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Wednesday, September 21, 2011

Cash is "The King"

What is the difference between the great recession started in 2007-2008 and the global crisis we are currently facing? It is a 4 letter simple word. CASH- no matter what currency it is.

If I focus on the US, the biggest economy in the world, all big banks and corporations are sitting on the huge piles of cash. This was not the case 4 years ago. Most of them were cash stricken. After Apple Inc, the most valued company on this planet, released its 2011 Q2 results, it showed over $70 billions of cash & cash equivalents which is more than the GDP of many countries. Lessons learned perfectly- that's what we can say! Now the question is if these mammoth companies have enormous amount of cash, then why are we on the verge of another worldwide crisis? It is because everyone is too skeptical about economy, political unrest and discomfort in European economies. No one wants to spend their cash based on weak outlooks. If there is no cash circulating in the markets, then how can one make money and drive economy along?

In the course of company's life cycle, if management thinks there is no more growth ahead, then they distribute  excess cash as dividends to reward investors or buy back their own shares. Recently, share buy back has been a spree which is a good sign since companies buy back their "cheap" shares in anticipation of increase in share value. But many companies are issuing cheaper bonds to raise cash and use that cash to buy back their shares. Isn't it unusual? Why would they not use abundant cash they have and end up paying interest payments to bond holders? We have connected the dots here. No one wants to use "cash" they have. Everyone has figured out that cash is the only way to get their company out of the potential financial mess. And once again, it has been proved that cash is the only king you want to save till the end.

Tuesday, September 20, 2011

Netflix confuses subscribers with a canny idea...

Price hikes. They are riding on the ECON 101 rule of growth and competitiveness in an industry. From my perspective, I was ok with paying half dozen bucks more a month after I heard the news couple of months ago. I think the money I pay for the service and access to the huge library I get is worth. But I am not on the same page with many of the 23 million domestic subscribers. We all do not need to be...

Reed Hastings, CEO of Netflix, sent an apology email to all domestic subscribers for the current pricing disappointment the company has given to their subscribers. The email also contains a brief on the company's plan to separate their streaming (Netflix) and DVD rental unit (will be named as Qwikster). Why? Why would they do such thing when everyone is still coping with the mess company has recently created? And I can imagine a canny idea behind this.

Internet access is ubiquitous. YouTube, Amazon Instant Streaming, Dish Network's acquisition of Blockbuster library and many more to come to share a pie of video streaming business. Growth is going to be good for next few years. Decline phase is not in sight. While the reverse is the destiny for DVD business which has sluggish growth forecasts and is going to be nearly unseen in next 10-15 years. In simple language, if weak outlook for DVD business persists, then Netflix (streaming only) is a better place to get handsome ROI than Netflix (Current: streaming + DVD).

"Wall Street to Netflix: Try Again". I read that on Twitter. After Hastings's public apology, share price tumbled further. So, a tweet justifies a stock market reaction to this event. But now I do not think alike. This seems like a smart move to me rather than pleasing the investors on day-to-day basis. Growth is not immortal. The more you extend your maturity phase, the longer you survive. And Netflix may have learned that already.

Tuesday, August 9, 2011

What Is Risk-Free Rate?

Let's begin with RISK-FREE RATE 101 class. (Prerequisites: Default-free, Treasury, Safe, Secured)

2 years in the business school and reading all those books of CFA program curriculum. The most repeated term has been- Risk-Free Rate (Rf). It is considered as yield of US Treasury securities. US Government is (was?) considered as default-free thought it fought hard to prevent default recently. Whenever global economy melts or shakes, investors look for Treasury securities. They have been known as the safest investment since there is no volatility or risk included. We employ many risk-return tools (for example, Sharpe Ratio) to calculate excess return achieved by investing in particular assets. This excess return is calculated by considering risk-free rate as benchmark. Many countries with political instability and higher inflation rates do not have their risk-free rates. They add their inflation rate to US risk-free rate to get the benchmark rate for their country. And thus long-term bond yields and so on. This is what the biggest economy stands for.

