But over the past five years, Alphabet’s stock soared more than 130% as Baidu lost more than half its value. Let’s see why that happened, and whether or not Alphabet will continue outperforming Baidu over the next few years.

How Baidu and Alphabet make money

Baidu generated 73% of its revenue from online ads last quarter. 26% came from its streaming video subsidiary iQiyi (NASDAQ: IQ), and the remaining 1% came from other businesses like cloud services and smart speakers.

Alphabet generated over 99% of its revenue from its main subsidiary Google last quarter. 84% of Google’s revenue came from ads, while the remaining 16% came from Google Play, Google Cloud, its Pixel phones, and other products and services. The remaining sliver of Alphabet’s revenue came from “other bets” like its driverless platform Waymo and its biotech unit Calico.

Which company is growing faster?

A comparison of the two companies’ ad revenues over the past year indicates that Baidu is struggling much more than Google:

YOY = Year-over-year. Source: Company quarterly reports.

Baidu is struggling for three main reasons: a sluggish Chinese economy causing companies to cut their ad budgets, competition from rival ad platforms like Tencent‘s (OTC: TCEHY) WeChat, and certain industries (like healthcare, fintech, and gaming) facing tighter government oversight of their advertising practices.

Google’s advertising revenue growth remained robust over the past year. In retrospect, its decision to exit mainland China after a clash with government regulators in 2010 now seems like a smart move.

However, Baidu’s ad revenue improved sequentially for two straight quarters, while its traffic acquisition costs (TAC) accounted for less than 16% of its ad revenue in the third quarter, indicating that it wasn’t spending too much cash to gain traffic. Google’s TAC accounted for 22% of its ad revenue last quarter.

Analysts expect Baidu’s revenue to dip 2% this year but rebound 13% next year as its advertising business recovers. iQiyi, which offset its declining ad revenue in recent quarters, should also keep growing.

Alphabet is expected to post 19% sales growth this year and 18% sales growth next year. It’s expected to maintain its duopoly in digital ads with Facebook across most markets, but Amazon is gradually gaining ground against both market leaders.

Which company is more profitable?

Baidu and Alphabet both rely on their higher-margin advertising businesses to subsidize the growth of lower-margin bets (like smart speakers and driverless cars) to expand their ecosystems.

That’s a big problem for Baidu, because its ad business isn’t growing. iQiyi also isn’t profitable yet, so its revenue growth actually weighs down its margins.

As a result, Baidu’s operating margin contracted eight percentage points annually to 8% last quarter. Alphabet’s operating margin dipped just three percentage points to 23% last quarter, even as it continued to launch lower-margin hardware devices and invest in speculative side bets like driverless cars.

Baidu is streamlining its business by divesting non-core assets (like its fintech, meal delivery, and online travel investments), but analysts still expect its earnings to drop 56% this year before possibly rebounding 46% next year. Alphabet’s earnings are expected to grow 6% this year and 17% next year.

The valuations and verdict

Baidu trades at 17 times forward earnings, while Alphabet has a forward P/E of 24. But Alphabet clearly deserves to trade at a premium to Baidu since it generates stronger growth at higher margins. Baidu isn’t a lost cause yet, but it will remain a weaker investment than Alphabet until its core advertising business recovers.

The post Better Buy: Baidu vs. Alphabet appeared first on The Motley Fool Canada.

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Google already owns Wear OS, but the smartwatch platform failed to gain enough developers and many of its hardware partners abandoned ship. It also acquired some of Fossil‘s smartwatch tech earlier this year. Google’s purchase of Fitbit could pave the way for its long-rumored “Pixel Watch” to hit the market.

However, analysts expect Fitbit’s sales to decline 4% this year as it falls further behind companies like Apple, which generated “strong double-digit growth” in Apple Watch sales last quarter, according to CFO Luca Maestri. It’s also unclear whether Google will replace Fitbit’s OS with Wear OS or the other way around.

Either way, Google could struggle to gain as many developers as Apple’s WatchOS, and it still faces competition from other smartwatch makers like Samsung, which notably replaced Google’s Wear OS with its own Tizen OS. In short, Google’s big bet on Fitbit won’t be its magic bullet for conquering the wearables market.

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TikTok, a social media app developed by Beijing-based ByteDance, has become a global phenomenon over the past five years. It was formed by the merger of two short video apps, Douyin and Musical.ly, and surged past 500 million monthly active users (MAUs) last year.

