Technology & Telecommunications
March 26, 2012
As Apple’s share price summits new all-time highs and its market capitalization of nearly $550 billion exceeds that of all the remaining S&P500 retailers in the United States, some investors thought it high time I update my view of Apple and my intrinsic value estimate.
Apple was first reviewed here (http://rogermontgomery.com/is-apple-an-a1/) at the Insights Blog on 12 July 2010. The share price was $254.30 and my IV estimate was $262.56 for 2010 and $305.03 for 2011. Many investors were surprised to see how quickly Apple rose from $400 to $500 a share — it took just 34 trading days — but the climb to $600 took place in just 23 days. So with the share price rising to over $600 and some analysts believing Apple’s market cap could top US$1 trillion, while other commentators (read conspiracy theorists) suggest it is one of the stocks targeted by the US Federal Reserve for some irrational exuberance of their own, I thought it worth taking another look.
Of all the views and stats I have read, there is one question I am left asking; What if everyone who has an ipad/iphone/ipod decides they’re happy with the one they’ve got?
In London this year at the Regent Street Apple store, there’s usually plenty of excitement on launch days. But 30 minutes after the Apple store opened its doors to let the hard-core queuers in, the queue was empty. Less than 400 people waited outside the store, which was 250 less than for last year’s iPad 2 launch. In Sydney there was virtually no queue.
A survey of queuers by Hudson Square Research at locations in Connecticut, New York found shorter lines than for the iPhone 4s or the iPad 2. They counted roughly 550 people on line at five locations vs. 2,300 people counted in their iPad 2 survey last year. Interestingly, all but three people surveyed already owned an iPad, whereas 69% of respondents in last year’s survey did not already have the iPad1. Further, half of the current iPad owners had the iPad1 and the other half the iPad2.
But a survey (see table below) this year by Visioncritical – an IT research firm – ownership and purchase intention numbers continue to grow – even in countries where the iPad dominates. Indeed in the weekend before last Apple shipped over 3 million units of the iPad3.
New markets and improving affordability may still drive increasing sales, but off the back of a much larger base, getting the same growth may become increasingly difficult.
Earlier this month the WSJ reported Deutsche Bank’s analyst Chris Whitmore, was taking Apple off a list of short-term recommendations of stocks to buy. The columns went on to observe;
“Mr. Whitmore’s skepticism about the pace of Apple’s advance is one that many on Wall Street share, but one that few are willing to articulate. Previous bearish calls on Apple have been proven wrong time and again.
“And yet, worries are creeping in at the seemingly parabolic rise of Apple in recent weeks. If anything, Apple’s share price has been accelerating in recent months — defying a belief that the stock’s large size alone would limit its ability to zip higher.”
The best insights I have seen relate to the narrowing market share dominance and observed margin compression Apple is experiencing as result of competition – especially Google’s Android. This effect on margins is hidden by the fact that the mobile market is growing so wide, fast and deep that it conceals margin compression behind massive unit sales as noted above.
One analyst, Reggie Middeltone notes; “Android has moved to over 44% market share in tablets from less than 3% in less than a year and a half. That’s amazing and much faster growth than it exhibited in smartphones – a category in which Android literally dominated in worldwide and US smartphone growth (as well as installed base re: US) in just a few short years. Apple dropped from just over 96% to just under 55% in the same time frame. Again, as with the smartphones, the Android tablet tech is superior to that of iOS products and as iOS normalizes the difference, margins will suffer. Margins will drop (is dropping) faster for tablets because prices are coming down as fast as tech is increasing.”
This is also evident as the average selling price of the iPad has dropped from $654 in 3Q-11 to $599 in 1Q-12.
UBM Techinsights (see table below) also observes that manufacturing and input costs for the new iPad is rising as Apple inserts more technology advances to take the fight to Android devices.
The end result must be lower margins. At present however lower margins aren’t showing up in the reported numbers. This could be because Apple is believed to have moved large quantities of depreciated iPhones to consumers at full price in the most recent quarter. iPhones represented just over half of the company’s revenue in the most recent quarterly results. But with greater competition from Android, Apple is expected to have to either spend up on R&D or discount the price of their products – either way it equals margin reduction. As an aside, to win the market share race (temporarily) one would expect the iPhone 5 will be spectacular. Despite dropping my iPhone in the pool last year, and saving it by dunking it in rice overnight, I am holding out for the iPhone 5.
Back to the story. 1) They are losing market share to Android devices. 2) margins are coming down. 3) The market is growing and so profits are growing. 4) Thus the share price is surging. 5) But in order to sustain the trajectory, two key products are being relied on – the iPhone and iPad.
