Top 10 Predictions for 2016

In my forecast of 2015 trends I wrote:

 “I’ve been very lucky to have a history of correctly predicting trends, especially in identifying stocks that would outperform. I say lucky because even assuming one gets the analysis right, the prediction can still be wrong due to poor management execution and/or unforeseen events. Last year I highlighted 10 trends that would occur in 2014 and I’m pleased that each proved accurate (see 2014 Predictions). Rather than pat myself on the back for past performance, my high-risk, A-type personality makes me go back into the fray for 2015. Last year’s highlighted stocks, Tesla and Facebook, were up 48% and 43%, respectively, from January 3 to December 31, 2014 vs. 15% for the Nasdaq and under 13% for the S&P 500. This year, I’ll identify more than two stocks to watch as I am probably over-confident due to past success. But because I’m not doing the level of work that I did on Wall Street, there is significant risk in assuming I’m correct.”

As I discussed in the last post I got even luckier in 2015 as my highlighted four stocks had average appreciation of 86% while the broader market was nearly flat. As we saw with the Golden State Warriors on December 12th, all winning streaks have to come to an end so bearing that in mind, I wanted to start with a more general discussion of 5 stocks and why I chose to highlight three and back off of two others (despite still liking their stories). The two stocks that I recommended last year that I’m not putting on the list again are Netflix and Amazon. The rationale is quite simple: neither is at the same compelling price that it was a year ago. Netflix stock, as of today, is up over 100% year/year while its revenue increase is under 25% and profit margins shrank. This means that the price-to-revenue and price-to-earnings multiple of its stock is about twice what it was a year ago. So, while I continue to like the long term fundamentals, the value that was there a year ago is not there today. Amazon is a similar story. Its stock is currently up over 100% year-over-year but revenue and profit growth for 2015 was likely around 20%. Again, I continue to believe in the long term story, but at this share price, it will need to grow 20% per year for three more years for the stock value to be what it was a year ago.

My two other highlighted stocks from last year are Facebook and Tesla. At today’s prices they are each at a lower price-to-revenue multiple than a year ago (that is, their stocks appreciated at a slower pace than revenue growth). But, in both cases, the fundamentals remain strong for another solid growth year (more below on these) and I would expect each to outpace the market. I’ll discuss my final (riskiest) stock pick below.

In each of my stock picks, I’m expecting the stocks to outperform the market. I don’t have a forecast of how the market will perform so in a steeply declining market, out performance might occur with the stock itself being down (but less than the market). So consider yourself forewarned on a number of accounts.

We’ll start with the three stock picks and then move on to the remainder of my 10 predictions.

  1. Facebook stock appreciation will continue to outpace the market (it is currently at $97/share). Most of the commerce companies in the Azure portfolio continue to find Facebook the most compelling place to advertise. Now many of the very large brands are moving more budget to Facebook as well. This shift to online and mobile marketing still has a long way to go and we expect Facebook revenue growth to remain very strong. In addition, Facebook has begun to ramp the monetization of other properties, particularly Instagram. If we start to see real momentum in monetization of Instagram, the market will likely react very positively as it exposes another growth engine. Finally, with the Oculus release early this year, we may see evidence that Facebook will become the early leader in the emerging virtual reality space (which was one of the hits at CES this year).
  1. Tesla stock appreciation will continue to outpace the market (it is currently at $193/share). Last year Tesla grew revenues an estimated 30%+ but order growth far exceeded that as the company remains supply constrained. The good news is that revenue growth in 2016 should continue at a very high level (perhaps higher than 30% year-over-year) and the stock’s price-to-revenue multiple is lower than a year ago. The new Model X has a very significant backlog (I’ve seen estimates as high as 25,000-30,000 vehicles). Since this would be incremental to Model S sales, growth could accelerate once capacity ramps. Additionally, both service revenue and sales of used Teslas are increasing as well. When this is added to distribution expansion, Tesla appears to have 2-3 years of solid revenue growth locked in. I’m not sure when the low priced vehicle will be announced (it is supposed to be in 2017) but a more modest price point for one of its models could increase demand exponentially.
  1. GoPro stock appreciation should outpace the market in 2016 (shares are currently at $10.86). On the surface this may appear my riskiest prediction but there are solid reasons for my thoughts here. I believe investors are mistakenly comparing GoPro to a number of tech high fliers that collapsed due to valuations based on “air”. GoPro is far from that. In fact, I believe it is now a “value” play. To begin, unlike many tech high fliers, GoPro is profitable and generates positive cash flow. Its current book value is over $6 per share (of which $3.73 is cash with no debt). It is trading at less than 1x revenue and about 15x 2016 earnings estimates. Despite the announced shortfall expected in q4 and a number of downward revisions, revenue should still be up about 15% in 2015. While the current version of its camera has failed to meet expectations (and competition is increasing), the brand is still the leader in its space (action video). If new camera offerings advance the technology, this could help GoPro resume growth in the video arena. The brand can also be used to create leverage in new arenas. The three that the company has targeted are: content, drones and virtual reality. Of the three, I would significantly discount their ability to create a large content revenue stream and believe virtual reality products may prove difficult (and even if successful, will take multiple years to be meaningful). However, the company is very well positioned to earn a reasonable share in the UAV/drone market (which was about $1.5B last year and could grow 50-100% in 2016). The primary use of drones today is for photography and video and the majority of the ones we saw at CES were outfitted with a GoPro camera. Given the GoPro brand and distribution around action video, I believe that, if they are able to launch a credible product by mid-year, the company will be well positioned to experience reasonable growth in H2 2016 and the shares should react well.

The remaining predictions revolve around industry trends rather than stocks:

  1. UAV/Drones will continue to increase in popularity. In 2015, the worldwide drone market reached about $1.5B and there is no sign of slowing growth. When I think about whether trends will continue, I base my analysis on whether there are valuable use cases. In the case of drones there are innumerable ones. We’ll save the detailed explanation for a full post but I’ll list several here:
    1. Photography: this is a major use case for both consumers and professionals, namely being able to get overhead views of terrain either in photos or in video.
    2. Security: as an offshoot of photography, drones offer the potential of having continuous monitoring of terrain from an aerial view. This enables intrusion detection, monitoring, and tracking.
    3. Delivery: although current drones are not yet able to carry significant payloads, they are close to having the ability to follow a flight path, drop off a small package and then return. As innovations in UAV hardware and battery technology continue, delivery will become more of a reality in the future (which companies like Amazon, Google and others are counting on). This will also require some type of monitoring of airspace for drones to prevent crashes.
    4. Consumer: consumers will purchase drones in droves not only for the simple pleasure of flying them but also for various types of competitions including racing, battling and obstacles.
  1. Political spend will reach record levels in 2016 and have a positive impact on advertising revenue. Political advertising is expected to reach a record $11.4 billion in 2016, up 20% from the previous presidential election year. While the bulk of spending is forecast to go to TV, 2016 will be the first election year in which digital ad spending will exceed $1 billion (and if the candidates are savvy may be even higher). Adding 2015 spending, total political advertising in this election cycle could total $16.5 billion or more. About 50% of the total spending typically goes for the national election and the other half to backing candidates and issues in local races. During the 2015-16 election cycle, $8.5 billion is expected to be spent on broadcast TV, with $5.5 billion coming from national races and $3.1 billion spent on state and local contests. Cable TV is forecast to see $1.5 billion in spending, with $738 million coming from the national contest and $729 million from local races. Online and digital spending is forecast to total $1.1 billion, with $665 million going for national races and $424 million spent on local contests.[1]
  1. Virtual/Augmented Reality will have a big year in 2016: With the general release of Oculus expected in 2016, we will see an emergence of companies developing content and use cases in virtual reality. Expect to see the early beginnings of mainstream adoption of virtual reality applications. In addition, augmented reality products were heavily on display at CES and we think they will begin to ramp as an alternative to virtual reality. Both virtual reality and augmented reality are similar in that they both immerse the user but with AR, users continue to be in touch with the real world while interacting with virtual objects. With VR, the user is isolated from the real world. For now, expect VR to remain focused on entertainment and gaming while AR has broader applications in commercial use (i.e., real estate, architecture, training, education) as well as personal use.
  1. Robotic market will expand to new areas in 2016: Outside of science fiction, robots have made only minimal progress to date in generating interesting products that begin to drive commercial acceptance (outside of carpet cleaning, i.e. the Rumba). This year could mark a change in that. First, carpet cleaning robots will expand to window cleaning, bathtub cleaning and more. Second, robots will be deployed much more generally for commercial applications (like they already are in the Tesla factory). And we will also see much more progress in the consumer entertainment applications highlighted by the emergence of actual giant robots that stage a monumental battle akin to ones previously only created visually in movies.
  2. A new generation of automated functionality will begin to be added to cars. Tesla has led the way for this and already has a fully automated car on the market. Others are now attempting to follow and perhaps even surpass Tesla in functionality. In addition to the automation of driving, the computerization of the automobile has led to the ability to improve other capabilities. One demonstration I saw at CES was from a company called Telenav. They gave a proof of concept demonstration of a next gen GPS. Their demonstration (of a product expected to launch in Q2 or Q3) showed a far more functional GPS with features like giving the driver alternate routes when there are traffic problems regardless of whether route guidance is on as it determined where the driver was going based on tracking driving habits by day of the week. Their system will also help you buy a cup of coffee in route, incorporate messaging with an iPhone (with the drivers voice converted to text on the phone and vice versa) for communicating with someone you’re picking up, helping you find a garage with available spots, etc. all through the normal interface. Telenav is working as an OEM to various auto manufacturers and others like Bosch are doing the same. And, of course, several of the car manufacturers are trying to do this themselves (which we believe will lead to inferior systems).
  3. The Internet of Things will further expand into kitchen appliances and will start being adopted by the average consumer. We’re going to see the launches of smart refrigerators, smart washing machines, ovens, etc. Earlier this month, Samsung released its new Family Hub refrigerator which uses three high quality cameras inside the fridge to manage groceries, identify foods you have or need, and track product expiration dates to cut down on waste. It also has a screen on its door that can interface with other devices (like an iphone) to find and display the current days schedule for each member of the household, keep a shopping list and more.
  4. Amazon will move to profitability on their book subscription service and also improve cloud capex. Amazon launched its book subscription service with rapid customer acquisition in mind. Publishers were incentivized to include their titles as the company would pay the full price for each book downloaded once a portion of it was read. This meant that Amazon was paying out far more money than it was taking in. We believe Amazon has gone back to publishers with a new offering that has a much more Amazon-favored revenue share which results in the service moving from highly unprofitable to profitable overnight. The Amazon cloud has reached a level of maturity where we believe the cash needed for Capex is now a much smaller portion of revenue which in turn should improve Amazon cash flow and profitability.

 

 

 

 

[1] http://www.broadcastingcable.com/news/currency/political-ad-spending-hit-114b-2016/143445

Recap of 2015 Predictions

Our forecasts for 2015 proved mostly on the money (especially for stocks). For context, the S&P 500 was down very slightly for the year (0.81%) and the Nasdaq was up 5.73%. I’ve listed the 2015 stock picks and trend forecasts below and give my evaluation of how I fared on each one.

  1. Facebook will have a strong 2015. At the time we wrote this Facebook shares were at $75. The stock closed the year at roughly $105, a gain of 40% in a down market. Pretty good call!
  2. Tesla should have another good year in 2015. At the time we wrote this, Tesla shares were at $192. They closed the year at roughly $241, a gain of 25%. I’m happy with that call.
  3. Amazon should rebound in 2015. At the time we wrote this, Amazon was trading at $288. It closed the year at $682, a gain of 137%. Great call but still trailed my next one.
  4. Netflix power in the industry should increase in 2015. At the time we wrote this, Netflix was trading at $332 but subsequently split 7 for 1 making the adjusted price just over $44/share. Since it closed the year at $116 the gain was 144% making Netflix the best performer in the S&P for the year!

The average gain for these 4 stock picks was about 86%. The remaining predictions were about trends rather than stocks.

  1. Azure portfolio company Yik Yak, will continue to emerge as the next important social network. I also mentioned that others would copy Yik Yak and that Twitter could be impacted (Twitter stock was down in 2015). Yik Yak has continued to emerge as a powerhouse in the college arena. After attempting to copy Yik Yak, Facebook threw in the towel. In November, Business Insider ranked leading apps with the highest share of millennial users. Yik Yak was at the top of the list with 98% indicating its importance among the next generation.
  2. Curated Commerce will continue to emerge. This trend continued and picked up steam in 2015. Companies mentioned in last year’s post, like Honest Company, Stitchfix and Dollar Shave Club all had strong momentum and have caused traditional competitors like Gillette, Nordstrom and others to react. Additionally, Warby Parker and Bonobos also emerged as threats to older line players.
  3. Wearable activity will slow. I had expected Fitbit and others to be replaced by iphone apps and that still has not occurred. On the other hand, the iWatch has fallen short of expectations. This is not a surprise to me despite the hype around it. Still, this prediction was more wrong than right.
  4. Robotics will continue to make further inroads with products that provide value. I also highlighted drone emergence in this forecast. We have seen robotics and drones make strong strides in 2015, but regulatory hurdles remain a real issue for both consumer and B2B drone companies.
  5. Part-time employees and replacing people with technology will continue to be a larger part of the work force. This forecast has proven valid and is one reason why employment numbers have not bounced back as strongly as some expected from the 2008/2009 recession.
  6. 3D printers will be increasingly used in smaller batch and custom printing. We have seen this trend continue and even companies like Zazzle have begun to move part of their business into this arena to take advantage of their superior technology and distribution.

I also mentioned in the post that the Cleveland Cavaliers would have a much better second half of the season if LeBron remained healthy. At the time their record was 20 wins and 20 losses. This proved quite accurate as they were 33 and 9 for the rest of the season.

I’ll be making my 2016 predictions in another week or so but it may be hard to match last year!

