Category Archives: Cloud Computing

GM's Self-Driving Fleet Gets $2.25 Billion Capital Infusion From SoftBank Ahead of 2019 Launch

, I write about industrial innovation and the global auto industry

GM

GM Cruise self-driving vehicles will be deployed at scale in 2019. (Photo by Karl Nielsen)

SoftBank Vision Fund will invest $2.25 billion in GM Cruise Holdings, the automaker’s self-driving car unit, to help commercialize GM’s autonomous vehicle technology in a large-scale fleet starting next year.

GM is also investing $1.1 billion in GM Cruise, strengthening its commitment to bringing self-driving cars to market in a big way.

“Our Cruise and GM teams together have made tremendous progress over the last two years,” said GM Chairman and CEO Mary Barra. “Teaming up with SoftBank adds an additional strong partner as we pursue our vision of zero crashes, zero emissions and zero congestion.”

SoftBank Vision Fund, the world’s largest technology investment fund, is a major player in the fast-developing field of autonomous vehicles and will now own 19.6 percent of GM Cruise.

“GM has made significant progress toward realizing the dream of completely automated driving to dramatically reduce fatalities, emissions and congestions,” said Michael Ronen, managing partner of SoftBank Investment Advisers. “The GM Cruise approach of a fully integrated hardware and software stack gives it a unique competitive advantage. We are very impressed by the advances made by the Cruise and GM teams, and are thrilled to help them lead a historic transformation of the automobile industry.”

GM President Dan Ammann said the automaker is excited to join forces with a tech leader that shares GM’s view of how AV technology will change the world.

The deal is subject to regulatory approval. SoftBank Vision Fund will invest $900 million when the deal closes, and the remaining $1.35 billion when Cruise AVs are ready for commercial deployment, expected in 2019.

Follow me on Twitter @JoannMuller

Determining The Return On Investment On A New Software Purchase

Senior Vice President of OrderInsite, delivering executive leadership in innovative pharmacy technology solutions. Connect with me.

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There’s no way around it: Companies often need the most modern software. Yet software costs money, something most companies don’t have excess amounts of lying around.

To make purchases more appealing to stakeholders and decision makers, you may need to calculate the software’s return on investment. However, this is a complicated calculation — it’s important to get it right so you can rest assured your company will be investing its money wisely.

Don’t make a poor estimate that might damage your stakeholders’ trust in you or even result in a bad decision. Follow these guidelines to learn how to calculate the return on investment for your software purchase in a straightforward, accurate way.

What Is Return On Investment?

A return on investment, or ROI, isn’t an abstract term. It’s a specific calculation of an investment’s cost versus its benefit. ROI is always calculated the same way, whether it’s for software or anything else.

The formula used to calculate ROI is as follows:

ROI = (Gain of Investment) – (Cost of Investment) / (Cost of Investment)

Let’s break down the two components of this calculation, one at a time, and consider how they relate to software purchases in the health care or pharmacy fields.

Gain Of Investment

Your gain of investment is the amount of money you stand to gain from implementing the new software system. In some lines of work, the gain is easy to calculate. For instance, if a retail store opens an online storefront, it will almost certainly see an increase in its sales.

In the pharmacy or health care business, you won’t see a clear increase in revenue. What you’re more likely to see is a decrease in costs.

For instance, many health care providers and pharmacies have obligations to regulators. If they don’t adhere to regulations, they may end up with a fine. Many software packages offer safeguards to make sure companies adhere to all regulatory requirements, thus reducing the likelihood of these fines. The money you don’t pay out in fines would be a gain in investment.

Likewise, many software packages have features that will help you do the work you already do more efficiently. The time you save, and the extra work you’re able to take on as a result, represents another part of the money you gain.

Finally, remember that for most companies, your new software will replace an old system. That old system cost you money, whether it’s through licensing fees for the software you used or the smaller costs associated with an old-fashioned pen-and-paper record system. You can factor the money you’re not spending on the system into the gain of investment.

Study: Eating Meals Earlier In The Day Can Cut Diabetes Risk And Lower Blood Pressure

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In our ongoing dieting dialogue we spend a lot of time talking about what to eat, but what if we’re leaving out something just as important? What if changing when we eat could significantly improve our health? For the first time, a study offers hard data supporting precisely that argument, showing that eating earlier in the day could affect our health as much as what we’re eating.

Animal studies have found that time-restricted diets can reduce diabetes risk by stabilizing blood sugar. To see if the same holds true for humans, a research team from the University of Alabama at Birmingham (UAB) recruited a group of overweight men, all nearly diabetic, to participate in a controlled 10-week study. Half of the group ate three meals a day within a six-hour period starting around 6:30 am and ending by 3 pm (in effect, they fasted for 18 hours a day). The other half ate three meals during a typical 12-hour day. The groups swapped eating regimens at the end of the first five weeks.

By the end of the study, it was clear that eating within a six-hour window versus a 12-hour window produced three big benefits. First, the participants’ insulin sensitivity increased, resulting in better blood sugar control (insulin is the hormone that keeps blood sugar in check; reduced sensitivity to insulin is a hallmark of prediabetes and diabetes). Their blood pressure also improved as much as if they’d been taking an average dose of blood pressure medication. And their appetite was reduced (a paradoxical outcome considering how many hours a day they weren’t eating, but predictable because their blood sugar had leveled out).

The researchers think that the results come from aligning eating times with natural circadian rhythms.

“If you eat late at night, it’s bad for your metabolism,” said lead study author Courtney Petersen, assistant professor in the UAB Department of Nutrition Sciences. “Our bodies are optimized to do certain things at certain times of the day, and eating in sync with our circadian rhythms seem to improve our health in multiple ways.”

