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Tech Wreck MkII Continued: Signs of a bubble?

Companies, Technology & Telecommunications | Comments (28)

Tech Wreck MkII Continued: Signs of a bubble?

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.

INVEST WITH MONTGOMERY

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.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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28 Comments

  2. Christina
    :

    I am currrently looking at International Coal Resources that will be going IPO end of July. However, I am quite worry about the carbon tax especially this is widely discussed on the radio in regard of coal mining in Queensland. I am currently reading Value.able and am following the advise on evaluating the pro forma of the prospectus. However, I am still query about my research. Is there any advice to evaluate this company?

    Thank you and really enjoyed the book!

    • Roger Montgomery
      :

      Hello Christina,

      All companies need to go through the same process. Their prospects are what you seek clarity on. Perhaps a few investors here at the blog can help.

  3. Chris B
    :

    I don’t know how to properly assess the barriers to entry of those sites – Groupon, Kayak, CatchOfTheDay etc. I was looking for tv’s today and found some great websites that scan retailers for tv’s, I think it was getprice.net.au. Sort of like webjet for electronics.
    James Packer knows what he’s doing with websites, I know why he sold Seek when he did, because Seek’s growth is not as impressive as it was in the first few years, now its almost saturated the Australian market. But it is still a good investment at a cheap price.
    I think the dot com boom in the early 2000’s came 10 years too early, I’m very impressed with the creativity that has happened on the internet with things like YouTube, internet TV, Facebook, LinkedIn. I don’t think many people could predict 10 years ago the creativity that has happened with the internet.
    Back to barriers of entry on websites – a crucial issue. I don’t know how to assess it. I beleive Seek have a long lasting barrier to entry, same with carsales.com.au. But these deal sites – I just don’t know therefore I won’t invest.

  5. Ken Ly
    :

    Hi Roger I’m from the U.S. and I’ve read your book several times. I’m loving it and learning a lot from it. However, I’m having a difficult time applying your techniques in the U.S. market. The verbage seems a bit different in the financial statements or maybe it could just be me. I’m totally new to this. I’ve did the christmas homework you posted in your previous blog about TSR and I was able to do it. My question is do you have any homework or examples of U.S. companies that I could practice on? I would greatly appreciate it if you have some.

    By the way, thanks for signing my book.

  6. Kent Bermingham
    :

    “Signs of a Bubble”, I have just come back from visiting Ireland and Europe and I can assure you the bubble is about to burst.The Governements have bailed out the Banks and the Insurance Companies, taken on the debt, mis-managed their countries and have youth unemployment at 40% with an ageing population.
    If this were a company we were valuating we would say Financial – Poor, Management – Poor, Cah Flow – Poor. Competetive advantage – Poor
    Companies would have to either raise capital or go broke and as value Investors would not be participating..So why are we not talking about the REAL Bubble and how best to conserve capital instead of waiting for the inevitable!

    • Roger Montgomery
      :

      Thanks Kent for the insights from the coal face. I was particularly struck by your comment; “youth unemployment at 40% with an ageing population.” As an aside was this an aggregated number for Europe or Ireland?

      • Kent Bermingham
        :

        No Roger, it was for Ireland and Greece, in particular, the comment was made because I have some stocks still showing a nice profit and maybe I should sell and keep my powder dry to buy some more fantastic companies when everyone else is selling in fear if there is more chaos fom the people in Greece, Ireland, Spain, Portugal, italy and Belgium in the short term. I know we are long term investors and we should be patient but these opportunities only come along every now and again and we should not take our eyes off the big picture while analysing individual companies.
        Enjoy the various posts and your thoughtfull insights, just thought I would throw in some comments from actually being there and talking to people who actually work or have worked in those countries whilst I visited them..

  7. Andrew
    :

    Hey Roger, have you read “The Devil Take the Hindmost” by Edward Chancellor.

    Seems history is destined to repeate again and again……

  8. Brad
    :

    My take is barriers to entry are low for deal of the day, catch of the day, scoopon, etc..

    Their competitive advantage, if they have one, is first to market and their databases.

    Get ready for stacks of copycat competitors, whilst the revolution in retail continues………

  9. dave
    :

    GNG has caught my attention as an interesting recent listing in the mining service space.
    Doen’t have any at this stage as havent worked out an intrensic value but good order book with a fairly high ROE.
    Looks a well established business.

  10. Kurtis
    :

    Hey Roger and Value.Able graduates.

    How do we go about evaluating an IPO? What do we look for and where do we find it. Is it any different from a company which is already publicly listed? Is it covered in the book? (I have the second edition). Sorry if the answer is obvious and thank you in advance.

