Back on December 19 (see write-up here), I suggested that Amazon's shares were undervalued and could appreciate by 20% over the next 12 months - they are up 18% today off the back of a stronger than expected earnings report. While any prudent investor would take profits here, including me (I am up 35% since getting in at the low $40s), I believe there is more upside at these levels and would continue to buy the shares.
As with my investment in Google (see write-up here), my Amazon investment highlights the value of sound fundamental research and proves that one can make money in this market on both the long and short side.
From Deutsche Bank Analyst Jeetil Patel:
Amazon's 4Q results demonstrated
Growth in revenues, profits bucking industry trends - BUY
We remain buyers of shares of Amazon.com, particularly as 28% unit
growth, 18% revenue growth and 3P growth reacceleration fueled
operating profit upside in 4Q. While the economic environment is
terrible, Amazon's business model and strategy continues to
outperform its retail AND Internet brethren. For 2009, we estimate
18% operating profit growth, with potential upside in 2H from a more
stable retail pricing environment (which could aid either margins or
growth). Our new price target is $65, or 25x 2010E EPS.
* 4Q upside from unit growth, 3P and fulfillment
Amazon.com beat our 4Q rev/EPS estimates by a healthy margin ($6.7bn/
$0.84 vs. $6.55bn/$0.65), on the heels of 3P growth re-acceleration
(+33% vs. +26% in 3Q) and excellent fulfillment cost management.
Unit growth of 28% was the highest among the big Internets, with
purchase frequency still up 10% Y/Y. Retail unit growth came in at
+26%, vs. +32% in 3Q, still suggesting that the company is
witnessing leverage against the cost structure. While operating
profit improvements are likely in 1H, we think that an improved
retail pricing environment sometime in 2009 could help fuel
incremental profit dollar growth this year.
* Raising 2009 estimates and introducing 2010 estimates
We are now forecasting 1Q09 revenues of $4.75bn (vs. $4.55bn
previously) and pro-forma (cash-tax) adjusted EPS of $0.46 (vs.
$0.44 previously). For 2009, we are now forecasting revs of $21.9bn
(+14%Y/Y) vs. $21.5bn previously. Our '09 proforma EPS forecast goes
to $2.31 vs. $2.24 previously (on a 20% tax rate). We also expect
$1.28bn in operating profit, or 5.9% margin in-line with our previous
forecast. We are also introducing 2010 estimates, calling for $25bn
in revenues (+14%Y/Y), operating profit of $1.59bn (6.4% operating
margin) & pro-forma EPS of $2.61 (+13% growth & 27% tax rate).
* Bumping Price Target to $65 ($57 previously)
Our new price target is $65 ($57 previously) based on 25x our 2010
pro forma EPS estimate of $2.61. While we fully acknowledge that our
earnings multiple is higher than sector averages, currently trading
at 15x 2010E earnings, we believe a premium is justified given the
company's continued fundamental growth in revenues and profit
dollars and the long term potential of its technology investments.
Risks include: increased competition from traditional retailers,
potential weakness in consumer demand, impact of marketing and
shipping initiatives.
Read More!
Friday, January 30, 2009
Wednesday, January 28, 2009
Wireless Supports Growth at Both AT & T and Verizon
Both AT&T and Verizon’s earnings results were supported by strong wireless growth and margins compared to the wireline businesses. At AT&T, the mobile division reported 2,095k net additions, driven by strong iPhone sales. EBITDA margins were a healthy 35.9%, helped by a 400bps impact from iPhone sales and a higher ARPU. At Verizon, wireless net additions were not as strong, however, ARPU growth was stronger than what mosts analysts were expecting and margins were a high of 47.2%, though helped by a few non-recurring items. Ex-cluding those items, margins were within the company's 43-45% long-term goal.
AT&T's wireline EBITDA margins were down 100bps sequentially to 33.6%, as enterprise revenue declined 3.7% and consumer revenue declined 5.3%, due to higher line losses. DSL subscribers continued to weaken, falling by an estimated 30,000, while consumer primary lines fell 11.4% YoY and retail lines dropped 4.3% YoY. The company provided guidance that was below Street expectations on EPS mainly due to weakness in the wireline business while the wireless business guidance was reassuring. Management is also pulling back on capex spend to the tune of 10-15%, so free cash flow should show stable growth despite the weak outlook for the wireline business.
Verizon's wireline businesses relfected a mix of weak DSL numbers while FiOS Internet additons were strong. Overall wireline margins declined 200bps sequentially to 25.4% due to increased marketing and bad debt expenses, and lower revenues. The company announced more layoffs as the economic environment proves challenging particularly for the wireline business.
Of the two, I prefer Verizon as the business is not dependent on iPhone sales. Further, Verizon's lower multiple of 4.5x '09 EBITDA appears to have already reflected the economic uncertainities, relative to the 5.5x '09 EBITDA multipe for AT&T. Thus, any improvement in Verizon's business is likely to be rewarded with multiple expansion. Read More!
AT&T's wireline EBITDA margins were down 100bps sequentially to 33.6%, as enterprise revenue declined 3.7% and consumer revenue declined 5.3%, due to higher line losses. DSL subscribers continued to weaken, falling by an estimated 30,000, while consumer primary lines fell 11.4% YoY and retail lines dropped 4.3% YoY. The company provided guidance that was below Street expectations on EPS mainly due to weakness in the wireline business while the wireless business guidance was reassuring. Management is also pulling back on capex spend to the tune of 10-15%, so free cash flow should show stable growth despite the weak outlook for the wireline business.
Verizon's wireline businesses relfected a mix of weak DSL numbers while FiOS Internet additons were strong. Overall wireline margins declined 200bps sequentially to 25.4% due to increased marketing and bad debt expenses, and lower revenues. The company announced more layoffs as the economic environment proves challenging particularly for the wireline business.
Of the two, I prefer Verizon as the business is not dependent on iPhone sales. Further, Verizon's lower multiple of 4.5x '09 EBITDA appears to have already reflected the economic uncertainities, relative to the 5.5x '09 EBITDA multipe for AT&T. Thus, any improvement in Verizon's business is likely to be rewarded with multiple expansion. Read More!
One Stock is Benefiting From The Recession
That stock is Netflix and it is one of the rare list of stocks that are trading near their 52 week highs. The stock price has doubled since reaching lows in October 2008.
One reason is that subscriber numbers are accelerating. In 4Q08, sub numbers grew 19% YoY from 16% YoY in 3Q08 and the midpoint of 1Q09 guidance points to another quarter of sub growth acceleration.
I could only arrive at one reason for this phenomenon and that is the millions of the unemployed are using part of their severance and unemployment checks for a bit of entertainment in the form of DVD rentals. I have several unemployed friends doing just that now. Most are foregoing visits to bars and restaurants and instead are sitting in front of their 50inch plasma TVs passing time watching movies. Several of them have subscribed to Netflix.
So what is happening that is causing the share price appreciation? In 4Q08:
1. Subscriber numbers that we talked about above accelerated 19% YoY due to a 40% YoY growth rate in gross subs (churn rate increased a few points).
2. Operating income grew 90% YoY
3. Gross margins improved 200bps and operating margins improved 400bps, the latter due to more efficient marketing spending and declining subscriber acquisition costs.
4. The company is buying back stock while most companies are holding off on share repurchases.
5. The model generated $51 million in FCF in 4Q and ended the year with $300 million in cash.
6. 1Q09 guidance was materially above Street expectations.
