MONEY Autos

The Price of Hybrid and Electric Cars Is Plummeting. Here’s Why

2012 Toyota Prius
Toyota Prius David Dewhurst

Among the trickle-down effects of cheaper gas prices are lower sales totals for alternative-fuel cars—which in turn have forced automakers to slash prices on these vehicles.

USA Today just reported that Ford is cutting the sticker price of the fully battery-powered plug-in Focus Electric by a flat $6,000. That’s on top of a $4,000 price reduction on the same vehicle a year ago. The new sticker price is $29,995 including shipping—but not including federal tax credits of up to $7,500 and state incentives that might effectively knock another $2,500 off the amount buyers pay.

Obviously, Ford wouldn’t be instituting such dramatic price cuts if the Focus Electric was selling well, and part of the reason sales have been poor is that the model doesn’t stand out in an increasingly crowded field of midlevel-priced plug-ins where the Nissan Leaf, the pioneer in the category, remains the indisputable leader. Another reason for underwhelming sales of the Focus Electric—and for many alternative-fuel cars in general, for that matter—is simply that gas prices have been getting cheaper and cheaper.

According to the AAA Fuel Gauge Report, the national average for a gallon of regular was just under $3.10 on Tuesday, compared with $3.35 a year ago and around $3.70 this past spring. Gas prices for the year as a whole are down slightly compared with 2013, and projections call for continued lower prices in 2015. All of which hurts automakers’ efforts to convince buyers that it’s a savvy move to pay a premium over a standard gas-powered vehicle for a hybrid or electric car right now, with the anticipation that they’d more than make up the difference later on in the form of savings on gas.

To help sales, automakers have been trying mightily to make the difference in price between alternative-fuel cars and their traditional car counterparts disappear. Nissan slashed the price of the Leaf in early 2013, effectively bringing the takeaway price of the vehicle under the $20,000 mark. Leaf sales have been strong throughout 2014, up 23% year over year thus far. Ford Focus Electric sales are up in the U.S. as well, with September units sold up 60% compared with the same month last year. Even so, we’re talking about extremely small numbers: 176 Focus Electrics sold last month, versus only 110 for September 2013.

What’s especially noteworthy is that the combination of lower gas prices and increasingly fuel-efficient internal-combustion engine cars appears to be putting the squeeze in particular on hybrid cars like the Toyota Prius. According to Toyota data, 14,277 Priuses were sold in the U.S. last month, compared with 15,890 for September 2013. For the year thus far, Prius sales are down 11.4% compared with the same period a year ago—and mind you, this slump took place a time when Toyota sales overall are up 5.7%. By far the worst-performing Prius has been the plug-in PHV; only 353 sold in September, a decline of 71% versus the same month a year ago (1,152). As for hybrid sales overall, a total of 31,385 units sold in the U.S. in September 2014, a decrease of 35% from the previous month, and a decline of 6.5% from the same month in 2013.

Bear in mind that the hybrid sales slump has occurred while automakers have gotten more aggressive with discounts. As Automotive News lately noted about the struggles of alternative-fuel cars:

Data from KBB.com show that Toyota boosted Prius incentives to $2,300 per vehicle in September from $1,400 a year ago while Ford ramped up C-Max spiffs to $4,900 from $2,650 per vehicle in the same period; neither move helped sales.

So cheaper gas prices benefit drivers not only in terms of the obvious—cheaper gas prices—but also because they’re forcing automakers to slash prices on hybrids and electric cars that boast savings on gas as a primary sales pitch.

MONEY Tech

Here’s Why Apple Had Such a Great Quarter

Local resident Andreas Gibson celebrates after being the first to exit the Fifth Avenue store after purchasing an iPhone 6 on the first day of sales in Manhattan, New York September 19, 2014.
Adrees Latif—Reuters

And why you can expect even more good news next quarter.

Summer is usually a slow time for Apple APPLE INC. AAPL 1.6312% , much as it is for other consumer-electronics companies. For the iPhone maker specifically, summer is right before its widely publicized iPhone launches, which should intuitively create purchase delays as consumers wait for the latest and greatest. Not this time.

Apple just crushed expectations.