But in the recent turmoil, I am not able to believe completely that we should still use Treasury yields as risk-free rate or not? I do not want to discuss why S&P has recently downgraded US credit ratings to AA+ from AAA. It may be reversed or may be not. S&P might be wrong in deriving this verdict or they might be late in doing this. I do not know the facts. But few things I surely know that there are few problems in Washington DC. There are serious fiscal challenges we have been facing. Looking at the current scenarios, US may not deserve AAA. But when country has to put efforts to prevent default which US did last week, their risk-free rate should not be considered as default-free rate or benchmark rate. Why can't we change that? Why can't we use risk-free rates from countries like UK, Germany and Canada who still have AAA?

I am not sure about literature we used in the business school, but CFA institute updates its books every year based on recent market conditions. I will not be surprised if I see Canadian rates as risk-free rate in those books next year...

Wednesday, July 20, 2011

Chipotle: Expectations vs Fundamentals...

I never thought that "burritos" would bring me out from hibernation (it has been nearly more than 3 weeks since I wrote the last blog). I love their food. Many of us do. It is Chipotle Mexican Grill, Inc (ticker: CMG). Short, simple and affordable- 3 words help it rule its peers. An inspirational success and growth story. Following chart  says it all:

Phenomenal growth. Handsome return to investors. Stock was worth $38 on November 20, 2008. Stock is worth $330 today. Do I need to show return figures? Company's business model is fundamentally strong. They target fast food consumers who want to spend $5-$10 on their meals. It has nicely managed the global food inflation. Its store operate in all metropolitan area of the US and try to provide affordable options in such areas. Conclusion: Sweet & Sound!

Yesterday, they announced their second quarter earnings. Earnings were pretty good despite of rough outlook of the global economy. All numbers were decent and higher than last quarter. But I heard the voice.... "Clear Disappointment". I am still trying to figure out why I was supposed to hear that. Reason was--- they missed analysts' estimates. What bothers me is they missed it by dozen cents. Negative earnings surprise. I understand that analysts on the street perform all fundamental analysis and provide their estimates. But I still consider a phrase "Failing to meet expectations" which may make another phrase "Clear Disappointment". If we compare all the numbers with its peers and industry overall, they are still the leader. There is nothing wrong happening with its revenue generating model. It is partially because of too much expectations, isn't it?

Based on Chipotle's news, I wonder what happens in the market if mammoth Apple Inc misses its estimates. Worse. Worst. Why? They never respect analysts' estimates and always believe it positive earnings surprise!! Yesterday, they announced those bottom line numbers 25% greater than estimates. And that sends the story to investors for their EXPECTATIONS from Apple in the next quarter...

Monday, June 27, 2011

How long can you put on your 3D glasses?

When I graduated from high school, I and one of my friends went for IMAX 3D "show". I did not write "movie" because it was a 30 minutes educational/ informative documentary which we always find here in museums. It was expensive. And rare! Times have changed. Now every Friday, we get at least one movie in 3D to spend our wealth on.

Before 3-4 years, when releasing movies in 3D was not as normal as it is now, it started to change the definition of movie watching on the big screens. Stumbling Regal Entertainment Group & AMC Theatres during the painful recession got some room to breathe. Rapid rise of 3D movies boost the earnings for Regal Group, RealD and the hopes for an IPO for AMC. Entertainment sector was almost back on the track with the 3D hits like Toy Story 3, Avatar, Transformers and Harry Potter. Then AMC postponed their IPO plans. Why?

  • 3D Burnout- Excess leads to an destruction. Well said! Burnout is the term often used during mortgage refinancing phase for prepayments. When rates are low, you refinance the loan by prepayments. After few years, when rates become lower again, you have nothing much left to refinance. Same applies here. 3D movies and its craze cannot be placed in the category of sustainable items.
  • Online movie providers- Ah! Internet is killing everyone. Surge in the paid subscription based online movie providers like Netflix, Amazon, YouTube have clearly staged their competition with these entertainment giants.
  • 3D TVs- Dance until music stops. And that is the reason why we can see the brand new isle of 3D TVs at Best Buy or Wal-Mart stores. 

