In an article in Computer World, Alfred Spector, Google’s VP of research, states that Google has developed technologies that enable the Google crawler to get content hidden behind passwords and user names.
This was in response to the following question:
Do you have plans to go after that huge body of information on the Internet that is not currently searched?
His answer:
“There is stuff on the Web, the so-called Deep Web, that is only “materialized” when a particular query is given by filling fields in a form. Since crawlers only follow HTML links, they cannot get to that “hidden” content. We have developed technologies to enable the Google crawler to get content behind forms and therefore expose it to our users. In general, this kind of Deep Web tends to be tabular in nature. It covers a very broad set of topics. It’s a challenge, but we’ve made progress.”
Several companies are currently developing technologies to access what is known as the Deep Web. We profiled Deep Peep recently. Google’s purchase of Transformics is helping them compete in what will be an important aspect of online search.
Read More!
Sunday, March 29, 2009
60 Million Americans Contemplating Terminating Wireless Service Plans
A new report from the Opinion Research Corporation for the New Millennium Research Council states that millions of Americans are set to disconnect or cut back on their expensive wireless service plans. That’s bad news for Sprint Nextel (S), Verizon (VZ), and AT&T (T), if true.
They are basing their analysis on a survey indicating that two out of every five Americans with contract-based cell phones, totaling 39% or 60.3 million, will cut back on their cell phones due to the severe recession.
Key would be whether those disconnecting revert to cheaper land-line connections or seek alternatives such as Skype, and whether this signals a behavioral shift that continues after (if) we emerge from the recession. Also, I am not sure what companies benefit from pre-paid connections. If you have ideas please forward to me.
Here are their key findings:
“A potentially major shift in consumer habits at the expense of contract-based cell phone service is underway as more consumers seek to save money in the face of the recession. No fewer than 40 million Americans – 26 percent of consumers with contract-based cell phone service -- are “more inclined today than ... six months ago to look at a way to save money on your cell phone bill, such as by switching to a prepaid cell phone service.” This group includes 38 percent of those in households making $35,000 a year or less, 32 percent of African Americans and 30 percent of those aged 18-34.”
“Cell phone extras – such as Internet connectivity, email and texting – are also likely to take a hit in the economic downturn. A total of 19 million Americans – one in five cell phone users with cell-phone extras -- have “considered cutting back” (5 percent) or actually “have cut back” (15 percent) on such features “in the last six months because of actual job loss, fear of job loss, the recession, or any other related financial concerns.” More than two out of five cell phone users with extras on their phones (41 percent) say it is “very” (19 percent) or “somewhat” (21 percent) likely that they will cut back on cell phone extras “if the economy gets worse in the next six months.” Fewer than two in five (39 percent) say it is “not likely at all” that they will make such cuts in the face of a deepening recession. “
OTHER KEY FINDINGS
• Nearly one in five Americans who now have prepaid cell phone service (17 percent) say they switched in the last six months from a contract-based cell phone service due to job or recession-related concerns. This figure includes 23 percent of 18-34 year olds and 29 percent of African Americans with prepaid phones.
• The ranks of all Americans without a cell phone who have “discontinued cell phone service in the last six months because of actual job loss, fear of job loss, the recession, or any other related financial concerns” includes 29 percent of 18-34 year olds and 28 percent of those living in households earning $35,000 a year or less.
• Among those who are likely to cut on back on their cell phones to save money “if the economy gets worse in the next six months” are 44 percent of those aged 18-34, 54 percent of those in households making $35,000 a year or less, and 55 percent of African Americans.
• Two thirds of prepaid cell phone customers say they are saving money “compared to a landline phone or contract-based cell phones.” Fewer than three in 10 (29 percent) said they were not saving money.
• Fewer than half of cell phone users (48 percent) say that the extras on their phone “such as Internet connectivity, email and texting” are delivering a “great deal” (29 percent) or “some” (19 percent) value. About one in five people see little value in such services. About a third of cell phone users (34 percent) have no such extras on their phones.
• More than four out five Americans (84 percent) are concerned about the economic recession and already have cut back their sending “quite a bit” (39 percent) or "somewhat" (45 percent). Only about one in 10 Americans (12 percent) have made no spending changes as a result of the recession. Over half (52 percent) of individuals in households earning less than $35,000 a year already have cut their spending "quite a bit."
• Four out of five Americans own a cell phone, ranging from 84 percent of 18-34 year olds to just 68 percent of those age 65 or older. While 91 percent of those in households earning $100,000 or more have cell phones, less than two-thirds in households earning $35,000 a year or less (65 percent) have such devices. Nearly one in five Americans (17 percent) reports having a prepaid cell phone currently, compared to 84 percent with a contract-based cell phone. (There is some overlap due to individuals who own both types of phones.) African Americans at 22 percent are the group most likely to have prepaid cell phones.
Read More!
They are basing their analysis on a survey indicating that two out of every five Americans with contract-based cell phones, totaling 39% or 60.3 million, will cut back on their cell phones due to the severe recession.
Key would be whether those disconnecting revert to cheaper land-line connections or seek alternatives such as Skype, and whether this signals a behavioral shift that continues after (if) we emerge from the recession. Also, I am not sure what companies benefit from pre-paid connections. If you have ideas please forward to me.
Here are their key findings:
“A potentially major shift in consumer habits at the expense of contract-based cell phone service is underway as more consumers seek to save money in the face of the recession. No fewer than 40 million Americans – 26 percent of consumers with contract-based cell phone service -- are “more inclined today than ... six months ago to look at a way to save money on your cell phone bill, such as by switching to a prepaid cell phone service.” This group includes 38 percent of those in households making $35,000 a year or less, 32 percent of African Americans and 30 percent of those aged 18-34.”
“Cell phone extras – such as Internet connectivity, email and texting – are also likely to take a hit in the economic downturn. A total of 19 million Americans – one in five cell phone users with cell-phone extras -- have “considered cutting back” (5 percent) or actually “have cut back” (15 percent) on such features “in the last six months because of actual job loss, fear of job loss, the recession, or any other related financial concerns.” More than two out of five cell phone users with extras on their phones (41 percent) say it is “very” (19 percent) or “somewhat” (21 percent) likely that they will cut back on cell phone extras “if the economy gets worse in the next six months.” Fewer than two in five (39 percent) say it is “not likely at all” that they will make such cuts in the face of a deepening recession. “
OTHER KEY FINDINGS
• Nearly one in five Americans who now have prepaid cell phone service (17 percent) say they switched in the last six months from a contract-based cell phone service due to job or recession-related concerns. This figure includes 23 percent of 18-34 year olds and 29 percent of African Americans with prepaid phones.
• The ranks of all Americans without a cell phone who have “discontinued cell phone service in the last six months because of actual job loss, fear of job loss, the recession, or any other related financial concerns” includes 29 percent of 18-34 year olds and 28 percent of those living in households earning $35,000 a year or less.
• Among those who are likely to cut on back on their cell phones to save money “if the economy gets worse in the next six months” are 44 percent of those aged 18-34, 54 percent of those in households making $35,000 a year or less, and 55 percent of African Americans.