I must confess that I was never a fan of the Netflix model although I appreciated its acceptance. One reason is because I thought distribution of movies over the Internet would have reached critical mass already and competition from Amazon, Blockbuster and others would have stymied Netflix's growth. Neither has turned out to be the case.
The stock is trading at 24x '09 EPS but at a reasonable PEG of 1.06. So there is likely more upside to the shares, but given the history of this stock I would caution anyone from jumping in at these levels. Read More!
One reason is that subscriber numbers are accelerating. In 4Q08, sub numbers grew 19% YoY from 16% YoY in 3Q08 and the midpoint of 1Q09 guidance points to another quarter of sub growth acceleration.
I could only arrive at one reason for this phenomenon and that is the millions of the unemployed are using part of their severance and unemployment checks for a bit of entertainment in the form of DVD rentals. I have several unemployed friends doing just that now. Most are foregoing visits to bars and restaurants and instead are sitting in front of their 50inch plasma TVs passing time watching movies. Several of them have subscribed to Netflix.
So what is happening that is causing the share price appreciation? In 4Q08:
1. Subscriber numbers that we talked about above accelerated 19% YoY due to a 40% YoY growth rate in gross subs (churn rate increased a few points).
2. Operating income grew 90% YoY
3. Gross margins improved 200bps and operating margins improved 400bps, the latter due to more efficient marketing spending and declining subscriber acquisition costs.
4. The company is buying back stock while most companies are holding off on share repurchases.
5. The model generated $51 million in FCF in 4Q and ended the year with $300 million in cash.
6. 1Q09 guidance was materially above Street expectations.
I must confess that I was never a fan of the Netflix model although I appreciated its acceptance. One reason is because I thought distribution of movies over the Internet would have reached critical mass already and competition from Amazon, Blockbuster and others would have stymied Netflix's growth. Neither has turned out to be the case.
The stock is trading at 24x '09 EPS but at a reasonable PEG of 1.06. So there is likely more upside to the shares, but given the history of this stock I would caution anyone from jumping in at these levels. Read More!
Microsft's Business Model Facing a Bevy of Threats
Who would think that a company with a cash and investments war chest of $25 billion would be under threat from changing consumer consumption patters and a sluggish economy and cannot do anything about it. Microsoft is facing this threat and for the first time in its 35 year history, the company is laying off employees and "attempting" to cut expenses.
There is currently a significant slowdown in desktop and laptop sales as both consumers and enterprises pull back on purchases. Chief information officers are simply recycling old computers, and given the massive layoffs at most companies, there is no need to buy new computers. This is exerting significant downward pressure on the client services and the business division, both of which depend on the sales of PCs and together represent 60% of revenues and more than 75% of operating income. Not good.
Even the upcoming Windows 7 roll-out is unlikely to spur significant upgrade sales, although reviews of the product has been extremely positive. Further, the rapidly growing netbook product is cannibalizing PC sales and contribute less revenues and profits for Microsoft given their low ASPs.
The online services business is facing the combined headwinds of a deteriorating online display advertising market and Google on search.
The entertainment business is growing strongly but operating margins in this business is minuscule.
And finally, the server and tools business, which has 20%+ margins is experiencing a pullback in demand, although growth in the most recent quarter was a healthy 15%. Furthermore, deferred revenues declined a few percentage points sequentially for the first time in several years.
So what is management doing given that these threats are beyond their control and if continued could spell the first secular decline in the company's history. They announced a headcount reduction but that only represented 2-3% of employees and most of it is not immediate and will occur over an 18 month period. In addition, despite the $1.5 billion in annual savings from the expense reductions, most analysts have second half FY09 operating expenses increasing close to $1 billion.
Management suspended stock repurchases possibly signaling that their shares could fall further (or they want to conserve cash for a Yahoo acquisition).
Microsoft is one of the greatest and most successful companies known to man but given the current headwinds it is difficult to invest in this stock with conviction. Estimates on the Street are likely to come down as we progress throughout the quarter as business conditions deteriote more than expected. Thus, I am staying on the sidelines for now until I see a few of these pressures abate. See my prior write-up on the software stocks as a safe haven here.
Read More!
There is currently a significant slowdown in desktop and laptop sales as both consumers and enterprises pull back on purchases. Chief information officers are simply recycling old computers, and given the massive layoffs at most companies, there is no need to buy new computers. This is exerting significant downward pressure on the client services and the business division, both of which depend on the sales of PCs and together represent 60% of revenues and more than 75% of operating income. Not good.
Even the upcoming Windows 7 roll-out is unlikely to spur significant upgrade sales, although reviews of the product has been extremely positive. Further, the rapidly growing netbook product is cannibalizing PC sales and contribute less revenues and profits for Microsoft given their low ASPs.
The online services business is facing the combined headwinds of a deteriorating online display advertising market and Google on search.
The entertainment business is growing strongly but operating margins in this business is minuscule.
And finally, the server and tools business, which has 20%+ margins is experiencing a pullback in demand, although growth in the most recent quarter was a healthy 15%. Furthermore, deferred revenues declined a few percentage points sequentially for the first time in several years.
So what is management doing given that these threats are beyond their control and if continued could spell the first secular decline in the company's history. They announced a headcount reduction but that only represented 2-3% of employees and most of it is not immediate and will occur over an 18 month period. In addition, despite the $1.5 billion in annual savings from the expense reductions, most analysts have second half FY09 operating expenses increasing close to $1 billion.
Management suspended stock repurchases possibly signaling that their shares could fall further (or they want to conserve cash for a Yahoo acquisition).
Microsoft is one of the greatest and most successful companies known to man but given the current headwinds it is difficult to invest in this stock with conviction. Estimates on the Street are likely to come down as we progress throughout the quarter as business conditions deteriote more than expected. Thus, I am staying on the sidelines for now until I see a few of these pressures abate. See my prior write-up on the software stocks as a safe haven here.
Read More!
Missed Opportunity in VistaPrint
VistaPrint reported stronger than expect earnings results and provided next quarter guidance above the Street, leading analyst Mark Mahaney of Citigroup to upgrade the shares to Buy mainly due to gross margin expansion. The shares are trading up 35% based on massive short covering.
I like this company and wished I got in when it traded down to $11. I was waiting for a pull back that never materialized. See prior write-up. I will need to do more work before I jump in here after the fact but will see what I uncover.
From Citigroup Mark Mahaney:
• Beat Beat & In-Lineish Dec. Qtr. - Q2 FY09 results were way above estimates - Revenue of $139MM and Non-GAAP EPS of $0.53 vs. CIR/Street estimates of $128MM and $0.39, respectively. VPRT left H2 FY09 guidance mostly unchanged, although March Qtr guidance is a nudge above the Street. We believe this was appropriate conservatism.
• Fundamental Inflection Point In Gross Margin - Revenue growth decelerated to 32% Y/Y vs. 44% in Sept. Qtr, but International & Consumer & Holiday Products segments (calendars/greeting cards/etc...) generated big upside. KEY POINT - GM increased 140 bps Y/Y to reach a 6-quarter high of 63.6%. Sustainable drivers were: scale, mix shift to Consumer & Holiday products, and workflow improvements. These offset the decline of high-margin Referral Fees.
• Increasing Estimates & PT - FY09 Non-GAAP EPS from $1.44 to $1.58. PT from $19.50 to $28 - 9X C2010E EBITDA of $158MM.
