Archives for October 4, 2017

Western Digital: “Nuclear Fallout” From Toshiba’s Chip Unit Sale

Shares of Western Digital (WDC) continued to feel the pain from Toshiba’s (6502.JP/TOSYY) $17.8 billion deal to sell its flash memory chip business to a consortium led by Bain Capital that includes rival Seagate Technology (STX).

Shares of Western Digital (WDC) continued to feel the pain from Toshiba’s (6502.JP/TOSYY$17.8 billion deal to sell its flash memory chip business to a consortium led by Bain Capital that includes rival Seagate Technology (STX).

The shares are down 3.8% today to $83.13 a share after Baird analyst Tristan Gerradowngraded the stock to a Neutral from an Outperform and slashed its target price from $120 a share to $93 a share, describing what he called the “nuclear fallout potential” on Western Digital, which relies on joint ventures with Toshiba for its NAND memory for its NAND chip supply.

From here, potential outcomes for WD range from neutral to significantly negative. Ultimately, Toshiba owns its NAND flash manufacturing operations.

  • It is critical for WD that Flash Ventures extend to Fab 6; WD’s 10K filing clearly states such partnership expansion is not guaranteed (please refer to the Details section).
  • Toshiba’s Fab 6 JV proposal has expired; the company believes it is under no legal obligation to renew it (but could) and as a result can act unilaterally.
  • We speculate WD’s arbitration actions could be negotiated against Fab 6 access.

WD’s at-cost access to NAND output via partnerships outside of TMC is unlikely, and WD has incurred $12B of incremental debt related to its NAND acquisition so far consisting of the Sandisk brand name, storage system solutions, and minority-based invest-and-purchase manufacturing agreements. We estimate WD needs to invest $1.5-$3B in NAND capex annually.

Adding to the weight on Western’s share price is a note out today from Moody’s analyst Gerald Granovsky detailing why Toshiba’s sale of Toshiba Memory Corp. is credit negative for Western, but a positive for Seagate.

The buying consortium includes two of WDC’s direct competitors – Seagate and SK Hynix (Ba1 positive). WDC currently enjoys a cost and technology advantage over its competitors’ products but that differential will likely shrink if Seagate and SK Hynix get direct access to TMC’s NAND output. As part of its investment in KK Pangea, Seagate will negotiate with TMC a long-term supply agreement of NAND flash, which it currently procures in the spot market and through short-term agreements with various NAND suppliers at much higher prices. By having a captive source of NAND supply, Seagate will gain the cost and supply clarity needed to make incremental investments to grow the SSD side of its business to reduce pressure on declining HDD sales.

Shares of Seagate are up 3% in recent market action to $34.18 a share.

A Tale Of 4 IPOs: Facebook, Alibaba, Snap And Square

Here’s one simple lesson to be learned from the initial public offerings of Facebook (FB), Alibaba (BABA), Snap (SNAP) and Square (SQ): Big-buzz IPOs don’t always live up to the hype – at least not at first.

Buying a stock right when it has an IPO is a high-risk proposition, regardless of how convincing the hype may seem.

Facebook, Alibaba, Snap and Square all headed south from their second week of trading, providing clear examples of why you should wait for a new IPO to form its first base before you invest.

It’s an important rule to keep in mind as Roku (ROKU) begins trading and we wait for the market debuts of Uber, Airbnb and others in the next crop of initial public offerings.

IPO Lessons Learned

From its first weekly close on May 18, 2012, Facebook sank 54% over the next four months. Snap plunged 48% from its first weekly close on March 3 of this year until apparently finding a bottom in August. And after closing out its first week of trading on Nov. 20, 2015, Square fell 37% over the next 10 weeks.

Keep in mind that if you take a 50% loss, you need a 100% gain just to get back to break-even.

Alibaba fared better when it went public in September 2014, declining just 12% from its first weekly close while forming an IPO base.

It did offer a buying opportunity when it broke out of that pattern in October, but the Chinese internet giant soon proved another point about new stocks: They can be quite volatile.