Importantly, the benefits didn’t come from weight loss, because all of the participants ate enough calories to maintain their bodyweight. Rather, the results seemed to come directly from changing when they consumed the same amount of calories.

“Our body’s ability to keep our blood sugar under control is better in the morning than it is in the afternoon and evening,” added Petersen, “so it makes sense to eat most of our food in the morning and early afternoon.”

This was a small study of just eight participants and far from the last word on this topic, but as an initial proof-of-concept, the results are important. As diabetes continues to explode across an increasingly obese population, strategies like shifting eating times to stabilize blood sugar could make a big difference. Same for blood pressure – reducing the amount of medication patients take by changing when they eat is an approach that makes sense.

Having said that, time-restricted diets aren’t easy to follow. Compressing every meal between 6:30 am and 3 pm takes commitment and more than a little willingness to endure stomach grumbles, at least initially before blood sugar spikes level out. We’re accustomed to eating dinner in the 5 – 7 pm window, often followed by a snack or two later at night. Changing that mindset takes work.

Further complicating matters is the growing popularity of fasting diets, mostly unsupported by evidence-based science, but fueled, as all diet fads are, by public demand to conquer our bodies’ worst tendencies. The latest study uses a fasting method (since the participants didn’t eat for 18 hours instead of a typical 10 or 12), but the focus wasn’t on restricting calories via fasting, but rather shifting when they’re eaten.

More research with more participants is needed, no doubt, but these preliminary findings are worth some attention. Food choices matter, but when we consume the food we choose may matter just as much.

The study was published in the journal Cell Metabolism.

You can find David DiSalvo on Twitter, FacebookGoogle Plus, and at his website, daviddisalvo.org.

The Amazing Ways Samsung Is Using Big Data, Artificial Intelligence And Robots To Drive Performance

, Opinions expressed by Forbes Contributors are their own.

Until recently, Korean company Samsung was said to behind its competitors in terms of researching and developing artificial intelligence (AI) technology, but the company’s recent strategy suggests that it’s committed to closing the gap and even competing for the top spot. Since 70 percent of the world’s data is produced and stored on Samsung’s products, the company is the leading provider of data storage products in the world. By revenue, Samsung is the largest consumer electronics company in the world—yes, it has even overtaken Apple and sells 500 million connected devices a year. From industry events to setting goals with AI at the forefront to updating products to use artificial intelligence, Samsung seems to have gone full throttle in preparing for the 4th industrial revolution.

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Adobe Stock

Bringing innovators together

Samsung started 2018 with intention to be an artificial intelligence leader by organizing the Artificial Intelligence (AI) Summit and brought together 300 university students, technical experts and leading academics to explore ways to accelerate AI research and to develop the best commercial applications of AI.

Samsung has Dr. Larry Heck, world-renowned AI and voice recognition leader, on their AI research team. At the summit, Dr. Heck emphasized the need for collaboration within the AI industry so that there would be a higher level of confidence and adoption by consumers and to allow AI to flourish. Samsung announced plans to host more AI-related events as well as the creation of a new AI Research Center dedicated to AI research and development. The research center will bolster Samsung’s expertise in artificial intelligence.

Bixby: Samsung’s AI Assistant

Bixby, Samsung’s artificial intelligence system designed to make device interaction easier, debuted with the Samsung Galaxy S8. The latest version, 2.0, is a “fundamental leap forward for digital assistants.” Bixby 2.0 allows the AI system to be available on all devices including TVs, refrigerators, washers, smartphones and other connected devices. It’s also open to developers so that it will be more likely to integrate with other products and services.

Bixby is contextually aware and understands natural language to help users interact with increasingly complex devices. Samsung plans to introduce a Bixby speaker to compete with Google Home and Amazon Alexa.

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Climate Change Made Zombie Ants Even More Cunning

Raquel Loreto is a zombie hunter, and a good one. But traipsing through dried leaves in a hot forest in Sanda, at the southern end of Japan, she needed a guide. Just a few months before, she’d been on the internet and come across the work of artist Shigeo Ootak, whose fantastical images depict humans with curious protrusions erupting from their heads. She got in touch, and he invited her to Japan for a hike to find his inspiration.

Ootak knew precisely where to look: six feet off the ground. And there in a sparse forest, that’s where they found it: the zombie ant, an entrancing species with two long hooks coming out of its back. By now you may have heard its famous tale. A parasitic fungus, known as Ophiocordyceps, invades an ant’s body, growing through its tissues and soaking up nutrients. Then it somehow orders its host to march out of the nest and up a tree above the colony’s trails. The fungus commands the ant to bite onto the vein of a leaf, then kills the thing and grows as a stalk out of the back of its head, turning it into a showerhead raining spores onto victims down below.

That’s how it all goes down in South American forests, where Loreto had already spent plenty of time. But the zombie she found on her hike in Japan was different. First of all, the fungus had driven it higher up a tree. And two, it hadn’t bitten onto a leaf, but had wrapped itself around a twig, hanging upside down.

See, in the tropics, leaves stay on trees all year—but in Japan, they wither and fall. Same goes for zombie ants in the southern United States. By ordering the ant to lock onto a twig, the fungus helps ensure it can stay perched long enough to mature and rain death on more ants. In a study out today in the journal Evolution, Loreto and her colleagues show that divergence between leaf-biting and twig-biting seems to have been a consequence of ancient climate change. So who knows, modern climate change may also do interesting things to the evolution of the parasite.

