-year history at Cash America. And I just have an intuitive sense today that we’re getting close to that return.” ($CSH)

It’s all about confidence:

“The issue in my mind has been confidence and our future confidence in their employment, confidence in their take-home pay. And when that strengthens in our particular consumer base, I am pretty optimistic that we’ll see some growth we haven’t experienced on a same-store basis here over the last 2 years.” ($CSH)

IBM says China weakness is a result of a hangover from new government structural reforms:

“The largest declines in China were in our hardware business. We continue to be impacted by the process surrounding the implementation of a broad-based economic reform plan. While there is more clarity on the overall plan, we continue to believe that it will take some time for our business in China to improve.” ($IBM)

It’s not clear to IBM whether China will return to growth even by 4Q14:

“It’s hard to tell. China is hard to tell, because I don’t have a good sense of how those reforms work their way through the system and the decision-making that goes all around it. This is a, as I am sure you will appreciate it, pretty complex environment and it’s difficult to gauge exactly what’s going to happen on a roll-out basis.” ($IBM)

Freeport McMoran seems more confident that infrastructure spend is still a big part of China’s growth plan:

“During 2013, China went through a government change, a reorientation of its economy towards internal consumption with less emphasis on exports and infrastructure development and major spending on infrastructure continues as evidenced by the recent announcement by state grid to increase its capital spending and that has a major impact on copper consumption there, but consumer demand remains strong. Infrastructure investment in China is a major part of this marketplace.” ($FCX)

According to Freeport, this is supporting copper fundamentals:

“copper markets appear to be strengthening from where we were a year ago…when you look at the performance of the economy in China, even though there’s some slowdown, the size of the economy is growing to the extent that the somewhat lower percentages still translate into very substantial amounts of copper demand.” ($FCX)

Jacobs Engineering agrees, mining is actually getting better:

“Mining and minerals is growing. It’s growing for us and the good news is, we think the industry is seeing the market come back a little bit. Commodity prices are firming. People’s expectations about where commodities would go, particularly iron ore and gold, haven’t come through. The copper supply situation remains a concern, and so we’re starting to see people contemplating real projects again.” ($JEC)

Financials

City National Bank doesn’t see strong loan demand in 2014:

“I think it’s really just a reflection of our outlook for the economy, the general level of loan demand. We had, I think, very strong growth this year and attracted a strong group of new clients. We think we will have another very solid year of growth in 2014. But at this point, we’re not projecting quite as robust a level of growth, just given the general economic conditions and low levels of loan demand.” ($CYN)

Real estate is a bright spot though:

“I think there’s a tone of additional optimism in the real estate space and in the commercial space. And our pipelines are actually looking pretty good across the company.” ($CYN)

Technology

PC was better than Microsoft expected:

“the PC market was slightly better than our expectations.

Businesses led PC demand, but consumer demand was still soft:

Business PCs grew again, for the third consecutive quarter, and benefited from an improving macro-environment, better availability of innovative new hardware, and a refresh cycle ahead of Windows XP end of support…Consumer PCs, while better than our expectations, continued to be soft, as they face challenges from competing form factors. And, as a general theme, developed markets outperformed emerging markets.” ($MSFT)

People still like to consume content on big screens, not everything mobile:

“For a lot of our entertainment, we are really pretty large screen centric. And so we are less driven by mobile trends than say a music service would be” ($NFLX)

NFLX isn’t too worried about net non-neutrality:

“if ISP especially major ISPs were to contemplate blocking Netflix or other services it will significantly fuel the fire for more regulation which is not something they are interested in.” ($NFLX)

4K video is a catalyst to adopt higher speed internet:

“If you are on the cost side than ISP, then you may be affected by that and think about that, but if you are on the revenue side, you are celebrating, because now there is a real need to get a 40 or 50 megabit plan. So you could support two streams and you have got something to get people to upgrade to the faster plans.” ($NFLX)

Applications push computing power, which pushes applications:

“For 20 years, we saw PCs get faster, applications get richer, which was a reason to get faster PCs, which then enabled richer applications. And that ecosystem really grew” ($NFLX)

