Should you stay at a job for more than 2 years regardless?

Job hopping is a common topic among white-collar worker communities. How long should a person stay at a company to avoid being negatively judged? Somebody started that conversation on Twitter a few days ago and the originator’s position was that job hopping, which in this case means that no previous tenure lasted more than two years, was terrible. Kelsey Hightower, the principal engineer at Google Cloud, chimed in with his opinion and own experience: he never worked at a place for more than 2 years before Google!

Some of my coworkers have been working here for more than 25 years, but most of them are on the same organizational level as I am, despite the massive difference in tenure. Does that make them less respectable? No! I respect them a whole lot for their knowledge and especially their personality. But I won’t be surprised if head-hunters raise questions on why they made so little progress career-wise over the years.

Kelsey Hightower became the Principal Engineer for Google Cloud, even though he didn’t comply with the conventional wisdom that you need to spend more than two years at one job. Bozoma Saint John was the top Marketing Executive at two different companies (Uber and Endeavor) in three years before being appointed as Chief Marketing Officer at Netflix in August 2020. Her reign at Netflix ended 8 short months later, in March 2021. If even widely successful professionals hop from one job to another, why should younger workers be judged harshly for doing the same?

There are literally countless reasons why relationship between employees and employers can sour. For instance, you may get a good-paying job that promises great career growths yet demands long hours. You have no choice but to quit because you have a newborn and you need to spend more time at home with him or her. You love a company, but the organizational structure doesn’t enable career advancements anytime soon in the next 3 years. Or the work is great, but your manager exhibits grueling micro-management and doesn’t advocate for you.

Finding a job where you can stick around for years is like finding love. You need dumb luck. A lot of things can go wrong and they often go wrong. Plenty of factors need to be aligned for a professional relationship between a company and an employee to last long. But if luck plays a big role in this matter, we should all take that into consideration whenever assessing someone’s working history. Extend more empathy. Ask questions. Give the person a chance to explain the short tenure, why they left the very previous job and what they did despite staying for a short time.

Let’s say a normal person’s career is 45 years long. Staying for two years at a company means you commit 4.5% of that career time, not an insignificant amount. We only live one life. Our time on Earth is so valuable that we shouldn’t waste it to stat-pad a resume. If it’s a pain to go to work or there is no prospect for career advancements and there is nothing that you can do more about it, then leave. Nobody knows what will happen in the future. Perhaps, the new job will lead to disappointment and you will have to jump ships again. But leaving may also give you a chance to find a better employment where you feel content and happy. There is only one way to find out.

To close, I’d like share a famous drawing of Tim Urban.

Source: Tim Urban

Do as I do

When I started working 10 years ago, I joined a local advertising agency in Vietnam. I was an Account Executive, the lowest rung of the ladder. I worked under an Account Director named Quang. I didn’t know much about her. In fact, I never got a chance to get to know her better at the time since she left two weeks after I joined. But she taught me an important lesson. One time, we were preparing a pitch deck for a potential client. I was tasked with doing some market research and putting together a few slides. Upon review, she told me that my slides didn’t have smooth transition because images were off by a few pixels from one slide to another. What she wanted was that when the audience moved from one slide to the next, everything would stay in the same position and there would be no movement, no changes in size of the images. Only the content of the images would change. I was shocked at the attention to detail and more when I saw the final product and other pitch decks from her. She did what she asked of me, even though I didn’t know her credentials at the time.

Almost two years ago, my company recruited a new person. This guy didn’t have any experience managing a credit card portfolio at an issuer before. Somehow, he was trusted by the leadership team to manage the acquisition side of a portfolio worth millions of dollars. The first few months on the job, he kept preaching about data-driven decision-making. Whenever somebody proposed something, he challenged by asking what data supported this. To me, that was a legitimate question. You need to back up your hypothesis with concrete numbers. The thing is that the standard doesn’t seem applicable to him. He repeatedly makes suggestions and decisions by starting with “my guts say” or “my hunch is”. A case of “do as I say, not as I do when the track record is non-existent”.

Amazon is known for putting a lot of thoughts to ideas before execution, even if such ideas might be crazy and far-fetched. The objective is to make the initiator think through the idea as much as possible. In “Amazon Unbound”, Brad Stone described two stories that were contrary to that reputation. In one instance, Jeff Bezos, the founder and legendary former CEO of Amazon, proposed off the cuff that the company should launch food trucks that roll into neighborhood and sell steaks to residents. Internal teams were tasked to develop a plan for that idea and execute. After more than one year and numerous days and nights worth of efforts, the service went live. But it was unsuccessful and abandoned shortly.

In another example, Jeff Bezos wanted his team to create a “single cow” burger that can only be bought from Amazon. The idea is that this Amazon burger would have meat from only one cow whereas commercial burgers on the market sourced the meat from several. It was even designated as one of the high-priority goals, directly tracked by Bezos himself and his direct reports. After almost one year, the product launched with great customer feedback initially. But the unit economics of this product didn’t make sense, as feared. Consequently, it eventually fizzled out.

You see, the one common theme of the three stories above is that a person in power asks somebody down the food chain to do something. The difference lies in whether the authority has credentials and whether such authority sets examples. My first manager showed leadership by setting examples, even though I had no idea about her credentials. The guy at my company didn’t adhere to the standard he set despite non-existent track record. Jeff Bezos didn’t demand of him what he demanded of others, but he had a monumental track record of great decisions.

The lesson here to me is that leaders should lead by examples. Show the troop that the standard is applicable to everybody, not selectively only when the situation suits those in authority. That’s especially important when a previous track record doesn’t exist. An established successful credential will earn a leader some leeway, but he or she should not use up the rope and act like they are THE culture and the expectations don’t apply to them. Aldi wouldn’t be what it is today if executives drove fancy cars and splurged the company’s money on themselves while forcing employees to find ways to cut expenses. Warren Buffett wouldn’t command respect and following if he showed up on newspapers with a scandal every 6 months, would he?

The longer leaders lead by examples, the stronger a culture becomes.

Weekly reading – 20th August 2022

What I wrote last week

Did App Tracking Transparency Really Ruin Small Businesses?

