Microsoft in a Fight to stay Relevant, PT $22
26 November 2012

imageMicrosoft started with a mission: to power the world’s hardware. Hardware was forecast as something of a commodity and the software became the value-add which brought forth the uniqueness of user experience onto lifeless devices. This viewpoint was convincing for two reasons. First, it made business sense for Microsoft to specialize in one core function in order to develop and maintain a competitive advantage. Second, building hardware requires the amalgamation of a handful of suppliers, making it difficult for any one manufacturer to gain a competitive edge.

Apple has always held a different understanding of the world: hardware is designed uniquely for the software, and vice versa. As soon as you generalize either to support multiple platforms, the end product and user experience will be compromised. This explains why Apple has never licensed its operating system to PC manufacturers and why Apple refuses to sell hardware running Windows software.

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Qualcomm set to Outperform, Price Target $72
17 November 2012

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The hardware market is known for low margins and stiff competition. Semiconductor designs commoditize quickly and leave little room for differentiation. (No example is as prime as my former employer Marvell whose share price has dropped over 72% since mid-2006; but let me avoid this tangent for now).

Qualcomm has a stellar business model: the company invests heavily in R&D to define the next generation of cellular technologies and then benefits from license fees and royalty payments from competitors. This alone comprised 33% of total revenue in FY2012…and what margins!

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Turbulence ahead for Apple, Price Target $500
14 November 2012

Now that Apple shares have accumulated a 23% discount since their high of $702 two months ago, I imagine there might be some upside in buying the stock. But before I go into the valuation specifics, investors should realize why $AAPL has taken a beating.

1. Pricing pressures: Margins are expected to drop in the near future with the highest margin iPhone5 facing competitive products at a discount, and the lower margin iPad mini reaffirming the market direction towards affordable tablets.

2. Increasing costs: Apple is in a fine balance with Samsung which is in direct competition in the smartphone/tablet market, but also manufactures the A9 processor for Apple. As Apple looks to diversify its suppliers, we can expect supplier costs to increase as few suppliers can accomodate the volumes required by Apple, and also as other manufacturers feed into the demand for core chip components.

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Valuation Exuberance, Here to Stay
11 November 2012

After four years of existence, Groupon currently stands at a handsome market cap of $1.8 billion. It’s a stellar achievement, sad only because it IPO’d at upwards of $13B valuation. Groupon is but one example of public markets placing unhealthy, aggressive multiples on new-to-market, vulnerable webbies (young web companies).

Let’s re-imagine the Groupon story. Imagine Groupon had steadily grown in the markets to achieve the $2 billion dollar valuation by in turn steadily growing its operations. Groupon would be a proud company with greater organizational efficiences, better ability to scale, and an enjoyable work environment. What a difference! Unfortunately, such luxury is not afforded to webbies. Look at the valuation history of $ZNGA, $FB, $P…well suffice it to say, any recent IPO but $LNKD. 

How do we end this unruly behaviour?

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Market discounts the discounter: $GRPN
9 November 2012

Groupon shares fell 30% after the market was less than impressed with 3rd quarter results. In the most unfortunate turn of events, we witness yet another webby (young web company) struggling with the burden of insurmountable growth expectations placed by the market. The share price has nestled below $3 after having hovered above $20 in the early days of this year - a discount of 86%.

The executives can wear a solemn face and claim the market has no effect on company strategy; can claim that the company will continue to proceed along its own merit, unbothered. (Flush). Groupon is being hit where it hurts the most: employee morale and company culture. This kind of hurt lingers, and this kind of hurt destroys.

Although it pains me to watch, I do comprehend that Groupon is facing some dire challenges:

Falling margins: Groupon’s third party revenue with lucrative gross margins of 85% seems to have plateau’d, with no increases from the same quarter last year. Increase in revenue is now being realized only through direct revenue where gross margins are in the meagre 12%.

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Re-visiting the VC Strategy
2 August 2012

I write not because I know, but because I want to learn. I’m also a firm believer that it is always better to take one step than no step - the mind of an Engineer. Thus as my thoughts translate into Opinials, I am always thrilled to receive feedback. It gives me new perspective and maybe it changes my stance; maybe not. It still helps me grow and I thank you in advance.

A fellow reader brought to my attention a Canadian VC firm that has acted in contradiction to my strategy, and is one of a select few that is on track to experience positive returns. (How many are there? I would really like to know.) And a handsome return at that! I was fortunate enough to get in touch with the Partners at this firm to discuss their investment strategy.

I learned that although said to focus on seed investments as well, the firm has been predominantly occupied with early-stage series A investments. With less than two dozen investments by the fund (now closed, and with 4 years to maturity), the firm is en route to make a sizable return. So what did they do right?

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