TikTok’s meteoric rise was sparked by its simplicity: Users recorded short videos, usually of themselves dancing or lip-syncing songs, and shared them. Creative videos often went viral and attracted more users to the platform. TikTok’s growth caused social media giants like Facebook (NASDAQ: FB) and Tencent to launch their own TikTok clones, but none of those efforts have curbed its growth so far.

That’s why it wasn’t surprising when The Wall Street Journal recently claimed that Alphabet‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) Google and Chinese tech company Weibo (NASDAQ: WB) were both interested in buying Firework, a new TikTok rival that was valued at $100 million after its last funding round.

The report claims that Google has “held discussions” with Firework, but that a price hasn’t been set and that “any acquisition would come at a premium.” It also stated that Weibo had “expressed interest” in Firework, but that its discussions hadn’t moved as far along as Google’s. Could these two tech giants spark a bidding war for Firework and force the winner to overpay for a speculative bet?

Is Firework really the next TikTok?

Many TikTok clones, like Facebook’s Lasso, slavishly copy ByteDance’s app without adding any meaningful new features. Firework is different because it employs both vertical and horizontal perspectives in a single seamless video with a “reveal” feature.

Users watch part of the video in vertical mode, then turn their phone to “reveal” the rest of the scene for a surprise or twist ending. Firework’s 30-second videos are twice as long as TikTok’s standard 15-second videos. To fend off the trolls, Firework doesn’t let viewers “like” videos or leave comments — it only lets them bookmark and share videos.

Firework claimed to have two million registered iOS and Android users in early 2019. Sensor Tower claimed that it had 1.8 million installations on iOS, and that 55% of those users were in the U.S.

Those are tiny figures compared to TikTok’s half a billion MAUs, so whoever acquires Firework needs it to post triple-digit user growth for several years to become a viable rival to TikTok. It’s still unclear how Firework plans to monetize the platform.

Why would Google and Weibo want Firework?

Google has repeatedly tried (and failed) to crack the social media market and catch up to Facebook. Its long list of failures includes Orkut, Dodgeball, Latitude, and Google+. Google’s biggest “social” platform is YouTube, which has over two billion MAUs, but it’s usually considered a streaming video platform instead of a social media app competing against Facebook, Twitter, or Snap.

However, YouTube’s popularity also suggests that streaming videos might offer Google the easiest path back into the social media market. It already started letting users film vertical videos last year to challenge Snapchat, Facebook, and others, so buying Firework — and possibly integrating its features into YouTube — could complement that push.

Weibo, often called the “Twitter of China”, is already one of the country’s top social media platforms with 486 million MAUs. But its core ad business is struggling due to the economic slowdown in China and competition from nimbler platforms like TikTok and Tencent’s WeChat.

To counter those rivals and pivot away from its core platform, Weibo is expanding its ecosystem with new apps like Oasis, which resembles a hybrid clone of Instagram and Pinterest. Buying Firework complements that expansion and would give it a foothold — albeit a small one — outside of China.

Could a bidding war happen?

There’s a chance that Google and Weibo would try to outbid each other for Firework, but it probably wouldn’t hurt either company — both tech giants can easily afford to pay big premiums over the start-up’s latest valuation of $100 million.

But Firework probably doesn’t have much leverage in these negotiations. Other platforms, like Qiubi, are also experimenting with seamless vertical-to-horizontal videos, so it might be cheaper for Google or Weibo to simply develop a similar in-house app. In short, the rise of TikTok remains a big priority for top tech companies, but Firework probably isn’t a magic bullet worth fighting over.

The post Will Tiktok’s Rival Firework Spark a Bidding War Between Google and Weibo? appeared first on The Motley Fool Canada.

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The Commerce Department claims that the blacklisted companies and bureaus provided technologies used for the “repression, mass arbitrary detention, and high-technology surveillance” of Muslim minority groups across China following the Urumqi riots a decade ago. China told the U.S. to stop interfering in its affairs, while Hikvision stated that it “strongly opposes” the decision.

Ambarella doesn’t disclose its revenue by individual customer, but plenty of red flags appeared earlier this year. In late May, Morgan Stanley analyst Joseph Moore warned that Ambarella generated a “high-teens” percentage of its revenue from Hikvision. In June, Needham analyst N. Quinn Bolton warned that losing Hikvision and Dahua would reduce Ambarella’s annual revenue by 25%-30%.

