Category Archives: The In & Out

Nutty Twitter?

“Is this nuts?”. In yesterday’s FT Analysis (p.9) Paul Murphy argues that “investors appear to have taken leave of their senses, pumping cash into projects regardless of profitability.” The article, inspired by Google’s £3.2bn acquisition for the privately owned four-year old start-up Nest, raises the question if investors once again have lost touch with reality – 15 years after what Murphy cheerfully (and appropriately!) describes as the “Great Dot Comedy”. The author examines four companies, one of them the “messaging service” Twitter which, according to Murphy, now commands a rating about twice that of Facebook.

In previous posts (1st and 5th Nov 2013) Pinkers strongly supported Twitter’s IPO and is happy to disclose that it put its money where its mouth is. Time has passed… and Pinkers isn’t so sure, anymore… . No, it’s not that Pinkers has lost faith in the Twitter model: This is as relevant as ever. In fact, Pinkers believes we may still underestimate its significance. The London brokerage Aviate goes as far as stating that “the opportunity for Twitter is to become the largest real-time delivery system, large enough and pervasive enough to exert noticeable ‘pressure’ on the internet itself.” Pinkers is inclined to agree.

However, this does not necessarily make it a great investment opportunity. Indeed, Twitter’s ‘DNA’ may actually prevent it from ever delivering the profits required to justify its current $40bn valuation which, by any conventional yardstick, can only be described as insane. So, is Paul Murphy right to refer back to the “collective psychotic episode” of the great dot-com bubble fifteen years ago? Yes, but for the wrong reasons. In its current form, Twitter provides a unique platform allowing its users to engage and communicate on a forum level hitherto unthinkable. The best example of its power is probably the ‘Arab Spring’: Without the instant messaging service Twitter, this would undoubtedly have taken a very different path and, indeed, may never have happened at all. Speed was of the essence, allowing the revolutionary ‘virus’ to spread rapidly and thus disabling the incumbent authorities before they even became aware of it. As such, Twitter defined and established itself as a highly effective democratic instrument.

Pinkers likes Paul Murphy’s definition “messaging service”. Pinkers has always argued that Twitter is not ‘social media’: Facebook is. Twitter is a telephone. No, not a ‘smartphone’ but just a good ‘new-fashioned’ telephone!  That it precisely why it is such an effective an powerful tool.

The founders’ decision to turn this tool into a conventional business model by tapping the public markets may yet backfire. Perhaps understandably, both founders and early investors wish to translate a great idea into hard cash. As it stands, in its current and original form, Twitter is a huge success. However, to monetize the model would require a complete transformation (advertising!) which may well turn out to be incompatible with its original DNA and in consequence risk damaging the core concept.

On reflection, Pinkers thinks the decision to go public was probably a mistake. A successful business is about bringing in customers, selling a product and making money. Twitter is bringing in customers but it is not selling a product and that is precisely why it is not making money. A ‘partnership’ model – perhaps along the lines of John Lewis? – might have been more appropriate. Unless the management  team can pull off a miraculous coup, Pinkers fears Silicon Valley’s  prevailing dynamics of a “magical valuation creation machine” may yet render Twitter impotent.

Get me OUT of here: Slumguzzle!

Published in today’s FT Money section, we are offered (for free!) a brilliant and simply invaluable piece of investment advice: How to bamboozle your way out when being confronted with an incontrovertible fact. Crushing defeat? Annihilation? No more! Here the perfect escape route, courtesy of:

The two double-barrelled protagonists:

Merryn Somerset Webb: Formidable, (razor!) sharp-witted… and yes, a little scary (!) editor-in-chief of MoneyWeek. (MSW)

Ewen Cameron Watt: Charismatic (aged Boris Johnson lookalike) and awe-inspiringly eloquent chief investment strategist at the BlackRock Investment Institute. (ECW)

MSW: “… No QE, no rising market.”

ECW: “I think it’s a bit more complicated than that. … . ”

Yes, the word ‘slumguzzle’ does exist and ECW’s answer is the perfect definition – no need to google further!

(For a full transcript: FT Money – Cover Story, pages 8, 9 and 10.  FT.com: “Watch out for investment banana skins in 2014″ by Jonathan Eley - honestly, a MUST-READ!)

Losing appetite?

While sales still managed to beat consensus forecasts, S&P Capital IQ maintained its ‘sell’ rating for Sainsbury’s and cut its target price, saying: “We are increasingly concerned about Sainsbury’s weakening balance sheet and do not see any dividend increase in fiscal year 2015.”

Pinkers says: NONSENSE!

Retailers are clearly OUT, especially the traditional ‘big four’ food retailers, and John Lewis is not for sale… but selling Sainsbury’s at this stage would be daft.  The price is firmly underpinned by continued takeover speculation and with Quatar owning 26% and the family shareholding now immaterial, there will inevitably some kind of new ‘arrangement’ in the not so distant future – probably coinciding with Justin King’s departure.  Furthermore, there is the property portfolio, valued well in excess of the company’s market cap.  The pension fund might pose a little hurdle but no more than that and certainly not the major obstacle it proved when the retailer was last on the shopping list in 2007. Sainsbury’s is not a buy right now – very little is – but investors should keep a firm grip on their holdings!

Talking food retail… minnow Greggs has held up remarkably well in the past few weeks. Surprising considering the generally gloomy sentiment in the sector. Could that be because it’s perceived to be the Aldi of takeaways?

Disclosure: Pinkers is a shareholder in both companies and rates both a hold, but no more.  Greggs could even surprise on the negative side, considering recent (ill-timed?) efforts to move upmarket. Fingers and pug’s paws firmly crossed.

PS 9 January!

Well, a lot has happened in the last 24 hours… M&S, Tesco, Morrisons and little Greggs have opened their books to the hungry world of food retail investors. In summary: Morrisons a disaster, Tesco no sign of hope, M&S bad but not as bad as feared and… little Greggs doing remarkably well! The brokers are out issuing their predictable recommendations and, today, M&S is in the good books of Investec, pushing up the s/p to even sillier levels. Or perhaps not so silly, after all? The M&S business model is redundant: Selling cans of baked beans alongside frilly knickers surely is not the future of retailing. However, even Pinkers rates M&S a firm hold as this business clearly is a prime candidate to be broken up by private equity. Contrary to Mr Green’s statements, Pinkers would not be surprised if he wasn’t talking M&S to some good friends… . As for Morrisons: lost cause. Tesco, the ‘super tanker’ may need more time to turn around? Very doubtful: As Justin King acknowledges, the food retail environment has changed for good. Waitrose and Aldi are here to stay and Sainsbury’s are successful because they have a much clearer distinction between their up- and down market offering.  Tesco is very confusing and just does not seem to be able to simplify its product range; the packaging, too, is badly designed – a mess, indeed.  Waitrose gets it right: simple and pleasing on the eye and stomach.  Sainsbury’s not too bad but could do a lot better; definitely scope for improvement.  As for little Greggs: Not sure… but hard-(de)pressed consumers clearly have taken to the sugary ‘food-on-the-go’ comfort eating.

Still, the ‘big four’ have turned into dinosaurs and we know what happened to that species… Sainsbury’s and M&S have break-up and M&A value. Forget the rest.