B14| Saturday/Sunday, August 17 - 18, 2019 ** THE WALL STREET JOURNAL.**
Nvidia Chips Away
At Its Long Game
Investors expect a strong year-end recovery
A self-driving car in Nvidia’s booth at the CES convention in Las Vegas.JUSTIN SULLIVAN/GETTY IMAGES; STORM TROOPER: JEFF GRITCHEN/ZUMA PRESSChina Worries Cloak
Burberry in Uncertainty
Shares of the British luxury brand are overpriced,
given the risks to the company’s turnaround planthe new creative approach and a
better handbag range—a more lu-
crative category than clothing—can
lift Burberry’s comparatively low
16% operating margin.
But investors have gotten car-
ried away. Burberry’s shares have
recently been pricing in sales
growth of 5% to 6% in the second
half of the company’s financial
year, which runs through March,
according to calculations by Bern-
stein. Meeting these high expecta-
tions will be tough. An immediate
problem is weak spending in Hong
Kong, where antigovernment dem-
onstrations are stretching into
their 10th week. A dozen or so
boutiques in the city account for
6% of Burberry’s revenue.
Moreover, the brand is more reli-
ant on Asian spenders than its ri-
vals. For the quarter through June,
sales in Europe were driven by
tourists rather than locals, while
business in its Americas region was
flat. As the brand is still removing
products from less-salubrious de-
partment stores in the U.S., growth
there should remain subdued. So
while signs that Mr. Tisci’s new col-
lections are going down well with
Chinese shoppers are positive, Bur-
berry has little to fall back on if
buyers tighten their belts.
Granted, China’s luxury spenders
have proven to be a resilient lot so
far this year, despite the wider
slowdown in consumer demand for
mass-market goods like electronics
in the Chinese market. But this
could change as the weaker yuan
makes European luxury goods more
expensive. The current Sino-Ameri-
can trade tensions are unpredict-
able—on Tuesday the U.S. delayed
the introduction of its latest tar-
iffs—but at some point they seem
likely to take a toll on the con-
sumer confidence of China’s elite.
Burberry’s stock, which hit a re-
cord last month, is still priced as if
Chinese shoppers could be taken
for granted. Investors’ optimism
may have only just started to sour.
—Carol RyanIt isn’t an easy time for compa-
nies that depend on selling expen-
sive products to Chinese consumers.
Trench-coat maker Burberry is
particularly exposed to the chill
winds blowing from Asia, even by
the China-centric standards of the
European luxury sector. Chinese
shoppers contribute roughly two-
fifths of Burberry’s revenue globally,
and many of them buy their prod-
ucts in protest-ridden Hong Kong.
The stock was immune to inves-
tors’ wider worries about China
until this month, when the whole
sector was hit by President
Trump’s announcement of a 10%
tariff on an additional $300 billion
of Chinese goods followed by
China’s decision to let its currency
devalue. Even now, after a 10% fall
in the month to date, Burberry
stock appears expensive on 23
times expected earnings—one-
tenth above its five-year average.
The brand is a little over midway
through a multiyear makeover. Last
year Chief Executive Marco Gob-
betti hired a new lead designer,
Riccardo Tisci, best known for his
work at Givenchy. The hope is that
Percentage of total sales to
mainland Chinese nationals
Source: HSBC
Prada
Burberry
Gucci
LouisVuitton
Moncler
Hermès
Tod’s
39%373533322929We’ve gone from the face that
launched a thousand ships to
those that prompt a billion clicks.
Tampering with the raw ingredi-
ents for such online popularity
could cost a social-media company
like Facebook’s Instagram a great
deal of money.
Influencers—social-media celeb-
rities who can spark buying deci-
sions—are akin to huge businesses
in their own right. Companies pay
some $2 billion annually to indi-
viduals who promote their brands
on Instagram alone, according to
Instagram tool Hopper HQ. Real-
ity-television star and billionaire
Kylie Jenner purportedly earns
$1.27 million each time she shares
a captioned photo with her more
than 143 million followers. Kim
Kardashian West earns just shy of
$1 million per post on the plat-
form, while siblings Khloe Kar-
dashian and Kendall Jenner rake in
hundreds of thousands of dollars
each, according to Hopper HQ.
You can’t buy stock in a Kar-
dashian—at least not yet—but you
can own the next best thing. Ce-
lebrities have established a symbi-
otic relationship with Instagram,
which Facebook bought in 2012 for
$1 billion. Various estimates have
pinned its value at as much as 100
times that purchase price today.
That calculation may be more than
an academic exercise if political
pressure on technology giants ever
causes them to be broken up.
But there is a more immediate
question, too. Under pressure, Face-
book has been working this year to
make significant changes to its
platforms to focus on privacy and
safety for its users. In a recent test,
Instagram has been hiding publicly
viewed “likes” in several markets.
Though it was touted as a way to
decrease social pressure and im-
prove users’ happiness, the test
threatens to upend influencers’
business models and could boomer-
ang to hurt Facebook itself.
Instagram says it doesn’t re-
ceive compensation directly for
the sales it enables through host-
ing influencers’ posts. Instead, it
basks in the traffic they bring. The
more people engage on their plat-
form, the greater its value to ad-
vertisers.
Under the test, influencers can
still view their own likes—key to
demonstrating their value to the
brands that bankroll their fabulous
lives. The problem, though, is that
popularity begets popularity. In an
article published in May in Psychol-
ogy Today, Pamela Rutledge, a pro-
fessor of media psychology at
Fielding Graduate University in
Santa Barbara, Calif., explains that
likes are a form of social proof—the
more likes, the more likable some-
thing is and the more it is worth.