After quickly rising as much as 20%, Alibaba reversed course, falling 47% from November 2014 until finding a bottom in September 2015. The stock continued to struggle and didn’t really get going until it launched its current run with a breakout at the beginning of this year.

Alibaba is currently a member of IBD Leaderboard.

Patience Pays Off

Although many investors chose to ignore it amid all the buzz, Facebook flashed a serious warning sign before its IPO: a sharp slowdown in earnings growth.

In the three quarters prior to going public, the company’s EPS gains slowed from 100% to 25% to 9%. And in Facebook’s first two reports as a publicly traded company, it posted 0% growth.

It wasn’t until about 14 months after its initial public offering that Team Zuckerberg finally found its mobile mojo and delivered a return to growth with earnings of 13 cents a share on a 58% gain in revenue for Q2 2013.

Facebook bolted out of a double bottom on that report and has since made a fivefold run.

Interestingly, it also took Square about 14 months of roller-coaster action before it found its market legs and began to climb. It’s no coincidence that the provider of payment-processing software started to climb as its earnings growth started to improve.

Square, which made IBD’s list of stocks expecting 50%-plus EPS growth in Q3, recently launched a new breakout and is now extended beyond buy range. and . Facebook is working on a new flat base.

And then there was Snap.

After heading due south for months after it went public, the Snapchat parent seems to have recently found a bottom. But the stock has not yet formed a proper base and, unlike Alibaba, Facebook and Square, Snap has no profits.

So while Snap may go on to make a nice run, the jury is still out.

Make An IPO Prove Itself Before You Buy

Buying a brand-new IPO can be tempting, but it can also be costly and painful.

As the examples above show, you can significantly reduce your risk and still reap plenty of rewards if you follow these three steps:

In other words, just like with any stock, make an IPO prove its fundamental and technical strength before you invest.

If the pre-IPO buzz turns into a bust, you’ll be glad you stayed out. And if the hype turns out to be true, you’ll still have plenty of chances to profit.

Wall Street wants GM to break itself up — but that could be a big mistake

general motors
general motors

(GM headquarters in Detroit.Bill Pugliano/Getty Images)
• Morgan Stanley continues to press for GM to spin off aspects of its business.

• GM has a bad history with spinoffs.

• GM owns its current strategy and doesn’t need to follow Wall Street’s lead.

At some point in the past five years, Wall Street stopped understanding the car business.

Major, publicly traded carmakers such as General Motors and Ford survived the financial crisis (GM had to endure federal bailout and bankruptcy) and have enjoyed a robust recovery in the US auto market and breakneck growth in China.

They raked in profits amid booming pickup truck and SUV sales. But investors have been unimpressed. Captivated by the alleged disruptions from Tesla and Uber and the ongoing mobility experiments of Google’s Waymo, markets have kept auto stocks in underperform territory.

GM shares have been edging up over the past month, reaching levels not seen since the company’s 2010 IPO, but Ford remains in the doghouse, despite repeatedly posting profitable quarters. And generally speaking, Wall Street thinks any optimism about traditional car companies is too late, as the industry girds itself for a sales downturn in the US after record years in 2015 and 2016.

The struggles of Morgan Stanley

FILE PHOTO: Julia Steyn, VP, General Motors Urban Mobility, speaks about GM's new Maven ride services unit, Maven, during the North American International Auto Show in Detroit, Michigan, U.S., January 9, 2017. REUTERS/Brendan McDermid
FILE PHOTO: Julia Steyn, VP, General Motors Urban Mobility, speaks about GM’s new Maven ride services unit, Maven, during the North American International Auto Show in Detroit, Michigan, U.S., January 9, 2017. REUTERS/Brendan McDermid

(GM’s Steyn speaks about the new Maven services unit during the North American International Auto Show in Detroit.Thomson Reuters)
No bank analyst is trying harder to sort out Wall Street’s relationship to cars than Morgan Stanley’s Adam Jonas. He’s become more bullish on GM, but there’s a catch: he wants the company to break itself up, in an effort to unlock value from the company’s newer ventures into self-driving cars and ride-sharing. His catch-all term for these new undertakings is “Auto 2.0.”

