Pride Goeth

A significant part of our portfolio is invested in Silicon Valley growth companies, but techies' attitudes may signify that another bubble is forming:

Silicon Valley's superiority complex....is an ugly thing to behold. As the tech industry has shaken off the memories of the last dot-com bust, its luminaries have become increasingly confident about their capacity to shape the future. And now they seem to have lost all humility about their place in the world.

Sure, they're correct that whether you measure success financially or culturally, Silicon Valley now seems to be doing better than just about anywhere else. But there is a suggestion bubbling beneath the surface of every San Francisco networking salon that the industry is unstoppable, and that its very success renders it immune to legitimate criticism.

We're not advocating more government oversight or control of the tech industry, which would make things worse. It would be nice, though, to see a little humility, some self-reflection, and yes, a little maturity. When the next bust happens, Silicon Valley will sneeze, but we'll catch cold. 

As the saying goes, only trees grow to the sky.

Barge under construction: a sign of arrogance, playfulness, vision, or just maybe
Google has too much money than it knows what to do with. (Examiner photo)

Battle of the Ecosystems

This humble blog has used Blogger, Google's free blogging and hosting service, for the past ten years. We are also regular users of other free Google applications, gmail, Maps, Calendar, and the Chrome browser, to name but a few. However, we're not monogamous: our hardware is mostly Apple, plus a few legacy PC's for business, and we admit that we're dependent on Apple's App store, iOS, iCal, iCloud, iTunes, and other "i"-services to make it through the day.

We haven't been posting to this blog all week because there's been a glitch in Blogger that won't let us log in. Obviously, a workaround surfaced. Other users pointed to the solution: stop using Chrome, the default browser on our Macs and PCs, and switch to Firefox or Apple's Safari.

Becoming too dependent on one company's ecosystem is a recipe for disaster. (Going all-Apple is not the answer either: if you switched from Google to Apple Maps last year, you could have died.)

The ecosystems do talk to one another. For example, entries on the Google Calendar automatically show up on iCal, so all our devices are linked and sync'ed to a certain extent. It's becoming less necessary to choose sides, and for safety's sake we're not going to. In diversity there is strength. © 2013 Stephen Yuen

Apple: Reversing the Negativity

Google, Amazon, and most NASDAQ stocks have risen
over the past 12 months while AAPL has sunk.

Over the past year long-term Apple investors have had to endure a sinking feeling while the rest of the stock market has been partying on. Oceans of pixels have been devoted to explaining Apple's decline: innovation is a shadow of its former self, Samsung and Google are seizing the market for smartphones and tablets, margins are declining, and, of course, the visionary founder is gone. Those who aren't following the stock closely, however, may have missed the bottom.

Apple shares dipped below $400 in April and June but rose in July when earnings fell less than expected. On Tuesday, when legendary billionaire investor Carl Icahn tweeted that he had bought Apple, others piled in. [update - 8/16: Apple rose this week while the market declined--see graph below]

We still think that re-attaining the all-time high of $705 won't happen any time soon, but the entry of Carl Icahn has reversed the atmosphere of negativity. Mr. Icahn, besides being smart, has a reputation for being ruthless and greedy. His evaluation is devoid of sentiment, and, at the age of 77 his investment horizon isn't overly long-term. Right now his presence is good for the stock, but when he tweets that he's gotten out, look out below. (I'm now a subscriber to his Twitter feed.)

Apple popped this week while the market dropped.

Mood Swings

AAPL is down 17% YTD, in sharp contrast to its large tech rivals and the NASDAQ, up over 20%.

Expectations for Apple had fallen so low that Tuesday's announcement of a drop in quarterly income that was smaller than expected was widely regarded as positive. Every day there are numerous articles from every conceivable viewpoint--from Apple stock is dead money to buy now because the stock has bottomed.

Like most chastened bulls, your humble Apple shareholder now thinks that last September's all-time high of $705 won't be attained any time soon, if ever. The dividend of $12.20, however, represents a yield of 2.7%--better than a bank account--at the current share price, and the $60 billion share buyback program provides an underpinning for future earnings per share, as at least 100 million shares out of nearly 1 billion will be retired. In other words the downside is low, and the 38% drop from the all-time high seems to have chased out the hot-money speculators.

As for potential upside, new products have been disappointing since Steve Jobs left the scene. But it's not likely that the entire $3 billion in annual R&D expense has been wasted; Apple's pipeline is bound to produce some products that will excite some people.

One thing is certain: investors in Apple must be able to handle mood swings. © 2013 Stephen Yuen

Tim Cook Speaks

Apple CEO Tim Cook speaks to Brian Williams
About television: "It's a market that we see that has been left behind.....It's an area of intense interest. I can't say more than that."

