TIME Markets

Why Biotech Stocks Are So Wildly Unpredictable

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Jean-Christophe Verhaegen—AFP/Getty Images A photo taken on November 27, 2012 shows a sample of a plant before a biochemical analysis at the INRA Nancy (National Institute of Agronomic Research) in Champenoux.

Where there's growth, there's instability

To understand why some investors are growing nervous about the biotech sector, consider the recent IPO of Axovant Sciences. The company was founded last October, isn’t profitable, and has already racked up a $21 million loss. Its CEO has much more experience with hedge funds than he does with biotech startups. Axovant has only one product candidate, an Alzheimer drug it bought from GlaxoSmithKline last December after it was tested on 1,250 patients in 13 trials and then stalled in development.

Two weeks ago, Axovant went public in an offering that raised $315 million. Axovant, which paid $5 million for the Alzheimer’s drug, says it needs the cash because it will have to pay Glaxo as much as $160 million more if the drug makes it to market. Incredibly, the stock doubled on its first day to $31 a share, but has since fallen by nearly a third of that peak value.

And it could well fall further. But that’s not what worries longtime observers of the biotech sector. The real fear is that this kind of speculative behavior among investors is all too familiar from the biotech and dot-com bubbles of 2000.

“The fact that someone can make something of this size out of virtually nothing should be of concern to everyone in the industry,” Fierce Biotech editor John Carroll wrote about the Axovant IPO. “When biotech mania takes over and perfectly legal schemes like this rain money, the pitfalls start to look like the Grand Canyon.”

Of the 129 biotech companies that have gone public since early 2013, few are as speculative as Axovant. Many, though, have recently gone public with huge losses incurred by heavy spending on the development of drugs that may or may not find approval from U.S. and foreign regulators. Even those that do may be so specialized in the diseases they treat that they may not become blockbusters.

If the party in biotech stocks is over, a lot of investors don’t seem to have gotten the message. The S&P 500 Biotech Index has nearly tripled in the past three years. The index had stalled and moved sideway for much of the past spring, leading some to wonder whether the rally was spent. Instead, it’s gained another 11.3% over the past month. The Nasdaq Composite, by contrast, is up only 2.5%.

Several factors have been fueling the biotech rally of the past three years. For one thing, the U.S. Food and Drug Administration has been pushing to speed up approvals. According to Ernst & Young, the FDA approved 41 new drugs in 2014, up from 27 a year earlier.

Meanwhile, the genomics-based insights that emerged in the early 2000s are finally delivering on new drug therapies. That in turn has led biotech firms to increase their research and development spending by 20% a year. After a decade or more of few promising drugs, the new generation is finally bearing financial fruit. Revenue at U.S. and European biotech firms rose 24% last year, while net income rose 231%, Ernst & Young reckons.

While new drugs may continue to come through the drug pipeline, the risk is they won’t benefit any and all biotech firms, but rather a select few. In the meantime, more investor cash is pouring into the sector indiscriminately, even into more questionable startups like Axovant. Some investors suggest it’s safer to stick with the larger companies – the so-called Big Biotech firms – that have a few promising drugs in the works as well as a track record of high growth.

Biotech stocks are vexing for many individual investors because, more than Internet or other tech stocks, they involve arcane science, a long and complex approval process, and a business model that involves largely hit-or-miss products. At the same time, no one wants to sit on the sidelines while a stock – let alone an entire sector – can double in value over the course of a year.

Many individual investors have opted to invest in biotech ETFs and mutual funds. Both of them have outperformed the broader market, but of the two, biotech ETFs have been the stronger performers. The Fidelity Select Biotechnology fund (FBIOX), for example, has risen 27% so far this year, or nearly three times as much as the Nasdaq Composite.

Several ETFs are doing as well or even better. The iShares Nasdaq Biotech ETF (IBB), which tracks biotech stocks on the Nasdaq, is up 26%. The SPDR Biotech ETF (XBI), which tracks the S&P Biotech Index, is up 39%. And the ALPS Medical Breakthrough ETF (SBIO), which began trading in early 2015, is up 47%.

The XBI and SBIO funds have outperformed because they focus more on small and mid-sized biotech companies. Nine out of the ten largest holdings in the XBI have risen more than 50% this year, and seven of them have more than doubled.

The IBB, which has emerged as something of a proxy for the industry for many investors, is weighted much more heavily to bigger, more proven biotech companies. Its top ten holdings make up 59% of the ETF’s value, including giants like Gilead Sciences, Biogen and Amgen.

The volatility of small- and mid-sized biotech stocks mean they will fall sharply once the inevitable correction comes, whether they have promising drugs in the works or not. The wildcard in the sector is the possibility of a wave of M&A, which could drive up some stocks. Synageva Biopharma, for example, has risen 140% this month on news of a buyout by a larger biotech firm, Alexion Pharmaceuticals.

But if picking which company has the next blockbuster drug is tough, anticipating the next M&A target is even trickier. And the longer the biotech rally continues, the more important it becomes to pick the winners from the losers. At some point, for the average investors, staying on the sidelines becomes the smarter play.

TIME Companies

Here’s Why Nobody Can Agree About Apple’s Stock

Apple Unveils New Versions Of Popular iPad
Justin Sullivan—Getty Images Apple CEO Tim Cook speaks during an Apple announcement at the Yerba Buena Center for the Arts on October 22, 2013 in San Francisco, California.

Two years ago, things were looking bad for Apple investors. The stock had declined more than 40% from its peak in 2012, erasing nearly $300 billion from the company’s market cap. A debate emerged over whether the stock’s best days were over. The bears thought so. The bulls foresaw a rebound.

As we know now, the bulls were right – more right than they probably knew at the time. Apple’s stock has risen 116% in the past two years, or more than double the Nasdaq Composite’s 54% gain. But the bulk of those gains came in 2014 as the iPhone 6 sales exceeded expectations, especially in China, and as the company beefed up its dividend and buyback program.

