SAMSUNG IS (AND HAS BEEN!) BOMBING While You’re Not Looking…

samsung stock bombs

While you’re not looking, Samsung has lost $44 billion in market value since April, marking the company’s worst streak since December 1983.

There are a couple reasons why Samsung’s stock has been absolutely murdered, but none is bigger than this: no one wants Samsung’s products anymore.

As it turns out, as hyped up as the product was in the media, no one really wanted Samsung’s latest line of Galaxy smartphones, bringing the stock down 8.1% this month alone (as a comparison, Apple’s stock fell only 6% during the market mayhem about a week ago — and this alone prompted Tim Cook to send an unprecedented letter to CNBC’s Jim Cramer to assure investors that Apple is fundamentally safe despite the widespread panic over China).

A large part of Samsung’s mistake was misreading consumer demand for the Samsung Galaxy S6/S6 Edge. As it turns out, customers wanted the three-sided S6 Edge more than the conventional looking S6 — and as a result, produced three times more S6 than S6 Edge… most of which are probably sitting in warehouses now.

Samsung also tried to one-up Apple by releasing the sequel to the S6 Edge (S6 Edge+) and Note 4 (Note 5) ahead of Apple’s September 9th event, where the company is expected to unveil the next-generation iPhones. Sure, that’s a great strategy and all, but there’s one big problem: Samsung’s most die-hard fans hated the products. They complained about the lack of a removable back, which means that customers will not be able to swap out additional memory or battery. Many even indicated that they were willing to jump ships across to iOS.

Samsung also priced its latest line of smartphones, by any definition, irrationally. The company is trying to compete with the iPhone – yet it has priced the S6 Edge+ and Note 5 higher than what Apple charges for the iPhone 6 Plus (a 64GB version of the S6 Edge costs $914.99 without contract, while a similar model of the iPhone 6 Plus costs just $849.99).

Here’s the one thing Samsung doesn’t seem to understand (and if they haven’t by now, will they ever?): The iPhone, with it’s tie-in to the iOS ecosystem, is a speciality product. It should be priced (and it is!) like one. On the other hand, Samsung’s Galaxy line of smartphones is a commodity. Every single Galaxy smartphone runs on Android, a software that just about any other smartphone manufacturer (apart from Apple) uses.

Samsung doesn’t have much to differentiate itself from the thousands of Android smartphones out there. Once an Android smartphone is “good enough” in terms of speed and quality, nothing else really matters other than the price. Why would anyone in the right mind buy a $900+ Samsung smartphone over a really well-made OnePlus, for just one-third of the cost?

Samsung thinks it can justify its high prices by copying Apple’s design, but fail to understand that people are often buying the iPhone for both the product and the ecosystem — an ecosystem that neither Samsung nor Android offers.

In fact, Samsung is getting clobbered exactly where all these cheap, yet beautiful Android smartphones are made: China. According to data provided by IDC, in Q1 of 2015, Samsung’s marketshare in China shrank by 53%. Comparatively, Apple’s increased by 62.1%. Behind Apple are the producers of the cheap and well-made Android smartphones, Xiaomi (up 42.3%) and Huawei (up 39.7%).

Here’s Samsung’s stunning free fall, illustrated in chart form:

samsung-loses-50-of-its-china-smartphone-market-sh-1431344174.06-4363879In an interview with Bloomberg, analyst Lee Seung Woo from IBK Securities Co. perhaps sums it up best: “We all know its smartphone business isn’t doing well… I can’t really figure out when the stock will stop declining. The fundamentals look problematic.”

INVESTORS WARN: A “Death Cross” Is About To Strike Apple…

dsc02292

The markets are in a bloodbath, and Apple’s stock is in the gutter.

Reports have indicated that Apple’s stock is now officially in the bear market (the stock plunged 16%, then another 6% in a single day — it closed the week after falling more than 20% from its 52 week peak).

Things could, however, get much worse for Apple.

Investors have been warning of a “death cross” in Apple stock movement, which foreshadows a much steeper decline in the close future. As MarketWatch reported, the last time the “death cross” struck Apple, the company’s stock dived 27% over the next four months.

What happened the last time a
CHART: What happened the last time a “death cross” struck Apple… | Source: MW
While it’s true that a company’s stock price is rarely affected by the company’s operations as much as it is by market reactions, in the case of Apple, there are some definitive reasons as to why investors are bearish about the stock.

Here are the five biggest…

1. China 

China’s market is in a free fall, and we’ve seen huge sell-offs in the Chinese stock market. Much of Apple’s current success is dependent on the health of its Chinese business — in fact, 26.4% of the iPhones (Apple’s most profitable product, by far) the company sold in Q2 of 2015 was in China.