Yet the bulls didn’t seem to pay attention. Instead, the stock hit a 52-week high in mid-September on optimism about its stabilizing revenue, the launch of its new computer vision chips, and a fresh buyback plan. Unfortunately, none of those improvements will offset the losses of Hikvision and Dahua.

Investors shouldn’t be surprised…

I’ve repeatedly warned that Ambarella’s dependence on China’s top security camera makers exposes it to the escalating U.S.-China trade war. The U.S. already banned Hikvision and Dahua’s cameras from government contracts and facilities last year, so it wasn’t surprising that they were formally blacklisted.

Losing Hikvision and Dahua will likely reverse Ambarella’s recovery in the first half of fiscal 2020. Ambarella’s revenue fell 10% annually last quarter, but it still rose 19% from the first quarter.

YOY = Year-over-year. Source: Ambarella quarterly reports.

Ambarella attributed that recovery to strong sales of its security camera System On a Chip (SoCs) sets in China, which offset the sequentially flat growth of its automotive business and its declines in other consumer-oriented devices. At the time, Ambarella estimated that its third-quarter revenue would rise 12%-19% sequentially and 10%-17% annually, which would end its two-year streak of revenue declines.

Ambarella previously expected two tailwinds to revive its top-line growth: the expansion of its automotive business with new SoCs for dash cams and computer vision chips for connected and driverless cars, and higher sales of SoCs for Chinese security camera makers. Unfortunately, the Trump Administration’s latest move will torpedo Ambarella’s security business and cripple its recovery in the second half of the year.

A lesson in customer concentration

During last quarter’s conference call, Ambarella CEO Fermi Wang warned that there was a risk that the U.S. would “limit or restrict” its shipments to top Chinese customers. However, Wang also noted that demand at its “largest security camera customer in China” (likely Hikvision) improved during the quarter.

Wang stated that Ambarella was reducing its dependence on Chinese companies by growing its security camera market share in other markets. However, Needham believes that Hikvision and Dahua’s orders still account for about half of Ambarella’s professional security camera revenue. Based on that percentage, Needham estimates that Hikvision and Dahua contribute about $50 million to Ambarella’s annual sales — which equals more than a fifth of its projected revenue this year.

Ambarella isn’t the only American chipmaker with heavy exposure to Hikvision, which controls roughly a fifth of the global security camera market. Its other suppliers include Intel (NASDAQ: INTC), which provides its cameras with CPUs and Movidius’ computer vision chips; NVIDIA (NASDAQ: NVDA), which supplies it with deep learning GPUs; and hard drive makers Western Digital (NASDAQ: WDC) and Seagate (NASDAQ: STX), which provide its surveillance systems with high-capacity drives.

Simply put, the Trump Administration’s moves against Hikvision, Dahua, and other Chinese companies will likely also hurt U.S. companies. It will also exacerbate the trade war and push China to aggressively reduce its dependence on U.S. chips, which sounds like a lose-lose situation for all parties involved.

Is it time to sell Ambarella?

There’s no real reason to keep holding Ambarella in your portfolio. The trade blacklist derails its recovery, its gross margins are slipping, and its stock looks pricey at 80 times forward earnings. Its core growth engine is sputtering out, so investors should avoid Ambarella and stick with its safer peers like Intel, NVIDIA, or AMD instead.

The post Ambarella’s Investors Shouldn’t Be Surprised by Its Latest Crisis in China appeared first on The Motley Fool Canada.

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Many investors have abandoned BlackBerry (NYSE: BB) over the past decade as the early king of smartphones lost its crown (and then virtually its entire kingdom) to Apple‘s iPhones and a host of devices using’s Alphabet‘s Android operating system. BlackBerry has tried to stage a comeback over the past six years under CEO John Chen through such efforts as halting first-party production of smartphones, expanding its enterprise software business, and squeezing out licensing fees from its patents.

Those efforts finally began paying off earlier this year as BlackBerry’s reported that in fiscal 2019’s fourth quarter (which ended Feb. 28) revenue grew for the first time in years. That report also showed improved margins and the return of profits. The stock hit a 52-week high of about $10 in late March after the Q4 numbers were released, but investor interest has since waned. Then, it plunged to a 52-week low of about $5 a share after a mixed fiscal second-quarter report in late September.

Let’s discuss what happened and whether or not BlackBerry’s turnaround remains intact.

BlackBerry’s core growth engine is slowing down

Chen’s main strategy was to phase out BlackBerry’s hardware and non-core businesses and boost its higher-margin software and services revenues with new products and acquisitions. On the surface, that strategy paid off over the past year:

YOY = Year-over-year. *Non-GAAP. Source: BlackBerry quarterly results.