Followers of the Buffettology approach to valuation (there’s a couple of valuation tools out there for which investors pay thousands for this less than robust methodology) would simply take the $35.12 of trailing 12 months earnings, grow it by the analysts projected 13% per annum for five years to arrive at earnings per share in the fifth year of $64.72 and multiplying this by the current P/E of nearly 17 times provides a future price (not a valuation) of $1100.00. Discounting this back by, say, 15% produces a target price of $547.01. Of course the neatness of this number belies the fact that its just a price based on an assumed P/E (don’t bother debating this point). If we use a more conservative P/E of 12 times, then we end up with $386.13.
Apples equity per share is $96 and it’s earning a 37 per cent return on this equity. The current price is six times book value for a book that earns just under 40%. Simple observation tells me that’s not so compelling from a value investing perspective. And now the company will be paying out a 30 per cent portion of that return on equity as dividends ($10.60 in the first year). This must reduce the valuation. Using $96 of equity per share, a 37 per cent return on equity, an 11 per cent required return and a 30 per cent pay out ratio, I get a very-rough-back-of-the-envelope estimated valuation of $481.69.
And those who love charts will look at the vertical share price and its eerie similarity to other blow offs that ended badly such as Google’s price action at the end of calendar 2007.
As a value investor, you should be comfortable with the fact that you will be early to buy and early to sell. My view will change the second Apple releases some new device that redefines breathing, living and spirituality but until then it appears there’s pressure on the business and possibly the share price because it may be higher than a rational estimate of intrinsic value. Seek and take personal professional advice before engaging in any securities transactions.
by Roger Montgomery Posted in Technology & Telecommunications
October 11, 2011
Vocus Communications is in the business of selling bandwidth. The company resells it on the cable that runs under the Pacific between Sydney and the US. Last night they laid some of their own under another sea; Sydney Harbour. The company – in which I have previously disclosed I own a small number of shares – sent me these photos of the process. As we have met with management as part of our analysis, we were delighted they remembered our interest in everything they are up to. I thought these photos were fascinating and given its something most of us wouldn’t ever get a glimpse of, I thought you’d be interested too.
There’s no investment merit in the photos so don’t go rushing off to buy shares (certainly not without conducting your own research and after seeking and taking personal, professional advice).
Think of this post as a Value.able photo essay of what some people are up to while you were sleeping.
Meeting point and briefing at the North end of the Tunnel
A closed Sydney Harbour Tunnel
A very empty Sydney Harbour Tunnel
Hauling starts about 900mtrs from the South Exit. It’s a single piece of fibre from end to end
3kms of conduit installed the previous few nights
First meter of fibre coming off the drum
Energy Australia, the RTA and the other carrier’s fibre exiting the tunnel on the South Side
Fibre coming out of the Tunnel on the North side
August 15, 2011
iiNet’s full-year results have been released. I have taken particular interest because communications and data is one sector of the marketplace I believe is relatively less affected, in terms of share-of-wallet, by the ructions in the US Europe.
The results released today (15 August 2011) were marginally below the expectations of several analysts we correspond daily with. Underlying EBITDA was up just shy of 30 per cent to $104.8 million (some analysts were expecting $106 million and a little more).
With DSL (Digital Subscriber Line) – the technology that significantly increases the digital capacity of ordinary telephone lines, and excluding HFC (Hybrid Fiber-Coax network – CABLE) – iiNet is now the number two competitor and the leading “challenger “in the Australian residential telecommunications market. As an investor, I am always interested in the number 1 or 2 player in town. However the gap between number 1 (Telstra) and iiNet (#2) is enormous. iiNet have 641,000 paid DSL subscribers (up 19 per cent). Telstra has 2.4 million.
The company reported its underlying Net Profit After Tax was $39.0m, up 12.4 per cent on FY10, while reported NAPT fell 3.7 per cent to $33.4m (FY10 $34.7m). On a quick glance, I reckon underlying profit was $37 million (you have to add back $3.9 million in deal costs, redundancy costs of $1.2 million and legal costs of $1.4 million but tax effect it). Stripping out the impact of the acquisition, I also estimate cash flow was close to $40 million.
The reason for the less than stellar growth in reported net profit was because iiNet’s tax bill was much higher than last year. The increase in tax wiped out all of the increase in the net profit before tax.
