What I learnt from the recent correction

• do not give investment advice to other people (when it is not your profession)
• think about upside and downside in probabilities, but do not forget about black swans
• momentum and valuation both are good indicators for buy and sell-it is impossible to time peak and bottom precisely, but it is not too difficult to avoid at least part of the correction/decline
• taking contrarian positions require extremely strong nerves

Apple - Linear vs. Non-linear Thinking

Human beings tend to think in linear fashion: what happens in the past will happen again in the future...the future follows the patterns drawn by the past...what is going well will keep going well...what is falling will continue to fall...

Linear thinking on Apple:
- iPod: people will never switch to MP3 players because of they investments they made in CDs and CD players; why would anyone go through the trouble of plugging their MP3 players to a computer to get music?
- iPhone: it has no keyboard! the battery lasts hardly longer than one day! why would I need to browse the internet on such a small screen when a laptop can do the job 10x better?
- iPad: why would I need a smaller, but more expensive Netbook? and no keyboard?!
- Apple Watch: why would I want to update my expensive watch every two years? why would I substitute the status simple (Rolex) for a general piece of consumer technology on the wrist? the battery hardly lasts longer than one day!
- China: consumers in China will keep buying the more expensive iPhones because it is one of the must-have middle-class symbols
- India: consumers in India will never afford iPhones when lower cost Android phones from China can do the same tasks at 1/4-or-below the retail prices

Non-linear thinking on Apple:
- iPod: MP3 players is not about music, but about the distribution of music
- iPhone: the new smartphone is about replacing feature phone functions, or mimicking productivity tools on notebook and PDAs, but about rethinking computing as personal and mobile necessity
- iPad: tablet is not about replacing notebooks, but mobile computing in a simplified package
- Apple Watch: the most frequent way people communicate with a computing device are measured in seconds, not minutes or hours; the number of digital connections between devices will grow exponentially, some a devices is needed to sit in the center of that mesh network
- China: a nationalist chairman and ascending value of Chinese handset OEMs will lure domestic consumers away from Apple. A increasingly conservative government will shut down App Store  (over which it does not have control) in China, reducing iPhone to a standalone smartphone without the benefit of the iOS ecosystem
- India: without strong domestic handset maker presence, Indian consumers will flock to iPhone in a more aggressive fashion than Chinese in pursuit of middle class status

"Strong Views, Weakly Held"

"Strong views, weakly held" is the critical principle futurist Bob Sutton identified to navigate uncertainty. I couldn't agree more.

One of the biggest nuisances sell side analysts face is the reluctance to flip their investment views overnight. The practice is not forbidden, but rare. Most analysts choose to "ease into" their ratings change, from Buy to Hold, then from Hold to Sell. It makes sense in theory, because most analysts prefer to identify themselves as fundamental analysts. Unless a unforeseeable, major event such as natural disasters occur, fundamentals don't change overnight. Those analysts are brave enough to make the call can be perceived as fickle and lacking "conviction".

In practice, I would argue, the change from Underperform to Outperform should happen more often. Ideas accumulate gradually. When they reach a critical mass, it often calls for a drastic change in analysts' stance. But the drastic change often implies that analysts are wrong previously. I think fewer people are brave enough to admit directly that they were wrong.

China Smartphone Market - What is Going on?

Fear is growing for macroeconomic weakness in China. 2Q GDP growth of 7% was in-line with government guidance, but lower than 7.5% in 2Q14,  depreciating currency has sparked fear across sectors and borders, consumer consumption appeared weak. And most devastating news in financial analysts eyes, is that the stock market has dropped from a peak of 5178 (on Jun. 11) to 3667 as of yesterday (Aug.17), a 29% drop from the top.

Many people were panicking that smartphone market in China is doomed for the above reasons. They are not wrong. 2Q sell-through data from GfK is showing a 10% Y/Y drop in China, while North America was up 10% Y/Y. After three years of Xiaomi, Xiaomi copycats, and their social media blitz, Chinese consumers are a little worn out. China will probably never see as big a unit shipment surge (like that in 2013) again, ever. Its smartphone penetration already quite high, and 4G roll-out will proceed at a much more rationale pace, given the lack of generous carrier subsidies. But I think it is way too soon to lose hope on China. Why? because North America could still grow 10% Y/Y, because iPhone shipment could still deliver 100% growth in South Korea (June Q in 2015). China naysayers are ignoring one secular trend that will keep the market thriving for the next 3 years:

Middle class to-be in China will drive the largest scale upgrade to premium smartphone in the world: this is already showing in the same GfK data for 2Q15. Although unit shipment was down 10% Y/Y, sales were up an impressive 17%. ASP rose 28% Y/Y from 1,400 yuan to 1,800 yuan. Also, "high-end" category rose from 10% a year ago, to 17% of total shipment in 2Q. Apple's market share gain in China is far from over. But Samsung should see a drastically different outlook. Domestic OEMs in China is catching up on build quality, user experience, and brand image. And they are 50-100% cheaper with the same performance. Samsung's brand equity, will follow Blackberry and HTC's footsteps and fall to zero quickly. There is no way out for Samsung, without its ecosystem, there is no way it can out-innovate its competitors in China. Flexible OLED is a differentiator competitors cannot have, but it also happens to be a feature real consumers find no use for. Apple, on the other hand, is quite different. iPhone is an object of desire, just like a LV bag or a Hermes belt. It easily conveys income level and taste. It is the ultimate affordable luxury - it is obtainable, but at the same time, it represent the ultimate mobile computing experience. A LV bag owner may feel poor at the sight of a Berkin bag, but an iPhone owner has no competition - it is the best mobile handset, period. Owners of the silly Vertu phones are merciless ridiculed and pitied nowadays.

The upgrade will not only happen in tier-2 and above cities, where markets are getting saturated quickly. It will be unleashed in tier-3 cities and below, by sheer scale, that is a much larger market then all of the top tier cities combined.

Fundamental Analysis Examples - Starboard

Looking through the Starboard's presentations on AOL and Darden, I find plenty of useful tidbits on ways to think about a underperforming business and fundamental analysis.

AOL: http://www.sec.gov/Archives/edgar/data/1468516/000092189512001124/dfan14a06297101_05222012.pdf

Darden: http://www.sec.gov/Archives/edgar/data/940944/000092189514000699/ex991dfan14a06297125_033114.pdf

Apple after F3Q15

The stock was down 7% at opening day following its F3Q15 earnings call. The results were great, beating Apple's own guidance and consensus estimates of Wall Street analysts. The results showed that iPhone's share gain over Android saw no sign of stopping. Sales doubled in matured markets such as Germany and South Korea. Growth in China also remained strong, China sales were higher than expected which caused a channel inventory reduction.

But the stock is still down, why? Common explanations are: 1) smartphone sales is slowing down and iPhone will not be able to grow as fast when markets reach "saturation", 2) Apple did not beat heightened expectation by as much as people expected.

Lazy thinking will propel one to think that Apple will stop growing, and maybe start declining. Indeed, it takes more incremental revenues to grow as fast as before. Also, Apple's largest revenue component, smartphone, is seeing slower growth as a product category in general. Those are legitimate concerns, however, Apple's ability to counter the conventional wisdom is overlooked.

Apple is is not an one trick pony. Unlikely Samsung, or almost any other smartphone OEMs that reply solely on hardware handset revenues, Apple generate substantial (and fast growing) revenues from services and cross-sale of other devices and accessories. Each iPhone (or Macbook, iPad) is a gateway to Apple's expanding ecosystem. The users are pulled in by better user interface (iOS), convenience (Apple Pay), differentiated functionality (Apple Watch), and third-party support (many apps and hardware prioritize support for iOS device over Android). Those non-smartphone revenue components will grow way past iPhone's plateau and  eventual downhill ride.

iPhone's growth is far from over. The smartphone market is behaving much like notebook PC market for Apple. Apple's PC business (iMac and Macbook) is consistently growing while the overall PC industry sees declines quarter after quarter. More notably, Apple is gaining share in the high-end PC market, in other words, it is taking higher proportion of $ value of the PC market while the market as a whole is shrinking. Another way to see the trend is that, as the market matures, Apple's share gain accelerates. The same thing is happening in the smartphone market. High-end Android phones have been losing share to Apple. And traditionally "low-end" markets such as China, is seeing iPhone share gain at a faster pace.

For the emerging markets, where Android currently have the dominant share, Apple will continue to gain share. For those experience Android users, iPhone is the holy grain, iPhone is the true definition of the smartphone. After all, Android is but an open, more confusing, and low-cost copy of iOS. Also, a greatly overlooked feature of iPhone, is that it is the best social equalizer. Even the richest person in the world will not be able to get a better mobile computing experience than a common office worker, because there is no superior mobile computer experience beyond iPhone; therefore, as a status symbol and an object of design, iPhone is an affordable to provide psychological satisfaction for a common person.

