Archives for February 2018

Why Etsy’s Stock Jumped 24% Amid Some Complaints From Sellers and Buyers

Artisan craft marketplace Etsy has had its ups and downs since going public almost three years ago, but new CEO Josh Silverman appears to have convinced investors that sales are on track for solid growth in 2018.

Etsy’s stock price jumped as much as 24% in midday trading on Wednesday, and has now more than doubled from a year ago, thanks to Silverman’s turnaround strategy that got the company out of Amazon’s long shadow. Silverman, a veteran of eBay’s (ebay) Shopping.com site, has emphasized simple improvements like adding “best seller” badges and site-wide sales for Labor Day and Cyber Monday last year, as well as deeper changes that improved customer searches using artificial intelligence and machine learning with a program Etsy calls “Context Specific Search ranking.”

The results pleased Wall Street. Etsy reported solid fourth quarter results on Tuesday evening, including sales on the site increasing 15% to $1 billion—the company’s first billion dollar quarter ever—while Etsy’s own revenue, which includes its cut of the sales plus other services it sells, increased 21% to $136 million. Earnings per share of 36 cents reversed a loss of 19 cents per share last year and beat Wall Street’s expectations of just 13 cents (though the latest quarter included a one-time benefit from the new tax law).

Analysts also cheered Etsy’s forecast for 2018, including overall sales on the site increasing 14% to 16% to as much as $3.8 billion and its own revenue growing 21% to 23% to as much as $543 million. Analysts had forecast Etsy’s 2018 revenue would hit only $519 million.

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Silverman explained the improvements that led to last year’s growing sales, while also offering more ideas that will boost growth this year. “There’s still much work to do to improve the shipping experience on Etsy and this will be an area of strong focus in 2018,” he told analysts on a call on Tuesday.

Still, there were complaints from some sellers and buyers last year that Etsy was losing its identity as a craft marketplace focused on individual artisans amid all the changes. Silverman said the latest results were proof that, on the whole, his strategy was working for most.

“You know as a platform our job is to make the experience better for all of our buyers and sellers,” he said. “On any given day, there will be individual winners and losers because that’s the nature of the marketplace–you know, is the product that a particular seller is selling, is it in fashion or not, how is it resonating with the marketplace, that’s up to each of our sellers.”

Under prior CEO Chad Dickerson, Etsy stumbled in the face of growing pressure from Amazon (amzn), which introduced its own handmade craft-oriented platform just a few months after Etsy went public. Dickerson was pushed out last May after a disastrous first quarter that led to layoffs

Further improvements at Etsy this year will come from giving sellers better data analytics tools, making it easier for buyers to have items shipped quickly, and further optimizing search results, among other initiatives, Silverman said. The company will also look at hosting more site-wide events with discounting, though Etsy (etsy) doesn’t want to become known as a discount site, he said.

In many cases, “these are things that are perhaps best practices already used in other parts of the web that we haven’t yet adopted,” Silverman said. “We also want to make sure that we’re stretching ourselves and we’re thinking about bolder bigger events.”

Supreme Court wrestles with Microsoft data privacy fight

WASHINGTON (Reuters) – Supreme Court justices on Tuesday wrestled with Microsoft Corp’s dispute with the U.S. Justice Department over whether prosecutors can force technology companies to hand over data stored overseas, with some signaling support for the government and others urging Congress to pass a law to resolve the issue.

Chief Justice John Roberts and Justice Samuel Alito, both conservatives, hinted during an hour-long argument in the case at support for the Justice Department’s stance that because Microsoft is based in the United States it was obligated to turn over data sought by prosecutors in a U.S. warrant.

As the nine justices grappled with the technological complexities of email data storage, liberals Ruth Bader Ginsburg and Sonia Sotomayor questioned whether the court needed to act in the data privacy case in light of Congress now considering bipartisan legislation that would resolve the legal issue.

A ruling is due by the end of June.

“Wouldn’t it be wiser to say let’s leave things as they are. If Congress wants to regulate this ‘Brave New World,’ let them do it,” Ginsburg said.

Alito agreed that Congress should act but added that “in the interim, something’s got to be done.”

Roberts appeared concerned that companies like Microsoft could enable customers to evade the reach of U.S. prosecutors by deliberately storing data overseas.

