Spend Is a Four-Letter Word

 | Apr 30, 2014 | 8:11 AM EDT
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Let's talk about two anathemas to this quarterly earnings period: spending and competition.

We know that companies that miss or guide down on any level, whether it be top or bottom line, have just become stock roadkill, bloated bodies on the sides of the highway waiting for short sellers to get them off the road for a decent burial or at least a dynamite cremation.

We heard the spend-and-competition gambit last night in eBay (EBAY) and it pretty much took your breath away. When you get as monumental a decline in eBay, both in terms of auctions and in terms of the once-fast-growing StubHub, it sends chills down your spine. It's pretty obvious that an auction-value decline of 9% is going to lead to some spend to get that thing going again and the "material deceleration" at StubHub because of "competitive dynamics," sent chills down my spine.

But they must lower fees to protect the franchise. Marketplace margins, still robust at 39.7%, were down 240 basis points from last year because of investments in "trust and marketing" and a lowering of fees. I didn't like the marketing services revenue number, especially in the light of needing to spend to grow.

Or how about 3D Systems (DDD)? Piper Jaffray, which said the company had to sacrifice near-term margin expansion to grow its top line. Why? I thought it had a big moat around the franchise?

The spending at the supermarket level to build out the organic and natural lines is pretty daunting, too. So many companies want to take on Whole Foods (WFM) and its once-dominant position that you have to recognize margins can't stay the same for WFM and its stock price is certainly telling you that. You certainly don't want to own Fresh Market (TFM) or Fairway (FWM) under those circumstances.

I spent hours at Under Armour (UA) yesterday and while it is still a David to Nike's (NKE) Goliath story, it's coming after that company in a very major line and it's not just doing it on technology, it's doing it on price. I can't imagine what can happen to Lululemon (LULU) as UnderArmour simply wants to own that business.

I was on the Spirit Airlines (SAVE) conference call yesterday and while I considered the quarter excellent, a major topic in the Q&A was potential competition from discounter Frontier. No, thank you!

Go listen to the Twitter (TWTR) call. That company's spending like crazy to protect its franchise. I had no idea that it even had to do that until its lackluster conference call last night. Too much spend, not enough revenue growth. Where's the leverage for those dollars. 

Or how about this Rubicon Project (RUBI)? This is a company that competes in the programmatic ad business, trying to help buyers and sellers of publishing ads to meet on exchanges. It's going to have competitive challenges from not one, but two soon-to-be well-financed competitors that are slated to go public. I don't see much that's proprietary there, which means margins have to come down.

The software-as-a-service companies have experienced decent margins, but you have to wonder how long that can last when all Oracle (ORCL), IBM (IBM) and Microsoft (MSFT) seem to want to talk about is a suite of cloud products that could come after all of these little companies that just came public. I don't see the little guys being able to maintain their competitive edge and I don't know how much they can really spend.

And isn't it logical that Gilead (GILD) will have to cut price on its hepatitis C cure once Merck (MRK) and AbbVie (ABBV) get their similar pills approved by the FDA?

Companies that have to spend and compete are an anathema to what this market wants to hear right now. Companies that are taking share without a lot of spend or companies that don't need to protect their franchises because the moats are high or companies that have been able to actually cut spend because decisions seem to have been made in the marketplace to diminish competition -- the larger airlines and the carbonated soda business, to use two examples -- are winners. But those seem to be a dwindling and endangered species coming out of the last few quarters we've heard, particularly in the technology business. Just not what we wanted to hear at a time when the Nasdaq's rolling over.

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