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:


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


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



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:



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:


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.


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:


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


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



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:


CLOROX – CLX – $67 to $90 in 1 year:

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



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

Qualcomm Now Hoarding More Cash Than Apple On Relative Basis

Qualcomm (QCOM), the leading provider of chipsets for wireless consumer devices, has seen its stock price underperform the S&P 500 index over the last year (see chart below), which could prompt shareholders to get more vocal about the company’s sub-optimal capital allocation practices later this year. We have seen with Apple that hoarding capital can negatively impact the multiple that investors are willing to pay for a company’s shares. In fact, Apple’s stock has rebounded nicely in recent weeks, after the company announced it was increasing the size of its share repurchase program by 500%, from $10 billion to $60 billion.

Believe it or not, Qualcomm’s cash hoard has eclipsed the $30 billion mark as of March 31st, though the company has no debt. On a relative basis, this is actually more anti-shareholder than Apple. QCOM’s cash amounts to 1.4 times the company’s annual revenue, 4 times annual cash flow, and more than 26 years’ worth of capital expenditures. Compare that to Apple’s $145 billion of cash as of March 31st, which comes to 0.85 times annual revenue, 2.5 times annual cash flow, and more than 14 years’ worth of capital expenditures.

For investors interested in Qualcomm as an investment, the future will clearly be impacted by how (or if) the company’s capital allocation actions change over time. Just as Apple’s share price plunge from over $700 to under $400 resulted in a louder chorus from investors about the return of cash, continued underperformance by QCOM stock might just have the same impact. The company certainly does not need $30 billion of cash sitting in the bank.

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

Alright Apple, Let’s Tackle This Cash Issue Once And For All

I am drafting my quarterly letter to clients right now and given the poor performance of Apple (AAPL) shares during the first quarter, it is a stock I have been adding to lately on the long side, even as it has clearly negatively impacted portfolio performance so far in 2013 (down 16% vs S&P 500 up 10%). The bullish argument is quite simple; the stock trades at a discount to pretty much every other large cap technology company. The lack of momentum in their business right now is clearly hurting the stock, but the lack of a cash plan is just as important, in my view. They need to take decisive action soon, if for no other reason than it will allow them to not keep hearing about it quarter after quarter in the future.

There is an argument out there that shareholders should not care if Apple holds its cash or uses it to buyback stock or pay dividends to shareholders. It’s an academic argument really, as finance textbooks insist that a $50 per share dividend will decrease the value of the stock by exactly $50, so shareholders are not better off one way or the other.

But think about this. Right now Apple is earning about 1% on $137 billion of cash (actually, the quarter just ended so they likely have closer to $150 billion as of today, although they won’t report earnings for a few weeks). They have two other options for that cash; repurchase stock or pay dividends. The idea that shareholders should be indifferent to those three choices is just silly. If Apple repurchased shares, the stock would only have to rise by more than 1% per year in the future to be serving shareholders better than their current hoarding strategy (even Apple bears would likely concede that a 2% annual return is a reasonable future outcome).

The case with a dividend is a bit more complex, but still easy to understand. If Apple pays out its cash to shareholders, the shareholder would have to reinvest it themselves and earn more than 1% per year on their own in order to be in a better situation than they are now. We could easily achieve that hurdle rate. What if you own Apple in a taxable account and have to pay taxes on those dividends? Instead of beating 1% per year you would have to earn about 1.2% per year. Again, piece of cake. What if Apple had to repatriate the cash from overseas and pay income taxes on that money before paying out the dividend? Instead of needing to earn 1.2% per year, shareholders would have to earn about 2% per year investing the money themselves. Again, piece of cake.

The math: $1 of overseas cash after repatriation taxes becomes about 70 cents, and after a 15% dividend income tax, comes out to about 60 cents net to the shareholder. Apple currently earns 1-cent per year on that $1 of overseas cash (1%). In order to be better off, the shareholder would have to earn more than 1 cent on the 60 cents they receive after all taxes are paid. That equates to just a 2% annual return.

Although hedge fund manager David Einhorn took some heat for suggesting that Apple’s share price multiple would increase if the cash were used in a more shareholder-friendly way, it is hard to argue that the market is giving Apple credit for its vast cash hoard right now. The stock currently trades at around $435 per share. Net cash is likely to be around $160 per share as of March 31st, so you are paying $275 for the actual business. That business will earn $40 billion (over $40 per share) this year, more than any other U.S. company.

The idea that Apple should trade at a 7 P/E simply makes no sense. There are many reasons why it does today, and the fact that they have $150 billion stashed away earning 1% per year is a major reason why. I am buying more of the stock at current levels because I am betting this cannot go on forever. Just including the cash and using a 10 P/E (in-line with other large tech stocks) on the operating earnings of the business nets you a $600 price target for the shares (38% above current levels). Even though Apple’s management team has been completely dismissive so far, I still feel strongly that this is a bet worth making. And that is what I will be telling my clients in this quarter’s letter.

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

Best Section of Warren Buffett’s Annual Letter to Berkshire Hathaway Shareholders: Why Buybacks Are Preferred Over Dividends

This weekend I had the pleasure of reading Warren Buffett’s annual shareholder letter (an annual exercise for me) and I wanted to share a section of the 23 page document with my readers. In it, Buffett discusses why he prefers share buybacks over dividends (Berkshire has never paid a dividend). Not only did he present a clear and concise explanation, but I also think it sheds much light into the current debate at Apple, where shareholders are hoping that management there finally makes some wise capital allocation decisions, as the stock hits a new 52-week low today. I have created a PDF file consisting of just the 3 page section on dividends versus buybacks if you would like to read it.