Facebook said last year that In-
stagram had reached a billion
monthly active users. According to
a 2019 survey from Pew Research,63% of users check in every day,
with 42% checking in multiple
times a day. There are 4.2 billion
likes a day on Instagram, accord-
ing to social-media analytics com-
pany Sprout Social, suggesting the
feature itself is well-liked. Cement-
ing the concept of likes as social
proof, the most-liked photo ever
on Instagram is one of a brown
speckled egg, which has racked up
54 million since January, when it
became the sole post from
@world_record_egg, an account
with the expressed goal of taking
the top spot from Kylie Jenner.Tweaking how Instagram works
might cost the Kardashians and
many lesser lights in the like-o-
sphere some profit, but influencers
aren’t likely to flee unless Insta-
gram suddenly starts charging
them—something it hasn’t indi-
cated it would do. Other than
Facebook itself, there is no com-
peting platform that offers compa-
rable reach.
Still, diluting Instagram’s value
proposition could cause bigger in-
fluencers like the Kardashians to
spend more of their time else-
where. These stars have their ownInstagram Is Breaking Hearts
The business of being a paid ‘influencer’ is under threat as
the social-media platform focuses on privacyCost per Kardashian
post on InstagramSource: Hopper HQKardashianTotalKylieJennerKimKardashianWestKendallJennerKhloeKardashian$3.39 million1. 270. 910. 610. 60HEARD
ON
THE
STREETFINANCIAL ANALYSIS & COMMENTARY
YouTube channels, television
shows and brands. And while there
is certainly no shortage of con-
tent—with some 95 million photos
and videos posted on Instagram
daily, according to marketing com-
pany Word Stream—content from
anonymous people may be less ex-
citing and compelling to users
overall. This could, in turn, hurt
Facebook’s business. The average
user spends 27 minutes a day on
Instagram, according to eMar-
keter—about 10 minutes more
than the average American spends
reading. Time is literally money
when it comes to ad dollars.
Much as it is unclear whether
hiding likes will boost or hurt self-
esteem, it remains to be seen
whether fewer likes could equal
less engagement overall on the
platform. That is something Insta-
gram will no doubt be monitoring
in its test markets before it makes
any permanent changes. The result
may tell investors just how critical
influencers are to Instagram’s
model and how interesting users
will find lesser lights to be.
It was Andy Warhol who pre-
dicted that “in the future, every-
one will be world famous for 15
minutes.” It seems for Instagram
to lessen reliance on its stars, that
prophecy is paramount.
—Laura Forman
and Lauren Silva Laughlin DOMENIC BAHMANNOVERHEARD
Not everything is proceeding
as Robert Iger has foreseen.
“I’ve been doing earnings
calls for a long time and this is
one of our more complicated
ones,” the Walt Disney chair-
man and chief executive said
during Disney’s quarterly con-
ference call this month.
Disney is betting big on Star
Wars to bring people into its
parks and onto its forthcoming
streaming service. It missed ana-
lyst estimates in the fiscal third
quarter partly because of these
outlays, causing a 7% decline in
its share price the following day.
The “Star Wars: Galaxy’s
Edge” attraction at Disneyland
Park is operational. Yet early
traffic has been muted. The
company blames itself, in a way,
claiming its own promotion of
the park sparked “tremendous
concern” about crowds, actually
deterring visitors. Higher prices
for park tickets and local hotels
surely didn’t help either.
Fortunately, Disney has said
its Disney+ streaming service
will be relatively cheap at $6.99
a month when it launches in
November. The service will
compete against Netflix, relying
on Star Wars, Marvel and other
Disney properties. Mr. Iger no
doubt believes investors are un-
derestimating the power of
these franchises.
—Laura FormanVisitors
haven’t
come out
in force to
the new
attraction.For Nvidia, no bad news
counted as good news.
The once-hot company has been
one of the worst-performing chip
stocks this year. Its current market
value of about $90 billion is barely
half its peak from just 10 months
ago.
Blame a perfect storm of
bloated inventories of graphics
chips left over from the crypto-
mining boom and a major slow-
down in capital spending by cloud
giants that use Nvidia’s processors
in their data centers.
Escalation of the trade fight
between the U.S. and China
hasn’t helped the mood around
chip stocks either.
That set the stage for good-
enough results for Nvidia’s fiscal
second quarter, reported late Thurs-
day. Revenue fell 17% year over year
to about $2.6 billion, which was still
a bit better than the 18% drop ex-
pected by analysts.
Operating income of $802 million
was about 7% ahead of Wall Street’s
targets.
Nvidia’s forecast of $2.9 billion
in revenue for the current quarter
was a bit light, coming about 3%
below analysts’ targets.But the company also projected
a notable improvement in operat-
ing margin for the period.
That suggests that its pricing
power is returning following a few
quarters spent trimming inventory.
Nvidia’s share price rose 7.3% on
Friday following the announce-
ment.
To be sure, Nvidia still has a lot
of work ahead. Data-center reve-
nue logged a record 14% drop to
$655 million in the quarter. This
segment makes up only about a
quarter of Nvidia’s total revenue,
but it is closely watched by inves-
tors given the importance of artifi-
cial-intelligence systems at cloud-
computing giants.
Data-center sales will need a
strong recovery in the fourth quar-
ter just to keep the overall busi-
ness flat with last year.
The same holds for the com-
pany’s flagship videogaming seg-
ment that sells graphics proces-
sors designed for gaming PCs.
Both scenarios are plausible but
far from certain.
Nvidia isn’t only competing
against other chip makers but also
its own recent high score.
—Dan Gallagher