Business

The HBO Max Rumor Mill Was Wrong — But There’s Still Pain to Come. The streaming business gets increasingly interesting yet complicated for me to wrap my head around. There are so many factors that go into the decision making and unfortunately, companies don’t divulge enough to investors. Anyway, it’s a good piece on HBO Max and the rumor that the new parent company will merge it and Discovery+.

Personalized coffees and prestige skincare: Consumers snap up premium products despite cost-of-living crisis. Who would have thought that consumers would prefer private label grocery brands to national names but be willing to spend on expensive coffee and pricey skincare products?

($) U.S. Approves Nearly All Tech Exports to China, Data Shows. Reading this article, I think the heart of this issue is communication failure. Other agencies don’t give effective input to the Commerce Department. Their objective is to facilitate trade between the US and other countries. China is rich enough that if the US restricts exports, other countries are willing to fill the void, especially when such exports are not 100% exclusive and rare. Also, there is no consensus on what should be the balance between not arming a worthy adversary and protecting the trade interests.

Dr Drew’s podcast episode with Morgan Housel. There are a lot of gems in this episode. One of them is the definition of rich vs wealthy. According to Morgan Housel, rich means that you are able to pay monthly bills on your own. Wealthy means that you set aside some capital for investments that you don’t have to use to pay for expenses. Once we are wealthy based on such a definition, what brings us misery is our greed and jealousy. I have to agree with him.

($) Should Disney Get Rid of ESPN? The Debate Returns. ESPN is an important asset of Disney as it holds broadcast rights to popular sports leagues such as NBA. ESPN+ is a crucial piece in the Disney+ puzzle and the bundle that Disney wants to sell to consumers. Therefore, I don’t see any reason why Disney should get rid of ESPN

Here’s why HBO Max is pulling dozens of films and TV series from the streaming platform. “While HBO Max already paid for the production of these shows, it’s still on the hook for residuals, including so-called back-end payments to cast, crew and writers, based on long-term viewership metrics. By removing these films and shows, especially the ones HBO Max created rather than licensed, executives can cut expenses immediately. Warner Bros. Discovery has promised at least $3 billion in synergies stemming from the merger of WarnerMedia and Discovery, announced in May. The content eliminations in total will save “tens of millions of dollars,” according to two people familiar with the matter, who asked not to be named because the finances are private.”

Other stuff I find interesting

Is dark chocolate really good for you? For those that are interested in the health benefits or potential risks of dark chocolate

The Day You Decided to Take the Leap. Building this blog was a leap to me several years ago. I was not a writer. I did not feel comfortable talking about myself or my thoughts. But I felt the urge. The urge of finding a medium through which I can improve myself while satisfying all the other requirements (school, work). I took that leap. Even though I haven’t had any financial returns (in fact it is an expense to maintain this blog), I find joy from this habit. It’s a sanctuary where I can be myself creatively and escape mentally at times. Those weren’t on the benefit list when I contemplated taking the leap.

We need to try harder to prevent the next pandemic. What do they always say? Failing to plan means planning to fail. As a country, it seems like we are planning to get hit again with another crushing pandemic. Our pandemic prevention budget went from an ambitious $65 billion to less than $3 billion, half of which will be dedicated to the modernization of CDC’s labs. You know how much we spend on military? $725 billion in 2020. It’s well documented that our generals didn’t think we need that much money on defense. Plus, an insider like the author of the book Kill Chain outlined all the monumental wasteful investments in defense. That we budget less than $3 billion on the prevention of pandemics, the latest of which took 1 million lives in America is baffling to me. Well, I mean pathetic.

Fresh Herbs & Spices in Vietnamese Food. Some of the herbs are not popular around here in the US or many countries. I am happy whenever I can introduce my country and culture to others

Ultimate list of Japanese Vegetable Cutting Techniques

Stats

In 2020, 16% of Blockbuster’s revenue ($ 800 million) came from fine fees

“38% of white adults say their parents or older relatives have given them or their family gifts or loans worth $10,000 or more over the course of their adult lives.”

Retail expenses make up 78% of a cup of coffee’s price

July 2022 was the world’s sixth-hottest July on record

One solar Watt in the US costs $2.77, about 4 times more expensive than in Australia

There were 43,000 traffic deaths in the US in 2021

5-10 hours of moderate physical activity or 2.5 to 5 hours of vigorous exercise will help lower the risk of premature mortality

Source: Supermarketnews

Did App Tracking Transparency Really Ruin Small Businesses?

Patrick McGee from Financial Times penned an article named “Small businesses count cost of Apple’s privacy changes“. The piece, as the title may already suggest, focuses on the premise that privacy changes from Apple, namely App Tracking Transparency (ATT), increase marketing expenses for small businesses. To make his case, the author cited a few companies that had to scale back, fire staff or even close shops due to rising marketing costs.

The alleged impact on SMBs’ customer acquisition expense has been one of the primary talking points of ATT critics. Make no mistakes here, I do think that ATT did make acquisitions more expensive, but it’s not right to say that Apple wrecks the advertising world or every company regardless of size. First of all, privacy and personal data belong to users. Facebook’s business model hinges on selling access to such data even though there was never explicit consent. There is no prohibitive policy on what Facebook does to user data captured on Facebook platforms. What Apple did is to simply give users an ability to allow or disallow Facebook to track them off-platforms. If it were wrong to let the end users have a voice in the use of their own data, then we would have a bigger problem at hands, wouldn’t we? In a world where personal freedom is considered sacred, why can’t we have a say in how our own data should be used or in whether we should be tracked on our own phone?

Facebook and other ads platforms were quick to use ATT as an excuse for their disappointing financial performance. However, as Nick Heer deftly pointed out, the timing of ATT and the reported numbers in the subsequent quarters indicate that there are other forces at play.

The actual figures tell a much murkier story. I do not think it is fair to suggest ATT does nothing, but its effect does not seem as pronounced as either its biggest supporters or its biggest naysayers suggest. Snap, for example, is a company that has no major revenue stream outside of ad placements in its smartphone apps. But in Q3 2021, a full quarter after ATT’s public debut, Snap posted year-over-year revenue growth of 57% overall. In North America, it reported 60% growth — higher than in any other region.