Come back in time with me 47 million years to an unrecognizable Germany. It’s much hotter and wetter. As such, evergreen forests grow not only up through Europe, but all the way up to the arctic circle. One day, a zombie ant wanders up a tree and bites onto the vein of a leaf, which conveniently enough gets fossilized. Time goes on. The climate cools, and Germany’s wet forests turn temperate.

Almost a decade ago, Penn State entomologist David Hughes looked at that fossil leaf and noticed the tell-tale bite marks of a zombie ant. “Given the fossil evidence in Germany, we know leaf biting occurred then,” say Hughes, a coauthor on the paper. “We suspect that it was also present in North America, and as those populations responded to climate change and the cooling temperature, we see a shift from biting leaves to dying on twigs.”

David Hughes

As vegetation changed from evergreen to deciduous, the fungus found itself in a pickle. But evolution loves a pickle. Ophio adapted independently in Japan and North America to order the ant to seek out twigs, which provided a more reliable, longer-term perch. The fungus grows much slower.

Loreto and Hughes know this thanks to the work of Kim Fleming, a citizen scientist who discovered zombie ant graveyards on her property in South Carolina. She’s been collecting meticulous data for the researchers, scouring the forest for the zombies and marking them with colored tape. “I made a map for myself so I wouldn’t get lost and leave some out,” says Fleming. (For her efforts, she’s now got a species of her very own: Ophiocordyceps kimflemingiae.)

What Fleming helped discover is that while in the tropics the fungus reaches full maturity in one or two months, in temperate climes like hers, the fungus sets up its zombie ant on a twig in June, but doesn’t reach maturity until the next year. In fact, the fungi may actually freeze over the winter. If it were attached to a leaf, it’d tumble to the ground in the fall.

“So it’s almost as if they’ve decided that nothing is going to happen this year, I’m just going to have to sit around because I don’t have time to mature and get spores out,” says Hughes. Plus, the ants hibernate in the winter anyway. Even if the fungus shot spores, there’d be no ants to infect—they’ll all chilling underground in their nest.

Opting for twigs does come with a downside, though: It’s really tough to get good purchase. Until, that is, the fungus initiates a second behavior, ordering the ant to wrap its limbs around the twig, sometimes crossing the legs on the other side of the twig for extra strength. “The hyphae of the fungus growing out of the legs works as glue on the twig as well,” says Loreto. “Sometimes they would even slide down the twig, but they wouldn’t fall.”

It’s hard to imagine how a fungus with no brain could figure this all out, but that’s the power of evolution. And it goes further: In June in temperate climes, the forest is still full of both twigs and leaves, yet the fungus directs zombie ants to lock onto twigs exclusively. And in the Amazon, where it’s lush all year round, they only ever lock onto leaves. “How in the name of … whoever … does the fungus inside the body know what the difference between the leaf and the twig is?” Hughes asks. It always has both options, yet only ever “chooses” one—the best strategy for its particular surroundings.

And so a parasitic manipulation that already defied human credulity grows ever more incredible, far beyond any work of zombie fiction. Your move, Hollywood.


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4 Reasons Microsoft Could Crush The Market Over The Next Decade

(Source: imgflip)

The goal of my dividend growth retirement portfolio is to own companies that are poised to grow their profits, cash flow and dividends for not just years, but decades to come.

This is what has me so excited about Microsoft (MSFT) which under current CEO Satya Nadella has staged one of the most impressive pivots in the tech industry. That’s because Microsoft has not just talked the talk about breaking into the leading edge tech of the future, but with its massive success in cloud computing and subscription services, is walking the walk as well.

Chart

MSFT Total Return Price data by YCharts

Of course that success hasn’t gone unnoticed by Wall Street, which has understandably fallen in love with the stock over the past year. However despite Microsoft being near 52-week highs a careful analysis reveals it to actually still be undervalued by about 23%. In fact there are actually four reasons that I think Microsoft is likely to beat the market (by as much as 86% annually) over the coming decade.

That makes this fast growing tech bluechip a must own for income investors looking to cash in on some of the most important business megatrends of the coming decades.

Reason 1: Strong Growth Powered By Cloud

(Source: earnings release)

Microsoft’s top line grew at an impressive rate in Q1 2018 (its fiscal Q3) led by strong increases not just in cloud but also its productivity and business segment (subscription services for consumers and enterprises). However the main growth catalyst for Microsoft remains its cloud infrastructure as a services or IaaS business.

That’s because Microsoft’s strength in cloud isn’t just in offering businesses low cost solutions for outsourcing their IT needs but in a deeply integrated ecosystem and advanced AI driven data analytics that can make companies more productive over time.

This is why Azure, the company’s cloud platform (that hosts its applications like Office 365 and Dynamics 365) continues to grow like a weed; 93% in the last quarter. What’s more Azure premium notched its 15th consecutive quarter with 100+% revenue growth showing that Microsoft retains a wide moat in cloud that allows it to command premium pricing power.

In fact gross margins on cloud rose by 6% in the past year to 57%. Microsoft’s success in continuously improving its cloud ecosystem is a big reason for that because it helps to retain customers better via an increasingly sticky ecosystem. That in turn allows it to amortize fixed costs over a larger revenue base boosting the profitability of the cloud business and company as a whole.

(Source: earnings presentation)

A good example of how Microsoft improves its ecosystem is with the integration of acquisitions liked LinkedIn. That controversial $26.2 billion deal brought Microsoft the world’s premier HR social media network and has made Azure and Microsoft’s overall commercial and cloud ecosystem all the more valuable. Note that in the past quarter LinkedIn sales grew 37% and the company is now profitable on a cash flow basis. And on an earnings basis LinkedIn will be accretive to EPS in fiscal 2018, a year ahead of initial expectations.

