Archives for June 2018

Amazon Replaces Merchants with Bots: How Levi's, Wolverine Worldwide and Saks Can Compete

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I came across an interesting article in Bloomberg last week. Amazon has been synonymous with robotics and automation, but for the most part that has been relegated to stocking the shelves and other operational tasks in the warehouse. Interestingly, according to the article, automation is starting to take over the roles of the white collar workforce as well. The article states:

“Machines are beating people at the critical inventory decisions that separate the winners and losers in retail. For the staffers deciding how many books, games or plastic pool toys to peddle, the tradeoff can be stark: Order too little and you miss out. Order too much and you’re forced into costly clearance sales. Amazon’s algorithms, refined through years of monitoring customer behavior, are getting the Seattle-based company out of the guessing game.”

Data-backed decisions are a topic that I discuss a lot on Forbes. It’s something that I firmly believe in. Retailers and brands can no longer rely solely on intuition given the power that the consumer has at his or her fingertips. Customers can find any product they want at the price they want, so how are retailers and brands going to deliver that differentiated product AND keep up with Amazon?

Not all retailers can be as fortunate as Walmart, who has the ability to purchase other companies to keep pace with Amazon. Acquisitions like Jet.com and Flipkart are enabling Walmart to compete on the web and in India, respectively. I will be writing more about this next week on the BUILD vs BUY mentality that Amazon and Walmart are exhibiting. For now though, its partnership with Lord & Taylor and acquisitions of ModCloth and Bonobos are also enabling the company to stake a firm claim in fashion. I expect Walmart is already on the prowl for its next acquisition, which likely would be similar to Amazon’s new technology.

So, while Amazon’s strategy has been to develop technologies internally and Walmart’s is to acquire technologies, how can the rest of retailers and brands like Levi’s, Wolverine Worldwide and Saks Fifth Avenue keep pace? Not everyone’s checkbook can afford a multi-million or even billion dollar investment, but you MUST compete.

It’s the same principle as any other facet of your life. If you’re heading on a trip and you need a GPS system to navigate you there, your first thought isn’t, “I should develop something.” Instead, you log onto the App Store, read reviews and download what you think is the best GPS solution for your needs.

The same is true in this scenario. As I’ve stated before, there are numerous technologies that retailers and brands should be doubling down on to compete with Amazon and position themselves best against their competition. Technologies that aid in critical product development and inventory decisions are just the latest that Amazon has shined a spotlight on.

Platform Strategies Serve Go-Jek And Line Well In Southeast Asia

, Opinions expressed by Forbes Contributors are their own.

Silicon Dragon

TechSauce panelists

Platformization is a term in technology that I haven’t heard used much, at least not until I came to Bangkok to speak at a TechSauce event focused on the growing opportunity in Southeast Asia.

I moderated a panel with a group of platform innovators from the region — Go-Jek and Line — with brands that cross many vertical sectors from gaming and chat to ride-hailing and shopping.

These two companies have expanded far beyond their core service. And that makes sense to keep their users coming back for more from their brands no matter the service, said my panelists Ajey Gore, CTO of Go-Jek and Ariya Banomyong.

It’s also a defensive move. If they don’t extend to new areas, someone else. That someone else could very well be the Chinese tech giants who see Southeast Asia as the next opportunity. With a market size of 665 million and a culture that is more similar to China than western markets, China’s largest technology companies are entering the region, snapping up shares in the region’s rid-sharing and payment upstarts such as Go-Jek, Grab, Ola and Paytm.

So it can amount to a strategy of building a moat around your business to ward off rivals. It’s survival of the fittest, explained Go-Jek exec Gore.

This platform is well played by Go-Jek and Line, which can simplify the name of their services with Go and Line, just like Alibaba has done with so many of its offerings such as AliPay, AliCloud, AliHealth and so on.

How do startups fare in an environment where so much of the action is centered on these platform players?

Grace Xia, a venture investor with Jungle Ventures and former Tencent executive, says that startups aren’t cut out. They can become innovation pipelines to these platform companies. That could even lead to an acquisition by the biggies, which certainly is not unheard of in this fast-emerging tech innovative region.

Rebecca A. Fannin is founder/editor of news, events and research group Silicon Dragon. She is an author of three books on innovation and venture trends, and is a public speaker.

Exclusive: Tesla to close a dozen solar facilities in nine states – documents

LOS ANGELES/SAN FRANCISCO (Reuters) – Electric car maker Tesla Inc’s move last week to cut 9 percent of its workforce will sharply downsize the residential solar business it bought two years ago in a controversial $2.6 billion deal, according to three internal company documents and seven current and former Tesla solar employees.

FILE PHOTO: Elon Musk, Chairman of SolarCity and CEO of Tesla Motors, speaks at SolarCity’s Inside Energy Summit in Manhattan, New York October 2, 2015. REUTERS/Rashid Umar Abbasi/File Photo

The latest cuts to the division that was once SolarCity – a sales and installation company founded by two cousins of Tesla CEO Elon Musk – include closing about a dozen installation facilities, according to internal company documents, and ending a retail partnership with Home Depot Inc that the current and former employees said generated about half of its sales.

About 60 installation facilities remain open, according to an internal company list reviewed by Reuters. An internal company email named 14 facilities slated for closure, but the other list included only 13 of those locations.

Tesla declined to comment on which sites it planned to shut down, how many employees would lose their jobs or what percentage of the solar workforce they represent.

The company said that cuts to its overall energy team – including batteries to store power – were in line with the broader 9 percent staff cut.

“We continue to expect that Tesla’s solar and battery business will be the same size as automotive over the long term,” the company said in a statement to Reuters.

