Yesterday I appeared on CNBC as they announced that I won their Superbowl themed stock picking contest. The contest involved 15 investment professionals choosing amount 21 stocks. It was light-hearted, but as all who know me can attest, I take everything money related quite seriously. I want to take the time to illustrate why I picked the stock that won - Google, and what was wrong with many of the other picks. Unfortunately, shorting wasn't allowed, for if it was my readers and subscribers know that Facebook and Apple would have been shorted in combination with a Google long that would have produced even more spectacular returns and less volatility (risk).

As can be seen below, I usually bring my children to interviews so they can watch me pontificate and debate issues on international television.

IMG 20130204 152401

I pulled my 6 year old out of school for her to watch the interview and afterwards we discussed the topics at hand:

  • paradigm shifts
  • the difficulty in analysts and financial professionals seeing shifts in demand and technology
  • network effects
  • unique business models

I took the risk that her 2nd grade teacher wouldn't be covering those topics last period. I mention this because a big focus later on this week at BoomBustBlog is the risk, bubble and burst of the US education system. It will be part four of my education bubble rant and it will be a doozy, not to mention directly related to the way people invest, manage risk and pick stocks and other risky assets. See the first three installments here:

  1. How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than Subprime & More Dangerous Than Sovereign Debt!
  2. How To Profit From The Impending Bursting Of The Education Bubble, pt 2 - "Knowledge How", Replicating Grecian Insolvency & Why Most Diplomas Are Depreciating Assets In Real Terms
  3. How To Profit From The Impending Bursting Of The Education Bubble, pt 3: As Bad As Harvard Endowment Funds -0.05% ROI? The Levered Harvard Diploma!

Theses education articles are hard hitting, and unavailable nearly anywhere else on the Web. They contain info and knowledge that effects us all and thus should have literally millions of views, yet they barely have an average following. This, in and of itself, is representative of the state of true learning in the US and a glimpse into the future of our ability to maintain a leadership role in the world economy. 'Nuff said! Now on to the topic at hand...

One thing that I didn't correct the host on was his assertion that Google makes over 90% of its money from advertising and the rest of the stuff was just a hobby. That is a mischaracterization of Google's business model. Google "cost shifts" thus uses advertising to monetize practically everything. Thus, Google makes its money from search, Android and Chrome mobile OS, Gmail, YouTube, etc., but uses advertising to both subsidize low or zero cost product (of very high quality, may I add) and monetize it. Here's a video from the Max Keiser show where I went into the topic in detail...

Another point of interest is the comment by Herb Greenberg, a reporter who has a true analytical bent (I believe he's a CFA) and a healthy pessimistic curiosity of corporate management proclamations. As he said in the video, we are both known for picking apart companies and finding things wrong. While many who don't know better call it perma-bear, as you can see its really known as fundamental analysis. When there's something wrong, there's something wrong. If you look at companies objectively, you not only see what's wrong, but you also recognize what's right. To be absolutely honest, my calls in this stock picking contest were the absolute antithesis of what Wall Street's sell side analysts have been selling its clients. Let's run through the Wall Street sell side mantra, shall we? Trust me, those who don't regularly follow me should click the links below and read the articles thoroughly. While they said...

  1. Buy Apple till $1,000What Sell Side Wall Street Doesn't Understand About Apple...
  2. Hurry and get this Facebook IPO while its hotThe Truth About Facebook That No Media Outlet Or Analyst Dare Admiand more to the point, Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman's Pricing: Here's What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!,
  3. and short Google to go long AppleMy Thoughts on Roger McNamee's View of Google ...

 

I said the exact opposite! Are the results a coincidence? I'm afraid not! Did A Blog Best Wall Street's Best of the Best In Gauging The True Value of Google? We Have To Think More Like An Entrepreneur & Less Like A Wall Street Analyst. Google is not the only time Wall Street's sell side fell to this lowly blogger. We're at roughly 72 companies/industries/countries/opportunities and counting... Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Believe it, naysayers and all!!!

My next post will discuss the other stocks in the stock picking contest which fell behind Google. In the meantime, feel free to peruse both my free and subscription Google research:

Google's Q4, 2012: This Looks To Be The Leader Of The New Distributed Information Paradigm

Subscribers should reference page 49 in the "Google Final Report" to see the results of Google's historical investment actions.

 

I feel that margins may increase slightly but for advertising they are on a long-term downward trend. That is the price Google will pay as digital advertising becomes more ubiquitous. What will be bought at this price? Google will permeate all aspects of digital life with cost-shifted products, based in large part on advertising revenues. In general, margins will drop, but revenues will explode. No longer will we get to keep 40% of our single dollar, but we will get 20% on the $10 dollar revenue bill. While Apple is pondering the Apple TV, Google is working on a wide variety if literally paradigm changing products - many of which are literal game changers: Google Glassdriverless carsGoogle Fiber...

Related articles...

  1. More Evidence That Google Is Already The New Microsoft, and Android Is The New Windows (To YOUR OWN Information)
  2. Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!
  3. As Lower Margin, High Price iPad Minis Outsell All Other iPads The BoomBustBlog Apple Margin Compression Theory Is Incontrovertible & Mainstream
  4. Real Numbers That Show Why Facebook's Ad Model Means Google Will Put It Out Of Business

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

A couple of bits from our archives...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

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This is an update to our first three Facebook forensic analyses, two of which released before the actual Facebook IPO  (search the :downloads section for the first two documents). The updated valuation for Facebook (which has actually has an increase in terms of value now that we have more information to deal with) is available to download for all paying subscribers (FB Q4-2012 Analysis & Valuation Note - update with per share valuation). I'm available to discuss this with professional and institutional subscribers via phone or Google+. Click here to subscribe or upgrade.

As of the writing of this addendum, Facebook is trading at $31.10, not even a year after debuting at $38.This utter disappointment and gutting of the Muppets is exactly what our research has anticipated. Facebook has fell as low as $17.xx, and is now on the rebound towards its IPO price. Notwithstanding the massive capital losses suffered by those who bought into the over hyped IPO against my admonitions, or the losses suffered by those who bought in the Sell Side powered private offerings which was actually valued higher than the majority of trading time as a public company, the argument is being made that Facebook has finally got the mobile thing and can’t be valued using conventional metrics due to its status as a high growth company.

