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Three technology titans reshaping retail

FEBRUARY 2019

How three disruptors are digitizing retail markets across the globeSTEPHEN DOVER, CFA PURAV A, JHAVERI, CFA, FRM DAN SEARLE, CFA MARY KILLIAN TEK KHOAN ONG, CFAKATHERINE S. OWEN, CFA

2 Equity Markets / Three technology titans reshaping retail

In this issue

Three powerful retailing disrupters—Alibaba, Amazon and MercadoLibre—are reshaping expectations about shopping and shipping by digitizing retail markets across the globe. New conveniences such as ordering groceries with a simple voice command are upending the old world order. Each firm uses technology to improve customer experiences—making it easier to browse, buy and receive goods—and increase sales by analyzing big data to anticipate customer preferences.

To compare how each firm tailors technology to fit local customs, lifestyles and payment abilities, we asked senior equity analysts across our Growth, Value and Emerging Markets teams to get their views. Each team approaches equities with a different invest-ment lens, but all three ground their analysis in modeling future cash flows to estimate a company’s value. In the following discussion, our analysts highlight some key assumptions in their cash-flow models, demonstrating that multiple lenses can reveal different investment opportunities.

Key viewpoints• Our Growth and Value teams have

different takes on Amazon. The US Growth team feels confident in Amazon’s path toward rising profit margins, while our Value analysts think the market is underestimating Kroger’s ability to successfully push into online groceries, despite Amazon.

• Our Emerging Markets analysts in Singapore point out that Alibaba’s profits outshine Amazon and think Amazon’s Whole Foods may mirror Alibaba’s approach to “new retail.”

• Our Global Growth team thinks MercadoLibre can remain the domi-nant e-commerce player in South America, partly by replicating Alibaba’s approach to payment services and consumer loans.

• Each firm is integrating all aspects of retailing—from inventory to distribution and payments—into a seamless continuum, though using different business models.

Reshaping retail on the global stage To say that Amazon has shaken up US retailing is almost cliché at this point. Looking globally, we see equally powerful retailing earthquakes emanating from Alibaba in China and MercadoLibre in South America. These firms, however, aren’t cookie-cutter versions of Amazon. Whereas Amazon spent years building state-of-the-art warehouses and logistics infrastructure,

Alibaba and MercadoLibre didn’t need to because they didn’t own inventory. Both firms initially had more in common with eBay, allowing merchants to sell goods on their online marketplaces.

Over time, these distinctions have blurred. Alibaba and MercadoLibre have been investing in logistics infra-structure to help ensure deliveries reach customers on time. Meanwhile, over half of Amazon’s online sales now come from higher margin third-

party sellers, which list their products directly alongside Amazon’s own warehouse inventory.

Contrasting these evolving retail approaches, we start our discussion by diving deeper into the mechanics of Amazon. This sets the stage for a some-what narrower overview of Alibaba, and finally MercadoLibre. With each company, we focus on just a handful of divisions and innovations our analysts believe are strategically important to

Equity Markets / Three technology titans reshaping retail 3

Amazon Alibaba MercadoLibre

Business summary Amazon is one of the highest- grossing online retailers globally. Dominating North America, Amazon built its brand on compet-itive pricing, unparalleled logistics with same-day shipping, and customer service. By wowing customers with its media, digital devices and Alexa-enabled products, Amazon deploys innovative customer acquisition and retention tools.

Alibaba is the world’s largest online and mobile commerce company measured by annual gross merchandise volume. It operates China’s most-visited online marketplaces: Taobao (consumer-to-consumer) and Tmall (business-to-consumer). Leveraging a deep pool of consumer data, Alibaba’s ecosystem now includes “new retail” brick-and-mortar stores— a precursor to Amazon’s likely strategy with Whole Foods.

MercadoLibre operates online marketplaces in over a dozen Latin American countries, with >90% of revenues coming from Brazil, Argentina and Mexico. By combining its online payment division (MercadoPago) with integrated shipping and customer loyalty promotions, MercadoLibre remains the dominant online marketplace in South America.

