Archive for the ‘internet services’ category

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Netflix and Tesla: Early Signs of Froth in a Bull Market

May 16th, 2013

It is quite common for a bull market to last far longer than many would have thought, and even more so after the brutal economic downturn we had in 2008-2009. Only just recently did U.S. stocks surpass the previous market top reached in 2007. Although it does not mean that a correction is definitely imminent, the current stock market rally is the longest the U.S. has ever seen without a 5% correction. Ever. Dig deeper and we can begin to see some froth in many high-flying market darlings. Fortunately, we are not anywhere near the bubble conditions of the late 1990′s, when companies would see their share prices double within days just by announcing that they were launching an e-commerce web site. However, some of these charts have really taken off in recent weeks and I think it is worth mentioning, as U.S. stocks are getting quite overbought. Here are some examples:

TESLA MOTORS – TSLA – $30 to $90 in 4 months:

tsla

NETFLIX – NFLX – $50 to $250 in 8 months: 

nflx

GOOGLE – GOOG – $550 to $920 in 10 months:

goog

 

You can even find some overly bullish trading activity in slow-growing, boring companies that do not have “new economy” secular trends at their backs, or those that were left for dead not too long ago:

BEST BUY – BBY – $12 to $27 in 4 months:

clx

CLOROX – CLX – $67 to $90 in 1 year:

clx
WALGREEN – WAG – $32 to $50 in 6 months:

wag

 

Ladies and gentlemen, we have bull market lift-off. My advice would be to pay extra-close attention to valuation in stocks you are buying and/or holding at this point in the cycle. While the P/E ratio for the broad market (16x) is not excessive (it peaked at 18x at the top of the housing/credit bubble in 2007), we are only 15-20% away from those kinds of levels. Food for thought. I remain unalarmed, but definitely cautious to some degree nonetheless, and a few more months of continued market action like this may change my mind.

Full Disclosure: No positions in any of the stocks shown in the charts above, but positions may change at any time

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Posted in consumer, internet services, media and entertainment, retail, technology and telecom, trading and technicals, transportation

Netflix Stock Repricing Overdone

January 24th, 2013

Netflix (NFLX) stock is soaring this morning, up 36% ($37) to $140 per share in pre-market trading. The company’s fourth quarter financial results were above expectations, but at first glance do not appear to warrant a 36% stock price increase. Revenue rose 7.9% year-over-year, leading to a very small quarterly profit of 13 cents per share.

Investors are enthusiastic about Netflix’s addition of 2.05 million domestic streaming customers (up 8.2% versus the prior quarter), but that figure is a bit misleading as actual paid customers rose by just 1.67 million (+7.0%). Obviously, lots of free trial memberships are given out at the holidays, but how many of them convert to paying customers is a big question mark.

It was also a good sign to see operating earnings from the domestic streaming segment rise to $109 million in Q4, versus just $52 million a year ago. The DVD mail segment earned $128 million domestically for the quarter, which just goes to show you how much more profitable those subscribers are. The DVD mail business earned more money, despite having just 8.05 million paid subs, versus 25.5 million paid streaming subs.

Netflix continues to see subscriber losses in its most profitable segment and gains in a streaming business that has very high operating costs. Just how valuable a streaming customer actually is will remain an important issue for investors. Based on the stock’s rise this morning, you would think streaming customers mint money for the company. Conversely, Netflix reported segment profits of $4.25 per paid subscriber during the fourth quarter. That comes out to less than $1.50 per month in profit from the $8.00 per month in revenue they generate.

Back in August, with the stock floundering in the mid 50′s, I wrote an article on Seeking Alpha entitled “Netflix Is Finally Cheap.” I did not buy the stock, which in hindsight was a mistake since the analysis was correct. With the stock around $140 as I write this post, I can not justify an equity valuation of $8.25 billion for the company, so if you have played this stock correctly lately, you might want to strongly consider lightening up on your long position into today’s strength.

Full Disclosure: No position in NFLX at the time of writing, but positions may change at any time

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Posted in internet services, media and entertainment, technology and telecom

Apple Shares Now Nearly As Cheap As Microsoft: Which Would You Rather Have?

December 20th, 2012

That’s right. With the recent share price plunge in Apple (AAPL), from over $700 to around $525,  the stock is rapidly approaching the valuation of 1990′s tech darling Microsoft (MSFT). While clearly facing near-term headwinds, both on the

product side (a narrowing of their technological lead over rivals) and the financial side (fiscal cliff, tax-related selling before year-end), among others, I find it hard to make an argument for why Apple should not trade at a premium to Mister Softee. To be fair, Apple still fetches slightly more if you go out to one decimal place, with AAPL trading at 6.4 trailing cash flow, versus 5.7 times for Microsoft.  If Apple shares fell another 8% or so, to around $485, and MSFT stayed around $27, both would trade at 5.7x trailing 12 month EBITDA. Still, investors are having a hard time understanding exactly how sentiment on Apple has shifted so much in just a few short months.

Now I know many people come to this blog to discover new investment ideas, and Apple definitely does not qualify. However, since contrarian investing is one of my core tenets, I think it is important to point out that Apple shares are dirt cheap right now. In order to justify a lower stock price, say one or two years from now, you have to think that Apple’s sales and earnings have peaked and are headed down from here. While that is not an impossibility, especially in the world of technology, I think it is far more likely that Apple’s market share gains slow and level off going forward. Even in that case, the end markets they serve as going to grow nicely over the next few years. As a result, I don’t envision their financials petering out from here, though for a company of this size, the hey days of rapid growth are clearly over.

For those who aren’t sure such prognostications will prove true, consider again the comparison with Microsoft. Regardless of Apple’s position relative to Google, Samsung, and the like in the coming years, is Microsoft really as well positioned? I don’t think so. Even a bet that Apple will outperform Microsoft, given their stocks are nearly identically priced, is a bet investors can make in the public market by shorting one and using the proceeds to go long the other. iPod versus Zune? iPad versus Surface? iPhone vs Windows Phone? It’s not a bad play.

Although discussing large cap tech titans like AAPL and MSFT hardly uncovers anything new for curious investors, I definitely think today’s share price on Apple is worthy of discussion. The recent 200 point decline seems very overdone to me, based on what is happening out in the tech marketplace. The last time I updated my fair value for Apple stock I got a number with a “7″ handle on it. Nothing has changed since then, and for the first time in a long time, I am actually looking to add to the stock in client portfolios.

Full Disclosure: Long Apple and no position in Microsoft at the time of writing, but positions may change at any time

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Posted in internet services, technology and telecom