• Upgrading To Buy Even With 25% After-Market Surge - VPRT closed at $16.22, and the stock traded just over $20 in the aftermarket. Fully respectful of those who called this stock lower, we are upgrading now because: 1) We believe VPRT has achieved Gross Margin stabilization (or better), and this was the key upgrade factor laid out in our 12/21 Initiation report; 2) @ $20, VPRT still only trades at 6X C2009E EBITDA, despite a 20%+ C09 growth outlook that we believe deserves a premium; 3) @ $20 VPRT is still 27% off a level where the company was buying back stock in September; & 4) We believe the market will pay a premium for unusual growth (20%+) in this severe recession.
Read More!
I like this company and wished I got in when it traded down to $11. I was waiting for a pull back that never materialized. See prior write-up. I will need to do more work before I jump in here after the fact but will see what I uncover.
From Citigroup Mark Mahaney:
• Beat Beat & In-Lineish Dec. Qtr. - Q2 FY09 results were way above estimates - Revenue of $139MM and Non-GAAP EPS of $0.53 vs. CIR/Street estimates of $128MM and $0.39, respectively. VPRT left H2 FY09 guidance mostly unchanged, although March Qtr guidance is a nudge above the Street. We believe this was appropriate conservatism.
• Fundamental Inflection Point In Gross Margin - Revenue growth decelerated to 32% Y/Y vs. 44% in Sept. Qtr, but International & Consumer & Holiday Products segments (calendars/greeting cards/etc...) generated big upside. KEY POINT - GM increased 140 bps Y/Y to reach a 6-quarter high of 63.6%. Sustainable drivers were: scale, mix shift to Consumer & Holiday products, and workflow improvements. These offset the decline of high-margin Referral Fees.
• Increasing Estimates & PT - FY09 Non-GAAP EPS from $1.44 to $1.58. PT from $19.50 to $28 - 9X C2010E EBITDA of $158MM.
• Upgrading To Buy Even With 25% After-Market Surge - VPRT closed at $16.22, and the stock traded just over $20 in the aftermarket. Fully respectful of those who called this stock lower, we are upgrading now because: 1) We believe VPRT has achieved Gross Margin stabilization (or better), and this was the key upgrade factor laid out in our 12/21 Initiation report; 2) @ $20, VPRT still only trades at 6X C2009E EBITDA, despite a 20%+ C09 growth outlook that we believe deserves a premium; 3) @ $20 VPRT is still 27% off a level where the company was buying back stock in September; & 4) We believe the market will pay a premium for unusual growth (20%+) in this severe recession.
Read More!
Bucking The Trend
My worked turned out to be correct in that Google would best analysts estimates in 4Q. See my prior write-ups here, here, and here about Google's 4Q. I got in aggressively in the $250-$275 price ranges so I am up between 25-35% on my investment.
Most of my analysis was correct except for CPC pricing, which declined while I was expecting growth.
I will likely take some profits soon as the overall market moves up due to Obama's Good Bank, Bad Bank stimulus package. However, when everyone realizes that these stimulus plans are ineffective, the market will head south and Google likely with it.
I am still a strong believer in Google as a company and a stock to hold for the long-term and believe that the market is undervaluing the company. I will continue to provide updates on my work on Google's fundamentals for 1Q09 so look for that in coming weeks.
However, I think it is difficult to hold onto any equity, except gold stocks, with conviction given the state of the economy, but money could be made in the short-term by trading the quarters. That practice though is risky and requires good analytical work of the kind I did with Google.
Meanwhile, a report on Google's 4Q by Jeetil Patel of Deutche Bank, one of the best on the Street provides more insight and recommeds purchasing the shares on weakness in the share price.
Reiterate BUY investment rating - $390 Price target
We would be buyers of shares of Google at current levels and on any
price weakness, particularly as prospects remain bullish for the
company (despite our expectations of a more cautiously optimistic
view). Google delivered 4Q revenue/EPS upside, driven by 18% click
volume growth (the peg for the multiple), healthy opex controls
(thanks for the shareholder friendliness) and 27% profit growth. In
2009, while paid search (gross) revs will increase 7%, note that
click volume growth of 13% should yield 20% profit growth.
* Growth in tact, while new opex lever fuels EPS upside in 4Q
Google beat 4Q expectations as revs increased 4% Q/Q (vs. 3.7% est.)
and EPS of $5.10 was in-line with our $5.13 est. (Street at $4.96).
With opex controls inplace and volumes still healthy, we think that
Google continues to execute well in a tough economic environment.
With increased emphasis on ad optimization (i.e. higher click-
through on inventories), Google may be able to capture un-spent
marketing budgets in coming quarters. The unknown lies in the
response/intentions on marketers as the economic environment
potentially worsens. Nonetheless, we expect 13% volume growth in
2009 and 5% CPC deflation from mix, forex headwinds and emerging
markets.
* Slightly raising estimates
For 1Q 2009, we are modeling net revenues/EPS of $4.25bn/$5.17 vs.
$4.30bn/$5.09 previously. For 2009, our estimates now stand at
$18.1bn in net revenues (+14%Y/Y), $11.1bn in EBITDA and $21.80 in
pro-forma EPS, compared to $18.1bn/$10.71bn/$21.45 previously. 2009
gross revenues are expected to increase 7%, impacted by the US
dollar strength. We are also introducing 2010 estimates, with
revenues of $21.2bn (+17%Y/Y), EBITDA of $13bn and $25.94 in EPS.
* Valuation & risks; $390 price target (vs. $480 previously)
Our new price target of $390 ($480 previously) is based on 18x our
2009E EPS of $21.80 and 15x 2010 EPS and 17x 2009 FCF. We assign a
premium to Google's blended peer group average of 16x consensus
2009E EPS. We believe a premium is justified given the company's 20%
annual profit growth outlook, almost double its peer group's average
growth of 10%. Investment risks include: slowing query growth,
slowdown in ad spending, competition, currency fluctuations, tech
obsolescence, and new interactive media.
Read More!
Most of my analysis was correct except for CPC pricing, which declined while I was expecting growth.
I will likely take some profits soon as the overall market moves up due to Obama's Good Bank, Bad Bank stimulus package. However, when everyone realizes that these stimulus plans are ineffective, the market will head south and Google likely with it.
I am still a strong believer in Google as a company and a stock to hold for the long-term and believe that the market is undervaluing the company. I will continue to provide updates on my work on Google's fundamentals for 1Q09 so look for that in coming weeks.
However, I think it is difficult to hold onto any equity, except gold stocks, with conviction given the state of the economy, but money could be made in the short-term by trading the quarters. That practice though is risky and requires good analytical work of the kind I did with Google.
Meanwhile, a report on Google's 4Q by Jeetil Patel of Deutche Bank, one of the best on the Street provides more insight and recommeds purchasing the shares on weakness in the share price.
Reiterate BUY investment rating - $390 Price target
We would be buyers of shares of Google at current levels and on any
price weakness, particularly as prospects remain bullish for the
company (despite our expectations of a more cautiously optimistic
view). Google delivered 4Q revenue/EPS upside, driven by 18% click
volume growth (the peg for the multiple), healthy opex controls
(thanks for the shareholder friendliness) and 27% profit growth. In
2009, while paid search (gross) revs will increase 7%, note that
click volume growth of 13% should yield 20% profit growth.
* Growth in tact, while new opex lever fuels EPS upside in 4Q
Google beat 4Q expectations as revs increased 4% Q/Q (vs. 3.7% est.)
and EPS of $5.10 was in-line with our $5.13 est. (Street at $4.96).
With opex controls inplace and volumes still healthy, we think that
Google continues to execute well in a tough economic environment.