This is from a research note published Tuesday:

At this point in the cycle (both in the US and globally), it is extremely difficult to sustainably push earnings expectations to new highs, particularly given the number of factors that drive incremental auto credit/demand completely outside of an auto firm’s control. Some of the few things within an auto firm’s control include its strategic outlook, company reporting structure and business/capital structure. At this point in the auto cycle, we are not surprised to see auto firms spend greater portions of their presentations focused on a thoughtful pivot to Auto 2.0.

Wall Street has caught this spinoff or restructuring bug largely because of Fiat Chrysler Automobiles, which spun off Ferrari in what is now considered a wildly successful 2015 IPO. The spinoff was led by the financially astute CEO Sergio Marchionne.

In 2017, Ferrari shares have blown away the markets, up a stupendous 93%.

GM should follow suit and spinoff Cadillac or its Maven ride-hailing/sharing brand, goes the thinking.

The carmaker might be entertaining this idea, which would, of course, open up some advisory opportunities for Morgan Stanley (don’t think that Jonas is crossing any lines here, however — his ideas really have been more strategically speculative than anything else).

A bad track record

FILE PHOTO: Tesla Supercharger station are seen in Taipei, Taiwan August 11, 2017. REUTERS/Tyrone Siu/File Photo
FILE PHOTO: Tesla Supercharger station are seen in Taipei, Taiwan August 11, 2017. REUTERS/Tyrone Siu/File Photo

(Wall Street is captivated by Tesla.Thomson Reuters)

But GM has spun off assets before and been burned (parts maker Delphi, for example, which became one of the longest bankruptcies in US history). Cadillac doesn’t make much sense as a stand-alone Tesla competitor because it lacks sales volumes (but not profits) and Maven is still in the early stages of establishing its brand. Ferrari, by contrast, has a long history and a legendary brand that a lot of people probably thought was on its own, not owned by Fiat and in turn FCA.

What Wall Street is missing about GM is that GM doesn’t care what Wall Street thinks about its strategic future. CEO Mary Barra and her team care about the stock price, but years of watching it lag the markets haven’t kept them from paying out a healthy dividend.

The carmaker has a strategic vision, and it’s executing on it. We’ve seen this with the sale of the long-underperforming Opel division to Peugeot earlier this year, the creation of Maven, the acquisition of Cruise Automation to leap forward on urban autonomous vehicles, a $500-million investment in Lyft, the rapid development and marketing of the Chevy Bolt long-range electric car, and most recently, the announcement that 20 new EVs will arrive by 2023.

This leaves Wall Street in a weird spot. Some investors will have to accept that GM is a well-managed business dedicated to returns on investment, with a solid game plan to remain relevant if nor revolutionary for decades to come. Others will have to twist themselves into knots to figure out if futuristic mobility technologies from new players, many based in Silicon Valley with no prior exposure to the car business, will pan out.

Expect GM, now outpacing its peers and thriving in both the US and China, to be a focal point for Wall Street’s confusion for the next few years.

What if the ‘retirement crisis’ has been exaggerated?

How real retirees make retirement work

Shutterstock – The simple formula for a happy retirement.

Every year, there is a new story of the scary “retirement crisis” facing our country.

It makes you wonder how real retirees are making retirement work. Have they run out of money, or somehow, are they managing to get by?

To take a closer look at how real people make retirement work, The Society of Actuaries (SOA) has conducted a series of studies, the latest of which is their Post-Retirement Experiences of Individuals 85+ Years Old in which they conducted 62 in-depth interviews of individuals across both the U.S. and Canada.

The people interviewed were not wealthy and had done little to no financial planning but overwhelmingly disclosed they had adapted to their situation and had surprisingly few regrets. What? No crisis? How could this be?

The answer is simple. These retirees live frugally. They calibrate their expenses to the amount of income that comes in.

