Are Money-Losing Companies Ever Worthy of Value-Oriented Investors’ Time?

As a valuation-based contrarian investor, it is relatively easy for me to make a strong case against allocating investment dollars to money-losing tech IPOs that pay out stock compensation equal to 20% or 30% of revenue to boost their “adjusted EBITDA” and GAAP free cash flow metrics and trade for 15 or 20 times that revenue. Simply put, the growth required for a company to “grow into” a 20 times revenue multiple, or a 100 P/E multiple, is so enormous that 90%+ of all businesses will never get there.

Of course, there are some that will and investing in those stocks can be very rewarding. Josh Brown, CEO of Ritholtz Wealth Management and frequent CNBC commentator, is quick to point out to television viewers that he is generally opposed to avoiding unique growth stocks solely due to valuation concerns. He walks the walk too, considering his purchase of shares in Shake Shack (SHAK), a regular ol’ restaurant chain currently trading at more than 6 times 2019 revenue and more than 50 times 2019 EBITDA.

Shares of Shake Shack surged out of the gate after an IPO in 2015 at $21 but insane valuation levels could not sustain the 4-fold rise for very long. After a period of consolidation, the valuation is once again getting frothy as the stock regains its former highs.

Just because I don’t think SHAK is worth its current valuation, even if it does reach its goal of over 400 domestic locations (vs ~150 today) and tons of franchised units overseas, I could be wrong. If the company becomes the second coming of McDonalds (MCD) 20 years from now, Josh will be right and we will all look back and say the $3.6 billion equity valuation in 2019 was a great entry point! So… if you feel that strongly about a company, and there is enough market opportunity for them to ultimately grow 5x or 10x bigger, a high growth investment can pay off regardless of the initial price paid.

Since I have been poking fun at folks paying 20 times sales for cash-burning, cloud-based software companies, I wanted to be transparent with my readers about the client portfolios I manage. Believe it or not, there is one high growth, money-losing stock that I have parked in some client portfolios; Teladoc (TDOC).

TDOC is the global leader in the relatively nascent telemedicine provider space. Just as technological innovation is disrupting many traditional sectors of the economy, TDOC is trying to make it commonplace for patients to access medical care via teleconferencing technology. Imagine how many visits to doctor offices do not actually require in-person consultation. Accessing medical providers remotely is not only more convenient for the patient, but it can reduce costs across the system.

Clearly the telemedicine trend has yet to take off globally, as it is very early on in being rolled out. It is gaining a lot of traction in certain subspecialities, such as behavioral and mental health, and I believe it could be very common a decade from now. TDOC has established itself as the leader, and with equity currency from the firm’s 2015 IPO, they have the ability to use M&A to further their position worldwide.

All of that said, you may have guessed that TDOC is losing money. Like many tech firms I scoff at, they are content to operate at a loss to build their leadership position and hopefully dominate the market over the very long term. In terms of growth, so far they are succeeding. TDOC’s annual revenue has gone from $20 million in 2013 to what should be well north of $500 million in 2019. Such growth explains the generous valuation implied by the current $58 per share stock price; an equity value over $4 billion and price-to-sales ratio of 6x on 2020 estimates ($675 million). My internal estimates show EBITDA in 2019 to the tune of negative $40 million.

To conclude, I think Josh Brown is right – sometimes valuation does not matter for growth stocks. That said, when dozens of businesses are trading at crazy prices relative to underlying sales and earnings, we should assume that most of those won’t work out for long-term investors if they overpay. I would have to be pretty confident that the upside potential is worth the risk. And in the case of TDOC, I can envision a scenario where telehealth is huge and TDOC dominates the field, but time will tell if they are the right horse to bet on.

In Large Cap Media Space, Fox Looks Undervalued

One of the things I try to do with this blog is highlight attractively priced securities that I might not have room for presently in client portfolios, but that warrant attention for value-oriented investors. As I have been active in media stocks in recent years, and many content providers are trading at meager valuations due to fears over cord cutting and increasing competition in content creation more generally, I don’t really have a lot of room for more media and entertainment exposure at the present time. However, if I did and I was looking for well established blue chips names in the sector to allocate investment dollars, recently slimmed down Fox Corporation (FOX) would be near the top of the list.

