Weekend Reading

23 September 2016 | by Paul Perrino, CFA

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

Apple in talks on McLaren supercars takeover (Matthew Garrahan and Tim Bradshaw, @MattGarrahan and @Tim, the Financial Times)

It’s rumored that the company that makes the most beautiful devices (Apple) has approached one the most beautiful car manufacturers (McLaren). This acquisition would provide Apple with the talent and experience needed for their secret car project, and all for a fraction of a single quarter’s profit. This is reminiscent of the Beats Electronics purchase for $3 billion in 2014, which allowed Apple to acquire the experience and connections of Jimmy Iovine and Dr. Dre. Apple executives are no stranger to the automotive industry “Phil Schiller, Apple’s marketing chief, is said to own a McLaren, and Eddy Cue, its services head, sits on the board of Ferrari, while top designer Sir Jonathan Ive has expressed his fondness for Bentleys and Aston Martins.”

The rise of the superstars (The Economist)

The entrepreneurship and spin-off’s of the 1980s and ’90s lead to the “demise of size”. Then the Great Recession lowered company valuations and interest rates to historic lows. This paved the way for companies to consolidate. The corporate landscape is looking like the early 1900s when America was dominated by a few powerful players, such as Standard Oil, US Steel, etc. But, today we have companies like Apple, Google and Amazon. According to McKinsey this consolidation has been so great that “10% of the world’s public companies generate 80% of all profits. Firms with more than $1 billion in annual revenue account for nearly 60% of total global revenues and 65% of market capitalisation.”

The Netflix Backlash: Why Hollywood Fears a Content Monopoly (Kim Masters, @kimmasters, Hollywood Reporter)

In an effort to attract more subscribers, Netflix has been bidding up to purchase great content, such as Stranger Things. They’ve done such a fantastic job, they received 54 Emmy nominations this year. The cost of those nominations wasn’t cheap. Netflix spends approximately $6 billion a year on content, while other networks, like HBO spend about $2 billion per year. This is shaking up Hollywood, so much so that “FX Networks chief warned that Netflix could be bucking for a Silicon Valley-style near-monopoly in entertainment, such as that enjoyed by Google in search or Amazon in shopping.” The Netflix culture is also changing Hollywood. From high standards (Netflix HR says: “Adequate performance gets a generous severance package.”) to executives not having their own assistants, “They run their own phone sheets, which may explain why many calls go unreturned. That doesn’t sit well with those who sit at the top of the Hollywood pyramid. ‘I can get Les Moonves, Steve Burke or Bob Iger to call me back,’ exclaims one senior agent. ‘I can’t get [Netflix vp of content] Cindy Holland to call me back. It’s unbelievable!'”

For the Debaters: What Shall We Do About the Tech Careening Our Way? (Farhad Manjoo, @fmanjoo, NYT)

There’s a lot of focus on consumer self-driving cars, but the commercial application of this technology has been just as exciting. At the infancy of many great disruptions, there are great complexities. In this case, we (as a society) need to figure out how this new technology is going to fit in. There may be fatalities as developers work out the kinks of the software, but in the long term it could save thousands of lives annually. Are we OK with this? Goods can continuously move freely without the need of a human who needs breaks and time off. How will these individuals continue to contribute to society?

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment advice. No advisor/client relationship is created by your access of information on this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire initial investment. If a security is mentioned in this post, you will find a disclosure regarding any position Ensemble Capital currently has in the security. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Each quarter we file a 13F, which discloses all of our holdings. Please contact us if you would like a current or past copy of our 13F filing.

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The Sustainability of Growth vs Return on Invested Capital

21 September 2016 | by Sean Stannard-Stockton, CFA

Previously we looked at the ways that growth, as well as return on invested capital (ROIC), drive PE ratios. Our conclusion was that both attributes increase value, but noted that many investors ignore the value-enhancing benefits of high return on capital, concentrating instead only on growth. In this post, we will demonstrate that high returns on invested capital are far more sustainable than high growth rates and thus this metric is more important than growth in determining valuation.

Investors in a company care about the future cash generation of the business. Cash is generated both by sustaining and expanding the business as well as by optimizing the amount of cash that must be invested in the business to achieve growth. But it isn’t just next year’s results that matter or the year after that. Businesses are long-lived organizations and their value is determined by the long-term sustainability of their cash flow. So while ROIC and growth both drive valuation, it is the sustainability of these metrics that matter, not their outcomes in the next couple of years.