With increased emphasis on ad optimization (i.e. higher click-
through on inventories), Google may be able to capture un-spent
marketing budgets in coming quarters. The unknown lies in the
response/intentions on marketers as the economic environment
potentially worsens. Nonetheless, we expect 13% volume growth in
2009 and 5% CPC deflation from mix, forex headwinds and emerging
markets.
* Slightly raising estimates
For 1Q 2009, we are modeling net revenues/EPS of $4.25bn/$5.17 vs.
$4.30bn/$5.09 previously. For 2009, our estimates now stand at
$18.1bn in net revenues (+14%Y/Y), $11.1bn in EBITDA and $21.80 in
pro-forma EPS, compared to $18.1bn/$10.71bn/$21.45 previously. 2009
gross revenues are expected to increase 7%, impacted by the US
dollar strength. We are also introducing 2010 estimates, with
revenues of $21.2bn (+17%Y/Y), EBITDA of $13bn and $25.94 in EPS.
* Valuation & risks; $390 price target (vs. $480 previously)
Our new price target of $390 ($480 previously) is based on 18x our
2009E EPS of $21.80 and 15x 2010 EPS and 17x 2009 FCF. We assign a
premium to Google's blended peer group average of 16x consensus
2009E EPS. We believe a premium is justified given the company's 20%
annual profit growth outlook, almost double its peer group's average
growth of 10%. Investment risks include: slowing query growth,
slowdown in ad spending, competition, currency fluctuations, tech
obsolescence, and new interactive media.
Read More!
Thursday, January 22, 2009
One Analyst Not Calling For A Microsoft Calamity
Analysts at JPMorgan are expecting tougher times for Microsoft but are not calling for a disaster when the company reports results tonight.
The firm expects Microsoft to reduce guidance for the fiscal year ending June 30, but that timing of channel sales may delay the impact of slowing PC demand to the financials.
From Analyst John Difucci At JPMorgan:
We expect MSFT’s December quarter results to reflect the difficult PC
market, but not to the degree that it has affected others along that food
chain—yet. While the majority of MSFT’s profit is driven by PC unit sales
to the developed regions of the world, and that number has been relatively
weak and may become weaker into the near future, the timing of channel
sales may delay some of the negative effects to MSFT’s results.
• Majority of profit driven by Client and Office. We believe that about
80-90% of Microsoft’s profit is derived from the Client and Office
businesses, both of which are largely driven by PC unit sales in the
developed regions of the world.
• Sell to channel introduces sales timing difference. We estimate that
majority of the Client business (perhaps 60-80%) and a meaningful
amount of the Office business (~20% or more) are sold to the channel
(versus through the channel), so there may be a delay of a quarter of so
before the full impact of a deteriorating PC market hits MSFT’s results.
• Expect lowered guidance. While we expect results to be better than the
disaster that some may anticipate for the December period, the effects of
the PC market should be felt in subsequent quarters. Therefore, we
expect MSFT to reduce guidance, and while investors may breathe a sigh
of relief in the thought that this guidance is easily attainable and
conservative, it probably is not.
• Other segments. We expect solid Server & Tools and E&D performance
on the back of maintenance and Xbox, respectively, while the OSB will
likely continue to be a meaningful drag.
• We continue to rate MSFT Neutral with a $22 price target based on
our DCF.
Read More!
The firm expects Microsoft to reduce guidance for the fiscal year ending June 30, but that timing of channel sales may delay the impact of slowing PC demand to the financials.
From Analyst John Difucci At JPMorgan:
We expect MSFT’s December quarter results to reflect the difficult PC
market, but not to the degree that it has affected others along that food
chain—yet. While the majority of MSFT’s profit is driven by PC unit sales
to the developed regions of the world, and that number has been relatively
weak and may become weaker into the near future, the timing of channel
sales may delay some of the negative effects to MSFT’s results.
• Majority of profit driven by Client and Office. We believe that about
80-90% of Microsoft’s profit is derived from the Client and Office
businesses, both of which are largely driven by PC unit sales in the
developed regions of the world.
• Sell to channel introduces sales timing difference. We estimate that
majority of the Client business (perhaps 60-80%) and a meaningful
amount of the Office business (~20% or more) are sold to the channel
(versus through the channel), so there may be a delay of a quarter of so
before the full impact of a deteriorating PC market hits MSFT’s results.
• Expect lowered guidance. While we expect results to be better than the
disaster that some may anticipate for the December period, the effects of
the PC market should be felt in subsequent quarters. Therefore, we
expect MSFT to reduce guidance, and while investors may breathe a sigh
of relief in the thought that this guidance is easily attainable and
conservative, it probably is not.
• Other segments. We expect solid Server & Tools and E&D performance
on the back of maintenance and Xbox, respectively, while the OSB will
likely continue to be a meaningful drag.
• We continue to rate MSFT Neutral with a $22 price target based on
our DCF.
Read More!
Monday, January 19, 2009
eBay Should Withhold Guidance As Core Business Continues to Struggle
eBay is scheduled to report 4Q08 earnings on Wednesday Jan. 21 and the Street is projecting revenues of $2.120bn and Adjusted EPS of $0.40. My work suggests that those numbers are achievable but 2009 Street estimates of $8.7bn and adjusted EPS of $1.65 could be a challenge to meet. As such, I believe that eBay should withhold providing guidance for 1Q09 and for full year 2009. Doing so should help stabilize the share price and reduce volatility in the near-term.
It goes without saying that eBay's core business remains challenging, while results from the payments, classifieds, and advertising businesses are strong. However, in order for the shares to recover, the core business will have to start performing. My estimates are calling for a dramatic 12% FX-neutral decline in 4Q GMV and an 8% decline for full year 2009, as slow auto sales weigh-in more negatively. Ex-autos, I expect a GMV growth rate of -6%. Unless the GMV growth rate stabilizes the shares are likely to languish for some time.
Listings trends have been strong and conversions on the auction business is stable per the data that I have analyzed. However, the BIN conversions are off sharply and ASP numbers are declining rapidly. In addition, it appears that listings quality has been declining. Further, per the comScore data, traffic to the site continues to decline as eBay's demand problem worsens. On the sell side, sellers are still departing the site in significant numbers to other channels such as Amazon (buyers are going to Amazon as well). Clearly the business remains challenged.
What is eBay's Management to do?
1. For starters, forget about issuing guidance and blame it on macro conditions that make it difficult to predict anything with surety. No one can argue with that.
2. There are clearly certain categories such as collectibles and autos that are perfectly suited to auctions while others are not. Adjust the model to reflect that reality. Contrary to some, I do not believe that eBay's entire auction business is structurally challenged.
3. Pull back on the share buybacks and allocate more capital to technology investments. Search on the site is lethargic. Management should either invest heavily in that area or outsource that function to one of the search providers like Google.
4. Sell Skype. It is not additive to the core business model. It is a telecommunications company and investors wishing diversification can do so on their own.
5. I would keep the payments business within the portfolio because selling it would put the current synergies at risk. However, if pressures mount, then a spin-off of the payments business, where eBay is the majority shareholder, would make sense.
6. Eliminate your high priced consultants and listen to your "sellers". They are the best source of input and their advice is free. Maybe create a high level management position like a seller czar, so to speak, whose sole function is to work with the sellers.
7. Develop a more effective marketing strategy to get buyers back on the site.
8. If all else fails, consider a merger with another one of the Internet leaders such as Google, Yahoo!, or Microsoft.
Meanwhile I will remain on the sidelines but will continue to monitor the business for any critical turning points. The shares are trading at extremely cheap multiples for an Internet stock at 4x '09 EBITDA and 8.0x Adj. '09 EPS. But shares are cheap for a reason and for eBay it's the struggling core business.