• Two thirds of prepaid cell phone customers say they are saving money “compared to a landline phone or contract-based cell phones.” Fewer than three in 10 (29 percent) said they were not saving money.
• Fewer than half of cell phone users (48 percent) say that the extras on their phone “such as Internet connectivity, email and texting” are delivering a “great deal” (29 percent) or “some” (19 percent) value. About one in five people see little value in such services. About a third of cell phone users (34 percent) have no such extras on their phones.
• More than four out five Americans (84 percent) are concerned about the economic recession and already have cut back their sending “quite a bit” (39 percent) or "somewhat" (45 percent). Only about one in 10 Americans (12 percent) have made no spending changes as a result of the recession. Over half (52 percent) of individuals in households earning less than $35,000 a year already have cut their spending "quite a bit."
• Four out of five Americans own a cell phone, ranging from 84 percent of 18-34 year olds to just 68 percent of those age 65 or older. While 91 percent of those in households earning $100,000 or more have cell phones, less than two-thirds in households earning $35,000 a year or less (65 percent) have such devices. Nearly one in five Americans (17 percent) reports having a prepaid cell phone currently, compared to 84 percent with a contract-based cell phone. (There is some overlap due to individuals who own both types of phones.) African Americans at 22 percent are the group most likely to have prepaid cell phones.
Read More!
Saturday, March 21, 2009
Bankrate's New Site is a Significant Improvement
Bankrate unveiled it's long awaited new site at http://beta.bankrate.com.The site is a significant improvement from the old site and should allow for better ad placement, better yield management, and higher click-thrus. Now all they need is more advertisers.
Read More!
Read More!
Wednesday, March 18, 2009
Google Offering Advertising Promotion
Google is offering a $50 AdWords promotion to Google Analytics users. This is clearly an attempt to spur usage, in my view, and could signal that current concerns of a revenue slowdown post mid-February could be true.
While I am not certain whether Google has offered a promo tied to Analytics in the past, they have over the years, offered promos to entice new users to use their advertising system. It appears that Google is offering this promotion to new users only so I am not expecting huge revenue reverals for 1Q09 (promotion goes through 4/15/2009). However, this is something the Street should give thought to with thier estimates for the quarter.
I am a big fan of Google and believe in the company wholeheartedly but when I see promos of this nature I get concerned. I am currently in the process of doing a similar analysis I did for 4Q08 (see old write-up here) and will report on my findings soon.
From Google:
"Begin advertising today
with a $50 coupon
Dear Google Analytics User,
You already know that Google Analytics helps you gain rich insights from your website. When you combine Analytics with Google AdWords, you can get even more from your website: more traffic, more conversions, more business. And with this $50 coupon, you can try AdWords risk-free.
Connect with your customers: Google's advertising network reaches 82%1 of all Internet users. Using AdWords, you can target the audience that matters to you, whether that's prospects and customers across the country or right in your neighborhood. AdWords shows your ads at the precise moment customers are looking for your products or services.
Do more with less: AdWords offers free tools that help you build cost-effective, efficient advertising campaigns and make the most of your investment. Set up a campaign in minutes, decide how much you're willing to pay, and once your ad is set up with CPC pricing, you only pay when someone clicks on your ad.
Stay in the know: Link your AdWords account to your existing Analytics account to measure your ads' performance and understand how to improve your campaigns. Analytics lets you track the ROI, revenue per click, and profit margin of your campaigns so that you can optimize more effectively."
"Promotional credit must be applied to a new AdWords account within 14 days of creating the account and is valid only for new Google AdWords customers with self-managed signup accounts. Advertisers will be charged for advertising that exceeds the promotional credit. Advertisers will need to suspend their ads if they do not wish to receive additional charges beyond the free credit amount. Subject to ad approval, valid registration and acceptance of the Google AdWords Program standard terms and conditions. The promotional credit is non-transferable and may not be sold or bartered. Offer may be revoked at any time for any reason by Google Inc. One promotional credit per customer. Advertisers with self-managed signup accounts are subject to a $5 activation fee that will be deducted from the promotional credit. Expires 4/15/09."
Read More!
While I am not certain whether Google has offered a promo tied to Analytics in the past, they have over the years, offered promos to entice new users to use their advertising system. It appears that Google is offering this promotion to new users only so I am not expecting huge revenue reverals for 1Q09 (promotion goes through 4/15/2009). However, this is something the Street should give thought to with thier estimates for the quarter.
I am a big fan of Google and believe in the company wholeheartedly but when I see promos of this nature I get concerned. I am currently in the process of doing a similar analysis I did for 4Q08 (see old write-up here) and will report on my findings soon.
From Google:
"Begin advertising today
with a $50 coupon
Dear Google Analytics User,
You already know that Google Analytics helps you gain rich insights from your website. When you combine Analytics with Google AdWords, you can get even more from your website: more traffic, more conversions, more business. And with this $50 coupon, you can try AdWords risk-free.
Connect with your customers: Google's advertising network reaches 82%1 of all Internet users. Using AdWords, you can target the audience that matters to you, whether that's prospects and customers across the country or right in your neighborhood. AdWords shows your ads at the precise moment customers are looking for your products or services.
Do more with less: AdWords offers free tools that help you build cost-effective, efficient advertising campaigns and make the most of your investment. Set up a campaign in minutes, decide how much you're willing to pay, and once your ad is set up with CPC pricing, you only pay when someone clicks on your ad.
Stay in the know: Link your AdWords account to your existing Analytics account to measure your ads' performance and understand how to improve your campaigns. Analytics lets you track the ROI, revenue per click, and profit margin of your campaigns so that you can optimize more effectively."
"Promotional credit must be applied to a new AdWords account within 14 days of creating the account and is valid only for new Google AdWords customers with self-managed signup accounts. Advertisers will be charged for advertising that exceeds the promotional credit. Advertisers will need to suspend their ads if they do not wish to receive additional charges beyond the free credit amount. Subject to ad approval, valid registration and acceptance of the Google AdWords Program standard terms and conditions. The promotional credit is non-transferable and may not be sold or bartered. Offer may be revoked at any time for any reason by Google Inc. One promotional credit per customer. Advertisers with self-managed signup accounts are subject to a $5 activation fee that will be deducted from the promotional credit. Expires 4/15/09."
Read More!
IBM to Buy Sun, Not Google
The Wall Street Journal is reporting that IBM is in talks to buy Sun Microsystems for a 100% premium to Sun's closing price. Recall in my 12 Predictions for 2009, I predicted that Google would look to buy Sun. I was right about Sun being bought but wrong on the acquirer. I wonder if Google puts in a competitive bid!
From The Wall Street Journal:
International Business Machines is in talks to buy Sun Microsystems in a combination that would bolster IBM's heft on the Internet, in data storage and in government and telecommunications areas, according to people familiar with the matter.
It is unclear whether the negotiations will result in a transaction, but if the deal does go through, IBM is likely to pay at least $6.5 billion in cash to acquire Sun, the people said. That would translate into a premium of about 100% over Sun's closing share price Tuesday.
Read More!
From The Wall Street Journal:
International Business Machines is in talks to buy Sun Microsystems in a combination that would bolster IBM's heft on the Internet, in data storage and in government and telecommunications areas, according to people familiar with the matter.