The operational closures, which have not been previously reported, raise new questions about the viability of cash-strapped Tesla’s solar business and Musk’s rationale for a merger he once called a “no brainer” – but some investors have panned as a bailout of an affiliated firm at the expense of Tesla shareholders. Before the merger, Musk had served as chairman of SolarCity’s board of directors.

The installation offices that the internal email said were targeted for closure were located in California, Maryland, New Jersey, Texas, New York, New Hampshire, Connecticut, Arizona and Delaware.

The company also fired dozens of solar customer service staffers at call centers in Nevada and Utah, according to the former Tesla employees, some of whom were terminated in last week’s cuts. Those employees spoke on condition of anonymity because making public comments could violate the terms of their severance packages.

“It’s been a difficult few days – no one can deny this,” a Tesla manager wrote in a seperate internal email, sent to customer service employees shortly after the cuts were announced.

Tesla has been burning through cash as it tries to hit a target of producing 5,000 Model 3 electric sedans per week after production delays. The company faces investor pressure to turn a profit without having to tap Wall Street for additional capital.

FILE PHOTO: A SolarCity vehicle is seen on the road in San Diego, California, U.S. June 22, 2016. REUTERS/Mike Blake/File Photo

The total number of cuts to the solar workforce remained unclear. Some personnel at facilities closing down were being transferred to other sites, the current and former employees said. SolarCity employed about 15,000 people at the end of 2015 but has since cut thousands of workers.

Ending the Home Depot partnership, which allowed for solar sales in about 800 stores, is part of Tesla’s larger effort to absorb SolarCity into its high-end brand and sell through 90 of its 109 U.S. retail stores and its website, the company said.

“Tesla stores have some of the highest foot traffic of any retail space in the country,” Tesla said.

Analysts questioned Tesla’s plans for the solar business in light of the latest cuts to staff and retail operations.

“In effect they seem to be saying, ‘We have no strategy for selling solar,’” said Frank Gillett, an analyst at Forrester Research, adding that the SolarCity purchase “looks pretty awful right now.”

FALLING SALES

In the first quarter of this year, Tesla installed 76 megawatts of solar systems – down from SolarCity’s more than 200 MW a quarter in early 2016, when it was the leading player in the industry. In announcing quarterly results in February, Tesla said growth in solar deployments would resume later this year.

Tesla’s falling solar sales also could jeopardize the future of a joint venture with Panasonic, announced as Tesla moved to acquire SolarCity in 2016, to produce solar modules at a new factory in Buffalo, New York.

Tesla has an agreement with New York state requiring the company to spend $5 billion within 10 years. If Tesla fails to meet that obligation and others, the company may be required to pay tens of millions of dollars in penalties at various milestones, could lose its lease, or be forced to write down the assets, the company told investors in a May filing.

FILE PHOTO: Men gesture next to solar panels set up by Tesla, at the San Juan Children’s Hospital, after the island was hit by Hurricane Maria in September, in San Juan, Puerto Rico October 26, 2017. REUTERS/Alvin Baez/File Photo

In response to questions from Reuters, Tesla said it is meeting its hiring and spending commitments for the factory.

In March, a Delaware judge ruled against a Tesla motion to dismiss a lawsuit by the company’s shareholders over the SolarCity deal. The lawsuit alleged Tesla’s board of directors breached its duties to shareholders by approving the merger.

SolarCity founder Lyndon Rive, who is Musk’s first cousin and left Tesla last year, did not respond to a request for comment.

HIGH MARKETING COSTS

The move to end the longstanding Home Depot partnership blindsided many staffers because Tesla had announced an expansion of the arrangement as recently as February.

GTM Research analyst Austin Perea estimated the partnership has recently accounted for about half of sales, in part because of previous Tesla moves to cut back on other sales and marketing costs.

Such third-party retail partnerships are among the most expensive means of generating solar sales, according to the clean energy research firm, in part because retailers take a cut of each sale.

The cost of winning a customer through a store like Home Depot can be up to $7,000 per system, according to GTM Research, compared with a national average of $4,000 per installation.

Home Depot spokesman Stephen Holmes said the retailer’s relationship with Tesla would last through the end of the year, adding that Home Depot would continue a partnership with Tesla competitor Sunrun in an undisclosed number of stores.

Over the past year, Tesla has stepped up efforts to sell solar and batteries for energy storage in its retail stores, something Musk said last year was “a much more efficient channel for demand generation.”

At the same time, Tesla stopped door-to-door sales, once among SolarCity’s most successful means of reaching new customers, and salespeople were no longer allowed to hold local events or buy online leads, the former employees said.

Such tactics are standard practice across most of the competitive residential solar industry.

The Home Depot partnership was costly but also integral to Tesla’s solar panel sales, a former employee told Reuters.

“It’s an expensive account,” the former employee said, “but it does bring in all the revenue.”

Reporting by Nichola Groom in Los Angeles and Salvador Rodriquez and Kristina Cooke in San Francisco; Editing by Richard Valdmanis and Brian Thevenot

Visa Wants Fingerprint Sensors on Your Credit Cards. Here's Why It Won't Happen Anytime Soon

Just when Americans were finally getting used to using chips on our credit cards, Visa and Mastercard are looking to introduce another security feature: fingerprint sensors embedded in the cards themselves. 

The Wall Street Journal reports that the two giants of plastic-based purchases are in the early stages of adding biometric security measures to their cards. 

The technology works in the same fashion as fingerprint sensors on smartphones. When you first get a card, you register your fingerprint on it and then each time you make a purchase you place your finger on the sensor and the card will check to make sure the print matches the one it has stored for the card’s owner.

There are a number of issues complicating what might seem like a straightforward feature here, however.

