Walmart’s New Product: More Than Just a Tablet

In the world of ecommerce and technology, multinational retail chain Walmart continues to innovate in order to capture consumer mindshare. This past week, the retailer announced its plans to release its own Android tablet. Walmart is nesting its new product under its ONN store brand and hopes the tablet will compete on a lower price and a more kid-friendly design. According to Walmart’s application with the U.S. Federal Communications Commission, a Chinese supplier will be partnering with Walmart in this venture. Apple debuted its iPad in 2010, and Amazon quickly followed with its Fire tablet in 2011. While Walmart boasts other tablet models on its shelves and could easily have utilized the technology to do this sooner, it is intriguing why Walmart is now finally deciding to take a piece of the tablet pie nine years later.

While it seems like Walmart is often playing catch-up with Amazon, the move to build and sell its own branded tablet further affirms that Walmart is a force to be reckoned with. In the ecommerce and technology landscape that Amazon dominates, consumers should not overlook Walmart’s ability to establish itself on par with Amazon. Over the past several years, Walmart has dedicated significant resources in its ecommerce efforts to mitigate Amazon’s influence. On the mergers and acquisitions front, Walmart has made crucial strides. In 2016, Walmart acquired Jet.com for more than $3 billion. Now, Jet.com is offering three-hour, same-day scheduled grocery delivery in New York. Furthermore, in 2018, Walmart made a string of acquisitions in order to boost its ecommerce presence. From Bare Necessities (an online retailer of lingerie, swimwear, and intimates) to Flipkart (an Indian e-commerce company), Walmart is signaling that it is ready to position itself next to Amazon and to compete side-by-side.

The rise of Amazon has undoubtedly influenced many retailers’ key strategic decisions. Walmart, whose strategy has always been to target price-conscious consumers, has enlarged its portfolio of companies that sell products in higher price ranges in order to capture Amazon’s market share of these consumers. However, this move to build a cheaper tablet may be Walmart’s effort to remind its price-conscious consumers that Walmart is here to stay in their lives. By building a cheaper tablet, these price-conscious consumers can be a part of the tablet ecosystem that they couldn’t otherwise be in because of the higher-priced iPad and Fire tablets. As a result, Walmart is able to interface in a new way with these consumers through its tablet, influence purchases by curating the tablet home page, and empower these consumers to adopt new technologies. By tapping into its original strategy to target price-conscious consumers, Walmart could continue to have more opportunities to rally with Amazon side-by-side.

Walmart’s New Product – More Than Just a Tablet

Hyper-Secretive Economists Are Transforming How Amazon Does Business

Amazon is fueling the growth of an expanding workforce: tech economists. Although economists have long worked in the tech industry assisting with economic forecasting and market strategy, in recent years “PhD economists have started to play an increasingly central role in tech companies, tackling problems such as platform design, pricing, and policy.” Using machine-learning algorithms, economists assist with decisions ranging from selecting real estate to consumer preferences, creating systems that are used to “address fundamental business questions.”

As one of the predominant recruiters for PhD economists, Amazon hired more than 150 in the past year, making it likely the second largest employer in the U.S. for these experts behind the Federal Reserve. One of Amazon’s primary draws for economists is the massive amount of data the company has amassed in its 24 years of existence. In fact, the availability of data is the key factor driving the growing supply and demand of tech economists throughout the tech industry. According to Beatrice Cherrier, an economics historian at the university of Cergy Pontoise, the role of economists today is changing: in the past, “economists used to work on public data … now, if they want to study behavior, the tech companies have [that data], and it’s proprietary.”

However, Amazon also stands out because of its lack of transparency. The company keeps the work of its economists highly secret and protected by non-disclosure agreements, which makes it difficult to determine exactly what they do for the company. One project that we do know about is Amazon’s initiative to develop a new system for measuring inflation. By analyzing transaction data and product descriptions on its platform, Amazon’s economists have teamed up with outside researchers to build “a more accurate, up-to-date index of how much things cost.” This would be a more efficient method of measuring inflation than that used by entities like the Bureau of Labor Statistics, which sends people to stores to record prices and calls consumers to learn about how much they spend.

Although it is impossible to know for sure what Amazon’s army of PhD economists is tasked with, the company does credit economists with playing an integral role in its growth and success.