Starting with the headliners

Most of the pertinent metrics tapped new records for the quarter ended in September. Revenue came in at $42.1 billion, which translated into $8.5 billion in net income. That’s $1.42 per diluted share. Gross margin stayed strong at 38%, a modest sequential decline. Apple also declared a $0.47-per-share quarterly dividend.

The Street was modeling for $39.9 billion in revenue, $1.29 in EPS, and a gross margin of 37.9%. Apple’s own guidance topped out at $40 billion and 38% gross margin.

iPhone is officially a $100 billion business

Despite all of the speculation surrounding the iPhone 6, iPhone unit sales came in well above expectations at 39.3 million, a 16% jump from a year ago. Analysts were expecting just 37.5 million units. Average selling prices put up an encouraging $42 jump to $603. That helped trailing-12-month iPhone revenue cross the $100 billion threshold for the first time ever.

Source: SEC filings. Fiscal quarters shown. TTM = trailing 12 months.

Even better yet, Apple normally puts up another ASP increase during the calendar fourth quarter following the launch of new models, so the company could have an ASP tailwind this holiday quarter.

Apple is unsure of when it will reach supply and demand balance, since it currently has a significant backlog of orders. The company is selling every unit it can make, and CEO Tim Cook said supply and demand are currently so far apart that they’re “not even on the same planet.”

iPad is still lagging

Technically speaking, the iPad remains a relative soft spot in Apple’s results, with unit sales falling 13% to 12.3 million. There’s a broader deceleration occurring in the tablet market, and Apple is not immune. Still, Cook continues to consider the current situation little more than a “speed bump” on the long-term road to riches.

He also added some useful context. First, since Apple has been in the tablet business for only four years, it’s difficult to determine what the upgrade cycle will be. Everyone expects it to be longer than smartphone upgrade cycles, but it remains unclear by how much. On top of that, what’s not shown in these high-level figures is which countries Apple is selling in, or the demand characteristics in those countries.

Adoption in developed markets was very quick to take off, and those users are still trying to determine their upgrade cycles. Sales are now shifting to emerging markets, where 50% to 70% of buyers are first-time tablet buyers. That has important long-term implications, since those users are now on the Apple upgrade track.

Cook is less interested in the quarterly trends and remains extremely bullish on the bigger picture.

Macs set a new record

Apple sold 5.5 million Macs during the quarter ended in September, a new record and again outpacing the broader PC market. The back-to-school season was particularly kind to the company, according to Cook.

Management attributed this strength to its laptop lineup, which is even more impressive considering the mid-2014 upgrades were modest, as Apple is still waiting for Intel to ship its Broadwell chips in volume.

Cranking up share repurchases

Last quarter, Apple kind of slowed its rate of share repurchases, which made sense, since shares have recovered and it gets marginally less bang for its repurchase buck. This quarter, Apple cranked up the repurchase again, embarking upon its fourth accelerated share repurchase program, or ASR.

Source: SEC filings. Fiscal quarters shown.

Share repurchases this quarter totaled $17 billion, consisting of a $9 billion ASR program and $8 billion in open market repurchases. Even as Apple shares are now within spitting distance of all-time highs, it clearly still thinks the current valuation is compelling. Cook more or less agrees with Carl Icahn.

Once again, the buybacks helped juice EPS growth. Diluted EPS was up 20%, outpacing the 13% jump in net income. Apple has now repurchased nearly $68 billion to date, leaving over $22 billion of its total $90 billion repurchase authorization. That should hold it over until the next update to its capital return program, which is typically in March or April.

Some reporting changes

Starting in fiscal 2015, which just kicked off, Apple is also making changes to its reporting methods. The last reporting change occurred about two years ago, when the company unbundled accessories and peripherals from their related segments and established the iTunes/Software/Services segment.

Going forward, iTunes/Software is being renamed the Services segment, but this will also include other services such as Apple Pay. Other Products will include the current accessories business, along with the iPod, Apple TV, and forthcoming Apple Watch.

Current segments Future segments
iPhone iPhone
iPad iPad
Mac Mac
iPod Services
iTunes/Software/Services Other products
Accessories

Source: Conference call.