First, there’s the notion that attaching fingerprints to transactions could actually introduce a new security vulnerability into the system, giving hackers and identity thieves a new data point to target, steal and exploit.

So far this hasn’t been much of a problem with fingerprint sensors on phones, at least not yet.

Then there’s the big question of cost. Banks would have to shoulder the cost of re-issuing all new cards with the fancy new sensors right after shelling out to send us all new chip cards.

There’s little motivation for card issuers to make that investment in security when very few customers are clamoring for fingerprint sensors. Mastercard has run a pilot of the cards in South Africa and Visa ran a U.S. fingerprint debit card pilot through Mountain America Credit Union earlier this year. According to WSJ, only 130 people signed up for the American program.

Of course, there is another solution to making transactions more secure. It’s called blockchain, but it’s a whole other can of worms that many banks consider a threat and most consumers don’t yet understand.

At the same time though, big names in finance like American Express and Santander are experimenting with their own blockchain implementations and flirting with existing cryptocurrencies and tokens such as Ripple. 

So it’s possible that our plastic purchases may be secured by blockchain before we ever get fingerprint cards, and most consumers may never even realize it.

A restaurant in China offers an all you can eat plan for $19 a month…and goes bust. Surprised?

Offering free products is a marketing tactic that has been used by businesses big and small ever since there have been businesses big and small. But these tactics certainly have their risks, as the owners of a restaurant in China recently found out.

For the equivalent of only 120 yuan ($19) per month, customers at Jiamener restaurant Chengdu, Sichuan province – a city that boasts more than 14 million residents – were able to eat as much as they wanted for as long as they wanted. The promotion was a hit. In only 10 days, more than 1,700 people signed up for the deal. Unfortunately, the restaurant’s owners got a lot more than they asked for.

Less than two weeks after starting the campaign, the restaurant was out of business and more than $78,000 in debt. The reason isn’t surprising. During that period the restaurant fed more than 500 customers a day – many who shared their “membership cards” with friends and family who then also lined up outside (and then lingered inside) from early morning until late at night. Workers at the restaurant pulled ten hour shifts and the eatery’s owners only managed a few hours of sleep. Not fun. Not profitable.

“We knew we would be losing money [by launching the discount promotion],” one of the owners was quoted as saying to the Chengdu Economic Daily and reported in the South China Morning Post. “We wanted to accumulate more loyal clients through this strategy.” The owners strategized that the additional customer volume would enable them to purchase beer and alcohol at reduced prices which would then offset the cost of the food they were essentially giving away.

All-you-can-eat restaurants are not new. Big chains and hotels in the U.S., from Golden Corral to Pizza Hut to Red Lobster to the higher end buffet spreads in Las Vegas all have similar models to what Jiamener offered. So why did this little restaurant’s all-you-can-eat promotion fail?

For starters, jumping into the “all-you-can-eat” world takes a lot of experience. Take a walk into one of those family style buffet restaurants in the U.S. and you’ll be subject to the tricks of the trade learned over many decades.

Carbs and starches, breads and other filling foods, along with less expensive salads, are presented to customers first and foremost before everything else to fill up their bellies. Food choices not only lean towards much less expensive options (pizza and pasta over steak) but – let’s face it – aren’t exactly made up of the finest quality ingredients. Drinks are aggressively peddled. All of these places are designed to fill you up with cheaper stuff and get you ordering higher margin products that are not included in the all-you-can eat deal. And most of it is self-served to cut down on employment costs. I’m betting these tactics were lost on the new owners of Jiamener.

I’m also betting those same owners didn’t really test out their financial model as much as they should have. Like any start-up, the numbers need to be conservative, tested and questioned. Were the assumptions too aggressive? Did they consider worst case scenarios (like diners giving their membership cards to their entire families?). Did they run their numbers by outside advisors like an accountant or lawyer? Were their estimates too rosy? Too optimistic? Seems so.

Finally, giving away free stuff like this is oftentimes best left to the big boys. Volume and scale is everything, particularly when you’re operating a low margin business like a restaurant. I’m not sure a single Fogo de Chão restaurant could be profitable on its own. But a chain of all-you-can-eat Brazilian meat restaurants where everything from purchases to employee contracts to kitchen equipment that can be negotiated at volume levels and a regimented order of cooking, serving, delivering and cleaning can be implemented across many locations? That’s where a restaurant can generate profits. When you’re big you can afford to give away free stuff. When you’re very small, like Jiamener, you’re taking a big risk and need to be very, very careful.

Unfortunately, Jiamener’s owners made one last, fatal flaw: they bet the farm on their idea. Now the farm, along with everything else – is gone.

I’ll give them credit for one thing though – they didn’t lay the blame on anyone else but themselves. “The uncivilized behavior of the diners was secondary,” one of the owners admitted. The main problem was our poor management.”

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Twitter to Score Ultimate World Cup Win

, I’m the CEO of CultureBanx, redefining business news for minorities. Opinions expressed by Forbes Contributors are their own.
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MOSCOW, RUSSIA – JUNE 19: Moussa Wague of Senegal is challenged by Kamil Grosicki of Poland during the 2018 FIFA World Cup Russia group H match between Poland and Senegal at Spartak Stadium on June 19, 2018 in Moscow, Russia. (Photo by Catherine Ivill/Getty Images)

Sports fans often use Twitter to follow and discuss live sporting events. A lot has changed on the platform since the last World Cup. Primarily the addition of video, along with a users ability to discover content that’s relevant to their interests. Will Twitter’s bottom line be the actual World Cup winner?