Oops

Today will be remembered as the day I met Dr. Mary Lou Jepsen. If you don't know who she is, here is her Wikipedia page

I will remember her messenger bag, her laptop, and the great shame I felt after I found out who she is after my largely ignorant conversation with her.

Amazon Dash

Amazon introduced "Dash Button" last Tuesday (3/31, link), which is a magnetic button device that allows for Prime members to order everyday household products with a simple pressing of the button. The device connects to home Wi-Fi network and is set up via Amazon's smartphone app. When pressed, users will receive a notification on their phones and they can cancel if the order is misplaced.

So far, the magical button is by invitation only, availability to initial customers will be announced shortly. I found 265 items on Amazon under the search term "Dash Button Products". Amazon is likely to bring about over a dozen different buttons in its first launch, as those 265 results include different packaging size and flavors of the same products.

Separately, Amazon also launch a new Dash Button like device for its Amazon Fresh service. The device/service is called Amazon Dash (link). It can scan the bar-code of household items (that are available via Amazon Fresh). Then users can place orders by voice input (pressing a microphone button on the device). The setup is similar to Dash Buttons, via Wi-Fi and the Amazon app.
I think this is the Dash Button is the biggest news in IoT this year. It is an elegant, alternative answer to the question: "when will a smart fridge place orders for the owner?" The solution presents minimum friction, as it utilizes services that today's Amazon customers are well acquainted with: Wi-Fi, Amazon app, and Amazon Prime. There is no need for complex settings for payment, connectivity, and user profile. I believe it will have profound implications in the following areas:

• Growing Prime Membership: The service is free for Amazon Prime members. I assume it will stay exclusive to Prime members. I believe it will help grow Prime membership base (especially in metro areas) as Amazon offers one more elegant solution to shopping everyday items.
• For Amazon, the Dash Button is essentially a low cost way to secure (almost) life-time streams of household item consumptions. At this moment, I can hardly think of a competitor with easier setup and better logistical support. 
• Changing Home Appliance Design: IoT is headache for home appliance makers, who are mostly at a loss to problems such as interface design, feature choice, and back-end service offerings. It is far easier for an appliance maker to ship a fridge with programmable Dash Buttons than building the whole chain from scratch. 
• Amazon is already introducing "Amazon Dash Replenishment Service (DRS, link) for business partners. It seems that Whirlpool will integrate the service in the Fall '15 washing machines. So (at least one) home appliance maker is seeing the compelling benefit it will bring.
• Inspiring New Consumer Electronics Designs: frictionless repeat orders, simple one-button design, integration into existing app/service ecosystem, utilizing the ubiquity of smartphone/tablet and Wi-Fi network. What will be the use case be for wearables? 
• What if Dash Buttons turn virtual on one's smart watch? When users approach their fridges, washing machines, pantries, the proximity sensor at these locations detects and identify the users, then prompts the smart watch to bring about orders users can place. 
• Pushing Out Alternatives (2-tier) Brands: once a brand or a product turns into a button, I think it is very unlikely that users will change (I am not getting two buttons for laundry detergent). The power of default will be similarly powerful in this case as well.

Overall, Amazon Dash Button is a very exciting products announcement. I believe it will leave profound impact on e-commerce. It sets a very high bar for home IoT market participants due to the (promised) elegance. I cannot wait to get my hands on those buttons. 

GoPro 4Q14 - Resetting Expectations [revised]

GoPro had great 4Q results and 1Q guidance, but the market seems skeptical, the stock was down over 10% the second day. So what happened? The COO is going away (mostly probably fired) and 1Q guidance is not beating consensus in the same epic proportion as 4Q14. I don't believe her exit would cause any material damage to the company. Her background is easily overshadowed by the high-profile recruits in 2014: Anthony Bates (Skype), Jack Lazard (Qualcomm), Peter Gotcher (Dolby), Zander Lurie (CBS), all rock stars on paper, probably all very expensive. Anthony Bates, for example, owns over 520k GPRO shares, according to GPRO’s secondary offering filing. 

I think GPRO today is like a kidult with bit of identity crisis. On the one hand, you have the marketing-oriented, headline-making, viral-video-worthy CEO Nick Woodman, and on other hand, you have a $6B-market-cap technology company led by managers and board members with deep experience in the "old guard" tech. Today, over 50% of the company is owned by the Woodman family. It seems that the kid side is still dominating, based on GPRO’s new marketing campaigns (new videos like Life in 4K), more flashy in-store display, and overall a strong emphasis on social media and viral videos. 