Not too long ago, 20th Century Fox was a large, diversified media company. The recent deal to combine much of that legacy business with Disney (DIS) has left behind a more focused Fox, which trades for $35 per share and sports an enterprise value of $25 billion.

The new company is focused on cable news, live sports networks, and Fox broadcast stations. They have essentially sold the higher cost, riskier, production and creative content creation business and kept the simpler, lower cost stations that focus on live programming and have less competition. The company is using free cash flow to also make small, strategic acquisitions to boost growth, such as a 5% stake in The Stars Group (TSG), which will partner with Fox Sports on sports wagering, and a 5% stake in streaming platform operator Roku (ROKU).

Fox recently reported their latest fiscal year results and booked revenue north of $11 billion, EBITDA above $2.6 billion, and free cash flow per share of $3.69. On an EV/EBITDA basis Fox trades for ~9.4x cash flow.

Given their dominant position in live news and sports, coupled with a strong balance sheet and superb cash flow generation potential, it appears that FOx shares at $35 each can offer investors an attractive, low risk opportunity to benefit from multiple avenues of value creation over time. While this is not a high growth, high return situation, paying less than 10x EBITDA for the franchise, which does not factor in assets such as the Roku stake (worth $750 million and rising) or operational upside from any of the company’s strategic investments, seems like a bargain.

From a capital allocation standpoint, Fox pays a 1.3% dividend (which is likely to increase over time), and free cash flow north of $2 billion annually will allow for a material reduction in share count over time. As a result, free cash flow per share should grow in the mid to high singles digits long term. With rising per-share cash flow and the potential for multiple expansion (why can’t this company trade for 10-12x EV/EBITDA?), there appears to be an attractive risk/reward opportunity here, though I understand it is far from a sexy pick in a climate where money-losing, high revenue growth entities are leading the way. If you like somewhat boring cash cows that are well positioned to maintain their franchises, Fox looks like a good bet.

Wynn Resorts Analyst Day Confirms Upside Scenario

Back in May I outlined a fair value range for gaming operator Wynn Resorts (WYNN) that suggested upside to at least $155 per share, if not 10-20% higher. That thesis was predicated on a 12-13x EV/EBITDA multiple and $2 billion of EBITDA in 2020.

Last week the company hosted an analyst day at its recently opened Encore Boston Harbor property and took analysts through a more than 75- slide Powerpoint deck that included projected company-wide growth between now and 2021. Overall, I was pleased with the guidance they provided, as their internal forecast for 2021 EBITDA is roughly $2.3 billion, which equates to 28% growth versus the current trailing 12-month figure of ~$1.8 billion.

It is quite common for companies to issue rosy guidance that factors in most of what could go right and little of what could go wrong, so the 2021 projection is far from assured. Still, I felt good about my $2 billion 2020 number beforehand and management’s presentation did nothing to shake that confidence.

That said, I am looking to trim my WYNN position around $145 per share, which is less than 7% from the low end of my fair value estimate. There have been several great opportunities to buy WYNN materially below current prices over the last couple of years and I have built up some fairly large positions in the name. With the stock on yet another upswing, I am hoping to pare it back as a source of funds.

Why not sell it all? Well, I can certainly assign a reasonable probability that WYNN does reach its $2.3 billion EBITDA target over the next 2-3 years. Using my 12-13x EV/EBITDA fair value multiple, the stock would reach $200 per share at the midpoint ($190-$210), which is enough upside potential for me to keep WYNN in client portfolios. However, since that scenario assumes no unexpected outcomes in Vegas, Macau, or Boston, and the stock has rallied around 40% in 2019 so far, an outsized position is getting less attractive.

Howard Hughes Corp: A Lesson in Price vs Value

I was planning on writing a bullish piece on real estate developer Howard Hughes Corp (HHC) today, as the stock has been crushed in recent months and closed yesterday at $92.59 per share, 35% below its 52-week high.

Well, that idea quickly went out the window when CNBC’s David Faber reported shortly after the opening bell that HHC’s board has hired Centerview Partners to explore strategic alternatives, including a possible sale, joint venture, or spin-off of all or parts of the business. To say that the stock is reacting positively to the news would be an understatement. As I type this HHC shares are up $29, or 31%, to $121 each.

