Predictions for 2020 by HBS Professors (podcast link)

1. Political

• There will be a large gap between electoral and popular votes that strikes public concerns.
• President Trump will do a re-election as the economic benchmarks are strong
• Prince William will be the last king, leading to the dismantling of British Royal Family.

2. Society

• Unemployment will continue to rise, along with the salary rate.
• Many states will approve sport bets

3. Technology

• Alphabet will mark a significant change in capital allocation strategy: a very large acquisition, a large special dividend or a large buy-back program.
• Hearables will blossom: not only work for music listening but also collecting  health data. Apple will invest in it to create an edge for the popular AirPod.
• Huawei will be the no.1 smartphone manufacturing  in the world till the end of 2020 with more stable growth & more astonishing updates than Samsung.
• China will be the leading AI center due to cheap labour cost. 
• There will be prominent deep- fake scandals
• Face-recognition will be put in many more applications, which leads to security concerns?

4. Retail

• Walmart will make a big push into healthcare, after opening a  primary care center
• Amazon will double down on brick-and-mortar store buy acquiring one player (ex: Target) as 2020 will be the first year E-commerce grow less than 10%

5. EVs: Electric cars will hit the tipping point when everyone can earn one: mass-price & easier access to charging station

6. Travel Industry: There will be some large mergers here. Ex: Google buy some OTAs

7. Entertainment

• Apple TV+ will not bring impressive growth. 
• (Looking back why Apple did not buy Netflix) Maybe the reason lied in regulatory obstacles

8. Climate change: Governments over the world will pay more attention towards climate change, after Australia’s incidents

In the middle of the merging rumor of GoJek and Grab, I want to come back to an old article related to their business model: progrssive pricing by BCG

Why Progressive Pricing 

Is Becoming a Competitive Necessity

Progressive pricing is a competitive necessity because of its added values to both customers and firms. Leading tech companies should carefully implement four imperatives to fuel this inevitable technology growth.

With progressive pricing, which was already embedded in the sharing economy, firms do differentiate their products and services by individual customers and differentiate their prices accordingly. The system comes from the idea that optimizing continuum of prices is better than optimizing a number of price points. From that, it can create a win-win opportunity for both companies (more innovation and more profitability) and customer (expanding-value surplus).

Four differences between progressive pricing and traditional fixed-price approach

• Market expansion. Every customer has an opportunity to use the product or service, with price and value carefully and consciously adjusted to the customer’s current situation
• More consumer Surplus. Customers as a whole retain more value (reduced waiting time)
• More Profit. The firm earns more money
• A renewed sense of fairness. customers pay a price proportional to the value they receive

Two trends are changing day-to-day reality

• The independence of innovation from costly physical product improvements. 
• The omnipresence of mobile technology enables companies and customers to forgo unprecedented links with each other.

Four imperatives that firms need to execute to read profitabilty

• Invest to innovate with data, software and artificial intelligence. 
• Reinforce the bond of trust with their customer by providing added-value incremental
• Make customer values more explicit, transparent and personal. 
• Redefine and communicate the fair principles behind the algorithms to emphasize that values are shared among customers rather than extracted from them.

Today I will summarize all the analysis on Apple that I read in Finimize Premium. Finimize and Quartz are the best newsletters on business updates and analysis/strategy to me.

The State of Play

1. iPhone performance 

• More than 900 million active users today.
• Gross margin (excluding corporate costs) is 40% – very high.
• “Still” bread-and-butter. However, sales are declining. Apple compensates by increasing price.

2. The reasons for falling sales

• Saturation. Penetration reaches 70% in most developed countries. 
• Longer life cycle due to plateauing innovation and improved battery life.
• Heightened competition from Samsung, Huawei, Xiaomi,…

Apple’s Services scenario

1. Why is this segment potential? 

• Apple has a captive market: 1.4 billion devices in active use worldwide which it can sell to.
• Apple is doing well on Services: $46B revenue in 2019 is even bigger than total revenue of Oracle, one of the largest software companies in the world

2. How can Services save Apple?

• Its revenue may offset iPhone declining sales
• It may bring a higher valuation multiple:

(1) Hardware sales can be seasonal and cyclical, why software sales (esp subscription services) are consistent and predictable

(2) It is usually costlier to make and sell hardware

(3) Global supply chains are at risks of disruption: US-China trade war & Coronavirus

• Higher profit margins: Services ’s gross margin is 64% compared to ~34% in Hardware        

3. How can Apple grow its services enough?

      To be a “software” company, >50% of its profit need to stems from Services, which is:

• $5.50 average revenue per user/month (current: $2.75)
• $46B revenue added
• $18B profit added (margin after tax, interests,.. is assumed to be 40%)   
• Value $450B in 5 years (valuation multiple 25x of software companies)
• $280N discounted to today (10% discount rate)

It seems a “fair” estimation as Apple has a diverse Services portfolio: Apple Music, Apple TV+, Apple Arcade,… What about bundling all of them in one package, like Amazon Prime?