The most recent good news is that Microsoft appears to be poised to win a major part of a six year $10 billion Pentagon cloud contract that provides cloud based enterprise services to 17 government agencies including the CIA and NSA. This is on top of a $1 billion contract that Microsoft, Dell, and General Dynamics (GD) won with the Air Force back in September of 2017.

And as impressive as Microsoft’s cloud growth has been it’s just the tip of the iceberg. That’s because the future of enterprise IT solutions is firmly in the cloud. In fact by 2020 analyst firm Gartner expects that the cloud computing market will total $411 billion in size and will be growing at 16% to 23% per year (in the parts Microsoft operates in).

(Source: Gartner)

What’s more according to Gartner Microsoft and Amazon are poised to command 90% of the IaaS market by 2019 thanks to their strong first mover advantages and increasingly sticky ecosystems that create high switching costs. IT directors are notoriously conservative folks and once they find a good solution that works they are loath to switch providers and risk disrupting their business operations. All of which means Microsoft’s future growth prospects, both in sales and earnings, appear very bright indeed. How bright?

Morningstar analyst Rodney Nelson is projecting that over the next decade Azure will be able to grow at 31% per year, eventually representing 40% of the company’s revenue by 2028. In addition the higher margins on cloud are expected to boost the company’s operating margin from 31% to 40%.

But wait it gets better. Because while cloud is indeed a large and fast growing cash cow for Microsoft, it’s far from the only growth driver.

(Source: earnings release)

Microsoft has leveraged its cloud platform to run its various enterprise and productivity apps like Office 365 and Dynamics 365, which last quarter put up 42% and 65% revenue growth respectively.

Metric

Fiscal Q3 2018 Results

Revenue Growth

15.5%

Operating Income Growth

23.3%

Net Income Growth

35.3%

Free Cash Flow Growth

2.8%

Shares Outstanding Growth

-0.2%

EPS

35.7%

FCF/Share

3.1%

Dividend Growth

7.7%

Dividend Payout Ratio

35.5%

(Source: earnings release, Gurufocus, Morningstar)

That helped fuel very impressive top line growth for a company of this size. More importantly earnings boomed even more. And while true that 34% of the impressive net income growth was due to tax reform lowering the company’s effective tax rate from 23% to 14%, note that operating income (not affected by tax cuts) rose far faster than revenue indicating margin expansion.

Now it should be noted that Microsoft’s free cash flow or FCF (what’s left over after running the business and investing in growth) increased a far smaller amount. However remember that FCF is operating cash flow minus capex, and investment is volatile from quarter to quarter. In the last quarter Microsoft boosted its capex investment into further expanding the cloud business to the tune of $1.25 billion or 73% compared to Q3 2017. Much of that was to expand its data centers, which are now in over 50 countries around the globe.

However note that in 2017 the company’s FCF grew by 26% indicating that Microsoft is indeed converting its impressive revenue growth into even stronger bottom line growth that is needed to accelerate dividend growth. And lets not forget that Microsoft continues to enjoy one of the richest FCF margins in the world; 34.7% in the most recent quarter. This creates a river of free cash ($33.5 billion in the last 12 months) that explains why it’s sitting on a $132.3 billion mountain of cash.

Metric

Fiscal Q4 2018 Guidance

Revenue Growth

25.0%

Operating Earnings Growth

71.4%

(Source: management guidance)

That river of FCF is only set to grow larger as management’s guidance for the next quarter indicates even faster growth in both the top and bottom line. In fact if Microsoft can hit those numbers it will mean its growing at similar rates as back in its glory days of the late 1990’s. To help maximize the chances of that the company is also doubling down on expanding its competitive advantages.

Reason 2: Company Is Investing Heavily To Widen Its Moat

One of the big risks for any big company is that management becomes complacent and decides to coast on FCF rich cash cows. This is certainly what Steve Ballmer did, but Satya Nadella is taking a totally different approach.

Chart

MSFT Research and Development Expense (NYSE:TTM) data by YCharts

Recently Microsoft has greatly beefed up its already sizeable R&D budget. That’s because it understands that the future of its business isn’t just in hosting IT cloud solutions for companies but in offering a one stop shop for business optimization. That includes for fast growing new industries like the internet of things ((IoT)) for industrial customers such as Toyota which is always eager to improve the productivity of its factories and manufacturing capabilities.

The company is incorporating advanced AI driven data analysis into its platform which 300,000 (a figure that’s growing at 150% per year) app developers are currently using. Basically Microsoft knows that the future of enterprise IT business is in the cloud and the industry leaders will be those that have the best AI integration. That includes advances in cyber security which have become a major concern for both consumers and businesses alike. Microsoft has recently upped its AI driven cyber security offerings including with: Microsoft Secure Score, Attack Simulator, and Windows Defender ATP automatic detection and remediation.

That’s why it’s constantly making small bolt on acquisitions like Semantic Machines, a startup specializing in conversational AI. This small deal will not just strengthen Cortana (the consumer facing side of Microsoft’s AI business) but also comes with top talent like Larry Gillick, formerly the head of Apple’s AI efforts. Semantic is the sixth AI startup Microsoft has purchased since Nadella took the wheel and brought in the new cloud first strategy.

Another smart strategic move Microsoft is pursuing is partially integrating (allowing cross usage) between its cloud platform and that of Amazon (AMZN), and Apple (AAPL).

This is because Microsoft realizes that its biggest competitive advantages are scale and network effects. The larger its cloud and services user base grows the more developers it can attract to its ecosystem and the more feature rich, useful, and valuable it becomes.