About resuming manufacturing in the U.S.: "Next year we will do one of our existing Mac lines in the United States."

About Apple's mission: "Our whole role in life is to give you something you didn't know you wanted. And then once you get it, you can't imagine your life without it."

Okay, so the company isn't the same without the guiding hand of its founder. Yet, who other than Tim Cook should be at the helm?

Bill Gates, whose once-dominant enterprise has been struggling just to hold onto second place, Google's Page and/or Brin who are brilliant but maybe a tad unfocused, Mark Zuckerberg, whose company has yet to fulfill the extraordinary promise of its IPO multiple, or John Chambers or Larry Ellison, both of whom are experts at marketing to businesses, not so much to consumers?

Billionaire CEOs or former CEOs all, their companies' shares have not appreciated as much as Apple's since Steve Jobs died fourteen months ago.

Business: the Unforgivable Sin

Apple's stock seems to have bottomed, perhaps temporarily, at $525.62 on November 15th. Since then it's risen 11%. Knowledge of the Maps debacle (Apple discontinued Google Maps on September 19th) has not dampened enthusiasm for Apple's products:

In the past 12 weeks, Apple’s mobile operating system has grown to now make up 48.1 percent of the U.S. smartphone market, just ahead of [Google's] Android at 46.7 percent.

Despite the fact that customers have shrugged off the Maps problem, Apple's management hasn't been as forgiving:

Apple Inc. pushed out an executive responsible for its mapping service about two weeks ago, according to people briefed on the matter, as the company tries to recover from the map service's rocky debut.

The vice president, Richard Williamson, had been a senior leader with Apple's iOS mobile software team. During his tenure, he oversaw a variety of services, including at one point Apple's voice-activated assistant Siri.

Mr. Williamson's boss, iPhone software chief Scott Forstall, was pushed out of Apple in October, also on the heels of the maps imbroglio.

Both Scott Forstall and Richard Williamson have been heavily involved in some of Apple's most important successes over the past ten years. Nevertheless, in the top echelons of business, like in sports and entertainment, the key question is "what have you done for me lately?" Both are gone because they committed the one unforgivable sin--no, not failure, but embarrassing their employer. © 2012 Stephen Yuen

Peace, Just Not There

The Middle East once again threatens to boil over: Israel, Egypt, Syria, Libya, Iran, Iraq---there's no conflict-free zone. Elsewhere, however, there are nascent signs of peace.

Google and Apple are talking about resolving all litigation [bold added]:

The companies have been exchanging proposals on using binding arbitration to reach a licensing agreement over patents that are essential to comply with industry standards on how phones operate. Such an agreement could lead to a global settlement of all of their patent disputes, Apple said in a Nov. 15 filing.

Stocks rose on Friday after signals from both parties that the impasse over the "fiscal cliff" may be resolved:

the top lawmakers emerged from the White House meeting, which lasted more than an hour, with uncharacteristic optimism that they would reach a deal in coming weeks. [snip]

Leaders from both parties and aides to Mr. Obama said they agreed to make concessions to achieve a deal. For Democrats, that included a willingness to curb entitlement programs, such as Medicare. For Republicans that meant a willingness to raise tax revenue.

Of course, the devil is in the details, but at this point any deal is better than no deal. Let's hope that the emotion surrounding Thanksgiving next week is one of gratitude, not fear or disappointment. © 2012 Stephen Yuen

Apple, Bitten

Apple's market cap has fallen $118 billion since Google Maps was removed September 19th.

Other companies (GE, Microsoft, Cisco, AIG) have fallen further in market capitalization, but Apple's recent drop is nonetheless remarkable in a non-crisis year. A scant 44 days ago AAPL had been rising on the heels of the iPhone 5 announcement and the rumored iPad mini. Then the new operating system, IOS 6, was released.

The premature removal of Google Maps was one of the greatest blunders in Apple's 36-year history. Apple knew that it was taking a chance but underestimated the negative reaction:

in breaking with Google and giving iPhone users worse maps than before, Apple has gambled on three things. First, that users will like its maps’ embedded content. Second, that it will be able to improve fast. And third, that the allure of the iPhone and the loyalty of Apple’s fans will buy it time. After all, people do not buy smartphones for the maps alone, and queues for the iPhone 5 were every bit as long as for previous incarnations of the revered device. But Apple has more catching-up to do than it expected. In a market where brands can rise and fall fast, it may also have less time than it thought.