Founder Jeff Bezos Jack Ma Marcos Galperin

Active users in 2018 410 million globally 636 million in China

249 million across Latin America

Gross merchandise volume US$390 billion US$850 billion US$13 billion

Areas of dominance • North American online retail• Cloud computing (AWS)

• China online marketplaces • China online payments (Alipay)• Cloud computing in China

• Latin America online marketplaces

• Online payments (MercadoPago)

Key differentiators • Shipping and logistics • Digital devices (Alexa) • Cloud services (AWS)

• Digital-centric ecosystem • Chinese consumer data• Expanding into brick-and-

mortar retail

• Robust technological infrastructure

• Strong payment services division

• Local knowledge of trends

Risks International expansion efforts face headwinds from local incum-bents and foreign regulations.

Expansion outside China has had limited success, except Lazada. Could drain resources from its core China ecosystem.

Main risks are macro-economic uncertainties stemming from high inflation and political turmoil.

THREE RETAILING DISRUPTORS—AT A SINGLE GLANCE

generating future cash flows, or for causing disruptions. One common thread across all three is a culture of innovation and bold experimentation. We conclude with a brief discussion of current operating margins and the balancing act of spending to build future growth versus generating higher near-term profits.

Amazon—an advertising powerhouse Amazon is big, and its disruptive impacts are far-reaching—just as its name implies. But it has only recently become

a profitable disruptor. That change has been driven, in part, by becoming a powerhouse in online advertising.

At the core of Amazon’s advertising services is a rich pool of data it keeps on the shopping habits of its estimated 410 million active users globally. Amazon knows what customers browse for and buy and what they are willing to pay, giving them an information advantage over platforms that don’t facilitate transactions themselves. And because Amazon visitors are primarily there to make a purchase, Amazon ads convert to sales at 3.5x

higher rate than Google ads.1 That means Amazon can make more money per ad. We expect Amazon will generate advertising revenues of US$10 billion for 2018, placing it in the number three position behind Google and Facebook in terms of digital ad revenues. Going forward, our US Growth team believes Amazon’s ad revenues will remain a significant profit stream.

Bezos’ innovation ethos Amazon hasn’t had a straight line to success since going public in 1997. And that’s perfectly fine with Jeff Bezos, chief executive officer (CEO) and

1. Source: Varma N. “Amazon Versus Google Search: Who is Winning the Battle and How?” Marketing Technology Insights July 2018.

Sources: Active users—company financial statements 2018. Gross Merchandise Volume—Amazon FactSet consensus estimate 2018, Alibaba financial statement calendar 2018, MercadoLibre FactSet consensus estimate 2018. For illustrative purposes.


2. Source: “Jeff Bezos: I’ve made billions of dollars of failures at Amazon” The Guardian December 2014. 3. Source: Synergy Research Group July 2018.

founder of Amazon. In his view, being a game changer requires experimenta-tion, a willingness to fail, and a long-term orientation that means capital investments can take five to seven years to bear fruit.2 This approach has led to some surprising breakthroughs, like Amazon’s Echo smart speakers, powered by Alexa, the cloud-based voice assistant. But it’s also produced disappointments that unnerved shareholders, like the Fire Phone, and mounting losses from failed efforts to compete in China.

On the heels of several failed launches and little progress in China, Amazon announced in early 2015 that it would break out the results of Amazon Web Services (AWS) for the first time in its financial statements.

Until then AWS was more or less hidden inside an “other” category for North American sales.

First launched as a service in 2004, AWS gives companies like NASA, Netflix and online rival MercadoLibre access to Amazon’s cloud storage and database infrastructure. With global market share estimated between 34–52%, AWS generates over half of Amazon’s total operating profits, with a US$27 billion annual revenue run rate as of last year’s third quarter.3 If some digital innovations take a few more years to bear profitable fruit, AWS can pick up the slack.