Why is Microsoft doing all this? Because it has a major problem in that its legacy (but wildly profitable) Windows OEM business is continuing to decline. Remember that originally Microsoft’s main business was licensing Windows for PCs.

(Source: earnings presentation)

However as you can see the consumer windows OEM business has been seeing accelerating declines in the past three quarters as global PC sales decline due to consumers shifting more to mobile platforms. But there is some good news, and I’m not talking about the strong growth in Windows Pro OEM that is partially offsetting the decline in the retail side. Nor am I referring to the surprising strength of the company’s hardware division (Xbox and Surface) or advertising revenue from Bing.

(Source: earnings presentation)

Rather I’m talking about the great success that Microsoft has had in switching over its legacy Windows users to subscription services especially on the enterprise (commercial) side. Currently Windows remains the dominant PC OS with over 1 billion global users and over 350 million of those are running Windows 10. However ultimately PC OEM licensing is going the way of the dodo while recurring subscriptions are the wave of the future.

Microsoft’s Office 365 is the most feature rich application suite for word processing, spreadsheets, and presentations, and the company continues to grow its subscriber base at a rapid clip (28% in commercial and 17% consumer). In fact according to Nadella Office 365 commercial now has 135 million global subscribers.

That means that Microsoft’s commercial revenues are now 89% from subscription services including Office 365 and Dynamics, both of which are hosted on its cloud platform and integrated into Azure. This will allow Microsoft to continue improving its feature set at an accelerating pace. That’s thanks to its investments in AI whose data analysis can provide real time feedback on what its customers are utilizing and thus what features might be more useful in the future.

The bottom line is that Microsoft’s pivot to cloud, subscription services, and an AI driven future set it up for potentially decades of strong FCF growth. Which in turn translates into exceptional dividend growth and total return potential.

Reason 3: Dividend Profile Shows Long-Term Market Crushing Return Potential

Company

Forward Yield

TTM FCF Payout Ratio

Projected 10 Year Dividend Growth

10 Year Potential Annual Total Return

Microsoft

1.7%

37.2%

13% to 14%

14.7% to 15.7%

S&P 500

1.8%

50.0%

6.2%

8.0%

(Sources: Morningstar, Gurufocus, FastGraphs, Multpl, CSImarketing)

Ultimately the most important factor for me when looking at a dividend stock is the dividend profile which consists of three things: yield, dividend safety, and long-term growth potential.

Now Microsoft’s yield is certainly nothing to write home about as it basically matches the S&P 500’s paltry payout. However it’s also one of the safest payouts in corporate America. That’s because the current dividend makes up just 37% of the company’s trailing 12 month free cash flow, which is growing very quickly.

The other part of dividend safety is the strength of the balance sheet. After all a company’s dividend isn’t supposed to put its ability to invest in growth at risk and dangerously high debt levels would certainly do that.

Company

Debt/EBITDA

EBITDA/Interest

S&P Credit Rating

Interest Rate

Microsoft

1.7

16.3

AAA

3.50%

Industry Average

1.3

26.5

NA

NA

(Sources: Gurufocus, Morningstar, FastGraphs)

At first glance one might think Microsoft has too much debt, given that its leverage ratio and interest coverage ratios are so much worse than its peers. However you need to realize that Microsoft has an enormous foreign cash position that until recently it couldn’t repatriate except at 35% tax rates. Thus it, like Apple and numerous other tech companies, borrowed against that cash at the lowest interest rates in history to fund capital returns. In reality Microsoft’s $132.2 billion in cash more than covers its $77.2 billion in debt and its $55.1 billion net cash position means that the dividend is bank vault safe. That’s why Microsoft is one of only two companies (the other being Johnson & Johnson) with a AAA credit rating, literally higher than that of the US Treasury.

Finally let’s talk about dividend growth potential which historically is the key determinant of a dividend growth stock’s long-term total returns. In fact historically total return approximates yield + long-term dividend growth. However it’s important to realize that this formula (called the Gordon Dividend Growth Model) assumes a stable payout ratio over time.

Thus dividend growth is actually a proxy for earnings and FCF/share growth over time. This makes intuitive sense since there are just three parts of total returns: dividends, dividend/earnings/FCF growth, and changes in valuation multiples.

Over time valuation multiples tend to be mean reverting and thus cancel out, leaving just current yield (or yield on cost) and dividend/earnings/cash flow growth. However this means that when modeling long-term dividend growth one should not anticipate payout ratio inflation (dividend grows faster than FCF for a time) but merely use the long-term expected growth in FCF/share.

In the case of Microsoft analysts are expecting 13.2% EPS growth over the next decade. While such long-term forecasts must always be taken with a grain of salt in this case I consider those to be realistic expectations given the numerous large growth catalysts the company enjoys.

This means that at current valuations investors could enjoy about 15% annualized total returns from Microsoft over the next decade. Note that means that in 2028 your Microsoft investment, inclusive of dividends, would be worth about 4X what you invest today. It’s also about double the 8% annualized total return the S&P 500 is likely to generate from its current valuations.

Reason 4: Valuation Is Actually Better Than You Think

Chart

MSFT Total Return Price data by YCharts

Thanks to Nadella’s cloud/subscription pivot, Microsoft has been on fire over the last few years, crushing both the Nasdaq and S&P 500. So naturally many investors are worried that its shares are overvalued today. Now don’t get me wrong, I’m a diehard value investor and a core principle is to NEVER chase performance and overpay for a stock no matter how great it might be.

But here’s the thing. There is no 100% objectively correct way to value any stock. All we can do is use a combination of several metrics that appear reasonable based on a company’s business model to estimate a rough approximation of fair value and pay no more than that, or preferably a lot less.