However, it generated more of that growth by acquiring companies — including Good Technology, Encription, and Cylance — than it did organically.

If we exclude the gains from Cylance (its latest purchase) from BlackBerry’s fiscal Q1 2020 numbers, its software and services revenues only rose 8% annually on a non-GAAP basis — marking a deceleration from its 14% growth in the prior quarter. That deceleration continued in fiscal Q2, as its combined revenues rose just 30%. BlackBerry’s non-GAAP software and services revenue also declined nearly 2% sequentially in the second quarter, indicating that its core business is losing steam.

Within that total, Internet of Things revenues fell 2% sequentially to $134 million, licensing revenues dipped 1% to $71 million as its patent lawsuits against Facebook and Snap ran into problems, and its BlackBerry Cylance revenues remained flat at $51 million. Moreover, BlackBerry’s current deferred revenue — a key indicator of forward demand — rose just 1% sequentially.

BlackBerry claims that its total non-GAAP revenues will rise by 23% to 25% for the full year, which indicates that it expects sequential growth to even out in the second half. However, analysts expect its revenue to rise just 8% next year as it laps the Cylance acquisition.

Unstable margins and rising competition

BlackBerry’s gross and operating margins improved throughout most of fiscal 2019, but both figures declined annually in the second quarter:

Non-GAAP. Source: BlackBerry quarterly reports.

Those declining margins, along with the “retooling” of its sales strategy, suggest that BlackBerry and Cylance might be struggling against competitors in the enterprise software market.

Cylance rival OptiV belongs to investment giant KKR — which can afford to run the cybersecurity unit at a loss to gain ground in a crowded market. Broadcom, which recently agreed to buy Symantec‘s enterprise security unit, represents a similar long-term threat.

BlackBerry believes that the Cylance deal will be accretive to its earnings within the first year, that the growth of its licensing revenues will offset its near-term declines, and that its automotive and Internet of Things services can drive its long-term growth.

That’s an optimistic outlook, but analysts still expect BlackBerry’s adjusted earnings to plunge 79% this year before rebounding 180% next year. The bulls believe the company will hit those targets, but the bears think that its core business will run out of steam amid fierce competition.

So is BlackBerry a buy?

BlackBerry is no longer dying, but it hasn’t demonstrated the ability to move forward without the crutches of acquisitions and significant exclusions (like stock-based compensation expenses) from its non-GAAP numbers. It also remains unprofitable on a GAAP basis.

While I don’t think shareholders should panic and sell BlackBerry yet, I also think investors shouldn’t buy it until its growth accelerates sequentially and its margins improve.

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Apple is undercutting all its rival services — including Netflix, Amazon Prime Video, and Disney+ — in the streaming market. However, Financial Times recently claimed that Apple could go a step further and merge Apple TV+ and Apple Music in a new bundle.

Apple Music currently costs $9.99 a month, and the FT report claims that the combined bundle could cost $13. There’s also talk about a “super bundle” of services that would bring Apple News+ and Apple Arcade onboard.

Apple’s strategy would propel it toward its target of generating $50 billion in annual services revenue by 2020. It would also strengthen the walls of its ecosystem and lock in revenue-generating users as its hardware sales decelerate. However, Apple’s media bundles could also hurt Spotify (NYSE: SPOT) and spark protests from record labels.

Running its media platforms as loss leaders

Spotify ended last quarter with 108 million paid subscribers and 129 million ad-supported monthly active users. Apple Music, which only operates as a paid service, hit 60 million subscribers in June.

Apple Music, Spotify, and other streaming platforms all previously paid 10.5% of their revenues as royalties to record companies. Last year, the Copyright Royalty Board (CRB) ruled that the rate would gradually rise to 15.1% by 2022.

Apple doesn’t disclose Apple Music’s revenue growth or profitability, but its margins probably aren’t much better than Spotify’s. Spotify posted a gross margin of 26% last quarter, but its operating margin stayed in the red at negative 0.2% due to higher labor costs, payroll taxes, and stock-based compensation expenses.

Apple doesn’t need Apple Music to be profitable, since it can offset the unit’s losses with more profitable services like the App Store. Instead, Apple views Apple Music as another way to lock users into its walled garden of services, ensure that they keep buying Apple devices, and boost its revenue per user as its hardware sales decelerate.