Next Gen Selling vs Old (or “Traditional”) Methods

In this post I want to compare the buying experiences I’ve had recently when purchasing from an older generation company vs a newer one. I think it highlights the fact that ecommerce based models can create a much better buying experience than traditional brick and mortar sellers when coupled with a multi-channel approach. The two companies I want to highlight are Tesla (where my wife recently purchased a car) and Warby Parker (where I recently bought a pair of glasses). I’ll compare them to Mercedes and LensCrafters but you should understand it almost doesn’t matter which older gen companies I compared them to, so just consider the ones I’ve chosen (due to recent personal experience) as representative of their industries.

Controlling the buying experience

Warby Parker began opening retail “Guideshops” a few years ago. I recently went into one and was very pleased with the experience. They displayed all the frames they have and there were only two price categories which included the prescription lenses and the frames, $95 and $145. I selected a frame, went over to the desk and received assistance in completing the transaction. The person assisting me took one measurement of my eyes and then suggested I get slightly better lenses for a charge of $30 which I think was only necessary due to my particular prescription. There were no other charges, no salesperson, no other upsells, no waiting while the glasses are being made. Once I paid by credit card, the glasses were put in their cue to be made at their factory and shipped to my home within 10 days (with no shipping charge) and my receipt was sent by email rather than printed. From the time I entered the store until I left was about 10 minutes.

Compare this experience to buying a pair of glasses at LensCrafters. At LensCrafters the price range of frames is all over the map without any apparent reason except many carry a designer brand logo (but are unlikely to have been designed by that designer). To me the Warby Parker frames are as good or better looking as far more expensive ones at LensCrafters.  Even if you select a frame at LensCrafters that costs $95-$300 or more, the lenses are not included. A salesperson then sits with you and begins the upselling process. Without going into all the details, suffice it to say that it is very difficult to discern what is really needed and therefore it is hard to walk out of the store without spending $100-$300 more than the cost of the frame. Further, since the glasses are made at the store you come back in a few hours to pick them up (of course this is a positive if you want them right away; I usually don’t care).  I have typically spent well over an hour in the buying process plus going for a coffee for the 2 hours or so it took for them to make the lenses.

Tesla has been very adamant about owning and controlling their physical retail outlets rather than having their cars sold by independent dealerships. This gives them multiple advantages as they completely control the buying experience, eliminate competition between dealers, reduce distribution cost and can decide what the purpose of each location is and how it should look. They have also eliminated having cars to sell on the lot but instead use an ecommerce model where you order a car exactly the way you want it and it gets produced for you and brought to the Tesla physical location you want for pickup. Essentially, they have designed two types of physical stores: one that has a few demo models to enable test drives and one that also has a customer service department. This means that the latter is a much smaller size than a traditional car dealership (as it doesn’t need space for new car inventory on the lot) and the former is much smaller than that. The showroom approach occupies such a small footprint that Tesla has been able to locate showrooms in high foot traffic (high cost per foot) locations like malls.  In their sites at the Stanford Mall and on Santana Row (two of the most expensive per square foot), Tesla kept the cars for test drives in the parking lots (at a fraction of the cost of store footage). When my wife decided to buy her second Tesla (trading in the older one) we spent about an hour at the dealer as there was no negotiation on price, the car could be configured to her exact specification on a screen at the dealership (or at home) and would be manufactured for her. There were no upsell attempts, no competing dealers to visit, and really no salesperson but rather a facilitator (much like at Warby Parker) that answered questions.

I bought my new car from Mercedes and had a much less pleasant buying experience. It starts with the fact that the price on the car isn’t the real price. This means that one needs to try to go to multiple dealers as well as online to get a better handle on what the real price is as the dealers are difficult to trust. Each dealer now has its own online person (or team) but this is actually still buying from a dealer. There is also a strong encouragement to buy a car in inventory (on the lot) and the idea of configuring the way one wants and ordering it is discouraged. The cars on the lot are frequently configured with costly (highly profitable) options that are unnecessary so that even with a discount from list one typically spends more than ordering it with only options you want and paying closer to list. After multiple days (and many, many hours) spent online and visiting dealerships I decided to replicate the Tesla concept and order a 2016 model to be built exactly how I wanted. Because I spent many hours shopping around, I still was able to get a price that was an extra $4,000 off list from what I had been offered if I bought a 2015 off the lot. The car was the color I wanted, only had the options I wanted and would have a higher resale value because of being a 2016. Since the list price had not increased and there were no unneeded options on the car I actually saved about $10,000 vs taking one off the lot with the lower discount even though all additional options I wanted were bundled with it.

Receiving the product

In the Warby Parker example, the glasses were shipped to my home in a very well designed box that enhanced their brand. The box contained an upscale case and a card that said: “For every pair of glasses sold, a pair is distributed to someone in need.” Buying at LensCrafters meant returning to the store for the glasses. The case included was a very cheap looking one (creating an upsell if one wanted a nicer case) and there was no packaging other than the case. However, I did get the glasses the same day and someone sat with me to make sure they fit well on my ears (fit was not an issue for me for the Warby Parker glasses but could be for some people).

On the automobile side, the car pickup at Tesla was a much better experience than the one at Mercedes. At Tesla, my wife and I spent a little over an hour at the pickup. We spent about 20 minutes on paperwork and 45 minutes getting a walk through on how various options on the car work. There were no attempts to upsell us on anything. At Mercedes the car pickup experience took nearly 4 hours and was very painful as over 3 hours of it was spent on paperwork and attempts at a variety of upsells. To be fair, we had decided to lease this car and that time occupied a portion of the paperwork. But the attempted upsells were extreme. The most ludicrous was trying to get us to buy an extended warranty when the included warranty exceeded the length of the lease. I could understand that it might be of value to some but, in our case, we told the lease person that we were only doing the lease so we wouldn’t own the car at the end of it. There were also upsells on various online services, and a number of other items. The time this took meant we did not have enough time left to go over all the features of the car. This process was clearly the way each person had been trained and was not a function of the particular people we dealt with. The actual salesperson who sold me the car was extremely nice but was working within a system that is not geared towards the customer experience as dealers can’t count on buyers returning even if they buy the same brand again.

Summary

There is a significant advantage being created by new models of doing business which control the complete distribution chain. Their physical locations have a much smaller footprint than traditional competitors which allow them to put their shops in high traffic locations without incurring commensurate cost. They consolidate inventory into a centralized location which reduces inventory cost, storage and obsolescence. They completely control the buying experience and understand that customer satisfaction leads to higher life time value of a customer.

 

SoundBytes

In my SoundByte post dated April 9, I discussed several of the metrics that caused me to conclude that Stephen Curry should be the 2014-15 season MVP. He subsequently received the award but it still appeared that many did not fully understand his value. I thought it was well captured in the post by looking at EFG, or effective shooting percentage (where a three point shot made counts as 1.5 two point shots made since its worth 50% more points), plus/minus and several other statistics not widely publicized. This year, Curry has become even better and I realized one other statistic might help highlight his value in an even better way, points created above the norm (PAN).