Hyper-secretive economists are transforming how Amazon does business

Privacy: Users Beware

Just this week, it was discovered that Facebook was storing millions of users’ unencrypted personal passwords on company servers, readable by thousands of employees. Unfortunately, this has not been Facebook’s only blunder regarding user privacy. Most notably, in March of last year, it was found that user data for about 50 million Facebook users had been obtained by Cambridge Analytica. Additionally, later that year in May, a bug turned users’ private posts to “public” without warning, and in June, a bug “unblocked” users previously blocked on over 800,000 accounts.

As a result of these mishaps, the Federal Trade Commission (FTC) began to investigate Facebook for potential privacy violations, which could lead to a fine worth billions of dollars. Some people are skeptical of Facebook and argue that Facebook does not have to invest in cybersecurity because, as a society, “we no longer care if our personal data is breached.” In fact, when news broke out regarding the unencrypted passwords, the news coverage lasted a few hours; by the following day, “it was all but over.” This is troublesome because Facebook is one of the five largest companies in the world (by valuation), and it dominates the social media app sphere as the owner of Facebook Messenger, Instagram, and WhatsApp.

Nevertheless, Facebook is taking steps toward protecting user privacy as they plan to integrate all three apps and encrypt all communications that can already be found on WhatsApp. Also, governments around the world have begun to form legislation in an attempt to protect users from privacy abuses. However, others are weary that legislation will not have its intended impact. Albert Gidari, Consulting Director of Privacy at Stanford’s Center for Internet and Society, believes that privacy laws are similar to environmental laws:

“True, we have cleaner air and cleaner water as a result of environmental law, but we also have made it lawful and built businesses around acceptable levels of pollution. Companies still lawfully dump arsenic in the water and belch volatile organic compound in the air. And we still get environmental catastrophes. So don’t expect today’s “Clean privacy Law” to eliminate data breaches or profiling or abuses.”

Ultimately, whether it is legislation, fines, or companies choosing to take action themselves, mistakes will still happen, and there will always be individuals trying to gain access to user data. So, for the time being, users beware.

Privacy- Users Beware

Picking up the Pieces – What’s Next after Biogen’s Costly Failed Drug Trial?

Biogen, a multinational biotechnology company, just suffered massive setbacks after the company halted two Phase 3 clinical trials for aducanumab, a drug designed to slow the adverse effects of Alzheimer’s. The drug was designed to target brain-destroying protein fragments known as beta-amyloids. Once promising, Aducanumab successfully reduced beta-amyloid plaque levels in mice during earlier phases but has been deemed “unlikely to be effective” following an internal study at Biogen. The results serve a big blow to advocates of the beta-amyloid hypothesis, once one of the most accepted theories.

A high risk, high reward gamble in “an unrelenting disaster zone,” Alzheimer’s drug treatments have been the El Dorado to biotechnology companies for the past 15 years, highly sought after but never discovered. Biogen is but one of the latest companies to succumb to disappointing results, following the footsteps of other companies such as Merck and Lilly whose recent attempts at developing an Alzheimer’s’ treatment showed ineffectual results.

In the wake of this news, Biogen’s shares dipped 25%, erasing more than $18 billion dollars from the company’s market value. Many institutional investors, such as hedge funds AQR Capital Management LLC and OrbiMed Advisors LLC, are reeling from the drastic decrease in price especially because both have substantial stakes in the company. As such, Biogen and other companies whose future value bank on high research cost, experimental drugs pose an increasingly debatable investment choice given the inherent uncertainty of the nature of such research.

Industry players will likely scrutinize Biogen’s next actions, which implicate the future development of Alzheimer’s treatment and the landscape of biotechnology R&D shops. The nearly $800 million lost in R&D for aducanumab sends a strong signal that Biogen’s research should focus more on short term projects to hit the company’s profit projection of $3 billion in sales by 2023. The silver lining to this ordeal spells good news for smaller biotechnology startups, as Biogen will likely attempt to generate growth and “replenish their pipelines via acquisitions.” Biogen may very well follow the path of Pfizer, a biotechnology company who cut R&D and turned to acquisitions to further growth, after the failure of a drug costing the company 10% in value.