The case pits the interests of tech companies and privacy advocates in protecting customer data against the demands of law enforcement in gaining information vital to criminal and counterterrorism investigations.

It started with a 2013 warrant obtained by U.S. prosecutors for emails of a suspect in a drug trafficking investigation that were stored in Microsoft computer servers in Dublin. Microsoft challenged whether a domestic warrant covered data stored abroad. The Justice Department said prosecutors were entitled to the data because Microsoft is headquartered in the United States.

Microsoft President and Chief Legal Officer Brad Smith (R) and his lawyer Josh Rosenkranz make their way to the news media to make a statement outside of the U.S. Supreme Court in Washington, U.S., February 27, 2018. REUTERS/Leah Millis

The New York-based 2nd U.S. Circuit Court of Appeals in 2016 sided with Microsoft, handing a victory to tech firms that increasingly offer cloud computing services in which data is stored remotely. President Donald Trump’s administration appealed that ruling to the Supreme Court.

The appeals court said the emails were beyond the reach of domestic search warrants obtained under a 1986 U.S. law called the Stored Communications Act.

Bipartisan legislation has been introduced in Congress to update the 1986 statute, a move backed by both Microsoft and the administration. The measure would let U.S. judges issue warrants while giving companies an avenue to object if the request conflicts with foreign law. If Congress were to pass the bill before the Supreme Court rules, the case would likely become moot.

FILE PHOTO: A Microsoft logo is seen a day after Microsoft Corp’s $26.2 billion purchase of LinkedIn Corp, in Los Angeles, California, U.S., on June 14, 2016. REUTERS/Lucy Nicholson/File Photo

Senator Orrin Hatch, a Republican who has led the efforts to rework the law, was in the courtroom to hear Tuesday’s argument, and afterward noted that various justices had referred to the importance of Congress acting.

“Our bill, the Clarifying Lawful Overseas Use of Data (CLOUD) Act, would resolve the question currently before the Court in a way that balances consumer, law enforcement, and privacy interests. This commonsense legislation has the full-throated support of both law enforcement and the tech community and deserves swift enactment,” Hatch said in a statement afterward.

Globally dominant American tech companies have expressed concern that customers will go elsewhere if they think the U.S. government’s reach extends to data centers all around the world without changes being made to the law.

Microsoft, which has 100 data centers in 40 countries, was the first American company to challenge a domestic search warrant seeking data held outside the United States.

The Microsoft customer whose emails were sought told the company he was based in Ireland when he signed up for his account.

Other companies including IBM Corp, Amazon.com Inc, Apple Inc, Verizon Communications Inc and Alphabet Inc’s Google filed court papers backing Microsoft.

The administration has the support of 35 states led by Vermont.

Reporting by Lawrence Hurley and Dustin Volz; Editing by Will Dunham

Famed ‘Pivot’ Strategy of Startups May Not Work For GE

This article first appeared in Data Sheet, Fortune’s daily newsletter on the top tech news. Sign up here.

While I was out last week Fortune published my feature on Eric Ries, author of the wildly popular book for entrepreneurs , The Lean Startup. Ries is a whirling dervish of the startup and innovation world. He’s an author, speaker, coach, consultant, and even CEO of an ambitious if quixotic startup of his own, the Long-Term Stock Exchange, which aims to combat short-termism on Wall Street.

Ries is a prophet in Silicon Valley, and his first book is its Bible. The thrust of my feature is the 39-year-old’s pivot to helping big companies find their inner startup and the book he has published as their field manual, The Startup Way. Ries and his teachings have been valuable to numerous companies—P&G and ING have had promising successes—and his work is an inspiration to a veritable cottage industry of innovation consultants.

That said, it might not be clear for some time if concepts like “pivoting” and “minimum viable product” can ever move the needle for big companies. (Buzzwordery meets cliché in a Ries-inspired firm that’s actually called Moves The Needle, which boasts: “We are innovation architects.”) Ries’s primary example in his new book is GE, where he was deeply embedded and coached at the highest levels.

Ries says he is “cautiously optimistic” about GE. He might be the only one. When I read The Wall Street Journal’s impressive reporting on GE’s yes-man culture, I couldn’t help but wonder if the tens of thousands of workers trained in lean-startup methods and hundreds of projects that followed its techniques were part of the “success theater” the paper describes.