However, as important as the Chinese market is to Apple, it’s not one the company can count on reliably: demand spikes each time Apple releases a new product, but tanks almost immediately after. Case in point: the release of the iPhone 6 gave Apple a huge boost in China in Q4 of 2014 but Apple’s shares of all smartphone sales fell drastically the next quarter.

Due to ongoing concerns in the Chinese market, firms such as Cowen has downgraded their outlook on Apple from “Outperform” to “Market Perform”.

Apple China Marketshare iPhone

2. Can’t milk the iPhone 6/6 Plus anymore

The iPhone 6/6 Plus is at the end of its product cycle. With the next-generation iPhone 6S/6S Plus due next month, no one’s buying Apple’s most profitable product any longer. Investors know this, and therefore aren’t expecting much growth in the near future, at least until the next-generation iPhones are released.

The next-generation iPhones is said to come with a 12MP camera capable of 4K recording, a pressure-sensitive Force Touch display, an entirely new wireless chip and a bunch of other incremental improvements, all in the same form factor as the current generation of iPhones.

According to WSJ, Apple is stock-piling 90 million units for the launch.

9to5mac_6s8
Leaked image of the iPhone 6S shell indicating a much faster and battery efficient wireless chip | Source: 9to5Mac

3. Mystery over the Apple Watch

How well or poorly is Apple’s latest product line doing?

No one knows.

The company declined to release any indication as to how the Apple Watch is doing in its latest earnings report, apart from giving the usual “better than expected” boilerplate without any figures to back the claim up.

Since its launch, the Watch has received mixed reviews, and although Apple — to its credit — is rectifying the situation rapidly with the imminent release of WatchOS 2,  no one really knows how much the fix is going to affect sales directly (probably not much, if at all). Sure, Apple is leading in the smartwatch category, but at the same time no one really knows how big or small the smartwatch market opportunity is.

CHART: The Watch is clearly beating all its competitors, but... | Source: BI
The Watch is clearly beating all its competitors, but nobody knows how big the market opportunity is… | Source: BI

4. Apple Music, another new product category, is failing

When a recent report from music industry research company MusicWatch found that 48% of the 5,000 participants surveyed who had tried out Apple’s new music streaming service had stopped using it, Apple rebutted the figure quickly: only 21% of users who had tried the service defected, the company said, almost half less than the initial number reported by MusicWatch. On the face of it, Apple’s rebuttal might’ve silenced some of the company’s skeptics… but look at that figure again: 21% decided that, for some reason or another, Apple’s latest product offering isn’t suitable for them.

This isn’t the perfect analogy, but imagine if, one day, Apple releases a new physical product and after purchasing it, 21% of its customers decide to return the product.

It would’ve been a disaster for the company.

Sure, 21% is better than 48%, but in the grand scheme of things, it’s not encouraging by any means.

All the hurdles Apple will have to overcome isn't exactly encouraging... | Source: Statista
All the hurdles Apple has to overcome in order to dominate isn’t exactly encouraging… | Source: Statista

5. Everything is a disaster, and Apple is just a victim

Apple is one of the few big-name and closely-watched stocks getting crushed by the market correction, and the deep dive in stock price can be attributed to what happens in the late stages of bull markets.

Investors could also be selling off Apple stocks in anticipation for an underwhelming future product line, or as a reactionary measure against the floundering stock market (in other words, in panic).

Either way, these aren’t things the company can control.

Apple is a victim of the panic in the stock market... |Source: CNBC
Apple is a victim of the panic in the stock market amid corrections… | Source: CNBC

Exclusive: Apple Set Its Sights On The DSLR Market With Next-Gen iPhones

iphone exclusive

BuzzFeed News has revealed that Apple will hold a special event the week of September 7th (with Wednesday the 9th being the likeliest date) to unveil its next-generation iPhones, presumably called the iPhone 6S and iPhone 6S Plus.

According to sources briefed on Apple’s plans, the company will dedicate a significant portion of the keynote to addressing what some within are describing as a “quantum-leap” in camera technology for the iPhone 6S/iPhone 6S Plus. With the substantially improved 12-megapixel camera sensors, Apple plans to not only surpass Samsung and LG’s smartphone offerings, but also set its sights on the amateur DSLR market. The camera, according to these sources, is also capable of recording videos in 4K quality.

