Friday 27/07/18

  1. In TECH NEWS TODAY, we see Facebook getting trashed, the implications of the Qualcomm/NXP breakdown, success for Amazon and Spotify and British virtual-world unicorn Improbable
  2. In INDIVIDUAL COMPANY NEWS, Starbucks benefits from price hikes, BAT forges ahead with its heated tobacco product and Nomura’s profits take a massive tumble
  3. In OTHER NEWS, I bring you a Drake-dancing dog. For more details, read on…



So Facebook has a nightmare, everyone takes stock after the Qualcomm/NXP breakdown, Amazon announces strong profits, Spotify increases paid users and Improbable gets a Chinese boost…

Although I talked about this yesterday, I thought I’d follow up given how many column inches are being given over to this today, but Facebook has biggest stock fall in US market history (Daily Telegraph, Matthew Field and Natasha Bernal) highlights Facebook’s dramatic fall from grace as a stock market darling. As I said yesterday, investors took fright by the company warning of slowing growth, higher costs and missed revenue targets – and sold the shares in dramatic fashion. The one-day 20% fall was the biggest drop ever for a US listed company – yet despite this, the share price has only dropped back to the level it was at in May. * SO WHAT? * Facebook has had a turbulent time over the last year and this dramatic drop has prompted fears it is reaching the peak of digital advertising (I don’t think so myself – I think there’s still a long way to go yet), that the tech bull run that has powered FAANG valuations to dizzying heights is faltering and that Zuckerberg has too much power in his dual role as chairman and chief exec. That said, Facebook’s stock has shot up by 355% since it listed six years ago and Facebook: hard luck, Zuck (Financial Times, Lex) reckons it might be prudent to buy into this particularly sharp dip despite the fact that there will probably be more fallout to come from all the privacy breaches, fake news and harassment. IMHO, it’s still a powerful company that is well placed to continue to benefit from the digital revolution given the quality and sheer scale of its offering – and if it managed to crack China (which I have to say I can’t see happening anytime soon, but you never know) it could shoot into the stratosphere!

Following on from another story I mentioned in yesterday’s WIFI about the failure of the mega-deal Qualcomm/NXP combo due to Chinese regulatory refusal, China’s suffocation of the Qualcomm-NXP merger signals new era (Financial Times, Tom Mitchell, Tim Bradshaw and Don Weinland) suggests that Qualcomm just became the unwitting patsy in the escalating trade war between Trump and China. * SO WHAT? * In letting this deal slide, the future of M&A for US tech companies is now looking less clear and Scuttled Qualcomm-NXP deal is a win-win for Beijing (Wall Street Journal, Dan Strumpf) says that China achieved two things with the deal rebuttal – it showed that it had ways to hit Trump other than tariffs and that it has stopped a powerful rival in its tracks in the long-term battle for tech supremacy. Qualcomm is at the cutting edge of chip technology and by blocking the NXP deal it has bought its own chip companies time to play catch-up. China economist Christopher Balding observed that “Qualcomm has for many years been a real worry of

Beijing’s, so it’s not surprising – trade war or no trade war – that this deal got scuttled. To give Qualcomm that much more market dominance across an even broader range of chips I think was a very worrying issue”. Qualcomm/NXP: block trade (Financial Times, Lex) observes that “Qualcomm’s failed attempt to buy NXP is a reminder of China’s willingness to intervene in global M&A”.

Amazon announces record £1.9bn profit on back of growth in cloud computing (The Guardian, Julia Carrie Wong) highlights record profits for Amazon in the second quarter, with special plaudits going to its non-retail divisions of advertising and cloud computing for its stellar performance. The profit was double that expected by analysts and the shares were up 3% in after-hours trading, adding to the stock’s rise of 50% since the start of the year. * SO WHAT? * The fact that Amazon’s NON-RETAIL divisions did so well is particularly notable and its increasing dominance in cloud computing will no doubt serve it well as a support to ALL its business interests.