So rather than explain why the stock appeared dramatically undervalued in the low 90’s, which I was apparently one day too late in sharing, I will instead offer up the observation that Warren Buffett’s often-quoted mantra “price is what you pay, value is what you get” is notable in this case.

Some investors give more credence to that concept than others, mainly because while value investors try to find situations where value > price, more short-term and/or technically-inclined investors use the market price as their guide and believe that the daily matching of buyers and sellers across the globe corrects most any material pricing inefficiency. Not surprisingly, I am in the former camp.

HHC is an interesting case because most fundamental analysts believe that the company’s assets are worth between $130 and $170 per share, net of debt, and that those same assets should grow in value nicely over time given their strong locations within the local trade areas they serve. Of course, if this is true, and markets are quite efficient, then the stock should not have closed yesterday at $92 and change.

Typically, bulls and bears are left arguing back and forth about who is right, but sometimes we get a better sense through actual corporate action. We won’t know whether HHC finds a buyer for some or all of its assets for at least several more months (and if so, at what price) but today’s trading action seems quite odd.

I would say that it is rare that a stock surges more than 30% on news that the company has hired bankers to approach possible buyers because we are still very far away from getting any idea as to how many interested parties there are, or what prices they might be willing to pay. Stock moves like this are usually seen late in the process, when a journalist gets word of who is bidding and what the range of bids has (roughly) been. In this case, CNBC’s Faber merely confirmed the hiring of advisors because the process has just begun.

What that tells me is that investors seem to believe a few things. First, that HHC’s net asset value per share is, in fact, materially higher than yesterday’s closing price. Two, that the market believes that there will be ample interest in HHC’s assets such that bids are likely to materialize (though of course no deal can be assured). And three, it probably helps HHC that interest rates have recently come down and lending capacity from financial institutions, hedge funds, and private equity firms appears robust, though obviously that can change quickly in today’s world.

I say all of this because I think it firmly supports the notion that markets in the short term can be quite inefficient. Up until today, HHC stock did not have many fans, but that changed in a matter of minutes as the fundamental story changed (or more precisely, a layer was added; the fact that the board is open to strategic alternatives). Conversely, if it was true that the market was efficient and the consensus view among HHC’s close followers was that the business was worth somewhere close to Wednesday’s closing price, we would not see the stock surging today.

The beauty, of course, is that now we might very well be able to settle the debate about HHC’s net asset value (or at least the opinion of that NAV among folks who want to buy the assets and have the cash to do so). The next few months should be very interesting.

Full Disclosure: Long shares of HHC at the time of writing, though I have been trimming positions into today’s strength, as Wednesday’s announcement confirmed they are open to selling, whereas the stock is acting as if a deal is nearing completion.

*Author Update* 4:30pm ET

HHC stock leveled off for a while and then surged again late in the trading day, closing at $131.25, up nearly 42% for the session. In the spirit of full disclosure, I have continued to sell more at prices as high as $131.50 and have also written some $140 covered calls against shares that remain in client accounts.

Simply put, I understand HHC is a unique company with great properties and I have no doubt that some bidders will emerge to try and pull some of them away from HHC. That said, this one-day move is pretty remarkable and I think it is overdone in the short-term. Accordingly, I think it is silly to not sell any stock at these levels, and would welcome a scenario where it cools down and I can buy back some of the sold shares at lower prices. Tomorrow (the last day of the quarter) should be the second-most intriguing trading day for HHC this year! 🙂

Lastly, some people are speculating that this announcement was all about juicing up Bill Ackman’s portfolio right before the end of the quarter and nothing truly will come of it. While a deal might not happen, I don’t think Bill’s HHC position is big enough (just 2% of disclosed portfolio value as of 3/31/19) for him to have orchestrated this whole thing just to show a better performance figure for Q2. After all, Pershing Square was already having a great year and another 100 basis points is a small prize for such an effort. Just my two cents…

While Publicly Traded Plant-Based Meat Alternative Companies Are New, The Products Are Not

First, there was cannabis seller Tilray (TLRY), which saw its stock price peak at $300 per share just a few months after a mid-2018 IPO that priced at $17. A buying frenzy among individual/retail investors resulted in a more than 17-fold surge, but as it usually the case, sanity returned. Today TLRY can be purchased in the 40’s.