For the past several months, though, Apple’s stock has been moving sideways — the stock peaked at $133.60 on February 24 and closed Monday at $127.61, or about 5% lower from that high point. This has ignited another burning debate between the Apple bulls and the Apple bears, who together are asking: are we headed for another Apple slump like the one that began in 2012?

The disagreement over Apple’s future involves several big questions. Let’s break them down here:

Will iPhone 6 stay hot? Since its release last fall, Apple has sold 136 million iPhone 6 and iPhone 6 Plus units through the end of March. That exceeded even some of the most bullish forecasts. Will sales remain strong through the iPhone 6S (or whatever Apple calls it) release and until the iPhone 7 is unveiled?

Bears look at the trajectory of the iPhone 5 and 5s and think not. Doug Kass of Seabreeze Partners, a longtime Apple bear, argued that “we’re well through the last important upgrade cycle” for the iPhone. But Pacific Crest analyst Andy Hargreaves said Apple’s suppliers and component orders suggest demand will remain stable, with Apple selling 52 million iPhones this quarter. That’s less than last quarter, but more than many analysts are forecasting.

Is there meaningful growth beyond the iPhone? A broader debate concerns whether Apple is relying too much on one product (the iPhone) with cyclical sales. Bears argue that it is. They point to the 29% drop in iPad sales last quarter, the fact that Macs now make up less than 10% of Apple’s revenue, and the scant impact that Apple Music, Apple Pay and Apple TV are having on growth.

More bullish analysts argue Apple is finally gaining ground and diversifying away from a reliance on the iPhone. Some see Apple Music and Apple Pay as new efforts at platforms that could add materially to profits in coming years. Katy Huberty of Morgan Stanley believes these services could make up as much as 20% of Apple’s revenue by 2017, offering a non-cyclical stability to Apple’s income.

Will new product categories bring new growth? There’s also sharp disagreement here, starting with the Apple Watch. Apple has not released any sales data on the Watch, but research firm Slice Intelligence estimated that 2.79 million units have sold since the device launched in April, with 17% of shoppers buying more than one Watch band.

Some early users of the Watch have expressed disappointment, suggesting limited mainstream appeal for the product. Others see the Watch as a work in progress, with Apple able to eventually add new features like a camera. Apple has a history of releasing products that underwhelm at first before becoming must-have devices. Few loved the first iPod on its release, and some questioned the potential of the iPhone in 2007.

Is Apple’s stock expensive? Apple is trading at 15.8 times its earnings over the past four quarters. Bulls will tell you that’s cheaper than the 20.6 ratio for the S&P 500. Bears will remind you Apple is a hardware manufacturer and is expensive relative to its peers in that sector. Either way, it’s cheaper than it was in 2012.

At UBS, Steve Milunovich noted that in 2012 Apple’s PE was above that of the S&P 500. Today, it’s lower, likely because of concerns about a slowdown in iPhone sales. Another difference from 2012: Back then, many big funds were overweight Apple, leaving little appetite to buy more shares. Apple made up 4.9% of the S&P 500’s capitalization then, and 3.9% now. And the company is spending more on dividends and buybacks today than it was two or three years ago.

The common thread throughout these areas of disagreement is the amount of faith analysts have in Apple’s ability to reiterate and improve on its existing products. If the status quo today isn’t – or can’t be – changed, then Apple is in trouble. Apple has greatly improved the iPhone over the years. It’s had less luck keeping iPad sales strong. Other products have been slow to improve: Until Apple Music, iTunes had been slow to evolve. And a better Apple TV has been awaited for years.

Apple is often seen as the premier Silicon Valley stock – a single proxy for many of the hottest areas inside tech. The reality is, for all its success and its $730 billion market cap, Apple stock has hit many rough patches in its time. It may be entering one of them now. But the long-term history of Apple shows that it never pays to bet against Apple for too long.

TIME stocks

Was 3D Printing Just a Passing Fad?

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Getty Images

Companies making "the next big thing" are having a tough 2015

It seems like once a decade there comes a technology so transformative it spawns several companies that become giants: Chips in the 70s (Intel, AMD), PCs in the 80s (Apple, Microsoft, Dell), the Internet in the 90s (Amazon, Google, eBay).

There are also innovations that are potentially just as disruptive but that, from the standpoint of investors, never offer an early chance to get in on the ground floor—the way Microsoft or Google did when they first went public.

Take nanotech, an investor fad a decade ago that faded because it wasn’t startups that brought it to market, but diversified giants like Intel and GE. Or solar energy, an important technology that is requiring decades to become a mainstream product but that involves costly manufacturing plants along the way.

And then there’s 3D printing, which is looking like one of those important but hard-to-invest-in technologies. For a while, it was looking like there were a few publicly traded stocks that could offer an early entry point in another promising technology but over the past year or so, it’s been looking more like another speculative frenzy playing itself out.

For decades, the technology that led to 3D printing was used in industrial design, creating quick and relatively cheap prototypes that could be tweaked without having to retool an entire manufacturing process. Then, around 2012, the buzz about the potential of 3D printing began to grow louder: It could could make customized shoes, empower DIY hobbyists, manufacture synthetic organs. Stratasys, an early pioneer in the field, even moved to prevent its printers from making homemade guns.

Along with the buzz, stocks of 3D printers caught fire. In the two years through 2013, Stratasys saw its stock surge 333%. That was nothing compared to 3D Systems, another pioneer in the field that expanded quickly by buying dozens of small companies in the space. 3D Systems enjoyed an 800% surge in its stock in the same two-year period.

Some pundits argued 3D Systems was a better long-term investment than Facebook or Apple. Others in the sector like ExOne and VoxelJet went public in 2013 and saw their stock prices double from their offering prices. But near the end of 2013, as warning signs emerged that the rally couldn’t last despite the technology’s promise, things took a turn.