Read More!
It goes without saying that eBay's core business remains challenging, while results from the payments, classifieds, and advertising businesses are strong. However, in order for the shares to recover, the core business will have to start performing. My estimates are calling for a dramatic 12% FX-neutral decline in 4Q GMV and an 8% decline for full year 2009, as slow auto sales weigh-in more negatively. Ex-autos, I expect a GMV growth rate of -6%. Unless the GMV growth rate stabilizes the shares are likely to languish for some time.
Listings trends have been strong and conversions on the auction business is stable per the data that I have analyzed. However, the BIN conversions are off sharply and ASP numbers are declining rapidly. In addition, it appears that listings quality has been declining. Further, per the comScore data, traffic to the site continues to decline as eBay's demand problem worsens. On the sell side, sellers are still departing the site in significant numbers to other channels such as Amazon (buyers are going to Amazon as well). Clearly the business remains challenged.
What is eBay's Management to do?
1. For starters, forget about issuing guidance and blame it on macro conditions that make it difficult to predict anything with surety. No one can argue with that.
2. There are clearly certain categories such as collectibles and autos that are perfectly suited to auctions while others are not. Adjust the model to reflect that reality. Contrary to some, I do not believe that eBay's entire auction business is structurally challenged.
3. Pull back on the share buybacks and allocate more capital to technology investments. Search on the site is lethargic. Management should either invest heavily in that area or outsource that function to one of the search providers like Google.
4. Sell Skype. It is not additive to the core business model. It is a telecommunications company and investors wishing diversification can do so on their own.
5. I would keep the payments business within the portfolio because selling it would put the current synergies at risk. However, if pressures mount, then a spin-off of the payments business, where eBay is the majority shareholder, would make sense.
6. Eliminate your high priced consultants and listen to your "sellers". They are the best source of input and their advice is free. Maybe create a high level management position like a seller czar, so to speak, whose sole function is to work with the sellers.
7. Develop a more effective marketing strategy to get buyers back on the site.
8. If all else fails, consider a merger with another one of the Internet leaders such as Google, Yahoo!, or Microsoft.
Meanwhile I will remain on the sidelines but will continue to monitor the business for any critical turning points. The shares are trading at extremely cheap multiples for an Internet stock at 4x '09 EBITDA and 8.0x Adj. '09 EPS. But shares are cheap for a reason and for eBay it's the struggling core business.
Read More!
Software As A Safe Haven
With the dismal retail numbers, high home foreclosure rates, continued bankruptcies of major companies, profit warnings from international banks thought to have dodged the credit crisis, and request for more bailout funds from Bank of America and Citigroup, it is becoming apparent that 2009 is shaping up to be as bad or worse than 2008. With that in mind, if investors are looking for a safe place to invest outside of cash and Treasuries, I think software stocks are a safe bet.
I never thought I would suggest Tech stocks as defensive plays, but I believe that the dynamics of the software space make them an attractive investment in a depressed economic cycle. Software stocks should perform better relative to other tech sectors other than the Internet stocks, which are more volatile.
The main reason is that maintenance revenues, which constitutes over 50% of enterprise software company revenues is stable and continues in spite of economic conditions. Those revenues are also highly profitable with 80-90% margins. Moreover, as license revenues come under pressure, the high margin maintenance revenues should become a bigger part of the revenue mix, helping those companies report stable or growing profits and cash flow.
Maintenance fees are paid by corporations for supplemental services such as product updates, bug fixes, and technical support. And unless the corporation goes out of business, which is a risk particularly for retail and finance companies, then those maintenance payments continue to the software company. In addition, most enterprise companies report maintenance renewal rates close to 100% due to the high switching costs.
So in choosing companies to buy, investors should look to companies with (1) high maintenance revenues as a percent of total revenues; (2) high corporate exposure relative to consumer exposure; and (3) higher enterprise exposure relative to small business exposure. Further, infrastructure companies are more favorable compared to applications companies due to the fact that infrastructure sales are based on CPUs, while application sales are based on total heads. With the latter, as layoffs continue revenues are eliminated.
With that in mind, the most attractive companies in the space are Oracle, Symantec, TIBCO, and McAfee. Although Microsoft doesn't necessarily fit the criteria because of the high consumer exposure, I like its current competitive position and I am adding it to the investment mix. I will report occasionally on picks within the space.
Read More!
I never thought I would suggest Tech stocks as defensive plays, but I believe that the dynamics of the software space make them an attractive investment in a depressed economic cycle. Software stocks should perform better relative to other tech sectors other than the Internet stocks, which are more volatile.
The main reason is that maintenance revenues, which constitutes over 50% of enterprise software company revenues is stable and continues in spite of economic conditions. Those revenues are also highly profitable with 80-90% margins. Moreover, as license revenues come under pressure, the high margin maintenance revenues should become a bigger part of the revenue mix, helping those companies report stable or growing profits and cash flow.
Maintenance fees are paid by corporations for supplemental services such as product updates, bug fixes, and technical support. And unless the corporation goes out of business, which is a risk particularly for retail and finance companies, then those maintenance payments continue to the software company. In addition, most enterprise companies report maintenance renewal rates close to 100% due to the high switching costs.
So in choosing companies to buy, investors should look to companies with (1) high maintenance revenues as a percent of total revenues; (2) high corporate exposure relative to consumer exposure; and (3) higher enterprise exposure relative to small business exposure. Further, infrastructure companies are more favorable compared to applications companies due to the fact that infrastructure sales are based on CPUs, while application sales are based on total heads. With the latter, as layoffs continue revenues are eliminated.
With that in mind, the most attractive companies in the space are Oracle, Symantec, TIBCO, and McAfee. Although Microsoft doesn't necessarily fit the criteria because of the high consumer exposure, I like its current competitive position and I am adding it to the investment mix. I will report occasionally on picks within the space.
Read More!
Wednesday, January 14, 2009
Ballmer Will Wait Until Bartz Comes Calling
So it turns out that a few investors were incorrect in that Microsoft was going to make a move for Yahoo's search business ahead of the appointment of a new CEO. So now I believe that in choosing Carol Bartz as Yahoo's new CEO, a transaction with Microsoft will be pushed back several months.
I have said in the past that a transaction is not imminent, despite the rampant speculation in the press. See old write-ups here, here, and here. But I also believe that Microsoft has no choice but to acquire Yahoo if they are serious about having a meaningful presence in online advertising. Microsoft cannot, in my view, close the 3% to 60% gap it has with Google on global search share by organic means. They need to acquire Yahoo if they are serious about online advertising. There is currently a market demand shift to performance based advertising, of which, search is the dominant form. Thus, search is likely to become a much more significant component of online advertising over the next few years.
Now back to Carol Bartz. Her successful history at Autodesk will no doubt be an asset to Yahoo in helping bring about a cogent strategic focus, cost discipline, and organizational control, which had been quite loose over the years.
But her challenges are enormous. Sure Yahoo is one of the leading Internet assets in the world, is number one in display advertising, a solid number two in search, has a strong balance sheet and has significant off-balance sheet assets. However, Yahoo has a struggling display business that is facing enormous headwinds due to the recession, the search business continues to lose share to Google, and the paid content business is largely irrelevant and a slow grower at best. Think about it. Which one of Yahoo's three core business are you willing to hang your hat on?
Other than hopes of an acquisition, there is no clear reason to own Yahoo's shares. However, I still believe that it make sense to put personal money into Yahoo and just sit and wait for an action with Microsoft.