I generally use at least three valuation metrics when deciding whether or not to buy or recommend a dividend stock. The first is the dividend profile, specifically whether or not a stock has the long-term potential to generate the 10+% total return that I use as my personal hurdle rate. Why 10%? Because since 1871 a low cost S&P 500 ETF would have generated 9.1% total returns net of expense ratio. Since owning any individual stock is always riskier than owning a diversified index fund I want to know that every investment I make at least has the potential to beat the market (otherwise just buy and index fund to get a strong and easier return). Microsoft’s approximate 15% total return potential easily passes that test.

Another valuation method I usually use is comparing the yield to the five year average yield. This is because yield is one of those mean reverting multiples that usually fluctuates around a fixed point over time. Thus the five year average yield can be thought of as a good proxy for fair value.

(Source: Simply Safe Dividends)

This is where Microsoft looks to fail big time and appears about 36% overvalued. However what I’ve recently realized is that the fast changing nature of the tech sector means that this method isn’t necessarily that appropriate. At the very least it shouldn’t serve as an automatic disqualification. That’s because major business model pivots can greatly change the growth outlook for a stock and thus make the fair value yield lower than it was in a company’s slower growing past.

Which is why I use a third valuation model as well, developed by Benjamin Graham, the father of modern value investing (and Buffett’s mentor).

Forward PE

Implied Growth Rate

Historical PE

Benjamin Graham Fair Value PE

Estimated Fair Value

Discount To Fair Value

24.2

7.90%

26.1

31.7

$121.41

23%

(Sources: Gurufocus, Benjamin Graham, FastGraphs)

Graham came up with a formula for estimating a fair multiple based on the long-term (seven to 10 year) projected earnings or cash flow growth rate. This formula is: (8.5 + (2X earnings/cash flow per share growth rate)) divided by the discount rate (decimal form).

For example if a stock has zero growth and you require a 10% total return (discount rate) then Graham estimated that a fair PE would be 7.7. Why? Because assuming that a company with zero growth (but a stable business model) pays out 100% of earnings as dividends then you would receiving a 13% annual return from this investment.

In the case of Microsoft if we use the 13.2% consensus EPS/FCF per share growth forecast that implies a fair PE multiple of 31.7 and a fair value for the stock of about $121. This means that under Graham’s method Microsoft is actually 23% undervalued. That’s also in line with Morningstar’s estimated fair value of $122 which is based on an advanced two stage discounted cash flow analysis. How can this be? Because Microsoft’s current forward PE is indicating that the market is pricing in about 8% EPS growth over the next decade. That’s a very low bar to clear for a company that has such a massive and long growth runway ahead of it.

Basically this means that even though Microsoft has soared 43% in the past year and is near its all time highs, its strong fundamentals and excellent long-term growth catalysts still make it a strong buy today. Assuming of course you’re comfortable with the risk profile.

Risks To Consider

While I’m highly bullish on Microsoft and plan to add it to my own portfolio, there are nonetheless several risks to consider.

First in the short-term be aware that Microsoft’s large volume of international sales creates relatively larger currency risk. That is only going to get bigger thanks to booming sales in emerging markets like India where Microsoft saw 49% sales growth in 2016, and 30% growth in 2017.

In the most recent quarter Microsoft’s results were hurt between 2% and 5% (depending on business unit) from a rising US dollar.

Chart

^DXY data by YCharts

That’s a reversal of the weakening dollar in 2017 that helped boost all multinational profits. When the US dollar appreciates against other currencies then sales in those currencies become worth less in dollars that Microsoft reports results in (and uses to pay dividends).

A main reason the dollar weakened in 2017 was due to investor confidence that stronger economic growth in the UK, EU, and Japan would allow interest rates in those countries to rise. Instead US economic growth has continued to outpace weaker than expected growth in other major economies and our interest rates have continued to rise while theirs haven’t. This creates increased demand for dollars which means a larger currency growth headwind that Microsoft and all major US corporations could face over the next year or two. Note that over time currency fluctuations tend to cancel out, meaning this is purely a short to medium-term risk.

The larger risk for Microsoft is strong competition from large and well capitalized rivals that are also gunning for market share in the cloud. This includes:

The immense opportunity of the cloud, which will one day likely be a multi-trillion industry, means that everyone and their mother is racing to win market share in the backbone of future tech.

Chart

MSFT R&D to Revenue (TTM) data by YCharts

With the exception of IBM, who has long been far behind in R&D funding (as a % of revenue), all of its major cloud rivals are spending significant and growing amounts money developing their cloud offerings. Much of that is focused on improving AI integration into platform applications which means that Microsoft is going to have to remain nimble and avoid the kind of complacency it experienced in the past.

(Source: CNBC)

Luckily with Microsoft still behind Amazon in overall cloud market share (13% vs 33%) it’s unlikely Nadella is going to pull a Ballmer and rest on his laurels. Just be aware that there is a risk that smaller rivals might end up getting desperate and try to start a price war that could result in future cloud margins not being as high as we hope. This means that continued investment into AI and application improvements becomes all the more important, to build a wide moat around the company’s biggest cash cow.

Finally as we’ve seen in the company’s past investors must always consider the risk of poor capital allocation which can come in two forms. First big acquisitions are common in the tech world, and frequently companies overpay and then write bad deals off with huge losses. Microsoft’s $7.6 billion loss on Nokia is just the most recent example in a long history of lighting shareholder cash on fire.

