Alphabet not Googling their cash

“I suppose you could call a division that costs you around $3 – 4 billion a year in losses a bet. Looking at the grand scheme of things, the investments are in areas that they say are “Disruptors”, “Growth” areas and have “global” potential.”


 

If you have not watched the latest blunders video, where have you been? No worries, here it is Blunders – Episode 11. Whilst you are at it, subscribe to the Blunder Alert! and never miss a season, you will get the email delivered to your inbox at the end of the week.


 

To market to market to buy a fat pig After a pretty dismal start Monday morning in Jozi, for stocks that is, we cleared out the road to bear in the late afternoon, and stocks as a collective rallied into the close. The Jozi all share index added on just over one-tenth of a percent. The Rand weakened a touch, this lent some help to the Rand hedges, industrials dragged us through as resources stocks threatened to derail the gains. There were some big moves lower from the heavyweights, Anglo and BHP Billiton sinking over four percent. Glencore, Amplats and Sasol all weaker too on the day, as commodity prices slipped.

Wedged in-between those stocks was MTN, the PIC rightfully grumbling about the severance packages of seniors at the business, for the Nigerian disaster. It has truly been a disaster on all fronts, the final amount yet to be decided, politicians weighing in with their (badly thought through) opinions. Politicians often think about “things” in a parallel universe, it is a surprise that we constantly elect them, not so? The PIC have the right to weigh in on the severance packages of MTN elected officials. I am guessing as a shareholder they no doubt would have voted these packages in. And known their contracts. See the Bloomberg story, Michael gets a great quote here: MTN’s Biggest Shareholder Sees Payout to Ex-CEO as ‘Excessive’. It is a contract. Honour it. Sigh.

And then this bidding to-and-fro that just won’t go away: Fnac Raises Darty Bid Again in Attempt to Ward Off Steinhoff. Darty is certainly a tasty flavour for FNAC and Steinhoff, according to the Bloomberg piece, Steinhoff are set to make another offer. Over the 170 pence one that FNAC made yesterday. I remember FNAC from my youth, it used to operate in Maputo during the bad old days, you could use your Dollars and Rands to buy goods as an expat that no locals could. There were two in Maputo, one at the top of town, the other at the bottom below, for those familiar with the layout of Mozambique’s capital. So much for equality, right?

I hope that Steinhoff don’t overpay, I really do trust their deal making abilities. Like I said in an email to a client the other day, South Africa’s richest man has thrown his lot in with the company. I am talking about one of the best of the best, Christo Wiese, who sold his 52 and a half percent stake in Pepkor for Steinhoff shares, being part of a bigger global group. From my reading back then, he got 609 million Steinhoff shares for the deal. According to the last annual report, Wiese owned 17.88 percent of the business, 654 million shares, through an entity named Thibault Square Financial Services. That was a year ago.

At a share price of 86.02 Rand a share, that equals 56.332 billion Rand. Or at the Frankfurt price, with the last close at 5.22 Euros a share, his wealth is 3.418 billion Euros. That is proper money, and that is just his Steinhoff stake. Let us just say that I am pretty sure, having entrusted Marcus Jooste to bat on his behalf (and Whitey Basson over at Shoprite), that Steinhoff will continue to buy companies and grow aggressively, without overpaying. For the purposes of comparisons, Wiese’s Shoprite stake (15.31 percent) is worth 14.78 billion Rand. At the current Euro Rand exchange rate, that equals 910 million Euro. Which means that his Shoprite stake is around one quarter of the size of the Steinhoff stake. Who would have thought?

And let us not forget the 180 odd million shares of Brait, that is worth 29.458 billion Rand or 1.81 billion Euros. I am going to say that with that sort of wealth creation, that sort of building and accumulation over decades, you can trust the decision making from Christo Wiese, as well as those that he gets to steer his investments. And lest we forget, he has a sizeable stake in Invicta, 22.68 percent (owned through Titan nominees) which is worth 1.35 billion Rand. And, wait for it, his 19.6 percent stake in Pallinghurst is worth 446 million Rand. Add up all the other parts and they are not equal to the Steinhoff stake. He owns (through Titan) around 1.5 billion Rand of Tradehold shares, oops, my bad, nearly forgot that one! So I get to around 103.86 billion Rand, his overall listed wealth.