Since early 2014, most of the stocks in the 3D printing industry have collapsed. Stratasys, 3D Systems, ExOne and VoxelJet have lost between 71% and 80% of their market value in the past 17 months. The reasons why are nothing new to investors who have speculated too early in promising technologies: Profits can be hard to come by, and revenue can fall short of expectations.

Recent earnings from Stratasys and 3D Systems suggest things are getting worse rather than better in 2015. In late April, Stratasys warned that its revenue would be much lighter this year than analysts had been expecting, while net income would also be smaller. Only three months earlier, the company issued a similar warning of disappointing earnings.

Stratasys’ announcement came a few days after 3D Systems issued its own warning that revenue and profit would be well below expectations. Both companies cited vague “macroeconomic” factors like higher oil prices and a strong dollar, which were forcing customers to cut back on capital spending.

Analysts weren’t buying those excuses. “3D Systems’ effort to explain the sharp pullback in unit demand was lacking, and Stratasys really doesn’t try,” Oppenheimer analyst Holden Lewis wrote. The problem wasn’t in 3D printing technology, which proponents say is finally delivering on its potential and still holds enormous potential in the future.

Instead, as is often the case with emerging technologies, the passage into a mainstream market is proving to be a slow and rocky one. Stratasys, for example, bought Makerbot in 2013 to get a foothold in the consumer end of the 3D printing market but consumers have been slow to buy in. Makerbot’s revenue fell 18% last quarter.

The bigger threat for 3D printing companies is that bigger, deeper-pocketed rivals like HP are making a belated but major push into the market, which may be giving customers pause. “Corporate buying managers are delaying purchases while they anticipate HP’s multi-jet fusion product in 2016,” Dougherty & Co. analyst Andrea James wrote recently.

Such broader concerns about 3D printing companies have dragged down the stocks of ExOne and Voxeljet as well, even after a mixed earnings report from the latter last month. Balancing the short-term demands of investors with technologies that take a long time to mature predictably leads to volatility. If things don’t turn around soon, some companies may be bought by a giant like GE.

But just because the hype surrounding 3D printing got out of hand quickly doesn’t mean the technology itself isn’t promising. There’s still plenty of potential in the market longer-term—there is in cleantech and nanotech. It will just take time to deliver on that potential. And meanwhile, speculative investors who are characteristically short on patience move on to the hottest new technology idea.

TIME

Here’s the Real Bubble We Should Be Worrying About

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Pgiam—Getty Images Stock market analysis

Bigger and bolder than anybody realizes

While people in Silicon Valley have been arguing over whether we’re seeing another tech bubble–a debate that has been burning for the past ten years–they may have missed the real stock bubble driven by tech mania: China’s red-hot stock exchanges.

The Shanghai Stock Exchange Composite Index is up 149% over the past year, while the Shenzhen Stock Exchange Composite Index is up 190%. The Nasdaq Composite, the historical proxy for publicly traded US tech companies, has risen 16% in that time.

And what about the private markets that have given huge valuations to US tech companies like Uber? A year ago, Uber raised money at a $18 billion valuation, and now investors are close to valuing it near $50 billion. That’s a 175% increase in a year, and it very well may be a sign that investors are acting irrationally.

But there’s a difference between irrational–which happens often enough even in healthy markets–and outright madness. Consider Beijing Baofeng Technology, a maker of virtual-reality headsets that has become something of a poster child for the Shenzhen bubble because of its outsize valuation. Beijing Baofeng went public in late March and has since risen more than 2900%. And that’s after news of a copyright lawsuit curtailed its rally last month.

What’s driving the gold rush on China’s exchanges? A key factor is that a lot of new wealth in China is constantly looking for a haven. For a while, that meant real estate, until China’s government moved tocrack down on property speculation. That chased some speculative money into other places like the Bitcoin market, until a new flood of IPOs on the Shenzhen market began to ignite yet another rally last fall.

Chinese regulators are locked in a cat-and-mouse game with speculators. They can never quite eliminate bubbles, only chase them to other markets. Before the real-estate bubble took off several years ago, the Shenzhen and Shanghai exchanges saw even more pronounced booms and busts. In 2007, the Shenzhen Composite rose more than tripled. In 2008, it fell by 67% from the peak.

This year, China has made moves to quell stock speculation. In January, Chinese stocks plunged 8 percent in a day after regulators tightened margin-lending requirements. They soon resumed their rally for a few months until regulators clamped down on leveraged buying while expanding short sales. Again, share prices surged even higher until last Thursday, when brokers tightened margin-trading requirements once again.

You can guess what happened after last Thursday’s rout. Shenzhen stocks have roared back to new highs while Shanghai stocks are close to doing so. The sentiment among investors seems to be that the moves to curb speculative trading are outweighed for now by broader moves the Chinese government has been making to foster growth industries and loosen some financial market rules.

Last month, China unveiled “Made in China 2025” its latest initiative to strengthen startups involved in digital technology, cleantech, biomedicine and robotics. Regulators have also lowered the financial requirements allowing tech startups to stage an IPO on exchanges. And other changes are making it easier for Hong Kong and international investors to invest in mainland stocks, and vice versa.

All of this has kept the bonfire burning in Shenzhen’s market, which is home to more startups in tech and other growth industries industries, while Shanghai has historically been dominated by state-owned blue chips. But it’s creating some phenomena that are reminiscent of the dot-com bubble in the US at the turn of the century.

As Bloomberg noted recently, all but a dozen or so of the 1,700 companies listed on the Shenzhen exchange have seen their stocks rise in the past year – a sign of a broad-based mania. It’s not unusual there to see a stock surge 500% in a few months, leaving the median P/E ratio above 100 – and some companies with P/E’s above 10,000. One troubled real-estate company even repositioned itself as a tech company and saw its tumbling stock suddenly rally.

