Amazon Holiday Fun Facts 2013 ($AMZN)

They never give specific numbers, but Amazon (AMZN) always takes plenty of time in crafting their holiday press releases. Here’s an excerpt from today’s:

Holiday Fun Facts:

  • Amazon shipped to 185 countries this holiday.
  • The last Prime One-Day Shipping order that was delivered in time for Christmas was placed on Dec. 23 at 10:22 p.m. PST and shipped to Carlsbad, California. The item was a Beautyrest Cotton Top Mattress Pad.
  • The last Local Express Delivery order that was delivered in time for Christmas went to Everett, Washington. It was a Plantronics Audio 655 USB Multimedia Headset in Frustration Free Packaging ordered at 12:26 p.m. PST on Christmas Eve and delivered at 3:56 p.m. PST that same day.
  • Amazon.com shipped enough items with Prime this holiday to deliver at least one gift to every household in America.
  • Prime was so popular this holiday, that Amazon limited new Prime membership signups during peak periods to ensure service to current members was not impacted by the surge in new membership.
  • On Cyber Monday, customers ordered more than 36.8 million items worldwide, which is a record-breaking 426 items per second.
  • More than half of Amazon customers shopped using a mobile device this holiday.
  • Between Thanksgiving and Cyber Monday, Amazon customers ordered more than five toys per second from a mobile device.
  • Amazon customers purchased enough Crayola Marker Makers to be able to draw a line around the world four times.
  • The new Xbox One and PlayStation 4 gaming consoles were so popular that at the peak of sales for each console, customers bought more than 1,000 units per minute.
  • Amazon customers purchased enough Rainbow Looms from third-party sellers that the bands can stretch around the circumference of the Earth.
  • Amazon customers purchased enough Hot Wheels from third-party sellers to stretch around the Daytona International Speedway racetrack.
  • Amazon customers purchased enough miniature flashlights to satisfactorily light four collegiate football fields in accordance with NCAA standards.
  • Amazon customers purchased enough running shoes to provide a pair to every participant in the top 10 largest marathons in the world.
  • Amazon customers purchased enough winter boots to keep everyone living in three of the coldest cities in America – Duluth, Minnesota, Butte, Montana, and Watertown, South Dakota – warm for the winter.
  • Amazon customers purchased enough cross-body purses to outfit every attendee at a typical Taylor Swift concert.
  • If you stacked every Himalayan Crystal Lamp purchased by Amazon customers this holiday season, the height would reach the top of Himalaya’s highest peak – Mt. Everest.
  • Amazon customers bought enough books in the Divergent Series – “Divergent,” “Insurgent,” “Allegiant,” and the complete box set – to wrap around Chicago’s Pier Park Ferris Wheel 263 times.
  • If you placed every upright vacuum purchased by Amazon customers end-to-end, they would reach 15 times the depth of the Marianas Trench, the deepest point in Earth’s oceans.
  • If the Nylabone Dinosaur Chew Toys purchased during this holiday season were stacked on top of each other, they would be the height of more than 950 T-Rex dinosaurs.
  • The number of “Star Trek Into Darkness” Blu-ray combo packs purchased would span the distance of 25 Star Trek Enterprise space ships.
  • If you had a single plain M&M for each Eminem album purchased on the Amazon MP3 Store over the holidays, you’d have nearly 100 lbs. of candy-coated chocolate.
  • Amazon customers purchased enough youth archery kits to outfit every resident of Katniss Everdeen’s hometown, District 12, four times over.
  • Amazon customers purchased enough Tovolo Sphere Ice Molds to fill Don Draper’s (of “Mad Men”) whiskey glasses for 251 years.
  • Amazon customers purchased enough Cuisinart Griddlers to place one in every McDonald’s restaurant in the world.