Below are a pair of charts from the book Valuation by McKinsey & Company. These charts examine the long-term behavior of growth and ROIC across publicly traded American companies. They divide the companies into quintiles and look at how companies growing (or generating ROIC) at a certain rate evolve over time.

mckinsey-growth-decay-rates

Source: Valuation by McKinsey & Company

The growth rate chart shows that no matter how high (or low) a company’s growth rate, over time growth has historically converged to about 5% on average. This makes sense as the economy has historically grown at about 5% and if any group of companies grew faster than the economy over the long-term, they would quickly become larger than the economy itself (an impossible outcome). What’s surprising about this chart to many people is how rapidly fast growing companies see their growth slow. For a company growing at 17% initially (a rate of growth that would clearly label the company a “growth stock”), has seen their growth rate slow to 6%-7% on average within 5-years and then gone on to slow to 5%. While analysts will often project a company like this to grow at a double-digit rate for five years or more, in practice this sort of company will see its growth rate drop into the single digits within just two to three years. Even hyper growth companies growing at over 30% per year generally see their growth rate drop into the single digits within four years.

This rapid rate at which growth “decays” to average is a primary reason why investors should be hesitant to pay high valuations for quickly growing companies. While certainly some quickly growing companies maintain high growth for a decade or more, the average high growth company does not. Offsetting those potential long-term growth opportunities is the math behind average results that means that an equal number of current growth companies will see their growth rate collapse even faster than the averages shown above.

mckinsey-roic-decay-rates

Source: Valuation by McKinsey & Company

This chart shows a similar study by McKinsey of how returns on invested capital evolve over time. While returns do show some level of decay, even over the very long-term high return businesses are able to sustain their rates of return. While American businesses have produced ROIC of 10% on average over time, companies that have initial high rates of return have not seen those returns decay towards average as we saw happens with growth rates. The average company with an initial ROIC of 17% was still producing an above average ROIC of 13% after five years and 12.5% over a decade later. Top performing firms returning 25% or more returns on capital have seen their ROIC persist in the mid-teens or better even over the very long run.

In our post on what drives PE ratios, we showed why a company with a high ROIC commands a high valuation ratio and we demonstrated the math behind the size of the valuation premium. This same math shows that a company with a 12.5% long-term sustainable ROIC will command a 20% valuation premium over the average stock. This is equivalent to a PE ratio of 19.2x vs the market average of 16x.

Keep in mind that this valuation premium is based solely on the enhanced ROIC and does not take into account any differences in growth rate. But as we saw, on average, both high growth and low growth companies see their growth rate converge towards the rate of economic growth in a relatively show period of time. What this means is that the valuation premium that growth companies command is real but fleeting. While the valuation premium that high ROIC companies command is meaningful and persistent.

The charts above forms the intellectual underpinnings of our investment philosophy, which focuses on finding competitively advantaged companies. Rather than look for statistically cheap stocks as many value investors do, we prioritize looking for moaty, high return businesses which we believe can sustain their rate of return on capital over the long-term. These companies are far more valuable than the average company and therefore represent a good value even when they trade at valuations that are not statistically cheap when compared to average companies.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment advice. No advisor/client relationship is created by your access of information on this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire initial investment. If a security is mentioned in this post, you will find a disclosure regarding any position Ensemble Capital currently has in the security. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Each quarter we file a 13F, which discloses all of our holdings. Please contact us if you would like a current or past copy of our 13F filing.

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How Apple Creates Value… By Creating Customers

20 September 2016 | by Arif Karim, CFA

fanboy-hair

japan-line

ny-line

Line outside NY 5th Avenue Apple Store

shanghai-line

Line at the opening of Shanghai Apple Store

Sources: idownloadblog.com, phonearena.com, nymag.com, iclarified.com

Apple has been in the business of “delighting” its customers since the introduction of the iMac after the legendary return of Steve Jobs in 1997. While most analysts examine the company based on its financial statements, market rates of growth, projections of market share, etc., to track the health of the company, Apple’s management team has made it a point to frame its focus on customer satisfaction rates for its products. And for good reason, because customer satisfaction rates drive retention and free, viral word of mouth marketing when it comes to consumer products. That has been the causal driver of the measurable financial reports that analysts focus on to gauge the success of Apple’s business model over time.

Horace Dedieu, publisher of the Asymco blog is a very insightful business analyst, with a focus on Apple. He was a former analyst at Nokia, which gives him great perspective from which to watch the machinations of the smartphone industry and the technology/innovation business more broadly. He is also a Senior Fellow at the Clay Christensen Institute. Yeah, THE Clay Christensen, the father of disruptive innovation theory.

