The Short Case on INVESTools

INVESTools (SWIM), according to their most recent 10-k calls themselves "a leader in investor education," helping users achieve their goals by using the "INVESTools method." The company consists of four subsidiaries including ZiaSun, Telescan, and SES Acquisition Corp., and Prophet Financial Systems. INVESTools recently acquired retail broker Think or Swim, rated highly by Barron's (.pdf), for what that is worth.

Business Strategy

The company's business strategy raises concern, and their products are gimmicky and misleading. INVESTools products and services are built around "a 5-Step Investing Formula that is designed to teach both experienced and beginning investors how to approach the stock selection process and actively manage their investment portfolios." The stated end goal for INVESTool customers is to "take control of their financial futures," just like every other infomercial I have seen. Investools courses range from a basic 5-step course to the laughable "Master Investor Program," and "Program of High Distinction." However, if INVESTools customers are truly interested in learning about financial markets instead of falling victim to another get rich quick infomercial, why don't they sign up for a course at their local university, consider a career change to the financial services industry, or visit their local library, which costs nothing. INVESTools' management team should not kid themselves into thinking that their product is somehow unique, special, or proprietary.

Sources of Revenue

According to the company's 10-k, revenue comes from (i) the initial sale of the company's products and services as a result of marketing efforts across multiple acquisition channels which include, but are not limited to, television, print, postal mail, radio, online banner, paid and organic search and email direct marketing campaigns driving customers to either a free preview of investor education products offered at locations near the prospect or the opportunity to speak with a telesales representative about the products offered; and (ii) the additional sale of products and services to graduates as a result of continued interaction with us in workshops, periodic email and direct mail communications and through access to coaches and instructors. In a nutshell, revenues for the INVESTools' segment come from continued marketing efforts.

Holes in the INVESTools Story

I believe that when the company's customers start to realize that this product does not work after several diligent efforts to get rich quick with INVESTools, the company's business model will crumble. The large increase in earnings growth is mainly a result of the ThinkorSwim acquisition in February, which provided $32.586 million during Q307 in additional revenue, and increased revenue for nine months ended September 30, 2007 of $69.441 million, with both increases coming from an easy comp base of zero. Comps for the investor education segment were actually down yoy Q307 by 20%, and for the nine months ended September 30, 2007 were down by 13%.

Bottom Line

With what appears to be growth mainly from the ThinkOrSwim acquisition, the quality of INVESTools' earnings must come into question. Although ThinkOrSwim may be a viable brokerage business, management needs to divest or liquidate their investor education unit and focus on the ThinkOrSwim segment, or risk wasting valuable resources on basically an infomercial business that is not viable long term. Management's exit strategy should be to continue to grow ThinkOrSwim before selling out to a strategic acquirer such as TD Ameritrade due to the intense competition and commoditization in the brokerage industry. However, this appears unlikely based on CEO Mr.Lee Barba's comments to SeekingAlpha.com contributor Joseph Citarella. With a fairly successful career on Wall Street managing the global trading business of Banker's Trust, as well as stints at Paine Webber and Lehman Brothers, it's astonishing that Mr. Barba can't see the weaknesses in his own company's business model.

Disclosure: none

Comments

[Chungst]

Paul Simenauer's article is incredibly sloppy, due to lack of cause and effect, and his analysis comes across as something conceived and written in thirty minutes.

First, there are a number of people (like as myself) who subscribe to Investools as a data service provider -- the monthly fee is $50, after a one-time payment to learn the stock investing course ($1,000 in my case). I've used Bloomberg's services on a professional basis for over 10 years so I understand the need for timely financial information. For people like me, $50 a month is a small price to pay for an insurance policy for key financial information when investing in stocks.

Second, Investools recommends its students to open an account with Think or Swim. In this sense, Investools is building a franchise around Think or Swim with the educational seminars as a way to attract and build its overall franchise.

Third, Investools acquired Prophet Software to further increase its franchise. While I am a fundamental analyst by training, I nonetheless see Prophet as value for technical analysis-oriented people. In this sense, Prophet is the "glue" that creates stickness for Investools customers.

To summarize the aforementioned key facts, Investools charges $50 a month (this is recurring revenues) from its users for the service. The Company also generates revenues from its education course and these are generally one-time in nature. Investools gets new accounts for Think or Swim from its new students (and this in ongoing due to ongoing seminars). Investools' methodolgy helps its users generate stock and option trading ideas and some of those trades is picked up via Think or Swim (thus increasing Think or Swim's commissions). Clearly, the people at Investools understand their franchise and how to create money from this franchise.

