Fri, 31 Jan 2014
Investors fret over Apple and emerging markets, the Fed continues its exit, and Facebook shares get over-liked.
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five: five more stats from the market and the stories behind them. Joining me with the Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for joining me.
Jeremy Glaser: You're welcome, Jason.
Stipp: What do you have for The Friday Five this week?
Glaser: The numbers we're going to look at are: 10%, $10 billion, $2.9 billion, 38 million, and 22%.
Stipp: 10% is the new key benchmark rate in Turkey after their central bank took very aggressive action to raise rates. Why did they need to take that action, and what do investors need to keep in mind?
Glaser: It sure was a pretty aggressive move, going from 7.75% to 10% on that benchmark rate. A lot of other rates went up, to 12% in some cases. What Turkey is trying to do is stop the flow of money out of the Turkish economy to places like the U.S., which now have slightly higher interest rates, and to try to keep the lira from depreciating any further. We saw a lot of other moves from different central banks this week, from India to Hungary to South Africa, trying to accomplish similar objectives.
[Morningstar director of economic analysis] Bob Johnson took a closer look at [these actions] this week and what some of the implications are. I think there are a few things that investors need to keep in mind:
The first is that a lot of these issues are not just economic. They are also political and structural, and some of the countries that are being hit the hardest, like Turkey, are ones where there are some political questions, like a corruption scandal and an election coming up. These issues aren't necessarily going to be evenly distributed. Countries that have more stable institutions are likely to be hurt less from this kind of fear that's mounting and the move toward safer assets.
The second one is that we are not necessarily on the precipice of a 1997-type crisis again. There are a couple of things that are different this time around. [The fact that] there are less fixed exchange rates and more debt is being issued in local currencies make that kind of crisis slightly less likely. Is it possible? Yes. But not something that I think investors need to be overly worried about at this point.
China remains a really big question mark here. There have been some murmurs that their shadow banking system might be running into problems and will need some bailouts. That potentially is a bigger problem, if we see some kind of financial crisis in China pop up. That would have ramifications across the entire global economy. That's potentially more troublesome than some of the moves that we've been seeing in currencies this week.
I think U.S. investors need to put this all in perspective. Yes, these currency issues could be a headwind to earnings throughout 2014 and could slow dividend growth. [Morningstar DividendInvestor editor] Josh Peters thinks that's a possibility. But most of the strong U.S. companies that have great competitive advantages will be able to ride out anything that happens over the next couple of months.
That sounds a bit like a broken record: Buy companies with economic moats. But we think it's a strategy that works, and this is an example of a time when these companies are really going to be able to thrive.
Stipp: The instigator behind these rising rates and some of these issues in emerging markets is the Federal Reserve and its tapering program. They tapered again, we found out this week, another $10 billion of tapering--bonds that they won't buy. What's the impact from that? Apparently they're not paying too much attention to emerging markets; it's not affecting policy right now.
Glaser: They're not outwardly worried about it. Like everyone had pretty much expected, there was another $10 billion taper, and there were a few question marks there, based on the fact that the December jobs report was much weaker than expected: Would that spook the Fed at all? And with all of these effects of the Fed taking their foot off the accelerator, how would this impact the rest of world markets? Would that make them rethink the pace of the taper or at least mention that it's something that they are watching.
We did see in the '90s, with Greenspan, that they did slow down tightening because of what was happening abroad. But that just does not seem to be the case [today]. There was a unanimous decision, something we haven't seen since 2011, to do another $10 billion of tapering. They really seem like they're staying the course. In Bernanke's last meeting, he made sure that the Fed was continuing down that road.
It doesn't seem like Janet Yellen is poised to make any big changes. They seem keen on having quantitative easing wound down by the end of the year. It's going to take a lot more than just one bad jobs report or some emerging-markets issues to derail it. What we saw this week is another confirmation of that.
Stipp: We got news this week that Google is selling the Motorola smartphone business to Lenovo for $2.9 billion. It seems like they're selling for a lot less than they paid for it, but there is more to the story.
Glaser: They brought it for $12.5 billion just back in 2012. So at first glance, this looks like a pretty big loss and a complete failure of Google strategy.