Wall Street appeared to applaud the hiring mainly because it removes an overhang and not because they believe Bartz will do something magical to turn this business around. She appeared overly confident on the conference call with analysts but she will soon come to realize that she is in over her head. Internet businesses are vastly different than software businesses. Ask Microsoft.
This brings me to my final point on the MicroHOO issue. A transaction will occur when Bartz realizes that there is nothing that Yahoo could do to improve its competitive position. Market dynamics are too unfavorable for Yahoo. She will then pick up the phone and call Ballmer and ask to be acquired. Ballmer knows this and is willing to wait it out. End of story.
But for now the saga continues.
Read More!
I have said in the past that a transaction is not imminent, despite the rampant speculation in the press. See old write-ups here, here, and here. But I also believe that Microsoft has no choice but to acquire Yahoo if they are serious about having a meaningful presence in online advertising. Microsoft cannot, in my view, close the 3% to 60% gap it has with Google on global search share by organic means. They need to acquire Yahoo if they are serious about online advertising. There is currently a market demand shift to performance based advertising, of which, search is the dominant form. Thus, search is likely to become a much more significant component of online advertising over the next few years.
Now back to Carol Bartz. Her successful history at Autodesk will no doubt be an asset to Yahoo in helping bring about a cogent strategic focus, cost discipline, and organizational control, which had been quite loose over the years.
But her challenges are enormous. Sure Yahoo is one of the leading Internet assets in the world, is number one in display advertising, a solid number two in search, has a strong balance sheet and has significant off-balance sheet assets. However, Yahoo has a struggling display business that is facing enormous headwinds due to the recession, the search business continues to lose share to Google, and the paid content business is largely irrelevant and a slow grower at best. Think about it. Which one of Yahoo's three core business are you willing to hang your hat on?
Other than hopes of an acquisition, there is no clear reason to own Yahoo's shares. However, I still believe that it make sense to put personal money into Yahoo and just sit and wait for an action with Microsoft.
Wall Street appeared to applaud the hiring mainly because it removes an overhang and not because they believe Bartz will do something magical to turn this business around. She appeared overly confident on the conference call with analysts but she will soon come to realize that she is in over her head. Internet businesses are vastly different than software businesses. Ask Microsoft.
This brings me to my final point on the MicroHOO issue. A transaction will occur when Bartz realizes that there is nothing that Yahoo could do to improve its competitive position. Market dynamics are too unfavorable for Yahoo. She will then pick up the phone and call Ballmer and ask to be acquired. Ballmer knows this and is willing to wait it out. End of story.
But for now the saga continues.
Read More!
Significant Macro Headwinds Could Drive Blue Nile Shares Lower
Shareholders of Internet jewelry retailer Blue Nile should be very concerned that Tiffany & Co posted a 21% decline in holiday sales due to a pullback in consumer spending across all "categories" and "price points" and that management expects the deteriorating conditions to persist throughout 2009.
The shares of Blue Nile have fallen 70% from its 52-week high and further downside to the share price is likely as more and more consumers pall back on high ASP and discretionary items – two core tenets of Blue Nile's direct-to-consumer model. Compounding the pressures on revenue is that management has less flexibility to cut expenses further and that could lead to huge profit declines.
Traffic to the website has plummeted in the past few months and is likely to get worse. While diamond and other commodity prices are coming down, demand for diamonds has essentially stalled due to layoffs, low to no wage increases, low to no bonuses at most companies, declining home values which makes tapping equity lines difficult, and reduction in credit card balances which reduces purchasing power. In addition, credit card application approvals are down significantly due to tighter credit standards.
My guess is that men will be dropping by their local jewelry stores to cut cash deals, so to speak, in order to get their engagement rings. Thus, in this environment, we are likely to see a share shift back to traditional jewelers.
Even with the sharp share price decline, the shares still trade at an unusually high multiple of 23x 2009 GAAP earnings and with a PEG of 1.3x, although I believe the PEG should be higher because analysts are overestimating the growth rate of 18%.
For a stock facing such headwinds, the shares should trade at a single digit PE, which would take the share price way into the single digits as estimates are ratcheted down. The company is probably looking at flat EPS growth in '09 and flat growth again in '10 at best. So what multiple do you apply to those earnings? Even if you are being generous and apply a 10x multiple to those earnings you are getting a $10 stock price. The shares are trading at near $20. Thus investors should look the other way on this stock as their investment could be cut in half.
Read More!
The shares of Blue Nile have fallen 70% from its 52-week high and further downside to the share price is likely as more and more consumers pall back on high ASP and discretionary items – two core tenets of Blue Nile's direct-to-consumer model. Compounding the pressures on revenue is that management has less flexibility to cut expenses further and that could lead to huge profit declines.
Traffic to the website has plummeted in the past few months and is likely to get worse. While diamond and other commodity prices are coming down, demand for diamonds has essentially stalled due to layoffs, low to no wage increases, low to no bonuses at most companies, declining home values which makes tapping equity lines difficult, and reduction in credit card balances which reduces purchasing power. In addition, credit card application approvals are down significantly due to tighter credit standards.
My guess is that men will be dropping by their local jewelry stores to cut cash deals, so to speak, in order to get their engagement rings. Thus, in this environment, we are likely to see a share shift back to traditional jewelers.
Even with the sharp share price decline, the shares still trade at an unusually high multiple of 23x 2009 GAAP earnings and with a PEG of 1.3x, although I believe the PEG should be higher because analysts are overestimating the growth rate of 18%.
For a stock facing such headwinds, the shares should trade at a single digit PE, which would take the share price way into the single digits as estimates are ratcheted down. The company is probably looking at flat EPS growth in '09 and flat growth again in '10 at best. So what multiple do you apply to those earnings? Even if you are being generous and apply a 10x multiple to those earnings you are getting a $10 stock price. The shares are trading at near $20. Thus investors should look the other way on this stock as their investment could be cut in half.
Read More!
Sunday, January 11, 2009
Yahoo!'s Board Trying To Box In Microsoft
The shares of Yahoo have held up quite well amidst the market sell off last week, with some attributing the strength to speculation that the board is nearing the end of the CEO search. However, there is an alternative explanation that is not getting as much press.
The latest scuttlebutt is that the board is using the press to box Microsoft into a quick deal to get back to the table for a full acquisition or a renewed deal for the search assets. The idea is that the board is signaling that it is winding down the search for a CEO and that Microsoft will need to act now (within the next two weeks) before a CEO is selected. If a new CEO is selected, then any deal will be delayed because the new CEO will need several months to a year to assess his or her strategic options - that is unless the new CEO is Sue Decker.
In an interview with CNET last week, Microsoft CEO Steve Ballmer stated that he wasn't in active discussions with Yahoo but then added the caveat "I think probably fair for us not to comment too much". This is a departure from the past and certainly toned down from his comments at CES that a deal with Yahoo is dead.
I have written numerous times in the past few months that a search deal is not imminent (see articles here and here). However, I have reevaluated my investment thinking on the stock and think it probably makes sense to park some free cash into Yahoo's stock and just sit and wait until something does happen - even if it is for 6 months or longer than a year. Might as was well do so, given that interest rates on bank savings accounts and CDs are so low.
From where I stand, Microsoft has 3% global market share of searches compared to Google's 60%+ global share and no amount of organic growth will help Microsoft close that gap in a meaningful way. Yahoo is their only major option. Further, Yahoo's branded business is under pressure due to the economic slowdown, the paid content business is a slow grower, and the search business is losing share to Google. They need each other. However, I think it makes better sense for Ballmer to acquire the whole company rather than the search assets. Read More!