It is unclear whether the negotiations will result in a transaction, but if the deal does go through, IBM is likely to pay at least $6.5 billion in cash to acquire Sun, the people said. That would translate into a premium of about 100% over Sun's closing share price Tuesday.
Read More!
Tuesday, March 17, 2009
Bernstein’s Ad Estimates Suggest Now is the Time to Buy Advertising Related Stocks
I was taking a look at the Bernstein advertising estimates that called for a -0.3% decline in global advertising in 2009 but for a rebound in growth of 5.5% in 2010 and 5.9% in 2011 and thought that, clearly, Bernstein is thinking the path to growth is imminent. If that is the case, then now would be the opportune time to buy advertising stocks if your investment horizon is three to five years. However, I am not entirely sure if I am in total agreement with that statement yet because economic indicators have not pointed to clear signs of an economic rebound.
Those ad estimates by Bernstein could be wishful thinking on the part of the analysts who put those estimates together, hopeful that the economy rebounds. It is, however, supported by the firm, whose economists are estimating a 4% growth in worldwide GDP in 2010 and a further acceleration of 7% in 2011, from an 8% decline in 2009.
Looking further at their numbers, they expect online advertising to drive 26% of the advertising growth in 2010 and 28% in 2011. I think they are being conservative and my own estimates point to online contribution north of 40%. I do not have the other ad bucket estimates so I am not sure where the other approximately 70% of the advertising growth will come from, however, I would think outdoor advertising and cable would command the highest share, with radio advertising continuing to show negative growth.
Interestingly, paid search is projected to drive 10% of the growth in 2010 and 8.7% in 2011, and display (and Rich Media) driving 5.2% of the growth in 2010 and 5.7% in 2011. The balance of online advertising growth is due to new formats like IP Video and mobile advertising.
So what stocks should you buy if you believe Bernstein’s estimates? Clearly stocks like Google (GOOG) and Yahoo (YHOO) since they are levered to online advertising which is accounting for a significant part of the expected rebound. The ad agencies like WPP (WPP), Omnicom (OMC), and Interpublic (IPG) and the online ad networks like ValueClick (VCLK) would make sense as well. The outdoor stocks such as Clear Channel Outdoor (CCO) and Lamar Advertising (LAMR) are good bets. Those two stocks have surprisingly retreated more than I expected.
Read More!
Those ad estimates by Bernstein could be wishful thinking on the part of the analysts who put those estimates together, hopeful that the economy rebounds. It is, however, supported by the firm, whose economists are estimating a 4% growth in worldwide GDP in 2010 and a further acceleration of 7% in 2011, from an 8% decline in 2009.
Looking further at their numbers, they expect online advertising to drive 26% of the advertising growth in 2010 and 28% in 2011. I think they are being conservative and my own estimates point to online contribution north of 40%. I do not have the other ad bucket estimates so I am not sure where the other approximately 70% of the advertising growth will come from, however, I would think outdoor advertising and cable would command the highest share, with radio advertising continuing to show negative growth.
Interestingly, paid search is projected to drive 10% of the growth in 2010 and 8.7% in 2011, and display (and Rich Media) driving 5.2% of the growth in 2010 and 5.7% in 2011. The balance of online advertising growth is due to new formats like IP Video and mobile advertising.
So what stocks should you buy if you believe Bernstein’s estimates? Clearly stocks like Google (GOOG) and Yahoo (YHOO) since they are levered to online advertising which is accounting for a significant part of the expected rebound. The ad agencies like WPP (WPP), Omnicom (OMC), and Interpublic (IPG) and the online ad networks like ValueClick (VCLK) would make sense as well. The outdoor stocks such as Clear Channel Outdoor (CCO) and Lamar Advertising (LAMR) are good bets. Those two stocks have surprisingly retreated more than I expected.
Read More!
Thursday, March 12, 2009
A Risky Bid For eBay
eBay's decision to shift the business mix back to auctions is a risky one, in my view. As I stated in my last write-up, I believe that management should bifurcate the model, focusing auctions on the auction friendly categories and new and in-season fixed price on the rest, while working to improve the user experience.
For now, I remain on the sidelines on the shares for lack of clear near-term catalysts.
Here as thoughts from Citigroup Analyst Mark Mahaney, Deutsche Bank analyst Jeetil Patel and Sanford Bernstein analyst Jeffrey Lindsay about the analyst day:
From Mark Mahaney:
eBay Hosted A Highly Detailed & Ambitious Investor Day - eBay provided a deep-dive into its 3 op. segments - Marketplaces, Payments, and Skype. eBay believes it can generate: 1) $10B-$12B in rev. by 2011 through current Payments and Skype revs and modest growth in its Marketplace rev.; 2) $2B in op. cost savings by 2011; and 3) $6B-$7B in FCF over the next 3 years. These projections are above ours - we view them as attainable, but aggressive.
A More Muted/Realistic Outlook For eBay's Core Marketplace Business - eBay guided to $5B-$7B in 2011 rev. for its Marketplace segment. eBay also guided to Marketplace segment op. margins of 35%-45% in 2011 vs. its '08 segment margin of approx. 44%. eBay went out of its way to target down its Marketplace market opportunity to the "Secondary Market," which is materially more muted than the broader online retail market that eBay mgmt has previously guided for. We view this as eBay correctly recognizing the limits of its value proposition in the in-season retail segment.
A Bullish Outlook For eBay's PayPal/Payments Business - eBay guided to $4B-$5B in 2011 rev. for its Payments segment. eBay also guided to Payments segment op. margins of 18%-20% in 2011 vs. its '08 segment margin of approx. 20%. PayPal is becoming an increasingly important part of eBay's overall business. Our view is that execution here has been top-notch. What's unclear, however, is whether off-eBay robust growth (Merchant Services) can overcome the drag of a deteriorating on-eBay business.
And A Bullish Outlook For eBay's Skype Business - eBay guided to $1B+ in 2011 rev. for its Skype segment and also guided to Skype segment op. margins of 18%-20% in 2011 vs. its '08 segment margin of approx. 21%. We believe eBay laid out a convincing growth strategy (based on product innovation and marketing opportunities) for Skype.
We Maintain Our Hold On EBAY - We'd say that eBay's Investor Day helped put a floor under a stock has materially underperformed over the last year. But we continue to view weakness in eBay's core Marketplace biz - which management acknowledged would underperform eCommerce in '09 - as limiting material share price appreciation. Further, eBay's segment margin outlooks and the company's overall mix-shift towards lower margin segments almost certainly translates into a consistent, multi-year margin decay that makes sustainable double-digit EPS growth a stretch and single-digit EPS growth the most likely outcome.
From Jeetil Patel:
An optimistic 2011, but what about 2009? - Reiterate SELL
eBay hosted its analyst day yesterday, at which management provided details behind its financial goals for 2011. While filled with long-term optimism, we thought the analyst event lacked near-term reality with respect to the current deteriorating fundamentals. In light of no near-term (2009) guidance, anticipate acceleration in growth, competitive pressures and economic backdrop, we think it's difficult to put much credibility into the 3-year plan. We think investors should gauge eBay against near-term performance. We reiterate our SELL.