I define PAN as the extra points created versus an average NBA player through more effective shooting. It is calculated using this formula:

PAN= 2 x (the players average number of shots per game) x (players EFG- league norm EFG)

The league’s effective shooting percentage as of December 6 is 49.0%. Since Curry’s effective shooting percentage is 66.1% as of today date, the difference is 17.1%. Curry has been averaging 20.2 shots per game this year so his PAN = 2 x 20.2 x 17.1%= 6.9. This means Curry’s shooting alone (excluding foul shots) adds about 7 points per game to his team versus an average shooter. But, because Curry is unselfish and is often double teamed, he also contributes heavily to helping the team as a whole be more effective shooters. This leads to a team PAN of 14.0. Which means the Warriors score an extra 14 points a game due to more effective shooting.

Interestingly, when you compare this statistic to other league leaders and NBA stars, Curry’s contribution becomes even more remarkable. While Curry add about 7 points per game to his team versus an average shooter, James Harden, Dwayne Wade and Kobe Bryant are all contributing less than the average player. Given Curry’s wildly superior efficiency he is contributing almost twice as much as Kevin Durant.

Efficiency

With Curry’s far superior individual and team contribution to shooting efficiency, it is not surprising that the Warriors are outscoring their opponents by such record breaking margins.

To further emphasize how much Curry’s PAN impacts his team we compared him to Kobe Bryant. The difference in their PANs is 11.8 points per game. How much would it change the Lakers record if they had these extra 11.8 points per game and all else was equal? It would move the Lakers from the second worst point differential (only Philadelphia trails them) to 10th in the league and 4th among Western conference teams. Since point differential correlates closely to team record, that might mean the Lakers would be competing for home court in the playoffs instead of the worst record in the league!

Transforming Education

I was recently interviewed on NBC regarding education, market valuations and the accuracy of my forecasts of market trends made in 2001, among other things (www.pressheretv.com). Since the interview stimulated thoughts on the education market, I thought it was worth capturing a few in a post.

Why the quality of education in the United States trails

According to the World Bank, the United States leads the world in Gross Domestic Product, dwarfing anyone else. The U.S. GDP is 70 percent ahead of number 2 China, and almost 4 times the size of number 3, Japan. Given this wealth of resources, it is somewhat surprising just how low we rank in K-12 education among nations:

  1. 36th in mathematics for 15 year olds[1]
  2. 24th in reading for 15 year olds[1]
  3. 28th in science for 15 years olds[1]
  4. 14th in cognitive skills and educational attainment[2]
  5. 11th in fourth-grade mathematics and 9th in eighth-grade mathematics[3]
  6. 7th in fourth-grade science and 10th in eighth-grade science[3]

Part of the problem is that much of our priority as a country tends to emphasize short-term gratification over long-term issues such as investing in primary education. But the problem goes much deeper.

Classroom sizes have been increasing

Parents Across America, a non-profit organization committed to strengthening US public schools, point to studies that indicate that students (especially in grades K-3) who are assigned to smaller classes do better in every way that can be measured. Of 27 countries shown in a 2007 Organization of Economic Cooperation and Development (OECD) survey the United States ranked 17th in lower education classroom size, at 24.3 students per class. While other countries are investing in reducing classroom size, the U.S. is going in the other direction. Of 26 countries included in the OECD data from 2000 and 2009, 25 either decreased classroom sizes or kept them about the same. The United States was the only one that increased classroom sizes during that period.

Heterogeneous grouping exasperates the problem

In years gone by, U.S. classrooms were homogenous, as children were separated according to their skill level. This practice came under heavy criticism because it was viewed as discriminatory.  Throughout the United States, schools shifted to heterogeneous classes not because this technique was proven to be effective but rather in an effort to promote “political correctness.”

One teacher pointed out that “administrators love to boast that their school has heterogeneous grouping…but the administrators aren’t in the classroom, and they don’t see the disappointment on the faces of students when a new experience is presented and not everyone remains on the same page.”

Another teacher stated: “That ideal [of heterogeneous grouping], is an ideal….Truth is, in our experience the low-end kids tend to pull down the high-end kids, rather than the other way around. The class pace slows, and the teacher has to in effect devise two lesson plans for each period, one for the accelerated students and another for those who have low skills.”

In the past decade, many teachers have moved toward creating homogenous groups for reading and math within their heterogeneous classroom. One teacher who has 17 years of experience teaching in New Hampshire said that the second graders in her class showed up on the first day with a bewildering mix of strengths and weaknesses. Some children coasted through math worksheets in a few minutes, she said; others struggled to finish half a page. The swifter students, bored, would make mischief, while the slowest students would become frustrated, give up, and act out.

“My instruction aimed at the middle of my class, and was leaving out approximately two-thirds of my learners,” said this fourth grade teacher at Woodman Park Elementary in Dover, N.H. “I didn’t like those odds.”

So she completely reorganized her classroom. About a decade ago, instead of teaching all her students as one group, she began ability grouping, teaching all groups the same material but tailoring activities and assignments to each group. “I just knew that for me to have any sanity at the end of the day, I could just make these changes,” she said.

Flexible ability grouping, when used appropriately, works. According to a 2010 meta-analysis by Kelly Puzio and Glenn Colby, students who were grouped by ability within a class for reading were able to make up to an additional “half of a year’s growth in reading in one year.” Similarly, a 2013 National Bureau of Economic Research study of students who were grouped by ability found that the performance of both high- and low-performing students significantly improved in math and reading, demonstrating the universal utility of this tool, particularly as our classrooms become more academically diverse.

In summary, I believe that teachers have a more difficult time today than ever before. Their classes are getting bigger, their budgets are smaller, and heterogeneous grouping for the class means that effective teaching requires splitting the class into homogenous groups that each require a different lesson plan. Teaching parts of a class separately leads to less quality time that a teacher can spend with each group.  Without essential one-on-one instruction time, students suffer. If the class isn’t divided into 2 or 3 homogenous groups for lessons the students suffer even more, as they are denied level-appropriate learning.

The current system discriminates against the lower two-thirds of society

What I find surprising is that more people don’t realize that the practice of heterogeneous grouping is actually discriminatory to the lower two-thirds of society. Wealthier families typically live in neighborhoods with better school systems (with students that are more homogenous in skill levels); can readily afford tutors for their children; can provide after school access to learning centers; give their children prep courses for various subjects and for SATs; and if all else fails, send their offspring to a private school. Those in the lower two-thirds, economically speaking, have more limited access to additional help outside the classroom, cannot afford private school, often have parents without college education who are less able to help them, and may not even take an SAT prep course. Each of these put them at a disadvantage versus those that come from the upper economic strata of America.

I myself had hardworking parents who had not gone to college. My father was an immigrant and had to work before completing high school. But my education was accelerated because homogenous grouping was the norm at that time. This included being placed into a class of high performers who all received 3 years of curriculum in two years and therefore skipped a grade. I also was able to take a competitive test that enabled me to be accepted into Stuyvesant, one of the very high-end public high schools in New York City, geared toward helping public school students receive an honors course level education. I firmly believe that the access I had to be paired with students that were high achievers played a very important role in my subsequent success.

