Weekly reading – 5th November 2022

What I wrote last week

Apple Earnings

Small but important things

Business

How Google’s Ad Business Funds Disinformation Around the World. A large scale investigation into how Google’s Ads benefit sites that distribute misinformation in non-English speaking countries. I understand that this problem is not easy, but Google is known for engineering prowess and this is an engineering problem. If ads still shows up on sites flagged as misinformers, it’s because someone decides to turn a blind eye on them. “ProPublica also scanned close to 10,000 active articles that fact checkers in the three Balkan countries flagged for false claims since 2019. Just over 60% were earning money with Google. The articles included a range of falsehoods about national politics, the pandemic, vaccines, the war in Ukraine and other topics. Dejan Petar Zlatanovic operates Srbin.info, a Serbian website that publishes pro-Kremlin propaganda copied from Russian state media, election conspiracies about the U.S. and anti-LGBTQ content. Its homepage features a prominent hyperlink directly to the official Kremlin website. Google ads abound there and on article pages. Zlatanovic said in an email that Srbin.info earns between $5,000 and $7,000 per month, with Google ads providing a key portion of the revenue.

The Hype Cycles of Venture Capital. Our society praises monumental wins of venture capitalists passionately and holds those men and women in high regard. But I don’t see the same vigor in criticisms when they fumble millions of capital on new, exciting and…useless ideas. Anyone remember Clubhouse? Or Bird?

Inflation – Stealing From Savers. The headline is that inflation is not going away any time soon and investors will have a hard time to earn sizable returns

After leading $20 billion Figma deal, Adobe’s David Wadhwani is in prime spot to be next CEO. As an Adobe shareholder, I feel good reading this article. Who’s better to succeed the current CEO than the guy championing the subscription business model and having the credentials of leading AppDynamics to be acquired by Cisco.

($) Big Tech’s Dirty Supply Chains Undercut Climate Promises From HQ. “Amazon.com Inc., Microsoft Corp. and Alphabet Inc. have pledged to run their own operations on 100% clean power. But their suppliers — the lesser known companies that make the key components of hit products like the Kindle, the Xbox or Pixel mobiles — remain deeply reliant on fossil fuels. Twelve of the 14 top suppliers get on average 5.4% of their energy from renewable sources or don’t disclose, data from a Greenpeace report released Friday showed. Taiwan’s TSMC is sucking up as much electricity as Sri Lanka’s 21-million population and is expected to use up 12.5% of the island’s annual power consumption by 2025. More than half of Taiwan’s energy is generated from coal and fossil fuels. In South Korea, home to another critical chip-supplier, SK Hynix, the story is similar. The company’s chip factories consume power equivalent to 1.6 million South Korean households and more than 60% of the country’s power comes from burning coal and natural gas.”

JPMorgan Chase wants to disrupt the rent check with its payments platform for landlords and tenants. This is an exciting new product from JP Morgan. It’s so frustrating that tenants have to pay by checks every month because landlords refuse to upgrade their infrastructure. I myself was asked to provide a check as collateral the last two times I tried to book a facility in my apartment building. I abandoned the booking simply because I refused to go to a branch just for a check. For JPMorgan Chase, this can be a strategically great move. At $500 billion in rent payment volume annually, even 0.2% of interchange and/or processing fee can bring in an extra $1 billion in revenue. Landlords that park their rent payments in a Chase account can help the bank get more deposits to fund their more lucrative loan-originating business. Last but not least, even if JPMorgan Chase doesn’t require landlords or tenants to be a customer of the bank, this new platform can serve as a tool to scout new prospects. Think about it this way. If the bank knows the address and rent-paying behavior of a prospect, it can leverage that data to craft a profile and run a marketing campaign toward that profile accordingly. That information is first party, reliably accurate and NOT easy to have.

This is how much more Apple Music pays artists than Spotify [Video]. I wonder what non-disclosure agreements these streaming services have with artists. But this is damning to Spotify. If a few more artists come out to back up this revelation, they will be under pressure to increase payout and that would mean higher expenses and less margin. Investors will not like that

Apple CFO talked about the small scale of his Finance team and how efficient they are

Other stuff I find interesting

How the New York City steam system works. The story of steam actually begins in Ancient Rome, where enterprising Romans were already building steam pipe systems for heating buildings and baths. The technology spread to the rest of Europe, but it was in the United States during the late 19th century. Inventors and businessmen turned it into a commercially viable heating option for towns and cities. New York was the first major city in the U.S. to have a steam system and still has the largest one to this day. In fact, if you add up the next five largest steam systems in America, it’s still smaller than New York City’s.

In Greece’s largest port of Piraeus, China is the boss. Europe must be mindful of these investments in key infrastructure by China. If there is opposition to China getting semiconductor technologies from the US, why shouldn’t there be caution when it comes to key infrastructure?