Incidentally, The Startup Way is making less of a dent in the world than its predecessor. According to Nielsen Bookscan, which measures only U.S. physical book sales, seven-year-old The Lean Startup sold three times as many books last week than The Startup Way, which came out in October. The Lean Startup is ranked No. 1,832 of all books on Amazon, a phenomenal ranking for such an old book; its heavily promoted successor is at No. 10,028.

***

My vacation reading: Anyone who writes should read this lovely and erudite essay by Amy Chozick of The New York TimesThe Economist competently sums up a thesis we at Fortune have been hammering for a year, that Chinese tech companies no longer are copycats—and that Silicon Valley has been arrogantly slow to figure this out … Onetime Time writer Joshua Cooper Ramo, supposedly an expert on Asian affairs, ought to pick up the haunting novel Pachinko, by Min Jin Lee. It’d be impossible to read it and not understand how Koreans feel about Japan … This stunning narrative in New York magazine about a young ex-Air Force linguist accused of disclosing top-secret information is all the more powerful for not having pointed out the central irony of the crime for which its subject will soon stand trial.

EU plans new tax for tech giants up to 5 percent of gross revenues

BRUSSELS (Reuters) – The European Commission wants to tax large digital companies’ revenues based on where their users are located rather than where they are headquartered at a common rate between 1 and 5 percent, a draft Commission document showed.

The proposal, seen by Reuters, aims at increasing the tax bill of firms like Amazon [AMZN.O], Google [GOOGL.O] and Facebook [FB.O] that are accused by large EU states of paying too little by re-routing their EU profits to low-tax countries such as Luxembourg and Ireland.

The plan resembles a French proposal on an equalization tax that was supported by several big EU states. However, it is likely to face opposition from small countries that fear becoming less attractive to multinational firms.

The document says the tax should be applied to companies with revenues above 750 million euros ($922 million) worldwide and with EU digital revenues of at least 10 million euros a year.

The proposal is subject to changes before its publication which is expected in the second half of March. Some of the key figures on rates and thresholds are in brackets, showing that work is still ongoing to define the final numbers.

Firms selling user-targeted online ads, such as Google, or providing advertisement space on the internet, such as Facebook, Twitter or Instagram, would be subject to the tax, the document said, citing these companies.

Digital marketplaces such as Amazon and gig economy giants such as Airbnb and Uber also fall under the scope of the draft proposal, the Commission said.

Online media, streaming services like Netflix, online gaming, cloud computing or IT services would instead be exempt from the tax.

The levy would be raised in the EU countries where users are located, rather than where companies are headquartered, reducing the appeal of smaller low-tax states.

“This would entail additional reporting requirements so that the tax authorities of member states can calculate how much tax is due in their jurisdiction,” the document said.

In the case of online advertisers, the tax should be levied “where the advertisement is displayed” and “where the users having supplied the data which is being sold are located.”

For online shopping, the tax would be collected in countries “where the user paying for being able to access the platform (or to conclude a transaction within the platform) is located,” the document said.

The levy would be calculated on the “aggregated gross revenues” of a business and should have a single EU rate “in the region of 1-5 percent.” It would be possible to deduct this tax as a cost from national corporate taxes.

The tax would be a temporary measure that would be applied only until a more comprehensive solution to fair digital taxation is approved, the Commission said.

The long-term solution would entail the adoption of new rules on a “digital permanent establishment”.

The proposal, once finalised, would need the approval of all EU states.

Editing by Matthew Mpoke Bigg

Samsung Galaxy S9 and S9+: Price, Specs, Release Date

Eager to put the Galaxy Note 7 disaster in the rearview, Samsung used 2017 to double down on impressive, feature-packed smartphones. Last year’s Note 8 and S8 handsets both impressed in a big way, bringing edge-to-edge, AMOLED-powered displays into the mainstream long before Apple was able to get the iPhone X to market. Naturally, as the smartphone expo of Mobile World Congress gets going today in Barcelona, Spain, it’s time to welcome the Samsung Galaxy S9.

The new S9 looks almost like last year’s S8, and that’s completely intentional. Both the S9 and S9+ refine the Galaxy’s already mature design. Perhaps the biggest physical change here (besides the addition of a badass Lilac Purple color option) is around the back of the phone, where the fingerprint scanner has been moved to sit just below the camera. This addresses one of the biggest gripes users had with the S8, since it was stupidly easy to smudge up the camera’s glass cover when feeling around for the tiny fingerprint pad.