Technology provides a range of alternatives

One potential way to bridge the gap is by having multiple teachers in a classroom but I think this would be extremely unlikely to be funded out of constrained government resources. A second possibility is to provide teachers with the training and technical resources that could be used to enhance the student experience. All too often when technology is utilized, it is not integrated into curriculum and/or very complicated to use.  However, in recent years, there have been advances in K-12 education through the use of technology that is relatively easy to use and integrate to curriculum. For example, an Azure portfolio company, Education.com has created online workbooks and games that are aligned to the Common Core and are sold to parents and teachers for a starting price of $49 per year, making a subscription affordable to everyone.  Millions of teachers and parents in the K-5 levels now are basic members of the site, which offers weekly emails and limited educational resources that can be consumed free each month. With a Pro subscription, a teacher can print out unlimited workbooks, worksheets, and lesson plans for their class. The company estimates that roughly one billion worksheets are printed each year by parents and teachers for students to use. While teachers are likely to print worksheets that complement their current curriculum, parents can use printable worksheets and workbooks as supplemental material to help their kids in academic areas where their skills need strengthening. The fact that about 8 million parents and teachers come to the site in a peak month also indicates how strong the need is for these types of materials.

Education.com’s Brainzy program is a first step at individualized learning. It uses games to practice strategies for mastering core curriculum for students in kindergarten through 2nd grade. I have also met with a number of other companies who are creating products that can provide students with personalized learning tools. What Education.com and others are doing is still early steps in a process that I believe will lead to individualized education. If the United States keeps insisting on heterogeneous classroom composition but couples this with under-investing in education and requiring teachers to divide their time into separate lesson levels, then computer tools for the individual personalized instruction of each student appears to be the solution that can bridge the gap.

SOUNDBYTES

  • Stephen Curry picked up right where he left off last year scoring 40 points in the first game of the new season on strong shooting. Over the last 11 games, the Warriors remain undefeated behind Curry’s league leading scoring. After 11 games, Curry is averaging 33.4 points per game, a full 5 points ahead of the number two, James Harden, at 28.4 points per game. On Saturday night, in Curry’s 427th game, he surpassed the number of threes made by his father, Dell Curry, over his 1,083 game career. Earlier this year, we discussed why Curry deserved to be the clear NBA MVP and analyzed his scoring efficiency adjusting for his ability to hit threes from seemingly anywhere on the court (he was subsequently voted the MVP) .

Curry backup

  • Curry’s shooting has been even more dominant this year. Even based on “standard” statistics, Curry leads the pack not only in scoring average but also in field goal percentage. At 51.7% he trails only Blake Griffin, who has only taken 3 three-point attempts this season, in the top 10 scorers. Looking at “Field Goal Efficiency” (FGE%), a metric introduced in our previous post, that calculates a 3-point field goal as worth 1.5 times a 2-point field goal, we see Curry’s true dominance this season. Also, “True Shooting Percentage” (TS%) assumes that 1 of every 9 foul shots is part of a 3-point (or 4-point) play and therefore considers 2.25 foul shots as the same as one field goal attempt (since most pairs of foul shots replace a field goal attempt). Looking at these metrics we continue to see Curry’s clear dominance. Curry’s performance is off the charts as he is nearly 7 percentage points ahead of the second highest of the top ten scorers in FGE% and he is also well ahead of anyone else in TS%.
  • In a recent ESPN segment, Brad Daugherty called Curry “un-defendable”. If he continues to shoot the ball at this level, the road to a second consecutive championship and another MVP seems well paved.
[1] Organization for Economic Cooperation and Development (OECD), Program for International Student Assessment (PISA). 65 educational systems ranked.
[2] Pearson Global Index of Cognitive Skills and Educational Attainment compares the performance of 39 countries and one region (Hong Kong) on two categories of education: Cognitive Skills and Educational Attainment. The Index provides a snapshot of the relative performance of countries based on their education outputs.
[3] International Study Center at Boston College. Fourth graders in 57 countries or education systems took the math and science tests, while 56 countries or education systems administered the tests to eighth graders.

OmniChannel Selling

The latest trend in retail is the concept of “OmniChannel” selling. While many players have been engaged in this arena for some time, there has been acceleration in the practice. Online retailers are now attempting to find ways to add an in-store experience and many brands, larger retailers, and numerous smaller ones have added more of a push towards e-tail. Additionally, direct sales through TV (QVC, Home Shopping, etc.), telemarketing and consumer-to-consumer fill out the spectrum of options.

The concept of selling through multiple and diverse channels is not a new concept, but the increased integration of in-store and e-tail channels is becoming more sophisticated. With 93% of consumer sales still occurring offline, many e-tailers understand that a physical presence can help escalate sales. Similarly, with this percentage shrinking and with $1.6 trillion in e-commerce sales expected this year, brick and mortar cannot ignore the importance of being online. Earlier this year, Square, in partnership with Bigcommerce, announced a new integration that provides merchants with a simple and seamless way to expand their businesses online. Similarly, Shopify’s POS system allows physical retailers to easily sell online.

US retail sales

E-Tailers Move to Physical Retail

This post focuses on the trend of e-tailers moving into physical retail and when and why it can work. E-tailers fall into three categories: those that only sell other company’s brands, those that are creating their own brand, and those that sell other brands as well as their own.

The dominant player in the first category is Amazon. ver time, it has built an overwhelming network of distribution centers geared towards efficiently shipping one or more items to an individual consumer. Now it has begun experimenting with physical locations, the first of which opened on the Purdue campus in February with additional locations being planned on other college campuses. There are also reports that it will follow this with other types of store openings. Given its widespread distribution centers, the company already has significant capability to inexpensively pick and pack goods for an individual consumer. But, despite limiting most shipments to one zone, there is still a relatively large cost to deliver a single order to an individual household. If it can begin getting non-Amazon Prime customers to come to a convenient location for pickup (Amazon locker or store), shipping cost could be reduced quite a bit. Further, having physical locations will undoubtedly add to the company’s sales and its brand. Since it would not need to stock the stores the way a traditional retailer does, it could capture the efficiency associated with centralized inventory locations combined with the brick-and-mortar efficiency of shipping a large number of goods to one location (probably in an Amazon-owned truck). I expect to see a major expansion of Amazon into physical locations over the next 5 years.

Trading High Shipping Cost for Brick and Mortar Cost

In e-commerce companies that we know well, fulfillment (picking and packing) and shipping can be as much as 40% or more of COGS.  Moving to one’s own physical retail stores adds substantial cost but removes shipping cost. Most e-tailers now offer some version of free shipping, but whether the seller or the customer pays for shipping, it is a major factor. What this means is that such an e-tailer can spend that money on its own stores or by offering to discount its products to a third-party brick and mortar reseller without necessarily incurring any loss in gross margin dollars (of course a larger discount may be required). Even if gross margins are lower when partnering with a third party brick and mortar retailer, it can still be as profitable as the e-tailer’s online sales since  brick and mortar stores already attract many customers whereas online sales normally require a marketing spend to create greater volume.