Investors tempted to jump belatedly into China’s 2015 stock rally might want to recall the greater-fool theory. Booms end in busts, and the turning point may be hard to time but it’s inevitable.

For Silicon Valley, there is a reassurance here as well as a warning. What’s happening in Shenzhen and Shanghai reminds us what a real bubble looks like. We are nowhere near that point right now. But then again, it only took a few months for a bubble to appear on China’s exchanges. And it likely happened when too many people had grown complacent about the likelihood of another bubble.

TIME Media

Why Disney Is Poised to Absolutely Dominate

Measles California
Jae C. Hong—AP Sleeping Beauty's Castle is seen at Disneyland on Jan. 22, 2015, in Anaheim, Calif.

The Mouse House is on a epic winning streak

Luke Skywalker. Tony Stark. Elsa and Anna of Arendelle. Captain America. Woody and Buzz. The fictional heroes of family entertainment have never dominated popular culture as much as they have in recent years. And there is one company that is largely responsible for that: Disney.

Founded nearly a century ago, Disney has long-held a firm place in America’s popular imagination, but even within that long history the past decade has been an impressive ride. Since Bob Iger took over as CEO in 2005, Disney’s stock has more than quadrupled while the S&P 500 is up 77%. Most of the gains have come since 2011 as Iger’s early moves began to bear fruit.

And so some Disney shareholders have come to regard Iger with the kind of awe children have for Disney’s franchised superheroes. But in recent months a debate has broken out between bulls and bears over how long the rally can continue.

While no one is doubting Disney’s immediate future, some analysts are concerned about the stock’s heady valuation. Disney is trading at 26 times last fiscal year’s earnings and 22 times its estimated earnings this year. The Dow, by contrast, is trading at 16 times its recent earnings.

Of the 31 analysts covering Disney, 12 of them have a hold rating on the stock – often a rating given when an otherwise healthy stock has grown pricey. It’s not just analysts who are cautious. Goldman Sachs recently calculated that hedge funds have an aggregate $4.5 billion in short interest in Disney, second only to AT&T among US stocks.

The thing is, Disney isn’t just growing, it’s performing so well that it’s surprising even the bulls. In March, one analyst downgraded Disney purely on its valuation,arguing further gains would be limited. But this month, Disney beat Wall Street’s consensus estimate for the fifth time in the last six quarters. Following its last earnings report, seven analysts raised price targets to between $120 and $125 a share. Disney closed Friday at $110 a share.

So while the bears argue that Disney is priced for perfection, bulls counter that the company has enough kindling to keep the bonfire burning for some time, largely because of two things Iger has built over the years: a steady lineup of content that appeals to the masses and an interlacing of Disney divisions that can feed business to each other.

This is especially clear in the film business. In 2006, Disney bought Pixar, an impressive deal given the bad blood that has existed between Steve Jobs and Iger’s predecessor Michael Eisner. Three years later, Disney bought Marvel Entertainment just as it superhero franchises were entering a renaissance. And in 2012, the company bought Lucasfilm just as a new Star Wars trilogy was being planned.

So far in 2015, Disney’s Cinderella has brought in $521 million worldwide and Avengers: Age of Ultron has pulled in $1.2 billion. The company’s Tomorrowland topped the weekend box-office in the U.S., but the movie fell short of expectations in what was the film industry’s lowest-grossing Memorial Day weekend since 2001. But Disney is only getting warmed up: Two Pixar movies, Inside Out and The Good Dinosaur, are coming this year, along with Star Wars: Episode VII – The Force Awakens. The anticipation of Star Wars is especially high–the latest trailer alone has already had more than 200 million views.

Beyond this year, Disney has a Jungle Book remake coming in 2016, along with Captain America 3, Finding Dory and a sequel to 2010’s Alice in Wonderland, which topped $1 billion in receipts. Frozen 2 and Toy Story 4 are in the works. And the Marvel lineup will remain busy, with new Thor and Guardians of the Galaxy films and two Avengers movies expected through 2019.

The relentless parade of blockbuster fare may feel manufactured but, for Disney, they are paying off through multiple revenue streams. Sales of Frozen merchandise in the past six months rose tenfold over the year-ago period, even though the movie was released in 2013. EA is timing a Star Wars: Battlefront game to coincide with the film’s release, and the Playdom gaming studio Disney bought in 2010 is working on Star Wars- and Marvel-themed games as well.

There are also tie-ins for theme parks, like Tomorrowland. Theme parks have become a growth area with operating profit in the unit growing 22% over the past six months. Disney is planning to open a new theme park in Shanghai in 2016, which could add to revenue in coming years.

The one area of potential weakness is in Disney’s largest unit, the media networks business including ESPN and ABC, which saw operating income flat in the last six months while revenue rose 12% in the period. In a call with investors, Disney cited higher programming costs for NFL and college football games as reasons for the flat profit in the division.

While it’s easy to imagine Disney’s growth continuing, it’s also easy to see areas of vulnerability. Audiences moving from broadcast TV and cable subscriptions in an era of on-demand Internet TV could slowly bleed Disney’s media-networks business. Disney has made moves to adapt to a world of over-the-top television, but the transition has started to accelerate this year.

The blockbusters could also become a vulnerability. Critics often chide the lack of originality in Hollywood’s blockbuster machine, and at some point audiences might lose their appetite for a glut of blockbusters. Tomorrowland, for example, drew only $40 million over the weekend, a disappointing take for a film with a $190-million budget. It doesn’t even rank in the top 20 grosses for Memorial Day openers.

For now, investors seem confident in Disney as long as Iger remains at the helm. Last fall, Disney extended Iger’s contract for the second time, pushing his retirement date back until 2018. More than any movie Disney’s studios may have in the works, the sequel investors are most interested in seeing is the success story Iger has brought to Disney shares.