RealD does many innovative things. It recently launches "Wimbledon 3D" for 2011 Grand Slam. Beautiful. Wimbledon 2011 is still in progress, but still RealD stock is suffering today. Why? It is because of less than expected, not poor, box-office performance of Cars 2 which also released in 3D during last weekend. It is a lovely example of positive correlation, isn't it?

Let's see how long we are able to witness the entertainment industry's fight against sustainability and volatility.

Thursday, June 16, 2011

A documentary explains "The Capture Hypothesis"

We have avoided disaster and we are recovering... But the men and institutions that caused the crisis are still in power... and that needs to change. They (mammoth banks) will tell us that we need them, and that what they do is too complicated for us to understand. They will tell us it wont happen again... It wont be easy, but some things are worth fighting for.

Finally, I got some time to watch last year's academy award winning documentary, "Inside Job". And what a masterpiece it was! Perhaps, it is the finest documentary I have seen in my life. Neat and straight. It is based on the catastrophic financial crisis from which we are still trying to recover. Last year, I read a book by Suzanne McGee, "Chasing Goldman Sachs: How the masters of the universe melted Wall Street down... and why they will take us to the brink again." The reasons why I like this book and this documentary are the timing, my education and my area of interest. I was about to graduate from business school in  the midst of this crisis. And I was exposed directly or indirectly to majority of the events listed in the book and shown in the documentary.

"Inside Job" emphasizes on the critical issues like political influence, lobbying power of Wall St, corruption- collectively "Wall Street Government" and other market changing events like introduction of derivatives in early 90's, housing bubble, ponzi schemes, subprime lending and the rise of structured products like MBS, CDO and credit derivatives like CDS. But the most important thing I have understood through this documentary is an industry regulation theory, "Capture Hypothesis". According to this theory, regulators of different industries are elected/selected from the pool of experienced and influencing candidates from their respective industries only. For example, regulator for environmental issues cannot be selected from the finance & banking industry. And that is the reason why regulators are more biased towards industry rather than consumers. If they do not support the industry, their spot will become endangered. That is what happened with the failure of 3 big Iceland banks. That is what happened with the regulators' decisions(influenced by Henry Paulson and other top executives from number of big banks) of permitting banks' leverage ratio to rise as much as 20:1 and loosening the regulations on derivatives. Eventually, this led to the collapse of Lehman Brothers, AIG, Bear Sterns, Merrill Lynch, Washington Mutual, Wachovia and many others.

When I was in grad school, I had to watch Wall Street, Boiler Room and Rogue Trader. I am sure that B-school finance majors will have to watch documentaries like "Inside Job" down the roads since ethics and finance and banking and investment are all coherent with one another.

Thursday, June 9, 2011

"New Normal"... Hope or Frustration?

Like every morning, I settled at my desk, logged in to my computer (Bloomberg Terminal) and read news. And saw a news story elaborating few economists' warning on unemployment rate in the US. Since the downturn started, we have been listening to and looking at all fiscal efforts to combat higher unemployment rate which is the key impediment to achieve economic growth. We have managed to drop it down to 9% and started to believe that within 3-4 years, it may be at its normal level. What is this "Normal Level"? Is it decided by the congress or economists or something else? Unexpected and turtle speed recovery in developed economies has certainly shifted those economic graphs.

Current unemployment rate is seen as "New Normal" by few economists. If that turns out to be true, then 8-9% rate will stay in normal business cycle. It may climb to 13% or 15% or 18%, if another downturn arrives. But no more hopes for those 5% or 7%?

Similar things follow in the case of US Debt Ceiling and US Credit Ratings. If we consider "New Normal" in debt ceiling, then new ceiling will allow the Government to borrow more than they are doing now. More public debt. Higher debt to GDP ratio. We know the consequences. I still remember one of the story on US credit ratings published couple of years ago. It said "If US credit rating is downgraded to AA from AAA, then new AAA will be AA." Doesn't it sound like "New Normal"? Yes, it does. New Normal changes the benchmarks.