The same logic applies to Apple TV+. That’s why it reportedly spent $6 billion on the platform’s initial lineup of shows. At $60 per year, it would need 100 million members to break even on its initial investment — which seems unlikely with that many competitors in the market.

Simply put, Apple is willing to run Apple Music and Apple TV as loss leaders to expand its ecosystem. Bundling both services, along with Arcade and News, into a single service would complement that strategy. Apple’s move seems to target big tech rivals like Amazon and Alphabet‘s Google, which both bundle their streaming video and music services together — but it could also hurt stand-alone streaming players like Spotify.

Why Spotify should worry

Apple’s bundles could appeal to its iPhone owners, who account for 13% of the world’s smartphone market, according to IDC. It could also be an attractive choice for Apple TV owners, who comprised 13% of the U.S. set-top box market last year, according to eMarketer.

Meanwhile, Spotify’s average revenue per paid subscriber has been declining in recent years due to shifts in its product and geographic mix. In other words, Spotify is expanding aggressively into lower-income markets, where it charges significantly less than its $10 per month fee in the U.S.

If Apple goes through with its bundling plans, it could force Spotify to lower its prices in higher income markets like the U.S., which would reduce its average revenue per subscriber and squeeze its margins.

But record labels could stop Apple’s master plan

This all sound like bad news for Spotify, but Financial Times claims that at least one major record label opposes Apple’s plans. The reason is simple: The proposed bundle reduces Apple Music’s total revenue, which would reduce the record labels’ percentage-based cut. If other platforms are forced to match Apple’s prices, the record labels would generate lower royalties.

Apple’s master plan won’t work without the support of the big three record labels — Warner Music Group, Sony Music Entertainment, and Universal Music Group — so their unwillingness to change the status quo could shield Spotify from Apple’s ambitions. But if Apple wins over the labels, Spotify investors should brace for a brutal pricing war and wider losses.

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As a result, HP expects to report a full-year GAAP EPS of $1.98-$2.10, compared to the consensus estimate of $2.18 and its EPS of $3.26 last year — which was significantly boosted by a big tax benefit. On an adjusted basis, which excludes the restructuring costs and other items, HP anticipates earnings of $2.22-$2.32 per share, which marks 10%-15% growth and matches analysts’ expectations.

HP’s announcement rattled investors since it came less than two months after the PC and printer maker issued soft fourth-quarter guidance and disclosed that CEO Dion Weisler would leave in January to attend to a family matter. I stated that I wouldn’t sell my shares at the time since HP’s core PC business remained stable, its free cash flow looked strong, and it paid a decent dividend. But I also noted that I wouldn’t add any more shares until its printing business stabilized and the trade headwinds waned.

HP’s latest announcement is forcing me to reevaluate that thesis. Let’s see why HP is laying off its staff, and if investors should consider the restructuring effort to be a red flag.

HP’s biggest problems

HP’s PC and printing businesses performed well throughout 2018, but the growth of both units decelerated significantly this year:

YOY = Year-over-year. Source: HP quarterly reports.

HP’s personal systems (PCs and workstation) unit, which generated two-thirds of its revenue last quarter, struggled as its consumer unit dealt with longer upgrade cycles, competition from mobile devices, and Intel‘s CPU shortage. Fortunately, stronger sales of enterprise-facing commercial devices — which offered better security features and longer-lasting batteries — offset its consumer declines.

HP’s printing unit lacked that cushion. Sales of both consumer and commercial printers fell annually last quarter, due to long upgrade cycles in both markets and sluggish enterprise spending in the commercial market. Sales of the unit’s higher-margin supplies also fell as it faced competition from cheaper brands of generic ink and toner.

Where will the job cuts hit?

HP expects its $1 billion in restructuring expenses to be spread out, with $100 million in the fourth quarter of 2019, $500 million in 2020, and the remaining $400 million split between 2021 and 2022.

HP didn’t offer any hints as to where the job cuts will hit. In the press release, it merely stated that the restructuring plan would “simplify its operating model” so it could become a “more digitally enabled company.”

I think the job cuts will hit the printing unit first, where operating margin fell 40 basis points annually to 15.6% last quarter as revenue declined. This unit acquired Samsung‘s (OTC: SSNLF) printer business and office supplier Apogee over the past two years, so incoming CEO Enrique Lores — who currently leads the printing unit — will likely look for ways to eliminate redundancies between its original and acquired businesses.