The Michael Report – along with other outlets – can confirm, after reviewing documentations sent to several carriers worldwide, that customers would be able to preorder the newly released iPhones on September 18th following the keynote. Customers living in the United States, United Kingdom, France, Germany, Australia and Hong Kong (among several other countries) who prefer to purchase the iPhones in-store will be able to do so starting September 25th.

Among other numerous improvements, the iPhone 6S/iPhone 6S Plus is expected to ship with a pressure-sensitive Force Touch display and an entirely new wireless chip, which is said to be significantly faster and much more power-efficient.

Apple is also expected to debut the next-generation Apple TV and iPad at the same event, although BuzzFeed News calls the unveiling of the much-anticipated 12.9-inch iPad Pro “a wildcard”.

[Image render via/TMR]

These Two Sentences Will Explain Why Apple Will Not Rally Like Google Did Last Friday

Per Bloomberg, last Thursday’s report “marked the first time since 2013 that Google has announced quarterly adjusted earnings per share higher than expectations.” The market responded accordingly, rallying Google’s stock to an all-time high of $699.62 (a 16% increase), and provided 39 points of the Nasdaq Composite Index’s 47-point gain for the day. As Walter Todd, CIO of Greenwood Capital Associates LLC puts it, “It’s a good feeling. The move in market cap is just insane.”

Now investors are wondering… can Apple repeat the same magic Google performed?

Once the market closes today, Apple is going to report earnings for its fiscal Q2 — the period covering April, May and June. Almost all signs point to a no.  To understand why, take a look at this Fortune article. More specifically, these two lines…

Google’s rally was sparked by quarterly earnings that beat Wall Street expectations for the first time since 2013.

Apple’s earnings have exceeded the expectations of Fortune‘s panel of Wall Street analysts eight quarters in a row.

What happened with Google was an anomaly. But with Apple, anomalies happen so frequently that it becomes normal — Apple is expected to outperform the expectations of Wall Street analysts anyway. So even if Apple exceeds their expectations today, it’ll just be another normal, boring earnings report.

BUT… there are a couple things that could push Apple’s stocks up today (albeit not as much as what happened with Google) … and these are the numbers investors are looking at closely.

iPhones: Apple is now an iPhone company. Revenue generated from everything else they do and sell are nothing more than rounding errors for the company.

Analysts are expecting Apple to sell 49.4 iPhones this quarter — a 40% growth (!) annually on a quarterly basis.

Apple should have no problem beating these expectations: since the release of the iPhone 6 and iPhone 6 Plus, Apple has blown all demand and delivery expectations out of the water. In fact, if Apple can prove that there’s still a strong demand for the current generation iPhone 6 and iPhone 6 Plus before the newer generation comes out sometime in September, it has the potential to positively affect Apple’s stock price even more.

The entire iPhone line is quite a miracle: it’s a $154 billion business that not only has the potential to, but does grow 40% annually without ever having to lower its profit margins. A report recently emerged highlighting Apple’s insane profit margins on these iPhones: even though the company only has 20% of the sales in the smartphone industry, it’s taking 92% of the profits.

Apple Watch: Apple’s newest product line went on sale at the end of April, which means that Apple will have to report earnings on it for the first time ever.

Due to competitive reasons, Apple will not report its Watch sales as an independent category, and instead will lump it with all the “other products”. The “other products” category is usually comprised of iPods, Apple TVs, Beats Electronics, and other accessories.

All the “other products” did $1.7 billion in revenues last quarter — it’s up to the analysts to figure out how much of the difference this quarter versus last quarter in the “other products” category is due to the Watch sales.

This is what revenues from the “other products” category currently look like (via QZ)

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The Watch is an entirely new product line for Apple, which means one thing: analysts really don’t know what to expect.

So here’s how they’re going to decide if Apple is performing well on the Watch sales or not: if revenues for the “other products” are much higher for this quarter than it was for last quarter, then Apple crushed it. If revenues are the same or only experience a slight bump, then Apple bombed it.

Indicative measures: These are the usual big numbers everyone is paying attention to that will indicate if Apple is doing well or not (via B.I.)

  • Revenue: $49.22 billion, via Yahoo Finance (would be growth of 31.5%)
  • EPS: $1.80, via Yahoo Finance (would be growth of 41%)
  • iPhone units: 49.4 million, via Fortune (would be growth of 40%)
  • Gross Margin: 39.5%, via Gene Munster of Piper Jaffray
  • Revenue guidance: $50 billion, via Gene Munster of Piper Jaffray

Everyone will be able to listen in on Apple’s post-earnings conference call with analysts at 5 p.m. ET (2 p.m. PT) today. Here’s the link.

