FB's Graph Search - Whom is it for?

A few days ago, Facebook announced a new capability in its social media platform. Called "Graph Search", it created more buzz with its pre-announcement media hype. Some news agencies described the actual announcement as a roomful of sleepy reporters.

It is for the advertisers, dummy!

It is clear FB's Graph Search is not built with the users in mind but built squarely for the advertisers. While most of us would rarely want to know, "Show me the favourite restaurant for all my friends in Washington DC", turn the same proposition around for advertisers, and it makes sense. Listen to Facebook making this pitch to a small down town restaurant looking to increase its evening sales. "If you, put up a Facebook page and encourage diners to like you, any of their friends in down town looking for a place to eat, can see the restaurant liked by their friends".

This and a few other indicators are the reason for my target price of $39.08 for the Facebook stock.

However, the true measures for validating if the stock is on track will be to see some new revenue streams appear in the financial filings. Till that happens, all the growth in the stock is already accounted for. Also, it is clear to me that the new revenue streams will not show up next week or even next quarter. It will be several quarters before these streams become big enough to cause a shift in he price,

New Trading Strategy for FB

Based on the above analysis, it seems clear that I will need to lower my average cost of holding FB stock. I will look for it to slide below $25 to pick the next lot, and then below $20 for the final lot. I think the actual impact of earnings is four to six quarters away.

Lets hope everyone has the stamina to stay with the stock for that long.

RIM's Blackberry 10 (BB10) OS a better choice for Corporate Users than Others

As Research In Motion (RIM) gets ready to launch its next generation of smartphones, I suspect the architecture of its new operating system and developer APIs will come under scrutiny  What many Corporate IT Security consultants will be looking at, will be its system attributes related to Security and Reliability. This will decide its adoption in the Enterprise. From first looks, it is designed with just that in mind.

In previous posts, I had looked at RIM's outlook from a fundamentals perspective as well as listed development options for application developers. In this post, lets look at the Operating System itself and what it may mean for future adoption.

Security First

One of the main advantages that the new platform will have will be the underlying operating system (OS). Based on QNX, a over 30 year old company RIM bought a few years ago, the operating system is based on a micro-kernel architecture. It essentially means that the core OS is very small and it loads other capabilities (such as networking, filesystems, etc.) at startup time with lesser privileges than the base OS. This design makes the OS much more secure than even traditional Linux distributions that are based on mono-lithic kernels where the core OS has much more services running with the highest level privileges.

It is this aspect, that allows the QNX Neutrino OS that is being proposed for the new platform to be used in health devices as well as managing Nuclear plants.

More Reliability as well

The same Micro-kernel architecture also makes the Operating System much more reliable. Since most core capabilities out side of the core OS is running as a daemon process (think Windows Services), they can be shut down and re-started without having to resort to a boot of the operating system. Android tries to achieve the same outcome at the application level (and not at the OS level), by running each application in a separate Java Virtual Machine process thus isolating their memory from other applications. However, QNX does this at a deeper and much more efficient level.

Also, if a component is buggy, a patch can be issued to replace that component alone without a full OS release.

An Industry Standard Interface for Applications

While the above justifies the selection of a micro-kernel based Operating System, the challenge now becomes ensuring compatibility with an application layer. For this, the QNX operating system is built to provide a POSIX standards based Interface. POSIX stands for Portable Operating System Interface and is a set of standards that allows applications compiled to this standard to work across operating systems. It is this standard that allows RIMM to offer multiple development options to application developers.

Summary

All these attributes suggest that Research in Motion has thought through their strategy for the next generation of smartphones and associated eco-system. End of the day, the customers will decide whether it all makes sense or is it RIM's last push to make a comeback.

RIM's attractiveness to developers

It is said that modern cellphones are not islands but need the support of thousands of developers to drive the adoption. Not sure, if that is something truly such a make or break.

RIM investors will be heartened to know that the BB10 platform supports all developers - C++, Java and HTML5 and a few lesser known ones.