TIME Turnarounds

How Sony Got Up and Out of Its Death Bed

President and CEO of Sony Corporation Hirai speaks at a Sony news conference during the 2015 International Consumer Electronics Show in Las Vegas
Steve Marcus—Reuters President and CEO of Sony Corporation Kazuo Hirai speaks at a Sony news conference during the 2015 International Consumer Electronics Show (CES) in Las Vegas, Jan. 5, 2015.

For the first time in a decade, the electronics company has a shot

In the annals of consumer electronics companies that have slipped from great heights, none has taken a bigger fall far from its glory days than Sony. But after years of struggling to right itself, the company is finally making real progress on a turnaround.

Just as Apple helped revive itself in the early 2000s with the iPod, Sony built much of its success on the idea of helping people carry music around in their pocket–first with the transistor radio in the 50s and 60s and later with the Walkman portable cassette player. Those products, coupled with smart engineering, made the Sony brand synonymous with peerless quality.

In the early 2000s, Sony began to lose its competitive edge. Rivals like Samsung had emerged to undercut its higher-priced TVs and stereos. Sony couldn’t get a foothold in new markets like mp3 players. Its earlier expansion into new areas like insurance and its overspending on film and music studios left it with a structure that was at once bloated and siloed.

Sony named Howard Stringer as CEO in 2005 to turn things around. Stringer cut a charismatic figure, but couldn’t speak Japanese and, as a lifelong media executive, lacked an engineering background. Stringer tried to conjure a convergence of electronics and media properties that never quite gelled. (Stringer is on the board of Time Inc.) Meanwhile, further setbacks struck: the global recession in 2009, the Fukushima earthquake in 2011 and a stronger yen that hurt Japanese exports.

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Sony has posted net losses for six of the past seven years. As a result, the price of its ADRs traded on the NYSE fell from $55 in early 2008 to below $10 in late 2012. (An ADR is a stock that trades in the U.S. but represents a specific number of shares in a foreign corporation.) Its credit ratings eventually fell to near junk levels. But then things began to look up: After bottoming out below $10 in 2012, its ADRs have risen back near $33 this month, a rally of 238% in the last two and a half years.

The change came after Sony replaced Stringer with Kazuo Hirai in early 2012. Hirai was a Sony veteran known for wringing profits from troubled businesses like the PlayStation gaming division. And like Stringer, Hirai didn’t fit the mold of the Japanese salaryman. Hirai grew up in Japan and North America, giving him a fluency in English and also a gift for being plainspoken, like when he told the Wall Street Journal on taking the job, “It’s one issue after another. I feel like, “Holy shit, now what?”

Hirai began an ambitious restructuring of Sony over the three years that followed. He quickly announced a “One Sony” structure that built on Stringer’s convergence with an emphasis on communication and joint decisions among siloed divisions. He focused the electronics business on mobile, gaming and imaging products. Over time, he cut thousands of jobs, sold off the Vaio PC unit, separated the ailing TV business into its own company and overhauled the smartphone lineup.

All of this added to financial losses with restructuring charges and made for a tumultuous 2014. But the low point came last November, with the infamous hack that left sensitive documents from Sony Pictures Entertainment in public view. But it was just around this time when some analysts began voicing their conviction in a Sony turnaround. The turnaround painstakingly plotted by Stringer and Hirai was finally bearing fruit.

That became more evident when Sony reported its most recent earnings. There were encouraging signs in the past year’s finances, like revenue rising 6% and the TV business posting its first profit in 11 years. But the better news was in the cautious forecast for the coming year.

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The bulk of the restructuring was behind Sony, CFO Kenichiro Yoshida said, and while revenue may decline 4% this fiscal year, operating profit would rise fourfold to $2.6 billion, its highest profit since 2008. Hirai had earlier projected net income to rise above $4 billion by 2018, which would be its biggest profit since 1998, before the great fall began.

There’s still some restructuring to do. The revenue decrease this year will come largely from Sony’s move away from mid-range mobile phones to focus on the high end of the market. While camera sales continue to decline, Sony is seeing strong growth in imaging sensors used in smartphones. Overall, Sony will be a smaller company in terms of revenue but with bigger sales and slow, steady move from aging markets into growing ones.

A turnaround needs more than cost cutting and restructuring. Sony has a long road ahead to go from playing catch-up in technology markets to playing a leading role in new ones. That step requires a lot more work, but Sony’s return to profitability makes a major turnaround as feasible as it’s been in more than a decade.

TIME Microsoft

Here’s Why Microsoft Is Suddenly Killing It Now

Key Speakers At The Microsoft Build Developer 2015 Conference
Bloomberg—Bloomberg via Getty Images

CEO Satya Nadella has changed the software giant's modus operandi. And investors are loving what they see

Remember Borg Microsoft, the bullying juggernaut that ruled the software industry with an iron fist? The Microsoft of 2015 has strayed so far from that original incarnation it might as well be called bizarro Microsoft.

Gone are the days when Bill Gates and Steve Ballmer mocked Linux or called it a cancer. Or when Ballmer laughed at the iPhone. Or when Ballmer dismissed Android was too hard to use. (A billion Android phones shipped last year.) The new Microsoft has shed its arrogance. These days, it works hard to play well with others.

And the new, more open approach is working. Microsoft’s stock is up 53% in the past two years after a very long season of stagnation. While the stock stumbled earlier this year, it’s up 14% since the company reported earnings on April 23, largely because of growth in its cloud business, such as its Azure computing platform.

Investors, flush from a strong year in tech stocks in 2014, are looking ahead to the end of 2015 and 2016. In some cases, they’re not liking what they see, but Microsoft is persuading more and more shareholders it’s ready to deliver on the cloud-first, mobile-first world that its CEO Satya Nadella has been touting. Unlike Netflix, Spotify or other companies that are thriving on cloud-based services for consumers, Microsoft has focused its cloud efforts in the enterprise market. Nadella said last week Microsoft’s enterprise cloud revenue, including hardware and software, would reach $20 billion a year within three years from about $6 billion now, an audacious goal but one that brought few snickers of disbelief.