Biggest Challenge for Social Media Stocks: 24-Hour Days

Many of us remember Napster, Friendster, and MySpace. Services that we used quite a bit for a while, only to see them fade away into obscurity as we moved on to the next cool thing. A more recent example is Zynga (ZNGA) and the FarmVille frenzy that took over Facebook (FB) for a while a couple of years ago. FarmVille users have fallen off by millions since then. Today Candy Crush is the hot game (and its creator, King, is rumored to be considering an IPO) but that too is likely to fade over time. Zynga timed its IPO well just as its user base had exploded, but now (as the stock chart below shows) that honeymoon is over. King would be smart to avoid the public spotlight and simply focus intently on not becoming an afterthought a year or two from now.

znga

 

I think the biggest issue social media companies are going to have, especially the ones that go public and see their initial valuations soar to the moon, is that there are only 24 hours in a day. And by that I mean, we can’t possibly use every single app, or visit every web site, or play every game, on a regular basis. There is simply not enough time. And as a result, when something new and cool comes out, we are forced to abandon the last cool thing in order to try it out.

There was a teenager interviewed on CNBC a couple weeks back and the anchors asked her what social media apps she uses most with her friends. She declared that her Facebook (FB) usage was declining (which jives with recent reports that teenage usage is stagnant or even beginning to drop) and that Twitter (TWTR) and Snapchat were hot right now. Within days we learned through media reports that Facebook offered to buy Snapchat for $3 billion. That is how fast these things move. It was once thought to be foolish to buy a company with no profits, but now Facebook feels like it has to fork over billions for a company that doesn’t even have sales, let alone profits. It seemed like a desperate move by Facebook to try and remain relevant with teens.  But what if Snapchat goes the way of Friendster, MySpace, and FarmVille?

The huge increase in the number of online choices consumers have is going to be a big problem for investors, I believe. There is simply no way that we can devote enough time to fully engage all of these different services. Maybe for a short time, but not over the long term. How long can you keep up religiously checking your Groupon (GRPN) and LivingSocial daily deal emails, Facebook wall, LinkedIn (LNKD) profile? Don’t forget to listen to your Pandora (P) music play list, play some rounds of Candy Crush, tweet to all of your followers, share photos with Instagram and Snapchat, check out the flash deals at Gilt and Zulily (ZU), and review the restaurant you just tried on Yelp (YELP). Eventually you have little choice but to weed out some of these services. Maybe you try a new one for a few months, but your technological schedule has its limits.

I point this out because right now there is a huge bull market/bubble in internet-related start-ups, especially social media apps. If you use the stock market as a barometer you would conclude that they will all be wildly successful; continuing to maintain and grow their user base and figure out how to monetize all of that customer engagement, to the tune of tens of billions of dollars. The problem? They can’t all be successful. There are only 24 hours in a day and we can’t possibly integrate all of these services into our daily life over the long term. Sure, there will be some winners, but I suspect far more will fade into oblivion over time and the newest hot app will just keep replacing the slightly less hot app and so on and so forth. We’ve seen this game before and it does not end like Wall Street and the Silicon Valley-based venture capital world seems to be suggesting right now. They all can’t be winners. For every Google there will be duds like Excite and Lycos.

The 2013 IPO Bubble Is Here, And Companies Are Lining Up Quickly Before The Window Closes

From Yahoo! Finance:

Zulily, Inc. operates as an online flash sale retailer in the United States, Canada, the United Kingdom, and internationally. It provides various merchandise products to moms purchasing for their children, themselves, and their homes, including children’s apparel; women’s apparel; children’s apparel products comprising infant gear, sports equipment, toys, and books; and other merchandise, such as kitchen accessories, home decor, entertainment, electronics, and pet accessories.”

Yes, Zulily (ZU). One of the latest hot initial public offerings. The company description above might sound fancy, but it’s a shopping site targeted at moms. Think of it as a specialty boutique store, with just an online presence. I don’t mean to minimize it, but there is no special sauce here. It’s a retailer, plain and simple. And a very popular one at that. For the first nine months of 2013, the company’s sales totaled $439 million, which generated $29 million of positive cash flow (7% cash flow margins).