Establishing "New Normal" for unemployment rate, debt ceiling and credit rating (... and many more may come) have positive consequences as well. Based on hopes and optimism, they give us room to accelerate recovery and to acquire potential growth opportunities. But that is what we have been doing since last three years. We might have started to realize that perhaps there is no hope. Potential frustration may make us prompt to start everything from scratch... and that can be done by creating new zeros... new benchmarks... new normal.

Thursday, May 26, 2011

Inflation, Commodity Futures, Speculating, Hedging... And Coffee.

Few days ago, I read the news uttering about the Americans' reactions on the inflation- especially on higher food prices. And I immediately tweeted that the Americans should not outcry for higher prices when they have no idea about the painful inflation in the emerging markets. I spent 22 years in India and I can understand how cheaper the daily necessities in the US are.

Commodity futures are positively correlated with the inflation and that is the reason why investors choose them as an inflation-hedge in the long-run. Commodity prices are speculator's & hedger's game besides the global demand-supply. If perceived price risk in the future is higher for consumers of commodities, they buy the futures and the net long position sends market towards the contango. And if perceived price risk in the future is higher for producers of commodities, they sell the futures and the net short position pushes market towards the backwardation. Generally, perceived price risk in the future is higher for producers and because of this, commodity markets are in normal backwardation most of the time. But consistent upward pressure in the global inflation in the recent years has pushed the global commodity market in normal contango.

If we talk about the whopping prices of coffee, Starbucks is being considered as one of the culprits who pushed coffee futures in the contagion world. Based on their recent quarterly reports, they have shown noticeable hedging activities especially in coffee futures. Their speculation of higher coffee prices in the future made them take net long positions in the coffee futures. Per recent Financial Times news story, they are fully hedged against their needs until the end of this calendar year in April. And that tells the whole story about the speculation. I do not find any fundamentals.

It is a simple phenomenon. If bigger players like Starbucks keep on buying futures, then demand for futures increases regardless of other fundamental or economic factors. And contango stands out as a bull market with a possible commodity bubble. It is not illegal for corporations to perform hedging activities, but there should be some difference between speculating and hedging. Per my knowledge, whatever Starbucks is doing is speculation and whatever all airlines are doing is hedging.

Tuesday, May 17, 2011

Stepping Stone for Social Media IPOs...

One of the interviewers asked "If you have money to invest in, which stocks you buy?" And I responded "I would have said Netflix if you had asked me the same question few months ago, but now I like LinkedIn. I am waiting for their IPO." Yes, LinkedIn it is. Investors are waiting for Thursday, May 19, 2011 when LinkedIn is likely to hit NYSE.

When you have faith in a company's operations, culture, financials, policies and strategies; you will see your money being secured while investing in it. It is all about confidence factor, but not about following the herd. One of my friends said that this stock is going to make you wealthy and all variations thereof, never work in long-run. Such sort of investor confidence is provided to LinkedIn. And that is the reason why they have raised the size of their IPO twice after their announcement in January 2011. Per recent announcement of their IPO size, stock will likely to trade between $42-$45 and valuation will be around whopping $4 billions.

Why not? If company believes in their chores and realizes the lustrous confidence of investors, it should ride on it. Personally, I have faith in LinkedIn and that is why I gave that response to an interviewer. LinkedIn is a part of  bullish social media industry, but it may be the only company who is providing the professional networking. Their business model seems clearly different than what Facebook, Twitter and others have. They connect recruiters, companies and job seekers in the unique ways.

Stepping stone. LinkedIn being the first social media company in the US who is going public this week, provides some efficacious groundwork for potential future IPOs of Facebook & Groupon. LinkedIn's valuation is certainly way lower than what Facebook and Groupon are valued at. But their post-IPO stage may deliver few twists in this household industry.

... "what is LinkedIn and why is it so hyped?" I hear such questions from professionals of the industries where vacant jobs are more than number of job seekers. The only key limitation I consider in the business model.