The Breakdown You Need to Know: The 2014 World Cup boosted Twitter’s second-quarter revenue by $24 million, according to MKM Partners. Some analysts predict this year’s event will be worth more and can affect results for the second and third quarters. Black U.S. adults could play a big role in this since they use Twitter more than any other ethnic group at 26%, according to Pew Research.

Since the last World Cup shares of Twitter are up 24% and currently trading near three-year highs. At this point the company has a more refined platform and strategy, which means the event could deliver an even larger boost this time around.

Twitter has exhibited its ability to shape global events and its head of content Kay Madati is helping make video profitable for the company. Madati recently announced 30 new video content partnerships. The 2018 World Cup is likely to spur even more user engagement which should translate into more ad revenue. Video ad spending at Twitter is set to total $18 billion in 2018, according to eMarketer.

CultureBanx research took a look back at past major live sporting events and their impact on Twitter’s engagement. There were 672 million tweets during the 2014 FIFA World Cup. Also, there were 45 million tweets during Super Bowl 2018 including 4.8 billion impressions. Lastly, the 2017-18 College Football season garnered 33 million tweets along with 4.9 billion impressions.

Through the social media giant’s deal with Fox Sports, the network will provide next to real-time highlights of every goal scored throughout the competition. Also, Fox Sports will produce both pre-game shows along with clips including player interviews. “Video is a major area of strength for Twitter, already driving more than half of the company’s total ad revenue,” wrote JP Morgan analyst Doug Anmuth.

The company now has 69 million monthly users in the U.S. and 267 million abroad. Of course the international nature of the event should help aid further penetration in some overseas markets. International now represents 48% of Twitter’s ad sales versus just 33% four years ago. It’s important to be aware that advertisers typically spend more to reach users in the U.S., compared with international markets particularly in developing areas.

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Fortnite's Stink Bombs Do Some Pretty Serious Damage

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, I write about video games and technology. Opinions expressed by Forbes Contributors are their own.

Credit: Epic Games

Fortnite: Battle Royale’s new stink bombs.

Fortnite got a new weapon today, and while that’s a sentence you can write just about every other week, this week’s feels like it might actually have the potential to change the way the game is played. The stink bomb went live today, and it’s basically a cute name for mustard gas: a brutal, yellowish cloud that forms sulfuric acid in your lungs and melts you from the inside. Despite the aesthetic similarities, Epic want sto be sure that you know the stink bomb is not that. Regardless, it’s just as brutal. Damage was a major question when the stink bomb first released, and I can assure you: the thing hurts.

Like most players, my first experience with the legendary-tier stink bomb was on the receiving end. I was playing squads without teammates because I was getting some challenges done and I find they’re easier in squads. So I was already at a steep disadvantage when I came across three opponents by the indoor soccer stadium. Regardless, I built my little 1X1 fort and took aim, like you do. I was immediately pelted by at least two stink bombs, rendering my fort completely unusable. I did the only thing that I could do and hopped out, where I was immediately shotgunned by the players that had been using the stink as a cover for an approach.

The stink here does 5 damage every half-second for 9 seconds for a total of 9 seconds, which is just under what it takes to kill an opponent at full health. Despite the two grenades, the damage I received did not appear to stack, meaning I still only received the five damage per half second. Regardless, that was enough to make my life very unpleasant. It means that if I were to have stayed put it would only have taken 10 health damage to put me down for good.

I’d expect this to change the game in interesting ways. Right now, explosives and wild firing are the only real area control methods, and neither does so as effectively as the stink bomb. It could really change the way the early moments of an encounter go if one player is able to scare the other out of their fort without losing access to theirs. I’m interested to see what this looks like at the higher levels.

Even After Multiple Cyberattacks, Many Businesses Fail to Bolster Security. Here's What You Need to Do

Small businesses suffered a barrage of computer invasions last year but most took no action to shore up their security afterward, according to a survey by insurer Hiscox.

It found that 47 percent of small businesses reported that they had one attack in 2017, and 44 percent said they had two to four attacks.

The invasions included ransomware, which makes a computer’s files unusable unless the device’s user or owner pays a ransom, and phishing, in which emails that look legitimate are used to steals information. The invasions also include what are called drive-by attacks, which infect websites and in turn the computers that visit them.

Despite the prevalence of the data invasions, only about half of small businesses said they had a clear cybersecurity strategy, the report found. And nearly two-thirds said they didn’t bolster their security after an attack.

Hiscox estimates that seven out of 10 businesses aren’t prepared to handle cyber attacks, although they can cost a company thousands of dollars or more and ransomware can shut down operations. Cybersecurity tends to get pushed to the back burner while owners are busy developing products and services and working with clients and employees. Or owners may see it as an expense they can’t afford right now.

Some basic cybersecurity advice:

–Back up all of a company’s data securely. This means paying for a service that keeps a duplicate of all files on an ongoing basis. The best backups keep creating versions of a company’s files that can be accessed in the event of ransomware — eliminating the need to pay data thieves. Some backups cost just a few hundred dollars a year.

–Install software that searches for and immobilizes viruses, malware and other harmful programs. Also install firewalls and data encryption programs.

–Make sure you have all the updates and patches for your operating systems for all your devices. They often include security programs.

–If you have a website, learn how to protect it from hackers, using software including firewalls. But you might be better off hiring a service that will monitor your site with sophisticated tools that detect and disable intruders.

–Tell your staffers, and keep reminding them, about the dangers of clicking on links or attachments in emails unless they’re completely sure the emails are from a legitimate source. Educate your employees about phishing attacks and the tricks they use. Phishers are becoming increasingly sophisticated and are creating emails that look like they really could have come from your bank or a company you do business with.