S9

Samsung

Two versions of the flagship Sammy phone will be available: a 5.8-inch S9 and a whopping 6.2-inch S9+. All the standard Samsung features have been branded this generation as “Galaxy Foundation,” and no, that’s not a new non-profit charity. This term sums up all the things that make a Galaxy a Galaxy—stuff like IP68 water and dust protection, fast wireless charging, and microSD memory expansion. New in the S9 and S9+ is an enhanced biometric security setting that combines the slower, more secure iris scanner with facial recognition. There’s even a headphone jack, which seems like such a luxury in 2018.

Sure sounds like a Samsung phone, doesn’t it?

The thing Samsung hyped the most when debuting S9’s is its new-and-improved camera. The marquee ability of the S9’s upgraded imaging hardware is a variable-aperture camera. The 12-megapixel, optically-stabilized main cameras of both the S9 and S9+ have two aperture settings thanks to an aperture plate on both phones that slides in place whenever it’s needed. Wide open, the camera gathers more light in dim situations at a fast f/1.5 aperture. When stopped down, it shoots in f/2.4, which is better for brighter environments. The camera’s other major trick is a super slow-motion setting, which leverages an on-sensor data buffer to shoot up to 960 frames per second.

Jumping into the animated, facial-mapped emoji craze, Samsung is introducing AR Emoji. Competing with the iPhone X’s Animoji, AR Emoji gives users a cartoon version of themselves they can use to express a range of emotions and reactions. The animations can be sent via SMS, and you can export a custom animation as a GIF, though Samsung’s take on this is more Nintendo Mii than anything.

Additionally, Samsung has added improvements to DeX, the app that lets you connect the phone to a keyboard and monitor for desktop-like experience. The new phones also get stereo Dolby Atmos-powered speakers, ever-so-slightly narrower bezels, the latest Qualcomm Snapdragon 845 chip, and some new Bixby abilities for good measure.

Preorders for the S9 and S9+ begin Friday, March 2. Retail stores will start carrying the new models on March 16. The S9 will start at $719 unlocked, while its larger Plus-sized sibling will go for $839.

More WIRED Gear

The Rick Gates Plea, an Apple Watch Mess, and More Security News This Week

Robert Mueller’s indictment of Russia’s Internet Research Agency—also known as the “troll factory”—feels like years ago at this point. It’s only been a week! And we took a deep dive into what it really says about Russia’s propaganda efforts during the 2016 presidential campaign and beyond. Trump campaign advisor Rick Gates has also copped a plea deal with Mueller’s team—which could have big implications for the investigation going forward.

We also got a rare look inside the toolkit of an up and coming North Korean hacking group, called APT37, which has recently started to branch out beyond targeting just its neighbors to the south. Meanwhile, cryptojacking struck once more, this time glomming onto Tesla’s public cloud to mine cryptocurrency. The silver lining? While sensitive data was apparently exposed, the hackers don’t appear to have pilfered any of it.

For whatever the inverse of a silver lining is, we look to US Customs and Border Protection, which has required RFID chips in passports for over a decade but never got around to installing the software that verifies the cryptographic signature, making forgeries and tampering potentially easier. And did you know that Facebook makes some users download antivirus software? It’s true! And weird! And not ideal!

And while it’s a rarity, there also was some good news this week. WhatsApp co-founder Brian Acton has infused $50 million into Signal, the gold standard for encrypted messaging, which should secure its viability for years to come.

And there’s more. As always, we’ve rounded up all the news we didn’t break or cover in depth this week. Click on the headlines to read the full stories. And stay safe out there.

Apple Repair Center Barrages Sacramento’s 911 Operators

Since October of last year, devices at an Apple repair center in Elk Grove, California have called 911 an average of 20 times a day, for a total of about 1600 dials, according to a local CBS affiliate. Apple acknowledged the issue in a statement, saying, “We take this seriously and we are working closely with local law enforcement to investigate the cause and ensure this doesn’t continue.” That investigation likely won’t take long; the Apple Watch automatically calls 911 if you hold the side button down for several seconds. Tapping the side button of your iPhone five times in succession does the same, if you’re on iOS 11. Those features are obviously helpful to people in legitimate danger. But unless Apple can wrangle its Elk Grove process to stop the influx of false alarms, it may end up blocking actual calls from getting through.