In his post, The Next 40, he observes:

My simple proposal is to think of Apple (and actually any company) as a customer creator. It creates and maintains customers. The more it creates, the more it prospers. The more customers it preserves the more it’s likely to persevere. This measure of performance for a company is not easy to obtain. It’s not a line item in any financial report.”

This is an interesting way of viewing Apple — it is in the business of “creating” and retaining customers. Such terminology only makes sense in the context of businesses that generate high rates of customer loyalty. Hence, Apple’s focus on “delighting” and satisfying their customers with their existing products. By doing so, they create the hyper-loyal “fanboy” mentality among their customers that drives the large-scale adoption of new products driven by customers’ expectations of what Apple will deliver on new products based on their experience with existing products.

To wit, in its first four quarters of sales, the iPad generated $12B of revenue while the Watch has probably generated an estimated $5B. These large first-year sales numbers ranked the businesses as legitimate S&P 500 companies in their own right based on their first year of sales! How many other companies can do that?

Dedieu states:

“Buyers are buying experiences. They are buying safety, comfort, convenience, simplicity, productivity. They are buying modules to combine with other modules that help to do something. Something better. They are buying hope, satisfaction, escape or vanity. In other words, they don’t know what they want but know when they have it. They trust products unseen which have a reputation of delivering that which they think they might like, without knowing what that is. By employing the product, and a whole lot more—effort, time, mental energy and repetitive actions—they learn to exploit a product to achieve satisfaction.

In our post, Why Apple’s iPhone Franchise is Sustainable, we made a similar argument about why customers buy iPhones and how this comprises a key part of Apple’s moat. In fact, given the importance that the iPhone plays in its users’ lives, both in terms of all of the tasks it can accomplish and the time users spend every day with the device, we made the argument that the $1/day it cost was an incredible value over a 3 year period.

In our post, we examined the Total Available Market (TAM) to get a sense for how many potential customers there are globally who could afford to buy an iPhone, which today is at the center of the ecosystem. We believe Apple can probably reach 1-1.5B people globally with its flagship product, the iPhone. These are also the most profitable customers in the world since they possess an income that affords them the luxury products Apple sells.

Dedieu spins the analysis a different way and examines the “daily” potential revenue Apple can derive from its customers based on the daily revenue accumulating over all of its devices (not just the iPhone) over their usable lives. Given the loyalty that Apple earns from its customers and the value they derive from the ecosystem, this is a fair way to examine the Total Available Revenue (TAR) that Apple can potentially earn. Loyal customers come back to Apple to upgrade their devices as needs and technology progress as well as buy new products. From this perspective, we are viewing customers’ Apple devices consumption as an annuity, measured on a daily basis.

Dediu makes this observation:

The closest figure we have is that today Apple has one billion active devices in use. 

quarterly-active-devices

Source: Asymco.com

So we know that at least Apple has created a large number of customers. Knowing total devices sold and number in use means that we can be sure that 63% of all the computers Apple sold are still in use.

We might want to ask about the causes of success or failure for a single company. We might want to sample its specific customers. We might want to observe how Apple’s own customers behaved in the past. We might want to use theories of brand value or theories of network effects or theories of software ecosystems.

These measures, rather than those of “comparable companies” might lead to different conclusions: That customers are loyal, that they will value the brand and that they are invested in a network. In other words, that they will buy from Apple again.

Considering this audience and the revenues generated, we can categorize the revenue by active device as follows.

 

apple-revenue-per-device-per-day

Source: Asymco.com

Each bar represents that product’s revenue per day in a given quarter (from Q4 2012 to Q4 2015). Each year is therefore represented by a different color. Dark green for 2012, light green for 2013, burgundy red for 2014 and dark red for 2015. For example, each iPhone in use was generating exactly $1/day in revenues (including services and accessories) during the first quarter 2013.

This allocates all of Apple’s revenues to these products and by proxy to customers.

In summary, the “average revenue per Apple device per day” is currently $0.68. If we assume one unique user per device then Apple collects 68 cents from each customer each day.[3]

In reality, each device is not owned by a distinct customer because many customers have more than one device (Dedieu also notes this in his footnote).

If we think of Apple of being in the business of creating customers (as really most valuable businesses are) and then monetizing them through products and now services, what is the potential revenue per customer that it can generate?