Wait a minute! Facebook as a high growth company is actually growing revenue SLOWER than its biggest and better capitalized competitor – Google! Considerably slower!  While it’s perfectly prudent for the management of a high growth company challenged for market share in a fast moving industry undergoing a paradigm shift, results must result from said efforts. Google is out Facebooking Facebook. Reference I Don't Think Facebook Investors Will "Like" This!!! Google Has Already Caught Up In Terms Of Active Users

In my previous warnings of Facebook euphoria, I brought up the topic of growth many times, particularly active user growth. Reference The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1, while remaining cognizant that this was written exactly 1 year ago:

Thus, it is highly unlikely one can legitimately factor in the type of growth needed to justify the current Goldman $50B valuation - particularly when you consider that Facebook's growth is already slowing!

Well, let's see if I had a valid point now that we have clear and convincing historical evidence from which to base our analysis... (click any of these graphics to enlarge to print quality size)c

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Uh huh! Facebook is MOVING BACKWARDS! IT'S LOSING USERS! LOOK OUT BELOW!!!

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At this point, I can't help myself. I MUST point out the literal rippoff that Goldman Sachs pushed as a once in a life time investment a year and a half ago. As excerpted from Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman's Pricing: Here's What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week! while remaining cognizant that this was written exactly 1 year ago:

Goldman warns, 'We’re probably going to dump this load, but we may also need you to remain behind to hold the bag!'

In its offer for the $1.5bn stock sale of privately held social-networking company Facebook,Goldman Sachs disclosed that it might sell or hedge its own $375m investment without warning clients. Under the deal, private wealth-management clients would be subject to “significant restrictions” limiting their ability to sell stakes while Goldman Sachs own holding can be sold or hedged at any time, and without warning. One would hope that astute clients and investors would be put on guard by such conflicting and restrictive liquidity measures! In addition, it appears as if Goldman Sachs failed to disclose its clients that it had offered Facebook shares to its internal investment group, Goldman Sachs Capital Partners, headed by one of its star fund managers, Richard A. Friedman.

So, this begs the question, "Has the easy money already been made Facebook???" Well, let's take an empirical look now that we have some hard data to steer us throught that sell side fog, that very same fog that people pay me to clear.... (click to enlarge to printer size)

 thumb image005 copy copy

'Nuff Said!

I’m available to discuss this in detail with all professional and institutional subscribers via Google+, or phone.

Is It Now Common Knowledge That Goldman’s Investment Advice Sucks??? Tuesday, 25 January 2011

It's official, the mainstream media has turned on those "doing God's work" and come to the side of BoomBustBlog.

I must admit, I was shocked when I first read this headline and saw the accompanying cover. After all, Bloomberg was the organization that published a story lavishing adulation upon a young Goldman analyst that had a 38% win rate throughout the credit crisis and (faux) recovery. I see those results as mediocre at best, and downright horrible from a realistic perspective. To make matters even worse, I believe I ran circles not only around that analyst, but the entire firm, see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

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Research in Motion, now known as Blackberry, has had a tripling of price over the six months or so. For those that don't follow me, I warned when Blackberry was in the $60's that it was just about a goner (reference Hindsight Is 20/20, And As Luck Has It Our Foresight On Research in Motion Was Right On The Money Two Years Ago). Like Apple, it had a lot of followers who spent more time looking backward than forwards, hence were literally and figuratively blind to the upcoming crash.

image008

Well, after tripling in an overdose of hopium, here we go again. Those who rode the fantasy narcotic-induced ride up obviously didn't read my post "Smartphone Hardware Manufacturers Are Dead, Long Live The Google-like Solution Providers".

You see, the problem is that Google's new age "less than free" business model has sparked a hardware war that no company that does not manufacturer its own parts can hope to win, or even flourish in - that is unless it is an expert in low margin sales. That... Blackberry is not! The Andriod tech, functionality, and mindhsar on both the hardware and software side is leapfrogging the competition (primarily Windows, Blackberry, iOS devices) almost QUARTERLY! With new handsets launching every six months boasting new functionality, and new OS versions launching every six months (alternating, thus creating an effective 3 month cycle) at the same many (or most) companies are slashing prices... How is a company like Blackberry which took two years to launch the revamped, yet barely competitive Blackberry OS10 to compete while maintaing a semblance of healthy margins or material market share? Quick answer, it can't! It's as simple as that.

All of the margin warnings that I gave throughout 2010 and 2011 still hold true today. Google's Android business model was designed to gut companies such as Nokia, Blackberry and Apple - all three of which need wide margins in order for thier business models to thrive. Two years ago, I warned that Android would compress the margins of all three of these companies - to Google's benefit and to their detriment. Let's see if I was correct...

 thumb image004 copy

So, do Blackberry investors really think this time is different??? I answered this question many months ago...

Relevant research...

  1. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
  2. The Complete, 63 pg Google Forensic Valuation is Available for Download
  3. Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All
  4. Subscribers see Apple 4Q2012 update professional & institutional and Apple 4Q2012 update - retail
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For those who don't follow me, I've been bearish on Facebook's stock since day one, primarily due to valuation and pricing issues.  I've made (or saved) my subscribers a fortune on the Facebook IPO, from pre-IPO private trading to IPO at $38, to its fall to $17 or so. Lately, the stock has been on a tear. On January 10th, I posted "As Facebook Finally Starts To Approach Its IPO Price The Competition Thoroughly Outclasses It - Buyer Beware", basically a warning that my many admonitions concerning FB's risk adjusted prospects for success are still rather optimistic considering the offerings of its most dangerous competitor, Google. The piece illustrated how Google+ was not only technically superior to Facebook in nearly every way, but far cheaper for advertisers (Facebook's only real revenue stream) as well. Well, here's another potential nail in the like button coffin...

Facebook has two major caveats to its current business model. One is the monetization of its user base. The second is the growth of said user base itself....

 

 image005

Facebook's subscriber growth has actually slowed materially since this graphic was made.  

FB IPO Analysis  Valuation Note Page 09

Well, here's the real kicker....

Google+ grows to become 2nd largest social platform globally

... and to make things worse, Google also owns the number three social platform as well. When combined, they have effectively caught up to Facebook already after just a single year of effort. That should scare the shit out of Facebook investors!