Can AWS maintain its global market share, as shown in Exhibit 1? Large US retailers such as Walmart and Gap

prefer using Microsoft’s cloud services instead of Amazon, but our US Growth team thinks AWS can remain competi-tive by reinvesting in more capacity and new innovations.

Amazon’s Achilles’ heel Waiting for Amazon innovations to deliver more profits is one thing. But patience for the company gaining a profitable foothold in China was running thin for our Global Growth team as far back as 2014. Today Amazon remains far behind Alibaba and JD.com in Asia and faces similar challenges in South America from MercadoLibre. See Exhibit 2.

Amazon isn’t alone in its global aspira-tions. Alibaba has pushed aggressively into the Asia-Pacific region with multiple

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AMAZON MAINTAINS LEAD IN CLOUD SERVICES Exhibit 1: Worldwide market share Q2 2018

Annual Growth Rate %

Source: Synergy Research Group. For illustrative purposes.

0%Worldwide Market Share

Gaining market share; but a long way to go.

Strong niche players

In a league of its own

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Google

Rackspace

Salesforce

Oracle

AmazonIBM

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4. Source: Singh M. “Amazon and Flipkart face uncertainty as India readies new rules for foreign ecommerce companies” Venture Beat January 2018.5. Source: Analysys International August 2007. 6. Sources: “China 3rd Party Mobile Payment Report.” iResearch 2017.

acquisitions, including Singapore-based Lazada in 2016. In response, Amazon has refocused its efforts on India, whose e-commerce industry is still rela-tively small. So too has Walmart, paying US$16 billion for a majority stake in Indian e-commerce company Flipkart. We think Walmart’s chess move was a smart one. When it comes to emerging markets, merely trans-planting a US-centric business strategy without local knowledge and expertise can produce lackluster results. Both firms, however, received a big blow in late December. The Indian govern-ment revised rules that essentially prohibit foreign firms like Amazon and Walmart from selling goods through Indian companies in which they have a stake.4 If this rule goes unchanged, it could significantly derail the opportu-nities both firms originally saw in India.

Alibaba’s retailing ecosystem Two years after Amazon went public in 1997, China’s Alibaba launched a business-to-business (B2B) website for small manufacturers looking to export overseas. Alibaba’s birth as an online retailing giant, however, didn’t really happen until four years later in 2003, the year eBay acquired China’s Eachnet.com. Countering eBay’s move, Alibaba quickly launched an online marketplace called Taobao, connecting fledgling merchants and small entrepreneurs with Chinese shoppers. In just two years Taobao’s share of China’s market of small businesses selling to consumers—confusingly referred to as consumer-to-consumer (C2C)—approached 60%, forcing e-Bay to close down Eachnet.com in 2006.5

Alibaba’s ability to rapidly pivot and launch Taobao came largely from founder Jack Ma’s belief in

experimentation and his concept of an interdependent “ecosystem.” From its start in Ma’s apartment, Alibaba embodied the energy of a scrappy Silicon Valley start-up. Each new busi-ness Alibaba launches retains the autonomy Ma’s original start-up did, while also producing synergies that Alibaba’s other businesses can leverage. Case in point is Alipay, Alibaba’s online payments service launched one year after Taobao.

Alibaba knew early on that Taobao needed something more than a colorful website tailored to Chinese aesthetics to help merchants make a sale. Most shoppers in China didn’t own credit cards, and many were suspicious that online products might arrive as some-thing less than advertised. Alibaba developed Alipay to resolve both issues. It creates an escrow service in which cash received for a sale isn’t released until the product arrives in satisfactory condition. Alipay was quite lucrative as a standalone business, but it also gave Taobao a leg up over e-Bay, which didn’t offer an Alipay-like service. Today, Alipay processes 80% of all transactions across Alibaba’s ecosystem of online marketplaces and 60% of China’s total mobile transactions.6