Whilst many analysts will look at the growth in operating profit (EBITDA), I’d look at the net profit before tax. If I add the legal costs in 2010 back to that year’s profit-before-tax and then add the one-offs for 2011, I get a jump in net profit before tax from $43.85 to $53.4 million and a reduction in margins from 9.25 per cent to 7.6 per cent. Hopefully the company’s expected ‘synergies’ (an extra $10 million from porting AAPT customers across to the iiNet billing system?) raise this to 8.5 per cent.
Net debt increased to $96.4m from $56.3m as a result of the AAPT Consumer division. This has had an impact on our Quality Score (the A1-C5 system), which was B2 previously. Gearing will be 40 per cent. And the the balance sheet? It now contains $302 million of goodwill compared to $242 million of equity.
Revenue and operating cash flow was up significantly with the full year’s benefit of the Netspace acquisition and a nine month benefit of the AAPT consumer division. What really would be interesting however is an estimate of what like-for-like revenue and operating cash flow is. Sure iiNet has no ‘stores’, but acquisitions and synergy extraction doesn’t have the same whiff of sustainability as a business that can grow organically. I would like to see how the old business (excluding the acquisitions) is travelling. Value.able Graduates – would you?
And when I hear company say that it is “Ideally positioned for the future“, I want answers as to whether they were previously ideally positioned for ‘now’.
The 19 per cent growth in DSL subscribers includes AAPT’s consumer division, so it doesn’t give us much insight into the organic growth of the company. With ARPU (Average Revenue Per User) largely unchanged, yet network and carrier costs up 56 per cent – above the 47 per cent increase in revenue – some insights into organic growth would be helpful. I suspect subscriber growth will reflect slow organic growth in FY12, and any margin/profit improvement will come from ‘synergies’. While these may be significant ($9 – $12 million from migrating AAPT customers onto iinet billing system), they are not a long-term delivery platform for profit growth.
It is clear that management’s confidence is high. They have significantly increased the dividend from $12.1 million last year to $16.7 million this year and have announced separately a share buy-back of up to 7.6 million shares, or about 5 per cent of the issued capital (about $17 million at current prices), despite the fact that debt has risen substantially by a net $52 million. Perhaps when you have $766 million coming through the door you can afford to be a bit fancy-free with your capital allocation? Thoughts anyone?
I hear whispers in the background… Roger, how do you know all this? Yes, I do listen to company presentations and we do read investor briefings. But nothing compares to the clarity that comes from using our A1 service. It is, quite literally, extaordinary. And we can’t wait to share it with you. Value.able Graduates – expect to receive your invitation very soon. Now, back to the program…
If organic growth is slow and acquisitions begin to thin out, one would expect debt repayment followed by an increase in the payout ratio. Or perhaps the other way around, if share price support is contemplated?
The prices paid for acquisitions does not immediately cause concern for me, because the returns on equity being reported aren’t poor. But they aren’t A1 either.
Investors have tipped in $223 million and left in $15 million. On those amounts, iiNet’s Return on Equity is about 16 per cent.That’s not bad, but are there better opportunities out there. Before you suggest Telstra, keep in mind it is 140 per cent geared and profits are boosted by the failure of the company to recognise software development expenses in the year they are incurred.
The old fashioned Value.able investor in me doesn’t like looking at a balance sheet that reveals the debt-funded acquisition of goodwill. I have witnessed far too many examples of this turning out poorly. Sure, some of you may say that MMS did the same thing? But while debt rose significantly there, the corresponding asset was PP&E, not goodwill. You may instead point out that interest cover is still high at 9 times (20 times last year). That, I accept.
Finally, the NBN. What does it mean for iiNet?
First, some background. An ‘Off-net’ customer is provided a DSL service through another network – usually Telstra wholesale. An ‘On-net’ customer is one that is provided a DSL service through the iiNetwork (iiNet’s own broadband network). The NBN is expected to reduce the average monthly cost of broadband + Voice bundling to $33, which compares favourably to the current off-net cost of $57. This is a potentially major saving, but the reason I am not as excited about this as the company is because as the transition is made, there will be some leakage. It will occur over an unexciting period of time and any number of offsetting factors could adversely impact revenues, costs and profits during that time.
I am more excited about other companies at the moment. A growth by acquisition strategy may offer wonderful potential in the short-term, but it can also be used to mask slow organic growth. The buy-back can be a sign that cashflow will be strong, but it can also be used to merely ‘display’ confidence and support the share price. At Montgomery HQ, we reckon the shares are very close to their Value.able intrinsic value, but iiNet’s fall in quality, from A3 to B2, suggests shifting your attention to other opportunities.