But, what will change the world again?

Most products go through a life cycle made up of four stages: introduction, growth, maturity and decline. Apple introduced the iPhone when the IPod was in its mature stage. Now IPhone is on its decline, what will be the successor? Maybe NOTHING

Apple has made a couple of endeavors already:

1. Current bets

• Apple Watch: Introduced in 2015, IPhone’s peak. For the last 4 years, Apple sold 20-25m annually, far from 200m IPhone
• Virtual-assistant market: HomePod, failed to compete with Alexa
• Airpod: successful, but low price lead to low revenue compared to IPhone

These streams only accounts for a minuscule fraction of Apple

2. Future products

• Project Titan (EVs): Apple acquired Drive.ai, working with Volkswagen, and hired formed Tesla chief engineer to work on this hidden project
• VR and AR. Apple is reportedly working on both and will launch Apple Glasses in 2022 pr 2024

Rough estimations for these projects: Valuation = Revenue * Revenue multiple

• EVs:  500,000 cars (10% of 2025 market) * $50,000 each= $25B Revenue *2.5 (Tesla multiple)= $63B in five years’ time
• AR/VR: 20% market share (same with IPhone now) *$80B total market (estimated by GS in 2025)= $16B *4.5x (industry multiple)= $72B in five years’ time

=> Total: $135B in five years -> $84B in 2019 (10% discount rate)

While this is still a very optimistic view for Apple in still-fledgling markets, it’s still far cry from the market valuation of $1.2B today.

1. #could CEO AWS in talks with Goldman Sachs CEO David Solomon  (GS)

What’s up?

Andy Jassy – CEO of AWS discussed how AI and cloud (my key takeaways) will shape our future and and his perspective to manage information security

What’s special about clouds?

Andy elaborated on two benefits of cloud to enterprises

• More flexible cost structure. With cloud, enterprises can turn the capital expense that laying out for servers and data centers into a variable expense (pay-as- you- go model). If they run on their own, their utilization rate is only 20%, a huge loss, right?
• Agility and speed to solve problems. This is the first-and-foremost reason that enterprises and government agencies switch to cloud service for their businesses. 

2. #insurance Prudentials has a new directions (Finimize)

What’s up?

Activist hedge fund Third Point has bought an almost-$2 billion stake in Prudential – and plans to use its newfound power to split up the insurer’s Asian and US businesses.

Why should I know?

Third Point -the hedge fund wants the insurer to separate its fast-growing Asian business from its small US business. It’s also pushing Prudential to move its costly head office away from the UK – a change that could save the business $260 million a year.

• Goal: Two more valuable separate insurers than one Prudential. Currently, Prudential has a lower valuation multiple than some of its Asian rivals
• Obstacles: There will be resistance elsewhere. The company has a large number of British investors who currently enjoy the London-listed stock’s hefty dividend.

3. #F&B Reviving the center aisle: An interview with Kellogg’s chief growth officer (McKinsey)

What’s up?

Monica McGurk, former McKinsey partner – Kellogg’s CGO since early 2019 revealed what drives plant-based protein market, the reason why big food manufacturer invests directly in it without acquiring star-ups and how retail landscape is evolving to accommodate the increasing demand.

Zooming out

• The market drivers: religious and cultural drivers, concerns about health, concerns about sustainability, government regulations, and so on.
• Reason why incumbents go after the opportunity organically: (1) They can be flexible with blended products and (2) The end-to-end value chain is really important to get right
• The movement of retail landscape: They are expanding the space they allocate to plant-based products, starting in the frozen case and now encroaching into the fresh-meat case.

1. #finance Morgan Stanley decided to diversify its business (Finimize)

What’s going on?

The company announced one $13B step of buying the online brokerage E*TRADE.

What does this mean?

• After the 2008 crisis, some of the riskier aspects of IB lost their lusters, lots of banks have diversified their businesses in search of stable revenues. Goldman Sachs- consumer banks, JP Morgan – payment and now Morgan Stanley – wealth management
• There is more for E*TRADE than just an eye-catching wealth management service: (1) It will reach 4,000 corporate customers from a business that Morgan Stanley’s already owned and (2) The deal will put E*TRADE’ investors in relief after the last turmoil. 

2. #banking HSBC is downsizing (Finimize)

What’s going on?

