Archive for the ‘internet services’ category

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Does Marissa Mayer Make Yahoo Stock A Worthwhile Bet?

October 24th, 2012

Granted, I am a numbers guy, so even asking whether a new CEO is enough to warrant buying a stock is a stretch for me. While quality leadership is certainly important, successful stock market investments require the numbers to work and no matter how great the CEO, they can’t magically make the numbers work all by themselves (unless you want the books to be cooked of course). Still, I am intrigued by Marissa Mayer’s hire as the new CEO at Yahoo (YHOO), even though the company is clearly not gaining relevancy on the Internet. A 1990′s darling, Yahoo has lost its lead in search (thanks to Mayer’s former employer, Google) and really only has a stronghold in a few areas of the web, such as email and fantasy sports.

Still, considering who has been occupying the corner office at Yahoo over the last decade, it is compelling that a tech person of Mayer’s caliber is now running the show. From 2001 to 2007 the company was headed by a movie studio exec (Terry Semel). From 2009 to 2011, they brought in a Silicon Valley veteran (Carol Bartz), but she previously ran Autodesk, a software company that sells products to help engineers design factories, buildings, and 3D animated characters. Is it really that surprising that Yahoo has been treading water for all these years?

Enter Marissa Mayer, Google’s 20th employee (and first woman engineer) who had been leading successful efforts in areas where Yahoo actually competes, like web search. If anyone can help reinvigorate Yahoo, it might just be her.  But isn’t that taking a big leap of faith? Sure, but there is another factor, other than the CEO, that makes a bet on Yahoo shares at $16 each worth a look. The numbers.

Yahoo’s current market value is less than $20 billion. As of September 30th, the company’s stake in Yahoo Japan ($7.7 billion) and Alibaba ($8.1 billion) account for the majority of that valuation. Even if you deduct the tax liability that would be incurred if Yahoo were to monetize these stakes, the organic Yahoo operations are priced at just $10 billion. What do investors get for that $10 billion? To start, how about nearly $7 billion of net cash on the balance sheet (plenty for Mayer to begin a transformation)? That leaves a mere $3 billion valuation on Yahoo’s core operations, which generated free cash flow of $250 million in 2011. That is a low price even if the company doesn’t grow at all going forward.

Yahoo stock today looks to me like a call option on Marissa Mayer. As I said before, a CEO alone is not a good reason to buy a stock. But what if you have a unique change in leadership that could very well pay off in spades, and the meager public market valuation of the company basically affords you limited downside risk? The combination of those two factors makes the stock an interesting opportunity in my view. If Mayer, like her predecessors, fails to reinvigorate the company, then the shares likely stagnate here in the mid teens. However, if she succeeds, as her resume seems to suggest she could, there is a lot of upside to the story. It feels weird for me to say, but Yahoo at $16 with Carol Bartz running the show didn’t interest me one bit. With Mayer it’s a different story.

Full Disclosure: Long shares of Yahoo at the time of writing, but positions may change at any time

 

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Posted in google, internet services, technology and telecom

Bubble Bursting 2.0 (Part 2): Isn’t Groupon Worth Something?

August 17th, 2012

Last November, in a post entitled “Numbers Behind Groupon’s Business Warrant Caution After First Day Pop”, I cautioned investors that the IPO of daily deal leader Groupon (GRPN) looked sky-high at the initial offer price of $20 per share, which valued the company at an astounding $13 billion:

“It is not hard to understand why skeptics do not believe Groupon is worth nearly $13 billion today. To warrant a $425 per customer valuation, Groupon would have to sell far more Groupons to its customers than it does now, or make so much profit on each one that it negates the lower sales rate. The former scenario is unlikely to materialize as merchant growth slows. The latter could improve when the company stops spending so much money on marketing (currently more than half of net revenue is allocated there), but who knows when that will happen or how the daily deal industry landscape will evolve in the meantime over the next couple of years.

“Buyer beware” seems to definitely be warranted here.”