One analyst asked whether grouping Apple Watch into the Other Products segment says anything about Apple’s expectations for its upcoming wearable. Cook responded decisively, “It says nothing about our expectations.” Rather, the decision was based on current revenue bases, and Apple may decide to break out Apple Watch performance at a later time.

More importantly, Apple knows that its smartwatch competitors are watching its every move and are very interested to get figures and data points surrounding this nascent business — figures and data points that Apple doesn’t want to share with its rivals. Not sharing with rivals entails not sharing with public investors.

That may be somewhat frustrating, especially at first, but if Apple Watch becomes material to the business, then Apple will probably begin disclosing pertinent figures. Until then, Apple will probably tout various milestones as it hits them from time to time.

Additionally, Apple’s retail results have long been a distinct segment, which has always made its geographical disclosures incomplete. For instance, all retail stores have been included in this reportable segment, regardless of where they are located. Apple is dissolving the Retail reporting segment and will begin including those results in the stores’ respective geographies. That will make the geographical segments much more relevant and usable (finally), particularly the all-important Greater China segment.

It’s the time of the season

As Apple heads into the holiday season with a fresh product lineup, it’s expecting another all-time record quarter. Revenue is expected in the range of $63.5 billion to $66.5 billion, which represents 13% growth at the midpoint. That would be the highest growth in eight quarters, before even considering the possibility of a blowout.

So much for slow summers — or falls or winters for that matter.

MONEY stocks

3 Things to Know About IBM’s Sinking Stock

141020_INV_IBM
Niall Carson—PA Wire/Press Association Images

IBM's shares plunged 7% Monday after a disappointing earnings report. Can tech's ultimate survivor transform itself one more time?

International Business Machines INTERNATIONAL BUSINESS MACHINES CORP. IBM 0.2288% has long enjoyed a unique status on Wall Street — a tech growth powerhouse that investors also see as a reliable blue chip, with steady profit growth and a hefty dividend. But with the rise of new technologies like cloud computing, Big Blue has struggled to maintain that balancing act.

Now investor confidence has suffered a big blow.

On Monday the company announced the results of a pretty lousy quarter. IBM’s third-quarter operating profit was down by nearly one fifth, and the company failed to generate year-over-year revenue growth for the 10th consecutive quarter.

Big Blue also revealed plans to sell-off its struggling semiconductor business, a move that involves taking $4.7 pre-tax billion charge against IBM’s bottom line. Actually, it is paying another company to take this unit off its hand.

While CEO Virginia Rometty acknowledged she was “disappointed” with IBM’s recent performance, she’s also pledged to turn the company around, led in part by IBM’s own foray into the cloud.

Now, you don’t get to be a 103-year-old tech company without learning to adapt. That’s what IBM famously did in the ’90s, when the computer giant started to shift away from profitable PC hardware in favor of consulting and service contracts for businesses.

But Monday’s dismal earnings show just how hard repeating that trick could turn out to be.

Here’s what else you need to know about the stock:

1) You can’t really call IBM a growth company anymore since its sales aren’t rising.

When it comes to revenues, IBM ranks behind only Apple APPLE INC. AAPL 1.6312% and Hewlett-Packard HEWLETT-PACKARD CO. HPQ 1.1888% among U.S. tech companies. On a quarterly basis, though, sales have actually shrunk for 10 periods in a row, including a 4% slide in the third quarter. The big culprit is cloud computing, in which businesses can access computing services remotely via the Internet.

Since the 1990s, IBM’s model has been premised on selling powerful, expensive computers to large businesses, then earning added profits on contracts to help firms run those machines. But the cloud lets companies rent, not buy, this computing power. “You only pay for what you use,” says Janney Montgomery Scott analyst Joseph Foresi. The result: IBM’s hardware revenues sank 15% last quarter.

2) IBM is racing to be a leader in cloud computing, but with mixed results.

The company has identified four alternative areas of growth. One is the cloud, the very technology eating into IBM’s hardware sales. Big Blue has spent more than $7 billion on cloud-related acquisitions. It’s also going after mobile, IT security, and big data, the analysis of information sets that are too large for traditional computers. An example of that is Watson. IBM’s artificial-intelligence project, which won Jeopardy! in 2011, is being marketed to businesses in finance and health care.