The global bank announced its plan to cut off 15% of its workforce (35,000 employees) in one of its biggest overhauls since the financial crisis.

Why should I know?

• HSBC is struggling. Its performance in Europe and America was poor, so this step will free the bank up to focus more on its Asia business (>50% revenue). However, it will need to confront with the ongoing protest and Coronavirus in this continent.
• So do other European banks. They are facing weak economic growth lately, not to mention ultra-low interest rates that have reduced their loan income. Some slashed jobs like HSBC, others go through mergers to curb their costs.

3. #tech How TikTok conquered Indian social media (Quartz)

What is it?

Three reasons why TikTok thrived in the  country that hosts the world’s second largest and fastest-growing internet user base: Great timing, great product and great image building strategy.

Zooming out?

• Great  timing. TikTok entered India in 2017, at the same time as Jio telecom company, who put “data charge” down aggressively, making it accessible for every Indian to go online.
• Great product. TikTok’s user interface is simple with (mostly) images and videos . It cleared the language barrier that other players like Facebook and Twitter have.
• Great image building strategy: (1) Run campaigns promoting education & equality, (2) Support public services and (3) Promote its commitment on data privacy.

Today I dedicate time to know more about the “recent” most valuable U.S. carmaker ever: Tesla

1. The history of Tesla in 5 minutes (Visual Capitalist)

2004: Elon Musk joined Tesla as an early investor, then brought simple but genius strategies:

• Focused on Li-on battery instead of “lead Acid” like the market leader: GM. 
• Started with high-margin sport cars, used the revenue to fund a more affordable car
• Achieved economy of scale, aimed for other applications of green electric

2008: Tesla nearly went bankrupt, Elon Musk became CEO and made drastic changes: fired labor, recalled on-sale cars and raised more money from public and government.

2010: Tesla went IPO, started to build gigafactories (2013) to reduce production cost of lithium-ion batteries, then it was able to build an electric car for the masses (2016)

Tesla is executing its mission: “accelerate the world’s transition to sustainable energy” by two fundamental goals:

• Create automatic factories, then boost economies of scale, produce more products like pick-up trucks and even public transports
• Change the energy paradigm: let homeowners use green energy for not only their cars but also other appliances 

2.  The York Times updates

What’s going on?

Tesla stock is going up 36% in two days. The article reviews what happened to Tesla since the beginning of 2020, then the contradict ideas on this growth

Zooming out

• What happened? Tesla’s shares closed at $887 on Tuesday, 36 percent growth compared to 2 days ago. Since the start of 2020, the price has more than doubled.
• Why enthusiastics? (1) Numbers is speaking: cost declined, sales increases, 

(2) Promising global expansion plan and (3) They have a lock on EV’s battery

• What are critics? (1) The company is having real problems producing cars on time, (2) Tesla does well when it enters new markets, often benefiting from customer tax incentives, but then struggles to keep sales growing at a fast rate, and (3) Lack of quality control.

However, these critics are driving up Tesla’s stock price with “short-squeeze” effect

3. Why Tesla’s expected to have lowest battery costs for years

In the first article, one reason that makes investors so enthusiastics on Tesla is “they have a lock on EV’s battery”. That’s right. Current average battery pack costs Tesla ~$156/kWh, which is $45-$50 cheaper than any other EV makers. Also, with constant investment and initiatives in electric battery research and development, this area will be Tesla’s competitive advantage in the far future.

1. #fashion Under Armour shares tanks as it is confronting many challenges a head (CNBC)

What’s going on?

Under Armour’s 2019 revenue fell short of investors expectation, then the company also announced the slower predicted 2020 sales. What is happening?

Zooming out

3 biggest challenges for Under Armour at this time:

• Growing competition from Nike, Lululemon and Adidas, which have created more fashionable workout gear to reach younger consumers
• Retailer’s problem: UA relies on retailers more than any other players. Retailers ’ve had to slash prices to better compete with Amazon’s rock-bottom prices. Then when shoppers get used to finding Under Armour on the discount racks, they’re far less likely to pay the full price
• The Coronavirus outbreak that dragged the revenue stream from international tourists

2. #tech How business apps help Chinese work from home (SCMP)

What’s going on?

In the midst of the Coronavirus outbreak, the majority of Chinese have to work from home. This lead to an upsurge demand for video conferencing platforms.

Why do I need to know?

• Dingtalk (owned by Alibaba): (1) Offered free use of its work-from-home features and (2) Added beauty filtesr to save users the trouble of putting on makeup to look good while working from home.
• WeChat Work (an offshoot of Tencent WeChat): (1) Increased the maximum number of attendants in video conferencing, (2) Added telemedicine feature for hospitals and (3) Added free online training for schools

3. #tech Samsung released S20 yesterday, then this is the summary of all the things you need to know (Forbes)

What’s going on?