Picking up the Pieces – What’s Next after Biogen’s Costly Failed Drug Trial?

Tech’s Latest Match: Airbnb & HotelTonight

Airbnb recently announced its acquisition of HotelTonight for an undisclosed amount. Based on its most recent round of funding in 2017, HotelTonight was valued at approximately $460 million, making its sale to Airbnb relatively sizeable. The acquisition represents Airbnb’s latest advancement towards fulfilling its desire to build an end-to-end travel platform that serves everyone. While acquiring HotelTonight helps Airbnb diversify its business and increase its attractiveness for potential investors ahead of its upcoming IPO, it may once again face considerable pushback from the hotel industry.

HotelTonight operates by listing vacant inventory from both boutique and large hotel brands at a discount. The company currently has partnerships with hotel chains such as Sheraton and Hyatt, which Airbnb historically has not meaningfully engaged with. If Airbnb’s past behavior is any indicator, these hotel brands may not have, or want to have, the same listing visibility as they once did within the HotelTonight ecosystem. It is not surprising then that HotelTonight CEO, Sam Shank, was appointed in conjunction with the acquisition to lead Airbnb’s boutique hotel category.

Despite Airbnb’s indication that HotelTonight will continue to operate as a separate entity maintaining its own app and website, the relationship between HotelTonight and its partner hotels may soon begin to deteriorate. Following the acquisition announcement, the American Hotel & Lodging Association’s (AHLA) president called Airbnb’s acquisition “further proof the company is playing in the hotel space while evading industry regulations” and indicated that Airbnb needs to enter the hotel business on a “level playing field” by abiding to the tax, safety and oversight laws that are adhered to by hotel companies. Given that the AHLA represents major brands such as Marriot, Hilton, and Hyatt, it begs the question of whether these brands will continue to interact with HotelTonight despite its newfound affiliation with Airbnb.

Moreover, all of this comes at an interesting point in time as Airbnb is rumored to go public in the near future. Investors will certainly be examining all of Airbnb’s different growth areas and its expected profitability at scale. Growing its presence within the hotel industry will certainly, as this acquisition proves, come at a cost. Therefore, investors will need to weigh the value Airbnb’s access to a new customer demographic within last-minute bookings will generate for the business. To what extent this new customer acquisition strategy will provide meaningful growth for Airbnb is unclear in the near-term. However, the company will certainly continue on its path of expansion towards becoming the end-to-end travel platform for everyone in the long-run.

Tech’s Latest Match- Airbnb & HotelTonight

The SEC’s Twitter Feud with Elon Musk Escalates in Federal Court

Elon Musk fired back at the Securities and Exchange Commission (SEC) in federal court last week, accusing the agency of making a retaliatory “unconstitutional power grab” to silence his free speech. The SEC seeks to hold the Tesla CEO in contempt of court over tweets sent on February 19 that allegedly violated a 2018 settlement agreement. Musk’s lawyers submitted a brief claiming the SEC’s strict interpretation of the settlement is an “unprecedented overreach” and an attempt to “trample on Musk’s First Amendment rights.”

In 2018, Musk posted a misleading tweet that he had secured funding to take Tesla private at $420 a share. The company’s stock soared, but the claim wasn’t true. The SEC hit Musk with $40 million in fines and a settlement agreement that forced him to step down as chairman. The settlement also restricted his communications to investors. Now, Musk must get preapproval from in-house counsel before sending any tweet about Tesla. The SEC claims the “twitter-sitter” did not approve a February 19 post in which Musk boasted that Tesla would produce 500,000 vehicles in 2019.

Musk’s aggressive response to the SEC is poorly timed. Because commercial speech is more regulated than private speech, the federal judge is unlikely to heed Musk’s First Amendment claims. Many predict the SEC and judge will try to avoid punishing Musk in a way that harms shareholders, meaning a permanent ban from Tesla is unlikely. But regardless of the outcome of the case, more negative publicity is the last thing Tesla needs.

Tesla stock is down 14% this year, and the company faces pressure from competitors, growing debts, and whistleblower complaints. Tesla has been so embroiled in controversy that it included scrutiny from critics as a risk factor in its recent 10-K filing. Musk’s needless provocation of the SEC might spur investors to push for further constraints on Musk’s role in the company.

