Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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Like Value.able graduates, Roger Montgomery values the best stocks and buys them for less than they’re worth. In this appearance on Your Money Your Call, Roger shares his insights on the long term prospects for uranium producer Paladin and also answers viewer questions about Mincor (ASX:MCR), Ket, Galaxy Resources and Kimberley rare earths. Watch this video and you will also discover Roger Montgomery’s forecast Value.able valuation for the Australias XJO and XAO indicies. Watch the interview.
In this appearance on Your Money Your Call with Chris Kimber, Roger Montgomery answers viewer questions on Amcor (ASX:AMC), Emeco Holdings Ltd (ASX:EHL), McMillan Shakeaspare (ASX:MMS) and Medusa Mining (MML). Roger also reveals which bank is offering the largest discount to his estimate of its Value.able intrinsic value. Watch Roger’s interview.
The retail landscape is changing, and changing fast. Hyped-up tech floats will be here soon enough, but there are better ways to play this theme. Read Roger’s article at www.eurekareport.com.au.
Shares in Australian brewing giant Foster’s rose after it dismissed a $9.5 billion takeover bid from SABMille. Roger Montgomery said “The board needs to create some competitive tension in order to extract the best possible price they can for Foster’s shareholders.” Read the transcript.
Irrational exuberance and tech stocks are old bedfellows. In my previous post, Is this time different?, I wrote “I never ever allow myself to believe this time is different to the last”.
With that in mind, approach the following list of upcoming IPOs with the same trepidation as a Value.able Graduate would the P/E ratio. Don’t get too distracted.
Facebook, Groupon, Kayak, HomeAway, Milennial Media, Trulia and Zillow Inc are expected to float in the near future. I’ll be watching them for signs of irrational exuberance. Why? Because locally, James Packer is buying into similar companies (Scoopon.com.au, catchoftheday.com.au and groceryrun.com.au), one suspects to subsequently spin them off, through an IPO, to you.
If you would like to keep this list updated, go right ahead.
On behalf of Value.able Graduates and every other investor who reads my Insights blog, I would be delighted to see you expand this list.
In your comments, feel free to add any upcoming floats or recent floats that I have left out (Zipcar, for example). Stay tuned for MQR’s and intrinsic valuations for these companies too! (they’re just a small part of our new A1 service – my team will invite all Value.able Graduates to pre-register soon).
Facebook: If floated, as many expect, in April 2012, Facebook could be valued at $100 billion. You can imagine the float price will be a bit silly… the company will tell 700 million users about it and will attract many first time Gen Y ‘investors’. Facebook is currently valued around $70 billion on the private market.
Groupon: One of the very first deal-of-the-day websites set up all the way back in 2009, Groupon has already filed to go public. The company estimated sales of $2 billion and is expected to float at $30 billion but that sales figure is based on the revenue from selling coupons. A significant percentage of that must go to the business that offers the goods/service in the first place. If ebay reported its sales revenue as the total value of all goods sold, it would amount to $61 billion rather than the $9 billion they did report. The correct sales number for Groupon is about $530 million. The valuation compares to $135 million funding in April 2010 that gave the company a $1.35 billion valuation, Google’s offer in November 2010 of $6 billion, and a $590 million raising in January 2011 that valued the company at 15 billion. At $30 billion the price-to-sales ratio is 51 times. This compares to Google at 6 times, Microsoft at 3.5 times, Apple at 5 times, and Amazon and Yahoo at 3 times.
Kayak: The leader in travel search filed for an IPO in November 2010. It generated $53 million in revenue for the quarter ending March 31, up 43 per cent from pcp (previous corresponding period). The company processed 214 million queries in the quarter, up 48 per cent from pcp and there were more than one million downloads of its mobile applications in the quarter, up 226 per cent from pcp. Kayak had a net loss of $6.9 million in the quarter, up from $854,000 in the year-ago period. But the company took a $15 million charge for dropping its Sidestep.com URL. The company stated:
“During the first three months of 2011 we determined that we would no longer support two brand names and URLs in the United States and decided to migrate all traffic from www.sidestep.com to www.kayak.com, resulting in the impairment charge.”
Kayak sources 56 per cent of content for the Kayak flight queries from a company called ITA Software. Google has acquired ITA software and is expected to build a competing product. On this development, Kayak has said that it received 7.8 per cent of total advertising from Google in the most recent quarter. It notes that a consent decree requires Google to renew Kayak’s contract with ITA. If, however, Google limits Kayak’s access to ITA or develops replacement software, Kayak could be hurt.