Wednesday, May 4, 2011

Where's the dinner tonight?

Well, being a connoisseur of food, I love to visit world cuisines and new restaurants in the proximity. And that includes few restaurant chains as well. I am a global individual, ain't I? Restaurant/dining sector was punished hard during the recession of 2007. Few chains were not able to produce profits for consecutive 2 years. And few bounced back like a marathon spring. But as they are saying, gone are the days! Restaurant Performance Index (RPI) is up again and back at 2005-2007 levels. Consumers have started to hate cooking food at home and so the sector components have started to cook some profits after years.

Here are some of the characteristics of this rebounding and bullying sector:

  • Industry leaders: Chipotle Mexican Grill, Inc (CMG), Panera Bread Company (PNRA), BJ's Restaurant Inc (BJRI) and Domino's Pizza, Inc (DPZ) are leading the sector with handsome growth and stock appreciation. 
  • Other growth proponents: Few restaurants chains have not been able to beat the market, but they have succeeded to help sector to boost its performance. They are Yum! Brand, Inc (YUM), Darden Restaurants, Inc (DRI), Red Robin Gourmet Burgers, Inc (RRGB), The Cheesecake Factory Incorporated (CAKE), California Pizza Kitchen, Inc (CPKI), Papa John's International, Inc (PZZA) and many others.
  • Turnarounds: A rise in consumer confidence, fall in unemployment rate, introduction of breakfast menus like Subway did, diversification in the traditional core menu like Domino's did by introducing all those gourmet pastas and subs and expansion of operations in emerging markets where consumers have newly found wealth to spend. 
  • Optimism: Rise in IPOs is a good indication of industry optimism. Recently, Arcos Dorados Holdings, Inc (ARCO), Bravo Brio Restaurant Group, Inc (BBRG) and Country Style Cooking Restaurant Chain Co. Ltd (CCSC) went public. Leading coffee giant Dunkin Donuts Inc has just filed for an IPO under the ticker of DNKN.
  • Pessimism: This sector is not an exception and that is the reason why it has also been affected by rising oil prices and skyrocketing inflation. These macroeconomic factors have caused restaurant chains to increase the noticeable prices in their menus.

... Mind well! Subway Restaurants have the honor of being considered as the world's largest restaurant chain after their locations figure surpassed McDonald's Corp (MCD) in the beginning of this year. And and and... The world's largest restaurant chain is still not publicly traded.

Monday, April 25, 2011

Tumbling WMT is healthy sign for the economy, isn't it?

We were given fictitious $250,000 to invest in 5 securities by our professor during one of the electives of the grad school. Investment Analysis it was. The objective of our portfolio was to preserve our capital. Those few lucky securities chosen by us were WMT, FDO and healthy weight on treasury bills. Based on our security selection and objective, I wonder any one cannot assume what period it was. Right? Yes, it was the midst of catastrophic recession which started in the 2007.

The best performance of WMT and the worst performance of NASDAQ Composite Index relative to each other during last 5 years, took place during the recessionary period. And that is the reason why we love to consider WMT as a recession-proof stock. But if we observe the charts now, NASDAQ composite and other market indices are quickly approaching to the higher returns. These are the signs of early expansion which are not preferred by discount stores like Wal-Mart who have been reporting consecutive decline in sales. Their stock is pretty much down from where it was during the great recession. If that is not enough, recent hike in gas prices and inflation have worsened  the outlook for the discount stores.

Wal-Mart has been trying various strategies to regain their momentum despite of negative correlation with the markets:

  • Recently, they have announced to acquire Kosmix which discovers social content by topic. This acquisition may bring Wal-Mart to the new age of social media influence on electronic and mobile commerce. When a retail mammoth taps the Silicon Valley, it has to be something strategic. And these are the impediments behind the expansion of WalmartLabs. 
  • Few days ago, they tested their online grocery store. This may have been game changing event if consumers easily adapt to this service. It can definitely give Wal-Mart some edge over its peers.
  • After successful entry in the Chicago market in the 2006, Wal-Mart began to think over the New York City market which has high barriers for entry. And based on poll results in the early 2011, New Yorkers showed positive response to embrace Wal-Mart.
... and if these help them perform well and beat the market, do we have to remove WMT from the list of those recession-proof stocks?