Consumer data drives profits Taobao’s rapid growth and ability to outmaneuver eBay were extraordinary by any yardstick, and it became hugely profitable. Like eBay, Taobao didn’t own or hold inventory in expensive ware-houses. Taobao’s strong operating margins come from consumer data, and the advertising services it sells to merchants eager to stand out from the online crowd. Advertising revenues also helped support Alibaba’s

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AMAZON ACHIEVES RECORD OPERATING PROFITS OF US$3.8 BILLIONExhibit 2: Quarterly operating income in US$ billionsFrom Q1 2015 to December 31, 2018

Source: Bloomberg. For illustrative purposes.

Q22015

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Total Operating Income

Amazon Web Services drives half of Amazon’s operating pro�t

Amazon’s international operations continue to lose money

Amazon Web Services (AWS) North America International


business-to-consumer (B2C) market-place called Tmall, launched in 2008. By tapping into Alibaba’s vast trove of Chinese consumer data, western brands like Apple and Nike can better target China’s rapidly growing consumer class, while also paying commissions to Tmall.

Fast forward to the present, and Alibaba’s constellation of online market-places generated gross merchandise volume of CNY4.8 trillion (US$768 billion) for its 2018 fiscal year ending last March. That represents 75% of China’s CNY5.7 trillion online shopping industry, and more than Amazon and eBay combined.7

Digitizing brick-and-mortar retail Alibaba set a new record in 2018, generating US$30.8 billion in sales on Singles Day—an online shopping extrav-aganza that Alibaba created in 2009. That’s more than the two biggest US shopping holidays—Black Friday and Cyber Monday—combined. To celebrate Singles Day last year, Alibaba threw a gala with celebrity Mariah Carey and showcased its “new retail” expansion into brick-and-mortar stores.

Long before Amazon bought Whole Foods, Alibaba was investing in retail chains, including a Costco-like market called Sun Art, department-store operator Intime, electronics retailer Suning, and its own home grown grocery chain named Hema Xiansheng. By integrating offline and online retail, Alibaba wants to deliver products to shoppers by whatever route they prefer—ordered online and delivered home, pre-sorted for in-store pick up, or neatly displayed so consumers can touch and experience new brands in person.

Behind the scenes, Alibaba’s new retail strategy aims to digitize the entire supply chain, both online and offline,

and collect more detailed consumer data. The ability to follow and analyze vast quantities of product and consumer data helps Alibaba eliminate inefficien-cies with smart logistics, digital inventory management, anticipating evolving consumer trends and personal-ized shopper experiences.

We think Alibaba’s Hema stores offer a likely blueprint for Amazon to trans-form its Whole Foods grocery chain. Launched in 2015, Hema stores serve a dual purpose as distribution hubs for local online deliveries, and offline platforms where shoppers can experi-ence new brands, pick fresh produce, and enjoy in-store dining. Chefs are on hand to prepare meals with the ingredients shoppers just purchased. Hema customers use an app to shop in stores, which logs their purchases and preferences, lists product ingredi-ents and places of origin, and lets them buy with Alipay or facial recogni-tion technology. Revenue per square foot at Hema is 5x other grocery stores in China, according to Alibaba. Online shoppers within two miles can have deliveries at their doorstep within 30 minutes. About 60% of Hema’s sales currently come through online delivery, but Hema’s founder Hou Yi is aiming to push that to 80% or higher.8

MercadoLibre’s evolution from eBay to Amazon Ten years ago when investors called MercadoLibre the eBay of South America, they were halfway correct. CEO Marcos Galperin started the company in eBay’s image with his Stanford business school classmates in 1999. They’ve since transformed the company from an internet auction site into Latin America’s leading online marketplace on par with Amazon.

Our Global Growth team sees two key ingredients to MercadoLibre’s early success: 1) a heavy emphasis on advanced technological infrastructure and, 2) tailoring its websites and payments services to fit South America. Understanding Latin America’s specific local context was key to avoiding the missteps eBay and Amazon made in China.