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Of course, much of this will come as its clients migrate from legacy products (like Microsoft Office) to cloud-based offerings (like Office 365), so there’s some cannibalization involved. And the shift is a project that Microsoft has been working on for years, thanks to moves made by Ballmer. Ballmer, it seems, was better at building an enterprise business than effectively bashing rivals in consumer tech.

Under Nadella, Microsoft is emerging as one of a handful of big names poised to thrive in the cloud economy alongside Amazon, IBM, and Google. But last week, as the company held its Build developer conference to announce details of Windows 10, Nadella made a pitch for Windows to become a platform where developers from other platforms–iOs, Android, Linux–would not only be welcome, but actively courted.

Windows 10 is designed to build “universal apps,” meaning a single app working on phones, tablets, PCs, consoles like Xbox and even one day a augmented-reality platform like HoloLens. App purchases can easily be billed directly through carriers, simplifying payments to developers. Microsoft also introduced Visual Studio, a free, cross-platform code editor that can write apps for Windows, OS X and Linux.

But the bigger surprise–and, depending on how developers respond, the potential game changer for Windows–is that Microsoft announced Islandwood and Astoria, two middleware projects that allow developers to easily port their existing apps into the Windows platform. Islandwood will let iOS apps work on Windows with a minimum of changes, while Astoria will do the same for Android apps.

In recent years, Microsoft has talked more and more about opening up its software ecosystem to developers working in other platforms, but much of the rhetoric has sounded like lip service. Visual Studio, Islandwood and Astoria moves show that Microsoft is dead serious about doing just that, retooling its offerings to actively reach out to the iOS and Android communities.

MORE Why Microsoft Thinks Your Phone Could Be Your Only Computer

The idea is to make it simple for iOS and Android developers to port their existing apps into Windows. In the mobile world, more apps can mean more users, which in turn gives developers more incentive to work with a particular platform. But the plan comes with risks, such as the possibility that some iOS/Android apps translate into inferior or buggy versions on Windows Mobile. Or that developers may be too busy or indifferent to try.

Microsoft is also doing what it can to upgrade users of Windows 8. Windows 10 will be free for the first year, which could interrupt the way Windows sales are recorded as revenue but has a much bigger draw: consumers and businesses will be more likely to upgrade quickly, giving Windows 10 developers a larger audience early on.

All of this is aimed at making Microsoft a single, unifying platform for developers. In that way, it’s not unlike the original goal Microsoft set out for itself. What’s fundamentally different is how Microsoft aims to reach that goal: not through brute-force coercion, but through creating an open and inviting platform that plays well with others.

In some ways, the open, cross-platform world of software today evolved in direct opposition to Microsoft’s arrogant dominance in the 80s and 90s. Now it must adapt. Nadella’s plan isn’t likely to make Windows dominant in the mobile world right away, but in time it could give it a more equal footing in mobile OS alongside iOS and Android. And that could keep Microsoft’s revenue growing for years.

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TIME Cloud Computing

IBM Is Stumbling Its Way Into the Future

A general view of IBM's 'Watson' computing system at a press conference at the IBM T.J. Watson Research Center on January 13, 2011 in Yorktown Heights, New York.
Ben Hider—Getty Images A general view of IBM's 'Watson' computing system at a press conference at the IBM T.J. Watson Research Center on January 13, 2011 in Yorktown Heights, New York.

Despite ambitious plans for its future, the technology giant faces serious hurdles

The problem with being a tech giant is that, no matter how hard you try to charge into the future, you’re always weighted down by the past. And lately, no company has exemplified this conundrum better than IBM.

In the past few months, IBM has rolled out innovation after promising innovation. The company launched an analytics tool for the healthcare industry based on its Watson artificial-intelligence platform. Watson tools for other industries are on tap, and meanwhile Watson has written a cookbook.

IBM is also building a cloud platform for the Internet of things that companies can use to make sense of data collected from far-flung sensors embedded in a wide variety of devise. The company not only announced its Hybrid Cloud–meshing IBM’s own cloud with a client’s on-premise machines–it signed the US Army up as a key customer. Oh, and it’s building new computers that mimic the human brain.

The company is serious about investing in these new ideas. CEO Ginny Rometty told investors in February IBM would spend $4 billion this year in growth areas like analytics, cloud computing, mobility and security software. These areas accounted for only 27% of IBM’s total revenue in 2014, but Rometty sees revenue growing to $40 billion from $25 billion in four years.

This all sounds encouraging, but now look at the first-quarter earnings report IBM delivered on Monday. Revenue fell 12% year-over-year to $19.6 billion and came in $100 million shy of analysts’ consensus forecast. That marked the 12th straight quarter of falling revenue and the eighth time in the last nine quarters that IBM missed its revenue estimate. In fact, it was IBM’s lowest quarterly revenue since the first quarter of 2002.

Explaining the weak revenue, IBM pointed out that the decline reflected the sale of certain assets like its low-end server unit and the effect of a strong US dollar. (IBM warned that if the dollar stays at current levels it could slice 80 cents a share off full-year EPS.) Excluding those factors, IBM’s revenue was still flat with the year-ago quarter. Net income fell 2.4% to $2.3 billion.

How can IBM have so many promising technologies and such a weak financial performance? The answer is a classic innovator’s dilemma, in which successful companies struggle to stay atop their industries as they face newer, more efficient technologies and business models that slowly drain life from their cash cows.

Enterprise IT giants like IBM, SAP and Oracle face one such threat from cloud computing. The choice they face is an ugly one: Dig in and maintain a profitable but slowly dying business; or invest in those same innovations, thereby cannibalizing their core business. IBM has made the bold choice to invest in the future, even if it’s eating into its present success.