–Hire an information technology consultant who will regularly look at your systems to be sure you have the tools you need to keep your data safe.

–The Associated Press

The Surprising Economic Benefits of Clean Energy

It seems to be a common misconception that environmentalism and economic growth are opposed, but nothing could be further from the truth. The economic power of the green movement is most visibly on display in the clean energy industry, which is rapidly growing and innovating daily.

Clean energy impacts residential, commercial, and industrial properties, so how it is supported and implemented is key to how it impacts both the planet and the economy. Here’s a look at programs that support the development and expansion of clean energy, as well as how clean energy is being integrated with our infrastructure today.

How clean energy impacts businesses

Clean energy might not seem, on its surface, like a business issue for anyone outside of the renewables industry. However, on the contrary, it is a powerful cost-cutting measure that carries with it a huge branding opportunity. Not only can businesses save money by harnessing the power of sun, air, or sea, but they can also demonstrate to a consumer base eager for corporate social responsibility that they care about their environmental impact.

Those benefits are driving adoption by more companies. In 2017, companies acquired more than 4 gigawatts of clean energy, the most of any year on record. And already in 2018 companies have acquired nearly three quarters of last year’s total, putting them on pace to easily surpass 2017’s record-breaking acquisitions of clean energy.

Adoption rates also mean that the branding advantage presented by the opportunity to shift to clean energy will soon turn into an imperative. Changing now means companies are responsible kids on the block, but waiting until later means they run the risk of looking like a lackadaisical polluter. As clean energy becomes more ubiquitous, it will be expected, rather than applauded. Large adopters are clearing the way for smaller companies, and clean energy is moving toward something that feels more like mass adoption.

Regulatory support for clean energy

In 2015, the White House established new Property Assessed Clean Energy (PACE) guidelines through the Federal Housing Administration that should help scale up adoption of clean energy. PACE enables low-cost, long-term financing for a variety of energy efficiency, renewable energy, water conservation, storm protection, and seismic improvements. PACE financing is repaid as a special assessment or tax on the property’s regular tax bill and is processed the same way as other local public benefit assessments like sidewalks and sewers.

Depending on where you live, PACE financing can be used for improvements on commercial, residential, nonprofit, light industrial and agricultural properties. PACE is designed to lower utility bills for homeowners, create jobs and help local governments achieve important environmental goals (although it hasn’t been without its opponents).

Real world implementation of clean energy

Technological development and theory are great things, but they are nothing without real action. How we implement clean energy and the market conditions surrounding it are the most important aspects of transforming the way we obtain our energy.

A number of companies use earth-friendly practices and products to provide the homeowner with energy saving solutions, offering qualifiable PACE improvements and upgrades that can be made to a home or business. Many work with financing companies like Renew Financial, a clean-energy finance company led by CEO Cisco DeVries, the innovator of the PACE finance model, to provide solutions that aim to keep the immediate environment clean and reduce energy waste and costs.

Environmental resiliency is certainly an issue across the country. In Florida in particular, homeowners are concerned due to the risks of flooding, hurricanes, and extreme heat.

One company, Evergreen Homes, says it’s seeing an increase in requests for critical property upgrades such as roofing, wind-resistant windows and other energy-efficiency improvements. CEO Ido Stern says it provides customers with a number of options “to make much-needed weatherization and energy improvements that make their properties hurricane safe, and comparable with new construction, while at the same time saving them money and increasing their property values.”

Every dollar saved by the implementation of green solutions and clean, renewable energies is a dollar that can be used in the local economy, boosting growth and improving the business environment. In this way, economic growth and environmental progress go hand in hand. So, the next time someone says you have to degrade the environment to make money, remember that a large sector of the American economy is driven by finding business solutions to critical environmental problems.

SA Interview: Focusing On The Numbers, Not Just The Story, With Peter Kaye

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Peter Kaye is an analyst at an investment advisor with >$1B AUM. He has completed all three levels of the CFA program. He primarily focuses on value and GARP strategies. We emailed with Peter about how to take advantage of a deal break and mispricing when investors write off an entire country as well as how (and why) investors can “shadow” a hedge fund manager’s portfolio.

Seeking Alpha: Can you discuss how (and why) investors can incorporate actual numbers into their investing rather than solely qualitative arguments? Can you give an example?

Peter Kaye: Good question. I find a lot of people get very attached to a story rather than actually looking at the numbers. I like using Microsoft (NASDAQ:MSFT) or Cisco (NASDAQ:CSCO) during the tech bubble as examples. Microsoft, for instance, is one of the best businesses ever: dominant position in software, very high switching costs, very high margins and tons of free cash flow the company can use to either buy back shares or reinvest in the business. It made a great story as well: software was (and is) eating the world, and there was the potential for multiple decades of growth ahead of the company.

That’s all well and good, but look what happened if you’d bought shares in 1999: you wouldn’t have broken even for 16 years (this is why numbers matter)! The simple fact at the time is that the shares were pricing in a perfect future. One can actually perform a fun exercise with some of the companies in the tech bubble where you put yourself in 1999, and run a DCF on the company you’re looking at using the company’s actual free cash flow that they generated over the next 18 years. You can see how far the valuation of many companies strayed from their intrinsic value during that time, and it really makes you think about the high flyers today.

Investing is all about probabilities because the future is inherently uncertain. The reason that value investing works, over time, is that low expectations are just easier to beat. Cheap companies either have management work hard to stop being cheap, or another company comes in and does an acquisition, or the business improves on its own. There are multiple ways to win there, whereas for a company whose intrinsic value is completely reliant on future cash flows that need to grow a lot, there are a lot of ways for that company to disappoint.