Money Laundering Hits Amazon’s Kindle Store

Here’s a novel way to launder money, as reported by Krebs on Security: Use a computer to generate about 60 pages’ worth of text. Slap a title and cover on it and toss it in the Kindle Store under someone else’s identity. Charge several hundred dollars for it. Buy it dozens of times with stolen credit cards, pocketing the 60 percent cut that Amazon shares with authors, and sticking the person whose name you stole with the tax bill. It sounds a little convoluted, but no more than your average John Barth short story. And in the case reported by Krebs, the scammers were able to successfully launder $24,000.

Stalkerware Finds Customers At the FBI and ICE

Consumer spyware is a bit of a scourge, as Motherboard has covered extensively. It becomes potentially even more alarming, though, when those consumers also happen to work for the FBI, DHS, or ICE. According to hacked data from spyware provider Mobistealth, people with email addresses from those and other law enforcement organizations have purchased the so-called stalkerware, as well as at least 40 members of the US Army.

The Black Market for Fake Certificates Lets Malware Thrive

Cryptographic certificates are an important part of internet security; they let your computer know that any given piece of software comes from the company it claims to. This week, researchers at Recorded Future released research that shows the market for counterfeit certificates jumped starting last year. The concern here is more over niche or targeted operations, given the expense of a fake, but the results can be vicious, tricking antivirus protections into thinking an intruder is legitimate.

Trump's Tax Plan: Bad News For Amazon, Tesla, And Netflix Shareholders

Trump Tax Plan’s Effect on Inflation and Interest Rates

As everyone now knows, President Trump got his corporate tax reduction bill passed in late December, lowering the tax rate on domestic business from 35% to 21%. Thus far, most investors and pundits have focused on how the lower corporate rate is a boon to big companies nationwide. Obviously, lower taxes should lead to higher profits, all else remaining equal. However, what has received a bit less attention is the effect that the tax plan will have on future interest rates and inflation. According to the Congressional Budget Office, the tax plan will add an additional $1.4 trillion (yes, that’s $14 followed by 11 zeros – or, if one prefers, 1,400 stacks of $1,000,000,000 each) to the federal debt over the next decade. Clearly, with the economy already strong and with debt levels already high, the tax bill should almost certainly result in higher levels of future inflation and, hence, higher future interest rates.

Indeed, it took only a month and a half after the tax plan’s passage for investors to feel the first jolts from higher inflation, as CNN reported on February 6th:

Be careful what you wish for.

Wall Street partied hard while President Trump pushed for huge business tax cuts that the economy didn’t really need. Tax cut euphoria carried the Dow a breathtaking 8,000 points to levels never seen before.

Now comes the hangover. Investors are remembering that giving lots of medicine to an already healthy economy can have side effects, namely inflation.

Those inflation fears are suddenly rocking Wall Street. They sent the Dow plummeting 1,800 points in just two trading days. The losses wiped out a quarter of the gains since Trump’s election.

For months, investors basically ignored the threat that the tax cuts might backfire, causing bond yields to spike and raising the likelihood that the Federal Reserve will have to raise interest rates faster to fight inflation.

“We have an infinite capacity for self-delusion as investors,” said Bruce McCain, chief investment strategist at Key Private Bank. “When we feel good, we don’t want to be bothered by reality.”

How Inflation Swindles the Equity Investor

So, what does all this mean for shareholders? Back in May 1977, Warren Buffett wrote an article for Fortune magazine (full article linked here) entitled “How Inflation Swindles the Equity Investor”. Given that we now appear to be heading into an era of higher inflation, it pays to take a look back at Buffett’s thoughts on the subject from nearly 41 years ago. How does Buffett describe the relationship between inflation and equities in the Fortune article? First, he refutes the previously accepted view that equities act as an effective hedge against inflation:

There is no mystery at all about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn’t going to be a big winner. You hardly need a Ph.D. in economics to figure that one out. It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms, let the politicians print money as they might. And why didn’t it turn out that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds. I know that this belief will seem eccentric to many investors. They will immediately observe that the return on a bond (the coupon) is fixed, while the return on an equity investment (the company’s earnings) can vary substantially from one year to another. True enough. But anyone who examines the aggregate returns that have been earned by companies during the postwar years will discover something extraordinary: the returns on equity have in fact not varied much at all.