In its early days, MercadoLibre gave merchants the option of listing products at fixed or auction prices. It quickly discovered the majority preferred fixed prices. MercadoLibre also changed the way merchants interacted with buyers.

Ant Financial In 2011, Alibaba made the controversial decision to transfer ownership of Alipay to a new entity under Jack Ma’s sole control. Now called Ant Financial, and 33% owned by Alibaba, the company expanded beyond mobile payments to issue loans to consumers and small businesses. Alipay users, for example, can get revolving credit lines for spare cash, and earn interest on unused cash balances from the world’s largest money market fund, Yu’eBao. Today, Ant Financial has issued US$95 billion in consumer loans, more than China’s second-largest bank.9 Ant Financial is expected to go public, though recent trade tensions between the United States and China have delayed the initial public offering (IPO).

7. Source: iResearch March 2018. 8. Source: Jacobs H. Zheng A. “Alibaba’s futuristic supermarket in China.” Business Insider May 2018.9. Source: Kwan A. “Ant Financial Consumer Lending Reaches $95 Billion.” Bloomberg News March 2018.


Shoppers couldn’t interact directly with sellers the way eBay allowed, because MercadoLibre rightly understood that would likely cut it out of the trans-action entirely. Instead, it developed Q&A message boards, which buyers found helpful.

Over time, to attract more merchants to its busiest online marketplaces in Argentina, Brazil and Mexico, MercadoLibre developed logistical shipping solutions through its MercadoEnvios division, helping ensure merchant deliveries arrived on time for a better shopping experience. It also generated powerful synergies through MercadoPago, a payment services division. Much like Alibaba’s Alipay, MercadoPago offers an escrow service for shoppers who need to fund their accounts with cash. Today, MercadoPago facilitates roughly 90% of the transactions across MercadoLibre’s online platforms.10

New financial technology It’s MercadoLibre’s push into new finan-cial technologies that holds significant promise in our Global Growth team’s eyes. Half of Latin America’s population remains without bank accounts (or credit cards), and its economies are still largely cash-based. One side effect for cash-based entrepreneurs is that banks won’t issue working capital without a history of verified bank trans-actions. MercadoLibre, on the other hand, has the data to determine credit-worthiness by tapping into its online sales history and customer reviews. Spurned by banks, more merchants are turning to MercadoLibre for loans.

For shoppers, MercadoLibre just launched a digital wallet that lets users earn interest on unused cash, as well as interest-free loans to buy products

from MercadoLibre merchants. Interest-free loans offer tremendous value to shoppers, given high interest rates in Latin America. This ease of doing business also increases customer loyalty, reducing the chances of shop-pers migrating to rival sites like Amazon.

These new approaches to financial services are one of the reasons our Global Growth team thinks MercadoLibre offers an efficient way to gain exposure to online retailing in South America. As more internet users migrate to online and mobile commerce in Latin America, we believe MercadoLibre has the opportunity to capture a majority of these shoppers.

Pathways to sustainable cash flows Across our equity teams, we evaluated recent company operating margins side-by-side so we could compare and contrast each firm’s accomplishments

from growth and value perspectives, as shown in Exhibit 3. What struck us right away was the impact Amazon’s capital-intensive business model has long had on its profit margins. Compared with Alibaba, Amazon looks anemic. Also noticeable are Alibaba’s declining margins and recent negative margins for MercadoLibre. Given these diverging trajectories, we asked our analysts to explain their views and reasons for remaining confident about future cash flows.

Amazon’s profits gain momentum Since going public, Amazon’s heavy investments in technology, logistics and new products have long dampened its operating income. Bezos must constantly balance between deploying capital to build future growth and holding back to boost near-term profits. It’s for this reason our US Growth analysts think traditional valuation metrics like price-to-earnings and enter-prise value/EBITDA aren’t good

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OPERATING MARGINS VARY WIDELY ACROSS THREE RETAILING TITANSExhibit 3: Amazon’s capital intensive business model stands out from its peersFrom September 30, 2013 to December 31, 2018

Source: FactSet. For illustrative purposes.

