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.”

Ensemble Capital’s clients own shares of Netflix (NFLX) and Google (GOOGL).


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