Tuesday, April 12, 2011

Head to China and Enhance the Ubiquity

Rumors. Rumors. And more rumors. Once you are on the top of the tree, you will likely to hear all sort of rumors surrounding you. Social media is the new, intangible household material and the most bullish industry sector. Rumors follow it. Facebook rules that industry. More rumors follow it. News feed is considering Facebook deal with Baidu to reenter China as blockbuster rumor. Facebook may have dealt with some local social network to enter China again after it was banned in the July 2008. No news has been confirmed by either Facebook or Baidu. But I can see handsome & strategic implications behind this.

As of June 30, 2010

Facebook undoubtedly reigns the social networking. It has becoming more ubiquitous with every sunrise. But because of China's ban on Facebook, it is still unexposed to the biggest Internet usage market in the world. If Facebook collaborate with some local social network there as stated in the news, it may have been turnaround for them. Facebook may be household name in the market of nearly 1.5 billion people. And this Chinese Presence may help Facebook to flourish revenues and amplify its already whopping valuation. If such thing happens before Facebook's possible IPO, I   can imagine some record setting numbers for IPOs.

After these rumors, we should not be surprised to see manifold bankers to visit Mark Zuckerberg and other considerable heads of Facebook every now and then. The Chase is going to be earnest and pungent...

Wednesday, April 6, 2011

"Let's assemble new Netflix." says Dish TV?

OK. I had knocked the right door when I heard about the bankruptcy filing of Blockbuster back in the last year.   Looking at the swaggering stock performance of Netflix over the last two years, I thought of a potential deal of buying Blockbuster. And Dish TV has finally done it. With that, an array of acquisitions in media & cable industry continues.

I believe the impetus behind this $320mm deal is:

  • Blockbuster has phenomenal collection in their library and it used to reign the movie rental market cleanly just before Netflix started to expand exceptionally.
  • Looking at such potent parameters, distressed value of $320mm seems like a handsome investment.
  • Subscribers do not need broadband connection to play content offered by Dish TV. This factor may become critical after AT&T and other broadband providers start putting "already announced" cap on internet usage.

If you cannot compete with expeditious NFLX, you have to build new NFLX. I will not be surprised if Dish TV has this gimmick behind the scenes.

Thursday, March 31, 2011

"Trust Me" Factor & Portfolio Management

I was working and listening to the news yesterday evening and suddenly a tag line popped up saying Breaking News. It was about David Sokol's resignation from Berkshire Hathaway Inc. Why was it breaking? Because this is the man who was considered as successor of Warren Buffet at the company. This is the man who made the Netjets story. Since yesterday, I have been hammered by these news "Sokol's shocking exit", "Buffet's surprised by David's resignation" and so on. Among all, a news about Berkshire Hathaway's stock valuation appeared and that caught my attention.

It is about "Trust Me" factor.

  • Inherent in the stock value of companies like Berkshire Hathaway Inc.
  • Such investment vehicles do not have manufacturing or retail operations and this is why they are able to deliver much needed transparency in their financial disclosures to the investors.
  • Because of such business nature, they have minimal accruals and accrual based earnings. As we know, the lesser the accrual based earnings and the higher the cash earnings are, the greater the quality of earnings is. In other language, when the accrual component contributes the least in total earnings, we get the earnings of the greatest quality.
  • Forecast of greater quality of company's earnings will always have positive correlation with stock price or its valuation and this is the reason why we cannot consider this factor as trivial.

Should some PhD in multi-factor analysis or in quantitative methods can substantiate a theory on this factor, then is it likely to be employed by portfolio managers in their multi-factor models? In such models, sensitivity to this theoretical factor should be higher for portfolio composed of securities from companies like Berkshire Hathaway like the same way in macroeconomic model where sensitivity to recession factor is higher for Ford Motors and lower for Walmart. 