Google+, who despite being branded a failure or ghost town by large portions of the media, grew in terms of active usage by 27% to 343m users to become the number 2 social platform. Interestingly for Google, YouTube (not previously tracked by us as a social platform) comes in at number 3, demonstrating the immense opportunity of linking Google’s services through the G+ social layer. This is also a key indication of why Google+ integrated with the Google product set is so key to the future of search and the internet. We’ve got more coming on Google+ later this week as well.
Source: +GlobalWebIndex 
Link: http://goo.gl/hgU4k


Here are some very interesting comments from the Google+ post that I sourced this from, one being from the Google+ head himself (Vic).

  • I recently read an article about Exxon using G+ in place of Facebook and Microsoft to create global collaborative workgroups. The article noted the seamless G+ integration with video, messaging, and document sharing as a key factor in their decision to utilize Google over similar services offered by MS and the like. Another interesting growth area has been in education.#GooglePlusInTheClassroomIMO Google Plus isn't as much of a social networking platform as much as a Information Enterprise platform for the masses.

vicsreponse 

This level of social interaction from Google managment is both impressive and commendable. Now, to reminisce on past pontifications Facebook....

I also happened to do the same on the Max Kesier show...

I discussed Facebook on the Peter Schiff radio show, the Facebook excerpt is below...

Additional Facebook analysis, valuation and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Double your money by shorting the Street's advice! Once Again!

How the Facebook story got started...

Facebook started its institutional investment life as a very popular, very well known company. Goldman took this story (private) stock and went bananas with it, as meticulously illustrated in the following blog posts:

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!

I issued private research to my subscribers while publicly warning that Facebook at, or anywhere near, its IPO price was a blatant bald faced SCAM & RIPOFF!!!

  1. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  2. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

As the actual IPO arrived, JP Morgan, Morgan Stanley, Goldman Sachs, etc. piled on the Bullshit, basically espousing how great an investment this was at $38, screaming that this was a once in a lifetime opportunity. Basically, they took the opposite stance of yours truly. And how did that worked out??? BoomBustBlog Challenges Face Ripping Facebook Share Peddlers That Left Muppets Faceless And Nearly 50% Poorer After IPO.

Here is a full year of free blog posts and paid research material warning that ANYBODY following the lead of Goldman, Morgan Stanley and JP Morgan on the Facebook offering would get their Face(book)s RIPPED!!! Could you imagine me on a reality TV show based on this stuff??? Well, it's coming...

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
  6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly
  8. On Top Of The 2x-10x Return Had Off Of BoomBustBlog Facebook Research, Our Models Show How Much More Is Available...
  9. Is Time For Facebook Investors To Literally Face the Book (Value)?
  10. Facebook Bubble Blowing Justification Exercises Commence Today
  11. Facebook Options Are Now Trading, Or At Least The PUTS Are!
  12. Reggie Middleton breaks down "Muppetology," Face Ripping IPO's, and the Chinese Wall!
  13. Facebooking The Chinese Wall: How A Blog Has Outperformed Wall Street For 5 Yrs
  14. Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?
  15. Shorting Federal Facebook Notes Are Not Allowed Today ?
  16. As I Promised Last Year, Facebook Is Being Proven To Be Overhyped and Overpriced!

It would seem that Facebook Finally Faces The Fact Of BoomBustBlog AnalysisProfessional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012. I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update, and the latest iteration can be found here FB IPO Analysis & Valuation Note - update with per share valuation 05/21/2012. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011).

 

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I was going to name this piece "Why Sell Side Wall Street and the Mainstream Media Can't Touch Me", but I decided to go the humble route :-) Do you guys remember those highly paid Wall Street analysts and popular MSM guys who had $1,000+ price targets on Apple just a few months ago? Let's reminisce, shall we...

Let's contrast this to what I have espoused over a similar time frame...
  1.  - This pretty much says it all, right Mr. Munster of Piper Jaffrey??? Yeah, I called you out on this one! Here is an excerpt for good measure, but before you read it remember that Apple's thrashing at the exchange has forced it to renounce its earnigns manipulating ways - just as I anticipated!!!
    • Riddle me this - If Apple can consistently beat the estimates of your favorite analysts quarter after quarter, after quarter - for 11 quarters straight, shouldn't you fire said analysts for incompetency in lieu of celebrating Apple's ability to surprise? ... Apple management consistently lowballs guidance to such an extent that it can easily manage, no - actually create outperformance. This has has a very positive effect on their valuation... The analytical community and the (sheeple) investors which they serve... Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.

      Below, I drilled down on the date and used a percentage difference view to illustrate the improvement in P/E stemming from the earnings beats.

      In our analysis of Apple, we are using real world assumptions of future performance derived from backing in to the low balling this company is prone to. If you look at its history carefully you can gauge what management is comfortable with, hence what they may be capable of on the margin. Using these more realistic numbers, it is much more likely Apple will deliver a miss in the upcoming quarters in its battle with the Android! The following is the reason why.

  2. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple - This reviews the history of the commoditization of the PC at the hands of Microsoft (2010)
  3. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance - This illustrates the pace of Android innovation forcing Apple to take a back seat or face margin compression
  4. Apple on the Margin - This is an illustration of margin compression, before the fact. Yes. Tomorrow's financial news,,, yesterday!

 Now, on to the title of the article and why these guys just don't understand Apple...

Apple is not the leader of the post PC world!Rotten plus GreenApple

Post PC World! That was part of the marketing mantra created by Steve Jobs and his RDF (Reality Distortion Field). PCs are personal computers. Personal computers are small (relative to mini computers and mainframes) computing devices. Apple made/makes nearly ALL of its revenues from PCs, particularly once they became imbued with always on telecommunication capabilities (ex. the Internet). These PCs include iMacs. Macbooks, iPods, iPads or iPhones - any way you look at it they are just PCs or ultra-portable PCs.
  1. So point one, PCs are still alive and well (thus far)...
  2. Point two, Apple makes nearly all of its money from PCs...
  3. Point three, Apple is not the leader of the PC world right now. It's not Dell nor HP, either. An Asian company is the PC leader - Samsung!

Samsung has out innovated, out distributed, outran and outsold Apple using the leverage of a free OS/ecosystem that is currently best of breed and improving at what is at least 3x the speed of the competition. Here's a tidbit to chew on..