On the other hand, some investors are confident that Tesla has matured enough to have a strong path forward with or without its CEO. As Ross Gerber said of Musk: “He’ll never be a liability for Tesla. He’s more a liability for himself.”

The SEC’s Twitter Feud with Elon Musk Escalates in Federal Court

Lyft Prepares to Hit the Road(show)

Ride-hailing company Lyft announced yesterday that it began its roadshow in preparation for its IPO later this year. While the company has not yet announced what day it will publicly list, companies typically begin trading two weeks following their roadshow, meaning Lyft’s IPO is just around the corner. Lyft is set to debut on NASDAQ under the ticker LYFT. The company updated its S-1 to offer 30.77 million Class A shares priced at between $62 and $68 dollars. This pricing would value Lyft somewhere between $21 and $23 billion, a big increase from its $15.1 billion valuation last June. Lyft’s rival, Uber, is expected to conduct its IPO with a valuation between $100 and $120 billion. The two companies seemed to be raising each other to be the first ride-hailing company to IPO. Lyft’s co-founder John Zimmer released a video explaining the five key reasons why “Lyft wins,” a not-so-subtle hint to explain why Lyft “wins” against Uber. Zimmer went on state to Lyft has a narrow focus, likely alluding to Uber’s expansion into food delivery services and the trucking industry.

Lyft’s IPO is the first of many anticipated initial public offerings this year. Though IPOs have been off to a slow start in 2019, Lyft and its rival Uber will soon be joined by tech giants Airbnb, Slack, and Pinterest. Levi Strauss & Co. is also set to IPO this Thursday at around $14-$16 a share, which is relatively cheap compared to the expected pricing of anticipated IPOs.

Investment bankers and capital market lawyers are not the only people in San Francisco who have been busily preparing for San Francisco’s burst of IPOs. The wave of IPOs is going to bring in a new class of millionaires to the city, which is already facing a housing crisis. There are estimates as high as 6,000 new millionaires emerging from this year’s IPOs, which will put a ton of pressure on the small San Francisco housing market. Real estate agents are preparing for cash buyers eager to stop paying rent and willing to overpay for single family homes; some estimate that single family homes may go as high as an average of $5 million.

Lyft Prepares to Hit the Road(show)

Jury Finds Apple Infringed Three Qualcomm Patents

Last Friday, a jury in U.S. District Court for the Southern District of California awarded Qualcomm $31.6 million patent royalties based on the finding that Apple infringed three Qualcomm patents.  This lawsuit marked Qualcomm’s first legal victory of US jury trial over its prolonged global dispute with Apple.

Comparing to the figure of about $265 billion in sales in fiscal 2018, $31.6 million is really a drop in the bucket for Apple. However, the “per-phone royalty rate” being recognized by the jury boosts Qualcomm’s confidence in contending that its licensing practices are fair.

After the jury verdict, Qualcomm’s statement tried to amplify the effect of the verdict by saying that “[they] are gratified that courts all over the world are rejecting Apple’s strategy of refusing to pay for the use of [their] IP.” In contrast, Apple attempted to divert the public attention to the antitrust investigations Qualcomm faces. Apple said, “Qualcomm’s ongoing campaign of patent infringement claims is nothing more than an attempt to distract from the larger issues they face with investigations into their business practices in U.S. federal court, and around the world.”

Apple has already been at a disadvantaged situation in Germany and China in this patent war against Qualcomm. In early December last year, an intermediate court in China issued injunctions against four Chinese subsidiaries of Apple on infringement of two Qualcomm patents. Under the China’s injunctions, Apple was ordered to cease the unlicensed imports and sales of several iPhone models in China. In Germany, a district court also ruled in favor of Qualcomm in an infringement claim, blocking the sales of some iPhone models.

The concluded jury trial last Friday is far from the end of the patent battle between the two companies. Next month, a much more important case concerning whether Qualcomm abused its “monopoly position” to impose “onerous” terms for patents is scheduled to start on April 15 in the Southern District Court of California.  The result of the case may affect the landscape of chip market globally.