But 4Q earnings call gave us a good picture of the adult side of GPRO creeping up from the shadow of its CEO. On the call, the CFO (Jack) and President (Anthony) are making an effort to reset the expectation of investors in two ways: 1) making it very clear that its media strategy does not involve making a lot of money ("not a priority"), and 2) 1Q guidance tells Wall Street analysts that their expectation is too high and they should reconsider the margin and growth outlook for 2015. 

2015 is a critical year for GoPro. The company needs to rebuild itself from the ground up. It needs a new camera with sufficient differentiating features from competition without the haunting downside issues (overheating, short battery life). It also needs to revamp its camera interface, smartphone app, and editing tools. If GoPro cannot outdo itself in 2015, competition and the shrinking market of digital camera/camcorder will quickly wipe out its growth to low double digit, or even to zero.

The biggest risk in 2015 is the lack of clarity in strategy. GoPro never puts product on top priority. It want to facilitate great video experience of its users, and yet the GoPro experience never extends beyond its waterproof casing. Much of the viral videos are edited using professional software and by video professionals. GoPro is not known for the elegance of its software. The media strategy left a good first impression on investors, but it was premature when announced without clarified path to monetization. As a consumer electronics company, GoPro needs to put product first, then improve the total experience around the hardware. 

For consumer electronics, product and timing is everything. GPRO’s past glory is a clear example of nailing these two factors. But the GPRO today is beginning to lose control of both. For GPRO to succeed going forward, the CEO’s skill set looks a bit unfitting and he is probably more suitable for a CMO and advisor/evangelist role.

GoPro 4Q14 - Resetting Expectations

GoPro had great 4Q results and 1Q guidance, but the market is skeptical, the stock was down over 10% the second day. So what happened? The COO is going away (mostly probably fired) and 1Q guidance is not beating consensus in the same epic proportion as 4Q14. COO’s exit is easy to explain, her background is being quickly overshadowed by the high-profile recruits in 2014. Anthony Bates, Jack Lazard, Peter Gotcher, Zander Lurie, all rock stars on paper, probably all very expensive. Anthony Bates, for example, owns over 520k GPRO shares, according to GPRO’s secondary offering filing. 

I think GPRO today is like a kidult with bit of identity crisis. On the one hand, you have the marketing-oriented, headline-making, viral-video worthy company led by CEO Nick Woodman, and on other hand, you have a $6B-market-cap technology company led by managers and board members with deep experience in the tech industry and excellent track record. Today, over 50% of the company is still owned by the Woodman family. It seems that the kid side is still winning, based on GPRO’s new marketing campaigns (new videos like Life in 4K), more flashy in-store display, and overall a strong emphasis on social media and viral videos. 

But 4Q earnings call gave us a good picture of the adult side of GPRO creeping up from the shadow of Nick Woodman. On the call, CFO (Jack) and President (Anthony) are making an effort to reset the expectation of investors in two ways: 1) making it very clear that monetization is not a priority for its media content strategy, and 2) 1Q guidance tells Wall Street that its expectation is too high and they should reconsider their margin and growth outlook for 2015. 

2015 is a critical year for GoPro. It is a year the company should rebuild itself from the ground up. It desperately needs a new camera that can differentiate itself from competition without much of the prior issues (overheating, short battery life). It also needs to revamp its in-camera software, its smartphone app, and its editing software. If GoPro cannot outdo itself in 2015, competition and the shrinking market of digital camera/camcorder will quickly reduced its growth to low double digit, or even to zero. The biggest risk in the company for 2015 is the lack of clarity in strategy. GoPro never puts product as its top priority. It want to facilitate great video experience of its users, and yet it is lacking so much experience in software and services. The media strategy sounds good initially for investors, but it was truly getting ahead of itself when it announced and then stressed it. As a consumer electronics company, it needs to put product first, then improve the total experience around the hardware. GoPro today, is the opposite of successful hardware companies like Apple. 

GPRO's CEO is not stupid, he knows that he needs help from bigger guys to elevate the company to the next level. And yet founders don’t always make good CEOs, the desire for control is quite hard to resist, which may be detrimental in making critical and time sensitive decisions. For consumer electronics, product and timing is everything. GPRO’s past glory is a clear example of nailing these two factors. But the GPRO today is beginning to lose control of both. For GPRO to succeed going forward, the CEO’s skill set looks a bit unfitting and he is probably more suitable for a CMO and advisor/evangelist role.

