GROWTH VS VALUE INVESTING – PART II

The factors which typically affect the performance of a value investor are Valuations, Opportunities, and Speculation.

Valuations

Deep Value Price-to-Cash-Flow Multiples over Time! This means stocks which are trading at low valuations multiply in value over time and same way the valuation may compress during another time.

Opportunities

Opportunities for investment open to the investor that stresses quantitative factors with precognition resulting into Growth.

Speculation

Massive interest in investment performance created through a short-term orientation.

The markets during the last decade have shifted towards “Opportunities” and “Speculation“. These have seen sell off in “Valuations” based business. In other words, deep-value stocks are at attractive prices maybe because of pessimism or pervasiveness.

As we follow “Opportunities” for sustainable wealth creation policies, the same can be found in “Trends” of the markets. Trend following works especially well for large growth and improves returns relative to buy and hold strategy. Trends work wonders across multiple asset classes and will not do justice to Value Investing if Growth is considered as an effective means for long term strategy. In short, Trend is an important catch.

If the Value has performed worse in recent times or is at low multiples, the chances of its expected returns becomes higher. With Growth though, the better the historic return, the higher the expected future return. Growth is generally seen in the Innovative Business segment of the economy. By innovating and creating new technologies, growth companies become more efficient with resources enabling them to deliver higher profit margins and faster earnings growth than their competitors.

Markets will chase Growth stocks by investing huge capital to seek comfort in very few companies leading to irrational stock prices at times. Value even at low multiples will struggle to perform as they must take huge actions in order for the business to sustain in a competitive and ever-changing economy. Not much capital will chase these value stocks hence multiples will take time to climb higher.

While growth stocks have soared to ever higher heights, value stocks have struggled to attract investor capital over the past 10 years mainly after 2007. Growth companies have access to cheap cost of capital compared to value companies as the latter has to reduce operations costs, pay dividends, do stock buybacks, etc, to keep cost of capital attractive and on the other hand, large growth stocks’ breakthrough innovations and fat profit margins.

But all said some value stocks still have an edge with companies that are profitable and cash flow positive to perform going forward.

GROWTH V/S VALUE INVESTING - PART I

This blog will attempt to break the myths about investing and how some great minds have been deeply influenced the new millennials and Generation X mind. Investing is an art that requires multiple strategies to reach the destination.  No “one“ strategy can be considered a fool proof way of the wealth creation process.

The process of investing since the era of The Great Depression from the purview of market greats like Benjamin Graham, David Dodd, John Bogle, Phillip Fisher, Warren Buffet, Charlie Munger, Peter Lynch and others have mostly stood the test of time. All these great Investors had one thing in common: the philosophy of “Value Investing“ based on fundamental data such as financial statement line items, economic data, and unstructured data in a rigorous and systematic manner.

The common thread that united these great minds was “ Precognition” What is “Precognition” ?? It is a prescience, future vision, and future sight as claimed by psychics to see events in the future. There is a cult following for all these great Value Investors and their style of investing which has been adapted time and again by the Millennials and Generation  X. The Equity and Debt markets have undergone a massive change more after 1980 when the USA went for an all out fight against Inflation and more such policies were introduced in the system by USA and various other countries.

The thesis followed by Investors across the world modeled after the legends mostly traces only “Value Investing” and not “Precognition”, as the former is quantitative in nature and latter is psychology in nature. For successful investing the combination of quantitative plus psychology gives rise to Qualitative model. Hence Psychology plays an additional  significant role towards “wealth creation”. Most Investors cannot replicate the success of these legends because of the lack of “Precognition”.

The ones who have mastered the art of Value Investing with Precognition are the most successful investors and wealth creators

 To be continued...

FACEBOOK’S $5.7 BILLION BET ON INDIA THROUGH JIO - PART III

PART 3

How the dynamics will work?

This acquisition benefits both companies. For Reliance, the equation is simple. The money is vital for fulfilling Mukesh Ambani’s goal of making Reliance Industries debt free by 2021 and For Facebook, the deal comes close on the heels of the nod from the Reserve Bank affiliated National Payments Corporation of India (NPCI) to allow WhatsApp Pay to operate in India, and its decision to comply with the data localization guidelines.