So, how much is Zulily worth? $5 billion. And I’m not joking. The company went public last Friday at $22 per share and now trades at around $37. The initial expected price range for the IPO was set at $16-$18 but investors were willing to pay more than 35% above that before the stock even began trading. After it opened, the price was bid up another 70% on the first day.

Zulily is the perfect example of why the current IPO frenzy has gotten out of hand (and likely won’t last too much longer). The company is targeting what is likely an under-served niche within specialty retail (moms), and it has been very successful thus far. In fact, they are based here in Seattle and I hope they continue to make their customers happy. But the price of the stock makes no sense. And that’s where the IPO market, and many retail investors who are gobbling up any newly issued stock they can, will wind up having a problem.

There is nothing new here in terms of Zulily’s business model (at least with Twitter (TWTR) you can argue they created something new and were a first-mover, so perhaps they will be a unique case). They are a retailer. We have a good idea of how that business works and what kind of profit margins one can expect. Accordingly, we should be able to determine what kind of market valuation makes sense. We might not be able to pinpoint it exactly, because Zulily is growing very fast (2013 sales are running double those recorded in 2012) and its exact growth trajectory is difficult to predict, but at this point they are simply taking market share from existing retailers, both online and off. Moms across the country aren’t all of the sudden dramatically spending more on their children. There is not a retailing renaissance more generally throughout the U.S. The consumer economy has not suddenly taken off. Zulily, if they continue to execute well in the marketplace, will see its growth rate slow over the next few years and then find itself just like any other retailer vying for consumers’ discretionary dollars.

And that is why the company should not trade at 150 times cash flow. The business model at it currently stands does not justify a $5 billion valuation. Heck, even Amazon (AMZN) trades at 34 times cash flow and it is one of the few companies that can barely turn a profit (7% profit margins on a cash flow basis — same as Zulily’s interestingly enough) and not face any objections by investors. Is every dollar of sales generated by Amazon really worth 75% less than a dollar of sales booked by Zulily? That is what the market is saying right now.

And because of that other internet start-ups are preparing to test the IPO waters. Just in the e-commerce space we have heard rumblings that Gilt.com, Wayfair.com, and Fab.com are itching to cash in, and I don’t blame them. So I would caution everyone to stick to a valuation discipline when you pick stocks for your portfolio. The last time we had companies being valued based on a multiple of sales (not profits), or saw P/E ratios reach triple digits, or saw analysts justifying prices by using financial projections five years into the future, was the late 1990’s. And we all know how that turned out.

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

Thoughts on the Twitter IPO

I confess; when Twitter (TWTR) launched I thought it was stupid. When every single television commercial and print advertisement started saying “like us on Facebook, follow us on Twitter, etc I felt like it was social media overload. Now I can hardly watch any TV program without having random hashtag phrases pop up on the screen. Like enough people are really dying to tweet about the Survivor episode they are watching. #redemption island? Please. Stop. And no, I don’t care what most celebrities have to say in 140 characters. And how many times do we need to hear about a professional athlete who tweeted something insensitive and then had to issue a public apology? We have better things to do with our time. As a result, I never thought I would really “get” Twitter.

But I am slowly coming around. Not because I find Paris Hilton interesting, but because I have actually found myself searching twitter several times lately for other reasons in my daily life. I was traveling on the day of the Potbelly (PBPB) IPO but one of my clients was interested in the shares, if the price was right after it came public (it wasn’t). So I am sitting in an airport terminal waiting for my flight and wanted to know how PBPB opened. Since IPOs typically don’t open until an hour or so after the opening bell in New York, I had no idea when that first trade would print. But a quick search on Twitter provided that information. I no longer had to be in front of a TV tuned to CNBC to find out.

Not only that, but I also wanted to know at what price it opened. Many stock quote apps are 15-20 minutes delayed and it would take 30-60 minutes for major news outlets to write and publish a story about it. Once again, Twitter was the only way I could find out the opening price in real-time. Within minutes after that I was boarding my flight and powered down my phone. But I knew that the price was above what I felt was reasonable and I could forget about it for the rest of the day.