These initiatives have promise, but IBM’s size is a curse. For instance, the company’s cloud revenues jumped 69% to $4.4 billion last year, but with nearly $100 billion in overall sales, “it’s hard to move the needle,” says S&P Capital IQ analyst Scott Kessler.

3) The stock is now much cheaper than its tech peers, but it may deserve to be.

Investors willing to wait and see if these moves will transform IBM may take comfort in the fact that the stock looks cheap. What’s more, the shares yield 2.4%, vs. 2% for the broad market. This could make the company look like a good value.

But investors should tread carefully, says Ivan Feinseth, chief investment officer at Tigress Financial Partners. He notes IBM has spent $90 billion on stock buybacks in the past decade, which has kept the P/E low by increasing earnings per share. Yet none of that money was invested for growth, as evidenced by IBM’s sluggish annual growth rate. It is hard to imagine IBM outmuscling Amazon AMAZON.COM INC. AMZN 0.4569% , Cisco CISCO SYSTEMS INC. CSCO 1.5907% , Microsoft MICROSOFT CORP. MSFT 1.4646% , HP HEWLETT-PACKARD CO. HPQ 1.1888% , and Google GOOGLE INC. GOOG 2.2845% in the cloud — and there are better values in tech.

TIME apps

Ads Are Coming to Snapchat for the First Time

Viewing the ads will be optional

Snapchat users will see ads on the messaging app starting this weekend, the social media company announced Friday.

“Understandably, a lot of folks want to know why we’re introducing advertisements to our service. The answer is probably unsurprising—we need to make money,” the company said in a blog post. “Advertising allows us to support our service while delivering neat content to Snapchatters.”

The company promised the ads wouldn’t display in people’s messages. “That would be totally rude,” Snapchat said. Instead, users will be able to choose whether to view the ads.

MONEY Tech

Everything You Need to Know About Apple’s Newest iPads and Macs in Two Minutes

Apple unveiled a new, thinner iPad Air and an iMac with retina screen at its October event, and the company jokingly announced Stephen Colbert as the new chief of secrecy.

MONEY Tech

Why Apple is Not a Tech Company

hand pulling iPhone box off shelf
Maxim Shemetov—Reuters

Peter Thiel argues that buying Apple means betting against innovation.

As the founder of PayPal, and the one of the first external investors in Facebook, it’s hard to argue that Peter Thiel doesn’t understand innovation or technology companies. But in his new book, Zero to One, Thiel takes somewhat of a radical approach to these concepts, drawing a line in the sand that may irk many traditional tech firms, as well as their investors.

Despite being both the largest and most well-known firm in The Valley, Thiel’s personal opinion is that Apple APPLE INC. AAPL 1.6279% isn’t much of an innovator these days: Just a few years ago, Apple’s stock was a bet on new technology — today, it’s a bet against it (at least according to Thiel).

In a recent phone interview, Thiel told me why he doesn’t consider firms like Apple, and most of the members of the Nasdaq 100, to be technology companies, and what that might mean for their investors.

An odd transformation

Thiel has somewhat of a problem with the concept of a “tech firm” — or at least, what people generally define one to be. In Thiel’s mind, true technology companies are firms leveraged to innovation — to new business models designed to shake up the status quo. Plenty of firms begin their life as a tech company, but those that find success often become something quite different.

“A whole bunch of the Nasdaq 100 stocks are bets against innovation … it’s a long list. [There's] a very short list of companies where you’re actually betting on innovation … Most of [the members of the Nasdaq 100] just throw off huge cash flows, and the risk is actually that there’s some innovation ….These companies are always described as ‘tech stocks’ because they were tech stocks … at some point in the past, but [today] they’re bets against technology.”

Although most still consider Apple, Oracle, and Microsoft to be technology firms, few hold the same opinion of General Motors. Yet according to Thiel, it’s all relative — simply a matter of timing and perspective.