But I don't think it's quite that cut and dry. We see that Google is keeping most of the patents. When they made the Motorola deal, that was one of the big things that they talked up was that this will give them a lot of ammunition in the patent wars--being able to have better patent agreements and protect the Android ecosystem, because they would control so much of the underlying intellectual property.
That's still going to be the case here. They had already sold off the set-top box business, and got some cash there, and it really helped solidify the position of Android.
Getting rid of the handset business helps Google focus on what their core strengths are, which is the software and the services. It was never going to be able to make great hardware devices. It's just something that they weren't able to do in the short term that they had Motorola.
Rick Summer, who covers Google for [Morningstar], says that Google still controls a lot of value in that smartphone stack. Being able to control that software, being able to sell those ads, that's where the money is, that's where the potential value is. And Lenovo can probably be a better steward of the hardware business--something they are more of an expert in. Let them deal with that, and let Google really focus on what they're best at.
Stipp: 37 million to 38 million is our estimate for Apple iPhone unit sales in the next quarter. This is based on some guidance that they gave this week in their earnings report. It obviously disappointed investors. What's the story for Apple now? Is it really a growth challenge for them?
Glaser: Growth absolutely is their biggest challenge right now.
Apple actually had a fine holiday quarter, but their guidance for this current quarter was very disappointing. There was some hope from analysts and others that because of this deal with China Mobile, because of some other carrier deals they've signed, that iPhone unit growth was going to look pretty good. Instead, they're saying it's going to be a little bit better than flat, or at least that's what Brian Colello, our Apple analyst, has extrapolated from the guidance that [Apple has] provided.
That really does point to this question of, is this big growth phase for Apple really over? It raises a lot of questions like, are they just going to be able to sell phones to people who already have them? They have this loyal customer base, but they're not going to be able to expand it. Are they willing to introduce a lower-priced phone in order to gain that market share? So far, they seem pretty hesitant to do that. The 5c was hardly a low-end product. Are they really going to be focusing on profitability instead of growing the size of the ecosystem?
I think those are all are very important questions, and Brian sees that for Apple, the real key is going to be, are they able to come up with these new product categories that are going to help drive growth? Will something like the Apple Watch or the Apple TV get people excited about the brand and be able to get more share there? Will they be able to create more phone products that are going to be potentially attractive to an even broader customer base?
But that being said, even their current customer base is pretty large. They would still be able to sell a large number of units, create a large amount of free cash flow. It's not that they are completely dead in the water, but it certainly could be a bit of a transition from thinking of it as a huge growth story to more of a mature business, and how they're able to react to that.
We think the shares are slightly undervalued right now, but certainly don't represent a great value at today's prices.
Stipp: 22% is the rise in daily active users of Facebook. We got more information from Facebook in their earnings this week. The market seemed to really like it. That's a pretty impressive gain. So what's the story on the stock?
Glaser: Researchers at Princeton a few weeks ago put out a study that they thought Facebook was basically in terminal decline. That was based on some Google searches, [from which they concluded that] it just didn't seem like people are interested in Facebook anymore.
This report from the fourth quarter disputes that very aggressively. [Facebook] saw that 22% rise in daily users--those are people who are really addicted to Facebook and checking it all the time. They were able to drive really impressive mobile advertising growth.
They now sell more mobile ads than ads on the desktop, and this is a product that barely existed just a year ago. It's pretty impressive growth. They saw a 30% increase in mobile advertising per user, and their profitability looked pretty good, too.
All of this points to the fact that Facebook really has a great business model, a wide economic moat. It's really the kind of business that's going to have the competitive advantage to stick around for a long time. It's not going to become the next MySpace.
But Rick Summer, who covers Facebook for us, thinks that the shares have become way too rich. Even after this earnings report, when shares hit an all-time high, it's pricing in a too rosy of a scenario. Even though Facebook is going to do really well and has a lot of growth in front of it, it's not an unlimited amount of growth, and you shouldn't pay for an unlimited amount of growth. He thinks investors are better off looking elsewhere for investment ideas right now.
Stipp: Jeremy, The Friday Five gets my Like each and every week. Thanks for joining me.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.