A few things have happened since then. First, Groupon has cut back on marketing spending and is now making a profit (free cash flow of $50 million in the second quarter). Second, the post-IPO insider lockup period has expired, removing a negative catalyst that the market knew was coming. Third, and most importantly, Groupon’s stock has plummeted from a high of $31 on the first day of trading ($20 billion valuation) to a new low today of $4.50 ($3 billion valuation).

Here is my question, as simply as I can put it; “Isn’t Groupon worth something?” The stock market seems to be wondering if many of these Internet IPOs will exist in a few years. Today’s 8% price drop for Groupon was prompted by an analyst downgrade to a “sell” and a $3 price target. Here is a company with $1.2 billion in cash, no debt, and a free cash flow positive business that will generate over $2 billion of revenue this year. That has to be worth something. How much is another story.

I would argue that it is too early to write off companies like Groupon as being “finished.” It is far from assured that they will be around in 3-5 years, but many of them have huge cash hoards ($2 per share in Groupon’s case), no debt, and a business that is making money today. My most recent blog post made the point that many of these Internet companies are going to survive, and in those cases bargain hunters are likely to make a lot of money. Will Groupon be one of them? I don’t know, but if an investor wanted to make that bet, at $4.50 per share, they are paying about $1.8 billion ($3 billion market value less $1.2 billion of cash in the bank) for an operating business that is on track for more than $2 billion in sales and $200 million in free cash flow in 2012. And who knows, with this kind of negative momentum, the shares could certainly reach the analyst’s $3 price target in a few more days.

Bottom line: these things are starting to get pretty darn cheap. If they make it, of course.

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

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Posted in internet services, retail

Bubble Bursting 2.0: Coming To A Dot-Com Stock Near You

July 31st, 2012

By now you probably know the poster children for the bursting of the 2012 Internet bubble:

Facebook (FB) IPO price: $38.00, Current quote $21.75 (down 43%)

Zynga (ZNGA) IPO price: $10.00, Current quote: $2.95 (down 70%)

Groupon (GRPN) IPO price: $20.00, Current quote: $6.66 (down 67%)

And as was the case in 2000, we are seeing violent selling in most any Internet company that reports a less-than-impressive quarter as a public company. We are also likely to get a repeat scenario in terms of bargain basement prices, for a time anyway, even on those companies who are able to survive and grow with a profitable business model. I think it is time to start monitoring these dot-com IPOs in search of those that might be written off prematurely. After all, unlike the late 1990′s, many of these companies do make a profit. The issue today is more that they don’t always make enough to justify multi-billion dollar stock market valuations.

Today’s disaster du jour is CafePress (PRSS), a profitable e-commerce site that has been around since, you guessed it, 1999. CafePress, which projects 2012 revenue of more than $200 million, went public in late March at $19 per share, giving it a market value at the time of about $325 million. In today’s trading the stock is falling by nearly $6, or 42%, to a new low of under $8 per share. Loss since the IPO: 58%.

So why bring up CafePress? I think it is the kind of company (a viable, profitable, and growing Internet operation) that might fall into that “written off way too early” category as the air continues to flee from the 2012 Internet company bubble. Granted, I have only spent an hour or so looking at CafePress specifically, so this is by no means a huge ringing endorsement yet, but it is the kind of stock I think warrants a closer look.

Even with reduced financial guidance for 2012 (the reason for today’s steep stock price decline), CafePress is predicting more than $20 million in EBITDA on more than $200 million in sales this year. With sales growing by about 20%, coupled with an 11% cash flow margin, PRSS is certainly a viable company. And yet, at under $8 per share, the stock price is indicating otherwise. The market value is now down to $135 million. PRSS has $60 million in cash on the balance sheet, so at current prices Wall Street is saying that the CafePress operating business is worth just $75 million, or 3 times EBITDA. That is the kind of valuation that Wall Street normally reserves for companies in a steep decline. As a value investor, numbers like these can’t help but get my attention.

Comments on the Internet stocks in general, or CafePress specifically, are always welcomed.

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

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Posted in internet services, technology and telecom