Eight million more dance to Spotify’s tune (The Times, James Dean) heralds good news for the music streamer as it beat forecasts for subscriber growth by adding 8million paying subscribers between the end of March and June 30th this year, bringing its subscriber numbers up to 83million in total – around one million more than analysts expected. * SO WHAT? * This is a solid performance from the company’s second set of quarterly results since flotation and takes the fight to Apple Music. Having said that, I think that Spotify should be doing better than this given its subscriber base and its first-mover advantage – so it should not rest on its laurels. Although it trumps Apple Music in terms of numbers, the growth of the latter is what should concern Spotify. As we all know, Apple is not known for being the first mover in most things – but it is often seen as having the most user-friendly offering and has a far wider reach in terms of user demographic than Spotify due do its iPhone user base. Spotify needs to continue to innovate to attract more paying users and convert existing freeloaders.

Virtual-world start-up Improbable valued at more than $2bn (Financial Times, Tim Bradshaw and Aliya Ram) highlights the success of a UK software developer that helps create virtual worlds for online games in attracting a $100m investment from Chinese internet group Netease. This has doubled Improbable’s valuation at a stroke to $2bn, one year on from when Japan’s SoftBank paid $502m for a significant minority stake in the company and Improbable is now up there amongst the likes of Deliveroo as one of the most valuable private tech companies in the UK. Improbable chief exec Herman Narula said of the partnership that it was a “sign of the maturity of the technology…one of the biggest games companies on the planet is deciding to use our technology for new games”. * SO WHAT? * This sounds like a great deal for a UK software developer (especially considering that it only generated £7.8m of revenues in the year to May 31st 2017!) and I suspect there is more to come in this sphere given the fragmented nature of the market and the continued need to have the best tech to generate the best content. Moves like this will perpetuate the buzz in this sector.



In individual company news, Starbucks has some good news, British American Tobacco targets the US and Nomura has a shocker…

In Starbucks US sales bump up after price hike (Wall Street Journal, Annie Gasparro) we see that the coffee giant saw its US sales rise in the most recent quarter amid top management changes, mini-scandals and tough competition via price increases put through in June. The company is trying to keep ahead of the game by boosting sales of its Frappuccino drinks, closing underperforming stores, opening stores in regions including the South and generally getting more focused on what customers are buying via using its mobile app. * SO WHAT? * Great news for a company that’s had a relatively rough time in the press of late. Having said that, their recent admission that China sales were slowing down continues to be a cloud on their future growth.

BAT targets US heated-tobacco market with its Eclipse device (Daily Telegraph, Oliver Gill) cites strong results from the world’s second biggest cigarette company which posted first half profits ahead of market expectations. The

owner of Dunhill and Rothmans also announced that it would be testing its Eclipse device in the US later on this year, which would put it ahead of its rivals in the world’s biggest vaping market. * SO WHAT? * Solid results, but the prospect of cracking a major market is getting investors excited.  Marlboro owner Philip Morris is the #1 in the tobacco heating market globally with its IQOS device and currently has an application in for approval to sell with US authorities, whereas BAT’s Eclipse device doesn’t. Both will be fighting over who gets first-mover advantage but I would have thought that the US market is big enough for both of them!

Nomura net profits tumble on slump in fixed income and equities (Financial Times, Leo Lewis and Kana Inagaki) says that Nomura Holdings has suffered its worst quarter since 2016 as Japan’s biggest investment bank fell behind its Wall Street rivals. The brokerage revealed a massive 91% drop in net profits year-on-year for the first quarter and blamed trade friction, increasing geopolitical tension and deepening caution by clients in emerging markets. Wholesale and fixed income were the worst performing divisions and its usually-reliable retail division also saw unusual weakness. * SO WHAT? * Nomura has been struggling with cost control since it bought Lehman Brothers in 2008 and has engaged in a number of business overhauls in the last few years. If it really wants to achieve its ambition of becoming the go-to global Asia-centric investment bank, it will need to do more to transform its current position as a Wall Street wannabe. More pain and job losses ahead, I fear.



…And finally, in other news…

Are you aware of the current dance craze, the #InMyFeelings challenge? This is where people get out of their car – while it’s moving – and dance along to Drake’s song, In My Feelings. Well this story goes one better: Dog beats everyone at the In My Feelings challenge by dancing on a scooter (Metro, Kate Buck Quality! BTW, don’t try the challenge yourself – it looks very dangerous!

As always, thank you for reading Watson’s Daily!