Monday, March 21, 2011

Synergy, Strategic Buying and Anti-trust--- A Big Telecom Deal

Couple of weeks ago, I tweeted about Sprint's takeover of T-Mobile USA news. I could not understand the "synergy" behind that looking at the Sprint's market share. But during the weekend AT&T shook the wireless telecom industry by agreeing to buy T-Mobile from Deutsche Telekom for $39 billions- almost at 75% premium. This is the largest telecom deal since 2004. And with this, AT&T will lead the US wireless telecom market which is currently being led by Verizon.

Source: Bloomberg
  Big deals always bring the Department of Justice, anti-trust laws and FCC to the picture. So, regulatory approval is really imperative here.

  • Per widely used theoretical concept of Herfindahl- Hirschman Index (HHI), anti-trust challenge is likely.
  • AT&T has one of the biggest lobbying powers in the Washington DC to get this deal considered as "done deal", though regulatory approval may take really long time.
  • Looking at the pre and post market shares of leading carriers, Verizon is not likely to be concerned about this deal unlike Sprint, who will still rank 3rd, but this time it will be by distant margin.
  • Sprint may prefer to acquire Clearwire Corp to increase its market share since it has already some stakes in Clearwire. 

Source: Bloomberg

  • In order to avoid potential anti-trust case, AT&T have to improve its services and to make some serious promises to please the Obama Administration. But T-Mobile is already the lowest rate carrier in the market and declining the rates any further will be a critical area to think upon for AT&T.
Customers of T-Mobile, please have patience. When I showed this news to my sister, the first reaction I got from her was "wow, we can get iphone now..." You will, certainly. There are some better phones and services are waiting in the backyard once AT&T gets green light from the Capitol.


Friday, March 18, 2011

Betting on Internet & Social Media...

A bullish social media industry

I tweet, visit Facebook on the go and network through LinkedIn almost every day. I often locate myself through Foursquare. But Groupon? I have never used it and am not planning to use it even though there is so much buzz around this 2 year old company which has given the new definition of "daily deal market". While there has been so much talk on the streets regarding social media companies going public, two of them- LinkedIn and Groupon have announced their potential IPOs in the 2011.

LinkedIn & Groupon both have different business models (please note that Groupon has not been able to explain their exact business model). LinkedIn specifically emphasizes on "professional networking" and the other is focusing on "discounted deals covering food, electronics, tickets, gifts and counting...". Though not accurate, but they have got vast difference in their valuations as well. On the personal front, I have been a big fan of LinkedIn and so I can be bias about my insight on Groupon. But certainly, Groupon's whopping valuation of $25 billions is eye-popping and dubious to me. Because:

  • Daily deal market is pretty crude and fresh for valuation analysts. Immaturity of this industry is one of the impediments behind mighty valuation numbers.
  • A new industry and particularly new company is often valued by venture capitalists and I believe that their perspectives are always overstating.

Here are few things I want to enunciate about Groupon's atypical growth story which is not new to anyone who knows what Groupon is:

  • A year ago from now and a year after its inception, it was valued slightly over $1 billion and now it is valued as $25 billion company. 
  • Hot off the press. They successfully drew around $950 millions last year in funding from venture capitalists.
  • Recessionary environment and looking for discounted deals are positively correlated with each other. And that beautiful correlation helped Groupon to be a bull.
  • It has been hiring employees and adding clients/ merchants all around the globe to its portfolio.
  • Presence in 35 countries with immense competitive presence in China and South Korea, which is the most active daily deal market.
  • Almost doubled their subscriber base in last 3-4 months.

......................... And there is "NO COUPON" for Groupon's IPO price or its valuation!!