Worldwide (traditional) PC shipments totaled 89.8 million units in the fourth quarter of 2012 (down 6.4% from Q4 2011) and is on  rapid and continuous downward decline in terms of growth (4Q12) - IDC

In the worldwide smartphone market, vendors shipped 219.4 million units in 4Q12. The year-over-year growth was 36.4%, as compared to what most people consider the PC's growth of negative 6.4% Althought the high-growth smartphone market was dominated by Samsung and Apple, prices are being driven down substantially by challengers.  As excerpted from IDC's mobile press release:

Kevin Restivo, senior research analyst with IDC's Worldwide Quarterly Mobile Phone Tracker. "Vendors with unique market advantages, such as lower-cost devices, can rapidly gain market share, especially in emerging markets. A good example is Huawei, which overtook LG as a Top 5 vendor in the overall mobile phone market and passed HTC to become a Top 5 smartphone vendor."

"The fact that Huawei and ZTE now find themselves among the Top 5 smartphone vendors marks a significant shift for the global market," noted Ramon Llamas, research manager with IDC's Mobile Phone team. "Both companies have grown volumes by focusing on the mass market, but in recent quarters they have turned their attention toward higher-end devices. In addition, both companies have pushed the envelope in terms of industrial design with larger displays and smaller form factors, as well as innovative applications and experiences."

What do ALL of these Asian companies have in common? What do ALL of these companies, except Apple, have in common? Well, for one, they're all growing a hell of a lot faster than Apple. In addition, Samsung has already overtaken Apple. But there's more. Here's a hint... Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance - This illustrates the pace of Android innovation forcing Apple to take a back seat or face margin compression.

So, what else is the sell side missing? Hardware is Dead!

Or at least the fat margined hardware model. Reference Smartphone Hardware Manufacturers Are Dead and Computer Hardware Vendors Are Dead, Part Deux! Yeah, you're not going to hear this from many investors or analysts, but then again how many can really see the forest for the trees? So, you ask, "How is it that hardware is dead?" Well....
  1.  For one: The open source OS paradigm calls for rapidly improving hardware specs at ever lower prices. I have pointed to evidence of this above, as these Asian OEMs produce ever better product at ever lower prices - just like the old school PC industry. This drives Google's info-centric business model which is why Google pushes free Android.
  2. Two: after years of outsourcing manufacturing tech and UP to low cost labor Asian countries, those countries have found a way to produce trinkets of their own. Of limited quality and value so you say? Well, remember the iPhone is a Chinese phone, through and through -at least Chinese built. So now you argue, it's American designed, just Chinese made! Please peruse the Oppo Finder 5, a phone that's drastically superior to the iPhone 5 in practically every single way, retailing for $100 less than the cheapest iPhone 5 made. Low cost, low margin products combined with Google's free OS will drive the price of hardware down to near zero, if not negative. Google even has its own hardware arm now (Motorola) to facilitate this downward march in margins and prices. Suppose Google decides to create best of breed Nexus devices and give them away just below cost? Imagine the best smartphone available in the world, unlocked, without a contract, for the cost of a single monthly wireless phone payment??? Google's Nexus program is acting as a training ground to teach Google's Motorola division to build best of breed! Google's biggest and most successful partner - Samsung, is an Asian company. Samsung Electronics of South Korea reported today that its quarterly profit  jumped 76%, as its Galaxy smartphones beat rival Apple's iPhone in each quarter of 2012. What many seem to have missed is that EBITDA, Operating and Gross margins all slipped QonQ though. A sign of things to come??? Remember, Google benefits most when the barriers to access information are least. Reference "Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!" as well as my videos below...

Samsung is also currently Google's biggest threat. This (soon to be combative) symbiotic relationship is akin to the relationship that Samsung had with Apple. Competitors, yet symbiotic partner/clients. Samsung and Google are poised to have a slugfest. Their relationship is similar to that of Samsung and Apple, with Samsung being the Apple in this case. Apple is highly reliant upon Samsung for memory and processor chips, and screens. Although Apple is a the biggest Samsung client, it's by far not the only one and the Chinese manufacturers are up and coming. 
Since Samsung is highly reliant on Google's Android but Google has significant diversification when it comes to its reliance on Samsung, Samsung's role is reversed here. You do see who's winning the Samsung/Apple battle, don't you? Expect the same conflict with similar results when Samsung butts heads with Google, unless some significant changes come into play - Which is quite possible in this rapidly morphing landscape.
Despite this, I'm sticking with Google on this for now. You see, despite Samsung's meteoric growth and triumphs over Apple, even its margins are sliding Q on Q, but most miss this because of the massive jump in earnings. Yes! Margin compression! Remember, RIMM and AAPL (and Nokia too) both exhibited this massive jump in earnings before commoditization born from the Android less than free model struck home. Many were caught with their pants down who didn't read BoomBustBlog.
I warned in plenty of time to both avoid loss and profit on the short side for each company:

Now, Samsung seems to be the most innovative of the handset vendors to date, but if I'm right, they will end up having to innovate in a commodity space just like the traditional PC manufacturers (Dell, HP, etc.) have to do now. Why?  Because of point number Three...

The new PC is not even a PC anymore, its a multi-tiered, multi-function, distributed cluster of interactive, location aware, multimedia applications sharing your social activities and data through a network of servers - in short, it's the cloud!

For right now, GOOGLE IS THE CLOUD! See my video descriptions of Google's business models above.
 
Apple can't do cloud! 
 
Simply ask those iMap (our whatever it's called) users who were Bamboozled into switching from Google Maps.... and Apple will not learn the Cloud until it has been a "has been" in the likes of Sony and the Walkman or the PlayStation. That's the base case scenario. The optimistic case is that Apple learns to do the cloud enough to compete with and possibly beat Google, and burns deep into its cash horde, reducing margins along the way. Yes, that's the best case scenario. You see, it's not about who has the best products services at this point. I believe that's Google and its partners, but again that belief is beside the points.  In order for Apple to be competitive in a truly post PC world (I can't even say remain competitive) it simply HAS TO DROP MARGINS!!!
 
When Apples MARGINS drop (which they will have to) then the stock valuation drops. That's the margin compression theory that I've been pushing since 2010, culminating with a public call to short the stick into the lower band off the valuation range that I posted my paying subscribers on my site. See  Deconstructing The Most Hated Trade Of The Decade, The 375% BoomBustBlog Apple Call!! Was I right? Well when the most loved and highly captialized stock in the world drops fro $707 to about $440 in  few months, you tell me?
 