  11. Rob S
    :

    One US-based float I’m keeping an eye out for is SRAM, a bicycle component manufacturer. Practically anyone into cycling will know of SRAM and their high-end groupsets (Force and Red), along with Zipp wheels, Truvativ, Avid, Rockshox… All well known and respected brands in the cycling world.

    There are basically 3 entrenched players in this field, Shimano, Campagnolo and Sram. Shimano traditionally has had a larger share of the OEM market, but SRAM has been repositioning here and is gaining a larger chunk of this pie. Aftermarket parts provide a higher margin, and this is the market Sram really seems to be targeting. Some see the absence (and lack of intention to develop) a high-end electronic shifting group by SRAM as a clear sign they are losing their position, but the market for 4-odd thousand bicycle gear-sets is thin at best – 2 thousand you might be able to sneak past the Financial Controller, plus their mechanical groups are by far the lightest for the price ;)

    As for the business, high margins, strong and growing cash flow, high ROE – albeit previously financed more by debt than equity. Some of the founding family will be cashing out in the deal, but the operating management will maintain a relatively healthy holding. Depending on the size of the IPO and the offering price, this could be a worthwhile investment. The problem is that given the obvious growth profile and high brand-name visibility, the shares are likely to become overpriced quickly – the best bubbles begin from sound underlying fundamental trends (See Soros’ idea of reflexivity).

    • Roger Montgomery
      :

      Thanks Rob. I will keep an eye for it too. I have bike swith X0 and a bike with X9 gear so was enthused by your comments. Would you like to do an assessment when the prospectus is out.

      • Thomickers
        :

        Can’t wait for this float. I am a road bike enthusiast and Roger is probably a mountain biker. hopefully I be an owner of the shares (for investment over novelty purposes). Where the future core business is will not be in the high-end parts (SRAM red + carbon stuff). I think the developed world will need to shift towards bicycles over cars (already done in the Netherlands and Denmark) in the upcoming years, whether you like it or not. HUB gears and easy servicing of parts is where the money is.

        As for Shimano vs Campag vs SRAM on road bikes. The weight differences are + or minus 10grams from each other. Roger mentioned a couple of times in previous blogs that its the rider who should lose the weight and not spend $$$$$ on “lighter” parts. I think this is how the average consumer will think, when they train for weekend rides.

        I think the IPO will be a cash out, unless they have better ideas of changing the biking world.

      • Rob S
        :

        Thomickers,

        While ideologically I agree with you for the need to shift to bicycles and away from cars, in a strategic sense, I think it is imperative that SRAM continue focusing on the high end kit. This is where their competitive advantage lies and why they have a high net margin on sales.

        High end bikes bought with top of the line group-sets cost a lot to maintain. This creates a captive market for high-margin aftermarket consumables – Roger would know this if he’s had you had to replace a cassette and chain on his X0 rig (or even worse if you run XX!). This also results in sticky customers – they have to keep coming back, or otherwise they face high switching costs (if you want to shift between sram and shimano for the shifters for instance, you need at least a new rear-derailleur too).

        Think about it this way – if they were to focus on the lower end, cheap and functional kit to go on mass-produced bikes, then they would in effect be producing commodity products. The customer doesn’t care if their bike is equipped with Sram, Shimano, or some Chinese knock-off you’ve never heard of. Their competitive advantage would be reduced to economies of scale, but unfortunately they are not the largest, or the lowest cost producer (Shimano is), so Sram would no longer be attractive as an investment.

        As for what they will do with the cash, back in 2008 Sram underwent a restructuring, which amongst other things, saw about 40% of the company in the hands of private equity group Trilantic Partners (formerly Lehman Brothers). Lance Armstrong was involved in this deal too, which saw them netting a minimum 15% annual return in the form of preferred shares. A large chunk of the IPO funds will go towards bailing out these groups. In adddition, Sram has been operating with negative equity for several years, so a further chunk of the raisings will go into paying down creditors.

        I’ve just seen that the amended prospectus was released yesterday, so I’ll spend more time on this and put a more comprehensive write up together soon.

        Cheers,
        Rob

      • Roger Montgomery
        :

        The strategy for all of them must be MS Window’s. Remember it cost nearly the same to build a base model commodore as a caprice. Branding is therefore important too and the perception of quality comes from the high end and trickles down…

  12. David Malcolm
    :

    I am watching/waiting to determine if Barminco will float – very big float – fully underwritten and in the right space.
    With the market in the doldrums could be priced at value

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