Aggressive 2011 Financial Targets
Even though current business trends remain challenged (sellers seeing further weakness in business in 1Q 2009), management positioned its views on the 2011 outlook, with $10bn-$12bn in revenues by 2011 and $6bn-$7bn in free cash flow generation over the next three years.
Considering the company averaged about $2.1bn the past three years, we think this assumes a decline in 2009 (to below $2bn in 2009), before aggressively ramping back up in 2010 and 2011.
Marketplaces Undergoing Transition, and Skype should be a keeper
Near–term, the marketplace business is expected to underperform industry growth trends before flattening out next year and reaccelerating in 2011 – representing an optimistic view from eBay,
we think . Clearly, this business represents the cash cow, and risk remains on declining demand, high seller commissions and lack of interface changes. We think the Skype unit is actually performing well, and management should hold on to this business model.
Price Target of $11
Our price target is based on 8x 2009E PF EPS of $1.40 reflecting a multiple below the S&P market multiple. We believe this multiple is warranted as the core business at eBay continues to show deteriorating market share trends, while its non-core assets/FX/acquisitions mask organic levels of growth which translates into a stock that deserves a below market multiple on our FY09
estimates. Risk on the upside include: listing promotions, positive impact from fee changes, operating margin expansion and marketplace transaction reacceleration.
From Jeffrey Lindsay:
EBay held its analyst day yesterday at its headquarters in San Jose. Management was candid about the issues facing the core Marketplaces business unit. We were encouraged by the acknowledgement that the auction model had been retained well past its best days and the cost of this had been a loss of share to competitors and lower customer satisfaction. Now the problem has finally been acknowledged, we think management will take appropriate steps to turn the core business around – with a particular emphasis on fixed-price sales. Management also painted an attractive picture of the future prospects for both PayPal and Skype, emphasizing the as-yet untapped potential for growth in their respective markets. Interestingly, PayPal was presented by management as eBay's "other core business" and PayPal management for the first time presented first – ahead of the management of Marketplaces and Sype.
Management forecasts for Marketplaces, eBay's core business, which accounted for 65% of 2008 revenue and 80% of operating profit, were in line with our already diminished expectations. Management confirmed that GMV and revenues are expected to decline in 2009 before leveling out in 2010 and resuming growth in 2011. While we doubt that the good news of the other businesses' upside will be enough to lift the stock significantly in the short term, we are encouraged by: (a) proposed improvements to the search platform, including cataloging; (b) the use of open standards development initiatives to boost innovation and development; and (c) the redesign of search into a platform rather than an application, providing greater flexibility for future development.
Read More!
For now, I remain on the sidelines on the shares for lack of clear near-term catalysts.
Here as thoughts from Citigroup Analyst Mark Mahaney, Deutsche Bank analyst Jeetil Patel and Sanford Bernstein analyst Jeffrey Lindsay about the analyst day:
From Mark Mahaney:
eBay Hosted A Highly Detailed & Ambitious Investor Day - eBay provided a deep-dive into its 3 op. segments - Marketplaces, Payments, and Skype. eBay believes it can generate: 1) $10B-$12B in rev. by 2011 through current Payments and Skype revs and modest growth in its Marketplace rev.; 2) $2B in op. cost savings by 2011; and 3) $6B-$7B in FCF over the next 3 years. These projections are above ours - we view them as attainable, but aggressive.
A More Muted/Realistic Outlook For eBay's Core Marketplace Business - eBay guided to $5B-$7B in 2011 rev. for its Marketplace segment. eBay also guided to Marketplace segment op. margins of 35%-45% in 2011 vs. its '08 segment margin of approx. 44%. eBay went out of its way to target down its Marketplace market opportunity to the "Secondary Market," which is materially more muted than the broader online retail market that eBay mgmt has previously guided for. We view this as eBay correctly recognizing the limits of its value proposition in the in-season retail segment.
A Bullish Outlook For eBay's PayPal/Payments Business - eBay guided to $4B-$5B in 2011 rev. for its Payments segment. eBay also guided to Payments segment op. margins of 18%-20% in 2011 vs. its '08 segment margin of approx. 20%. PayPal is becoming an increasingly important part of eBay's overall business. Our view is that execution here has been top-notch. What's unclear, however, is whether off-eBay robust growth (Merchant Services) can overcome the drag of a deteriorating on-eBay business.
And A Bullish Outlook For eBay's Skype Business - eBay guided to $1B+ in 2011 rev. for its Skype segment and also guided to Skype segment op. margins of 18%-20% in 2011 vs. its '08 segment margin of approx. 21%. We believe eBay laid out a convincing growth strategy (based on product innovation and marketing opportunities) for Skype.
We Maintain Our Hold On EBAY - We'd say that eBay's Investor Day helped put a floor under a stock has materially underperformed over the last year. But we continue to view weakness in eBay's core Marketplace biz - which management acknowledged would underperform eCommerce in '09 - as limiting material share price appreciation. Further, eBay's segment margin outlooks and the company's overall mix-shift towards lower margin segments almost certainly translates into a consistent, multi-year margin decay that makes sustainable double-digit EPS growth a stretch and single-digit EPS growth the most likely outcome.
From Jeetil Patel:
An optimistic 2011, but what about 2009? - Reiterate SELL
eBay hosted its analyst day yesterday, at which management provided details behind its financial goals for 2011. While filled with long-term optimism, we thought the analyst event lacked near-term reality with respect to the current deteriorating fundamentals. In light of no near-term (2009) guidance, anticipate acceleration in growth, competitive pressures and economic backdrop, we think it's difficult to put much credibility into the 3-year plan. We think investors should gauge eBay against near-term performance. We reiterate our SELL.
Aggressive 2011 Financial Targets
Even though current business trends remain challenged (sellers seeing further weakness in business in 1Q 2009), management positioned its views on the 2011 outlook, with $10bn-$12bn in revenues by 2011 and $6bn-$7bn in free cash flow generation over the next three years.
Considering the company averaged about $2.1bn the past three years, we think this assumes a decline in 2009 (to below $2bn in 2009), before aggressively ramping back up in 2010 and 2011.
Marketplaces Undergoing Transition, and Skype should be a keeper
Near–term, the marketplace business is expected to underperform industry growth trends before flattening out next year and reaccelerating in 2011 – representing an optimistic view from eBay,
we think . Clearly, this business represents the cash cow, and risk remains on declining demand, high seller commissions and lack of interface changes. We think the Skype unit is actually performing well, and management should hold on to this business model.
Price Target of $11
Our price target is based on 8x 2009E PF EPS of $1.40 reflecting a multiple below the S&P market multiple. We believe this multiple is warranted as the core business at eBay continues to show deteriorating market share trends, while its non-core assets/FX/acquisitions mask organic levels of growth which translates into a stock that deserves a below market multiple on our FY09
estimates. Risk on the upside include: listing promotions, positive impact from fee changes, operating margin expansion and marketplace transaction reacceleration.