Tuesday, March 15, 2011

8.9, Earthquake, Tsunami, Japan, Economy and the US

"Jasmine Revolution" began in Tunisia in the early 2011 and it rippled across the Egypt, Libya, Bahrain and the other middle east countries. I believe that's what we have been listening to and watching since last two and so months. And suddenly, a 8.9 magnitude quake and tsunami hit the Japan- the world's third largest economy. Though Japan is located on one of the most active geological fault lines, it experienced one of the biggest quake in its history and the most severe after the Kobe. The worst situation this quake followed by tsunami created is  "The Nuclear Explosion". And the country is trying hard to prevent its spreading along with other rescue efforts.

Looking at Japan's standing in the world economy, the ripple effects of this natural calamity are as horrified as expected. It may likely to impair nascent economic recovery in the developed markets. I have come across few areas where the US have some potential or immature impacts from this disaster.

  • Borrowing cost of US Treasury securities: Japan needs handsome capital to trigger reconstruction and recovery efforts though Bank of Japan has recently infused cash in to the economy following the quake. As Japan is the second largest holder of US Treasury securities after China, it may sell those to get capital it needs. In that case, borrowing costs or rates may be increased to lure investors in the global markets. On the contrary, investors have responded by huge sell off globally and by dumping the risk assets. Their demand for safe haven- US Treasury securities seem to be increased.
  • Money managers' holdings: Money managers across the globe will likely to face short term losses from their holdings in Toyota, Canon, Hitachi and other Japanese companies. These losses are strictly being considered as short term because of global presence of these companies.
  • Pharmaceuticals: Japanese pharmaceutical market is the second largest market after the US and it is expected to grow at the highest rate among the developed markets. For example, Pfizer gets his $5-$10 billions of revenues from Japan alone. Such a high correlation could slow down the industry growth.
  • High end retailers: Japan is one of the huge market for high end products. To name a few, US based retailers like Tiffany, Callaway Golf, Coach may be the worst hit high end retailers in the first two quarters of this year because of potential squeeze in consumer spendings in Japan.
  • Tourism: Based on some news & research, Japanese travelers contribute approximately 20% to the tourism in Hawaii. Looking at the potential ebb in spending patterns in Japan following this disaster, Hawaii tourism may likely to see some fall.

I wish and pray for their safety and well-being.

Saturday, March 12, 2011

Unforeseen rivalry for Netflix (NASDAQ:NFLX)

Since its inception in 1997, Netflix has risen phenomenally. I still remember the stock price of NFLX was around $50 in the summer of 2009- in the midst of the great recession when I joined Netflix community as one of their over 10 million subscribers. I like this concept of movie-watching and so do the Americans. Since then it has increased fourfold and is seen as one of the bullish stock on the Wall Street.

Netflix has seen many competitors in the American market like Blockbuster Video, Movie Gallery and Hollywood Video. It is solely considered responsible for bankruptcy and shrinkage of those ubiquitous DVD rental chains. And now a days, it is successfully dominating this sector of industry despite of some substantial competition provided by Coinstar's Redbox.

The most buzzed topic on the Wall Street in recent times is bubbling and bullying "Social Networking Industry". Star bankers from everywhere are following these private companies like Facebook, Twitter to help them go public and cash in billions for their banks like it happened during Google's IPO. Netflix's business model is nothing to do with social networking industry. As we studied in ECON 101, competition lures new entrants and squeezes the mature companies. And Netflix is not an exception. But the competition it is going to face, seems unforeseen and out of theory. It has deals with a number of studios like MGM, Paramount, Lionsgate, Warner Brothers etc. to stream or rent their movies after they release DVDs. Studios have earned handsome money from Netflix's expansion. But recent deal between Warner Brothers and Facebook is eye catching to me.  Why would someone take such a cannibalizing step?
  • Buzzing atmosphere around social networking industry.
  • Facebook has 500 millions subscribers; the way bigger than Netflix has.
  • Impetus for linking yourself with social networking giants like Facebook is skyrocketing these days.
To me, it is not clear yet. But Netflix suffered immediately after this news and justified analysts' skeptical recommendations for NFLX. I have not made any valuation for NFLX, but based on my market insight I would love to HOLD for NFLX.