The following quarters all show overall revenue gains in North America just one percentage point below the company’s total growth. It is a pattern that more closely mimics the number of daily active users. Snap has only posted modest, single-digit year-over-year gains in North American users, but decent double-digit growth elsewhere. Meanwhile, its growth in the average revenue per user has been stronger in North America since ATT’s debut than anywhere else.

Meta’s business is the one everyone appears to be watching because two quarters this year have been rough. In its most recent, it reported its first ever year-over-year revenue decline, which dropped by about a billion dollars in Europe and about $600 million in the U.S. and Canada. That is alarming for the company, to be sure, but it still does not track with ATT causality for two reasons:

  • iOS is far more popular in the U.S. and Canada than it is in Europe, but Meta incurred a greater revenue decline — in absolute terms and, especially, in percentage terms — in Europe.
  • Meta was still posting year-over-year gains in both those regions until this most recent quarter, even though ATT rolled out over a year ago.

In the case of Facebook, this is a tough environment for their business. TikTok is insanely popular among younger users and shows no signs of abating. A few days ago, Pew Research reported that only 32% of teenagers aged 13 to 17 in the US used Facebook, a massive drop from 71% reported in 2015. Additionally, supply chain, inflation and the threat of an economic downturn are red-hot concerns for every business and they all prompt businesses to take a hard look at expenses, among which advertising is the easiest and most obvious choice. When there are such headwinds, it’s a little bit dishonest and misleading to say that ATT is the primary reason for financial mishaps.

Think about it this way. If regulators cracked down on the sales of dubious cryptocurrency or increased the scrutiny on this business, the issuers would say: well, your actions would affect companies that sold accessories like cold storage. How do you think about that argument? For me, it’s pretty similar to what we have regarding ATT. Businesses that directly or indirectly benefit from shady practices should know that eventually there will come a time when somebody refuses to look the other way.

I’ll let the CEO of one of the companies cited in the article reflect on how ATT impacted his business

Shelly Cove’s Schroeder has cut his digital ads budget to one-third what it was a month ago, hoping that returning customers will keep the business afloat. “It’s irresponsible to say ‘Apple killed my business’,” he said. “I’m self reflecting — I realised I was way too reliant on Facebook.”

I don’t believe that as a society, we need surveillance tracking which Facebook is engaged into, in order for small businesses to survive. As the owner of the biggest social media apps in the world with millions of daily active users, Facebook has enough at their disposal to compete. They can afford expensive PR campaigns to repair their image and generate goodwill. These will lead to more trust from users and ultimately permission to track the them across apps. Moreover, the executives already thought about changing their business models. They just decided not to, out of concern that it would hurt the bottom line. Well, perhaps the recent onslaught on the stock may change their minds.

In this debate, I support Apple, but I am under no illusion that the company is an angel. The company is driven by the top and bottom line too. Though Apple has their own reasons why they do certain things and I believe them in many cases, I also believe that if they could curtail their greed a bit and do things a little bit differently, there wouldn’t be as many criticisms leveled at them as what we see now. Examples are:

  • Invest more in app reviews. Some developers complain about the time-consuming aspect of the review process and how it can be used to coerce developers into paying the company more
  • Be more discreet about the ads business. The launch of ATT and the ads business were pitifully close to each other. It’s no surprise that folks lament that Apple cares more about its financials, than users
  • Stop pushing their own services at every chance. Even I am annoyed that Apple advertises their own services on the Settings or Profile page on my iPhone. As the most followed brand in the world, with the financial resources at disposal, I am sure Apple won’t have to worry too much about consumers not knowing their services

In short, I am in favor of ATT and giving consumers more say in how they are tracked. Having said that, I do understand why some folks are frustrated with Apple and doubt their motive. I am sorry that some small businesses got caught up in this whole situation. But I have no empathy for Facebook, even the slightest.

Weekly reading – 13th August 2022

What I wrote last week

PayPal Q2 FY2022 Results

Business

Monzo growth. A fascinating story on the early days of Monzo, a successful fintech company from the UK

The Wolf in Cashmere’s Conglomerate. A fantastic podcast episode on LVMH and the empire that they have built

($) How One Grocery Chain in Pennsylvania Is Preparing for a Downturn. An interesting case study of how a low-margin business in a cut-throat industry is responding to the macroeconomic challenges. I wonder if these companies will keep lessons learned during this period long in the future. You know what they say, never let a crisis go to waste

Deckers Brands: “The Ugliest Shoes of All Time”

Multicultural Grocers Drive Sales by Catering to Increasingly Diverse America. It’s imperative for grocers to closely understand the social fabric of the areas where they operate. Folks from different backgrounds have different preferences. Grocers who make the best use of their footprint, aka maximize revenue per square foot, must appeal to as many customers and sell as many goods as possible. This will require efforts, focus and investments in infrastructure and tools. But there is no other choice in the ever highly fragmented and competitive world of grocery

Ad Tech Revenue Statements Indicate Unclear Effects of App Tracking Transparency. A very balanced and reasonable take on ATT. If you are interested, here is my take on ATT

Landmark “Self-Dealing” Arbitration Found Netflix In “Violation” Of WGA Contracts. It’s interesting to learn about contracts and compensation schemes in Hollywood

Other stuff I find interesting

China’s southern tech hub Shenzhen becomes first city on mainland to regulate fully autonomous, driverless cars on some roads. The Chinese may have autonomous vehicles on the streets before we do. I am not talking about a few vehicles or test drives. This is about a large scale adoption of autonomous vehicles. Technology alone is not enough. There are important questions that must be answered. For instance, who will be liable for damages in accidents? Are there regulations for that? Shenzhen’s regulations already took place; something that is not yet available here in the US, to my best knowledge. For me, that’s an encouraging sign and a big step towards the future that many envision.