It turns out Twitter is very useful for non-investing information as well. Now that I have lived in the Pacific Northwest for almost 18 months, I have grown to be a huge fan of food trucks. They were everywhere in Portland (part of the culture really) and here in Seattle there aren’t as many but still quite a few. In fact, there are two that serve the parking lot outside my office a few times a month. The schedules can be variable and sporadic (the food truck business is tough from a proprietor standpoint so unless you have a “can’t miss” location reserved, you are likely to mix it up day-to-day or week-to-week to try and get by financially). It turns out the only way to really find out where and when a particular truck will be in a given location is through Twitter. Web site listings become quickly out of date given how much these trucks relocate and how little advance notice is typically given.

So, I am warming up to Twitter. I don’t actively tweet (although links to each of my blog posts are set up to automatically go out to followers of @peridotcapital) and I don’t plan to, but the service clearly has value. And as I have found, not only to celebrity junkies or tech heads. Now, does the fact that I can get Potbelly quotes and food truck location updates mean that Twitter is a sure-fire business that is worthy of your consideration at a $20 per share IPO price/$14 billion initial valuation (and likely to go higher than that even before it begins trading)? Maybe, maybe not.

I don’t think there is any way to know that without a crystal ball. After all, the company will bring in about $700 million in revenue this year so investors who buy the stock are buying it for future revenue and profits, not what they are earning today (which is only about $3 per year for each of the 230 million monthly active users they have right now).

It is entirely possible the stock opens at $40 next month (I would not be surprised if the IPO price gets bumped up to $25-$28 before it is all said and done as well) and comes with a nearly $30 billion valuation. It is hard to justify that, but I am beginning to see that Twitter could play a large role in social media going forward with a larger slice of the population than I would have guessed and is likely to figure out a way to make several billion dollars monetizing the platform over time. Whether investors are willing to pay $10 billion, $20 billion, or $30 billion for that business remains to be seen.

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

Netflix Management: Our Stock Is Overvalued

It won’t get much attention since Netflix (NFLX) stock has been on fire this year and investors today are loving the company’s third quarter earnings report released last night, but Netflix’s CEO and CFO have actually come out and publicly warned investors that the stock price performance in 2013 (started the year at $92, opened today’s session at $388) is likely overdone to the upside. In their quarterly letter to investors published yesterday this is what they wrote:

“In calendar year 2003 we were the highest performing stock on Nasdaq. We had solid results compounded by momentum-investor-fueled euphoria. Some of the euphoria today feels like 2003.”

Let’s see what they are referring to. As you can see below, Netflix stock went from $5 to $30 in 2003:

NFLX-2003

And then in 2004 it peaked at $40 and fell all the way down to $10:

NFLX-2004

Netflix started 2013 at $92 and opened today’s trading session at $388:

NFLX-2013

 

In this case the company is executing very well but the stock price does not really make any sense. Shareholders beware.

UPDATE (11:55am ET): Netflix is currently trading at $328, down $60 per share from its opening price this morning. Maybe the company has actually called the top in its stock for now. Interesting.

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

Yahoo Stock No Longer Cheap After Doubling In A Year

We are less than two weeks from the one-year anniversary of my blog post entitled “Does Marissa Mayer Make Yahoo Stock A Worthwhile Bet?” that highlighted how cheap the shares were at $16 each and the answer has been a resounding “yes.” Yahoo (YHOO) has now doubled in price and I think the easy money has been made. Take a look at my sum-of-the-parts valuation on the company:

yahoo

 

As you can see, the majority of the value in Yahoo is their 20% stake in Alibaba (slated to go public soon at a valuation of around $100 billion) and the company’s core operations that Marissa Mayer is in the process of trying to turn around. The stock right now is trading right at this $32-$33 valuation. While there is additional upside if Alibaba marches even higher post-IPO and/or if Yahoo can start to grow its core business, both of those are far from assured. As a result, the stock looks fully priced based on what we know today.