But that doesn’t mean HP will spare its personal systems unit. That unit’s operating margin rose 170 basis points annually to 5.6% last quarter, thanks to lower component prices (especially hard drives and memory chips) and tighter cost controls. But when component prices start rising again, HP will likely prioritize cost-cutting measures by laying off additional employees.

It’s not all bad news…

HP’s outlook seems bleak, but it still has irons in the fire. It’s beefing up its enterprise PC unit with new integrated security features, expanding its printing unit into the promising industrial 3D printing market, and countering generic suppliers with its Instant Ink subscription service, which generated “double-digit” revenue growth last quarter.

HP still expects to generate “at least” $3 billion in free cash flow in fiscal 2020 and plans to return over 75% of that total to shareholders via buybacks and dividends. It also raised its dividend 10%, which continues its annual streak of dividend hikes following its split with Hewlett Packard Enterprise (NYSE: HPE) four years ago.

HP’s restructuring plan is surprising in its magnitude, but investors shouldn’t panic and sell their shares yet. The moves were necessary to streamline its business after several acquisitions, and could help HP focus on fresh ways to grow while rewarding patient shareholders with buybacks and dividends.

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Let’s take a closer look at three tech stocks that are “no-brainer” investment options  — Cisco (NASDAQ: CSCO), Apple (NASDAQ: AAPL), and Infinera (NASDAQ: INFN).

1. Cisco

Shares of Cisco, the world’s top maker of networking routers and switches, have fallen about 10% during the past two months. Most of that drop occurred in mid-August when the company followed up a solid fiscal fourth-quarter report with soft guidance for its first quarter.

Cisco’s revenue and adjusted earnings rose 7% and 20%, respectively, in fiscal 2019. But for the first quarter of fiscal 2020, it expects its revenues to be in the flat to 2% higher range, and for its adjusted EPS to rise 7% to 9% year over year. For the full fiscal year, analysts expect its revenue will rise 2%, and for earnings to climb by 8%.

Cisco faces tougher year-over-year comparisons in fiscal 2020, as well as decelerating enterprise spending in China, the U.S., and the U.K. due to macroeconomic headwinds like the trade war and Brexit. However, its higher-growth security and applications units (which accounted for 16% of its 2019 revenues) are still generating double-digit percentage sales growth. In fiscal Q4, 70% of its software revenues came from stickier subscriptions, and it only generates a tiny sliver of its sales from China. It also expects its gross and operating margins to hold steady in fiscal Q1, even as its revenue growth slows.

Cisco still has some irons in the fire. It ended last quarter with $33.4 billion in cash and equivalents, and it recently agreed to buy Acacia Communications (NASDAQ: ACIA) — one of its suppliers — in a move that should cut costs and help it upgrade its networking device offerings for data centers. Its forward dividend yield of 2.9% and its forward P/E ratio of 13 should also set a floor under this unloved stock until the near-term headwinds fade.

2. Apple

Apple today admittedly isn’t as innovative as it was under the late Steve Jobs. It’s also still too dependent on the iPhone, which generated 48% of its revenues last quarter. But under CEO Tim Cook, it is aggressively expanding its services ecosystem (21% of its sales) with new platforms like Apple Arcade and Apple TV+ — which could generate more revenue per user as its hardware sales decelerate.

It’s also making progress in the wearables market with the Apple Watch and AirPods. Cook claimed that Apple’s wearable sales surged “well over 50%” annually last quarter, accelerating from segment growth of “near 50%” in the second quarter. The HomePod also claimed 5% of the U.S. smart speaker market in June, according to research firm CIRP.

The initial reception for the new iPhone 11 has also been warm — even in China, where Apple is struggling with local competition, an economic slowdown, and trade war-related tensions. Cook recently told German newspaper Bild that iPhone 11 sales were off to a “very strong start.”

Analysts expect Apple’s revenue and earnings will rise 5% and 9%, respectively, next year — solid growth rates for a stock that trades at 18 times forward earnings. It also pays a dividend with a forward yield of 1.8%.

More importantly, Apple ended last quarter with $210.6 billion in cash and equivalents — which gives it plenty of room for stock buybacks, dividend hikes, acquisitions, and investments in new products. That cash cushion, along with the strength of its brand, makes Apple one of the safest tech stocks to buy for the long term.