From Jeffrey Lindsay:
EBay held its analyst day yesterday at its headquarters in San Jose. Management was candid about the issues facing the core Marketplaces business unit. We were encouraged by the acknowledgement that the auction model had been retained well past its best days and the cost of this had been a loss of share to competitors and lower customer satisfaction. Now the problem has finally been acknowledged, we think management will take appropriate steps to turn the core business around – with a particular emphasis on fixed-price sales. Management also painted an attractive picture of the future prospects for both PayPal and Skype, emphasizing the as-yet untapped potential for growth in their respective markets. Interestingly, PayPal was presented by management as eBay's "other core business" and PayPal management for the first time presented first – ahead of the management of Marketplaces and Sype.
Management forecasts for Marketplaces, eBay's core business, which accounted for 65% of 2008 revenue and 80% of operating profit, were in line with our already diminished expectations. Management confirmed that GMV and revenues are expected to decline in 2009 before leveling out in 2010 and resuming growth in 2011. While we doubt that the good news of the other businesses' upside will be enough to lift the stock significantly in the short term, we are encouraged by: (a) proposed improvements to the search platform, including cataloging; (b) the use of open standards development initiatives to boost innovation and development; and (c) the redesign of search into a platform rather than an application, providing greater flexibility for future development.
Read More!
Wednesday, March 11, 2009
Barclays Capital Five Fundamental Trends in Media
Barclays Capital media analyst Anthony J. DiClemente, has an interesting note out on five trends to watch for in Media. The analyst noted that year-to-date that the Entertainment stocks that he tracks (Disney, Viacom, Time Warner, CBS, Discovery, Scripts Networks Interactive) is down 27% and have underperformed the S&P in 2009.
He stated that Entertainment's largest company, Disney, is down 26.8% YTD, having underperformed the SPX by 650 bps. Longer-term structural concerns on 1) the broadcast TV business model; and 2) DVD sales declines have been well-documented by now, if not fully acknowledged by media management teams, according to him. He believes that a media investor’s challenge is what to do when macroeconomic concerns abate, at which time some investors may choose to buy the stocks for a cyclical advertising upturn, perhaps with the knowledge that secular issues are unlikely to be resolved for quite some time.
He then goes on to highlight five fundamental trends to watch for in the Entertainment sector, all of which reinforce his cautious view of the sector.
1) Advertising deterioration continues unabated. Local advertising media, particularly TV stations, continued to show accelerating declines in the 4Q08. All of U.S. advertising will likely show sequential deterioration in 1H09. The May 2009 Broadcast TV upfronts could be the next catalyst for U.S. TV advertising. NWSA, CBS, and DIS are exposed to worsening broadcast TV trends.
2) Declines in DVD sales accelerating. Cyclical impact and secular trends towards digital continue to disrupt DVD sales. Filmed entertainment operating income declined precipitously for DIS and NWSA in 4Q08. DIS, TWX, NWSA, and VIA.B are vulnerable here.
3) Cost-cutting has not happened quickly enough to preserve margins. Operating margin compression has accelerated dramatically, as cost cuts have not nearly offset revenue declines. This is especially true for CBS, DIS, TWX, and NWSA.
4) Not only are FCF declines accelerating, but investors aren't getting a return of capital. Operating income declines are dropping quickly to the FCF bottom line. Buybacks are scarce, as are regular dividends. FCF declines are most notable for DIS, NWSA, and CBS.
5) EPS estimates remain stubbornly high. Absent multiple expansion, P/E valuation investing continues to prove a "value trap" given continual reductions for Street EPS, not only for 2009E but also for 2010E. Our Entertainment models are currently below consensus on EPS estimates for all of Entertainment, save VIA.B's 2009E estimate. We believe Street estimates must continue to come down, particularly for DIS.
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He stated that Entertainment's largest company, Disney, is down 26.8% YTD, having underperformed the SPX by 650 bps. Longer-term structural concerns on 1) the broadcast TV business model; and 2) DVD sales declines have been well-documented by now, if not fully acknowledged by media management teams, according to him. He believes that a media investor’s challenge is what to do when macroeconomic concerns abate, at which time some investors may choose to buy the stocks for a cyclical advertising upturn, perhaps with the knowledge that secular issues are unlikely to be resolved for quite some time.
He then goes on to highlight five fundamental trends to watch for in the Entertainment sector, all of which reinforce his cautious view of the sector.
1) Advertising deterioration continues unabated. Local advertising media, particularly TV stations, continued to show accelerating declines in the 4Q08. All of U.S. advertising will likely show sequential deterioration in 1H09. The May 2009 Broadcast TV upfronts could be the next catalyst for U.S. TV advertising. NWSA, CBS, and DIS are exposed to worsening broadcast TV trends.
2) Declines in DVD sales accelerating. Cyclical impact and secular trends towards digital continue to disrupt DVD sales. Filmed entertainment operating income declined precipitously for DIS and NWSA in 4Q08. DIS, TWX, NWSA, and VIA.B are vulnerable here.
3) Cost-cutting has not happened quickly enough to preserve margins. Operating margin compression has accelerated dramatically, as cost cuts have not nearly offset revenue declines. This is especially true for CBS, DIS, TWX, and NWSA.
4) Not only are FCF declines accelerating, but investors aren't getting a return of capital. Operating income declines are dropping quickly to the FCF bottom line. Buybacks are scarce, as are regular dividends. FCF declines are most notable for DIS, NWSA, and CBS.
5) EPS estimates remain stubbornly high. Absent multiple expansion, P/E valuation investing continues to prove a "value trap" given continual reductions for Street EPS, not only for 2009E but also for 2010E. Our Entertainment models are currently below consensus on EPS estimates for all of Entertainment, save VIA.B's 2009E estimate. We believe Street estimates must continue to come down, particularly for DIS.
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Deutsche Bank Upgrades Digital River to Buy
Deutsche Bank analyst Jeetil Patel upgraded the shares of Digital River (DRIV) to buy from hold and set a $30 12-month price target on the stock, up from $20 previously.
The analyst states that business trends have been improving in 1Q and future prospects look healthy. In addition, he believes that the company is looking to diversify revenues via the consumer electronics industry, which is facing a shrinking retail distribution channel, shift to direct Web distribution and growing costs in managing e-commerce internally. He thinks that CE wins and potential acquisitions could help diversify revenues for Digital River in 2009.
The analyst raised his 1Q09 revenue estimate to $99 million and EPS to $0.51 from $97.5 million and $0.49 previously. For 2009, his estimates increased to revenues/EPS of $408.5/$2.05, vs. $405.5mn/$2.00 previously.
The price target is based on 15x '09E EPS, in-line with his e-commerce peer group (at 15x '09E EPS). The price target is also reflects 8x 2009E EBITDA of $116mn, also in-line than with the group average of 8x EBITDA. He believes that multiple expansion exists if the company is able to develop a 10% customer or vertical. Investment risks include: Symantec concentration, anti-virus pricing pressure, commission pressure, e-commerce slow down and client retention.
Jeetil states that with Symantec revenue declines largely factored into financials (and the share price), Digital River could begin to benefit from consumer electronics companies looking to outsource e-commerce to dedicated outsourcing partners (like Digital River), much in the same way that software companies outsourced post the Internet bubble. While the CE and games verticals could account for 10% of revenues by year-end, he notes that the company may also look to diversify revenues through acquisitions of companies focused on Asia or the CE vertical. In the near-term, he highlights that 1Q business trends have been healthy, yet the potential for software customer contracts (and potentially application stores for mobile vendors) could lead to revenue and earnings upside in coming quarters.