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Alibaba Amazon MercadoLibre

10. Source: MercadoLibre November 2018.


The Amazon effectAmazon grabbed the spotlight in 2017 when it bought Whole Foods—nicknamed “whole paycheck” for its pricey organic produce and ethically sourced proteins. In one fell swoop, Amazon pivoted into the brick-and-mortar grocery business that its Amazon Fresh delivery service was struggling to disrupt. The market noticed. In recent years, publicly listed grocery chains, drugstores and healthcare insurance providers all saw their share prices plummet when the media reported Amazon was approaching, as shown in Exhibit 4. Clearly, the market takes Amazon’s disruptive retailing power quite seriously.

Of course, Amazon isn’t the only disrupter. Performing an autopsy on a decade of brick-and-mortar bankruptcies, we note many struggled with large debt burdens as privately owned companies. Using leveraged buyouts to gobble up a floundering business certainly has merits in a steady state environment. But in today’s rapidly evolving world of digitized retailing, servicing too much debt can be damaging if you aren’t also investing in new technology.

That’s been the case with US grocer Albertsons. A creature of leveraged buyouts, Albertsons’ private equity parent Cerberus rightly thought economies of scale were critical for survival in the age of Walmart. Since 2014, dozens of smaller US regional grocery chains have filed for bankruptcy, including Southeastern Grocers’ Winn-Dixie and Bi-Lo chains. To avoid a similar fate, Albertsons became the second largest traditional grocer behind Kroger after merging with

Safeway in 2015. But with US$12 billion in debt, Cerberus’ plans to unload Albertsons through an IPO have stalled.

It turns out that scale alone is not enough to succeed, as Kroger’s push into online grocery proves. We believe investments in technology are necessary to amplify economies of scale and offer more digital conveniences consumers are looking for these days. Kroger is taking these steps through ambitious acquisitions and partnerships. Last May, Kroger bought a minority stake in the UK online grocer Ocado, striking an exclusive deal to build 20 robotic ware-houses in the United States to service its online traffic. Using robots to pick and pack grocery orders should enable Kroger to shave off labor costs and improve margins. Kroger’s customers won’t ever interact with its warehouse robots, but its online shoppers in Scottsdale, Arizona, are already receiving their orders from Kroger’s fleet of self-driving cars. Kroger is testing driverless deliveries to gauge customer experiences before expanding to more stores.

Our Value team put Kroger under the microscope just after Amazon’s Whole Foods announcement, sensing a potential bargain. They think Amazon’s disruptive impact may create better share prices for some viable companies—whereas Amazon’s own growth story doesn’t make sense to them from a valuation perspective. In their eyes, Kroger is a survivor and potential thriver despite the Amazon threat, largely because of its scale and strategic investments in new technology.

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THE AMAZON EFFECT—SPANNING GROCERY, DRUGSTORE AND INSURANCE INDUSTRIES Exhibit 4: Share price declines following market-moving Amazon announcements

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Chart shows stock price history for some of the affected companies from date of announcement to 1 month post announcement date. Prices are normalized to 100 on date before announcement.

Source: Bloomberg. Historical stock prices are shown one month following an Amazon announcement. Prices normalized to 100 on day of announcement. For illustrative purposes.

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Announcement: Amazon to join JP Morganand Berkshire Hathaway to reduce health care costs in US.


yardsticks for Amazon.11 Simply put, these metrics aren’t a reliable snapshot of Amazon’s long-term profit potential, in our analysts’ views.

Case in point are Amazon’s growing profit margins over the past year. Operating profits were a record US$3.8 billion in last year’s fourth quarter— the fifth consecutive quarter that Amazon topped $1 billion of net income since 2017’s fourth quarter. Our US Growth analysts think Amazon’s margin expansion story is finally taking root, thanks to strong advertising revenues, AWS profit margins and selling more high-margin third-party merchandise.