3. Infinera

Infinera isn’t as well-known as Cisco or Apple. The optical transmission equipment maker mainly sells wave division multiplexing (WDM) systems, which let internet service providers and telecoms increase the capacity of their existing networks without laying down additional fiber — a cost-effective option for carriers dealing with the bandwidth demand that comes from the rising use of cloud-based services.

Yet Infinera’s stock price plunged from $12 in May 2018 to about $3 in July 2019. There were two key reasons for that drop. First, demand for long-haul WDM systems, from which Infinera generates most of its revenue, dried up as service providers focused on shorter-range WDM solutions like metro and data center interconnect (DCI) systems. Second, its forecasts following its acquisition of Coriant — a smaller rival which produces shorter-range WDM solutions — were initially too high.

However, the stock has rebounded by roughly 70% over the past three months as investors realized that its cyclical business was bottoming out and that the concerns about Coriant were likely overblown. Last quarter, Infinera’s revenue rose 47% annually, compared to 46% growth in the first quarter. It expects that figure to accelerate again to somewhere in the 60% to 70% range in the third quarter, and for its gross margin to expand sequentially.

Infinera remains unprofitable, but it expects its synergies with Coriant to lift its free cash flow and adjusted profits back to positive levels by the fourth quarter. If it achieves those goals, its stock could rally much higher — since its current market cap is less than this year’s sales.

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The U.S. and China are set to resume trade talks in the second week of October. Investors shouldn’t assume that these talks will yield any better results than the previous discussions in July but should still keep an eye on these three unloved Chinese stocks that could bounce on any positive news.

China Mobile

China Mobile (NYSE: CHL), the country’s largest state-backed wireless carrier, lost about 15% of its value over the past 12 months due to three main issues: the saturation of China’s smartphone market, government-mandated reductions in prices, the elimination of data roaming charges, and the high costs of upgrading its networks to 5G standards.

The protests in Hong Kong exacerbated the pain since China Mobile — which generates most of its revenue from mainland China — is based in Hong Kong and a component of its Hang Seng Index. The Federal Communications Commission (FCC) also rejected the company’s application to expand into the U.S. market — but that was old news, since the approval had been in limbo since 2011.

Yet China Mobile’s core business remains strong. It had 941.3 million wireless subscribers in August, up from 938.6 million in July. Its number of wireline subscribers also grew from 178 million to 180.8 million.

There are also other near-term tailwinds: the government-mandated price reductions are now in the rearview mirror, smartphone sales in China could improve this year with the arrival of new phones like the iPhone 11, and China Mobile’s revenues per subscriber should rise with new 5G plans.

The company’s revenue and earnings rose 2% and 3%, respectively, in 2018, and it should post similar growth rates this year. It trades at just 10 times earnings and pays a forward yield of about 5% — which limits its downside potential and indicates that it could rally sharply on any positive developments in China or Hong Kong.

JD.com

JD (NASDAQ: JD) is China’s largest direct retailer and second-largest e-commerce company after Alibaba (NYSE: BABA). Its stock rose about 10% over the past 12 months but remains well off its highs due to concerns about its slowing growth, rising expenses, and the economic slowdown in China.

Unlike Alibaba, which doesn’t take on inventories and uses third-party logistics services, JD takes on inventories and fulfills orders with its own logistics network. It accepts lower margins to maintain tighter quality controls than Alibaba, which often struggles with unscrupulous sellers peddling counterfeit goods. That slow-and-steady approach paid off earlier this year as JD’s revenue growth stabilized and profits improved.

JD’s revenue rose 23% annually last quarter, fueled by strong demand for big-ticket items like electronics and home appliances. It expects its third-quarter revenues to rise 20%-24% annually — which indicates that consumer spending in China remains healthy.

Its adjusted profit grew more than sevenfold annually, as it reaped the cost-cutting benefits (like automated warehouse robots and delivery vehicles) of its multiyear investments in tech and logistics. More companies also signed up for JD’s logistics services — giving it a new stream of higher-margin revenues.

Analysts expect JD’s revenue and earnings to grow 17% and 34%, respectively, next year — which are high growth rates for a stock that trades at 23 times forward earnings. Any positive news about the Chinese economy would likely cause this stock to jump higher.

Baidu

Baidu (NASDAQ: BIDU) owns China’s most popular search engine. It generates most of its revenue from ads, but the trade war, the economic slowdown, and competition from rival platforms caused that core business to hit a brick wall.

Baidu’s total revenue rose just 1% annually last quarter. Its advertising revenue, which accounted for nearly three-quarters of its top line, fell 9% annually compared to 25% growth a year earlier. However, the robust growth of its video platform iQiyi (NASDAQ: IQ) offset those declines.