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The analyst states that business trends have been improving in 1Q and future prospects look healthy. In addition, he believes that the company is looking to diversify revenues via the consumer electronics industry, which is facing a shrinking retail distribution channel, shift to direct Web distribution and growing costs in managing e-commerce internally. He thinks that CE wins and potential acquisitions could help diversify revenues for Digital River in 2009.
The analyst raised his 1Q09 revenue estimate to $99 million and EPS to $0.51 from $97.5 million and $0.49 previously. For 2009, his estimates increased to revenues/EPS of $408.5/$2.05, vs. $405.5mn/$2.00 previously.
The price target is based on 15x '09E EPS, in-line with his e-commerce peer group (at 15x '09E EPS). The price target is also reflects 8x 2009E EBITDA of $116mn, also in-line than with the group average of 8x EBITDA. He believes that multiple expansion exists if the company is able to develop a 10% customer or vertical. Investment risks include: Symantec concentration, anti-virus pricing pressure, commission pressure, e-commerce slow down and client retention.
Jeetil states that with Symantec revenue declines largely factored into financials (and the share price), Digital River could begin to benefit from consumer electronics companies looking to outsource e-commerce to dedicated outsourcing partners (like Digital River), much in the same way that software companies outsourced post the Internet bubble. While the CE and games verticals could account for 10% of revenues by year-end, he notes that the company may also look to diversify revenues through acquisitions of companies focused on Asia or the CE vertical. In the near-term, he highlights that 1Q business trends have been healthy, yet the potential for software customer contracts (and potentially application stores for mobile vendors) could lead to revenue and earnings upside in coming quarters.
Read More!
Tuesday, March 10, 2009
Pali Downgrades Disney After The Fact
Pali analyst Richard Greenfield downgraded The Walt Disney Company (DIS) to Sell from Neutral after the stock declined 38% in the past three months versus a 24% decline in the S&P 500.
His change was premised on what he believes is: (1) struggling content compared to the past few years and he believes 2009 will be a challenging year, citing disappointing results for Bolt; (2) 2009 will not be a trough year for theme parks given the possibility of a delayed economic recovery; (3) the strengthening dollar will result in less foreign travel to Orlando - this revenue stream is higher margin; and (4) management has less flexibility with share repurchases given increasing capital expenditures and falling EBITDA - share repurchases had driven earnigns growth over the years.
He places a $12.50 price target on the stock based on 4.4x 2010 EV/EBITDA and 8.6x PE. The shares are currently trading at 5.4x 2010 EV/EBITDA and 11x PE.
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His change was premised on what he believes is: (1) struggling content compared to the past few years and he believes 2009 will be a challenging year, citing disappointing results for Bolt; (2) 2009 will not be a trough year for theme parks given the possibility of a delayed economic recovery; (3) the strengthening dollar will result in less foreign travel to Orlando - this revenue stream is higher margin; and (4) management has less flexibility with share repurchases given increasing capital expenditures and falling EBITDA - share repurchases had driven earnigns growth over the years.
He places a $12.50 price target on the stock based on 4.4x 2010 EV/EBITDA and 8.6x PE. The shares are currently trading at 5.4x 2010 EV/EBITDA and 11x PE.
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Sunday, March 8, 2009
Uneventful eBay Analyst Day Expected; Spin-Off Payments?
eBay (EBAY) is scheduled to host an Analyst Day on Wednesday, March 11, the first under the new CEO John Donahoe. At a share price of $10, the stock is trading at its lowest levels since 2001. The shares are down approximately 80% from all time highs set in late 2004. This compares to a 50% contraction in the S&P 500 over the same time period. Clearly, management has destroyed value.
I am not anticipating any game changers from the Analyst Day and I am not coming out with a list of questions for management. However, I do have a few ideas which I will discuss later.
But first this is where eBay stands as a company:
1) The company’s core business has lost significant market share to Amazon and niche ecommerce sites and the share loss is likely to continue for the foreseeable future. Several structural challenges exist that is likely to keep a lid on growth from some time. Further, average selling prices and conversion rates continue to trend lower leading to continued negative year-on-year GMV growth rates. User traffic growth has been negative for several months and is indicative of the subpar buying experience and the demand problem that the company faces. Sellers continue to migrate to other channels in search of a better selling experience and higher ASPs and conversions.
2) Advertising and classifieds are clearly strong businesses; however, overall industry trends for advertising and classifieds are negative. Thus, the strength in those businesses are due to them growing off low bases and I believe they will likely succumb to industry wide trends. Shopping.com already felt the pinch in 4Q08, with a revenue decline of 50% YoY, but management blamed this, in part, on search engine algorithm changes.
3) No one can argue that Skpe is not a great standalone business (I use it quite often), but management has finally fessed up to the fact that it is non core and are seeking buyers. The 44% revenue growth rate in 2008 and double digit margins are impressive but eBay must part ways with the business. Note that the growth rate on Skype averaged 50% in the first three quarters of 2008 but declined to 25% in the fourth quarter.
4) That leaves PayPal, which has great competitive advantages and represents the diamond in the rough or the crown jewel of eBay’s business model. The runway is wide and long for this business, in particular, the off-eBay Merchant Services business, which grew 50% in the last quarter based on transaction volume processed.
5) The company has a stockpile of cash in excess of $3.2 billion but close to 90% of that cash is located overseas. Bringing the cash to the U.S. to conduct share repurchases, acquisitions, or a one-time dividend, will lead to huge negative tax consequences.
eBay’s Marketplace business, which includes the core auction and fixed price business represented 55% of revenues in 2008. The auction business accounts for half of gross merchandise volume but matured two years ago and appears to be in the decline phase of its product cycle. However, the business is still a cash cow and I think, contrary to some, that the business can be salvaged by focusing on categories that still lends themselves to the auction model, such as Collectibles. The option here is to bifurcate the marketplace business by focusing the auction model on certain categories, and focus the fixed price business on rest, while simultaneously attempting to improve the user experience on the entire business.
On Skype, the sale price should bring in about $1.8 billion in cash. eBay purchased the business for $2.6 billion in 2005 and recently wrote down the value by $900 million, implying a $1.7 billion value for the business. Alternatively, the business should generate close to $700 million in revenues in 2009 and assuming a 20% EBITDA margin, we arrive at $140 million in EBITDA. Apply a 12-13x multiple to the business would yield a $1.7-$1.8 billion value or about $1.35 per share. I am not sure if the cash from the sale would be housed in the U.S., but if it is, eBay can use the cash to retire shares or maybe consider a special one-time dividend.
For PayPal, I have argued that a sale is not optimal because the value of the synergies with the core business would erode overtime. What management can consider is a spin-off of 50% of the business to existing shareholders. In that way, shareholders get a new currency of a business still in its growth phase, and management maintains control.
Hopefully for eBay’s shareholders, management provides catalysts for the shares during the Analyst Day.
Read More!