This isn’t new. Throughout its history, IBM has backed out of aging businesses to focus on new areas of growth. In the past four decades, it’s sold off its Selectric typewriters to Lexmark, its copier business to Eastman Kodak, its hard-disk drive unit to Hitachi, and its PC and low-end server divisions to Lenovo. In the late 90s, the company broke from its roots to push into IT services. Under Rometty, IBM is again making a transition into areas it sees as growing for years.

The catch is that areas like cloud-based services are growing because they’re cheaper, lither versions of the legacy services IBM and others have depended on for profits. In a conference call discussing earnings Monday, CFO Martin Schroeter talked about “a pretty dramatic shift of spending within IBM… Some of what you’re seeing in that core business decline is that engineered shift toward the strategic imperatives.”

“Strategic imperatives” is IBM-speak for the growth markets it’s pushing into: data analytics, cloud, mobile and security. Behind the bigger headlines of falling revenue, IBM is actually seeing some success here. Analytics revenue rose more than 20% last quarter. Cloud revenue—including the hardware that lets clients build their own “private cloud”—jumped 75%. This business has brought in $7.7 billion in revenue during the past 12 months.

Looking at cloud as a service alone, revenue totaled less than $1 billion. Again, this represents a tiny portion of IBM’s total revenue. But consider that at an annual rate it’s bringing in $3.8 billion. By way of comparison, Amazon’s Web Services, which focuses on cloud hosting, brought in $4.6 billion in revenue in 2014 with razor-thin margins. From that perspective, it’s not hard to imagine IBM as a rising leader in the emerging cloud economy.

As promising as this future growth sounds, it doesn’t change the fact that slowing revenue has pulled IBM’s stock down 22% in the past two years, a stretch when the S&P 500 has risen 32%. Investors remain patient, however, partly because IBM has doled out $26 billion in stock buybacks over that period, in addition to $8 billion in dividends.

Investors may grumble, but few are rebelling. Earlier this month, Reuters said top shareholders were seeking out activist investors to shake up IBM. But at least two such activist firms balked, in part because they felt Rometty was doing as good a job as could be expected with a tough transition. Another deterrent was Warren Buffett, who seems to support Rometty’s work. Berkshire-Hathaway has been adding to its position in IBM, which now stands at a 7.8% stake.

So go ahead and shake your head at IBM’s earnings. Yes, the company set clear goals for 2015 profits and has fallen short. Yes, revenue is shrinking and may do so in future quarters. But the company deserves credit for the painful work of building a foothold in the future of tech, even at the cost of easy profits today. IBM has chosen to address the investor’s dilemma head on, knowing no giant can endure over time without some pain along the way.

Read next: All Your Modern Technology Is Thanks to This 50-Year-Old Law

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TIME Telecom

Why Nokia’s Blockbuster Merger Turned Into Such a Mess

Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.
Chesnot—Getty Images Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.

Nokia marrying Alcatel-Lucent will have a huge impact

The big headlines in tech M&A come when they involve growth – Facebook buying Instagram or WhatsApp, for example – but more often they tie together two aging companies in established but still important industries. Ideally, in those cases, the merging partners will complement each other’s weaknesses, making for a stronger corporate marriage.

Take the mature but competitive telecom-equipment industry. If selling and maintaining the arcane gear that quietly keeps the Internet humming is hardly a sexy industry, it’s crucial if you want to watch a video of a dog trying to catch a taco in its mouth. Last week, when one industry giant (Nokia) offered to merge with another (Alcatel-Lucent) in a $16.6 billion deal, it seemed like a textbook tech M&A deal, one that analysts have been expecting for years.

Instead, the announcement of the deal seems to have left everyone unhappy. Analysts lined up to argue why the tie-up would be troubled, while investors wasted little time in selling off shares of both companies. Since the deal was announced Wednesday, Nokia’s shares have lost 4% of their value and Alacatel-Lucent’s have lost 21%.

This is the rare M&A deal that everyone has long-expected to happen and yet seems to please almost nobody. The telecom-equipment sector has been rife with consolidation and restructuring for years, as companies scramble to grab control of technologies that power broadband, wireless networks, networking software and cloud infrastructure.

Both Nokia and Alcatel-Lucent have been undergoing wrenching restructuring to compete with Sweden’s Ericsson, the market leader, and China’s up-and-comers Huawei and ZTE. Nokia sold its handset business to Microsoft for $7.2 billion in 2013, which helped return the company to profitability last year. Now that Nokia is alsoshopping around its mapping software, a merger seems like an important step toward strengthening its remaining operations in the telecom-equipment business.

Alcatel-Lucent has been having a harder time in the past decade. In 2006, the stock of France’s Alcatel was trading near $16 a share when it paid $13 billion for US-based Lucent. But clashing cultures, rigid bureaucracies and a failure to innovate led to years of losses at the combined firm, pulling Alacatel-Lucent’s stock down as low as $1 a share. Years of restructuring brought tens of thousands of job cuts but also, in recent quarters, signs the company may be making a fragile comeback.

So why did everyone expect a Nokia-Alcatel merger to work when the Alcatel-Lucent one failed? For one, there was a complementary fit in terms of the product and geographical markets both companies served. Also, both companies had just emerged from painful restructurings holding smaller shares of a competitive market. By combining, they could command a market share rivaling Ericsson’s and also marshall resources needed for the high R&D costs of next-generation gear.

That was the theory on paper, and for years reports surfaced periodically that the two were talking about joining forces. Talks of Nokia buying Alcatel’s wireless business fell through in 2013, and another report of a merger last December went nowhere. Now that it’s happening, the conversation has shifted from speculation about the deal to the details of how it would work. And some of the details aren’t pretty.

Any large-scale tech merger requires years of integration of sales, engineering and managerial ranks. In the best case, it takes years to complete. In the worst, it leads to entrenched fiefdoms and a bureaucratic hall of mirrors. And in areas where there is overlap, job losses will follow. But Alcatel-Lucent is partly owned by the government of France, which sees the company as a strategic national asset. It will fight massive post-merger layoffs in France, and the Finnish government is likely to do the same.