WhatsApp could leverage Jio’s Payments Bank as a sponsor bank to power its UPI-based payments. The deal will open up WhatsApp’s entire user base for Reliance Jio, including the customers on rival telecom partners. The power of content, commerce, and community supported by the mobile network can be unleashed for these services at scale, making the impact widespread from e-commerce to telecom to mobile payments and potentially even healthcare and education. Through this deal, JioMart could become a one stop shop for e-commerce, social media consumption, instant messaging and digital payments. The network effect also helps in creating an ecosystem that disincentivises users from leaving.

The cryptocurrency community in India is upbeat about the deal between Facebook and Reliance Jio. Last year, Reliance Jio announced its plan to build the largest blockchain network in India. The Indian cryptocurrency space recently got a boost when the supreme court quashed the banking ban by the central bank, the Reserve Bank of India (RBI). Since then, the crypto sector has been growing and attracting investments from abroad despite the global coronavirus pandemic and the nationwide lockdown. Meanwhile, Facebook’s Libra project has undergone a major change.

Notwithstanding its minority share, the fact that Facebook now has a seat on the board of Jio Platforms might mean that its voice will be given greater importance in policy deliberations. This could mark a shift away from Chinese investments and prove to be a boost for Indo-U.S. trade and investment relations. This deal comes on the heels of a change to India’s Foreign Direct Investment (FDI) norms that make it more difficult for Chinese companies to continue investing in India. These norms certainly act as fetters to the Alibaba-Paytm alliance to compete with Jio Mart.

Facebook constellation is sitting on a huge pile of data which they were not able to monetize. The vast quantities of data generated by users of online services can now be processed into valuable information for commercial and strategic gains by leveraging Jio Mart’s reach. In reverse data sharing, WhatsApp, through its commercial agreement with JioMart, could end up providing deeper and richer data to Facebook which will provide more intense, localized insight into the consumption patterns of Indian customers. This new perspective on Indian consumers will add to Facebook’s already formidable advertising revenue stream.

Just as a firm’s competitive advantages are shaped by the strategy and resources of the firm, so it goes with platform-based advantages. When the platform yields synergy, each member can be thought of as adding something to the network-based advantages. As a platform scales, its costs per unit sold decreases logarithmically in comparison to linear business. A platform grows not by buying more assets, but by acquiring more users, which has a near-zero cost. This costs the platform next to nothing.

Credits: Ravi Agarwal, Sam Shead, Akshat Kashyab, Debasish Sarkar, Casey Newton, Arindrajit Basu, Amber Sinha, Kevin Helms, Nick Wood, Ruchi Gupta 

FACEBOOK’S $5.7 BILLION BET ON INDIA THROUGH JIO - PART 2

What is Jio Platforms?

 Jio Platforms is a technology subsidiary of Reliance Industries that came to light in 2010 when Infotel Broadband Services Limited (ISBL) spent $2.7 billion to win pan-India license during broadband spectrum auction. Shortly after the auction, Reliance Industries took a 95 percent stake in ISBL. In 2013, Mukesh Ambani renamed ISBL as Jio Platforms, which operates Reliance Jio Infocomm Limited as a wholly owned subsidiary. Jio platforms is described as a next-generation technology platform focused on delivering digital services across India. Jio Platforms claims to build a digital society powered by Reliance Jio‘s network technology. Jio platform was growing through mergers and acquisitions such as Saavn’s merger with Jio Music in 2018 and Haptick acquisition in 2019.

 

The power of content, commerce, and community supported by the mobile network can be unleashed for these services at scale, making the impact widespread from e-commerce to telecom to mobile payments and potentially even healthcare and education. To put it another way, Jio was a bet on zero marginal costs — or, at a minimum, drastically lower marginal costs than its competitors. This meant that the optimal strategy was — you know what is coming! — to spend a massive amount of money up front and then seek to serve the greatest number of consumers in order to get maximum leverage on that up-front investment.

What is the synergy between Facebook and Jio Platform?

 Facebook has invested in the Jio platform to create and unlock meaningful value through Network Synergy. The two companies could leverage each other’s strengths to build a Connected Ecosystem comprising of digital payments, telecom, and offline/online commerce. The deal will unlock a huge network effect with the combined power of Facebook and Jio’s subscribers across plays in commerce and payments.