Why Switzerland built a 2-kilometer-long train. I am marveled by the fact that there is a 2km-long train out there. I wouldn’t get on board if the train was operated in many countries, including Vietnam. But since this is the Swiss we are talking about, I’d give it a shot.

The enduring sexism of India’s tech industry. With 1.3 billion people in population and a big portion of that as women, India would be even more competitive if they could foster a culture more liberating and friendly towards women

Vietnam is luring tech giants out of China with flashy infrastructure projects. If our country just provides lands and labor, there will be little transfer of technological, commercial or scientific knowledge. Don’t get me wrong. It’s good to increase the GDP and all that for Vietnam, but I’d prefer us taking a page out of Singapore’s playbook.

($) The Metals for Your EV Are Stuck in a 30-Mile Traffic Jam. This is an eye-opening account on how copper is transferred from mines to ports in Africa. My gosh, what a tough gig it is. The whole continent is hungry for infrastructure investments that will make thousands of lives easier and improve commerce. Rich countries wishing to establish influence should pay attention and act before China does, if they haven’t already

Stats

Meta’s Reality Labs is projected to cost as much as the Apollo Program, the very one that landed humans on the Moon

37% of small business owners in the U.S. were unable to pay their rent in full and on time in October

Apple Earnings – The Resilience & Effectiveness Of Apple

Last Thursday, Apple announced its Q4 FY2022 earnings results as follows

  • Revenue: $90.15 bn vs $88.9 bn estimated. Up 8% year over year (YoY)
  • Gross Margin: 42.3% vs 42.1% estimated. Essentially flat YoY
  • iPhone revenue: $42.63 bn vs $43.21 bn estimated. Up 9.7% YoY
  • Mac revenue: $11.51 bn vs $9.36 bn estimated . Up 25.4% YoY
  • iPad revenue: $7.17 bn vs $7.94 bn estimated. Down 13.6% YoY
  • Other Products revenue: $9.65 bn vs $9.17 bn estimated. Up 9.9% YoY
  • Services revenue: $19.19 bn vs $20.1 bn estimated. Up 5% YoY
  • EPS$1.29 vs. $1.27 estimated

On the surface, it looks like a routinely great quarter for Apple, but there are a few points worth calling out.

Apple's revenue growth
Figure 1 – Apple’s revenue growth

First, Apple got hit with a 600 basis point of unfavorable foreign exchange impact due to the strength of the dollar. Had the currency exchange stayed constant, Apple’s revenue growth would likely have been two-digits and could have gone up to as much as 14%. Despite significant foreign exchange headwinds, product margin was 35%, flat compared to Q3 FY2022, and 100 basis point up year over year. This indicates Apple managed to gain efficiency and sell more expensive products. To investors who care about how a company is run, this is a good sign.

Second, the stickiness of iPhone. Since Q4 FY2020, iPhone revenue has increased year over year every quarter. In FY2022, iPhone revenue grew by 7%, on top of the monstrous 39% growth achieved in FY2021. As a billion business worth more than $200 billion, that’s no mean feat. More impressively, the numbers could have been even rosier. According to Tim Cook, the company has been facing and still faces supply chain constraints for the popular iPhone 14, iPhone 14 Pro and iPhone 14 Pro Max. Had Apple had enough parts to meet the demand, they could have added a couple of more billions to their top line. In the time of unprecedented inflation and uncertain macro-economic conditions, this shows how much consumers love their iPhone and considers it more of a necessity than a luxury.

Apple business segments' revenue growth
Figure 2 – Apple business segments’ revenue growth

Next, Services grew 5% YoY and slightly missed analysts’ expectation. Adding the estimated foreign exchange impact of 600 basis points, Services would have grown by 11%, beating the consensus. Since 2018, Services has grown by double digits every year, reaching $78.1 billion in annual revenue in FY2022, up from almost $40 billion in 2018. Compared to previous year, FY2022 posed a lower annual growth, but there are levers that Apple can pull:

  • Apple recently announced price hikes on Apple Music, Apple TV+ & Apple One. The company explained that the price increase for Apple Music is due to more payouts to artists while that for Apple TV+ is fair considering the amount of content that Apple has added since the launch of the streaming service. As the flagship overarching subscription, of course, Apple One will also be more expensive. I think the justification makes sense because if Apple REALLY wanted to increase Services revenue and abuse its power, the company would raise iCloud’s prices. There are alternatives to Apple Music and TV+, but there is nothing to replace iCloud and no Apple user I know doesn’t buy additional storage. In short, this is not a move out of desperation.
  • Apple is loading more ads on the App Store. In their 2022 annual report, the company already cited advertising as one of the main drivers behind Services’ growth. Ads revenue is great and all, but too many ads will harm the user experience. Plus, there is already backlash from developers who saw online gaming ads placed next to their apps. Hence, Apple needs to be careful and considerate about pushing their advertising division
  • Apple Business Essentials. There has been no disclosure from Apple regarding this service, but I suspect it will come to the fold more in the next couple of years

Last but not least, I am really pleased with how Apple manages its costs. The gross margin profile of Products, Services and the whole company have been very stable in the last four years, despite Covid-19, the war in Ukraine, the withdrawal from Russia, the supply chain challenges and other macro-economic events. Operating expenses, including R&D and SG&A, as % of total revenue never exceeded 8% in the last four years. Based on the commentary from the executives, that should be the case for the next twelve months:

When we look at our capex, as you correctly said, I mean, we’ve been fairly stable, and I think our capital intensity is really very good. We have three major buckets in capex for the company. We have certain dedicated tools for the manufacturing facilities. We had some spend around data centers, and we have spent around our office facilities around the world. We obviously monitor all of them. There is nothing unusual that we see for the next 12 months.