HomeAway: The vacation rental site filed for a $230 million IPO in March 2011, hoping to sell 9.2 million shares at $24 to $27 each. HomeAway will list this week. Last week the company raised the goal for its initial stock offering to $248.4 million giving it a proposed value of $2 billion. 2010 revenue was $167.9 and net profit was $16.9 million. HomeAway makes more than 91 per cent of its cash annual subscription fees. Most property managers/owners pay $329 per listing per year to be featured on HomeAway.com, HolidayRentals (UK) and HomeAway FeWo-direkt (Germany). It’s a subscription fee business model that doesn’t rely on ad dollars, but according to the company, is “highly predictable and profitable”. Last year, more than 75 per cent of HomeAway’s clients renewed their existing listings. But $2 billion for a profit of $16 million in profits? Fairfax got a steal when they bought OzStayz! The auditors can relax about the valuation of goodwill on the company’s balance sheet.
Milennial Media: The third-largest mobile-advertising company in the US is talking to bankers about a potential initial public offering. The IPO is expected late this year or in early 2012, values the company at $700 million to $1 billion. Milennial Media helps advertisers find space on mobile devices, such as smartphones. It’s increasing its market share in the industry, but its competitors include global dominators Google and Apple. According to research firm IDC, Millennial accounted for 6.8 percent of mobile-ad revenue last year, up from 5.4 percent in 2009. Also according to IDC, total US mobile-ad market, however, generated just $877 million in 2010.
Trulia: Real estate search engine Trulia hired former Yahoo CEO Paul Levine in February. Trulia won’t say when it plans to float, but Chief Executive Pete Flint recently told Reuters that an offering is part of the company’s longer-term plans. “Building an IPO-ready management team is our focus, but we’re certainly in no rush, and as we announced, we’re profitable, so we’re not in need of external capital.” Its main competitor is Zillow.com (see below).
Zillow Inc: Filed on April 18 to raise $51.8 million, the company is backed by venture capital firms Accel Partners and Sequoia Capital . Zillow has hired Citigroup Inc. to handle the IPO. In three years its revenue mix has gone from being advertising-based, to fees and subscriptions from its Zillow Mortgage Marketplace, which connects borrowers with lenders. In 2009, Zillow earned 22 percent of its revenues from the marketplace, and 78 per cent from display advertising.
In 2010 display advertising dropped to 57 per cent of the total pool, while marketplace revenues more than doubled. Display advertising revenues however grew by 27 percent this year. In total, Zillow earned $30.4 million last year, and made a loss of $14.1 million in 2010 after a loss of $12.9 million in 2009. Its venture capital investors have sunk $87 million into the company.
So there’s the list and I would be delighted to see you expand it. Irrational exuberance in the US can spread like a virus here. James Packer’s investment in the founders of catchoftheday, dealsdirect and groceryrun values the coupon business at $200 million. What valuation will be given when they are dressed up for a float here? Watch this space…
What upcoming or recent floats are you watching? Feel free to submit the new Aussie floats that you are watching and I’ll add the Montgomery Quality Ratings and Value.able intrinsic valuations to them over the coming weeks.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 20 June 2011.
“If you’re playing a poker game and you look around the table and can’t tell who the sucker is, it’s you.” Paul Newman
“Great men are not always wise” Job 32:9
“If one man says to thee, ”Thou art a donkey’,’ pay no heed. If two speak thus, purchase a saddle.” “Doubt cannot override certainty” The Talmud
“The seed ye sow, another reaps; The wealth ye find, another keeps; The robes ye weave, another wears; The arms ye forge, another bears.” Percy Bysshe Shelley
If you are watching events unfold in the US like me, you’re probably hearing a lot about the tech stock frenzy going on over there. Stunning IPO successes this financial year are once again drawing a crowd. But are we looking at a Tech Bubble MkII? Are the big banks, without a suite of CDSs and CDOs to sell, now performing the same cup-and-ball trick on a different table? Or is this time genuinely different?
Read on – you be the judge (my mate Jim Roger’s is short “US Tech”, and I never ever allow myself to believe this time is different to the last).