The latest scuttlebutt is that the board is using the press to box Microsoft into a quick deal to get back to the table for a full acquisition or a renewed deal for the search assets. The idea is that the board is signaling that it is winding down the search for a CEO and that Microsoft will need to act now (within the next two weeks) before a CEO is selected. If a new CEO is selected, then any deal will be delayed because the new CEO will need several months to a year to assess his or her strategic options - that is unless the new CEO is Sue Decker.
In an interview with CNET last week, Microsoft CEO Steve Ballmer stated that he wasn't in active discussions with Yahoo but then added the caveat "I think probably fair for us not to comment too much". This is a departure from the past and certainly toned down from his comments at CES that a deal with Yahoo is dead.
I have written numerous times in the past few months that a search deal is not imminent (see articles here and here). However, I have reevaluated my investment thinking on the stock and think it probably makes sense to park some free cash into Yahoo's stock and just sit and wait until something does happen - even if it is for 6 months or longer than a year. Might as was well do so, given that interest rates on bank savings accounts and CDs are so low.
From where I stand, Microsoft has 3% global market share of searches compared to Google's 60%+ global share and no amount of organic growth will help Microsoft close that gap in a meaningful way. Yahoo is their only major option. Further, Yahoo's branded business is under pressure due to the economic slowdown, the paid content business is a slow grower, and the search business is losing share to Google. They need each other. However, I think it makes better sense for Ballmer to acquire the whole company rather than the search assets. Read More!
Bankrate Shares Come Under Pressure
Bankrate's shares have dropped 20% from highs set in the past two weeks with the recent pull back attributable to comments made by CFO Ed DiMaria at the Citigroup conference about the lack of mortgage advertisers on the site.
Mr. DiMaria stated that while Bankrate has seen an increase in traffic due to government efforts to reduce mortgage rates, the increased traffic did not and is not translating into increased mortgage related revenues, given tight credit conditions. In addition, the credit card business faces headwinds in the affiliate channels. I wrote about both of these previously, see articles here and here.
However, he did state that deposit revenues were strong and were offsetting the weak mortgage related revenues and that he expected EBITDA margins to creep back up towards the 40% range (margins had taken a hit due to lower margin business acquisitions and investments). Further, the site redesign is finally expected in 2Q, about a year behind schedule.
The stock remains extremely volatile. I was hoping to short it when/if it reached the low $40s but now will look to buy shares if it drops into the low $20s. Looks like that will be the trading range for the stock over the next six months. Read More!
Mr. DiMaria stated that while Bankrate has seen an increase in traffic due to government efforts to reduce mortgage rates, the increased traffic did not and is not translating into increased mortgage related revenues, given tight credit conditions. In addition, the credit card business faces headwinds in the affiliate channels. I wrote about both of these previously, see articles here and here.
However, he did state that deposit revenues were strong and were offsetting the weak mortgage related revenues and that he expected EBITDA margins to creep back up towards the 40% range (margins had taken a hit due to lower margin business acquisitions and investments). Further, the site redesign is finally expected in 2Q, about a year behind schedule.
The stock remains extremely volatile. I was hoping to short it when/if it reached the low $40s but now will look to buy shares if it drops into the low $20s. Looks like that will be the trading range for the stock over the next six months. Read More!
Tuesday, January 6, 2009
My 12 Predictions For 2009
Since everyone and their mother is coming out with predictions for 2009, I thought I would weigh in with my own set of predictions. I do not profess to be an expert in anything under the sun. But I do pride myself on knowing a little something about everything in order to live a productive and fulfilling life. So here goes:
1. I'll start off with something that I think is not likely to happen. Microsoft will not make a move for Yahoo! in any capacity.
2. Expedia and Priceline will attempt to merge but there maybe anti-trust issues raised.
3. Yahoo! and eBay will explore ways to cooperate or work together. Could lead to a merger down the road.
4. The U.S. dollar will crash mid-year.
5. Inflation will become an issue once again.
6. The market will run-up into the Obama stimulus package but will then correct by 20%.
7. AOL remains independent, i.e., no buyer surfaces.
8. Bankrate will be purchased by a traditional media company. Tom - get out while the going is good.
9. Several large retailers will file for bankruptcy as well as a few major financial institutions.
10. Google may look to buy what's left of Sun Microsystems.
11. There will be several major oil field discoveries around the globe, particularly Eastern Europe and Asia.
12. The New York Knicks makes a play for Lebron James.
Read More!
1. I'll start off with something that I think is not likely to happen. Microsoft will not make a move for Yahoo! in any capacity.
2. Expedia and Priceline will attempt to merge but there maybe anti-trust issues raised.
3. Yahoo! and eBay will explore ways to cooperate or work together. Could lead to a merger down the road.
4. The U.S. dollar will crash mid-year.
5. Inflation will become an issue once again.
6. The market will run-up into the Obama stimulus package but will then correct by 20%.
7. AOL remains independent, i.e., no buyer surfaces.
8. Bankrate will be purchased by a traditional media company. Tom - get out while the going is good.
9. Several large retailers will file for bankruptcy as well as a few major financial institutions.
10. Google may look to buy what's left of Sun Microsystems.
11. There will be several major oil field discoveries around the globe, particularly Eastern Europe and Asia.
12. The New York Knicks makes a play for Lebron James.
Read More!
eBay Converions And Listings Are Up But Staying On The Sidelines
In a prior write-up on eBay (see eBay's Demand Problem Worsens), I quoted data from Jeffries & Co. analysts Youssef Squali that eBay's global listings were up close to 40% YoY, but that traffic to the site was down 11% YoY, suggesting that the demand problem had not been fixed
However, I have analyzed conversion rate data for the quarter and the data suggests a surprising improvement in auction conversion rates on a sequential basis. On the other hand, the fixed price conversion rates entered a tailspin in early September and never recovered in 4Q. Taken together, the overall company conversion rates remained steady from the third quarter.
Wall Street Analysts have suggested that company wide conversion rates have deteriorated in the quarter, so if my data is correct, then the increased listings with steady conversions would be a positive for eBay and would suggest a possible beat for the quarter.
However, it is too early to call a turnaround in the business because eBay's structural problems persists and the demand problem has not been corrected. Although eBay has been one of my favorite companies to watch over the years I am staying on the sidelines as there are more attractive investments with better upside potential and with lower operational risks.
From A Recent Note By JPMorgan Analyst Imran Khan:
We are maintaining our Neutral rating on eBay. We believe weakness in usage and
conversion, as well as a more competitive broader eCommerce market, present
challenges that will make it difficult for eBay stock to outperform in the coming
months. Our 12-month price target is $17.
• Marketplaces usage metrics point the wrong way. ComScore data indicates
that the number of US users coming to eBay’s sites declined 17% Y/Y in the
three months ended 10/08. We believe the decreased usage and difficulties in
optimizing the search algorithm have resulted in significant weakening of
conversion for eBay listings. These factors are offsetting the gains from
revitalized listings growth on the platform.
• Are online auctions a mature market? Auctions traffic has been anemic, as we
believe a more mature eCommerce market is increasingly driving buyers to
expect a top-flight user experience and an ability to order items, especially new
items, immediately. We think this shift presents a challenge to eBay: auctions are
a near-monopoly for the company, whereas consumers seeking immediate
purchases have a wealth of options, of which eBay is only one.