“GM was a tech stock in the 1920s — it was still sort of a tech stock in the 1950s. [But] by the 1980s, you invested in GM as a bet against German and Japanese innovation. You said, ‘I’m long GM because Germany and Japan are never going to build cars that are that good.’ At some point, a lot of these tech stocks become weirdly changed to being bets against technology … [Of course] the companies can never say that, because their internal narrative and their external story is [based] so much around how they were historically innovative.”

Know what you’re buying

Admittedly, General Motor’s transformation from technology firm to incumbent took decades, but Thiel believes the shift is often far more straight-forward: Simply look for the founder to depart. With Apple, the change occurred just over three years ago, with the passing of Steve Jobs that thrust Tim Cook into the spotlight.

Thiel is a fan of Cook’s management skills (“I think Tim Cook has done a very good job in an impossible position to try to fill Steve Jobs’ shoes,” he told me) but believes the Apple story is fundamentally different with him at the helm: Once, people bought stock in Apple because it was creating revolutionary new products — today, it’s all about the cash flow.

“No one is investing in Apple because they think it will create new products. People are investing in Apple because it’s generating massive cash flows, and the bet is that the cash flows will go on [for] somewhat longer than people think … that the rest of the world will not innovate; will not succeed in closing the gap.”

While plenty of investors may disagree with Thiel (the new Apple Watch, for one, gives investors something to look forward to) it’s indisputable that Apple is generating billions of dollars of cash, largely on the back of one product: the iPhone. Apple generated $10.3 billion in cash flow alone last quarter — enough to acquire many members of the S&P 500 outright. The iPhone brings in more than half of Apple’s revenue, and likely the bulk of its profits.

Not a bad investment

But even if Apple’s best work is behind it, it doesn’t make it a bad investment. In fact, Thiel believes Apple could be an excellent stock — so long as the iPhone cash-cow continues to deliver.

“Apple [will keep] generating massive cash flows so long as nothing much changes — as long as it maintains a certain brand lead, a certain premium on the iPhone. [If so,] it will generate huge cash flows [for many years] … the risk is that other people will catch up.”

That risk could come from rival handsets. Competitors like Xiaomi and OnePlus have attracted a fair amount of attention recently for their quality handsets, which they sell at a fraction of what Apple charges for the iPhone. Or it could come from advanced wearables — watches and other gadgets designed to replace the traditional smartphone. It may come from a radical reinvention of the handset — something like Project Ara, that shakes the current smartphone business model to its core.

Of course, it may not come at all — or if it does come, not for many, many years. In which case, the cash flows should continue, and Apple should reward its shareholders.

“Maybe there’s not much innovation happening. Maybe people overestimate innovation … but I think it is very helpful to try to get the framing right and understand, ‘OK, I’m betting against technology here.'”

MONEY Tech

What Will Apple Unveil This Week?

Souped-up iPad Air and iPad mini tablets are widely expected to debut Thursday. But a higher-resolution iMac desktop computer could be on the menu too.

MONEY online shopping

3 Reasons Google’s Same-Day Shipping Looks Like a Game Changer

141014_EM_Google_1
Nick and Laura Allen—AP

Google already dominates search. If the big expansion of a same-day shipping service proves successful, it could be on its way to dominating online shopping too.

On Monday, Google announced that the express online shopping-and-shipping service it has been testing for months in northern California and parts of Los Angeles and New York City is expanding to three more cities: Boston, Chicago, and Washington, D.C. The service, originally dubbed Google Shopping Express and now shortened to just Google Express, allows shoppers to place orders online or via mobile device with partner retailers such as Walgreens, Costco, Staples, Barnes & Noble, and Sports Authority. Google promises same-day shipping on all such orders, at a cost of $4.99 per delivery or flat subscription plans of $10 monthly or $95 a year.

Former Google CEO Eric Schmidt mentioned this week at a conference that Google’s biggest rival isn’t Yahoo or Bing but is in fact Amazon.com, and the expansion of Google Express into Amazon’s online shopping turf is a clear indication that Google takes this rivalry very seriously. While Amazon is still the most dominant player in e-retail, Google’s newly expanded service is arguably superior and a better value compared to anything Amazon currently offers. Here are three reasons why Google’s service is particularly compelling:

1. Same-day delivery that’s “free.” Consumers increasingly demand free shipping with online purchases. Things have gotten to the point that free shipping is so readily available—via a coupon code here or reaching a minimum purchase threshold there—that the idea of paying for delivery can now be a deal breaker.