A little bull case for GoPro

The bull case for GoPro maybe buried in its recent partnership announcement with NFL. The first wave of GoPro growth comes with its popularity among extreme sports enthusiasts - skiing, surfing, skydiving, mountain biking, etc. But if major sports such as hockey, football, and basketball start using GoPro, then it creates a massive reach to broader consumers at a scale unseen before. Think Red Bull vs. Coca Cola. However, I still think that seeing athletes wearing GoPro cameras at Super Bowl is unlikely. Athletes safety, content ownership, endorsement are just a small number of the many considerations multiple parties need to address before an actual deployment. It all boils down to the interests to different parties? Who benefit the most from such user? GoPro, obviously, will gain the most, from media coverage and subsequent push in sales. Perhaps it can realize its promise of transforming into a media content company. For professional sports associations and teams, the issue gets a bit more complex, and therefore worth a closer look. 

Professional sports associations such as NBA, NFL, and MLB typically implement a revenues sharing program, where each team is required to hand in a % of its revenues into a pool, then the league will redistribute the pooled fund among the teams and sometimes devote the funds to marketing campaigns that promotes the sports. The source of revenues are media revenues (mostly regional and national broadcast), ticket sales, concession, and licensed merchandise. 

GoPro today is device maker with a very limited proprietary media presence. The distribution of its content is largely dependent on third parties such as youtube, Facebook and instagram. So it really has very little negotiation power against sports teams and broadcasting companies. But if GoPro finds a way to make money off the content deals with sports teams (so that they can share the revenues or have positive return on investments they made in teams), then it may get interesting. But making money off on-line video ads is certainly not an attractive enough option for them now. 

For teams, GoPro’s camera enable them to present themselves in a new angle, but Sony or Casio camera can also provide the “new angles”. The biggest advantage is the much bigger social media presence GoPro can leverage - in a way it holds the promise of free viral marketing for the teams. The social media aspect of GoPro’s business is currently unrivaled by Sony or any other camera makers. 

GoPro is a marketing company

Let’s face it, GPRO does not make great cameras. The company at its core is a genius marketing machine that successfully created a cult user following among sports enthusiasts, and then a global distribution network that reaches this target audience. Since earlier 2014, it even started to generate popularity among regular consumers. The perception of its product is so well curated that it becomes synonym with action sports and active lifestyle.

That all perception aside, I have to say it makes crappy camera and even worse software. Its profound success was largely dependent on timing - it had the right product at the right time, and for a good period of 5 years, its target market is small enough to avoid the attention of major consumer electronics OEMs. 

GoPro has a content strategy. For now, it is not making money from the content created with its cameras. But another obvious reason to promote the content is that those viral videos of epic moments help to sell the camera to more people. But regular consumers rarely realize two facts: 1) those videos are often recorded and edited by professional hands, and 2) without the daredevil acts and breath-taking backdrop of some remote mountains, your daily life recorded will go no where close to be comparable to those GoPro channel videos. I foresee major disillusions from consumers  when they realize how difficult it is to make quality videos with amateur hands, and how clumsy and unpractical GoPro is as a regular, everyday camera. 

As a company making 100% of the money from its hardware sales, it is surprising how little resource GoPro put to research and development, or the actual making of the camera. We have seen 4 maybe 5 major iterations of the original camera design, but yet it is still lacking image stabilization features, a critical feature for action camera if you want clear, crispy images. If we move non-critical features such as connectivity, app support, and editing software, the incompetency is orders of magnitude greater. And yet those non-critical, non-image capturing related features largely defined the happiness of its average consumer users: how well and convenient they can share the video, how closely they can couple the phone with the camera, and how easily they can edit the random video clips into a remotely watchable film. So far, instead of focusing on making a solid product experience (better hardware and software), it again focus mostly of its energy on making a great branding experience. The greater consumer perception is, the more disappointed consumers will be once they lay their hands on the actual product. If GoPro wants to make its cameras a true must-have to capture the everyday moments. GoPro must refocus on the product itself. Without great product, one cannot create great experience, and let alone a viable ecosystem, which is essential for its long-term survival. 

And in the long-term, smartphone cameras and its durability will get so good, that regular consumers will never need a separate action cam to record their bike rides, scuba dive or ski trips. Action cam will be forever confined to the action sports crowd.