YouKu
Based in Beijing and now listed on the Nasdaq, YouKu is China’s answer to YouTube. The stock closed at $33.44 on its first day of trading in December 2010 (its now $28.04) – that’s 160 percent above its offer price of $12.80! The company offered 15.8 million shares of American Depository Receipts (ADRs), representing 16 percent of the total shares, giving it market cap of $3.3 billion or 71 times revenue. Youku generated revenue of $35 million in the first nine months to 31 December 2010 and lost $25 million during the same period.
Founded in November 2005 and launched in December 2006, YouKu never really relied on user-generated content. More than 60 per cent of its videos are from traditional media companies in China. The company has 40 per cent penetration amongst China’s 420 million internet users. YouKu claims 200 million unique visitors a month in China, however independent comScore estimates a smaller 78 million.
LinkedIn was priced at $45 per share but traded between $80 and $120 for more than a week after listing, giving the company a market ‘valuation’ as high as $11 billion. Unlike many of the tech stocks that tempted investors in 1999 and early 2000, LinkedIn is profitable.
The company reported its first quarter revenue in 2011 was up 110 percent to $93.9 million compared to pcp (previous corresponding period) and ‘Net income’ increased to $2.08 million for the same period, compared to $1.81 million for pcp.
But there is profitable and there is ridiculous. An $11 billion valuation, or more than 22 times revenue for a business that earns 2 per cent on its revenue, seems, at best, unconnected to the underlying financials. Even someone like me that pays no attention to price or revenue multiples can see that.
Yandex
On 26 May 2011, Yandex NV (YNDX), owner of Russia’s version of Google and the country’s most popular Internet search engine, listed on the NASDAQ. Yandex sold 52.2 million shares (or 16.2 percent) at $25 per share, raising $1.3 billion and valuing the company at $8 billion. On their first day of trading the shares rose $13.84, to $38.84, giving the company a market capitalisation of $12.4 billion or a multiple of 43 times next year’s forecast earnings. For those seeking a reference point (not a valuation), Google trades at about 13 times estimated 2012 earnings.
Total online advertising in Russia climbed 51 percent from 2008 through 2010, but still amounts to just $940 million! Private equity accounted for seventy per cent of the shares sold in the Yandex float.
Renren Network
The demand for shares in Renren – the Facebook of China with 117 million users* – was clear days before it floated on 2 May 2011 (the company raised the expected price range of its IPO of 53.1 million shares by 30 percent to $12 to $14 per share from a previous range of $9 to $11). The float raised about $743 million and gave the company a valuation of more than $4 billion, or 52 times sales. Renren’s net revenues were $76.5 million in 2010, up 64 per cent from $46.7 million in 2009 and up from $13.8 million in 2008. Renren had a net loss in 2010 of $64.1 million, down from $70.1 million in 2009.
The head of Renren’s audit committee, who is also a board member, quit after allegations of fraud against Longtop Finanicial Technologies. The company also revised down its unique user numbers to a rise of 19 per cent (it originally advised 29 per cent).
Renren said in its prospectus that it operates under a prohibition against posting content that, “impairs the national dignity of China” or is “superstitious”, or content that is “socially destabilising.”
If Renren fails to comply, the company says its websites could be shut down. Clearly that could put it out of business.
The company also has a “material weakness” and a “significant deficiency” in its internal financial controls: it doesn’t have enough people with knowledge of U.S. GAAP (Generally Accepted Accounting Principles). Eighty seven per cent of Renren’s leased office floor area did not have the proper title documents.
*Renren doesn’t really seem sure how many users it has. According to its April 27 revised IPO filing, monthly unique log-in user base grew by only 5 million, or 19 per cent, in the first quarter of 2011 – not the 7 million, or 29 per cent, it reported in its first filing only 12 days earlier.
Pandora (not the charms)
Online radio operator Pandora runs an online personal music service – with applications for the iPhone and Google’s Android mobile operating system – that lets users pick songs, styles/genres and bands from which to build a personal radio station. As at the end of April, Pandora has about 94 million registered users, of which 34 million are considered active. This is up from 18 million at the same time last year.
Pandora offered 14.7 million shares, or just 10 per cent of the total float at $16, raising around $235 million and putting a valuation of $2.6b on the whole shebang. Pandora was priced at about 19 times revenue for last year. Revenue Value.able Graduates, not NPAT.
Pandora has not reported any profits in 2010 or 2011. Indeed in the last three years, Pandora has lost $46.7 million and the company said in its IPO filing that it doesn’t expect to be profitable this year or next. Worryingly, it doesn’t say when it expects to be profitable.