This should have been glaringly obvious to anyone who actively used and followed the products and services of Google and Apple, and had even a rudimentary understanding of business valuation. You know, it's amazing how far an awareness of cognitive biases and a mastery of second grade math can get you on Wall Street. It can actually bring you tomorrows news yesterday! Subscribe to BoomBustBlog today!
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Rotten plus GreenAppleBertha Coombs of CNBC reports the NASDAQ Composite is down 21 points due to NFLX spiking up 38%, thereby adding 1.5 points to the composite. Meanwhile AAPL is dropping 10.7%, which subtracts 32 points from the composite. Where have you heard this iBubble warning before. Read BoomBustBlog: Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All or watch TV, right here http://youtu.be/Q3g__vy6Pmw?t=3m 

Here I explained that not only will Apple's share price collapse (called near the all time high), margins will collapse (call thus far executing like clockwork), lose significant market share (check), but an Apple fall will also compress the NASDAQ... iBubble.

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Apple has reported, and rather than go through my usual analytic narrative, I've decided that I'll just post my Twitter stream from the last 30 minutes. For those that don't follow me, I have been practically a lone bear on Apple and finally publicly called for a short on their stock the week the iPhone 5 was released. That was about $700 per share. AAPL is trading after hours and after earnings at about $459 per share, or over 400% later in 3 month puts? Many sites had commentors, with ZH and Seeking Alpha in particular, spread no shortage of hate. Well, karma would have 100s of apologetic, "You were spot on" style apologies, correct? New comers to my writings should review "Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All" in detail. No further comment necessary...
 
Eric B 13 @13EricB

@ReggieMiddleton Genius calls on#AAPL for the last year and a half. Great Research!

 
Shane MacDougall @Tactical_Intel

@ReggieMiddleton You've been calling the Apple margin compression issue for a long time. Kudos.


  

Posted b4 4th #AAPL miss: Cost Shifting Your Way To Prominence: Google Wins - Apple, RIM & Microsoft Have ALREADY LOST! boombustblog.com/blog/item/6246…

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image002As the video denotes below, here we have big brother, traded on an exchange. The following are anecdotal notes and observations on Google's Q4, 2012. As is customary, I'm willing to discuss my views, opinions and findings with any professional or institutional BoomBustBlog subscriber over the phone or via Google+ Hangout. If you wish to have such a discussion, please email me.

Revenues were up 36% year-on-year, and 8% quarter-on-quarter. Google hit $50 billion in revenues last year - the company is only 15 years old. Motorola is still pulling income margin down, but I (and it appears the market) am confid-ent that Google will successfully monetize the IP and OEM production assets, if they have not already done so. Of concern is the fact that margins are shrinking sans the Motorola acquisition (see below). Does this concern me? Well...

Fears of maturation and saturation in Google’s core ad business appear to have been drastically overblown:

Paid Clicks increased approximately 24% over the fourth quarter of 2011 and increased approximately 9% over the third quarter of 2012. 24% growth in a business that was supposed to start leveling off is a hell of an achievement. What the armchair pundits apparently failed to realize is that the mobile market is akin to almost an entirely new field for Google to plunder. If anything, one should be looking at this from a bullish perspective, not a bearish one. Alas, the margins on this high growth, big opportunity market are bound to be lower – at least thus far, which brings us to…

Cost-Per-Click, which  decreased approximately 6% over the fourth quarter of 2011 and increased approximately 2% over the third quarter of 2012. Google is apparently losing some pricing power with the shift to mobile, as has everybody else in the business. It appears that some firmness has been found Q on Q, as was the case with Facebook as well. Time will tell if this is a seasonal thing, a temp blip, or the start of something more lasting. Remember, this is a new market and a new business for all.

TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $3.08 billion in the fourth quarter of 2012, compared to $2.45 billion in the fourth quarter of 2011. TAC as a percentage of advertising revenues was 25% in the fourth quarter of 2012, compared to 24% in the fourth quarter of 2011. Google’s cost of revenue acquisition is going up!

Other Cost of Revenues – Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs, credit card processing charges, and manufacturing and inventory-related costs, increased to $3.14 billion, or 22% of revenues, in the fourth quarter of 2012, compared to $1.25 billion, or 12% of revenues, in the fourth quarter of 2011. For those who are not paying attention, this is a Google "Call to War"! Google is rapidly ramping investment (incorrectly categorized and classified as expense by GAAP). I believe this is attributable to two things:

  1. The preparation for mass monetizing of the hardware/cloud integration side of the Motorola acquisition. Motorola brought valuable IP, patents,and a mobile OEM business, but it brought material dead weight as well. This dead weight has been (is being) jettisoned, but we have yet to see the positive results of the handset/tablet business. Expect to see that in 2013.
  2. Google is in a cloud infrastructure arms race with those most capable of competing in this arena, namely – Microsoft, Amazon and Facebook. No, I no longer believe Apple is a challenge, and I didn’t think they were much of a challenge last year either. See the accompanying video, Apple is more a purveyor of fads than cloud tech. In the push to usurp Windows as an OS (see Chrome OS and the Chromebook), Microsoft Office with Google Docs/Drive, conventional network TV with YouTube (see below) and the smartphone tablet space with Android - Google plans on tying everthing together in a massive cloud infrastructure. It singularly has the assets, infrastructure, IP and managerial expertise to become the world leader in all of the aforementioned categories - and most importantly, it can afford to be very entrepreneurial and take risks for it can subsidize its experiments with the Google Ad revenues.

Rumor has it that Google is reportedly developing real estate in London for about $2 billion and is doubling its investment in a South Carolina data center to $1.2 billion. There is a practical barrier of near impenetrable expense, not unlike a moat around an olde English castle, that protects Google’s primary and secondary revenue producing assets, not to mention many of the tertiary ones.

Search

To replicate or challenge this hegemony will take the massive resources and extant footprint of a company like Microsoft, with the strategic partnership of extant, long time players such as Yahoo to come in a distant second place.

Mobile Computing

What was the hottest (non smart phone) portable computing device of 2012? Hint: It was designed and marketed by a search company and only costs $200 - the Google Chromebook. See the reviews

What was the hottest mobile OS last year? Which one grew the fastest? Which one had the largest market share? Which had the most tech innovations and capability? Hint: It came from a search engine company. There's no need to tout the Android OS. With roughly 76% market share and still growing faster than all of its competitors combined, Android will soon be the de facto mobile computing platform, much as Windows was the de facto desktop computing platform. Imagine the profit potential that came from thinking different!!!

Online video (YouTube)

Currently has no true competitors, with the second runner up being roughly 90% smaller AND growing slower.  If you look at the second and third most popular video sites, you can probably tell where Google is heading with YouTube. 