Basically, Buffett takes the view that equities are disguised bonds that pay around 12% on par value (i.e., book value, or shareholders’ equity). Thus, stocks are hurt just as much as bonds when inflation rises because the price-to-book ratio (and, consequently, price-to-earnings and price-to-sales ratios) for stocks must necessarily decrease just as a bond’s price decreases in inflationary times. Conversely, the lower the relative level of inflation, the higher bond prices rise and the more P/B, P/E, and P/S multiples for stock expand (all other things being equal).

Buffett goes on to identify a key additional characteristic of low inflationary environments: they favor companies that reinvest their earnings (versus paying them out via dividends). Why? Because when stocks are trading at 3.4X book value, as they are today, every $1 of cash from operations that gets reinvested in said book value should translate into an incremental $3.40 in market value for the shareholder (versus worth just $1 when paid out as a dividend, or even less after payment of taxes thereon). Buffett explains further:

This characteristic of stocks – the reinvestment of part of the coupon – can be good or bad news, depending on the relative attractiveness of that 12%. The news was very good indeed in the 1950s and early 1960s. With bonds yielding only 3 or 4%, the right to reinvest automatically a portion of the equity coupon at 12% was of enormous value. Note that investors could not just invest their own money and get that 12% return. Stock prices in this period ranged far above book value, and investors were prevented by the premium prices they had to pay from directly extracting out of the underlying corporate universe whatever rate that universe was earning. You can’t pay far above par for a 12% bond and earn 12% for yourself.

But on their retained earnings, investors could earn 12%. In effect, earnings retention allowed investors to buy at book value part of an enterprise that, in the economic environment then existing, was worth a great deal more than book value.

It was a situation that left very little to be said for cash dividends and a lot to be said for earnings retention. Indeed, the more money that investors thought likely to be reinvested at the 12% rate, the more valuable they considered their reinvestment privilege, and the more they were willing to pay for it. In the early 1960s, investors eagerly paid top-scale prices for electric utilities situated in growth areas, knowing that these companies had the ability to re-invest very large proportions of their earnings. Utilities whose operating environment dictated a larger cash payout rated lower prices.

We note here that the 30-year Treasury bond yield has jumped up recently, appreciating about 45 bps over the past six months to the ~3.20% level (source):

30 year

Granted, we are not even remotely close today to the ~15% level of the early 1980s, however, for equity investors, we currently appear to be moving in the “wrong” direction, at least if one buys into Buffett’s thesis. Indeed, looking at the very long view, it appears that the ~35-year bond bull market may finally be ending (source):

Now, we know why investors have been in love with so-called “growth” companies (especially big tech companies) during the recent moderate growth, low interest rate, and low inflation environment. These tend not to pay dividends but rather reinvest all their cash flows into existing or new operating businesses. Consider Amazon (AMZN) for a moment. All operating cash flow is plowed back by Jeff Bezos either into the existing retail business or in newer businesses such as Amazon Web Services. Unfortunately, the higher interest rates rise, the lower the relative benefit of the reinvested dollar for shareholders, and the less attractive “growth” stocks look compared to stodgy dividend payers like AT&T (T) or General Motors (GM) (again, other things being equal).

Buffett notes that a “reversal” phenomenon took hold in the mid-to-late 1960s just after major institutional investors had stampeded into growth stocks at nosebleed valuations:

This heaven-on-earth situation [regarding the superiority of growth stocks in low interest rate environments] finally was “discovered” in the mid-1960s by many major investing institutions. But just as these financial elephants began trampling on one another in their rush to equities, we entered an era of accelerating inflation and higher interest rates. Quite logically, the marking-up process began to reverse itself. Rising interest rates ruthlessly reduced the value of all existing fixed-coupon investments. And as long-term corporate bond rates began moving up (eventually reaching the 10% area), both the equity return of 12% and the reinvestment “privilege” began to look different.