Alibaba’s data-centric ecosystem Unlike Amazon’s recent positive profit momentum, Alibaba’s operating profits have faced headwinds from spending on businesses outside its core China retail marketplace, including logistics infrastructure, local food delivery services where it competes with a Tencent-backed rival, and Lazada in Asia. Profits from its “new retail” stores will likely take years to materi-alize. Agile competitors with deep pockets mean Alibaba needs to spend to keep existing customers happy and to lure new ones.

So how does Alibaba steer margins back in an expanding direction? Our Emerging Markets team sees a couple of avenues, starting with growing its cloud computing business in China. Alibaba also aims to help more brick-and-mortar retailers digitize their own back office supply chains through smart logistics, and by boosting front-end traffic by tapping into Alibaba’s deep pool of consumer data and cloud analytics. We see Alibaba less as a collection of e-commerce marketplaces and offline retail hubs, and more as a data-centric ecosystem that drives profits through digitization and technology, while generating better customer experiences.

Building warehouses to stay on top MercadoLibre is investing in shipping logistics and consumer incentives to shore up its commanding lead over competitors like Amazon. Taking a page out of Amazon’s playbook, MercadoLibre is building new ware-houses to serve as cross-docking locations. It receives products from merchants at one end and then turns around and delivers orders more efficiently to customers at the other end. Yet costs to build these fulfillment centers, plus free shipping incentives, have taken a noticeable bite out of profit margins in the past year.

Nevertheless, our Global Growth team is confident these investments can pay off by improving the customer experi-ence and by attracting more merchants.

The retail revolution is accelerating The reality of today’s digitized market-place means that not only has shopping changed dramatically in just a decade, the rate of change continues to accel-erate. It’s now easier for shoppers to get tailored items and access products more quickly and conveniently than ever before. Technology pioneers like Amazon, Alibaba and MercadoLibre are largely responsible for setting new standards in the world’s biggest markets—continually improving customer experiences by anticipating their preferences, lowering prices and delivering items faster. Plowing vast amounts of capital into new innovations (sometimes to the detriment of near-term profits), these companies are raising the bar for everyone by reshaping customer expectations. We believe each company bears close watching to understand where the retail landscape is heading next.

11. Price-to-earnings is a ratio for valuing a company that measures its current share price relative to its per-share earnings. Enterprise value is a measure of a company‘s total value, often used as a more comprehensive alternative to equity market capitalization. EBITDA, or earnings before interest, taxes, depreciation and amortization, is a measure of a company‘s overall financial performance and is used as an alternative to simple earnings or net income in some circumstances.


Primary contributors to this issue

Stephen H. Dover, CFA Head of Equities

Franklin Templeton Investments

Tek Khoan Ong, CFA Director of Research

Franklin Templeton Emerging Markets Equity

Purav A, Jhaveri, CFA, FRM Investment Strategy / Portfolio Manager

Franklin Templeton Investments

Katherine S. Owen, CFA

Portfolio Manager / Research Analyst

Templeton Global Equity Group

Dan H. Searle, CFA Research Analyst

Franklin Equity Group

Mary Killian Research Analyst

Franklin Equity Group

Franklin Templeton Thinks: Equity Markets highlights the global views our equity invest-ment teams have across developed and emerging economies, sectors and individual companies. Each quarterly issue spotlights fresh insights that our analysts and portfolio managers bring to active security research, examining risks and opportunities from both growth and value frameworks.


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All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Invest-ments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.