As to how investors can incorporate numbers? Always ask for proof of a qualitative claim, and always remember that the price you pay (relative to value) is the greatest determinant of long-run returns. In order to figure out the value, you need to run some numbers.

SA: The phrase “this is priced into the stock” gets thrown around a lot – how do you determine what is (or is not) priced in? Are there specific factors or examples?

PK: My own personal way to check this is to run a simple DCF of the company. The idea is simply that, similar to a bond or any other financial asset, the value of a company is the present value of the free cash flow it generates over time. This is true simply because of math: if you buy a company for $1 and it generates $2 of FCF for a year, your return will mathematically be 100%. You’ll probably never find 100% free cash flow yields anywhere, but the principal is the same (higher free cash flow, now or in the future, means higher returns). This is why looking at free cash flow (and numbers!) matters.

Let’s say a company has sales growth of 5% and generates 10% free cash flow margins. Let’s assume that continues forever, and run a DCF using those assumptions. If that results in a stock price of $100 and the current price is $50, then we can say the market is pricing in significantly worse results, and we can then delve into why that is. The model may well be wrong, and the market might be right, but now at least you have some questions to ask and research to do.

The process works the other way as well: if the stock price is $100 and the DCF gets us to $50, then the market is pricing in either faster sales growth or much better margins, and we can then delve into why that might be and whether those assumptions are realistic.

I’ll walk through a simple example.

I know that analog semiconductor businesses should grow at 1.5x to 2x GDP due to increased technological content in pretty much everything around the world. GDP growth around the world is expected to be between 2 to 3% over the long run, so we know that at the low end, analog businesses should grow sales at 1.5 x 2% = 3%.

I know that analog semiconductor businesses have high barriers to entry and it’s a pretty consolidated industry, so margins tend to be quite high, with Texas Instruments having the highest margins due to scale (semiconductors are basically a manufacturing business so economies of scale are an important part of the business). A company like NXPI has averaged roughly 20% free cash flow margins, and that’s a little lower than some other larger names, and higher than smaller names, so that fits with the scale dynamics I discussed earlier.

So we can put the two together: grow sales at 3%, and slap a 20% free cash flow margin on it, and whatever value that gives us is sort of a floor valuation for a long-term investor. In NXPI’s case, this results in a valuation of about $98 per share using a 9% discount rate.

Now what can go right here? GDP growth could be faster. Analog businesses could grow at 2x GDP instead of 1.5x. Margins could increase as the business grows. So there are multiple sources of upside to this value that I can quantify if I choose to, but I can simply say they’re “free” upside if the stock price is trading below my conservative estimate of fair value.

After going through the above analysis, I can say that what is “priced in” to NXPI is a darker future than what I believe will happen over the long term (say 5 to 10 years).

SA: In your bullish thesis on Workiva (NYSE:WK) you said “A SaaS business is effectively a business where each customer is like a bond” – can you unpack that thought process? How can investors in SaaS companies determine if their “bond” will default or is AAA?

PK: As I said above, the value of any financial asset is the present value of the free cash flow it generates. The same is true of a customer! For most businesses, there is only one cash flow: a single sale. For a SaaS business, with recurring revenues, there is a cash flow stream, and we can value that stream. Each customer brings in revenue, and there are COGS to expense, and the net of the two is the cash flow per customer. If we see that the company has customer retention of say 80%, then we know that the average customer life is 1/(1-0.8) or 5 years.

We can then compare that to the cost to acquire that customer to see whether the business makes sense. In Workiva’s example, the company earns a lot from customers, and it doesn’t cost them too much relative to what they earn, to go acquire them. Thus, it makes sense for Workiva to spend as much as possible acquiring all these customer “bonds” and sitting on them. This dynamic is why it can make a lot of sense for growing SaaS businesses to actually post operating losses as they grow: they’re investing in getting highly profitable customers!

One can look at the customer retention rate to see the likelihood of “default”, but it’s a difficult thing to really measure. Lots of factors weigh on it like switching costs, customer service, competitors’ products etc. One has to just make a best guess as to how happy the customers are and how long they’ll stay with the company. If the company’s customer retention rate has been high historically (and there aren’t a bunch of customers on free or discounted software…) then that should give some confidence that customer life will be decently long.

SA: Can you discuss how an actual or expected deal break can be a potential long idea?

PK: Deals are usually bought by M&A arbitrage funds who attempt to profit from the spread that deals trade at. The problem is that when a deal fails, these funds have to sell the stock. For widely held deals, or illiquid stocks, this can create a huge wave of technically motivated selling that has nothing to do with the fundamentals of the company.

I start licking my lips when I see things like this happen: the best thing to be in the whole world to me is a buyer from a forced seller. When people have to sell, they make dumb emotional decisions, and that’s where an investor with a little patience can profit!

The other advantage of a broken deal is that you can see where, roughly, the private market values the company. If a strategic acquirer was perfectly willing to pay $100, but the deal failed because of regulatory reasons or financial reasons, then you can make a decent guess that the business is probably worth around $100 to a strategic acquirer.

That doesn’t, of course, mean you should rush out and buy the company. The deal might fail for a lot of different reasons, and the case might be that it’s just a bad company with a declining business. You always have to do your homework, and establish what you think the intrinsic value of the business is before you buy it.

I would say that companies like Monsanto (NYSE:MON) or NXP Semiconductors, if their deals fail, would be great examples of businesses that are fundamentally sound, have interesting growth drivers, and would likely trade off severely due to forced selling because there are a lot of arb funds in those names. I do hold NXP, and I bought Monsanto when it traded way off earlier this year to ~$115 which is what I estimate fair value is for the company as a standalone.