Prison Money Diaries: What People Really Make (and Spend) Behind Bars. I felt angry after reading this piece. Even though violators of the laws should pay for their transgressions, as one of the most developed and richest countries in the world, we should build prisons that offer sufficient living environments to inmates. According to inmates, everything in prisons is pricey and they get increasingly more expensive over time. To buy goods, inmates have to work, although the pay is embarrassingly low. One receives $7 for 8 hours of work. And he said this: “If I work two sessions, that’s $6.68 per day. Almost nothing else in the Department of Corrections pays like this. Plus, during Covid, they gave us hazard pay — $2 extra per day. Last July, I made $334. The two primary things I spend on are: my phone credit account and commissary store purchases. The food at the chow hall is terrible and of poor quality — it’s not fit for a dog, seriously.” Google the prisons in Finland or Norway and see how badly we treat our fellow citizens.

Global Supply Chains of EV Batteries. A long yet excellent primer on the global supply chain of EV batteries. As everything around us requires batteries, those who hold power in this supply chain have tremendous advantages in the future

iOS Privacy: Instagram and Facebook can track anything you do on any website in their in-app browser. This is exactly why I support Apple in disabling cross-app tracking. Facebook and other advertisers have all the motivation in the world to collect data on us. They are financially incentivized to do so. It’s up to us and companies like Apple to tell them NO

No Great Stagnation in Guinness. Guinness is one of my go-to beers at a pub. It’s great to read a bit about how unique and quirky the business is

Europe’s remote, lost-in-time villages. “Life in Târnava Mare has barely changed in centuries, offering a precious insight into the age-old traditions that are still going strong in its Saxon villages.”

Stats

35% of Gen Z adults in the US don’t trust colleges and universities in the country. Wow!

Adobe’s Digital Price Index found that online prices dipped down 1% year over year in July

Organic fresh produce tends to be twice as expensive as conventional produce. However, conventional fresh produce had a bigger price hike recently

Source: Supermarketnews

Source: IEA

PayPal Q2 FY2022 Results

Last week, PayPal announced its Q2 FY2022 results, its forecasts and some important personnel changes. Here are the headlines:

  • Net revenue hit $6.8 billion, a 9% YoY growth
  • International revenue declined by 1.7%, to $2.9 billion, while US revenue was $3.8 billion, a 19% growth YoY
  • Operating cash flow and free cash flow grew to $1.5 billion and $1.3 billion respectively, meaning that FCF margin is 19%
  • Total Payment Volume increased by 9% to $340 billion
  • Total payment transactions of 5.5 billion
  • US TPV grew 16%, to $219 billion, while International TPV and Cross Border TPV decreased by 1.6% and 11.8% respectively
  • Venmo recorded $61 billion in TPV, an increase of 5.2%, and 90 million active accounts
  • Total active accounts went flat sequentially at 429 million with 35 million active merchants
  • While the company welcomed a new CFO, it’s now looking for a replacement for their CPO, who is retiring at the end of the year
  • Cost-saving initiatives are expected to save the company $900 million by the end of 2022 and $1.3 billion next year
  • $15 billion in share buybacks was authorized, $4 billion of which will be realized by the end of 2022
  • PayPal expects operating margin expansion in FY2023

Despite the tough macro challenges and fierce competition, PayPal’s TPV increased by 9%, on top of the 30% and 40% YoY growth in the last two years. That’s pretty solid because Visa grew payment volume in the same quarter by 12%, even with its duopoly market power. The divorce from eBay is entering the final stages as the famed marketplace now makes up only 3% of PayPal’s TPV and is projected to have negligible impact in the future. Losing a household name like eBay isn’t great, but because the partnership was exclusive, PayPal couldn’t work with any other retailers or marketplaces. Hence, the separation paved the way for deals like the one with Shopify or Amazon, and would benefit PayPal more in the long term.

Another bright spot is the US market. PayPal’s home soil saw a 16% increase in TPV and a 19% expansion in revenue. Considering that the US is home to other payment alternatives, including some fierce direct competitors, those US numbers showed resilience and a formidable market presence of PayPal. Because the company barely added new active accounts, given the lack of full disclosures, my guess is that PayPal managed to increase usage among existing users.

Venmo TPV
Figure 1 – Venmo TPV

Among the factors that contribute to the domestic success, I want to call out Venmo. Popular among young consumers, Venmo boasts 90 million active users, double from what it had three years ago. In the same time frame (from Q2 2019 to Q2 2022), Venmo TPV grew by 150% from $24 billion to $61 billion. Despite this growth, Venmo still has a lot of grow to monetize. The three main levers are debit card, credit card and the partnership with Amazon. While I suspect that PayPal will have to make some financial concessions to be on Amazon’s marketplace, this will undoubtedly help grow both revenue and margin. Meanwhile, the management team has high hopes for what the Venmo debit and credit card can bring onto the table. If PayPal can monetize Venmo more, the company will become so much more secure and attractive in the eyes of investors. In case you forgot, despite the massive scale of adoption, Venmo is still only available in the US.

Gabrielle Rabinovitch

I’d also point out the card strategies for Venmo are important, as well. The debit and credit cards continue to grow their volumes and those are really important for habituation. They reinforce all the in-wallet spend with offline spend, as well.

Dan Schulman

Yes, I totally agree with that. If you look at Cash App, their big growth is off of their debit card. We have a lot of room in our debit card and credit card to grow too.

Source: PayPal’s Sell-Side Analyst Conference

Moreover, I am very pleased with the switch of focus onto increasing efficiency. I used to receive a bunch of promotional offers from PayPal. $5 here, $10 there for low-impact activities. Now, the company is willing to let go low-engagement customers and focus marketing dollars on driving usage from active users. Efficiency is also apparent in the product development side as well. Although stock trading was on the plan last year, PayPal decided to put a halt on its development. The push for in-store QR code is now replaced by efforts to promote card usage. These decisions obviously led to surplus in headcount and dismissals, where necessary. Due to its enormous scale, PayPal managed to negotiate more favorable contract terms with suppliers. The management team believes that these efforts will drive ROI and yield higher results for the organization. Concretely, they are estimated to bring $900 million in cost savings for the rest of FY2022 and $1.3 billion next year.

These cost savings are likely the main reason why the management forecasts operating margin expansion next year. Low-margin businesses such as BNPL, Venmo and Braintree are expected to grow in the near future. It’s unclear to me, reading their reports, where the margin will come from the revenue side of things. Hence, the gains must come from being a leaner organization with reduced expenses.