1 | YouTube
4 - eBizMBA Rank | 450,000,000 - Estimated Unique Monthly Visitors | 4 - Compete Rank |4 - Quantcast Rank | 3 - Alexa Rank.
Most Popular Video Websites | Updated 1/4/2013 | eBizMBA

2 | NetFlix
81 - eBizMBA Rank | 55,800,000 - Estimated Unique Monthly Visitors | 34 - Compete Rank| 108 - Quantcast Rank | 100 - Alexa Rank.
Most Popular Video Websites | Updated 1/4/2013 | eBizMBA

3 | hulu
110 - eBizMBA Rank | 40,000,000 - Estimated Unique Monthly Visitors | 121 - Compete Rank | 39 - Quantcast Rank | 171 - Alexa Rank.
Most Popular Video Websites | Updated 1/4/2013 | eBizMBA

See http://www.ebizmba.com/articles/video-websites for more info.

Expect the barriers to network TV and subscription TV (ex. cable TV & satellite) to be cost shifted, just as the newpsaper, mobile advertising, classifieds and mobile OS industries have been.

Yes, TV is will soon be Googled! One would expect the TV and Movie distribution industries to be on their toes, looking for a new model that will actually usher in paradigm change versus sitting on their collective asses waiting to be commoditized. Yeah, one would expect...

Of additional concern is the fact that Google's total cost of business appears to be rising. Not only is the cost of revenues increasing (alhtough there was a QonQ decrease), but their operating expenses are increasing as well. Operating expenses, other than cost of revenues, were $4.81 billion in the fourth quarter of 2012, or 33% of revenues, compared to $3.38 billion in the fourth quarter of 2011, or 32% of revenues. This should be of concern to the casual observer. The not so casual observer should realize that much of what is being characterized as expense in the Google statements, is actually investment. GAAP accounting is deficient in capturing efficient economic investment vs actual expenses. Google is a master of long term vision, investment and risk taking. Subscribers should reference page 49 in the "Google Final Report" to see the results of Google's historical investment actions.

Operating Income – Although Google's net income is growing briskly, their margins have been shrinking. One obvious cause of the shrinking was the monstrous Motorola acquisition. The question is, "Was that the only reason?".

On a consolidated basis, GAAP operating income in the fourth quarter of 2012 was 24% of revenues as compared 33% of revenues, in the fourth quarter of 2011. Non-GAAP operating income in the fourth quarter of 2012 was 30% of revenues as compares to 38% of revenues in the fourth quarter of 2011.  Even when separating the Motorola acquisition, we find Google's margins are still dropping...

  • Google Operating Income – GAAP operating income for Google was $3.75 billion, or 29% of Google revenues, in the fourth quarter of 2012. This compares to GAAP operating income of $3.51 billion, or 33% of Google revenues, in the fourth quarter of 2011. Non-GAAP operating income in the fourth quarter of 2012 was $4.42 billion, or 34% of Google revenues. This compares to non-GAAP operating income of $4.04 billion in the fourth quarter of 2011, or 38% of Google revenues.

  • Motorola Mobile Operating Loss – GAAP operating loss for Motorola Mobile was $353 million, or -23% of Motorola Mobile revenues in the fourth quarter of 2012. Non-GAAP operating loss for Motorola Mobile in the fourth quarter of 2012 was $152 million, or -10% of Motorola Mobile revenues.

I feel that margins may increase slightly but for advertising they are on a long-term downward trend. That is the price Google will pay as digital advertising becomes more ubiquitous. What will be bought at this price? Google will permeate all aspects of digital life with cost-shifted products, based in large part on advertising revenues. In general, margins will drop, but revenues will explode. No longer will we get to keep 40% of our single dollar, but we will get 20% on the $10 dollar revenue bill. While Apple is pondering the Apple TV, Google is working on a wide variety if literally paradigm changing products - many of which are literal game changers: Google Glass, driverless cars, Google Fiber...

Related articles...

  1. More Evidence That Google Is Already The New Microsoft, and Android Is The New Windows (To YOUR OWN Information)
  2. Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!
  3. As Lower Margin, High Price iPad Minis Outsell All Other iPads The BoomBustBlog Apple Margin Compression Theory Is Incontrovertible & Mainstream
  4. Real Numbers That Show Why Facebook's Ad Model Means Google Will Put It Out Of Business

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

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This is one of those pieces where, after reading it you say "Damn, why didn't I think of that!".. By demonstrating how Google is transforming the telecomm landscape, I may actually save up to $5,700 for at least a quarter of the readers who are perusing this blog. Yes, it's for real, and its a benefit of the "knowlege how" mentality that I described in my previous pieces on education. You'll see where I'm coming from once you get to the long graphic below...

T-Mobile has had a serious problem competing with the big boys of US wireless carriers. They are the only one not to carry the iPhone. This, in my opinion, was a wise move for the subsidy game has been a money loser from the get go, and although the iPhone is still selling like hotcakes, those hotcakes are looking much cooler as Andrioid sales have taken off. Still, T-Mobile doesn't seem content, so it decided to do what most of the carriers should have done a long time ago. T-Mobile is breaking the wireless carrier contract hegemony and offering pure service without the BS. For ANYONE who can count, this makes the decision to go with T-Mobile as brainless a decision as the sneeze is a reflex reaction. Let me count the ways...

Rip Up The Contract & You Reduce The Risk For Both The Carrier & The Consumer. As A Matter Of Fact, Only Fat Margined Hardware Vendors Have Anything To Fear - Oh Yeah, As Well As Those Carriers That Still Rely On Contracts!

The grand disruptor, Google, has been trying to break the grip the carriers have had on the smartphone industry for years, starting with the introduction of the Nexus phone which it sold direct to consumers online. The propeller heads at Google figured they would offer a better product at a lower price and people would simply flock in to buy it. Said propeller heads apparently didn't understand people. They won't always do what's best for them, but they will buy what is sold to them. So this time around, with 3rd (or 4th?) iteration of the Nexus phone, Google has paired with a major carrier in addition to selling it direct. Now, Google sole the last Nexus through Verizon, but Verizon crippled the device in attempt at carrier lock-in - an old school, naive and ultimately self destructive move, in my humble opinion.