There are still 25m Americans without smartphones:

“We still have approximately 25.5 million basic phones and 24.7 million 3G smartphones in our customer base which gives us plenty of opportunity in 2014.” ($VZ)

Materials, Industrials, Energy

Brazil drilling activity will likely remain weak through 2014 and recover in 2015:

“In Brazil the business environment remained difficult with lower activity in the fourth quarter for Petrobras as well as the local independent and the international oil companies. We have adjusted our cost base in the country and are prepared to manage what appears to be a challenging 2014 before activity growth likely resumes in 2015.” ($SLB)

Still pricing pressure in North America services market:

“The main challenge in the North America land market is still pricing and we saw further downwards pricing pressure in most product lines in the fourth quarter partly amplified by the renegotiation and roll over of several key contracts.” ($SLB)

Pricing pressure probably wont get better this year:

“at this stage we do not expect the market to reach equilibrium in 2014.” ($SLB)

Oil service companies have to continue to push technology in order to protect pricing:

“I’m quite positive and optimistic that through the new technology introductions we can continue to drive the effective pricing up.” ($SLB)

Low hanging fruit in drilling efficiencies may have been picked by now, but there is still room for improvement:

“I think clearly the low-hanging fruit has been picked. Right now, I don’t see any reason why we will not continue to get year-over-year well count efficiencies. You’re starting to see sort of a massive upgrade to the rig fleet that’s out there. The move to pad drilling, obviously I think is one of the real drivers we saw last year in terms of the efficiency gains. But…there’s other plays in the U.S. that are still moving toward more pad, more horizontal drilling. So I think just the nature of the transition of the market, the new technologies that not only Halliburton and the other service companies have, but the rig contractors are investing more in efficiency. So I don’t really see an end to it at this point in time, but I think your big low hanging fruit’s been picked at this point.” ($HAL)

Fundamentals support oil price (Brent) at $100 per barrel:

“we also expect the global oil market to be well supplied in the coming year driven by continued growth in North America liquids production, leading supply and demand relatively well balanced…continuous support for Brent crude prices around $100 per barrel.” ($SLB)

Miscellaneous Nuggets of Wisdom

Slower growing businesses have value too:

“You can get hung up on the optics of growth rate and say, Geez it’s hurting, it’s diluting my growth rate but at the same time I think the notion that it’s making a fair amount of money and it’s profitable and there is value in that. So I think our job is to figure out best way to optimally derive that value for our investor” ($ABT)

Consumers make price choices around heuristics, not logic:

“in pricing period, there is also a sense that consumers make choices around heuristics. And so a dollar rich might not sound like a lot on a logical basis, but consumers may have shortcuts that they make, they take the middle or the upper or the low and so that factors into the right course as well.”($NFLX)

Respect your competitors even when it looks like you’re the top dog:

“So there is a number of players in all the major markets and then the smaller markets. They are all doing good work. I think what we have seen with our success in the UK is that there can be very strong players like the BBC iPlayer, (indiscernible) and Sky. And we can still build a very successful business. And so I think the key is having unique content, a great reputation, a good value proposition and we can succeed and in many cases, that competitors can also.” ($NFLX)

Go to extremes to please your customers:

“we have got a go to great extremes to give consumers control of the content you know going all the way to the extreme of putting the entire season out at one time”($NFLX)

Microsoft 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Xbox One led December

“According to NPD Group figures, Xbox One was the leading console in the U.S. for the month of December, which was its first full month in market. When adding in Xbox 360, which held the third spot, Xbox led the U.S. market, with 46% share in December.”

PC Better than expected

“let me share some perspective on what we saw in the PC market, which was slightly better than our expectations. Business PCs grew again, for the third consecutive quarter, and benefited from an improving macro-environment, better availability of innovative new hardware, and a refresh cycle ahead of Windows XP end of support.”

Consumer PC remains soft though

“growth was higher in large enterprises than small and medium-sized businesses. Consumer PCs, while better than our expectations, continued to be soft, as they face challenges from competing form factors. And, as a general theme, developed markets outperformed emerging markets.”