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

Fossil Stock Momentum Could Falter If “Smart” Watches Are Successful In Coming Years

Shares of accessory maker Fossil Group (FOSL) have been on fire lately, capped by an 18% jump on Tuesday after a better-than-expected second quarter earnings report:

FOSL

While Fossil’s business is unlikely to be impacted in the next few quarters, I have to wonder what happens to this stock if the category of “smart” watches takes off in coming years. After all, during the first half of 2013 more than 75% of Fossil’s revenue came from watches. We know that tech giants like Apple and Microsoft are developing smart watch products to be used as phone extension accessories. Smaller firms focused on wearable computing are also jumping into this space.

While it is too early to declare the product category a success (development could go south, or the products could bomb upon release), given that the younger generation does not really wear watches at all (they simply use their cell phone to tell time) and plenty of companies believe they can add functionality for the traditional watch wearer, it stands to reason that Fossil would suffer materially if a certain percentage of regular watches were replaced over the next few years by a wearable electronic device.

If these new product developments continue to progress, Fossil shares could be a very attractive short candidate. Given how focused Wall Street is on short term results, it does not appear that many investors have this potential catalyst on their radar. In my view it is definitely something to monitor, especially if Fossil shares continue to march higher short term even as the demographic and technology trends are moving against them in many respects over the intermediate and long term.

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

After Doubling, Groupon Shares Now Appear Fully Valued

After two very accurate calls on Groupon (GRPN) stock on this blog; bearish on the company’s $20 per share IPO in 2011 (Numbers Behind Groupon’s Business Warrant Caution), and bullish last year as the stock was being priced like trash at $4.50 (Isn’t Groupon Worth Something), I should probably quit while I am ahead. But what the heck, let’s try to go 3-for-3.

In the year since my last Groupon post the stock has doubled to $9 per share, giving the company an equity market value of $6 billion. At this point I believe the market has appropriately priced it, understanding that while the company’s growth has come to a screeching halt, it has a sustainable business (which I argued was not the consensus view at a $3 billion market cap). The company is profitable, proving the naysayers who raised solvency concerns last year wrong, and should book about $2.5 billion in revenue this year.

grpn-july-2013

It is hard to argue that the stock is worth materially more than the current price, in my view. While I still believe that high fixed-cost businesses, such as hotels and movie theaters, will continue to use Groupon to draw customers to fill unbooked rooms and empty seats, many small businesses will realize that repeated Groupon promotions aren’t likely to pay off meaningfully for them. While new businesses should still consider Groupon for an awareness campaign (again, my personal view), growth from new vendors is not going to move the needle very much now that Groupon has become a multi-billion dollar company.

Today, Groupon’s daily deals business is likely to succeed with only a subset of small businesses nationwide, and their Groupon Goods overstock retail offerings can certainly move volume, albeit at very low, Amazon-like profit margins. So while Groupon stock has done well lately as the doomsayers quiet down, I don’t see how one arrives at a valuation much higher than $6 billion/$9 per share, and there are risks to the business longer term from a competitive perspective. A year from now, I’ll try and revisit the stock again and see if I was able to go 3-for-3.

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

Apple Shipped 14,000 iPhones Every Hour Last Quarter

Apple (AAPL) shipped 31.2 million iPhones during the second quarter. Without any context that might not mean anything. So let’s give it some context. That’s 342,000 phones per day and more than 14,000 every hour. What is even more remarkable is that Apple stock has gone from $700 to $400 because the company has been muddling through a gap in new product introductions. Lots of people believe Samsung has stolen their smartphone thunder with the Galaxy S3 and S4. Some industry pundits have left them for dead, citing the typical cyclical nature of popular consumer electronic brands. While we won’t know what Apple is working on exactly until after they launch new products later this year and next, this company clearly has not been passed by. Companies don’t ship 14,000 phones every hour, every day, for three months straight, if they are in a death spiral. If Apple can use the money they make on all of these phones and churn out impressive new products, the naysayers (even with the stock down around $400 per share) will likely be proven very, very wrong. That is the bet I am making with my clients’ money as well as my own.

Full Disclosure: Long Apple at the time of writing, but positions may change at any time.

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

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