In the weeks prior to listing, the lead manager, Morgan Stanley, raised the expected price range from $7-$9 to $10-$12. Then, after the marketing period ended, priced the shares at the final listing price of $16.
And it gets more fascinating. On its first day of trading, Pandora shares rose as much as 63 per cent to a high of $26, giving it a market capitalisation of $4.2b. A competitor listed on the Nasdaq, Sirius XM, trades at 2.6 times revenue.
According to documents filed with the SEC just six months ago, Pandora’s own board reckoned its stock’s value was/is $3.14 a share, or a market capitalisation of about $500 million.
Pandora generated revenue of $51 million in the first quarter ending April 30 – more than double the $21.6 million for the pcp. The company however lost $6.8 million in the first quarter this year, up from around $3 million in the same quarter last year.
Until recently advertising has represented more than 90 percent of revenue, however revenue from subscriptions (which lets subscribers skip the advertisements the company’s other customers pay for to appear between songs) has been growing. At the end of April, subscription revenue was about 15 per cent and is growing at more than 100 per cent per annum.
But more than 50 per cent of total revenue is paid for song rights and the more people that listen to music through Pandora, the higher this royalty grows. Pandora has an agreement with SoundExchange for its streaming rights that expires in 2015. Between now and 2015, the rates Pandora pays are expected to go up by 37 per cent for songs streamed by free listeners, and by 47 per cent for songs streamed by paid subscribers. In addition to these fees, Pandora has deals with BMI and SESAC to pay 1.75 per cent and 0.38 per cent of gross revenue respectively. In order to become profitable, Pandora will need revenue per user to go up. And it will need a new deal with the music labels.
The share price is now below $16.
Bubbles? This Time is Different!
Ok. Enough of the fundamentals, no one is paying attention to those anyway. From what I have been reading there are many experts who are saying… what exactly? That this time is different!
Those who believe this time is different to the tech boom of the late 90’s point out that 90’s technology companies never generated profits or even revenue. Pandora however has a revenue model, and it’s rare to see today’s tech IPO without one. Effectively the ‘experts’ are suggesting the tech stocks listing today are more mature. Some investors and analysts even brushed off red flags like Renren revising down its user and user growth numbers just before its float, saying China is still the biggest internet market in the world and its rapid growth will continue. They suggest that figures reported by Chinese companies should be used for directional guidance, rather than as quantitative truths.
And that’s pretty much their argument.
My team and I have the ability to analyse every single listed company, globally (and the indices on which they are based), with fundamental data that is updated daily (very soon you will have the opportunity to use our extraordinary A1 service for every Australian company too, so don’t be tempted by all those end of financial year special offers).
Our intrinsic value analysis for the companies described above, and many of their more mature peers in the US and elsewhere, reveals gullible investors are once again being taken for a whimsical ride accompanied by a flagrant disregard for value.
Bubbles can go a long time before popping, and given that bubbles are best identified by credit excesses, not solely valuation excesses, we may be only in the very early stages of the bubble in technology stocks (but very close to the bubble bursting in US TBonds).
Your thoughts?
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 19 June 2011.
Businesses that achieve Roger Montgomery’s A1 grade generally have good cash flow and bright prospects. In this appearance with Peter Switzer on the Sky Business channel, Roger Montgomery shares his quick back-of-the-envelope Value.able cashflow calculation for Monadelphous, Technology One, Forge, Fleetwood and ARB Corp. Roger’s advice? Turn off the noise of the stock market and focus on buying the best stocks for less than they’re worth. Watch the interview.
On 2 June 2011, Roger Montgomery revealed his quick-back-of-the-envelope Value.able method investors can follow to calculate cash flow. In this appearance on Switzer TV with Peter Switzer, Roger reveals four businesses that don’t make his A1 grade, including Naomi cotton, Funtastic, Lend Lease and Nexus Energy. Businesses with poor cash flow generally generate low profits and have high debt. Investor’s would be better to avoid such businesses. Watch the interview.
Roger Montgomery is not worried that the stock market is going down. Quite the opposite, Roger is excited! Roger reveals to Ross greenwood where investors can find Value.able opportunities in the current market. He also reveals his Value.able intrinsic values for BHP, Westpac, ANZ, Myer, David Jones and Metcash. Listen to the podcast.
Telstra’s woes are unlikely to be cured by a multi-billion dollar novelty cheque. To prosper, the company must use the cash injection to build a valuable and sustainable competitive advantage. Read Roger’s article at www.eurkeareport.com.au.