“After a couple of years of other Android phone makers nipping at Samsung’s heels, the S20 lineup is the company’s statement for 2020 that it can still make the best Android phones” (TheVerge)

Zooming out

• Models and Pricing: S20 comes in three flavors: S20, S20+ and S20 Ultra
• Design: not much different from S10, except from Apple-like camera
• Photography and Video: This is the area in which Samsung raised the bar: ‘Pro-Grade’ camera configuration: a wide-angle, telephoto and ultra-wide-angle three camera configuration with an upgraded digital camera pipeline featuring new, larger sensors
• Connectivity: 5G is coming, then with T-mobile and Sprint merger, yeh it rocks
• Storage, Memory and Battery: The second mobile phone in the world with 12GB and even 16GB RAM in S20 Ultra (industry first)

1. #retail Mall owner Simon Property Group to buy rival Taubman Centers in $3.6 billion deal (CNBC)

What’s going on?

The news sent Taubman’s stock soaring up 52% and Simon shares were up less than 1% in premarket trading, after going down 24% over the past 12 months.

Why should I know?

• US mall operators are under increasing pressure to lure customers, who are more and more favor buying products online or at strip malls where it’s easy to dart in and out for purchases.
• Simon’s targets from the deal: enhancing the ability of Taubman to invest in innovative retail environments to create (1) exciting shopping and entertainment experiences for consumers, (2) immersive opportunities for retailers, and (3) substantial new job prospects for local communities.

2. #tech SoftBank’s Vision Fund 2 Fails To Meet Funding Goal (Pymnts)

What’s going on?

Yeh, the sequel of the successful Vision Fund 1 did not go through the financing round, and it is even expected to halve the targeted amounts $108B.

Why should I know?

• Investors are spooked by the failures of investments in WeWork, Uber, the latest closed Brandless, …then they are not willing to pony up new capital.
• There has been tension between SoftBank CEO Masayoshi Son, who wants completed fundraise and Vision Fund head Rajeev Misra, who favors one-off deals.
• Softbank are tackling this challenge by (1) Allowing investors have more influence on where money goes, (2) Create a hedge fund, (3) Relocate key executive from base office London to Abu Dhabi to gain more interest from key investor: Emirates.

3. #telecom T-Mobile and Sprint win lawsuit and will be allowed to merge (TheVerge)

What’s going on?

In January, the merger was disapproved with the concern of decreasing competition and higher price for customers. However, the challenge ended this Tuesday.

Zooming out

• For T-Mobile and Sprint: more capital and capacity, to finalize 5G network and compete as one player in the market with AT&T and Verizon
• For consumers: (1) Move from Sprint to T-Mobile (the buy side), (2) Receive a new phone plan with no higher price, as T-Mobile promised and (3) Get access to a larger 5G network with no latency.

Let’s discuss on Uber today

1. Uber is going profitable this year, which means one year sooner than expected (Finimize)

What’s going on?

Uber reported better-than-expected quarterly results last week, then also revealed that it will become profitable at the end of this year.

Zooming out

Early profitable prediction comes from two reasons”

• Revenue is rising: booking revenue grows 70% in UberEats and 30% overall
• Cost is reducing. The new CEO is doing what he promised: cut off marketing expenses, laid off workers and abandon unprofitable business (selling UberEats in India)

2. Looking deep in Uber’s earning report, and how Uber makes money what happened? (Investopedia)

First we need to know that, Rides is the bread-and-butter of Uber (76% revenue) and it is profitable (yeh, but still with generous accounting method). The peripheral two are Eats (16%) and Freights (7%) are growing precipitously but making losses, especially “Eats”. At the end of last year, Uber focused on minimizing loss from this branch.

Second, Uber free cash flow is improving, from the loss of -$1,070B (Q2,2019) and -$1,007B (Q3,2019) to -$270,2B (Q4,2019). With further cost cutting measures that the new CEO Dara Khosrowshahi pledged, the company is reaching the crucial milestone of positive FCF. 

3. The growing threats that could delay Uber’s profitability pathways

• California, a new gig work law is limiting Uber’s ability to classify its drivers as independent contractors. (Cnet)
• Uber loses its London license as regulator cites a ‘pattern of failures’ (TheVerge)
• Car-booking app Ola (from India) aims to overtake Uber in London. What I do not understand is that both of these companies are Softback-backed… (YahooFinance)

Even the self-driving car Waymo is a big threat (Investopedia)