I would say as a closing comment that this same “forced seller” dynamic is why spinoffs tend to be fertile grounds to look: large investors might receive some shares in a small company that is too much of a hassle to worry about, so they sell immediately regardless of whether that is a financially prudent decision.

SA: One of your best calls was on Polaris Infrastructure (OTCPK:RAMPF) – can you discuss how opportunities are created when investors write off an entire country as being uninvestable or too complicated to analyze?

PK: Polaris was a company that went bankrupt, and actually had a lot of forced sellers in it. The bondholders got converted into equity, and then had to sell as holding equity was outside the mandate of their funds. This caused the price to decline from about $10 CAD after the restructuring to about $6.50 or so when I started covering it. It was clear that the asset was very good and that the problem had simply been a financing one.

One seemingly big risk of course was that the company’s only producing asset was located in Nicaragua, which is a bit of a scary place for western investors.

My dad was a corporate banker for 27 years without a single loan loss, which is pretty impressive in my view. He lent to some of British Columbia’s biggest corporations, including a number of our large mining companies, and he saw first hand that country risk is real. Investors like to discount politics, but it can play a huge role in everything from changing tax rates to a government effectively nationalizing a project.

Because of this, it’s pretty critical to spend some time evaluating the politics of a country and its history and culture to try and figure out what’s really going on. The nice thing about humans is that no matter where they’re from, they respond to incentives, so it’s really figuring out what their incentives are.

In the case of Nicaragua, the thing that stood out to me was that it was 100% in their national security interest to stop relying on oil, and start generating domestic renewable energy. They don’t have the engineering or the capital to do this, and so it seemed unlikely to me that at this relatively early stage in their development, Nicaragua would choose to shoot itself in the foot and start nationalizing projects (which would then scare off foreign capital).

That being said, Polaris will always (at least until it gets an asset somewhere else) trade at a discount to peers with safer assets. Investors should expect higher returns from a company with assets in Nicaragua vs. a company with assets in the US or Canada. For that reason, Polaris is not my largest position: there is a chance, however small, that they could see 100% of the value of the company wiped out if Nicaragua chooses to nationalize their asset.

Indeed, right now we are seeing the cost of being in Nicaragua for Polaris as the shares have sold off due to extreme levels of political unrest in the country. For the time being, I don’t see how this unrest will impact the company: people still need electricity, and their customer is a large state utility. Where this could get ugly is if the current dictator’s government falls, and the new government embarks on a radical bout of political changes.

I think this selloff in Polaris shares is overdone, but I can certainly empathize with it. I have no concrete answer as to what the country will look like in a year, and that certainly highlights the risks in investing in emerging markets. That being said, long term I expect the company to do just fine.

More broadly, I think that unless investors have some special on the ground knowledge, they should take a dim view of many geographies. 90% of the time, investments in places like Russia or Egypt or Iraq can work out, but 10% of the time, you lose everything or close to it. That risk of permanent capital loss means that a company in a risky geography should probably be weighted in such a way as to allow for the investor to stomach losing 100% of what they put in.

So in summary, I would say that countries don’t necessarily present opportunities; individual companies present the opportunity. It’s more that investors need to pay very close attention to the risks involved, and I would say that as a political science major, most people discount politics a little too much.

SA: How, when, and why can investors “shadow” a hedge fund manager’s portfolio rather than invest directly?

PK: Great question. I think other smart investors are the best source of investment ideas, period. I follow a lot of managers from Bill Ackman (despite his recent terrible performance) to Allan Mecham at Arlington Value. These guys (and I follow maybe 30 to 40 different managers) are my filter. I don’t shadow a single manager’s portfolio, I take what I think are the best ideas from all of them!

If you think about it mathematically, here’s why it saves a ton of time. Each manager has a number of analysts, and each manager might have a universe of 500 stocks they know well. There will be some overlap of course, but even with 50% overlap, that still means a universe of 250 x 40 = 10,000 stocks around the world that they’re looking at. They then do the work and pick the best ideas and stick those in their portfolios.

I then look at those portfolios, and let’s say there’re 30 stocks in each, that means 30 x 40 = 1200 stocks, but often there’s some overlap, so say it’s 600 stocks. 600 stocks are enough to keep me busy for a while, but these managers have gone the extra step and done the screening of the 10,000 names for me, which saves a ton of time. They’re all smart people, so I trust that the stocks in their portfolios are on average pretty good.

I then look at their position sizing and when they added them, and I try and focus on the largest one, or the ones they’re adding to, reason being that I want to look more closely at their higher conviction names or the ones they think are undervalued now. So let’s say that gets you to 100 names, that’s still a lot of due diligence to do to narrow that down to 20 or 30 to stick in your own portfolio.

The reason you don’t shadow blindly is that often managers are wrong. I knew that Bill Ackman going into Valeant was wrong, and I thought he was way too early in Chipotle (NYSE:CMG). Einhorn’s investment in AerCap (NYSE:AER) is not one I would have made, just because I don’t really like that sort of financial/capital intensive business generally. For each name I put in my own portfolio, I conduct my normal due diligence and do my own valuation so that I am fully comfortable with what I own and I can trade it myself rather than relying on other people to think for me.

So as you can see, I would only use other managers as a filter; you still have to do all the work yourself before you actually invest.

I would also point out that there is no shame to looking to others to find ideas. As a great example of this, in The Big Short, many of the investors who foresaw the crisis heard about the short housing trade from Greg Lippman at Deutsche Bank, and then did their own due diligence and entered the trade.

Many others who were not profiled in the book but made money on the theme, likely heard about it from friends or other fund managers in the industry. This is a great case of how one of the best trades of all time didn’t have to be your idea, you just had to be listening to other smart people.