I am not anticipating any game changers from the Analyst Day and I am not coming out with a list of questions for management. However, I do have a few ideas which I will discuss later.
But first this is where eBay stands as a company:
1) The company’s core business has lost significant market share to Amazon and niche ecommerce sites and the share loss is likely to continue for the foreseeable future. Several structural challenges exist that is likely to keep a lid on growth from some time. Further, average selling prices and conversion rates continue to trend lower leading to continued negative year-on-year GMV growth rates. User traffic growth has been negative for several months and is indicative of the subpar buying experience and the demand problem that the company faces. Sellers continue to migrate to other channels in search of a better selling experience and higher ASPs and conversions.
2) Advertising and classifieds are clearly strong businesses; however, overall industry trends for advertising and classifieds are negative. Thus, the strength in those businesses are due to them growing off low bases and I believe they will likely succumb to industry wide trends. Shopping.com already felt the pinch in 4Q08, with a revenue decline of 50% YoY, but management blamed this, in part, on search engine algorithm changes.
3) No one can argue that Skpe is not a great standalone business (I use it quite often), but management has finally fessed up to the fact that it is non core and are seeking buyers. The 44% revenue growth rate in 2008 and double digit margins are impressive but eBay must part ways with the business. Note that the growth rate on Skype averaged 50% in the first three quarters of 2008 but declined to 25% in the fourth quarter.
4) That leaves PayPal, which has great competitive advantages and represents the diamond in the rough or the crown jewel of eBay’s business model. The runway is wide and long for this business, in particular, the off-eBay Merchant Services business, which grew 50% in the last quarter based on transaction volume processed.
5) The company has a stockpile of cash in excess of $3.2 billion but close to 90% of that cash is located overseas. Bringing the cash to the U.S. to conduct share repurchases, acquisitions, or a one-time dividend, will lead to huge negative tax consequences.
eBay’s Marketplace business, which includes the core auction and fixed price business represented 55% of revenues in 2008. The auction business accounts for half of gross merchandise volume but matured two years ago and appears to be in the decline phase of its product cycle. However, the business is still a cash cow and I think, contrary to some, that the business can be salvaged by focusing on categories that still lends themselves to the auction model, such as Collectibles. The option here is to bifurcate the marketplace business by focusing the auction model on certain categories, and focus the fixed price business on rest, while simultaneously attempting to improve the user experience on the entire business.
On Skype, the sale price should bring in about $1.8 billion in cash. eBay purchased the business for $2.6 billion in 2005 and recently wrote down the value by $900 million, implying a $1.7 billion value for the business. Alternatively, the business should generate close to $700 million in revenues in 2009 and assuming a 20% EBITDA margin, we arrive at $140 million in EBITDA. Apply a 12-13x multiple to the business would yield a $1.7-$1.8 billion value or about $1.35 per share. I am not sure if the cash from the sale would be housed in the U.S., but if it is, eBay can use the cash to retire shares or maybe consider a special one-time dividend.
For PayPal, I have argued that a sale is not optimal because the value of the synergies with the core business would erode overtime. What management can consider is a spin-off of 50% of the business to existing shareholders. In that way, shareholders get a new currency of a business still in its growth phase, and management maintains control.
Hopefully for eBay’s shareholders, management provides catalysts for the shares during the Analyst Day.
Read More!
Defending Bankrate
I’ve been waiting for the Wall Street analysts with $40ish price targets on Bankrate (RATE) to come out and defend the stock, which has fallen 30% over the past week due to concerns on further display advertising pullback and the near collapse of the credit card business.
Citigroup Internet analyst Mark Mahaney did just that on Friday buy lowering his price target on the stock to $33 from $41 but maintaining his buy rating on the shares. The analyst lowered his ’09 revenue and EBITDA estimates by 9% and 12% to $169 million and $60 million, respectively. His ’09 Adjusted EPS falls to $1.42 from $1.66. His ’10 EBITDA was cut by 11% to $73 million.
The analyst admits he was wrong in being too early in calling the bottom in the display advertising business (approx 20% of revenues) and being too optimistic about the credit card business (20% of revenues), which has hit a wall. However, he remains positive due to: 1) valuation, with RATE trading at 5X '09 EV/EBITDA - a trough multiple for RATE & one that is attractive versus his long-term 10% EBITDA growth outlook; 2) RATE's consumer finance diversification strategy (Mortgage, Deposit, Insurance, Credit Card) provides a balanced long-term growth platform; 3) RATE is being hit by Macro factors - not competitive issues - he sees RATE as a long-term share gainer; and 4) he views management as one of the best among Internet Small Caps.
I’ve been sounding the alarm bells on this stock for quite some time (Final Option for RATE: Find A Buyer) and thought that the majority of the analysts were wrong in their analysis on the stock. I ended up being right; however, I thought the stock would bottom at $20. Thus, I was too early in buying the shares (Good Entry Point).
However, I think the shares were oversold last week and believe that significant upside remains at this levels. So I agree with the analyst on his reasons for staying positive on the shares and would buy on the weakness.
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Citigroup Internet analyst Mark Mahaney did just that on Friday buy lowering his price target on the stock to $33 from $41 but maintaining his buy rating on the shares. The analyst lowered his ’09 revenue and EBITDA estimates by 9% and 12% to $169 million and $60 million, respectively. His ’09 Adjusted EPS falls to $1.42 from $1.66. His ’10 EBITDA was cut by 11% to $73 million.
The analyst admits he was wrong in being too early in calling the bottom in the display advertising business (approx 20% of revenues) and being too optimistic about the credit card business (20% of revenues), which has hit a wall. However, he remains positive due to: 1) valuation, with RATE trading at 5X '09 EV/EBITDA - a trough multiple for RATE & one that is attractive versus his long-term 10% EBITDA growth outlook; 2) RATE's consumer finance diversification strategy (Mortgage, Deposit, Insurance, Credit Card) provides a balanced long-term growth platform; 3) RATE is being hit by Macro factors - not competitive issues - he sees RATE as a long-term share gainer; and 4) he views management as one of the best among Internet Small Caps.
I’ve been sounding the alarm bells on this stock for quite some time (Final Option for RATE: Find A Buyer) and thought that the majority of the analysts were wrong in their analysis on the stock. I ended up being right; however, I thought the stock would bottom at $20. Thus, I was too early in buying the shares (Good Entry Point).
However, I think the shares were oversold last week and believe that significant upside remains at this levels. So I agree with the analyst on his reasons for staying positive on the shares and would buy on the weakness.
Read More!
A Deeper Peep into Search
Search engine Deep Peep (http://www.deeppeep.org) is one of the few search engines purporting to provide results from the deep web, which is a term associated with providing access to information contained behind passwords and user names. They describe themselves on the site:
"DeepPeep is a search engine specialized in Web forms. The current beta version tracks 13,000 forms across 7 domains. DeepPeep helps you discover the entry points to content in Deep Web (aka Hidden Web) sites, including online databases and Web services. This search engine is designed to cater to the needs of casual Web users in search of online databases (e.g., to search for forms related to used cars), as well as expert users whose goal is to build applications that access hidden-Web information (e.g., to obtain forms in job domain that contain salary, or discover common attribute names in a domain). The development of DeepPeep has been funded by National Science Foundation award #0713637 III-COR: Discovering and Organizing Hidden-Web Sources."