According to Dedieu, the iPhone translates to about $0.80 per day per customer. The Mac, iPad, and Apple TV generate about $0.85, 0.40, and $0.35, respectively, while the less mature watch is likley to generate about $0.30 in our view (vs the $0.60 that Dedieu calculates) for a total potential device revenue per customer per day potential of $2.70 per day. As it stands today, with an estimated base of customers of about 600MM (our estimate, including a minority that bought 2nd hand devices), Apple’s revenue potential from devices is $590B/yr compared to its 2015 CY device revenue of approximately $214B (Services were an additional $21B). Among its existing user base, Apple has the potential to almost triple its annual revenue with existing products.

How can it grow this per customer revenue? Obviously adding more devices that bring the Apple experience to other areas of a customers’ lives makes sense. Rumor has had it that the company is working on an Autonomous Electric Vehicle as an example. The new Airpods are also another set of devices that play into the ecosystem while both leveraging capabilities of existing devices and adding more value and ecosystem integration. Other accessories like Beats headphones also play into bringing in high margin add-on product revenue to complement core devices Apple sells.

While Services only generate revenue of about $0.10 per day per user, this is an area that is growing rapidly and will continue to see additional focus from Apple. Adding services, such as Apple Music and iCloud storage and backup subscriptions as well as transactional services like the App Store, Apple Pay, iTunes, and Apple TV content adds incremental value to customers by leveraging the power of the devices already in customer’s hands (increasing usage and satisfaction) while also generating incremental high margin revenue for Apple. With the rapid global growth of subscription services for music and video used on smartphones, we know these are very appealing and value-enhancing services that users are willing to pay for. The fact that the devices are mobile makes the need for cloud services to store data that can be accessed anywhere an intuitive incremental service offering. Warranty and financing services are already a part of Apple’s offerings, though not in all markets yet.

What else does Apple have in store over the next few years? Given the trend towards the penetration of technology into many everyday industries (Marc Andreessen’s “software is eating the world”) and increasing consumer expectations for high service levels (i.e. to be “delighted”) with ongoing subscription-based value delivery, we see increasing opportunities for a company with Apple’s resources and skills to continue adding value to its customers’ everyday experiences.

Just to make the illustrative point, if Apple can grow its daily potential revenue by 20% from $2.80 (devices+services) to $3.36 and adds an additional 200MM users (~7% per year) over the next 5 years, it will have a Total Available Revenue opportunity of $1 Trillion from its customer base.

How much of that Apple will be able to capture remains an open question, but getting to the Total Available Revenue opportunity does not seem like a stretch given the company’s ability to create and retain its loyal and growing customers. Apple is already the world’s most valuable company and as long as Apple continues to focus on creating customers and delighting them with intuitive, usable, and beautiful products, it’s likely to become even more so.

Ensemble Capital’s clients own shares of Apple (AAPL).

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment advice. No advisor/client relationship is created by your access of information on this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire initial investment. If a security is mentioned in this post, you will find a disclosure regarding any position Ensemble Capital currently has in the security. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Each quarter we file a 13F, which discloses all of our holdings. Please contact us if you would like a current or past copy of our 13F filing.

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Weekend Reading

16 September 2016 | by Paul Perrino, CFA

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

Noise: How to Overcome the High, Hidden Cost of Inconsistent Decision Making (Daniel Kahneman @DanielKahneman, Andrew M. Rosenfield, Linnea Gandhi @LinneaGandhi, Tom Blaser, Harvard Business Review)

Behavioral and cognitive biases are always present and constantly need to be monitored and reflected upon. Daniel Kahneman is a well-respected researcher on the topic. In his latest article, he and his colleagues discuss “the concept of noise as a source of errors and explain how it is distinct from bias.”

Google’s DeepMind Achieves Speech-Generation Breakthrough (Jeremy Kahn, @jeremyakahn, Bloomberg)

Google’s DeepMind project continues to break new frontiers. In the latest development, WaveNet, DeepMind’s speech AI, was able to mimic the human speech better than Google’s old text to speech software. It’s still detectable as a computer but it’s working towards beating the Turing test.

Safety Trade Leaves S&P 500 on Knife’s Edge as Valuations Soar (Oliver Renick, @OJRenick, Bloomberg)

Similar to our recent post, Oliver comes to the same conclusion “Utilities, consumer staples makers and phone companies — sectors that usually do well when the economy isn’t — plunged at least 2.8 percent Friday, worse than the broader market. It’s an abrupt change for companies that were among the few winners at the start of the year and are often labeled by Wall Street as safety sectors.”