When a company reaches a trillion dollar mark in valuation and generates billions of dollars in cash flow every 90 days, there is understandably a risk of being negligent on cost control. Think about yourself. Do you allow yourself more luxuries and impulsive purchases now than you did as a student and when you had lower income? From this perspective, Apple has been a disciplined and prudent steward of shareholder capital. To some extent, I don’t think you can make the same point about other big techs, such as Amazon or Facebook.

Apple's gross margin
Figure 3 – Apple’s gross margin

In short, this quarter’s results were not the most impressive that Apple has ever put out. They were just routinely and boringly good from my perspective and for the reasons I listed above. Even though there is no headline-grabbing debate-fueling stuff such as the investment in Reality Labs by Facebook, I prefer a stable and effective management that keeps their feet on the ground and produces results for shareholders.

Weekly reading – 8th October 2022

What I wrote last week

Take-aways from CFPB’s report on Buy Now Pay Later

Business

($) Apple’s Tech Supply Chain Shows Difficulty of Dumping China. A good piece on how dependent American companies are on China. Case in point, it is estimated that it would take Apple 8 years to move 10% of the production capacity out of the country.

The Legacy of Jack Welch’s Managerial Capitalism. A brutal indictment of Jack Welch and his managerial practices. I often heard people quote Jack on many things business-related. Hence, it’s refreshing to have an opposing view.

Elon Musk’s Texts Shatter the Myth of the Tech Genius. “The texts also cast a harsh light on the investment tactics of Silicon Valley’s best and brightest. There’s Calacanis’s overeager angel-investing pitches, and then you have the more chill tactics of people like Andreessen, who in a tossed-off Twitter DM offered Musk “$250M with no additional work required.” “Thanks!” Musk responded. In a separate exchange, Musk asks Ellison if he’d like to invest in taking Twitter private. “Yes, of course,” Ellison replies. “A billion … or whatever you recommend.” Easy enough. For this crew, the early success of their past companies or careers is usually prologue, and their skills will, of course, transfer to any area they choose to conquer (including magically solving free speech). But what they are actually doing is winging it.”

($) ‘I Am Energy’: Inside the Bang Billionaire’s Reeling Empire. This CEO would have more success if he hadn’t let his success get into his head

Embedded Finance: What It Takes to Prosper in the New Value Chain. An excellent piece by Bain on Embedded Finance

It’s Time to Start Worrying About Peacock. This is another example of analyzing data with context. Growing a subscriber base by 2 million users seems great, till one goes through what NBC had to do in the last few months to get that growth. As it turns out, there is a lot more going on that just that absolute number.

A very solid overview of financial statements and how to read them by PwC

Other stuff I find interesting

Can industrial tourism help revitalize Japan’s manufacturing regions? I, for one, would love to travel to Japan just to see how things are done. Like matcha, wasabi, Japanese swords, etc. Those long-standing craftsmanships are just beautiful.

Study reports first evidence of social relationships between chimpanzees, gorillas. Enhanced foraging opportunities, not survival from predators, are the bigger reason why chimpanzees and gorillas bond socially, according to the research. I have nothing but deep respect for researchers who spend years working on something that ordinary people like me rarely care about. To advance our science and the understanding of the world.

Coding in a war zone: Ukraine’s tech industry adapts to a new normal. A fascinating on how tech companies and workers prepared well in advance for an invasion and reacted to a new reality when Russian troops rushed in. I would be so unsettled if my employer, on my first day at work, handed me a package in case wars happened.

Stats

Apple Music has 100 million songs

Plant-based dairy is a $2.6 billion category

Source: Senator Elizabeth Warren
Source: Gallup

Weekly readings – 26th October 2019

AWS Customers Rack Up Hefty Bills for Moving Data. Cloud spending isn’t as cheap as some may think.

The Heart of a Swimmer vs. the Heart of a Runner

Source: DuckDuckGo

Craftmanship in 1930 Vietnam as Seen in Paris Specialized Municipal Libraries. If you want to see a little bit of how Vietnam looked almost 100 years ago, here is a great article

Jeff Bezos’s Master Plan

Is Amazon Unstoppable?

News tab on Facebook

A great post with usrprising details on the spectacular fall of WeWork