Yip, I trust that fellow, Christo Wiese. There may well be loads of other stuff that I have missed out, including some of the holders of Tradehold (he is a board member of Granadino, the biggest shareholder of that business). I don’t trust him as he is rich, I trust him for his deal making activity. The fact that he does and can. The fact that he chooses wisely. And he has done exceptionally well. I just hope that Steinhoff don’t overpay for Darty, and call it quits if it is too much. After all, their French subsidiary, Conforama owns around 20 percent of the Darty shares already.

Over the seas and far away stocks made a solid comeback in New York, New York (the Yankees won last night). The Dow Jones Industrial Average lost 0.15 percent, the broader market S&P 500 sank 0.18 percent whilst the nerds of NASDAQ lost a little over one-fifth of a percent. During the morning part of the session, stocks were down over half a percent. Tonight there is of course Apple results, worries abound around the current iPhone cycle. We have been here and done this before, their products are awesome, they will continue to create awesome re-inventions of what we know already. And lest we forget, for most market chatterers, the Fed meets tomorrow. Sigh. This is not the most important thing in the world people, not.


 

Company corner

Last week we had Alphabet Announcing First Quarter 2016 Results. This is only the second time that the results have been released under the name Alphabet. Before that it was known as Google.

The company might be reporting under a different name but it is still basically only Google until some of their side projects like “Google Fiber” start to make money. When people call Google a “one trick pony” here is why:

As you can see, “Other bets” is a side show at the moment that just costs the company money. I find it amusing that the company calls the non-google component of the company “Other Bets”. I suppose you could call a division that costs you around $3 – 4 billion a year in losses a bet. Looking at the grand scheme of things, the investments are in areas that they say are “Disruptors”, “Growth” areas and have “global” potential. These bets are being funded by the $75 billion cash pile that Alphabet is currently sitting on. The cash pile is up $2.2 billion since the last quarter.

Here are the numbers, Net income is up 20% to $4.21 billion for the quarter and revenue is up 17% to $20.26 billion, in constant currency they were up 23%. It is clear that the company is still growing at a good clip and is forecast to continue on that track. All this growth comes at a cost, the share is trading on a P/E of 30 but that unwinds to an 18 P/E with the forecast 2017 numbers.

That high P/E also comes with high expectations, so even though the numbers from Alphabet were solid they missed estimates, resulting in the shares being down 4%. Not too bad when you consider that over the last year the stock is up around 30%. The one number that had people concerned is the average cost per click (the money paid to Google every time an ad is clicked on), the average cost per click is down 9%, slower than the 13% decline in the last quarter. Given the increased competition in the online advertising space it is not surprising that the cost per click is declining but there is more than enough business to go around. The number of paid clicks was up 29%..

We are happy holders of Alphabet, going forward there is still growth on the horizon and over the next couple of years their “other bets” segment will start to play an increasing role on brining in profits and more than likely change the way that humans do things.


 

Linkfest, lap it up

Desperate to own a few gold coins? Don’t do it. An interesting post from our old friend Cullen Roche out from the US West coast, in which he suggests that there might be nobody who can explain the gold price premium, this may well be a case of people believe it, therefore it is: There are no Good Gold Analysts

One of the most highly anticipated seasons (they seemingly all are) of Game of Thrones was aired Sunday night in the US. It has such a huge global following that streaming music service Spotify saw an opportunity, match the characters with a type of music. Does Game of Thrones end at the top, or fade away? Who knows, when I watch reruns of Friends it doesn’t seem the same now, right? Spotify Matches Users With Game of Thrones Characters Based on Music Tastes. Make hay whilst the sun shines.

Super stuff this Bloomberg story, about the most highly anticipated vehicle, ever. And of course we are talking about the Tesla Model 3. Via a tweet from Paul, what is quite amazing is that the vehicle smashes some well known German brands in acceleration, as well as price, and being almost the most aerodynamic vehicle too – Ten Charts That Will Make You Rethink Tesla’s Model 3. I’ll get a second hand one when they are affordable.

Bright picked this up over the weekend, it is from a crowd called Excelacom, and basically the picture tells you everything you need to know. The story is summarised well here, image below: The Ridiculous Amount of Business Uber, Amazon and Facebook Do in a Minute. You can only own 8 of these companies, including the overlaps like Instagram/Facebook/WhatsApp being the same company.


 

Home again, home again, jiggety-jog. Spurs? What the …. ? Those people from Leicester City F.C. have a hand on the cup. Markets are down marginally, not a lot at all, stocks across Europe are up, stocks across Asia are a little mixed. Oh, and did we say that there was a Fed meeting tomorrow? Yes, there is.


Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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