• PayPal unit remains a prize asset. Payments revenue was up 32% Y/Y through
9M’08, and we are projecting 22% growth in F’09 as the off-eBay side of PayPal
remains a key growth contributor; additionally, we expect a slight benefit as the
impact of the Bill Me Later acquisition is folded in.
• 2009 drivers. In our view, the following factors will drive shares in 2009: (1)
changes in Marketplaces conversion driven by better search, (2) corporate
structure changes such as a sale of Skype, and (3) the impact of any credit market
developments on the receivables book at Bill Me Later.
• Maintaining 4Q’08, F’09 estimates. We are maintaining our 4Q’08 and F’09
revenue, EBITDA and EPS estimates; we are introducing new F’10 estimates; all
these are summarized in the table below: Read More!
However, I have analyzed conversion rate data for the quarter and the data suggests a surprising improvement in auction conversion rates on a sequential basis. On the other hand, the fixed price conversion rates entered a tailspin in early September and never recovered in 4Q. Taken together, the overall company conversion rates remained steady from the third quarter.
Wall Street Analysts have suggested that company wide conversion rates have deteriorated in the quarter, so if my data is correct, then the increased listings with steady conversions would be a positive for eBay and would suggest a possible beat for the quarter.
However, it is too early to call a turnaround in the business because eBay's structural problems persists and the demand problem has not been corrected. Although eBay has been one of my favorite companies to watch over the years I am staying on the sidelines as there are more attractive investments with better upside potential and with lower operational risks.
From A Recent Note By JPMorgan Analyst Imran Khan:
We are maintaining our Neutral rating on eBay. We believe weakness in usage and
conversion, as well as a more competitive broader eCommerce market, present
challenges that will make it difficult for eBay stock to outperform in the coming
months. Our 12-month price target is $17.
• Marketplaces usage metrics point the wrong way. ComScore data indicates
that the number of US users coming to eBay’s sites declined 17% Y/Y in the
three months ended 10/08. We believe the decreased usage and difficulties in
optimizing the search algorithm have resulted in significant weakening of
conversion for eBay listings. These factors are offsetting the gains from
revitalized listings growth on the platform.
• Are online auctions a mature market? Auctions traffic has been anemic, as we
believe a more mature eCommerce market is increasingly driving buyers to
expect a top-flight user experience and an ability to order items, especially new
items, immediately. We think this shift presents a challenge to eBay: auctions are
a near-monopoly for the company, whereas consumers seeking immediate
purchases have a wealth of options, of which eBay is only one.
• PayPal unit remains a prize asset. Payments revenue was up 32% Y/Y through
9M’08, and we are projecting 22% growth in F’09 as the off-eBay side of PayPal
remains a key growth contributor; additionally, we expect a slight benefit as the
impact of the Bill Me Later acquisition is folded in.
• 2009 drivers. In our view, the following factors will drive shares in 2009: (1)
changes in Marketplaces conversion driven by better search, (2) corporate
structure changes such as a sale of Skype, and (3) the impact of any credit market
developments on the receivables book at Bill Me Later.
• Maintaining 4Q’08, F’09 estimates. We are maintaining our 4Q’08 and F’09
revenue, EBITDA and EPS estimates; we are introducing new F’10 estimates; all
these are summarized in the table below: Read More!
Monday, January 5, 2009
Can A Monkey Run The State of California?
The Wall Street journal is reporting that Meg Whitman, former CEO of eBay, is mulling a run for governor of the state of California. They are drawing this conclusion after Ms. Whitman withdrew from the boards of eBay, P&G, and Dreamworks.
Hopefully, not many eBay sellers reside in California else her chances will be severely diminished. But seriously, her opponents will likely look to her leadership of eBay to form assessments about her potential to lead the state. Surely, Meg (as she is referred to in the Internet community) led eBay to one of the most influential new economy companies. However, she then failed to foresee the difficulties the company currently faces and did not implement strategies that would have saved the company from its structural problems. How much opponents will point to her lack of vision is yet to be seen, if indeed she does run. I wish her well if she runs but I can already foresee the level of discontent from the eBay seller community. Safe to say that she likely won't get their votes. Next up is Eric Schmidt, CEO of Google, and his political aspirations (see my previous write-up on that here).
P.S. - The title referred to a comment Meg made, "A Monkey Can Run This Train", when eBay's auction business was experiencing significant growth.
From The Wall Street Journal:
Meg Whitman stepped down from the boards of Procter & Gamble Co., eBay Inc. and Dreamworks Animation SKG Inc. effective Dec. 31, her spokesman said.
The move is another signal that Whitman is seriously considering a run for governor of California, a person familiar with the matter said, adding that an announcement could come in the next four to six weeks.
Whitman’s spokesman, Henry Gomez, declined to comment on her political ambitions, saying she stepped down “for personal reasons.”
A P&G spokesman said, “We deeply valued the contribution Meg made to our board over the last five years.” EBay and Dreamworks couldn’t be reached for comment. . Read More!
JPMorgan Upgrades Amazon To Buy From Hold
JPMorgan upgraded the shares of Amazon to Buy and set a $65 price target. The price target represents a 20% upside from current trading levels. Sounds familiar? On Dec. 19th I suggested that Amazon is taking share from rivals and that the shares could appreciate by 20% over the next 12 months. See the write-up here.
Despite the upgrade, the analyst reduced both his 4Q08 and 2009 numbers for Amazon citing economic pressures that is impacting both revenues and profits. But driving the shares will be share gains, impact from offline retail bankruptcies, and uptake of digital downloads and web services.
From JPMorgan Analyst Imran Khan:
We are upgrading Amazon.com to Overweight from Neutral. Although we believe a
tough consumer environment may hamper spending in the near term, in the medium
to longer term, we see Amazon continuing to take share within eCommerce even as
eCommerce continues to outpace overall retail growth. Our 12-month price target for
AMZN is $65.
• Amazon is a net share gainer. eCommerce is gaining share – and Amazon is
gaining share within eCommerce. Through the first 9M’08, US retail sales rose
2%, US eCommerce grew 8%, and Amazon North America retail revenue was up
31% Y/Y. We expect these relative trends to continue through F’09, with
eCommerce growing faster than retail and Amazon outgrowing eCommerce.
• Amazon is diversifying its business. The company has added more product lines
(e.g., office products), continues to expand its geographic footprint, and is
aggressively pursuing revenue streams not derived from physical sales from
inventory: third-party sales, digital media sales and Web Services. We think
Amazon is establishing itself as an unmatched online marketplace, and its highermargin non-retail businesses could boost profitability in the medium to long term.
• Low Cap-Ex model driving solid FCF generation. Since 2Q’07, Amazon’s
TTM CapEx has been at or below 25% of operating cash flow, a trend we expect
to continue. While we think operating margins are likely to stay in the 5% range
in the medium term, we believe Amazon can continue to produce solid FCF
growth, up 57% in F’09 and 42% in F’10.
• 2009 drivers. In our view, the following factors will drive shares in 2009: (1) the
impact of the economy on retail and eCommerce spending, both in the US and
abroad, (2) Amazon’s ability to take share within eCommerce, (3) the impact of
brick-and-mortar retail bankruptcies, and (4) customer uptake of digital download
and web services businesses.
• Adjusting 4Q’08 estimates. We are lowering our 4Q’08 revenue, EBITDA and
EPS estimates, to $6.25B, $376M and $0.35 (from $6.65B, $407M and $0.40), as
we expect the tough environment to result in slower revenue growth and add
pricing pressure this quarter; we are also lowering our F’09 revenue, EBITDA
and EPS forecasts due to our anticipation of a longer, deeper recession that we
previously saw.
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