Baidu’s increasing dependence on iQiyi is troublesome because the video unit, which was spun off in an initial public offering (IPO) last year, is unprofitable. Relying on a stream of revenue with negative margins as its higher-margin ad revenues dry up is an unsustainable strategy.

Baidu is streamlining its business by dumping non-core assets like its food-delivery unit, its online-to-offline platform Nuomi, and its fintech unit. It’s also expanding into more promising next-gen markets like artificial intelligence (AI), voice assistants, and driverless cars.

But as long as Baidu’s ad business stays in the penalty box, investors will avoid the stock. That’s why the stock was cut in half over the past 12 months and trades at just 16 times forward earnings. Analysts expect its revenue and earnings to decline 1% and 54%, respectively, this year before possibly rebounding next year.

Therefore, any hint at better economic conditions in China would lift Baidu’s stock, since healthier Chinese companies would likely increase their marketing spend again on leading platforms like Baidu.

The post 3 Top Chinese Stocks to Watch in October appeared first on The Motley Fool Canada.

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The announcement wasn’t surprising, since Facebook has constantly expanded its VR ecosystem since its acquisition of Oculus VR five years ago. However, Horizon looks like Facebook’s biggest and most cohesive attempt at creating a virtual world to date, and it could offer us a glimpse of the social network’s future when it arrives in 2020.

Making the OASIS a reality

Facebook’s Oculus gives every new employee a copy of Ernest Cline’s book Ready Player One, in which people spend most of their lives in the OASIS, a massive VR universe that spans countless planets. A central theme in the book, which Steven Spielberg adapted into a film last year, is that VR represents the ultimate form of social escapism.

Facebook clearly sees Oculus as the foundations for a real OASIS, and CEO Mark Zuckerberg expects VR to become the next major computing platform, with more than a billion users within the next decade. But to date, Facebook’s efforts to build that computing platform have been messy and fragmented.

There was Oculus Home, which let users create virtual homes and invite friends over, but the app only ran on its high-end Rift headsets. Facebook’s first stand-alone headset, the Oculus Go, ran a similar platform called Oculus Rooms and Venues, but it didn’t connect to Oculus Home. Go’s successor, the Quest, released this May, ran a new software platform which wasn’t compatible with the earlier platforms, leaving third-party developers to bridge the gaps with cross-platform apps.

Back in 2017, Facebook launched Spaces, which encouraged VR users to invite up to three other users to chat, watch videos, or play games together. This seemed like a promising step toward creating a real OASIS, but the platform was only launched for the Rift and HTC‘s Vive instead of the Go and Quest.

Clearing the way for a proper VR ecosystem

Those fits and starts indicated that Facebook needed a cohesive VR strategy that put everyone on the same page.

The first major step in the right direction was the Oculus Quest, which was well-received after its launch in May. Zuckerberg recently claimed that Facebook was selling the Quest “as fast as we can make them,” and SuperData expects the headset’s shipments to hit 1.3 million units this year.

That’s still a niche market, but it finally gives Facebook enough room to launch a more ambitious VR social network with Horizon. Facebook has stated that Horizon will run on both the Rift and Quest headsets, indicating that it finally plans to pull its higher-end and lower-end hardware users onto the same page.

Facebook’s introductory video for Horizon is light on details but indicates that it will support more simultaneous users than Spaces and resemble an MMO (massively multiplayer online) game environment instead of enclosed rooms. That open-world environment could encourage users to socialize with people all across the world — which would complement the growth of its core social networking platforms and new efforts like online dating.

But that’s not all. Facebook recently acquired CTRL-labs, which develops a wristband that intercepts electric signals between the spinal cord and hand. Over the long term, those brain-computing links could eventually replace traditional controllers or haptic gloves and allow users to seamlessly navigate VR environments.

What does this mean for investors?

Facebook still generated 98% of its revenue from online ads last quarter, so sales of hardware devices like its Oculus headsets and Portal devices won’t move the needle anytime soon.

But over the long term, Facebook’s big bets on VR could increase the stickiness of its ecosystem and expand its social network beyond PCs and mobile devices. In the future, tech investors might look back at Spaces and Horizon and realize that they were witnessing the first steps toward Facebook’s creation of a real-life OASIS.

The post Facebook Horizon Is a Preview of the Social Network’s VR Future appeared first on The Motley Fool Canada.

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