This chart does not show the intra-day high of $300 but it did indeed peak at that price

With the cannabis craze now passed, as well as that of bitcoin, which stole the show in 2017, we have another round of exuberance with Beyond Meat (BYND), the plant-based meat alternative seller which priced its IPO at $25 last month and this week topped $200 per share.

While I lacked helpful fundamental insights into TLRY, outside of the always important valuation discussion, the “alt-meat” sector is something I know a little about because my wife is a vegetarian and we typically have very little in the way of actual meat products in our house. As a result, over the last decade or so we have tried most of the products out there. Some impress, others do not.

What I find perhaps most interesting about the last month is that because BYND is the first pure play plant-based meat alternative company to go public, those who follow the financial markets (but don’t eat the products), seem to think that this market is brand new and that BYND (and fellow upstart Impossible Foods) are the first two companies to launch plant-based meat products. If there was indeed some sort of first-mover advantage, and the market for these items was brand new and growing like crazy, I guess one could justify paying a huge valuation for BYND. Though I think the current $10 billion equity value is beyond rich for even such a scenario.

The problem with that viewpoint is that plant-based burgers, ground beef, and chicken nugget alternatives are not new. Brands like Morningstar Farms, Quorn, Lightlife, Gardenburger, Boca, Field Roast, and Gardein have been at this game for a long time. In fact, market leader Morningstar Farms (owned by Kellogg), with annual sales estimated at $750 million, was started all the way back in 1975!

I suspect that people are noticing them more today because both Beyond and Impossible have been aggressively marketing their products and have succeeded in getting them on restaurant menus over the last couple of years (the legacy brands have typically focused on grocery store distribution). Sure, there are more vegetarians and vegans today than there were 20 or 30 years ago, but it would be a mistake for investors to assume that a couple of new companies are going to dominate the market and have no competition.

The market size is also an interesting topic, because in 2017 only 3% of Americans identified as vegan or vegetarian. If 5 companies battle each other for maybe ultimately 5% of the meat market in the U.S., it might be hard for investors to justify anywhere near a $10 billion market value for BYND, let alone a handful of players combined.

Some people are saying that meat eaters will eventually become big customers, but I doubt that will be true. Surely there will be some, as I enjoy many of the items with my wife (even though I do eat meat, poultry, and fish at restaurants), but I don’t think specific situations like ours will be all that common, even five years from now.

So while these products are real, in many cases quite tasty, and the businesses are growing, the stock valuations are clearly out of whack. There is no way BYND is worth $10 billion when Kellogg’s equity is valued at $19 billion and Conagra (the owner of Gardein) is worth $14 billion. Those companies have total annual revenue of $13 billion and $10 billion, respectively, while Beyond is projected to book sales of $300 million in 2020.

Much like cryptocurrencies and cannabis, many investors seem to be overestimating the alt-meat market opportunity (through insane stock market valuations). This is not to say there won’t be winners and profits won’t be made, but in a rush to want to own shares of what could be the “next big thing” valuation gets thrown out the window in favor of momentum and excitement. That typically does not end well. After all, the saying “buy low, sell high” was never shortly replaced by “buy high, sell higher” mainly because that strategy rarely works over the long term. Tilray speculators learned that and I suspect BYND bulls will as well.

Lastly, if you are curious and want to try some of the legacy alt-meat products (and compare them with BYND to see if they really have a better mouse trap), here are our favorites:

The IPO Market Has Taken The Baton From Large Cap Tech And Is Running Like Crazy

For several years until recently large cap technology companies were carrying the U.S. stock market on their backs. The nickname of FANG was even coined to describe the group, which included Facebook, Apple, Netflix, and Google. However, all of those companies saw their stock prices peak in 2018 and move in sideways fashion since, which has resulted in the S&P 500 doing the same over the last year:

With the tech sector comprising more than 30% of the S&P 500, as big tech stocks see their rapid ascents halted, so does the overall market…

However, with the economy doing well and stocks having rebounded from their Q4 2018 swoon, there are going to be pockets of strength in the market regardless. For a while it was cannabis stocks but now it appears to be the IPO market.