 

What is Network Effect?

 Network effects are the incremental benefit gained by an existing user for each new user that joins the network. There are two types of network effects:

 ·    Direct network effects - Also known as the same-side effects. The value of service simply goes up as the number of users goes up. 

 ·   Indirect network effects - Also known as cross-side effects. With indirect network effects, the value of the service increases for one user group when a new user of a different user group joins the network

 

Platform Business Cost Model

Platforms boast higher profit margins and higher price-to-revenue multiples. Perhaps this explains some of the high valuations we see in platform businesses today including the recent Facebook – Reliance Jio deal.

 

Platforms business have two or more user groups exchanging value with one another. The more consumers on the network, the more valuable that network is to producers, and vice versa. The deal will jointly create an ecosystem that take advantage of Facebook’s high daily active users and Jio’s platform assets. For Facebook, this deal presents an opportunity to leverage the partner’s significant reach in India and explore the next-billion-user landscape. For Reliance Jio, the business will not be dependent solely on how successful the next generation is, as it will continue to grow with the strategic partner.

 

TO BE CONTINUED…

FACEBOOK’S $5.7 BILLION BET ON INDIA THROUGH JIO - PART 1

     

Facebook has spent $5.7 billion for a 9.99 percent stake in Jio Platforms, the tech subsidiary of India’s Reliance Industries. It was the classic Silicon Valley bet: spend money up front, then make it up on volume because of a superior cost structure enabled by the zero-margin nature of technology. Reserve Bank of India’s 2018 directive, which mandated the local storage of all payments data, various entities in the Indian government have introduced a slew of data localization policies mandating some form of data localization. Facebook, desperate to avoid the onerous compliance costs of data localization, left no stones unturned in getting the Indian government to renege on their data localization mandate. 

The investment—One of the single largest in Facebook’s history—is a giant bet on India’s online growth. India has long been a major growth market for Facebook, one that it has yet to successfully monetize. 400 million WhatsApp users—platform owned by Facebook that has more users in India than in any other country. The investment increases Facebook's exposure to India's massive SME market, and potentially opens a major new opportunity for those companies involved in the Telecom Infra Project (TIP), in which Facebook plays a pivotal role.

What is TIP??

Telecom Infra Project (TIP) was formed in 2016 as an engineering-focused, collaborative methodology for building and deploying global telecom network infrastructure, with the goal of enabling global access for all. One of Jio Platforms' strategic objectives is to use its network, cloud, and software assets to improve access to cutting-edge connectivity and online services for Indian consumers and businesses – particularly SMEs, so-called micro-businesses, and farmers. There are more than 60 million SMEs, 30 million small merchants, and 120 million farmers across India.  They account for the majority of jobs in the country and form the heart and soul of rural and urban communities. Their collaboration with Jio will be creating new ways for people and businesses to operate more effectively in the growing digital economy.

 

TIP could also be a significant beneficiary of this deal.  Jio provides for an aggressive, 4G-only deployment with disruptive pricing while forging swiftly on fibre deployment across the nation, in parallel. Jio Platforms encompasses not just fixed and mobile networks, but everything that goes with them including services, apps, content, AI, devices, and cloud. Jio offers mobile Internet for nearly free and tries to make money by up-selling subscriptions to their own versions of Spotify and Netflix. 

Is there still room for Facebook to grow?? The answer is a BIG YES and here is how… 

 

At least half a billion Indians remain offline. Partnering with Jio and its influential owners may help the company navigate an increasingly protectionist Indian market. Facebook has previously been rebuffed by Indian regulators—when it tried to launch a free, gated version of the internet in 2016. Jio, now the biggest cellular internet provider in India, is a valuable friend for Facebook to have in its corner. Jio’s success in India has raised a lot of eyebrows but the biggest moment came when Mukesh Ambani invested $33 billion to construct a nationwide 4G broadband service network. This allowed Jio to offer cheaper data services and free domestic calling to its subscribers. Reliance Jio has the highest ARPU (Average Revenue Per User) in the industry.

TO BE CONTINUED….