You should be practising your own Value.able valuations. So what do you get for iiNet for 2011, 2012 and 2013?
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 15 August 2011.
June 20, 2011
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”.
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.
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.
by Roger Montgomery Posted in Companies, Technology & Telecommunications
June 19, 2011
“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).
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.
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.
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).
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.
by Roger Montgomery Posted in Global markets, Technology & Telecommunications
April 29, 2011
If you are new to our Value.able community, Ben Graham’s concepts may be foreign to you. Ben is the author of Security Analysis. He is regarded as the father of security analysis and the intellectual Dean of Wall Street.
I support Ben’s revered status and what he has to say on the subject of investing, but perhaps controversially, I also believe that, had he access to a computer that allowed him to properly test his ideas, he may not have reached all of the same conclusions.
It is exactly one year since I first penned some of my thoughts about Ben Graham on this blog here: http://rogermontgomery.com/should-a-value-investor-imitate-ben-graham/
There are many things that Ben said that not only make sense, but has also made significant contributions to investment thinking. Indeed they have become seminal investment principles. These are the things to which Value.able investors should hold firm.
Ben Graham authored the Mr Market allegory and also coined the three most important words in value investing: Margin of Safety. In fact Ben said this: “Confronted with the challenge to distill the secret of sound investment into three words, I venture the motto: Margin of Safety”
These are two concepts that value investors hold dear and which have, in many different ways, become a formal part of our Value.able investing framework.
Mr. Market is of course a fictitious character, created by Ben to demonstrate the bipolar nature of the stock market.
Here is an excerpt from a speech made by Warren Buffett about Ben Graham on the subject:
“You should imagine market quotations as coming from a remarkably accommodating fellow named Mr Market who is your partner in a private business. Without fail, Mr Market appears daily and names a price at which he will either buy your interest or sell you his.
“Even though the business that the two of you own may have economic characteristics that are stable, Mr Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains…
“Mr Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow.
Transactions are strictly at your option…But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr Market is there to serve you, not to guide you.
“It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.”
If you have read Value.able you will understand Margin of Safety, know exactly what a suitable Margin of Safety is and also how to apply it to Australian stocks.
Despite the high profile of these two enduring lessons, I believe there is a third observation of Graham’s, which is equally important. Fascinatingly, with the benefit of computers, I can also demonstrate that Graham was spot on.
Graham was paraphrased by Buffett in 1993 thus:
“In the short run the market is a voting machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long run, the market is a weighing machine”
What Graham described is something that, as both a private and professional investor, I have observed myself; in the short term the market is a popularity contest – prices often diverge significantly from that which is justified by the economic performance of the business. But in the long-term,prices eventually converge with intrinsic values, which themselves follow business performance.
Have a look at the amazing chart below.
(c) Copyright 2011 Roger Montgomery
Its Qantas (ASX:QAN, MQR: B3, MOS-44%): – its my ten-year history of price and intrinsic value (and three year forecast of intrinsic value which updates daily). Now right click on the chart and open it in a new tab. Zoom in. Now stand back from your computer screen. What do you see?
First you will notice two intrinsic values – a range is produced. Next you might notice that there have been short term bouts of both optimism and despondency and this is reflected in the short term share price changes. The final observation you might make and which the charts make most powerfully, is that since 2001, the intrinsic value of Qantas, which is based on its economic performance has, at best, not changed. Look closer and you will notice that the intrinsic value of Qantas today (2011) is lower than it was a decade ago. Even by 2013, intrinsic value is not forecast to be materially different from that of 2002.
Just as Ben Graham predicted, the long-term weighing machine has correctly appraised Qantas’ worth. Unsurprisingly, the share price today of Australia’s most recognised airline, is also lower than it was a decade ago. And unbelievably, the total market capitalisation of Qantas today is less than the money that has been ‘left in’ and ‘put in’ by shareholders over the last ten years!
These charts aren’t just easy or nice to look at, they are incredibly powerful. If you can calculate intrinsic values for every listed company, you can turn the stock market off and simply pay attention to those values. Then, during those times that the market is doing something irrational, you can take advantage of it or ignore it, just as Ben Graham advised.
Unless you can see a reason for a permanent change in the prospects of Qantas, the long-term trend in intrinsic value gives you all the information you need to steer well clear of this B3 business.
Now have a look at the second chart. What does it tell you?