EXCLUSIVE: Reddit’s Internal Plan To Fix Itself

As Reddit charts its future with a new CEO, co-founder Steve Huffman, the company has been scrambling to decide on what to do with the hateful subreddits that currently exist on the site (such as /r/CoonTown). The Michael Report talked to several employees and people familiar with the matter and here was what they told us…

  • The company has reached a middle ground between what previous CEOs Yishan Wong and Ellen Pao wanted for Reddit (for it to be as free as possible from restrictions; to allow offensive content to exist as a small price to pay for having meaningful discussions and not letting users feel as though they’re censored) and what the board of directors wanted for the company (for Reddit to purge all of its offensive subreddits once and for all, so the site becomes more ad-friendly).
  • Under Steve Huffman’s guidance, Reddit will allow the offensive subreddits to exist, but each of them will be flagged and hidden from those who aren’t looking for them specifically (i.e. logged-out users). TMR has also heard that Reddit plans to exclude these subreddits from search (it was not clear from our source whether this means Reddit’s internal search system, Google search, or both).
  • Subreddits that host offensive content will be flagged with some version of the NSFW tag. In order to view these subreddits, users would have to create a Reddit account and get to them through URLs rather than search.
  • This is done in part to demotivate people from creating more of these hateful subreddits, and to decrease viewership numbers to the more offensive parts of Reddit. If and when traffic to the offensive subreddit decreases, it will be easier for the company to just purge them all once and for all.

Tip us off if you know more!

CHAOS REIGNS: Sources Tell Us What Really Happened At Reddit With The Firing Of Key Employee Victoria Taylor… (Exclusive)

Reddit, the Internet’s bulletin board that serves 7.55 billion pageviews monthly, is in complete chaos after the company’s first Director of Communications, Victoria Taylor, was fired abruptly. Since Taylor’s termination on Thursday night, several default subreddits have gone “dark” (setting themselves to private, and thus blocking the public’s access to the subreddits’ content) in protest and to show solidarity with Taylor.

Taylor, during her time at Reddit, was arguably the company’s most public face, having organized, verified and moderated most of the celebrities’ AMAs (“ask me anything”).

Those who knew Taylor personally said that she was warm and genuine, and had the integrity to never let anyone but the celebrities themselves answer the questions posed by Reddit’s users. Almost universally beloved, Taylor’s firing puzzled many. Taylor’s presence was also instrumental to getting celebrities onboard with the idea of doing AMAs, helping them understand, most crucially, the format which may seem hectic and disorienting for first-time users.

But now, all of a sudden, she’s gone.

No explanation, nothing. Just fired.

Why?

After speaking to several Reddit employees (all of whom declined to be named due to the high tensions surrounding this issue) and people familiar with the site’s operations, here’s what The Michael Report exclusively found out… and it’s not pretty at all.

Reddit wanted to commercialize AMA, but Taylor wasn’t comfortable with selling users out

When Reddit received a $50 million investment from prominent venture capitalists such as Marc Andreessen, Peter Thiel and Ron Conway in October last year, the site, which operated in the red, promised to be profitable in the near future. One of the ways the executive team overseeing Reddit’s operations thought they could do that was if they pushed harder to commercialized the AMA subreddit, which often featured prominent celebrities such as President Obama and a guy with two fully functioning penises. Taylor, however, was not comfortable with how much Reddit wanted to commercialize the AMAs.

Multiple sources within Reddit told us that the management team including Reddit’s founder Alexis Ohanian wanted Taylor “extract soundbites from celebs that they can sell on shirts and cups and whatever” during the AMAs, which would require Taylor to either modify the users’ questions or selectively pick questions in hopes of getting the soundbites instead of doing what users expected her to do, which is to ask the most upvoted questions. Other sources said that Reddit’s management team, most of who rarely reads the AMAs themselves, often pushed for Taylor to modify the questions posed, angling it such that Reddit would be able to obtain more advertisers.

In one particularly egregious example, a current Reddit employee told us that there were high-level discussions for convince Taylor to receive questions from a celebrity’s agent (the source declined to reveal which) and have the celebrity answer those questions with prepared statements that is intended to generate goodwill among the site’s users.

One of the ideas floated around by higher-ups at Reddit was also to do video AMAs (instead of the current text format), which would command extremely high ad rates from advertisers due to the attention given to certain celebrities. The idea, we were told, was to “pre-sell ad spots to advertisers beforehand”, including but not limited to preroll video ads and having the celebrities plug the sponsored products during the interview. As far as we know, Taylor has resisted these pressures and remained loyal to the site’s users.