Now Nadella has so far avoided huge deals other than LinkedIn, which has thus far proven a wise strategic purchase. So in terms of idiotic acquisitions I’m far less worried with Nadella behind the wheel than I was with Ballmer in the top spot. However no one is perfect and even business geniuses can be wrong so poorly conceived and money losing acquisitions are certainly a risk to keep in mind.

Finally I’m a tad worried that Microsoft might end up using its tax windfall (ability to repatriate tons of foreign cash at much cheaper rates) to do something stupid. That would include paying an enormous special dividend as some have speculated it will.

Now I should clarify that Microsoft has not yet revealed how its capital return plans will change post tax reform so this fear may be overblown. In addition many investors like special dividends, because they consider them a windfall that can be either reinvested back into more Microsoft shares or some other stock (or used to pay the bills).

However ultimately all I care about is that Microsoft use its capital return programs to boost long-term value. A growing dividend, as well as buying back undervalued shares (company has $30 billion remaining on its current repurchase authorization) creates long-term value. A special dividend doesn’t because once it’s paid the cash is gone and the share price falls by the amount of the special dividend on the ex-dividend date. Basically a special dividend has no benefit and reduces a company’s financial flexibility for things like investment, acquisitions, buybacks, and faster growing regular dividends.

Fortunately such worries should be low on one’s list of risks since it’s still a relatively speculative concern. One which management has shown no indication it is seriously considering.

Bottom Line: Microsoft’s Market Outperformance Is Not A Flash In The Pan But Likely To Continue For The Foreseeable Future

Don’t get me wrong, I’m NOT predicting that Microsoft is going to crush the market every single year like it has recently. Rather what I’m saying is that the company’s current business strategy has created a self perpetuating virtuous cycle in which the company can continue to grow quickly thanks to the immense scalability of its cloud platform. A platform which is deeply integrated into its ever improving subscription services and early stage (but promising AI) offerings.

That could translate into an ever stickier ecosystem that results in continued margin expansion resulting in an exponentially growing river of free cash flow to fuel impressive dividend growth. Which in turn should allow Microsoft to be a long-term market beater and a must own dividend growth stock for the next few decades at least.

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

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

The Warriors' Draymond Green Just Taught a Wonderful Lesson in Reacting to Criticism (Yes, That Draymond Green)

Absurdly Driven looks at the world of business with a skeptical eye and a firmly rooted tongue in cheek. 

If you’re not a Golden State Warriors fan, you likely don’t warm to Draymond Green.

The power forward might seem to you like an arrogant, big-mouthed bully who, just as many bullies do, whines when he doesn’t get his way.

As far as former NBA whining bully Charles Barkley is concerned, well, he offered that Green annoys him so much he’d like to punch him.

The actual quote was: “I want to punch his ass in the face.”

Which conjures too many awkward images for my taste.

I fancy, though, that Barkley’s fist-swing is about as good as his golf swing — uglier and more ineffective than espadrilles in a rainstorm.

However, the former so-called Round Mound of Rebound was suddenly confronted with Green face-to-face after Game 6 of the NBA Western Conference Finals on Saturday night.

Would he take a swing? Or would he merely choose to insult the Warriors star a little more, in that adorable joking-not-joking manner?

And how might Green react?

Well, Barkley cowered somewhat. It was left to fellow TNT panelist Kenny Smith to point out that Barkley, in his dim, distant playing days, wasn’t dissimilar in style to Green.

Barkley claimed this was all “making a mountain out of a molehill.”

The only criticism he could articulate was that Green never admitted to committing a foul. 

And then, perhaps, well, there’s all the physicality — some borderline, some even worse — that Green brings to his game.

For his part, Green could have reacted to Barkley in so many different ways. 

He could have offered a politician’s bluster. He could have offered some bland statement that avoided the question. He could even have snarled.

Instead.

[embedded content]

Instead, he just admitted that he knew precisely why some people don’t view him with kindness.

He said that he didn’t think anyone in the NBA thought they ever committed a foul.

But.

“I can get bad with that at times,” he said. “My mom always reminds me of it, my grandmother will say it, my uncle was really hard on me about it. So, I could understand that.”

Criticism is hard to take. The problem is that, occasionally — very occasionally — it’s true.

If you recognize that a criticism is true, there’s something glorious in admitting it.

It’s not easy.

Your ego is vast and vulnerable. Admitting fault feels like losing — or, even worse, exposing an ugly truth about yourself.

Oddly, though, you might find that people respect you more for showing that you at least know how you’re perceived by others.

I confess that, even though I’m a Warriors fan, I’m occasionally exasperated by Green’s highly sensitive reactions to alleged injustice.

Yet seeing him react with poise and honesty was a refreshing reminder that we’re all desperately imperfect.

Privately, we beat ourselves up over these imperfections.

To admit to them in public is the first step to a sane redemption.

Tencent chairman pledges to advance China chip industry after ZTE 'wake-up' call: reports

HONG KONG (Reuters) – Tencent Holdings chairman pledged to advance China’s semiconductor industry, saying the blow to ZTE Corp from Washington’s ban on U.S. firms supplying telecommunications company was a “wake-up” call, local media reported.

FILE PHOTO: Tencent Holdings Ltd Chairman and CEO Pony Ma attends a news conference announcing the company’s annual results in Hong Kong, China March 21, 2018. REUTERS/Bobby Yip

China’s No.2 telecom equipment maker ZTE was banned in April from buying U.S. technology components for seven years for breaking an agreement reached after it violated U.S. sanctions against Iran and North Korea. American firms are estimated to provide 25-30 percent of the components used in ZTE’s equipment.

While the U.S. administration said on Friday it had reached a deal to put ZTE back in business after the company pays a $1.3 billion fine and makes management changes, the plan has run into resistance in Congress, indicating ZTE was still far from out of the woods. Also, ZTE is yet to confirm the deal.