Some of my top ideas right now including NXPI (Elliot Management), TripAdvisor (NASDAQ:TRIP) (GreenWood, Greenhaven Road, PenderFund Capital), Workiva (Pat Dorsey), Polaris (PenderFund Capital), EnviroStar (NYSEMKT:EVI) (Greenhaven Road), Rolls Royce (OTCPK:RYCEF) (ValueAct) and many of my other best ideas in the past were sourced from people I admired in the industry.

SA: What’s one of your highest conviction ideas right now?

PK: Aside from NXPI or Workiva, I have two high conviction ideas.

TripAdvisor

I have a fairly sizable investment in TripAdvisor, which jumped 20% after earnings (a great example of what happens when expectations are non-existent!). The basic thesis here is pretty simple actually. The company has two businesses, the core hotel review business and a non-hotel attractions business, and the market isn’t really getting what’s actually going on with them.

The hotel business has been declining for a few years, in no small part because people are switching to mobile and mobile monetized at like 20% the rate of desktop. This business is coming close to an inflection point, however, because 1) at some point mathematically mobile dollars start growing faster than desktop dollars shrink and; 2) monetization of mobile is now close to 50% of desktop. The two forces mean that soon, I expect, the hotel business will start posting decent growth numbers again.

There is another advantage to the hotel business’ move to mobile which is that it greatly lessens the power of Google over TRIP. TRIP’s users are very loyal and so if TRIP can keep them on the app it means lower marketing spending and better margins and also a greatly reduced competitive threat.

The non hotel business, which allows you to look up and book attractions and restaurants, is growing gangbusters at 30 to 40% a year, and is rapidly becoming a much larger part of TRIP’s business. We can look at the price that OpenTable was sold to Priceline (now Booking.com) for, and see that this business is quite valuable.

Finally, TRIP has hundreds of visitors and collects huge amounts of data which is valuable to somebody. The company is largely controlled by Liberty Media (LMCB). This creates a very nice floor on the stock’s valuation as if TRIP gets too cheap, it’s likely to be sold at a premium.

So the result is a business whose financials obscure what are actually decent trends within its business (and recall that TRIP is a very high margin business, so additional revenue drops almost entirely to the bottom line). Either the company is sold, or it resumes growth and we should see both improved financials and a good degree of multiple expansion in the stock.

Some of that multiple expansion has already taken place. TrirAdvisor was very heavily shorted and what we’ve seen in recent weeks has likely been driven, at least in part, by short sellers covering. I think over the long term we still have a lot of growth for TripAdvisor as their market is growing strongly and their margins should greatly expand as the business scales. While shares aren’t as cheap as they were at $30, I think for someone with a long term time horizon they still represent attractive value.

I’d note that a lot of people think TRIP and Trivago (NASDAQ:TRVG) are the same thing, and whenever Trivago misses earnings people sell off TRIP. Trivago is a mess (I’ve been short the stock as a hedge for TRIP actually) where they are simply buying customers using expensive TV ads. They don’t have the same market power, user base, customer loyalty, shareholder base, or even the economics of TRIP. Google and Booking.com are likely to crush Trivago and I think it’s a terminal short.

Enbridge

My second high conviction idea is Enbridge (NYSE:ENB), which is the largest energy infrastructure company in North America. The company pays a 6.5%+ dividend (so you get paid for patience) and management has targeted 10% growth in the dividend for the next few years. The company has come under fire recently as interest rates have risen and they’ve faced some political headwinds (a FERC ruling and some opposition to their large Line 3 project), and shares have cratered. There’re also concerns about leverage.

What the market is missing I think is that ENB placed a lot of assets into service last year that haven’t really showed up in the financials yet, and they’re going to do the same this year (of their $22 billion backlog, more than half will be placed in service between last year and this year). The street is also bad at modelling the company as they acquired Spectra Energy and many banks didn’t cover both. What they miss is that Spectra’s Q1 is very strong and last year, ENB hadn’t closed the acquisition until the end of Q1, so you don’t see that strength in Enbridge’s financials.

I think that the market is going to see that the fundamentals of the company are very good, and that they’re going to be able to pay down debt quicker than the market believes (though still more slowly than what ENB was promising after Spectra closed). They are also going to sell some assets to fund their growth, which isn’t a net positive really but it does show that the company has a lot of levers to pull in order to deliver on that growth.

ENB also has a very complex corporate structure, and the plus of the recent FERC ruling is that ENB is more likely to simplify that structure, which should make investors more comfortable with the company.

I think today’s current valuation builds in room for rates to go up to about 4% on the US 10 year, so there’s some margin of safety in the valuation. I think that as debt gets paid down over the next 5 years, you’ll see some multiple expansion as the company de-risks the balance sheet. This sort of setup is a little private equity style: buy something cheap, pay down the debt, and earn good levered IRRs. Because ENB’s assets are regulated, and now with oil at $70, I think there’s very little operational or asset risk here, it’s almost entirely a debt paydown story.

I would caution, though, that pipelines rely on the capital markets to fund growth, and that can create some problems: lower growth means lower valuations, which means growth gets harder to execute because you have fewer financial options. Growth being harder means the potential for further valuation declines, and the cycle continues. Thus, while I have high conviction on ENB, I think investors should size it appropriately in case things continue to go downhill. Every time I’ve had a blow-up, it’s been due to leverage, so I’m very careful to size these sorts of positions carefully.

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Thanks to Peter for the interview. If you’d like to check out or follow his work, you can find the profile here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Check with individual articles or authors mentioned for their positions. Peter Kaye is long NXPI, WK, RAMPF, TRIP, MON, ENB, EVI, RYCEF and short TRVG.