On the other hand, it’s not all smooth and rosy with PayPal. I am concerned about the uncertainty that changes at the top level will bring. They have a brand new CFO, who was chosen among at least 14 candidates. By next year, they will have a new Chief Product Officer. These changes may bring about new ideas and positive results, but they may also delay the progress as new hires need time to acclimate themselves to the new work settings.

PayPal's Revenue Growth
Figure 2 – PayPal’s Revenue Growth

While it’s good that a business wants to be laser-focused and mindful of expenses, it remains to be seen whether PayPal is doing too much. After riding to new heights amidst Covid, PayPal’s stock got clobbered, down from more than $300 to $90, due to abandoned forecasts and slowed growth. Then, the narrative switched to higher efficiency and more focus. I get it. The leadership wanted to present a nice story to investors to stop the bleeding. They may even genuinely want to set the company on a better course for the future. But they also have a history of botched plans and forecasts. Who is to say that they are not being too aggressive at the moment? What if the cost cuts hurt the business in the process? We already have three consecutive quarters of decline in International. PayPal competes on multiple fronts and their competitors are fierce. Can they right-size their capital allocation to avoid disasters?

Overall, this is not a disastrous quarter. There are some bright spots, including Venmo, solid growth overall, the US market, the cost-cutting initiatives (at least for now) and the buybacks. However, there are also things that give me pause for concern. As bullish as I want to be on the company’s outlook, I’ll wait for another quarter or two so that by then some of my concerns will be hopefully eased.

Appendix

PayPal's Active Accounts & Active Merchant Accounts
Figure 3 – PayPal’s Active Accounts & Active Merchant Accounts
PayPal's Transactions Per Active Account
Figure 4 – PayPal’s Transactions Per Active Account
PayPal's P2P TPV
Figure 5 – PayPal’s P2P TPV

Weekly reading – 6th August 2022

What I wrote last week

Apple Q3 FY2022 Earnings

AWS, what a business!

Even with a loss of $2.6 billion, Uber had a great quarter

Business

($) America’s New Energy Crisis. A worrying report on the state of the energy supply in the US. Demand continues rise and unfortunately, so do oil prices. Projects to produce green alternatives take a long time to be completed and integrated into the national grid. “As U.S. power supplies tighten, developers are struggling to build these projects quickly enough to offset closures of older plants, in part because of supply-chain snarls. Another reason: It takes longer to approve their connections to the existing electricity grid. Such new requests neared 3,500 last year compared with roughly 1,000 in 2015, according to research from the Lawrence Berkeley National Laboratory. Typical time needed to complete technical studies needed for that grid approval is now more than three years, up from less than two in 2015. One renewable-energy developer, Recurrent Energy, filed more than 20 of these grid-connection requests last year in California, a state that needs more clean power to replace several gas-fired power plants as well as a nuclear plant slated for retirement in the coming years. It took the company seven years to get approval and construct a separate battery storage project in that state.”

($) JPMorgan Is Building a Giant Travel Agency. “It bought a booking system, a restaurant review company and a luxury travel agent. It is building its own airport lounges and a force of thousands of travel agents. A new website will launch in the coming months. JPMorgan estimates that its customers account for one of every three dollars spent on leisure travel in the U.S., though those customers book only a tiny amount on the Ultimate Rewards website. With the new offerings, JPMorgan executives believe the bank could capture $15 billion in bookings in 2025, five times what it handled before the recent buildup. That would make it the third-biggest travel agent in the country, based on 2021 volumes, according to industry publication Travel Weekly. The plan has risks. Travel-rewards giveaways have proved expensive for JPMorgan and other banks, and they haven’t always led to the lasting relationships the banks hoped for. JPMorgan also has important corporate partnerships with airlines and hotels that expect the bank to send customers their way. Some of those partners have already complained about the success of Sapphire taking away customers from their cards. The bank is already seeing early signs of that luxury demand. The average price Chase customers are paying for hotels is more than double the industry average, the bank said.”

From legroom to airfare: How JetBlue’s takeover of Spirit could change air travel. If you don’t know how expensive it is to travel domestically in the US, take a trip to Europe and try to fly within the continent. I was really shocked the first time I booked a domestic flight here. I am still shocked sometimes nowadays. There is competition between major airlines, but prices are still high because there is no regulatory pressure on a handful of airlines that fly customers. I don’t know if this merger will help anything. Having another major may drive air fares down. But it could as well join the fun and charge a lot.

US, Japan reaching for a 2-nm chip breakthrough. The race to secure semiconductor supply for the future amidst the political threat from China is more intense than ever. I don’t think China, regardless of whether Xi will be in charge, will give up Taiwan, home to TSMC. It’s not only because TSMC is THE fab of the most advanced chips in the world, but it’s also because China believes Taiwan belongs to them and has no rights to independence. Any nation’s leader will not fulfill their duty if they don’t think about hedging this risk. US and Japan are doing the right thing here. Better late than never.

Ad tracking rules could become much stricter in Europe; Apple’s ATT vindicated. Companies that rely on ads dollars should really pay attention. “This is the single, most important, unambiguous interpretation of GDPR so far. It backs up the approach of Apple.

($) Netflix Is Scrambling to Learn the Ad Business It Long Disdained. “One of Netflix’s goals was to secure a big “minimum guarantee”—a promise that it would get a large influx of ad revenue to limit its financial risk, say people familiar with the discussions. Netflix also hunted for a senior leader with advertising expertise, mindful that it knew little about the business of selling ads. The company approached at least two top Comcast executives for a senior role while the partnership negotiations were continuing with their employer, angering the top brass at the cable giant, some of the people said. Mr. Hastings has set lofty financial ambitions for the ad business. He and other company executives have told investors and ad industry executives privately in recent months that Netflix will eventually be able to charge advertisers about $80 for every 1,000 views of an ad by helping them target specific audience segments, people familiar with the discussions said. That would put Netflix among the most expensive destinations for ads, alongside top NFL television programming. Creating an advertising-supported tier isn’t the only about-face the company is making in its quest to revive growth. After years of treating password-sharing by customers as a marginal problem—Mr. Hastings said in 2016 he loved the practice—Netflix plans to begin charging households a sharing fee sometime in 2023.