U.S. Household Income Grew 5.2 Percent in 2015, Breaking Pattern of Stagnation (Binyamin Applebaum, @BCAppelbaum, NYT)

“Household income rose significantly last year, but it is still slightly lower than it was before the last two recessions. The rate of those living in poverty fell to its lowest level since the Great Recession, but, as with income, the rate is higher than it was before.”

 

Big Week for Apple

Apple’s iPhone Keeps Going Its Own Way (Farhad Manjoo, @fmanjoo, NYT)

A few years after the release of the first iPhone commentators said the iPhone would be commoditized and prices would fall. But today Manjoo says “The iPhone’s continuing dominance may not be a sure thing, but in the tech industry, it’s as sure a thing as you can find right now.”

Airpods (Neil Cybart, @neilcybart, Above Avalon)

As Apple has done in the past (eliminating the CD-ROM), they continue to look into the future and start paving the new path for consumers to follow. This time, it was the headphone jack. It may not seem revolutionary, but it’s another step in develop the user ecosystem, which Apple is the center of.

With the iPhone 7, Apple Changed the Camera Industry Forever (Om Malik, @om, The New Yorker)

The camera feature in smartphones has improved dramatically over the past few years. The latest version of the iPhone 7 Plus starts to rival the quality of DSLR cameras.

 

Best Video of the Week

Watch Boston Dynamics’ Atlas Robot Balance On One Foot (Brendan Byrne, @valuewalk, Value Walk)

Watching the development of AI and robotics is like watching a child develop. Amazing! “Maybe the most striking thing about the video isn’t necessarily the extended period of time it spends balancing, but the incredibly human-like way the robot tries to regain its balance at the end of the video.”

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment advice. No advisor/client relationship is created by your access of information on this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire initial investment. If a security is mentioned in this post, you will find a disclosure regarding any position Ensemble Capital currently has in the security. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Each quarter we file a 13F, which discloses all of our holdings. Please contact us if you would like a current or past copy of our 13F filing.

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Weekend Reading

9 September 2016 | by Paul Perrino, CFA

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

The Problem With Dividend Stocks (John Coumarianos, @JCoumarianos, WSJ)

Funds targeting income generating assets, such as REITs and dividend paying stocks have seen dramatic in-flows of capital. Assets in the Vanguard REIT Index Fund (VGSIX) grew over 10 times from 2009 to today ($6 billion to $67 billion). Vanguard’s Dividend Growth Fund (VDIGX) has doubled in size since 2013. This rapid growth has caused Vanguard to close the fund to new investors. As assets have flowed into these types of funds (not just Vanguard), they’ve been forced to deploy the deposits and buy stocks that match their strategy in order to keep the fund fully invested. This bidding up of these stocks has caused valuations to skyrocket. A great example of this is WD-40. Check out our recent blog post (here) to learn more.

High-Quality Risk (Eric Cinnamond, Absolute Return Investing with Eric Cinnamond)

A number of high-quality stocks are also high-dividend paying stocks. These high-quality stocks are typically characterized as slow, stable, reliable growth. This allows them to be consistent dividend payers. These stocks are currently trading at valuations much higher than their historical averages. They’re being priced as if they’re a high growth or an incredibly low-risk company. Analyzing the cash flow of J.M. Smucker Company (SJM), the required return to justify the price is signaling an incredibly low-risk business. “In my opinion, investors are confusing low volatility — in business results and stock prices — with low investment risk. They are not the same.” At Ensemble Capital, we believe that quality businesses can also be found in economically cyclical industries and that today, these areas of the market offer far better value to investors.

Swedroe: Low Vol Benefits Fading (Larry Swedroe, @larryswedroe, ETF.com)

Moving from the bottom-up analysis in the preceding article, Larry takes a statistical approach to analyzing these low volatility stocks. It turns out that there is a “positive exposure to [the] term risk.” The strong long-term bull market in bonds can explain some of the return generated by these low-volatility stocks. The strong demand for this strategy is changing the very nature of the underlying stocks. The valuation metrics of these stocks, such as P/E, P/CF, etc. are higher than they have been in the past. “The lower exposure to the value premium means that they now have lower expected returns. In other words, since there is an ex-ante value premium, what low volatility is predicting at this point in time is not higher returns, just low future volatility. In addition, it doesn’t seem likely that low-volatility strategies will benefit as much in the future as they have in the past from their exposure to term risk.”