Now, T-Mobile will be offering the device (it's already in stores, just not officially selling yet) and will offer it unlocked, off contract, for its original (not inflated like other carriers) price of $299, and with its original capabilities. This device is state of the art, btw, and blows the iPhone 5 out of the water in practically every way. Keep in mind that an iPhone 5 would retail at your local carrier retail store for $200 to $300, subsidized, tied to a 2 year contract. You can buy a far superior device outright for just about the subsidy downpayment of an iPhone.

One of the best devices on the market, approximately  1.5x the device the iPhone 5 is for roughly half the price! $299

Google Now. Amazing Photo Sphere camera. Totally wireless... OR you can pick up a very good Chinese phablet for even less....

ZOPO ZP950 Phablet - 5.7 Inch HD Screen Dual Core 8MP Camera 1GB RAM Android Phone

ZOPO ZP950

Short Description

- 5.7 inch HD screen, 1280*720 pixel display
- 1GB RAM + 4GB ROM
- 1GHz dual-core MTK MT6577 processor
- Support 3G network: GSM 850/900/1800/1900 & WCDMA 850/2100 MHz
- 8MP rear camera + 2MP front camera

Price: $279

OR you can pick up a smaller form factor for over $100 less...

Zopo ZP500 Libero ICS SMARTPHONE
These are actually very good devices , without compromise. They are, in my opinion, more desirable in terms of functionality than the iPhone 5. For less than the contract sign up price for an iPhone of ATT/Sprint/Verizon late model phone, you can fully purchase one of these devices and pay for the first month of service - contract free, free to leave the county, and free to change carriers or quiet at will. That's not the gist of it...

A Smart Mentality For Dumb Pipes

 T-Mobile may actually profit where other companies take a loss by eliminating the expensive and risk subsidy/contract trap. In addiion, it will pull head of the pack by recognizing what it is, and being aware of what it is not. T-Mobile, like the other carriers (they just don't know it yet) is a utility. It's a dumb pipe through which Goog;e's customers pump data. It is not a software programmer or development house like Microsoft (so it has finally stopped trying to skin Android), and it is not a transaction company (so it has stopped trying to compete with Google Wallet). It is not a content company (so it does not attempt to compete with Netflix, Amazon or iTunes). Unfortunately, the other carriers haven't realized this yet. As a result, although they are bigger and better funded, the new T-Mobile is posed to change the industry. In recognizing that it is a dumb pipe that should compete on data throughput, volume and quality, it is on the road to creating a new business model of being a smart pipe - just as handset makers moved from dumb phones to smart phones. In order to do that though, they will need a change in mindset.

The Performance Trap: Is LTE Really the next big thing or just a thing carriers use to charge you more?

Verizon, Sprint, Metro PCS (a MVNO reseller) and AT&T all market their 4G LTE services heavily. They also charge accordingly. I purchased a Galaxy 3 LTE phone and ran up a $150 bill within 18 days (that's right, I was just over halfway through the monthly billing cycle), without even trying. I called customer service, and they offered me a $50 credit, but the damage was done. I returned the phone forthwith. T-Mobile offers its HSPDA+ service as 4G, and it is actually quite fast for what is considered an antiquated technology. As excerpted from Fiercewirelss.com and Rootmetrics:

RootMetrics: Average download and upload speeds

To the average user, T-Mobile's speeds will barely noticeable in terms of difference from AT&T. Uploads may be noticeably slower, though. Verizon seems to blow them both out of the water, but there is this real life consideration of cost  real life perofrmance issues that comes into question. With that, the equation changes considerably. The battery life on T-Mobile's HSPDA+ is practically twice that off the same devices running LTE. Until better tech is released, LTE is not a valid all day, battery operated solution IMO. Then there's the issue of cost. Uh Oh!!!!...

Price vs. Performance

Let's look at the monthly cash flows.... Yes! You actually SAVE $5,500 per bi-annual cell phone contract. Read carefully and thank me later... Click to enlarge...

image006 copy copy

I will hold an interactive video chat on this topic at approximately 9:45 am, Friday the 11th in the Valuable Knowledge Community on Google+. I welcome all to attend.

Who ultimately benefits? 

First, you, the consumer. Thsi competition is very good. The second beneficiary also happens to be the one that started this mess in the first place, Google! You see, Google is a data company, and data companies need bandwidth. The more cheap bandwidth you have access to, the more data you will be prompted to move, access, save, search for, request and engage with. The cheaper the hardware, the more hardware you will use. The more advanced the hardware, the more you will do with it. "Do what", you ask? Do data! Do Google! This is what Android is truly all about. This is why its free! This is why Google is poised to take over the (data) world. All of those armchair pundits and silly sell side guys who constantly quip about Google not making money on Android sound similar to those who scream, "But that damn fox is not making a dime on the free trips the chicken taxi is making to the chicken coops!" "'Hens R Us' makes more fare on transporting those chickens to the fox hole than Mr. Fox does!" Yeah! Think about it for a few seconds. That's all it takes in terms of critical thought to comprehend the Google business model. Yes, sometimes it is hard to see that forest with all of the tree bark in the way...

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

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A couple of months ago I posted Real Numbers That Show Why Facebook's Ad Model Means Google Will Put It Out Of Business, wherein I shared the opinions of a social media expert extolling the virtues of Google's newest social media thingy, Google Plus Communities. I created a sample community that I will use as an interactive research distribution and learning platform and started playing with some of the features. I can sum it up in less than a sentence. Facebook is in some very serious trouble! What Google has done was to create an extremely rich, extremely interactive, highly social multimedia publishing and sharing platform accessible from any connected device. It can broadcast video/audio/apps/presentations live and automatically post both the live stream and an automated archive on its ubiquitous YouTube site.

I started drawing traffic and comments within 4 minutes of starting my impromptu test of the platform sitting in my car after dropping my daughter off from school, the very same car seat that I'm sitting at typing this post ten minutes later. One can simply imagine what corporates can do with a small budget, a studio and some real determination. Click here to view the post on Google+ complete with screen scrapes of my client's Apple profit margin models, video and sharing. The auto-generated YouTube video is below.

Note: I will be hosting a more organized (as opposed to this impromptu, informal and disorganized) Google+ Hangout at 9:30 AM tomorrow (Friday) morning. I invite all to come by, participate, and assist me in picking apart Apple's margins, and potentially Facebook and Google, time permitting. Click here to join the learning community and my Circle.

The pertinent points made in Real Numbers That Show Why Facebook's Ad Model Means Google Will Put It Out Of Business are even more salient now. For instance, for Facebook, subscriber growth is an issue...

 image002

These facts should not have been a surprise, and blog subscribers were made aware nearly a 2 years ago, as excerpted from our 2nd most recent forensic analysis.