While the valuations are not as extreme as they were in 1998-2000 with the tech bubble, they nonetheless don’t jive with the underlying financial profiles of the companies. Beyond Meat, which will wind up being among dozens of alt-meat competitors, should not be valued at $10 billion (for example). Unlike high margin tech companies like Facebook or Google, traditional businesses like food manufacturing or general merchandise retail have low margins and therefore will not result in large price-to-sales multiples over the long term.

I bring up the latter category because today’s IPO winner du jour is online pet store (CHWY), which price its IPO at $22 per share and nearly doubled to more than $41 before 11:30am ET. At that price, CHWY’s market value is $17 billion.

Chewy is growing very fast and could very well reach $5 billion in annual sales this year. That sounds great, and at a tad over 3 times annual sales, maybe the stock is not mispriced? Well, let’s not forget that Chewy sells pet food online and ships it to their customers. This is not a revolutionary business model, and it certainly is not cheap to operate. Cost of goods for Chewy is above 75% and operating margins are negative. If the company decided to grow more slowly and cut marketing expenses from 10% of sales to 5% of sales, they could perhaps breakeven.

Even in a world where Chewy reaches $10 billion of sales and manages to turn a profit, the valuation should be relatively meager. General merchandise retailers like Costco, Target, Wal-Mart, and Best Buy all trade for less than 1x annual sales in the public market. This is because margins are relatively low (EBITDA less than 10% of sales) and retailers tend to trade at or below market multiples because they are simply middlemen/resellers of products that someone else makes.

Will the share of pet care continue to move in the direction of online e-commerce transactions? Almost certainly. Will Chewy be forced to price very competitively to win share from Target, Amazon, and Petco? Absolutely. Will they be able to ever make big profits by selling cat litter online and shipping it to your house? Of course not.

If Chewy trades at 1 times annual sales five years from now, it has to grow its business by 28% annually during that time to be be worth today’s price in 2024. For investors who buy it today and expect a 10% annual return over the next five years, Chewy would have to grow 40% per year through 2024.

So is Chewy the next big thing or just the most recent example of an overpriced new IPO? I would bet on the latter and will be paying close attention to see if high valuations persist when many recent IPO are available to short with minimal cost.

Full Disclosure: No position in Chewy at the time of writing

(Author’s note added at 6/14/19 12:40p ET – Petsmart bought Chewy in 2017 for $3.35 billion, so they are sitting on a 5x return in 2 years, to give readers a sense of the valuation inflation going on here)

Why Tech Is Likely to Withstand Antitrust Inquiries

Mega cap technology companies are now facing heat as the federal government continues the process of investigating their market positions as it relates to antitrust/monopolistic issues. Some politicians are calling for breakups of tech companies. The narrative within the investing community seems to be that Microsoft (MSFT) was severely crippled by an antitrust settlement nearly 20 years ago, and as a result, this could get ugly for today’s tech leaders as the FTC and DOJ take closer looks.

So I decided to go back and see exactly how stifled Microsoft’s growth was after the government’s lawsuit was settled in 2001. The answer might be surprising:

MSFT Fiscal 2001 Sales: $25.3 billion

MSFT Fiscal 2001 EBITDA: $13.2 billion

MSFT Fiscal 2011 Sales: $69.9 billion (+176% vs decade prior)

MSFT Fiscal 2011 EBITDA: $29.9 billion (+126% vs decade prior)

If the Microsoft case is supposed to be the poster child for how a government lawsuit can kill your business, it does not seem to be much of an issue, and certainly not to the extent investors are worried right now. Interestingly, while MSFT initially lost their case, they prevailed nicely during the appeals process, which ultimately led to a settlement that had the effect of “limiting” the company’s EBITDA growth rate to +8.5% annually for the ensuing 10-year period, with revenue rising even faster (+10.7% annually).

Keep in mind that we are very early on in the process today, with regulators just now deciding who will take a look at each company. It will take years for them to draw a conclusion, possibly file a lawsuit, potentially prevail in court, then have to defend during an appeal even if they win, and only then would tech firms have to adapt to any stipulations.