Thus far, the phenomenal success of Amazon Prime has most clearly demonstrated the power of shipping when it’s not only reliably free but speedy as well. Prime subscribers receive free two-day shipping on most orders placed via Amazon.com, and the service has proven so popular and indispensable that enrollment numbers have continued to climb even after prices rose recently from $79 to $99 annually.

Overnight and same-day shipping are more costly services than two-day delivery, however, and Amazon Prime members must pay extra for these expedited options—typically $5.99 for same-day shipping, where and when it’s available. That’s on top of an annual subscription fee.

Like Amazon Prime, Google Express is available via subscription, priced at $95 per year (just a smidge under the cost of Prime) or $10 per month. Members then get free same-day delivery of all orders with a minimum purchase of $15. (As an alternative, nonsubscribers can pay a flat $4.99 delivery fee per order.) One of the big differences between Amazon Prime and Google’s subscription service is that the former includes two-day shipping at no additional charge, whereas the latter covers same-day delivery. Prime has many other benefits—free video streaming, for instance, not to mention a much broader selection of products than Google’s service—but in terms of speedy shipping, Google Express has the edge.

Bear in mind that you’re paying for whichever service you choose. These services are presented as featuring “free” shipping, but that’s silly. Subscribers pay a membership fee to cover the costs of shipping, and there’s nothing free about it. “Prepaid” may be a better way to describe the shipping offered by these services. A subscription is a potentially good value in the same way that an all-you-can-eat buffet is a smart buy for someone who eats (or orders online) a lot, but it can be a waste of money for others.

2. Same-day delivery of stuff you actually need that day. Based on the success of Amazon Prime, plenty of consumers are more than OK with two-day shipping on the vast majority of online purchases. After all, when you’re buying a new TV, or a winter coat, or batteries or coffee pods or a Christmas gift for your aunt, or any other thing you might purchase at Amazon, there are generally no pressing needs that might require you to be in possession of them on the very day you place the order.

Likewise, same-day shipping would seem to be less of a necessity for the products typically purchased from Google Express partners such as Sports Authority, Guitar Center, and Toys R Us. It’s often a different story, though, for the goods one needs from drugstores and supermarkets, because when you need cold medicine or diapers or food on the dinner table, you tend to need them right away—not two days after placing an order. The normal approach in these situations is to handle the errand the old-fashioned way, by making a physical run to the store. But because Google Express’s early partners include Walgreens and grocery chains such as Giant, Stop ‘n Shop, and Whole Foods, these kinds of everyday errands can be crossed off your list quickly online, without even the need to pay extra for same-day delivery. (Same-day delivery from another Google partner, 1-800FLOWERS.com, is probably even more of a necessity among certain shoppers on certain anniversaries and birthdays.) For the sake of comparison, Amazon has already introduced an online grocery service in select markets with same-day and overnight delivery, but its subscription runs $299 per year.

3. Same-day delivery on stuff that’s a hassle to buy in person. Another intriguing partner of Google Shopping Express is Costco. The warehouse membership club giant is beloved by bulk-size-loving patrons, yet much about the shopping experience is less than ideal—starting with the huge size of much of its merchandise and ending with the absence of shopping bags for carrying one’s purchases. What’s more, Costco has had some trouble attracting younger customers because fewer millennials have cars, which are all but necessities for any Costco shopping trip, and they tend to want to live in urban areas rather than the suburbs where most Costcos are located.

Many of these issues disappear when Google and its same-day delivery service enter the equation. If Google is handling the pickup and delivery, customers no longer have to worry about being strong enough to maneuver gigantic tubs of laundry detergent into shopping carts, then into one’s car. Heck, there’s no need for a car at all because, again, Google is taking care of the shipping.

While Google’s service is still in its infancy, it’s probably being helped greatly by the fact that that a popular retail brand like Costco is a partner. But who knows: Down the line, it could be that Costco membership numbers rise because same-day delivery is available via its partner, Google Shopping Express.

Read next: Google Express Expands its Same-Day Delivery Reach

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