The OmniChannel Approach for Branded Product

Amazon is in a unique position because of its size. Although there are other e-tailers of third-party products with sufficient size to open their own physical locations, the bigger opportunity to increase sales resides with e-tailers that have their own branded product. A great example of this is Warby Parker, an emerging brand in eyewear. About 2 ½ years ago it opened its first brick and mortar store in New York City. What it found is that this not only added to its client base through in-store purchases, but also drove additional online sales. Why would this occur? Besides the obvious fact that many people still prefer buying from a physical location, trying on a pair of frames and having them fitted to your needs improves the experience. The inability to do this online may have inhibited some customers from purchasing. But once you have had the opportunity to have eyeglasses fitted to your requirements, it is much easier to buy subsequent pairs online with the knowledge that the fit should be appropriate.  The same issue of good fit applies to shoes and clothes.

Fit is one reason why Bonobos, an online e-tailer of men’s clothes, began opening shops.  But unlike Warby Parker, the Bonobos shops are “Guideshops” (where clothing can be tried on and then ordered for delivery). By taking this approach, Bonobos keeps inventory centralized and the stores much smaller (only requiring one unit of each SKU) but gains the benefit of addressing people less comfortable with shopping online and also insuring that the clothes fit. By locating the shops in malls and other high traffic areas, Bonobos gains exposure to a fair amount of foot traffic making the stores another customer acquisition vehicle. Note that the stores we expect Amazon to open are essentially Guideshops but on a much larger scale.

Online Brands Partnering with Brick and Mortar Retailers Will Continue to Increase

Bonobos has also partnered with Nordstrom but in its case it’s simply as another brand offered in Nordstrom stores.  In August, Warby Parker announced their first retail partnership with Nordstrom. Once Nordstrom saw the benefits of OmniChannel brands, it acquired Trunk Club (another men’s clothing e-tailer). Subsequent to the acquisition, it began adding space in some of its stores for men to come in, get fitted and talk to a stylist about preferences. The stylist then acts as a personal shopper and picks Trunk Club clothes for the customer to try. This results in a much larger average order than online sales for Trunk Club. In this case the customer takes the clothes with him. Again, once this occurs, buying subsequent items online becomes easier as there is more confidence that the fit will be good. Now Trunk Club is entering the women’s clothing market to compete with the successful online brand, Stitchfix.

Shoes are even more difficult to buy without trying on than eyeglasses or clothes. As a result, Shoes of Prey, which offers women the ability to design their own custom shoes, has also opened Guideshops but in their case they are in known retailers like Nordstrom. This makes sense to me as I prefer buying my first pair of shoes in a store and “refills” online. And now most brands that once were only available in brick and mortar stores can be purchased online. For the first pair I sometimes try on 8-10 styles/sizes before finding one that satisfies my needs (this is a major problem for Zappos who appears to have about a 35% return rate. If I try to buy a second pair a few months later from the same store, odds are they won’t have it. Instead, it’s seamless to go online for the follow-on pair. With the acquisition of Trunk Club, Nordstrom has taken a strong initiative in blending the online/offline experience.

Notice the difference between Warby Parker and Bonobos versus Trunk Club. Warby Parker and Bonobos, in addition to being another brand at third party retailers, opened their own branded stores whereas Trunk Club began expanding into an existing major retailer (albeit its new parent) as a service to customers. Opening your own stores can involve substantial capital expenditures and large ongoing operating cost. The alternative of getting one’s online branded product to be carried by a retailer reduces risk and saves substantial fixed cost. But, there’s a trade-off; the brand gives up margin as the third-party retailer will be buying at a discount. Merely getting into stores does not guarantee added success. In the store, the control of the purchase experience moves to the retailer so it becomes very important that the brand is comfortable with the way the retailer will position its products in terms of shelf space and point of purchase marketing through materials and/or sales people in the store. Julep, a successful online brand in the cosmetics space, has partly solved the issue of positioning by partnering with QVC as well as several brick and mortar retailers including Nordstrom. A strong advantage of a QVC partnership is that “shelf space” allocated to the brand consists of a brand spokesperson going on the TV show to market the brand to a very large audience. Resulting sales occur immediately through QVC but other channels also benefit.

Advantages to the Retailer of Carrying Online Brands in Their Physical Stores

An online brand should have substantial information regarding customer demand. It knows the geographies in which its products sell best, the demographics of its customers, which of its products will be in greater demand, etc. It also may have very substantial traffic to its site, to which it can offer the alternative of buying at physical retail. Furthermore, unlike physical retail, e-commerce retailers have a deeper understanding of customer acquisition metrics and customer conversion funnel, and can readily A/B test various elements on their site. Such insights can help a physical store decide which items to carry, volumes needed in different geographies and more.  It can also mean the online brand will drive additional customers to their store. A brand like Le Tote, one of Azure’s portfolio companies, which offers women a subscription that entitles them to rent everyday clothes, has even more data as an average customer will have worn over 50 of their clothing items over the course of a year. Since the company receives ongoing feedback on most of the items it ships, it has very substantial data on customer preferences regarding third party brands as well as house brands. The company believes that it is likely to form one or more partnerships with brick and mortar retailers to begin selling its “house” brands.

Intelligently Moving to OmniChannel Selling Makes Sense for Many Players

Given the growing synergism between online and offline retail, there is substantial opportunity for heightened growth for startups that are able to intelligently emerge from an e-tail only model to one that uses both online and brick and mortar distribution. If the e-tailer has its own branded goods, then this can be done through partnering with existing stores. In executing this strategy, it is important to ensure that the presentation and knowledge of the products placed in such stores are sufficient to enable customers of the store to adequately learn about the products. In turn, the e-tailer can provide a deeper understanding of the customer in order to accelerate growth and improve sales conversions in all channels. The abundance of data being provided from online channels as well as in-store tracking can provide significant insight to retailers, and startups that best capitalize on this information are better positioned for success.  Startups that are able to capitalize on this trend can experience a significant escalation in growth.

SoundBytes

  • The recent acquisition of EMC by Dell brought back memories of my thesis while still on Wall Street as a top analyst covering technology. In 1999 I predicted that successful PC companies would hit roadblocks to growth and profitability if they didn’t move “Beyond the Box”. As we’ve seen the prediction proved true as Apple thrived by doing so and others like Compaq, Dell, Gateway and HP ran into difficulty. I’m not as close to it now but the merger of these two companies seems to create obvious cross-selling opportunities and numerous efficiencies that should benefit the combined entity.