Jury Finds Apple Infringed Three Qualcomm Patents

Despite Government Support, Potential German Finance Giants’ Merger Faces Major Obstacles

This past weekend, Deutsche Bank and Commerzbank announced that they had begun talks for a possible merger of Germany’s two largest financial institutions. Marked by several years of disappointing revenue, the two firms hope a consolidation effort might give them the edge they need to compete with the likes of Goldman Sachs, JP Morgan Chase, Morgan Stanley, and other major, foreign financial players.  Backing the merger, the German government has lent its voice in favor of consolidation, stressing the need to create a competitive, domestic financial entity that would shield the German economy from reliance on foreign firms – critically important in the event of another financial crisis when German businesses may have difficultly acquiring foreign credit. Moreover, the German government’s extant equity position in Commerzbank following a 2008 bailout means that the government could hold as much as 5% of the consolidated company (which will probably be Deutsche Bank, as it is the larger firm), further aligning its interests.

However, the proposed merger is not without its opponents. A consolidation would likely result in the loss of tens of thousands of jobs, leading unions representing workers in the banking industry to come out strongly against it. In addition, some investors and analysts doubt the wisdom of merging the two German giants, citing the difficulties associated with combining highly competitive firms, each already suffering from a long list of ailments that led them to this point; consolidation might actually make worse the problems the two banks now face. Deutsche Bank has been in the news lately regarding investigations into the financing of major Trump Organization projects, drama that could taint the firm’s image at a time when investor confidence needs to be at an all-time high.  Still, if a merger is successful, the resulting firm would have access to a considerably larger talent, resource, and capital pool – maybe enough to get it to the critical market share it needs for the long-standing German finance industry to survive.

Despite Government Support, Potential German Finance Giants’ Merger Faces Major Obstacles

Amazon: Two Years Tax-Free

Amazon raked in $11.2 billion in profit last year, about double its 2017 profits of $5.6 billion. However, instead of paying a 21% income tax rate on its U.S. earnings, Amazon reported a $129 million federal tax rebate for 2018. This represents the second year in a row that Amazon paid zero federal income taxes despite its staggering profits.

In 2017, Amazon benefitted from a huge, one-time tax write-off from the December enactment of the 2017 Tax Act. Because of the permanent reduction in the corporate tax rate from 35% to 21%, it remeasured federal net deferred tax liabilities for a tax benefit of $789 million. Deferred tax liabilities are recorded when figures for accounting purposes differ from figures for tax purposes, such as when depreciation on equipment for accounting purposes is less than depreciation using accelerated depreciation for tax purposes. This difference eventually reverses out, which is why it is recognized as a liability. When the tax rate decreases, that eventual payment on the deferred tax will be lower than originally anticipated, which manifests as a reduction in income tax expense in the period of enactment.

Amazon attributed its low-income taxes in 2017 to this one-time favorable effect of the 2017 Tax Act as well as tax benefits from its stock compensation. Yet, in 2018, Amazon again paid zero income taxes. In note 9 of its financial statements, it vaguely represents $419 million of “tax credits” and $1.1 billion of benefits from stock compensation.

Paying stock compensation occurs quite often as a means of reducing tax liability. Indeed, according to Netflix’s 2018 financials, it paid an effective 1% tax rate with stock compensation being its largest write-off. Stock compensation serves as an attractive means of compensation because, minus a slight timing difference, it allows companies to benefit from the tax deduction of a normal compensation expense while also not limiting cash flow.

The other $419 million of Amazon’s tax credits is likely due to accelerated depreciation of its equipment and property. The 2017 Tax Act enhanced the option to claim bonus depreciation from 50% to 100% for qualified property acquired and placed in service in 2018, and Amazon purchased $13.4 billion worth of property and equipment in 2018. Not surprisingly, this increase in property and equipment corresponded with an increase in its deferred tax liabilities from depreciation and amortization by about $1 billion in 2018.

While Uncle Sam clearly missed its share of Amazon’s 2018 profits, 2018 does not necessarily mark the end of the story. The 100% bonus depreciation creates a deferred tax liability that eventually reverses out. While Amazon and other companies take full advantage of the Act and invest today, Uncle Sam may eventually gain back the losses of tax revenue through a larger economy, fueled by today’s capital investments. Of course, this assumes companies will return their profits from overseas.

Amazon- Two Years Tax-Free