There is one additional platform. BB10 supports Qt/ QML. Hundreds if not thousands of developers, disenfranchised by Nokia when it moved to Windows 8 have probably a new home. Not only that, but RIMM is also the brand most preferred by corporate executives, which means developers can opt for getting more money for their effort. I personally feel this bodes well for RIM. Time will tell.

Research In Motion (RIM)'s outlook for 2013 and beyond

A quick look at Research In Motion (RIM)'s stock price shows the much beating it has received in the past 8 quarters. The impending launch of the BB10 operating system and a roadmap showing 6 upcoming devices suggests that RIM may be back in business.

At the time of this writing (mid January 2013), the stock had risen based on a favourable news that BB10 was finally being released. In order to see what should be the ideal target price, I started on this exercise.

First things first. One of my sources is www.trefis.com. The live version of the Trefis price is shown below.

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Trefis price for Research in Motion:$11.98

For the purpose of the post, I considered it better to take screen shots of the site, so as to crop the content to highlight what I thought was significant. The main premise of Trefis is that the stock is currently overvalued and the fair price is $11.98. The distribution between the components' fair value is as shown below.

So after predicting RIMM's predicted cash flows for the next five years and discounting future earnings to their present value, Trefis feels the fair price of the stock is $11.98. That is lower than their market value for the day, which was $13.56 per share.

Going through the Trefis analysis in slight more detail, a few details baffled me about the assumptions used to determine the fair value of the stock in the analysis. These assumptions are

1. The continuously falling phone sales and total revenue
2. Missing the Enterprise story
3. What about the application store?

Trefis Analysis Issue 1: The continuously falling phone sales and total revenue

The revenue in the coming years (specially from the phone sales – shown in red in the chart below) keeps on falling, till the projected year.

In fact the analysts re-baselined the revenue from phone sales on the 2012 performance rather than treating 2012 as a dud year, where people did not buy RIM phones since they were waiting for BB10 OS and associated devices to be released. This of course also affects the Gross Profit and the Free Cash flow shown below.

The Free Cash Flow is particularly important since it will impact the Future Market Value and hence the fundamentals based stock price of the stock.

This is a far cry from the FCF generated by the company in the years gone by, and on which the stellar stock price was based.


The assumption of course made by the Trefis team that since the current market share and the associated trend in the last 12 months was negative, the market share would continue its downward trajectory to end at close to 1 % instead of the 3% in its prime.

I adjusted the trend line to reverse the market share trend predicting that the RIMM market share will soon revert to the original 3% by the end of the forecast time period. This is because in 2012, RIMM barely introduced any new devices and market was anxiously waiting for the nexy version OS. There have been 6 new models announced on the new platform after March 2013.


Another issue is of average price of a Blackberry handset. Here again, one can see a sharp decline in price between '09 and '12. This may be since RIMM would be pushing to get rid of inventory against th e impending launch of new devices. In my mind there is no reason why the trend should conitinue with the state of art hardware.

Trefis Analysis Issue 2: The missing Enterprise Story

This was my second issue. Trefis team assumed that the Enterprise E-mail platform was the only Enterprise offering on the cards. Now, the RIM management has repeatedly mentioned their strength in Enterprise security and a strong play in the corporate customers. I corrected this problem in my analysis as shown below by increasing the corporate users as percentage of total.

Another item should be the assumption of enterprise applications which is not included. I kep push E-mail capability as a proxy for the more detailed analysis and development that need to be carried out..

Trefis Analysis Issue 3: What about the application store?

Also, a quick glance at Apple and Google illustrates how much these firms value the App Store. In RIM's case this grouped with accessories and thrown in one group. I have been more generous with earnings per customer.

The final adjusted price came out to be the following, which I suspect will need some more effort.

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Arthgallo's price for Research in Motion:$17.94

More on this in later posts.

Update: In more recent posts, I have provided comments on RIM's new Operating System in BB10 as well as capabilities that are relevant to developers, both differentiating aspects of the platform.