The Argument for Curry as a Unicorn

In our previous post we posed the potential for Stephen Curry to become a Unicorn (in venture this is a company that reaches $1 billion in value). While it was mostly for fun, on reflection we decided that it actually could prove valid. This post will walk you through why an athlete like Curry (or potentially James Harden, Russell Westbrook or Anthony Davis) could become a Unicorn should they be elevated to the elite status of a LeBron James.

curry unicorn

The Precedent for Creating a Corporation Owning an Athlete’s Earnings Exists

In April 2014, Vernon Davis offered stock in his future earnings via a venture with Fantex, Inc. as part of a new financial instrument being sold by Fantex. Davis offered a 10% share of all future earnings from his brand marketing company to Fantex, which would then turn around and divide it into shares of a tracking stock that can be traded within their own exchange. The offering was 421,100 shares, valued at $10 each, for a total of $4.2 million. This implied a total value of the “Vernon Davis Corporation” of $42 million. Davis’ current salary is $4.7 million and endorsement income about $1.75 million for a total income of $6.5 million. Given that the longevity of football players is rarely into their mid-thirties coupled with Davis being over 30 at the time, it seems likely that he had no more than 3-4 years left in his playing career. Putting those facts together makes it appear that Davis was unlikely to earn much more than $42 million going forward and might earn less as we would expect his income to drop precipitously once he retired. So buying the stock was probably viewed as more of a symbol of support for Davis and its “market cap” appears about equal to his expected future earnings.

NBA Stars are Among the Highest Earning Athletes’

The current highest earner of endorsements in the NBA is LeBron James at about $44 million per year (Kevin Durant is second at $35 million). The highest contract in the league is Kobe Bryant at about $23 million per year (and had been $30 million previously) with the 10 highest players in the league making an average of over $21 million. Given the new TV contract scheduled to go into effect in the 2016-2017 season, it’s been projected that the cap will increase from about  $63 million today to $90 million in 2017 and be nearly $140 million by 2025 (10 years from now, at age 37, Curry should still be playing). Let’s make the following assumptions:

  1. Curry’s salary will go from a current level of $11 million in 2015 and 12 million in 2016 (4 other Warriors will be paid more that year) to about $30 million in 2017 assuming the top salaries tend to be about 1/3 of their team’s cap as they are today.
  2. It will be up to $40 million in 2025, or less than 1/3 the projected $140 million cap.
  3. His endorsements will reach midway between the current levels experienced by LeBron and Durant, to about $40 million by 2017 (they are currently at about $5.5 million from Under Armour)
  4. His endorsement income will rise by about 10%/year subsequently, through 2025 to reach $92 million in 2025
  5. He will continue to earn endorsement income (but will retire from playing) subsequent to the 2025 season.
  6. The level post 2025 will average $60 million per year for 10 years and then go to zero.

The last assumption is based on observing the income of retired stars like Michael Jordan (earning $100 million/year 12 years after retirement), David Beckham (earned about $75 million the first year after retiring), Arnold Palmer (earned $42 million/year 40 years after winning his last tournament), Shaq ($21 million), Magic Johnson is now worth over $500 million. Each are making more now than the total they made while playing and, in several cases, more per year than in their entire playing careers. So assuming Curry’s income will drop by 1/3 after retirement is consistent with these top earners.

chart

This puts his total income from 2016 through the end of 2035 at over $1.5 billion. All of the above assumptions can prove true if Curry continues to ascend to super-star status, which would be helped if the Warriors win the championship this year. They could even prove low if Curry played longer and/or remained an icon for longer than 10 years after retiring. Thankfully, Curry has remained relatively injury free and our analysis assumes that he remains healthy. Curry is not only one of the most exciting players to watch, but is also becoming the most popular player with fans around the league. Curry now ranks second overall in total uniform sales, behind LeBron James.

So while the concept of Stephen Curry as a Unicorn (reaching $1 billion in value) started as a fun one to contemplate with our last post, further analysis reveals that it is actually possible that Fantex or some other entity could create a tracking stock that might reach that type of valuation.

As a VC, I would love to invest in him!

SoundBytes:

  • In the recent game against the Blazers there was further validation of Curry’s MVP bid. Curry delivered eight 3-pointers, hit 17 of 23 shots and went 7-of-7 in his 19-point fourth quarter. His last two threes were a combined distance of 55 feet, setting a new record for threes in a season and breaking his own record!
  • To understand just how well Curry shot, his Field Goal Efficiency was 91% (he had 8 threes bringing his equivalent field goals to 21/23). Not only was this higher than anyone who scored 40 points this year or took at least 20 shots in a game, we believe it may be among the highest ever for someone taking 20 shots in a game.
  • As a comparison, the two Portland stars, Aldredge and Lillian, each had strong games and scored 27 and 20 points, respectively. But, to do that, they took 46 shots between them (double that of Curry) and only scored 2 more points in total for the extra 23 shots!
  • The 4th quarter performance by Curry, cited above, translates to a 114% FGE rating, which is averaging more than 100% shooting as he scored 16 points on 7 shots. When foul shots are taken into account, his True Shooting % was 137% as he scored 19 points on 8 field goal attempts (counting the one on which he was fouled).To draw a comparison, when Russell Westbrook scored 54 points against Portland on April 12 he took 43 shots, 20 more than Curry (23 more if we include shots that led to foul shots).

Is Stephen Curry Becoming a Unicorn?

Why Curry should be the clear NBA MVP

Much has been written about the importance of discovering and investing early in “Unicorns”, companies that eventually cross the $1 billion valuation threshold. In basketball, teams make tough decisions as to whether to sign individual players to contracts that can be worth as much as $120 million or more over six years. The top few players can earn a billion dollars over their career when endorsements are added to the equation, assuming they can last as long as a Kobe Bryant or Tim Duncan. Clearly part of the road to riches is getting the recognition as one of the elite. This year, several players previously thought of as “quite good” are emerging in the quest to be thought of as “great”. Nothing can help a player put his stamp on such a claim as much as winning the MVP. In the spirit of trying to identify a future “Unicorn” in professional basketball, I thought it would be fun to analyze the current crop of contenders.

Given an unusual emergence of multiple stars, this year’s NBA MVP race is one of the most hotly contested in years. There are five legitimate candidates: Stephen Curry, Russell Westbrook, James Harden, Anthony Davis and LeBron James. All of them are having spectacular seasons and in most years that would be good enough for them to win. But only one can take the MVP crown. LeBron is the reigning king of the league and has long ago hoisted his flag atop the mountain. But, he has won the MVP title a number of times and while he remains a solid choice, he is not a clear choice. Therefore, it appears almost certain that most voters will favor a candidate who has yet to win. In the last few weeks Davis seems to have faded from consideration so, in this post, I will provide the analysis that has led me to determine that Curry is a more worthy recipient than Westbrook and Harden.

Scoring

Basketball columnists and analysts often focus too much of their evaluation of success on a player’s scoring average. In an attempt to help understand a player’s full value, John Hollinger created a Player Efficiency Rating (PER) that incorporates several statistics in the hope it provides a single rating that determines the best player. While it is a truly worthy effort, we feel there is quite a bit of judgement incorporated in what value to place on different statistics.  For example, it rewards players who take more shots even when the extra shots are 2-pointers at a low field goal percentage (taking extra 2-point shots at over a 31% increases the rating even though that is well below what the rest of his team would likely shoot). We would place more value on giving the ball up (and having a lower scoring average) than taking a low percentage shot.