Chip Makers Have a Message for Car Makers: Your Turn to Pay. The ever-growing demand for chips turns the negotiation tables around. Chip manufacturers now command more bargaining power than they ever have. Car producers have no choice but either put up or shut up. As every car company is now racing to bring electric vehicles and trucks to the market, they won’t shut up.

Other stuff I find interesting

Some wonderful photos of my country taken by an award-winning photographer

US regulators will certify first small nuclear reactor design. I understand that there are concerns over safety and nuclear waste, but nuclear is perhaps the best tool at our disposal to generate clean energy at scale to accommodate the ever increasing demand. I wonder how and/or if this step would help increase the use of nuclear power

Who Is Collecting Data from Your Car? An eye-opening read on the vehicle data world

Tails, You Win. Now that I think about it. Love is just pure dumb luck. The person that you fall in love with happen to love you back. If you manage to fall in love and spend the rest of your life with the same person, creating happy moments and sharing wonderful children and grandchildren, that’s as taily as tails get.

Biden wants an industrial renaissance. He can’t do it without immigration reform. As an immigrant myself, I can tell you that if I had known what I do now, I would not have come to the US. The immigration process here is very talent-unfriendly. The country pours billions of investments into technology, yet the immigration system is antiquated and undoes all the good that such investments bring. To secure the future of the US, the government needs to massively and quickly reform its immigration

Hidden menace: Massive methane leaks speed up climate change. It’s horrifying to learn that we are pumping an incredible amount of this polluter into the air while knowing that it can speed up climate change significantly.

The U.S. made a breakthrough battery discovery — then gave the technology to China. I could hardly believe what I read. A promising battery technology took a dozen US scientists, 6 years and millions of taxpayers’ money to be developed. Then, the Department of Energy transferred the technology to a company based in China where it is currently further developed and produced

Stats

HALF of the nation’s clean power is generated by nuclear energy

Gen Z has led all generations in terms of 30-59 day credit card delinquency this year, according to Vantage Score

OnlyFans has 200 million registered users

Globally, only 9% of plastic waste is recycled while 22% is mismanaged

Even with a loss of $2.6 billion, Uber had a great quarter

Uber lost $2.6 billion in the last 90 days!

However, that headline-grabbing figure doesn’t fully tell the whole picture. The fact that Uber stocks went up by more than 10% after hours indicates investors were pleased with what they saw and heard from management. There are reasons to that.

Total Gross Bookings (GB) grew by 33% amidst a challenging environment when inflation was the highest in decades. Revenue went up by 105%, although that included contribution from the acquisition of Transplace. Without the acquisition, my estimate is that Revenue would still be up by at least 30-40%. The number of monthly active platform users hit an all-time high record of 122 million while the number of trips increased by 24% to 1.87 billion, just a tad shy of the all-time record of 1.9 billion set in Q4 FY2019, right before Covid.

More importantly, Uber became a free cash flow generator for the first time in history. All three main businesses, including Mobility, Delivery and Freight, were all profitable on an adjusted-EBITDA basis. I understand that some folks have a bone to pick with the adjusted-EBITDA numbers, but Free Cash Flow doesn’t lie and it indicates Uber is on the right track. The giant net loss quoted above included $1.7 billion of unrealized losses related to Uber investments in Zomato, Aurora and Grab, as well as $470 million in stock-based compensation expense.

Back in my review of Uber Q3 FY2021 earnings, I wrote that Covid created a golden opportunity to transform itself. The latest results were further proof of that. Before Covid, Uber was all about Mobility, both in terms of gross bookings and revenue. The pandemic hit Mobility hard, but gave Delivery a great momentum that has not been relinquished since. In the last quarter, both segments notched the second-highest gross bookings in history in Q2 FY2022 while each recorded the highest revenue ever, albeit with some benefits from the model changes in some markets. Without Covid, I doubt that Uber could turbocharge its Delivery business that quickly. Now, instead of relying on Mobility, Uber has two weapons that complement each other well.

Uber Mobility and Delivery's Gross Bookings and Revenue
Figure 1 – Mobility and Delivery’s Gross Bookings and Revenue
Uber Delivery Gross Bookings and Basket Size
Figure 2 – Uber Delivery Gross Bookings and Basket Size

In A look at Uber after it acquired Postmates and Drizly, I wrote:

The way I think about Uber as a business is that it connects end users, partners and drivers altogether. The more end users Uber can present to its partners, the more partners it is likely going to sign. In turn, that means Uber’s end users can have a bigger selection at their finger tips, raising Uber’s value proposition. On the other hand, a bigger end-user pool helps the company sign up drivers. Drivers have limited resources in their vehicles and time, as even the most dedicated drivers can’t drive for more than 24 hours a day. Nobody wants to drive around needlessly all day without getting paid while having to pay for vehicle expenses and gas. As a result, the more business opportunity Uber can bring to drivers, helping them better leverage their time and resources, the more drivers will sign up.

The rise of Delivery does wonders for Uber as it can bring more businesses to drivers. At times, when there is no rider to transport, couriers can deliver food or other items to better utilize the one resource that we can’t get back: time! Now that consumers are back on the road to office and travel, drivers have more opportunity to earn. On the call, the executives bragged that drivers in the US earned $30 per hour on average. That’s pretty competitive. Thanks to its scale, Uber believes it is best positioned to attract and retain drivers. The company has consistently talked about being more efficient with their operations and relying less on incentives. Such self-sustained growth is reflected by the fact that Delivery has had positive adjusted EBITDA for three quarters in a row.

Uber Delivery Net Revenue and Adjusted EBITDA
Figure 3 – Uber Delivery Net Revenue and Adjusted EBITDA

Uber is a multi-sided network, dealing with consumers, drivers and merchants. They co-exist together and each cannot without the other two. Retaining drivers is crucial to retaining merchants and riders. In addition to the $30+ per hour income, Uber recently introduced some new features to support drivers. Soon, for the first time ever, drivers will be able to see in advance where the trip will end and how much they will earn for that trip. Drivers can compare multiple trips at once and decide what works best for them. Then, Uber will offer drivers a chance to earn 2-6% cash back at gas stations with Uber Pro Card. Gas is arguably one of the biggest expenses for drivers. The cash back is a nice gesture that will go a long way to retain this important class of stakeholders.