“[Victoria] pissed the management team enough that they thought she should be replaced by someone… more obedient,” a source within Reddit told us.

There’s a huge disconnect between Reddit’s management team and users

Despite having a community team whose job is to appease Reddit’s moderators (volunteers who manage the subreddits), it seems like the team has not been very effective in doing their jobs. The general sentiment among the site’s moderators is that the administrators (paid Reddit employees) often brushed off their question and concerns whenever they had one or needed the admins’ intervention. Taylor, on the other hand, often tried her best to assist the moderators in resolving their issues. “What really lit the fuse was that literally none of the moderators knew Reddit was gonna fire Victoria, and Reddit didn’t bother telling them. Reddit’s execs, who don’t even use Reddit, really don’t know what’s going on and the shit that just hit the fan,” a person close to Reddit’s operations told us.

Indeed, Reddit’s moderators seem to have no idea that Taylor was going to be terminated (neither did Taylor: in one thread, Taylor said she was “dazed” by the decision). One of the r/AMA mods, who goes by the username karmanaut, wrote in a post explaining why the subreddit went dark:

Today, we learned that Victoria was unexpectedly let go from her position with Reddt. We all had the rug ripped out from under us and feel betrayed.

Before doing that, the admins really should have at least talked to us (and all the other subs that host AMAs, like/r/Books, /r/Science, /r/Music, etc.) (Edit: not to suggest that we expect to know about Reddit’s inner workings. Just that there should have been a transition in place or something worked out to ensure that Victoria’s duties would be adequately handled, which they are not) We had a number of AMAs scheduled for today that Victoria was supposed to help with, and they are all left absolutely high and dry (hence taking IAMA private to figure out the situation)…

The admins didn’t realize how much we rely on Victoria. Part of it is proof, of course: we know it’s legitimate when she’s sitting right there next to the person and can make them provide proof. We’ve had situations where agents or others have tried to do an AMA as their client, and Victoria shut that shit down immediately. We can’t do that anymore.

Part of it is also that Victoria is an essential lifeline of communication.

Part of it is also organization. The vast majority of scheduling requests go through her and she ensures that we have all of the standard information that we need ahead of time (date, time, proof, description, etc.) and makes it easier for the teams that set up AMAs on both ends. She ensures that things will go well and that the person understands what /r/IAMA is and what is expected of them. Without her filling this role, we will be utterly overwhelmed. We might need to scrap the calendar altogether, or somehow limit AMAs from those that would need help with the process.

We have been really blindsided by all of this. As a result, we will need to go through our processes and see what can be done without her.

Sources we talked to said that Reddit’s commercialization efforts are inherently at odds with the site’s purpose… “look at what happened to Digg or StumbleUpon and look at where this is headed,” an ex-employee told us, referring to two once-dominating social networks which have since fallen by the wayside. One employee whose job used to be interacting with Reddit’s moderators and users viewed the entire drama with disgust, comparing the monetization efforts to turning Reddit into a graveyard.” “Reddit, without its users, is an ugly ass site,” he continued. “But the users make it great. The only thing Reddit can ever monetize is the incredible community… but piss them off, and they leave. They’re literally destroying the product they’re monetizing. Maybe one day they’ll be smart enough to realize that.”

Reddit’s founder Alexis Ohanian’s nonchalant response to the drama (“The popcorn tastes good.”) has further agitated users (update: he has since backtracked).

When asked for comment regarding Taylor’s termination, a spokeswoman for Reddit told The Michael Report “we don’t comment on individual employee matters.” It is interesting to note, however, that the response came not from a Reddit employee but from an executive at Abernathy MacGregor, a crisis management public relations firm.

A current petition to remove Ellen Pao as Reddit’s interim CEO has reached 16,200+ signatures.

EDITOR’S NOTE & UPDATE: In light of new information provided by multiple former and current employees, as well as people currently familiar with the situation, TMR has rewritten significant portions of the original post to reflect our better understanding of the rapidly evolving situation.

VCs Are Becoming Increasingly Desperate, Explained In 2 Charts

What is the capital markets environment for startup tech companies?

I think these two charts tell most of the story:

median pre-money

Seed and Series A is more or less healthy. Series B is getting overheated. Series C and beyond has gone crazy.

public market trends

Public markets are rational. Tech stock performance has been strong but is driven by strong revenue growth and good business fundamentals generally speaking.

The disconnect is entirely between the late stage private markets and the public markets. That’s where things are unstable.


This post was written by top venture capitalist Fred WilsonRead more of Fred Wilson’s work on his blog, AVC.