(c) Copyright 2011 Roger Montgomery
There have been short-term episodes of price buoyancy, but over the long run the weighing machine has done its work. The intrinsic value has not changed in ten years so, over time, the share price has once again reflected the company’s worth and gradually but perpetually fallen until it reaches intrinsic value. This is my ten-year historical price and intrinsic value chart (and three year forecast) for Telstra (ASX:TLS, MQR: B3, MOS:-32%).
What about an extraordinary A1 business?
Sally Macdonald joined Oroton (ASX:OTN, MQR: A1, MOS:-17%) as CEO in 2005/06. Observe the strong correlation between price and value since Sally’s appointment.
(c) Copyright 2011 Roger Montgomery
I acknowledge that there are critics of the approach to intrinsic value we Value.able Graduates follow. But like me, you should be delighted there are. Indeed, we should be encouraging departure from this approach!
The critics are necessary. Not only do they help refine your ideas, but without them, how else would we be able to buy Matrix at $3.50, Forge at $2.60, Vocus at $1.60 or Zicom at $0.32! And how else would we be able to navigate around and away from Nufarm or iSoft, and not fall into the trap of buying Telstra at $3.60 because the ‘experts’ said it had an attractive dividend yield? If it was universal agreement I was after, I would just keep writing about airlines.
The Value.able approach works. If you have been visiting the blog for a while, you will know this only too well.
The above charts (automatically updated daily – and I have one for every, single, listed company) confirms what Ben Graham had discovered without the power of modern computing; In the short run the market is indeed a voting machine, and will always reflect what is popular, but in the long run the market is a weighing machine, and price will reflect intrinsic value.
If you concentrate on long-term intrinsic values and avoid the seduction of short-term prices, I cannot see how, over a long period of time, you cannot help but improve your investing.
…And in case you are wondering about the link between Ben Graham and the photograph of Comanche Indian ‘White Wolf’… the photo of White Wolf was taken in 1894 – the year Ben Graham was born.
HOMEWORK RESULTS: I will publish the holiday results homework on Monday. Thank you to all who participated. It is vital what you continue to practice your technique. With repetition you’ll get to the point where you can simply ‘eye-ball’ Value.able intrinsic value.
July 13, 2010
Did you buy an iPhone between October 2007 and December 2009? Over 41 million people did. Maybe you and 1.7 million others queued outside an Apple store because you had to have the new iPhone 4 in its first week of release, or you are one of the 45,000 people per day buying an iPad? The numbers are astounding.
If you are like Forrest Gump of River Road, Greenbow Alabama, who owns Apple shares, and even if you are not, you may be interested in my estimate of the company’s intrinsic value.
For those faithful to the PC, your loyalty may soon be tested. Apple’s strategy of dominating the home entertainment market is converting the world to its products, and is eating into the business world too.
While the number of sales are amazing are they enough for Apple to replace Microsoft? In the fast changing world of technology, why not? But in the slow-moving world of value investing, who knows? And thats the difficulty – working out if Apple will dominate in ten years time and betting that there aren’t two young guys in a garage somewhere cooking up the next apple, dell, windows or microsoft office.
Apple’s resurrection started with the return of its founder and prodigal son, Steve Jobs. Whilst off in the ‘wilderness’, Jobs kept himself busy acquiring a little animation studio called Pixar for $10 million, building it up and selling it to Disney for more than $7 billion. He also developed and subsequently sold to Apple his NeXt operating system – for $427 million.
Apple has a market capitalisation of $228 billion. It’s the second largest company in the US – currently bigger than its nemisis Microsoft and about $60 billion behind Exxon Mobil.
Yet as we know from Australia, market cap means little. It is Return on Equity, margins and revenue that reveal the quality and performance of a business. And in these areas Apple and Microsoft are similar.
It is however Apple’s revenue-per-employee number that truly causes the jaw to drop. Microsoft’s revenue divided by its employees equals US$630,000. Apple’s is an astounding US$1.5 million.
Despite the company’s success, things haven’t always been rosy at Apple. In the 1980’s Apple lost the personal computer war to the PC and Windows became the standard. This was in part due to the fact that the Windows platform had attracted the ‘killer app’ – Office. But dud Windows revisions and costly software upgrades left unhappy consumers to explore alternatives.
Re-enter Steve Jobs, as interim CEO of the company he co-founded twenty years earlier. Apple’s staff called him the ‘iCEO’… seriously. It was July 1997 and Apple had lost $1.8 billion in the previous 18 months.
Jobs set about replacing Apple’s board, dropped a case against Microsoft in return for Microsoft developing Office for the Mac, edified the grandeur around the brand, killed off the white labeled versions of its products that were cannibalising the company and most importantly simplified the product pipeline, killing every product except four top-end machines. This last move got the [remaining] staff more focused and inventory fell from $400 million to $100 million in one year.