Perhaps more importantly, I think it is helpful for us, as users of these tech products, to ask ourselves if we believe that the mega tech companies of today have grown so large because they have created things that consumers find helpful and value-creating in their lives, or if it is more due to them simply using their power to force consumers to use their stuff. Perhaps more now than at any other time, it seems to me to be the former. As a result, it is hard to argue that consumer are being unfairly harmed with offerings such as free 1-2 day shipping with Prime, a free multi-featured Google Maps app for their phone, and a social network platform where anyone can sign up, post anything they want, and share it with whomever they want.

Coca Cola Bottling Shares Surge 130% After Name Change: Could FinTech Be To Blame?

Hat tip to Upslope Capital for bringing this to people’s attention. It appears that do-it-yourself investors relying on tech platforms to invest need to be even more careful than some may have previously thought. Sure, having a computer decide your asset allocation could be problematic long term, but it turns out that even someone trying to buy Coca Cola stock might get into trouble if they don’t do their homework.

Whereas Coca Cola trades under the symbol KO, their largest bottler/distributor trades under the symbol COKE. The latter used to be called “Coca Cola Bottling Co Consolidated,” which made it easier to understand which stock was which (given that the “real” Coke did not trade under “COKE”). Then in January the bottler changed the company name to “Coca Cola Consolidated” and dropped the “Bottling” completely.

So what happened? COKE shares almost immediately surged more than 130%:

So much for being just a boring bottler of soft drinks… COKE shares rally from under $130 to a peak of $413 in just four months after a questionable name change.

What could possibly have prompted such a huge move in this once boring stock? Well, one theory was floated by Upslope Capital; the name change itself!

If you read through their report (linked to above at the outset), you will notice that users of the popular Robinhood investing app have gobbled up COKE stock this year, likely due to the fact that searches for “Coca Cola” bring up the name of the bottling company with the stock symbol COKE. If you were a young, amateur investor, you probably would not think twice about putting in a buy order thinking you were getting shares in the mega cap global beverage giant that counts Warren Buffett as an investor and sports a total market value of more than $200 billion (70 times bigger than the bottling company!). And then you would wind up with an investment in the far smaller bottling company. And worse, your fellow investors would be doing the same, helping to push the stock up more than 100% in a matter of months!

While the air has come out of the balloon in recent days, COKE is probably still overvalued at $316 per share. I suspect sometime over the next year the stock trade back to $200 or $250 and plenty of investors will wonder exactly how they lost so much money on such a dominant company’s stock.

While technology surely will play a role in evolving the investment process for many, the idea that hiring a human being to assist you with your savings and investment objectives is unlikely to become outdated for the majority of folks, for reasons exactly like this one. Sometimes the computers are going to be value-destructive, not value-additive as intended.

Full Disclosure: At the time of writing, I am short shares of COKE, but positions may change at any time.

Not Enough U.S. Cash Burning IPOs for You? Here Comes China’s Luckin Coffee

Just as U.S. investors are trying to make sense of the Uber (UBER) and Lyft (LYFT) IPOs, both disastrous for those buying at the offer prices, on Friday we will get a U.S. listing of Chinese-operated, Cayman Island-incorporated coffee upstart Luckin Coffee. How much should investors pay for this so-called Starbucks of China (even though its business model is not copying the Seattle-based giant)? Quite frankly, who the heck knows? If that is not a sign that one should pass for now, I don’t know what is.

Below is a summary of Luckin’s financials from the IPO prospectus, though keep in mind its operating history is short (having gone from zero to 2,370 stores between October 2017 and March 2019).

This income statement reads like a Silicon Valley cloud-computing start-up, not a Chinese bricks and mortar coffee chain

As you can see, Luckin’s stores are run at a loss, with Q1 2019 sales of $71 million dwarfed by direct store operating costs of $83 million and another $25 million of marketing expense.

Investors should not exactly be enamored with Luckin’s growth rate. After all, selling coffee at a loss is an easy way to rack up sales and there is no way that the company has a detailed, refined, and proven unit expansion plan in place given that they are opening these money-losing locations as fast as humanly possible (an average of more than 4 new stores a day since they launched 18 months ago!).