I haven’t seen much out of Google, Yahoo, and Microsoft on indexing content in the hidden web. Deep web search is difficult to implement because of the human element required in accessing and manipulating the content on the sites.
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"DeepPeep is a search engine specialized in Web forms. The current beta version tracks 13,000 forms across 7 domains. DeepPeep helps you discover the entry points to content in Deep Web (aka Hidden Web) sites, including online databases and Web services. This search engine is designed to cater to the needs of casual Web users in search of online databases (e.g., to search for forms related to used cars), as well as expert users whose goal is to build applications that access hidden-Web information (e.g., to obtain forms in job domain that contain salary, or discover common attribute names in a domain). The development of DeepPeep has been funded by National Science Foundation award #0713637 III-COR: Discovering and Organizing Hidden-Web Sources."
I haven’t seen much out of Google, Yahoo, and Microsoft on indexing content in the hidden web. Deep web search is difficult to implement because of the human element required in accessing and manipulating the content on the sites.
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Wednesday, March 4, 2009
Twitter's Real Time Search Threat to Google
I thought it interesting that Google’s CEO would refer to Twitter as the poor man’s email but did not address the growing threat to Google’s search system from Twitter’s real time search ability.
I rarely use Twitter but use http://search.twitter.com/ quite often and I admit probably more than Google and the other search engines. The content is a lot fresher than what one would find on Google News or Yahoo! News. I suspect as the word gets out about the growing reliance on real time search, Twitter will take share from the other search engines.
I think this caught Google, Yahoo!, and Microsoft off guard and I am sure all three are scrambling to find a solution to this growing threat to their business models. Twitter is essentially the answer for social search that Yahoo! and others have been seeking to master.
The search engines should look to partner with Twitter to organize the real time search data, index it, and make it searchable on their systems.
For now this is one to watch.
Read More!
I rarely use Twitter but use http://search.twitter.com/ quite often and I admit probably more than Google and the other search engines. The content is a lot fresher than what one would find on Google News or Yahoo! News. I suspect as the word gets out about the growing reliance on real time search, Twitter will take share from the other search engines.
I think this caught Google, Yahoo!, and Microsoft off guard and I am sure all three are scrambling to find a solution to this growing threat to their business models. Twitter is essentially the answer for social search that Yahoo! and others have been seeking to master.
The search engines should look to partner with Twitter to organize the real time search data, index it, and make it searchable on their systems.
For now this is one to watch.
Read More!
Monday, March 2, 2009
The Stock Market Equivalent of a Bank Run
I think at 6500 the market properly prices in the fundamentals of the economy but my friends at a few fund of funds are telling me that forced selling by hedge funds is driving the market. Investors just want their money back and heavy redemptions will likely begin again next month. So there is a good chance the market goes much lower and there is nothing one can do even though stocks are screaming cheap – that is because the arbs that would take advantage of the mispricing are the very same ones being forced to sell. Hence, there is no buying support. That’s why I say this is the stock market equivalent of a bank run – technical phenomena.
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Good Entry Point on Bankrate
I’ve been waiting for an entry point on Bankrate (RATE) in the $20-$22 range (read previous write-up) and that opportunity presented itself last week due to cautious comments from management at an investor conference, coupled with overall market turmoil.
At that conference, management stated that the deposit and insurance businesses are performing well but the mortgage and credit businesses continue to face headwinds. Consumer demand is strong for mortgage refis but advertiser demand remains low because of the overwhelming number of leads received by the mortgage finance companies. With time I think this resolves itself and RATE will start to benefit from refi advertising dollars.
The credit card business, on the other hand, will likely remain subdued due to tighter credit standards. This situation will not change anytime soon because I believe the U.S. is going through a material change in living standards (see my Economic Reset graph) and credit availability is unlikely to rebound to levels that we have been accustomed to.
The shares are currently trading at 6x ’09 EBITDA and at these levels I believe RATE’s risks are properly reflected in the share price, hence, why I am buying now. My DCF points to a $28-$33 value in 12 months, thus I am looking at a ~30% potential return, provided that the economy does not slip into a depression - though some are arguing we are already there.
I do not see any near-term catalysts to point to but at these levels management has to consider repurchasing shares. They appeared confident on the 4Q08 earnings call that they can grow EBITDA in the double digits in 09 but ultimately I think they should look to sell the company. I am certain that M&A directors at several of the large media companies, large cap Internet companies, and possibly even “Microsoft” are looking at RATE at these levels.
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At that conference, management stated that the deposit and insurance businesses are performing well but the mortgage and credit businesses continue to face headwinds. Consumer demand is strong for mortgage refis but advertiser demand remains low because of the overwhelming number of leads received by the mortgage finance companies. With time I think this resolves itself and RATE will start to benefit from refi advertising dollars.
The credit card business, on the other hand, will likely remain subdued due to tighter credit standards. This situation will not change anytime soon because I believe the U.S. is going through a material change in living standards (see my Economic Reset graph) and credit availability is unlikely to rebound to levels that we have been accustomed to.
The shares are currently trading at 6x ’09 EBITDA and at these levels I believe RATE’s risks are properly reflected in the share price, hence, why I am buying now. My DCF points to a $28-$33 value in 12 months, thus I am looking at a ~30% potential return, provided that the economy does not slip into a depression - though some are arguing we are already there.
I do not see any near-term catalysts to point to but at these levels management has to consider repurchasing shares. They appeared confident on the 4Q08 earnings call that they can grow EBITDA in the double digits in 09 but ultimately I think they should look to sell the company. I am certain that M&A directors at several of the large media companies, large cap Internet companies, and possibly even “Microsoft” are looking at RATE at these levels.
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Software Stocks as a Safe Haven
It is becoming apparent that the economic picture in 2009 is shaping up to be as bad as or worse than 2008. Nationalization of major companies, more bankruptcies, and more layoffs loom. Plus, the president of Blackstone thinks we are in a depression. With that in mind, if investors are looking for a place to invest outside of money markets, gold, and Treasuries, I think software stocks are a safe and somewhat inviolable bet.
I believe 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 high switching costs.
Hence, 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 application 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.
The most attractive companies in the space are Oracle, Symantec, TIBCO, McAfee, SAP, Adobe, and Autodesk. Microsoft doesn't necessarily fit the criteria because of the high consumer exposure, plus the company’s business model is under threat. However, I do like the company for its cash position, which is paramount in this environment. Further, MSFT becomes interesting if they pull the trigger on a Yahoo! acquisition or partnership.
Full Disclosure: I am Long Oracle
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I believe 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 high switching costs.
Hence, 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 application 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.
The most attractive companies in the space are Oracle, Symantec, TIBCO, McAfee, SAP, Adobe, and Autodesk. Microsoft doesn't necessarily fit the criteria because of the high consumer exposure, plus the company’s business model is under threat. However, I do like the company for its cash position, which is paramount in this environment. Further, MSFT becomes interesting if they pull the trigger on a Yahoo! acquisition or partnership.
Full Disclosure: I am Long Oracle
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