The category killing machine for Apple in the late 1990’s was the iMac – in fruity colours. Remember those? And Jobs was serious about simplification. These iMacs did not even have a floppy drive. The user downloaded software from the internet and they were the first computer with a USB port. iMacs were thought of as being ahead of their time.
And being ahead of their time meant Apple could charge premium prices and generate better margins. The additional cash funded research that ultimately launched the iPod. Coinciding as it did with the emergence of the “digital life”, the iPod re-launched Apple.
Fast forward to 2010 – what is the intrinsic value of Apple? And is that value rising? Can Apple live up to the iPad’s promise that ‘…this is just the beginning’.
Apple’s Return on Equity from 2001 to 2005 looks like this: 22%, 24.4%, 27.2%. 29.6%. 28.4%. 29.3% and 27.1% forecast for 2011. I have access to a range of forecasts. While some analysts have projected iPad sales will continue for a year at the current rate of growth, others suggest that once the Mac aficionados have purchased, sales will slow significantly. Revenue estimates for 2011 range from $18 billion to more than $45 billion. The 2011 estimated decline in ROE needs to be seen in that context.
As you may know I rate companies on a quality scale from A1 to C5, using metrics designed for bank credit departments. Apple is an A1, and that A1 has been consistent for several years. Microsoft, by comparison, is an A2, but its performance has recently been declining.
Why is Apple an A1? It has no debt and even though equity has grown (from retained earnings not capital raisings) from $3.5 billion to over $10 billion, returns have been maintained. This is exceptional.
Buffett says that he likes big equity and big returns on equity and on that score Apple makes the grade. But Buffett avoids fast-changing sectors like technology because he cannot say with confidence where the company will be in terms of competitive positioning in, for example, a decade’s time. And who knows that there isn’t a couple of university dropouts in a garage somewhere building the next apple, dell, office suite or google!
So with the share price at US$258, does a discount to intrinsic value exist? Moreover, is intrinsic value rising?
On the first score the answer is yes slightly. Apple’s intrinsic value is US$262.56. On the second score intrinsic value is rising to a 2011 estimate of $305.03 – a 16 per cent increase.
For the last five years, intrinsic value has indeed increased substantially. Below is a little table to show you Apple’s share price and intrinsic values since 2005.
*Estimate. Not a recommendation. Seek and take personal professional advice.
Only a very small margin of safety exists today and while you may be optimistic about the fact that Apple’s intrinsic value is rising at a satisfactory rate, you do need to remember that the business is in a fast-changing industry. Future performance and intrinsic value will depend on whether Apple continues to strengthen its competitive advantages. Thank you to the many investors who emailed me and asked for a quick look at Apple.
Posted by Roger Montgomery, 12 July 2010
by Roger Montgomery Posted in Companies, Technology & Telecommunications
October 17, 2009
With a 66% market share, Telstra’s monopolistic powers are in the news and generating quite a stir. The only problem is that the telco’s monopolistic powers are not stirring its profits.
With a 90% share, Telstra dominates what used to be called the ‘local call market’. In the last decade mobile phone services have risen from 8 million to 22 million, internet penetration has risen from 30% to 79% of households, and despite unique anti-syphoning legislation which ensures free-to-air tv gets to show the big sporting events, pay tv has increased to 30% household penetration from virtually nothing in 1995.
Despite this rapid growth in new technology and Telstra’s dominant landline market share, its profits are no higher today than they were ten years ago. And while its intrinsic value has risen slightly in the last two years, it has not registered impressive growth overall.
The ‘rebalancing’ and ‘cannibalisation’ that the industry is experiencing, and the government wants, does not detract from the very high underlying growth factors in the telecommunications industry.
Demand for high-speed services will exceed supply. By 2017 Fibre to the Household (FttH) will make our present broadband look like the dial-up systems of ten years ago and will be used by the telecoms, IT and media industries to deliver digital media services, applications, video content hosting and distribution. Whether Telstra will be able to take advantage of it and win is anyone’s guess.
In fast-changing industries, working out who will dominate is difficult and therefore so is estimating an intrinsic value. In any event, Telstra in its current form has not been able to convert its dominant position and the strong growth in telecommunications demand into improving economic performance. There is little reason to believe that it will in the future.
By Roger Montgomery, 17 October 2009
by rogermontgomeryinsights Posted in Technology & Telecommunications