I am surprised that the simplest calculation of scoring efficiency does not surface as a regularly reported statistic. Some sources occasionally report an “Adjusted Field Goal Percentage” (AFG%) that counts a 3-point field goal as worth 1.5 times a 2-point field goal. We believe this is the correct way of viewing a shooter’s effectiveness and called it field goal efficiency (FGE%). It calculates the percentage as the equivalent of 2-point field goals made per field goal attempt (FGA):

FGE% = (2-point shots made + 1.5 x 3-point shots made)/FGA

There is one statistic that analysts call True Shooting Percentage (TS%) that goes one step further. It also takes foul shots into account. It assumes that 1 of every 9 foul shots is part of a 3-point (or 4-point) play and therefore considers 2.25 foul shots as the same as one field goal attempt (since most pairs of foul shots replace a field goal attempt). TS% is calculated by adding the field goal attempt equivalent of foul shots to normal field goal attempts to determine the equivalent number of attempts used by a player. By dividing points scored by 2 we know how points scored equates to 2-point field goals made (FGME). This translated to the following formula for TS%:

Equivalent field goal attempts (EFGA) = FGA + FTA/2.25

FGME = points scored/2

TS% =FGME/EFGA

Now let’s compare Curry, Harden and Westbrook based on these statistics all on a per game basis:

Slide1

Harden and Westbrook are neck-and-neck in scoring average, each about four points per game higher than Curry. But Curry plays fewer minutes per game and takes fewer shots. His shooting efficiency at 58.6% is by far the highest of the three by a significant amount (a full 14% higher than Westbrook and 7% higher than Harden). It is also the highest in the league for players that have taken at least 8 shots per game (which includes all of the top 100 players by scoring average). At over 90%, Curry is the number one foul shooter in the league. But Harden and Westbrook are also hitting roughly 85% of their foul shots. Therefore, the fact that they get fouled much more than Curry brings each of their TS%s closer to Curry’s. Still, Curry is a whopping 10% higher than Westbrook and 2.5% higher than Harden. It is apparent that the scoring average advantage is more a function of Curry playing fewer minutes and being more selective in his shots.

To see the impact of this we calculated their scoring average per 36 minutes played (which we consider about average for a team’s star) and points scored per 25 equivalent field goals attempts:

Slide2

So, even if he played the same amount of time as Harden and Westbrook, Curry would trail in average points per game, primarily because he still would take fewer shots. But if he took the same number of equivalent shots he’d have a higher scoring average than both.

A Few Other Statistical Comparisons

While scoring efficiency is an important measure of a players value to his team, several other statistics like assists, rebounds, and steals are also considered quite relevant. To make comparisons fair, we adjusted to the average per 36 minutes for each:

Slide3

For steals, Westbrook and Curry are close to dead even with Harden about 11% behind. However, Westbrook is the clear leader in rebounds and has 7% more assists than Curry with both well ahead of Harden.

Each of these three players leads their team’s offense. They all control the ball attempting to score themselves or assist others in scoring without turning the ball over, as every turnover is a lost scoring opportunity. The ratio of assists to turnovers helps capture effectiveness as a guard. On the defensive end they each can compensate for a portion of their turnovers by stealing the ball. The ratio of steals to turnovers captures how well they are able defensively to partly compensate for depriving their team of a scoring opportunity. But attempts to steal the ball can lead to more personal fouls. The ratio of steals to personal fouls helps understand defensive effectiveness. Here are the comparisons:

Slide4

Harden and Westbrook are 25%-40% behind Curry in all of these categories. What the first ratio tells us is that Curry passes the ball more accurately and/or takes less risk so that he gets his assists without turning the ball over as frequently as the others. Another way of looking at it is that the extra 0.6 assists that Westbrook averages per 36 minutes comes at the expense of one extra turnover vs Curry.  The steal/turnover ratio tells us that for every 3 turnovers Curry has, he is able to get the ball back twice through steals. The others recover less than half of their turnovers through steals. Finally the steals/personal foul ratio shows that Curry is quite effective defensively with a ratio that is over 30% better than either of the others.

 

Curry Creates the Most Team Success

So, what is the bottom line that helps capture the impact of the various statistics we have shown? Of course one measure is the fact that Curry has helped his team achieve a much better record. What other measure should be considered in evaluating a potential MVP’s impact on a team? Given Curry’s extremely high Field Goal Effectiveness, does his taking fewer shots help the team more than Harden and Westbrook taking more shots and scoring more? The league average for scoring per game is roughly 99.9 points (through about 76 games of the season). Each of the three help their team score at a higher rate than that, but Curry has led the Warriors to the highest scoring per game in the league. The comparison:

charts

A natural question is whether this superior offensive performance comes at the expense of inferior defense.  So we should include the average points given up per game by each team to round out the picture. Notice the Warriors allow fewer points per game than the league average while both the Thunder and the Rockets allow more than the league average. The combination for the Warriors means that they have the highest plus/minus in the league by quite a bit (the Warrior’s 10.4 is 60% higher than the Clippers who are second at 6.5), and it is nearly double the sum of the plus/minus for the Rockets and Thunder combined.

Slide6

The league also maintains plus/minus differential by player. That is how many more points a team scores than opponents when that player is on the floor.  In all three cases, it seems clear the players are driving the team’s effectiveness as their differential exceeds that of the teams (meaning that without them on the floor, the other team, on average, outscores their team). This statistic takes offense and defense into account and helps measure the influence a player has on his team’s effectiveness.

Slide7

This means that Curry is responsible for a 12.0-point improvement in plus/minus when on the floor versus how the team does when he isn’t, while both Westbrook and Harden improve their team’s plus/minus by 5.0 points. Given his top score in plus/minus, much higher Field Goal Effectiveness and TS%, combined with driving the Warriors to the top record in the league, it seems that Curry should be the league MVP and is on his way to becoming a Unicorn. As a VC, I would love to invest in him!

SoundBytes:

  • The recent ESPN selection of the top 20 players of the past 20 years is quite enlightening in how well the NBA markets their elite players compared to other sports. Despite the fact that football and baseball have a multiple of the number of players and are more popular sports, five of the 20 were from the NBA:
    • Number 1: Michael Jordon
    • Number 2: LeBron James
    • Number 8: Kobe Bryant
    • Number 11: Shaquille O’Neal
    • Number 14: Tim Duncan
  • There were 3 from football (all quarterbacks) and 2 each from baseball, tennis and soccer. And one each from 6 other sports (hockey, boxing, golf, swimming, track and cycling).
  • The four emerging stars (this includes Anthony Davis) we have discussed all have the potential to be on a future such list but their status among the greatest will also be dependent on their ability to win multiple championships. Winning MVPs makes a player great, winning multiple championships makes them one of the greatest.
  • Last night’s game against the Blazers was further validation’s of Curry’s MVP bid. Curry delivered eight 3-pointers, hit 17 of 23 shots and went 7-of-7 in his 19-point fourth quarter. His last two threes were a combined distance of 55 feet, setting a new record for threes in season and breaking his own record!