When delivery companies such as Getir or GoPuff are forced to shrink operations, the scale that Uber is operating on provides a great deal of advantages. If they can maintain that scale, other competitors will find it highly challenging to take share from Uber without near-term damage to profitability. And in case you haven’t noticed, profitability and sustainable growth is the tune that Wall Street wants companies to sing, not growth at all cost.

Sustainable growth is one area where Uber has been much better since Dara became CEO. Back in 2020, in Uber’s latest chess moves, I wrote about the downside of Uber operating in many markets and praised Uber’s effort to withdraw from countries where it was not competitive. Yesterday, in a conversation with Bloomberg, Dara reiterated that stance by saying that Uber is still operating Mobility in India, but will shut down Delivery because they don’t think they can be the market leader. This type of strategic thinking and discipline can only benefit a company like Uber in the eyes of investors.

Moving forward, there are several levers that Uber can pull to stimulate growth and profitability. The first is Uber One. As of Q2 FY2022, Uber One has 10 million paid subscribers. That’s a respectable figure, compared to the 6 million reported in Q3 FY2021. However, considering that the company has 122 million monthly active platform customers, Uber One’s penetration is less than 10%. Once that number increases, it will boost the company’s top and bottom line meaningfully.

The second lever is advertising. Every company wants those high-margin ads dollars and Uber is no exception. Since its launch in Q3 2020, advertising on Uber has been used by 27% of all active Delivery merchants. Though Uber should be mindful of how a litany of ads can adversely affect customer experience, I don’t see any reason why the share of active advertising merchants cannot reach 40%.

Uber Active Delivery Merchants and Share of Active Advertising Merchants
Figure 4 – Uber Active Delivery Merchants and Share of Active Advertising Merchants

Then, there are New Verticals in Delivery (groceries and non-food items) and Uber 4 Business. Combined, these two levers make up less than 10% of Uber’s Gross Bookings, indicating that there is room to grow in the future. The management team mentioned that they are still hiring for Uber 4 Business, a strong signal that they consider it important to the company’s future. New Verticals, like the partnership with Albertsons, plays a key role in increasing the utility of the Uber apps to consumers. Here is what Uber had to say:

As far as new verticals go, we’re quite satisfied in terms of the growth of that team. It’s at about a $4.5 billion run rate in terms of gross bookings. We are investing in this business. And despite investing in this business and it’s in the hundreds of millions of dollars, you can see the profitability that we’ve been able to drive with the delivery business overall. It’s really because of the scale and efficiency that we’re bringing to bear.

What we’re seeing with new verticals customers is that Uber Eats customers who also order from new verticals tend to stay with us, tend to have higher frequency. And it’s really a part of the power of the platform that we’re having. If you ride with us, if you eat with us, if you drink with us, if you order groceries with us, we just become an everyday part of your life. You top that off with the membership program. And we think we have a relationship with customers that really can’t be duplicated in industry on a global basis. That’s what the strategy is all about and we’re quite optimistic about our progress to-date

Source: Alphastreet

Overall, I am pleased with what Uber reported this quarter. Even though the stock is still down significantly, the business is in a stronger position now than it was before and during Covid. That is not to say that the company can afford to take its foot off the gas pedal and to lose discipline. What is gained today will be easily lost in 90 days. The macro economic situations remain chaotic and unpredictable. Consumers may have to cut back on non-essential spending and Uber, whether they like it or not, often falls into that category. Regulatory threats are always there. Formidable rivals such as DoorDash and Instacart are still competing hard. Hence, they need to stay focused and relentlessly execute. But with this result, I think at least they gained some investors’ confidence, including mine.

AWS – What a business!

AWS, AWS, AWS

The importance of AWS to Amazon cannot be overstated.

Covid-19 was a blessing to Amazon between Q2 FY2020 and Q2 FY2021, boosting its top line significantly. As the economies opened up, folks got back to the stores and the YoY comparisons were clearly tough, growth became so much harder to find. North America’s 10% YoY growth this quarter is the lowest I have seen in the last five years. International took a 12% plunge after growing 38% and 36% in the same period in 2020 and 2021 respectively. Both segments reported negative operating margin, the third quarter in a row.

Amazon's Business Segment YoY Growth
Figure 1 – Amazon’s Business Segment YoY Growth

Meanwhile, this quarter saw AWS take home $19.7 billion in revenue, brining the turnover in the last twelve months to a tad more than $72 billion. Despite a rapid increase in scale, AWS still clocked in 30% YoY consistently in the last year and a half! Although the business only made up 16% of the parent company’s revenue, AWS was responsible for all of Amazon’s operating margin when North America and International were in the red. Traditionally, AWS has been the engine powering Amazon’s profitability. Now, it carries the company’s revenue growth as well.

For good measure, AWS’s potential is as good as its current numbers. While quarterly revenue is now almost at $20 billion, AWS has long-term commitments (from contracts of at least one year in length) of more than $100 billion. These commitments have never grown less than 48% YoY since they were first reported back in 2018. If we compare this unearned revenue to the rolling last twelve month sales of AWS, the ratio grew from 75% in Q4 FY2018 to 139% currently. It means that AWS has the last twelve month sales and 39% on top of that in unearned revenue!

AWS Quarterly Revenue & Unearned Revenue Commitments
Figure 2 – AWS Quarterly Revenue & Unearned Revenue Commitments

Amazon management knows that they have a gem in possession and they are spending money to keep that gem. Let’s look at it this way. AWS sales in the last twelve months totaled $72 billion. The company is trading at $1.25 trillion today. The market capitalization is about 17.4 LTM sales. If we project the next twelve months’ sales is about $83 billion, the multiple is 15. Some argue that means we get the Retail business for free and like it or not, they may have a point!

In 2021, the company splashed $24 billion on technology infrastructure which includes support for AWS. They planned to increase total capital investments in 2022 and more than half would go to infrastructure. It’s not certain that more CAPEX would mean more growth or revenue. But it’s a positive sign that a company is willing to open its checkbook to deepen the moat of its star business.