Could retirement success be that simple? In some cases, yes. You simply do what humans do well, you adapt. You maintain a short-term focus and make sure what goes out each month is no more than what comes in. The SOA research shows this works, and for the most part, retirees interviewed feel they live frugally, but are not uncomfortable. As the study describes, “Most had made peace with their standard of living a long time ago and learned to live within its constraints.”

If you’re a fly-by-the-seat-of-your-pants type, this approach to retirement might work. But what if learning to live within a set of budget constraints doesn’t sound so good to you? A different approach may be required.

As the slogan at my local gym says, “what gets measured, gets improved.” This mantra applies to retirement as well as to your workout program. For example, according to the 2017 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI), workers who have a retirement plan are far more likely to feel confident about having enough money for retirement. That makes sense; retirement plans report your total savings to you on a regular basis. They measure for you. And there certainly can be something magic about watching your savings grow. As you start to have success, you want more success. It feels good.

Another thing that stood out in the EBRI study was the level of confidence expressed by those who were already retired. The report says “Seventy-nine percent of retirees report feeling either very or somewhat confident about having enough money to live comfortably throughout their retirement years.”

Once again, that doesn’t sound like a crisis.

In both the SOA and EBRI study, health care expenses seemed to pose the biggest threat to the comfort level expressed. In the SOA study, although interviewees expressed satisfaction about their situation, many had not thought about long-term care expenses and had no clear plan for handling things as their needs changed.

In the EBRI study, “Among those who say that their health care or other expenses were higher than they expected, 50% say they coped with these higher-than-expected expenses by adjusting their budget, adapting, managing, and living within their means.”

Overall, it seems the retirement planning tool that the press rarely discusses is the one most widely used — living within your means.

Planning, of course, can help make the “means” within which you must live a larger number. And for those who don’t plan, well, as we all do, you’ll adapt. That’s how real retirees make retirement work.

Why you might trade your wired internet connection for your phone

You could kill your wired internet connection for your phone’s wireless connection. (Reuters)

Even with recent improvements, competition remains weak in wired broadband — for many Americans, it’s the local cable company or slow, phone-line-based DSL. But if you need mobile broadband for a smartphone or tablet, you’re blessed with four nationwide carriersyearning to earn your business, plus countless resellers of their networks.

Wouldn’t it be nice if you could fire your ground-bound internet provider and give your business to one of the wireless services instead?

The obvious answer might seem “of course not, I need a real computer!”, a mobile-only connection can make sense if you can fit your online life into a smaller screen. And in some ways, it’s too bad that isn’t an option for more of us.

What if a mobile device is your only device?

A few things have changed in recent years to make wondering if wireless broadband can replace wired seem less crazy than it might have when mobile web access meant poking through text-only sites on a flip phone’s screen.

Today’s mobile devices are far more capable than their predecessors. They run exponentially better apps and connect to a far vaster universe of mobile-compatible sites. And a growing fraction of Americans have responded by making their mobile gadget their only means of home internet access.

An April 2016 report by the Department of Commerce’s National Telecommunications & Information Administration drew on 2015 Census Bureau data to find that 20% of U.S. households relied solely on mobile broadband at home.

Separate surveys by the Pew Research Center found a lower percentage of smartphone-only internet access: 12% in 2016, up from 8% in 2013.

It’s not exactly as far-fetched to supplant your wired internet with a wireless connection as it once seemed. Consumers can now avoid busting a plan’s data cap, thanks to AT&T (T) and Verizon’s (VZ) decision to offer “unlimited” (in reality, unmetered) data plans much like those already sold by Sprint (S) and T-Mobile (TMUS).

But that might not work for you

But most of us don’t rely only on mobile devices and shouldn’t. Even with recent advances in making more sites phone-friendly, many tasks remain difficult on a pocket-sized screen.

Pew’s research noted that. A 2015 study found that 47% of smartphone users couldn’t get job-related information to show up right on their devices, while 37% ran into problems trying to submit documents required to apply for a job.