FB IPO Analysis  Valuation Note Page 04FB IPO Analysis Valuation Note Page 04

Now, Facebook can afford a drop in subscriber growth if it can monetize its current base without a material amount of attrition. This appears to be the crux of the massive spike in its share price. 

image002 copy copy 

Now, those who are bidding up the FB share price should be cognizant of the level and quality of competition that the company faces. Most importantly, Google offers a superior version of much of what Facebook offers through its Groups apps, for free (Facebook charges good money). Ask Google's other competitors how easy it is to compete with a free product, particularly a free product that is better. Back to the excerpt:

Google, with the introduction of Google+ communities, has essentially matched or surpassed every level of functionality available on Facebook for a Business to develop its brand, and attract a growing number of followers to its audience. The additional features of SEO, Authority, and Trust associated with a Google+ presence is a difficult thing to pass up, and I predict that the steady stream of Businesses building a Brand Presence on Google+ will soon, with the addition of Google+ Communities will soon become a flood. 

    • Because Facebook has no public search engine, all content is confined within its forums. Facebook will not be able anytime soon to emulate what Google has done with SEO, Authorship or even Hangouts.  You see, the video performance of Hangouts cannot be duplicated without an associated fiber-network between datacenters like those Google has built. 
    • Google+ users connect through this network, away from all of the latency adding routers, switches, repeaters that connect together the rest of the internet. Creating desktop video conferencing for up to 10, or (15 users with a paid Google Apps account) is basically impossible given today’s video compression standards.  Google has promised HD Hangouts in the not too distant future.  I would expect to see those first along Google’s Fiber rollout for users in Kansas City, MO. 

Whew! That's a lot of info to digest. I apologize for excerpting so much of JC's content, but he had so much of relevance to contribute I had to. This is not all of it, by a long shot, so I again urge you to read the original SocialMedia Today article. The obvious question is, "Does he actually make a valid point?" BoomBustBloggers as well as FB and Google investors really need to know. Even though Facebook Does The Reverse Gravity Thing, Defies Logic, I still had to quip  - Hey Muppets, Only Another 100% Climb In Share Price To Go Before You Break Even With MS/GS/FB Investment Advice

By effectively combining search with social media (which Google is doing) Google can convert Plus into a push versus pull scenario. Now for the most important point: Google Plus has just been launched, and it is now just launching new aspects of the platform. All of these platform aspects from Google are absolutely free. If you factor in the cost of paid advertising on LinkedIn, Twitter, or Facebook and cost per page visit, Google Plus shoots way up to the top. WAAAAYYYYYYY UPPPP!!!! Try ti for yourself. Divide the cost of advertising on these platforms plus the cost of content creation and management by the net visitor or engagment session or purchase (or however you measure success) and you will find Google Plus to end up at the top of the list - and that is despite its highly nascent state! Imagine what happens once Google actually gets the ball rolling!!!

This is going to be a problem for all of those social media sites whose business models are predicated on ad revenue. How can you charge for something when your competitor gives the same thing away (arguably on a better platform) for free? This is the question of doom that proved to be the death of the classifieds industry, soon the news industry as we know it, and the smartphone OS industry (ask RIMM if I know what I'm taking about BoomBustBlog Research Performs a RIM Job!, or even Apple Deconstructing The Most Hated Trade Of The Decade, The w 375% BoomBustBlog Apple Call!! and Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All).

Google is able to disintermediate these industries through a process known as cost shifting - basically offering a competitors cash cow product for free to the end user by shifting the cost of making and delivering said product to a natural producer who must incur said costs anyway, thereby totally disrupting the business models and crushing the margins of the established status quo. With the newness of Facebook et. al., it may be hard for old timers to consider them status quo, but in Internet Time, Facebook is old school and faces disintermediation through cost shifting if they don't figure something out, and figure it out fast! 

Here I break down Google Cost Shifting on the Max Keiser (who, after being broadcast on China TV, may very well be the most seen independent newscaster in the world) Show

Here's where I broke it down on Capital Account

I also happened to do the same on the Max Kesier show...

I discussed Facebook on the Peter Schiff radio show, the Facebook excerpt is below...

Additional Facebook analysis, valuation and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Double your money by shorting the Street's advice! Once Again!

How the Facebook story got started...

Facebook started its institutional investment life as a very popular, very well known company. Goldman took this story (private) stock and went bananas with it, as meticulously illustrated in the following blog posts:

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!

I issued private research to my subscribers while publicly warning that Facebook at, or anywhere near, its IPO price was a blatant bald faced SCAM & RIPOFF!!!

  1. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  2. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

As the actual IPO arrived, JP Morgan, Morgan Stanley, Goldman Sachs, etc. piled on the Bullshit, basically espousing how great an investment this was at $38, screaming that this was a once in a lifetime opportunity. Basically, they took the opposite stance of yours truly. And how did that worked out??? BoomBustBlog Challenges Face Ripping Facebook Share Peddlers That Left Muppets Faceless And Nearly 50% Poorer After IPO.

Here is a full year of free blog posts and paid research material warning that ANYBODY following the lead of Goldman, Morgan Stanley and JP Morgan on the Facebook offering would get their Face(book)s RIPPED!!! Could you imagine me on a reality TV show based on this stuff??? Well, it's coming...

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
  6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly
  8. On Top Of The 2x-10x Return Had Off Of BoomBustBlog Facebook Research, Our Models Show How Much More Is Available...
  9. Is Time For Facebook Investors To Literally Face the Book (Value)?
  10. Facebook Bubble Blowing Justification Exercises Commence Today
  11. Facebook Options Are Now Trading, Or At Least The PUTS Are!
  12. Reggie Middleton breaks down "Muppetology," Face Ripping IPO's, and the Chinese Wall!
  13. Facebooking The Chinese Wall: How A Blog Has Outperformed Wall Street For 5 Yrs
  14. Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?
  15. Shorting Federal Facebook Notes Are Not Allowed Today ?
  16. As I Promised Last Year, Facebook Is Being Proven To Be Overhyped and Overpriced!

It would seem that Facebook Finally Faces The Fact Of BoomBustBlog AnalysisProfessional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012. I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update, and the latest iteration can be found here FB IPO Analysis & Valuation Note - update with per share valuation 05/21/2012. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011).

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

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