Nokia expected to close this quarter

“on Nokia. We continue to expect that the deal will close this quarter, but are still in the process of securing all regulatory approvals and meeting closing conditions. So all guidance provided here assumes no impact from Nokia.”

Reasons for better business PC spend

“The overall macro spending environment is better. It’s a little better than we thought, and in businesses we’re seeing it, you’re seeing it in some of the IT spend forecasts you all put out. They’re being raised, and I think that has an impact.

The second is I think our partners have done a very good job expanding the types and availability of new and interesting hardware. That brings people to the store, and I think it’s an encouraging sign. And finally, as you asked, is the end of life of XP.”

Q: Why haven’t you talked about windows phone? A:

“It’s a good point. We didn’t have a chance to discuss the phone results. We did see growth in Windows Phone, both in the licensing and in the mobile phone IP revenues. Both grew this quarter. And we continue to see the growth in many of the places we’ve seen historically, so unsubsidized markets, as well as with entry level smartphone devices.”

Q: Why is the surface still losing money on 900m in revenue? A:

“You know, when we launched Surface just a year ago, our goal was really to create a product that showcased what can happen when you innovate in hardware, in the service, and in the software. And as you know, we’ve learned a lot over the course of this journey. And we have to make more meaningful progress”

Starbucks 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

5% comp growth

“solid Q1 comp sales growth of 5%, consisting with our previous mid single-digit guidance representing our 16th consecutive quarter of 5% comps or greater.”

Holiday 2013 was the first major shift to online shopping

“Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. Customers research, compare prices and then bought the brands and items they wanted online, frequently using a mobile device to do so.

This was also the first holiday in which consumers embraced the convenience and flexibility afforded by physical and digital gift cards with the passion. Instead of gifting a particular item, many consumers instead choose to give the gift of choice.”

15,000 Americas Stores

“Starbucks Americas segment now comprising over 13,000 stores had another strong quarter with revenues up 8% and comp sales up 5%, including a solid 4% increase in traffic.”

Premium carbonated beverages

“beyond tea, another important area of innovation and interest for us is premium handcrafted, cold carbonated beverages.”

4000 Asia Pacific Stores, 1000 in China

“Asia-Pacific segment, currently comprising over 4000 stores in 14 countries, including 209 net new stores in Q1, delivered strong revenue growth of 25% and exceptional strong comp growth of 8%”

“We have more than 1000 stores today and China remains on track to become Starbucks’ largest and most successful market outside the U.S.”

2000 EMEA stores

“Starbucks’ important EMEA segment now comprising more than 2000 stores had a particularly noteworthy Q1 with revenues increasing 11% and exceptionally strong comp sales growth of 5%.”

Seismic shift in retail

“That truth is that traditional brick and mortar retailing is an inflection point. No longer are many retailers only required to compete with stores on the other side of the street. They are now required to compete with stores on the other side of the country. Navigating the seismic shift will continue to be very, very difficult”

Investing in digital, staying ahead of the curve

“we invested and continue to invest well ahead of the curve and today have world-leading proprietary digital, social, mobile payment and card technologies and assets. These assets are enabling us to broaden and deepen our connection to customers, enhance overall Starbucks customer experience and further differentiating distance ourselves from competitors.”

Digital assets will drive traffic

“I believe very strongly that we have the inherent benefit built in to be able not only to capture incremental traffic but to drive traffic into our stores as a result of the things that we will be doing and the combination of physical and digital assets that will get stronger over time”

“I don’t know any other retailer or restaurant that drove traffic into their stores at that time and if you look at how much money we spent on consumer advertising and trying to capture customers it’s is very very de minimus compared to others.”

Consumer better off than a year ago, but still fragile

“I think the health of the consumer today is better than it was a year ago. But I do think it’s still a fragile issue and what we saw with the government shutdown on October, is any isolated events of that magnitude can have a very drastic and dramatic effect on behavior and I think that’s speaks to the fragility.”