Just typing at length on a phone can get exasperating. Having to finish a post on my phonelast year was among the most excruciating work experiences I’ve had in awhile.

Yes, you can get an LTE-equipped tablet — but then you’re looking at an add-on charge to put that on your line. And some tasks remain out of reach even on the larger device: You need a Mac to write an iPhone app.

The unmetered plans from the big four do allow you to share that bandwidth with nearby laptops or desktops using a phone’s mobile-hotspot function, but they limit your use to 10 or 15 gigabytes a month. Downloading a single operating-system patch from Apple or Microsoft (MSFT) will put a serious dent in that.

T-Mobile and Verizon also now require that you pay $10 a month extra to avoid having this “tethering” limited to 3G or worse speeds. Verizon knocks you back to just 600 kilobits per second.

And at $60 to $90, those unmetered plans might not work for low-income households, which are most likely to rely on smartphones — among online households with incomes lower than $25,000, 29% relied on mobile broadband, according to the NTIA report.

The plans they can afford offer much less utility.

“They are rate-limited, they do have bandwidth caps,”  said Bill Cromie, director of emergent technology at Blue Ridge Labs, a Brooklyn group working to make tech more accessible. “You see a lot of access to the internet happening at McDonalds. Imagine if you had to go to McDonalds to apply to a job.”

And as good as wireless coverage has gotten, the fastest kind isn’t everywhere. Just ask the guy in charge of the FCC.

“I personally believe that there are significant challenges,” chair Ajit Pai said at an event hosted by the conservative tech-policy group Lincoln Network in San Francisco last week. “There are many parts of this country that don’t have 4G LTE, that don’t have competition.”

We want to believe

But the dream of ditching Big Cable or The Phone Company for a wireless service may never die, not when the prospect of broadband competition seems stalled by the same infrastructure-level obstacles that people identified seven years ago.

And if today’s wireless broadband can’t cut it, then surely 5G wireless will fix everythingstarting just a couple of short years from now, right?

At least, that’s what I’ll keep telling myself the next time I get an email from a reader angry about being stuck with the one broadband service in town. Because I probably won’t have anything better to suggest to this person, or the next 10 to write in with the same complaint.

Why the tech industry is worried about a bill targeting sex trafficking

Photo: Bloomberg

It’s hard to think of a tougher policy sales pitch for the tech industry than its argument against a bill called the Stop Enabling Sex Traffickers Act (SESTA).

Advocates for it have a simple request: Do something to stop the plague of online sex trafficking! Opponents are stuck with a more nuanced request on behalf of companies that are not always too beloved on Capitol Hill: That bill might make life dicier for social-media sites.

Major changes to the Communications Decency Act

The bill would make two significant changes to the 1996 Communications Decency Act’s Section 230, which currently says a site can’t be held legally responsible for what its users post there, and that a site moderating or screening those contributions doesn’t erase that immunity.

Yes, you can blame “CDA 230” for allowing comments sections to exist, but it’s also enabled the entire category of social media to flourish.

One part of SESTA would allow civil lawsuits and state prosecutions against sites that foster sex trafficking—that is, sex for money performed by children or adults subject to “force, fraud or coercion.” Another would criminalize “knowing conduct” by a site that “assists, supports, or facilitates” those crimes.

“Congress must stop allowing websites to promote and profit from sex trafficking,” said Sen. Richard Blumenthal (D.-Conn.) at a Sept. 19 Senate Committee on Commerce, Science and Transportation hearing.

‘SESTA would introduce new legal risk’

Internet Association general counsel Abigail Slater expressed a different perspective minutes later, suggesting the law could hurt sites that might unintentionally benefit from sex trafficking but have no practical way of stopping it.

“SESTA would introduce new legal risk not just for internet services that do not knowingly and intentionally facilitate illegal conduct, but also create risk for an incredibly broad number of innocent businesses,” said Slater, whose trade group represents Twitter (TWTR), Google (GOOGGOOGL), Facebook (FB), and other tech giants.