None of this says anything about the long-term odds of success for Luckin Coffee. They could very well become China’s largest coffee seller and make money doing it. There is simply no way to know at this point, so investors are left deciding whether they want to take a gamble or not. Many will given that the company will list on a U.S. exchange this week, but with no sound financial model to back up the prices being paid for the shares, there is really no fundamental case to be made for buying the stock.

All one can do is estimate what they think margins could ultimately be based on the business model, assume long-term success, and calculate an imputed price-to-sales ratio worth paying today given certain growth assumptions. That is how Uber and Lyft are likely to be valued (assuming people care to value it at all), and the same idea applies to Luckin Coffee and whatever the next cash-burning IPO waiting in the wings happens to be.

Author’s note: To give you an example, assume that Uber can ultimately earn 20% EBITDA margins over the long-term and one can justify paying 15x EV/EBITDA given their potential growth outlook. That valuation equates to an EV/sales ratio of 3x, which based on 2020 revenue projections could yield a per-share fair value in the $30 ballpark (vs today’s quote of $40). And don’t even ask me to guess what Luckin Coffee’s margins could be.

Gaming Update: Wynn Set for Boston Opening and Why Penn Looks Dirt Cheap

A lot has been going on with Wynn Resorts (WYNN) since my last post about six months ago so I figured it was time for an update. In addition, I recently significantly increased long holdings in regional gaming operator Penn National (PENN) and will share some brief thoughts there.

Shares of WYNN have continued in seesaw fashion, as the Massachusetts Gaming authorities held hearings to determine if it would allow the company to keep its gaming license in the state and open its Encore Boston Harbor property on schedule this summer. After a lot of tough talk, WYNN was fined $35 million for how it handled its former CEO amid inexcusable behavior, but got the green light for the Boston resort, and the stock has firmed up with the uncertainty cleared up.

It will take some time before we know exactly how profitable the new property will be, but I have been sticking with my $2 billion EBITDA target for 2020 throughout my holding period, and there is no reason to think that figure will be materially off base at this point.

If we apply an EV/EBITDA multiple of between 12x and 13x on that cash flow number, fair value for WYNN shares would be in the $155-$175 range, compared with the current price in the 130’s. On a free cash flow basis, a 15-18x multiple on my $1.1 billion estimate (once Boston has stabilized), gets us to a fair value range of $154-$185 per share.

As a result, the stock is still well priced for longs, but given that it moves up and down a lot quite quickly, there could be an exit point approaching near the bottom end of that range if one can find other opportunities with even more upside.

On that front, I really like shares of Penn National Gaming and have been buying a lot more at $18 and change this week. PENN is the nation’s leading operator of regional casinos, with more than 40 properties in nearly 20 states. Competition is typically intense, as jurisdictions often grant additional licenses in order to try and maximize tax revenue, but PENN has proven to be as solid an operator as they come, and does not shy away from accretive M&A deals when given the chance.

PENN shares have been cut in half from their 52-week highs despite a highly accretive merger with one of its largest peers (Pinnacle), and continued single property acquisitions – such as Greektown in Detroit.

The stock has been crushed lately and in the high teens fetches an EV/EBITDA multiple in the mid 6’s. The free cash flow multiple is even more extreme at sub-6 times. With sports betting now legal, the company should benefit over the long term, as more and more states pave the way for taking bets. While the margins on betting won’t be huge (the house takes a 10% cut and then gives a nice chunk to the state via taxes), it should be an incremental positive, and ancillary revenue such as food/beverage and hotel stays should get a nice bump as well.

Regional gaming assets typically fetch around 8x EV/EBITDA in private transactions and I see no reason a diversified operator like PENN, with a long track record of impressive capital allocation on behalf of shareholders, should not trade at a similar multiple, if not a slight premium. The market does not agree at the moment, but there is a great chance that at some point in the next couple of years that sentiment will change.

If we assume further deleveraging in 2019 and into 2020, my financial model shows a per-share fair value as high as $30 per share, assuming a valuation of 8x EV/EBITDA and a net leverage ratio of 2.5x excluding lease obligations.