FILE PHOTO: A sign of Tencent is seen during the third annual World Internet Conference in Wuzhen town of Jiaxing, Zhejiang province, China November 16, 2016. REUTERS/Aly Song/File Photo

“The recent ZTE incident made everyone more clearly realize that however advanced one may be in mobile payment, without the mobile, the chips and the operating system, you still cannot compete,” Chinese media reports cited Tecent’s Pony Ma as saying at a forum in Shenzhen on Saturday.

FILE PHOTO: A sign of ZTE Corp is pictured at its service centre in Hangzhou, Zhejiang province, China May 14, 2018. REUTERS/Stringer

Tencent, which alternates with Alibaba Group to be Asia’s most-valuable listed company, is the largest social media and gaming company in China and operates the popular WeChat app.

Ma said “even though the ZTE situation was in the process of being resolved, we must not lose vigilance at this time and should pay more attention to fundamental scientific research”.

Tencent is looking into ways it could help advance China’s domestic chip industry, which could include leveraging its huge data demand to urge domestic chip suppliers to come up with better solutions, or using its WeChat platform to support application developments based on Chinese chips, Ma said.

“It would probably be better if we could get in to support semiconductor R&D, but that is perhaps admittedly not our strong suit and may need the help of others in the supply chain.”

China has been looking to accelerate plans to develop its semiconductor market to reduce its heavy reliance on imports and has invited overseas investors to invest in the country’s top state-backed chip fund.

Reporting by Sijia Jiang; Editing by Himani Sarkar

Customers angry after National Australia Bank hit by technology outage

MELBOURNE (Reuters) – National Australia Bank on Saturday suffered what it described as a “nationwide outage” to some of its technology systems, leaving customers unable to access banking services or withdraw money.

FILE PHOTO: A National Australia Bank (NAB) logo is pictured on an automated teller machine (ATM) in central Sydney September 12, 2014. REUTERS/David Gray/File Photo

Customers took to social media to vent their frustrations, with some saying they were left unable to pay for groceries or refuel their cars.

“Loyal member for 15 years and you leave me standing at the supermarket altar with a trolley full of shopping,” said one Twitter user.

The bank tweeted just after midday (0200 GMT) on Saturday that some services were coming back online.

“We’re sorry and it’s not good enough … but we’ll get it fixed as soon as possible,” Chief Customer Officer Business and Private Banking Anthony Healy said in a video posted on Twitter.

NAB is one of Australia’s four largest retail banks with a customer base of 9 million, according to its website.

The outage follows growing customer discontent with the so-called “Big Four” banks, which have suffered numerous embarrassing disclosures at an inquiry into financial sector misconduct.

A spokesman from the bank told Reuters by telephone that it was a national outage, without elaborating on its cause.

The Bank of New Zealand [BNZL.UL], a NAB subsidiary, also experienced outages on Saturday across New Zealand, but the spokesman was unable to confirm a connection between the two incidents.

Reporting by Will Ziebell in MELBOURNE; Editing by Joseph Radford

Report: Document Shows Apple Knew iPhone 6 Was More Likely to Bend

Apple knew ahead of time that its iPhone 6 was “more likely to bend” than other iPhones, according to tech news site Motherboard.

A lawsuit filed in 2016 claims Apple knew about defects with the iPhone 6 and 6 Plus, including so-called “touch disease” — or problems with the iPhone 6 and 6 Plus touchscreen responsiveness, which can happen if the phone is bent.

While documents submitted by Apple in this case are under seal, U.S. District Court judge Lucy Koh made some information public in a procedural ruling on the case on May 7. In it, she said that “Apple’s internal testing ‘determined that the iPhone 6 was 3.3 times more likely to bend than the iPhone 5s (the model immediately prior to the subject iPhones) and that the iPhone 6 Plus was 7.2 times more likely to bend than the iPhone 5s.”

She continued: “Underscoring the point, one of the major concerns Apple identified prior to launching the iPhones was that they were ‘likely to bend more easily when compared to previous generations’ something that Apple described as ‘expected behavior.’”

Koh also wrote that Apple began adding reinforcement to the iPhone 6 and 6 Plus in May 2016 that caused malfunctions. (Koh also presides over a long-running patent infringement case between Apple v. Samsung).

After the premiere of the iPhone 6 and iPhone 6 Plus in 2014, some customers complained about the phones bending, leading media outlets to give the problem the nickname “bendgate.” Following those reports, Apple released a statement that minimized the problem:

“Our iPhones are designed, engineered and manufactured to be both beautiful and sturdy. iPhone 6 and iPhone 6 Plus feature a precision engineered unibody enclosure constructed from machining a custom grade of 6000 series anodized aluminum, which is tempered for extra strength. They also feature stainless steel and titanium inserts to reinforce high stress locations and use the strongest glass in the smartphone industry. We chose these high-quality materials and construction very carefully for their strength and durability. We also perform rigorous tests throughout the entire development cycle including 3-point bending, pressure point cycling, sit, torsion, and user studies. iPhone 6 and iPhone 6 Plus meet or exceed all of our high quality standards to endure everyday, real life use.

“With normal use a bend in iPhone is extremely rare and through our first six days of sale, a total of nine customers have contacted Apple with a bent iPhone 6 Plus. As with any Apple product, if you have questions please contact Apple.”

Apple, according to Motherboard, has argued that bending cannot cause “touch disease” “unless the phones had already been repeatedly dropped on a hard surface.”

Fortune contacted Apple for more information about Motherboard’s report and will update as necessary.