The removal of a single app, important as it may be, wasn't the reason that the market values Apple $118 billion less. Now that Steve Jobs is gone, Apple is beginning to look like just another good but not extraordinary company. The revolutionary product in the pipeline may well be a myth.

It's going to be an uphill slog back to $700 per share.

[Disclosure: I am long Apple.] © 2012 Stephen Yuen

Google: Unexpected and Disappointing

Google's third quarter results disappointed investors [bold added]:

Google posted a third-quarter profit of $2.18 billion, or $6.53 a share, down from $2.73 billion, or $8.33 a share, a year earlier. Excluding stock-based compensation and other items, profit fell to $9.03 from $9.72 a share. Revenue, excluding traffic acquisition costs, improved to $11.33 billion.

Analysts surveyed by Thomson Reuters expected earnings of $10.65 a share and net revenue of $11.86 billion.

Total costs jumped 71%.

Google had been on a roll. It continues to dominate Internet search and Internet advertising. Smartphones that use the Android operating system outnumber everyone else's. Well-publicized missteps by its rivals made it seem like we were in the age of Google, not Apple or Facebook.

Until today.

Net income per share, excluding stock-based compensation and other items, fell 7.2% versus the same quarter last year, instead of rising 9.6% as the analysts expected. The disappointing results sparked reassessment, and the stock fell 8%.

Sidebar: a big "oops" moment occurred when financial printer R.R. Donnelley & Sons disclosed the results three hours before the market closed:

The premature posting rattled markets, and led to a 2½-hour halt in trading of Google shares from 12:50 p.m. to 3:20 p.m. ET.

Believers in the semi-strong form of efficient capital markets may be cheered by this example of how quickly Google shares adjusted to the "right" price. Trading was halted for 2½ hours to allow market participants to digest the new information, yet the price remained about the same after trading resumed.

Flashback: nine months ago Google had a negative earnings surprise, and the stock fell $53.58 (8.3%) to $585.99. That would have been an excellent time to buy: GOOG is 19% higher, even after today's drop. I still have no idea whether it's a good investment.

Disclosure: I have positions in Apple but not in Google or Facebook.

The Chairman Speaks

Interesting quotes from a recent interview with Google Chairman Eric Schmidt:

“The Android-Apple platform fight is the defining fight in the industry today."

“These patent wars are death."

“Apple should have kept with our maps.”

On Microsoft: “It’s a well-run company, but they don’t make state-of-the-art products.”

In the interview Eric Schmidt repeated an earlier opinion that the four leading companies in tech are Amazon, Apple, Facebook, and Google.

Question: If you had to be a CEO again, would you choose Apple, Amazon or Facebook?

Schmidt: Which one has the most cash? That would be Apple.

Twelve years ago the top-company list might have included Yahoo, America Online, Microsoft, Cisco, Dell, and Intel, but not any of Eric Schmidt's current "Gang of Four." Google and Facebook weren't even public companies back then, and Apple could have been bought with Microsoft's petty cash. How times have changed.

Left by the Side of the Road

Hard to miss a turn with Apple's Maps

Apple's new-product releases introduce technologies that become industry standards. Nearly as significant are the technologies that Apple stops supporting along the way. Apple was one of the first to discontinue built-in floppy disk drives, then optical drives, on its computers. Steve Jobs provoked a furor when he explained "why we do not allow [the widely used Adobe] Flash on iPhones, iPods and iPads."

The iPhone 5, set to be released on September 21st, has at least two "left behind" features amidst all the cutting-edge hoopla. The iPhone 5 has a new connector that doesn't work with ancillary equipment built for the iPod, iPad, and old iPhone. Some Apple customers have to spend thousands of dollars upgrading or adapting their equipment.

Google Maps has more detail.

But the most criticism seems to have been reserved for the abandonment of Google Maps in favor of Apple's own Maps application.

The criticism poured in world-wide as users of the new maps found misplaced labels for businesses and landmarks, cities with missing roads and erroneous features like a fractured river in Ann Arbor, Mich. A search for the Golden Gate Bridge yielded a marker roughly four miles away in San Francisco.

Apple has a history of gauging just how much inconvenience its customers are willing to tolerate without jeopardizing sales of its latest offering. I suspect this controversy will blow over as well, especially as Apple Maps is improved in later versions of the operating system.

Note: Google Maps is far from perfect either. Yesterday a colleague had a meeting at NVIDIA headquarters in Santa Clara. He typed in the address, 2701 San Tomas Parkway, Santa Clara, and Google Maps sent him to a location north of Highway 101.

If he had just typed "NVIDIA," Google Maps would have steered him straight. He would have exited south from Hwy 101 and gotten to the meeting on time.

© 2012 Stephen Yuen