The iPhone 7’s powerful camera could take virtual reality mainstream (Anita Balakrishnan, @MsABalakrishnan, CNBC)

Apple’s “best iPhone yet” includes a new powerful camera. It includes features that are typically found in high-end DSLR cameras, such as the new “portrait” feature that keeps the subject in focus and blurs the background. The Plus version of the new iPhone includes an additional 12-mexapixel telephoto lens camera that pairs with the wide angle lens that’s included in the baseline iPhone 7. These improvements in the camera are causing some to speculate that this is a shift Apple is making toward promoting “user-generated virtual reality (VR) content.” Apple expressed interest in VR when they acquired Flyby Media last year. If Apple continues to innovate and create excellent user experiences, the introduction of a VR platform on the iPhone could be a material impact on how consumers use their phones.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment advice. No advisor/client relationship is created by your access of information on this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire initial investment. If a security is mentioned in this post, you will find a disclosure regarding any position Ensemble Capital currently has in the security. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Each quarter we file a 13F, which discloses all of our holdings. Please contact us if you would like a current or past copy of our 13F filing.

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Weekend Reading

2 September 2016 | by Paul Perrino, CFA

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

How Driverless Cars May Interact With People (John Markoff, @markoff, NYT)

Most articles about self-driving cars are focused on the car and its ability to drive itself from point A to point B. The more these cars are on the road, the more important it is for developers to think about how pedestrians and other non-self-driving cars are going to interact. A new company, Drive.ai has been focusing on this. They’re thinking through critical questions, such as “How does a robot, for example, tell everyone what it plans to do in intersections when human drivers and people in crosswalks go through an informal ballet to decide who will go first and who will yield?”

Google Takes on Uber With New Ride-Share Service (Jack Nicas, @jacknicas, WSJ)

On Monday (8/29/16), Alphabet executive David Drummond left the board of Uber. On Tuesday (8/30/16), Google announces a new ride-sharing service. This new service is offered through Google’s widely popular navigation app, Waze. Starting in the San Francisco Bay Area, users will be able to offer rides during their commute to other users in need of a ride. “In the San Francisco pilot, any local Waze user can sign up as a driver, but ridership is limited to roughly 25,000 San Francisco-area employees of several large firms, including Google, Wal-Mart StoresInc. and Adobe Systems Inc. Riders are limited to two rides a day—intended to ferry them to and from work.” While this new service isn’t as similar to Uber as Lyft is, the competition remains fierce.

The Majority of Netflix Subscribers Will Be International Within 2 Years (Lucinda Shen, @ShenLucinda, Fortune)

With the success of Netflix in the US, their next major step is to expand subscribers internationally. They’re streaming in 190 countries and have started creating original content in foreign markets for international appeal. Nacros, a Spanish-language show, is one such show. One country that is missing is China. Netflix will have to go down the same road as other US tech companies, Google, Facebook, etc. and determine if they’re able to come to an agreement with Beijing.

What managers misunderstand about shareholder value (Alfred Rappaport, FT)

Every business class talks about shareholder value and the objective of a company is to maximize that value. In a world where financial media focuses on quarter to quarter earnings, the meaning of shareholder value has become opaque. This is an important reminder of what we mean by “shareholder value.” The focus and management of quarter to quarter reporting results (earnings) is not a driver of long-term growth in a company. Cash flow that results from their capital allocations decision (which can take several quarters to realize) is the primary driver.

The Illusion of Lagging Productivity (Noah Smith, @Noahpinion, Bloomberg View)

Technology and productivity are closely related in economics. Given the slowdown in productivity over the past 16 years, some economists debate about the impact of technology. Some argue that the reduction has been overstated because it’s allowed us to enjoy more leisure time. Others say it’s overstated “because it’s inherently hard to measure the value of free software products.” Professor of economics at the University of Houston, Dietrich Vollrath, argues that companies are taking “more economic rent — meaning, profits from not producing anything — but statisticians don’t pick up on this, it gives the appearance that businesses are over-consuming capital. That in turn makes it look as if they’re less efficient than they really are.” Companies are able to do this because they’ve created a moat – an advantage that causes a lack of competition. When there is no competition, companies earn wide profit margins and technology and innovation slows. “But as Vollrath shows, it also might be giving the appearance that the stagnation in technology is worse than it actually is.”

 

 

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment advice. No advisor/client relationship is created by your access of information on this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire initial investment. If a security is mentioned in this post, you will find a disclosure regarding any position Ensemble Capital currently has in the security. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Each quarter we file a 13F, which discloses all of our holdings. Please contact us if you would like a current or past copy of our 13F filing.

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