Analysts expect the trouble that all this work involves will hamper Nokia for some time. Some argued Nokia should have bought only Alcatel’s wireless assets, but since that didn’t didn’t work Nokia offered a discount for the whole company. And what a discount: Nokia’s bid is worth only 0.9 times Alcatel-Lucent’s revenue last year, well below the average figure of 2.5 times revenue for recent telecom deals. Alcatel-Lucent’s shareholders feel the discount is too much, leading to last week’s selloff.

So as inevitable as a combination of Nokia and Alcatel-Lucent seems, there are regulatory, integration and cultural issues that will complicate things for years. In the meantime, few investors are pleased about the deal. Throwing these companies together may be like, well, that taco heading toward the dog’s mouth: the appetite is there, but in the end all you have is a mess.

TIME Media

Why Investors Are So in Love With Netflix Right Now

The Netflix company logo is seen at Netf
Ryan Anson—AFP/Getty Images The Netflix company logo is seen at Netflix headquarters in Los Gatos, CA on April 13, 2011.

Nothing is ever straightforward about Netflix earnings–and last quarter was no exception: Netflix shares surged 12% in after-hours trading Tuesday after it reported earnings per share of 38 cents, a long way from the 63 cents a share that analysts had been expecting.

To explain that disconnect, you either have to conclude that Netflix investors have lost their minds or that there’s something else they saw and liked in the numbers. With Netflix, it can be both at once.

Because it’s as if there are multiple companies being analyzed here: the one poised to take over the world, or the one that is breaking the bank to get there. The stock that’s risen 4,000% over the past decade, or the speculative stock with the PE ratio above 160. In the case of Netflix, there’s plenty of room for both arguments.

One reason investors were willing to overlook the big earnings miss is that much of it was caused by the strong US dollar, which lowered international revenue 48%. Without the foreign-exchange losses, Netflix would have reported a 77-cents-a-share profit, above the Street’s expectations. As it was, Netflix reported a $14.7 million net profit, less than half the $35.8 million profit a year ago.

Investors, it seems, are willing to overlook that because of another metric, one that’s particularly scrutinized at Netflix these days: new subscribers. In the US, Netflix added 2.3 million new subscribers net of cancellations, which was well above the 1.8 million adds it had expected. Internationally, Netflix added 2.6 million net subscribers, also above the 2.25 million it forecast.

That was largely because of new original programming the company has creating, like the third season of House of Cards and the debut of new Netflix creations like Tina Fey’s Unbreakable Kimmy Schmidt and the star-studded drama Bloodline. Netflix has been cultivating series that can appeal in the US as well as abroad, and the new subscriptions suggest it’s working for now.

This quarter, the company is rolling out even more original content, such as the Marvel series Daredevil, released last Friday; a documentary series, Chef’s TableGrace and Frankie, a comedy starring four Emmy award winners; Sens8,a scifi series created by the Wachowskis; and the return of Orange Is the New Black. Those should keep new subscribers signing up, but they’re also adding to spending.

It’s the mounting spending that the Netflix bears often point to. Streaming content obligations (basically, licensing fees for titles coming in the future) rose to $9.8 billion in the last quarter from $7.1 billion a year ago. These figures don’t necessarily affect the current income statement as much as give an indication of how spending will happen in the future, but they are daunting numbers nonetheless.

For the last quarter’s spending, Netflix offers another home-brewed metric, contribution profit. It’s revenue minus content spending and marketing expenses, so it excludes tech infrastructure or administrative costs. It’s an unorthodox metric, but it at least shows how, as Netflix pushes into new markets, content and marketing are performing against revenue.

In the last quarter, the contribution profit from US streaming operations rose 55% year over year to $312 million, or 32% of revenue. International streaming, however, incurred a contribution loss of $65 million, up from a loss of $35 million a year ago. In the current quarter, the contribution loss will swell to $101 million.

On a video call discussing earnings (like its home-brewed metrics, Netflix has its own style of conference call, where a pair of rotating analysts ask questions on a Google hangout), CFO David Wells was asked about how long the spending would keep growing. He reiterated a warning Netflix has made before, that the losses could grow throughout 2015, thanks in good part to marketing in newer markets in Europe and Asia.

“We’ve said we are committed to running the business at global breakeven and we have ambitious plans for international growth,” Wells said. “We’ll have some bigger launches, and we’ve described them as meaningful and significant investments in back half of this year. So you should expect those losses to trend upward and into ’16, and then improve from there.”

The case Netflix has been making has been that it’s spending aggressively to take advantage of a global, long-term trend away from traditional broadcast and cable TV and toward TV streamed over the Internet. Others, like HBO, Hulu and possibly Apple are approaching the same market, but Netflix is racing less to compete with them today than to be ready as the audience and demand for Internet TV emerges.

To get there, Netflix has made it clear it will spend what it needs to, even at the risk of losses or shrinking profits this year. Future content obligations are growing, Wells said, but not faster than current revenue. The company’s big bet is the spending today will translate into faster growth and more profit starting in 2016.

This explains why subscription growth is so closely watched. It’s the clearest measure of whether the spending on new programs and new markets is actually delivering. The bulls believe this long-term growth will come as Netflix has promised.

What it doesn’t explain is why the stock sees such volatile swings whenever Netflix reports its quarterly earnings. For that, you need to look to the stock speculators, who have for years driven Netflix shares to euphoric heights that make its executives uncomfortable, if not themselves.

Netflix’s business may be as bullish as ever, but that doesn’t mean the stock price is fairly valued. It rose $56 to $531.50 on Tuesday’s earnings, making it worth 162 times the profit Netflix is expecting this year. Netflix is making some risky but realistic investments in its future growth. But that risk is nothing compared to what investors are taking on by buying at such a crazy valuation.

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