Andy Jassy, the current CEO of Amazon and the man credited with the success of AWS, said previously that Amazon actually stumbled upon this amazing business. At the beginning of the 2000s, after working diligently to improve the internal tools that supported the eCommerce site, Amazon realized that they were really good at running infrastructure services. It took three more years of planning and preparation after such realization before the company launched what is now a highly important and lucrative business in AWS. What a serendipitous discovery!

Apple Q3 FY2022 Earnings

A well-managed company

Let’s go over the headline numbers first. Apple had a record Q3 result with almost $83 billion in revenue, a 2% YoY increase on the back of a 36% growth last year. The 1% decline in product revenue was more than offset by the 12% growth in Services, which hit almost $20 billion in sales. The company’s gross margin profile this quarter stayed relatively similar to the historical trends: 36% for Products, 71% for Services and 43% for the whole company. Operating margin was 28%, down 200 basis points YoY, while net margin dropped to 23% from 27% in Q3 last year.

Figure 1 – Apple’s revenue and YoY growth

Make no mistakes: this was a tough quarter. All companies had to deal with significant challenges such as the new variant of Covid-19, unfavorable foreign exchange headwind, supply chain constraints, the war in Ukraine and macroeconomic concerns across the globe. Big retailers like Walmart or Target reported higher expenses and lower profit guidance. Meta had the first revenue decline in history while incurring more operational expenses. Even the great Amazon saw a 4% decline in revenue from their famous eCommerce segment.

Figure 2 – Product, Service & Overall Gross Margin

Yet, we see Apple increase their top line, albeit modestly. Unfavorable foreign exchange rates were estimated to have a 300 basis point impact. Otherwise, the revenue growth would have been higher. On the other side of the equation, Apple stayed disciplined with their costs. Gross margin was relatively intact while the operating expenses (R&D and SG&A) were under controlled and rose only modestly. We all know how hard it is personally to stay disciplined with living expenses when disposable income grows. Hence, given the balance sheet that Apple has, they deserve praise for not wasting shareholders’ money on unnecessary acquisitions or ludicrous ventures.

For the next quarter, the company expected a 600 basis point impact from foreign exchange, better-than-this-quarter supply chain status and an acceleration in revenue growth. The positive note on revenue forecast is dire contrast with a somber tone from other companies, especially when we take into the size of Apple and the breadth of its operations across the world. Apple used to be a design firm known for the willingness to spend on products and services regardless of the cost. Tim Cook took over and steered the company towards a financially and operationally disciplined entity. It pays off handsomely.

iPhone and the resilient brand

Commentary from the management detailed how strong customer loyalty was towards the Apple brand. iPhone customer satisfaction stood at 98% and there were record switchers from other operating systems to iOS. Installed base for Mac, iPad and Wearables all reached a new all-time high. Over half of the new customers in the quarter were new to these products.

Apple products don’t exactly fall into the necessity category due to their high prices. As inflation hits consumers hard every country and supply chain issues still wreck multiple industries, it’s nothing short of impressive to see a 3% YoY increase in iPhone sales. That is robust proof of how dominant and what a great brand iPhone is. And we all know that once a consumer enters the Apple ecosystem, they are likely to buy more products and services. Therefore, investors can be more confident in the strength of Apple’s business amidst economic downturns, but there is NO guarantee that will happen.

Figure 3 – Apple Business Segments’ YoY Growth

Greater China

China still made up 18% of the total company, pretty much in line with the historical figures for Q3. According to Apple, China’s Services revenue grew faster than the company average of 24% and hit an all-time June quarter record. The growth in Services revenue was offset by the lower demand of products in China, due to the lockdown, albeit a push late in June. China’s operating margin dropped from 43% to 38%. Because Services, which has a higher margin, grew this quarter, the drop in operating margin is likely attributed to higher SG&A. Traditionally, Q4 is the weakest quarter for China, both in revenue and operating margin. I expect the revenue share and operating margin to drop to 17% and 34% respectively. It’d be great to have an analyst ask the management for more color on China in Q4.

Figure 4 – Apple’s Revenue broken down by geographic areas
Figure 5 – Geographic areas’ operating margin

Services

Per Apple:

Our Services set a June quarter revenue record of $19.6 billion, up 12% over a year ago, with all-time revenue records in the Americas and the rest of Asia Pacific and June quarter records in Europe and Greater China. We also achieved June quarter revenue records in each major Services category, including all-time revenue records for Music, Cloud Services, Apple Care, and Payment Services.

Source: Fool.com

Where are the critics of Apple’s growing Services? The pivot to Services a few years ago raised eyebrows, but eventually proved extremely fruitful and important to Apple. Not only does Services make customer experience on Apple’s devices better, but it also aids the company’s profitability with 70% gross margin. Since 2019, Services is the only part of the business that has had no down quarter and as of this quarter, made up 24% of the company’s top line. For reference, in terms of 4-quarter rolling average revenue, Apple’s Services is already bigger than Amazon’s AWS.

The number of paid subscriptions rose steadily every quarter over the past 4 years and hit the 860-million mark. At this rate, we’ll cross the 1-billion mark in the next 12 months. As the paid subscription population is highly correlated with Services revenue, the more subscriptions there are, the higher Services revenue grows.

Figure 6 – Apple’s paid subscription and Services revenue

Additionally, Apple’s commentary on the drivers of Services is very interesting. Apparently, the major contributors are Cloud, Apple Care, Payment Services and Music. The first three have high margin and are like to grow since they are sticky and central to user experience with Apple devices. How many use an iPhone without iCloud and Apple Pay? When, not if, this trend continues, it will do wonders to the gross margin of Services and the company.

One notable absence is ads. It’s understandable that this quarter saw some softness when the likes of Snap, Facebook or Google all reported slower growth than expected. But once this current economic environment subsides, ads will be a great lever to pull. Formerly limited to the Search tab on the App Store, Apple Ads was recently expanded ads to Today’s tab. More ads slots mean more revenue for Apple. These dollars also have high margin and don’t