Are we on the precipice of a new downward revaluation of stocks, given looming inflation? Today, stocks trade around 3.4X book value, compared to 2.0X book value in 2009 and just 1X book value in 1980. Let’s take an extreme scenario where interest rates are rising significantly and investors are only willing to pay book value for the S&P 500 again, as they did at the conclusion of the last bond bear market. Obviously, a growth company that trades today at 10X book value pays no dividends and earns 15% return on equity has much more potential downside than a dividend payer trading at 1.5X book value also earning 15% return on equity, since, even if the former were to trade at a consistent 3X the market multiple of book value (as it does now), it would still lose 70% of its value in the adverse scenario (i.e., its valuation would be reduced from 10X book to 3X book). In comparison, the dividend payer now trading at 1.5X book value might trade down to 1X book in the adverse scenario, meaning it would only have 33% downside, or less than half that of the growth stock.

Wither Tech Stocks Post-Trump Tax Reform?

So, how do some recent market darlings trade versus book value? Below are 5-year price-to-book charts for Amazon, Tesla (TSLA), and Netflix (NFLX):

PB 1

PB 2

PB 3

We find that Amazon trades at 26X, Tesla trades at 14X, and Netflix trades at 34X book, or an average for the three of about 25X book value. This represents a multiple of over 7X the overall market’s (already historically high) P/B ratio. Moreover, none of these companies pays a dividend, so they receive maximum credit from investors for the fact that all cash (including cash sourced from incremental debt) gets reinvested in the underlying business at book value. As interest rates have relentlessly fallen during the current 9-year bull market, investors have logically marked up the equity valuations of these three to higher and higher multiples of book value. If Buffett is correct, however, these will be the very companies whose valuations contract the most when inflation and interest rates rise, as should occur in an era of higher and higher government spending and deficits.

Moreover, the likes of Amazon, Tesla, and Netflix are also the type of companies helped the least by the Trump tax cuts. For one thing, they are either unprofitable or marginally profitable, so cutting their tax rate yields minimal to no gain for them in terms of immediate earnings and cash flow. Second, the value of any deferred tax assets on their balance sheets is lower, since going forward, the amount of taxes they will be able to offset with their DTAs will be lower under a 21% tax regime than a 35% tax regime (for example, Tesla had $2.4 billion in DTAs on its balance sheet as of the end of 2017). Finally, the current market valuation for all three companies is largely based on investors’ expectations of massive profits many years down the line (under typical sell-side analyst DCF analyses, near-term profits for these companies remains subdued to nonexistent and then explodes to the upside in the out years, similar to a hockey stick effect). Yet if the tax cuts lead to higher interest rates, the present value of these out-year profits will necessarily be less, as the discount factor applied to them will be higher. Thus, we find that the Trump tax cut has a triple negative effect on companies such as Amazon, Tesla, and Netflix.

Indeed, media outlets noted the initial negative tech investor reaction to the tax bill:

CNBC Tax

Of course, certain highly profitable large-cap tech players such as Apple (AAPL), Google (GOOG) (NASDAQ:GOOGL), and Microsoft (MSFT) should benefit from the Trump tax plan, as their cash taxes should decrease significantly going forward. In addition, they will be able to repatriate billions of overseas profits at favorable rates. Thus, not all tech companies should be put into the same boat.

Conclusion

The passage of the Trump tax plan looks to be a major negative for companies like Amazon, Tesla, and Netflix. Not only do they fail to benefit immediately from the lower corporate tax rate (since they generate minimal to no profits), the present value of their future profits is less if higher government deficits lead to higher long-term interest rates (a process which seems to be already well underway). Not only that, but if Warren Buffett’s analysis is to be believed, higher rates will necessarily cause price-to-book multiples to contract market-wide from the current (historically high) 3.4X level. As a group Amazon, Tesla, and Netflix trade at a massive 7X the overall market’s P/B ratio, indicating that the downside risk from such a contraction could be significant. To be sure, the valuation of any individual company depends on many variables, including the quality of management and products, revenue versus expense growth, market share dynamics, etc. However, the truly scary thing for Amazon, Tesla, and Netflix shareholders about the Trump tax bill is that the negative knock-on effects for these companies, as outlined in this article, are completely outside their and their company managements’ collective control.

Disclosure: I am/we are long GM, AAPL.

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

Additional disclosure: We are also short TSLA and NFLX.

Apple’s Long-Awaited AirPower Could Launch in March

It’s been awhile since we’ve heard much about Apple’s AirPower wireless charging device. But it might finally hit store shelves soon.