The reality, as ever, is more complicated. SESTA would indeed weaken a key piece of law that enables sites to give users a voice online without fear of endless litigation, even as current laws await use by prosecutors against the cretins trying to profit from child prostitution and sex slavery.

But while sites that rely on “user generated content”—especially those smaller ones that can’t afford to keep squads of lawyers on retainer—fear eroding that protection, they and the groups speaking for them in Washington seem resigned to accepting some form of this law.

‘A dollar has become more important than a human life’

The hearing last week provided compelling testimony for the bill that Sen. Rob Portman (R.-Ohio) introduced Aug. 1.

Yvonne Ambrose tearfully recounted how her 16-year-old daughter Desiree Robinson was raped and killed by a man who had responded to a listing that her pimp had placed for her on the classified-ads site Backpage.com.

“She screamed for help, and there was no one around to help her,” Ambrose said. And yet, she said, she could not hold that site responsible for profiting from her child’s exploitation. “Somehow, a dollar has become more important than a human life.”

What do current laws not do?

Federal criminal law doesn’t go away because of CDA 230, but courts still must decide where that law’s immunity ends. And multiple witnesses at last week’s hearing said it doesn’t provide enough guidance.

“Courts have struggled and failed to reconcile the CDA’s narrow immunity,” said Yiota Souras, general counsel for the National Center for Missing & Exploited Children.

California Attorney General Xavier Becerra observed that a state court threw out sex-trafficking charges that his office had brought against Backpage. “We’re fighting with two hands tied behind our back,” he complained.

That site has long been public enemy No. 1 for opponents of online prostitution. Well after Craigslist shuttered its “Adult Services” section, Backpage kept its own comparable category until January; the same types of listings now run elsewhere on the site.

The hearing, however, did not mention a newer law, 2015’s Stop Advertising Victims of Exploitation Act, that bans sex ads involving minors or coerced individuals—and which has yet to be invoked by a prosecutor, even though it was written with Backpage in mind.

“I don’t see any defect that’s made it unviable,” said Alexandra Levy, an adjunct professor at the University of Notre Dame’s law school, in an e-mail.

She noted that if Backpage actually commissioned ads for sex services—something the Washington Post found that it did in a July investigation—then the CDA wouldn’t protect it.

Backpage did not respond to a request for comment submitted through its site Wednesday.

Why SESTA makes sites nervous

Opponents of this bill say it will subject well-meaning sites to abusive or frivolous litigation. And while the resulting legal bills might not leave much of a dent in a Google or Facebook, they could easily bankrupt smaller firms.

“A single bad lawsuit can totally destroy a company,” said Evan Engstrom, executive director of the startup-advocacy group Engine, at a panel discussion in Washington Thursday.

They also argue that SESTA’s “knowing conduct” clause could incriminate sites that try to moderate user input—since, in theory, that meant they should have known of attempts to advertise sex services. They might find it safer, as Goldman said in the hearing, to give up moderating entirely.

Mike Masnick, founder of the tech-policy site Techdirt, noted that his site, like many, attracts a massive amount of comment spam that often links to illicit offerings, and automated filters can’t catch it all.

“We’ve seen fairly clever spammers posting perfectly legit and on-topic comments… but with links to whatever it is they’re spamming,” he wrote in an e-mail. “It’s a legit fear.”

SESTA backers, however, say they won’t yield on core principles. “We will not gut a bill that has broad and diverse Senate support with 31 cosponsors,” Portman spokesman Kevin Smith wrote in an email.

That leaves opponents of the bill hoping to soften its edges. At the Senate hearing, the Internet Association’s Slater asked legislators to clarify the “knowing conduct” rule and only allow lawsuits against sites that “acted with knowledge and intent.” Engine’s Engstrom made similar suggestions at Thursday’s panel.

In a conversation afterwards, Engstrom sounded reasonably optimistic about getting those changes. But SESTA features a widely loathed opponent, a goal virtually everybody supports, and a tech lobby that now finds itself increasingly questioned if not resented in Washington. It may be the rare tech-policy bill that Congress easily passes.