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Australia: Issued by Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services License Holder No. 225328), Level 19, 101 Collins Street, Melbourne, Victoria, 3000. Austria/Germany: Issued by Franklin Templeton Investment Services GmbH, Mainzer Landstraße 16, D-60325 Frankfurt am Main, Germany. Authorized in Germany by IHK Frankfurt M., Reg. no. D-F-125-TMX1-08. Canada: Issued by Franklin Templeton Investments Corp., 5000 Yonge Street, Suite 900 Toronto, ON, M2N 0A7, Fax: (416) 364-1163, (800) 387-0830, www.franklintempleton.ca. Dubai: Issued by Franklin Templeton Investments (ME) Limited, authorized and regulated by the Dubai Financial Services Authority. Dubai office: Franklin Templeton Investments, The Gate, East Wing, Level 2, Dubai International Financial Centre, P.O. Box 506613, Dubai, U.A.E., Tel.: +9714-4284100 Fax:+9714-4284140. France: Issued by Franklin Templeton France S.A., 20 rue de la Paix, 75002 Paris, France. Hong Kong: Issued by Franklin Templeton Investments (Asia) Limited, 17/F, Chater House, 8 Connaught Road Central, Hong Kong. Italy: Issued by Franklin Templeton International Services S.à.r.l. – Italian Branch, Corso Italia, 1 – Milan, 20122, Italy. Japan: Issued by Franklin Templeton Investments Japan Limited. Korea: Issued by Franklin Templeton Investment Trust Management Co., Ltd., 3rd fl., CCMM Building, 12 Youido-Dong, Youngdungpo-Gu, Seoul, Korea 150-968. Luxembourg/Benelux: Issued by Franklin Templeton International Services S.à r.l. – Supervised by the Commission de Surveillance du Secteur Financier - 8A, rue Albert Borschette, L-1246 Luxembourg - Tel: +352-46 66 67-1 - Fax: +352-46 66 76. Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. Poland: Issued by Templeton Asset Management (Poland) TFI S.A., Rondo ONZ 1; 00-124 Warsaw. Romania: Issued by the Bucharest branch of Franklin Templeton Investment Management Limited, 78-80 Buzesti Street, Premium Point, 7th-8th Floor, 011017 Bucharest 1, Romania. Registered with Romania Financial Supervisory Authority under no. PJM01SFIM/400005/14.09.2009, authorized and regulated in the UK by the Financial Conduct Authority. Singapore: Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E. 7 Temasek Boulevard, #38-03 Suntec Tower One, 038987, Singapore. Spain: Issued by the branch of Franklin Templeton Investment Management, Professional of the Financial Sector under the Supervision of CNMV, José Ortega y Gasset 29, Madrid. South Africa: Issued by Franklin Templeton Investments SA (PTY) Ltd which is an authorised Financial Services Provider. Tel: +27 (21) 831 7400 Fax: +27 (21) 831 7422. Switzerland: Issued by Franklin Templeton Switzerland Ltd, Stockerstrasse 38, CH-8002 Zurich. UK: Issued by Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. Authorized and regulated in the United Kingdom by the Financial Conduct Authority. Nordic regions: Issued by Franklin Templeton Investment Management Limited (FTIML), Swedish Branch, Blasieholmsgatan 5, SE-111 48 Stockholm, Sweden. Phone: +46 (0) 8 545 01230, Fax: +46 (0) 8 545 01239. FTIML is authorised and regulated in the United Kingdom by the Financial Conduct Authority and is autho-rized to conduct certain investment services in Denmark, in Sweden, in Norway and in Finland. Offshore Americas: In the U.S., this publication is made available only to financial inter-mediaries by Templeton/Franklin Investment Services, 100 Fountain Parkway, St. Petersburg, Florida 33716. Tel: (800) 239-3894 (USA Toll-Free), (877) 389-0076 (Canada Toll-Free), and Fax: (727) 299-8736. Investments are not FDIC insured; may lose value; and are not bank guaranteed. Distribution outside the U.S. may be made by Templeton Global Advisors Limited or other sub-distributors, intermediaries, dealers or professional investors that have been engaged by Templeton Global Advisors Limited to distribute shares of Franklin Templeton funds in certain jurisdictions. This is not an offer to sell or a solicitation of an offer to purchase securities in any jurisdiction where it would be illegal to do so.

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