Apple is planning to release its AirPower wireless charging accessory on time in March, Apple-tracking block Macotakara is reporting, citing people who claim to have knowledge of the company’s plans. There’s still no word on exactly when the AirPower will launch in March, but it’ll be available both in Apple’s stores and at Best Buy, according to the report.

Apple unveiled its AirPower with the announcement of its iPhone 8, iPhone 8 Plus, and iPhone X last year. AirPower is a wireless charging mat that users can place their iPhones and Apple Watches on and power them wirelessly. The charging mat also works with the company’s AirPods to keep the wireless earbuds filled with power. Apple only discussed the AirPower briefly last year and said that it would share more details, including pricing and availability, sometime in early 2018.

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Rumors have been swirling that Apple is planning to hold its first major press event of 2018 in March, where it could unveil new iPads and MacBooks. It’s possible that the company could use that event to reveal more details about the AirPower and its availability.

Apple, however, hasn’t announced any plans for a March event yet. The company has also remained silent on AirPower plans.

This Is How Much Snap CEO Evan Spiegel Got After IPO

Snap Inc.’s Chief Executive Officer Evan Spiegel is poised to become one of the highest-paid U.S. executives for 2017, thanks to a $636.6 million stock grant he got when his company went public.

The Venice, California-based maker of the Snapchat photo-sharing app awarded Spiegel shares equal to 3 percent of the outstanding capital stock when the initial public offering closed in March, according to the firm’s annual report filed Thursday. He’ll receive the shares in increments through 2020.

Snap has had a volatile first year as a publicly traded company. Executives overseeing product, engineering and sales have departed. Facebook Inc. has copied some of its most popular features for bigger audiences and Twitter Inc. is said to be working on a new Snapchat-style product.

Scores of users including Kylie Jenner have criticized the recent update of the app. The stock fell as much as 7.2 percent on Thursday after Jenner tweeted to her 24.5 million followers, “sooo does anyone else not open Snapchat anymore? Or is it just me…ugh this is so sad.” The stock also has lagged the S&P 500 Information Technology Index in the past 12 months.

Read More: Snap Royalty Kylie Jenner Erased a Billion Dollars in One Tweet

Spiegel, 27, also received about $1.08 million in company-paid perks including legal fees and $561,892 for personal security services. His salary was cut from $500,000 to $1 around the time of the IPO.

Chief Strategy Officer Imran Khan received $100.6 million in compensation last year. That includes a grant of stock worth $100.1 million that will be fully vested within about a decade regardless of the firm’s performance.

Both Spiegel’s and Khan’s grants were one-time awards, according to the filing. Companies often grant large blocks of equity to executives when they go public, saying such awards are necessary to keep them on the job.

Spiegel last week sold about $50 million of stock, his first disposal since the firm went public. The company’s executives and directors have sold about $160 million worth of shares since the IPO, according to data compiled by Bloomberg. Some of those transactions have been made solely to cover taxes on shares that vested.

Here Are the Next Cities to Get Amazon Go Cashier-Less Stores

Amazon’s attempts at creating a cashier-less convenient store that people actually want to go to are expanding to more cities.

The e-commerce giant will open up to six more Amazon Go cashier-free stores this year, Recode is reporting, citing people who claim to have knowledge of its plans. A few of those locations will be opened in Seattle, home to Amazon’s headquarters and the first Amazon Go stores. The company could also open in Los Angeles, among other cities.

The first Amazon Go store opened last month in Seattle. Unlike a traditional convenience store, there are no humans there to check you out when you buy products. Instead, customers simply walk into the store, pick up what they want, and they’re automatically charged for their purchases on their accounts. The stores use a variety of scanning technologies and algorithms to monitor patrons and verify purchases.

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For now, Amazon Go stores are tests to see if a cashier-less experience is feasible. The company’s decision to expand to more locations across Seattle and Los Angeles suggest that the early experiments are going well. But a true test centers on Amazon testing its Go locations in multiple places where customer behavior could be different. The effort to expand in six more locations this year appears to be a step in that direction.

The report didn’t specify as to when Amazon might open these Go stores and at least so far, the company hasn’t confirmed the news. Amazon also didn’t respond to a Fortune request for comment on the report.