As a side note, Investools offers additional education beyond the stock course (again for me the stock course was a one-time sunk cost to get access to the data feed) and those courses deal with options and technical analysis. Some of these courses cost as little as $6,676 ($4,999 special price if you signed up during the stock seminar) for basic options to $35,362 ($23,999) for their PHD level course. Since I earned my MBA from a top 5 finance program and was award my CFA(r) Charter in 2001, there is no way I will pay those prices -- in my opinion, these courses are highway robbery. However, I did witness a number of people sign up for the PHD program at $23,999 and I was simple stunned by this fact. I couldn't get an accurate count of those enrolled in the PHD program because the program was for two people. I will also say that there is a lot of pressure (i.e. hard sell) from the instructor to get its students to sign up for the advance classes.

Lastly, and most importantly, the author fails to explain what the intrinsic or fair value for Investools as a stock. Warren Buffet has stated it is important for stock investors to ascertain the true value of the stock. Therefore, if Paul Simenauer never provided an objective analysis of the fair value for Investool's stock, then on what basis can the author claim Investool is over-valued and thus a short candidate?

Thank you -- by the way, I don't own any Investool stock.

[Chungst]

I just want to make it clear that $50 a month for the service is $600 a year. Given Investools has about 250,000 subcribers, that gives Investools a stable revenue run rate of about $150,000,000 per year. Since Investools has already built up its network, the marginal customer to the network is very profitable after the one-time new customer acquisition expense.

[Chungst]

I just check the recent news release (dated 11/9). Investools had 100,700 active subscribers to its Investools Online, Investools FX and Prophet.net websites.

I must have confused the over 250,000 who took the course with active subscribers -- I knew the subscriber appeared too high. Again, to be clear, I pay $50 a month for Investools on line and I am not sure what the recurring fee is for Investools FX or Prophet.net.

[SpecialSituationInvestor]

I welcome any intelligent debate, although do not appreciate how you begin your criticism with a personal attack, which is considered bad form in any argument. I concur that based on the facts you have laid out, their business model, with a significant amount of recurring revenue and ability to scale, is attractive. Furthermore, ThinkorSwim and Prophet.net enhance this value, which you correctly pointed out.

Still, my main concern is the product itself, as I don't see how helpful this product really is for the company's target audience of retail investors. Until I see some data that shows users outperforming the market, I will remain skeptical. Ultimately, one must ask if the customer is really better off for using INVESTools. In my opinion, the long term viability of INVESTools hinges on this fact.

On the other hand, you have mentioned that as a subscriber, and I would assume as an institutional investor (as you have your MBA and CFA), you appreciate their product as it provides timely financial information for a low cost of $50/month, especially Prophet.net, which is a lot less than Bloomberg and other types of information platforms. If this is the case, then perhaps the company should be focusing on institutional customers, as opposed to marketing their product to retail investors.

I appreciate your detailed commentary, as it was well informed and tells me that at least someone is reading my articles. If my writing invokes debate, all the better. Only through rigorous analysis and questioning of facts can we ultimately arrive at the truth.

[Invictus]

Pual,
You come off as the typical condescending Ivy league kid. You think you can 'know' something without experiencing it.

Yes, Investools swindles folks out of an absurd amount of cash for their trading education.

Yes, revenues from their absurdly priced program will peak when they hit a market saturation point for gullible Americans.

Yes, successful 'blackbox' programs naturally have diminishing returns as they gain popularity. However, Investools is not another 'blackbox'. I'm sure your familiar with simple technical analysis like stochastic oscillators, MACD, and support and resistance. All Investools 'blackbox' does is teach students to interpret technical signals on stocks. They also provide filters and screens to make sure students trade fundamentally sound or momentum stocks.

Yes, a willing person can educate themselves for a fraction of the cost. Investools, however, is a master at convincing not only blue-collar Americans, but also extremely smart doctors and professionals to shell out $5,000-$20,000 for the investment education. With the opportunity cost alone of the fee you need a lot of winning trades to recoup those fees. At the conferences, I've seen people pay with 4 different credit cards believing they had finally found the easy money in life. IMO Investools is one of the most unethical companies listed on the major exchanges.

Yes, prophetcharts is the best consumer technical analysis software.

Yes, it is logical to vertically integrate with the thinkorswim purchase. This allows Investools to capture double profits on their customers. OptionsXpress was built from Investools referrals, and look at their comps and metrics since Investools quit passing on their students.

With small caps you have to mimic Peter Lynch and experience them for yourself.

All this said, I have no position. I am a broke public college student who educates myself on investing. Although I attended a bunch of Investools seminars to watch, document, and learn the psychology behind their sales tactics. And Investools could sell Ice to an Eskimo. If you want understand Charlie Mungers views on human misjudgment go to a seminar.
www.loschmanagement.co...

I think Investools has probably reached their market saturation for unsophisticated gullible investors to swindle into to paying absurd fees for their program.

One final question on 'Blackboxes', why has Renaissance Technologies consistently outperformed other quants?

[Invictus]

Paul writes, "Only through rigorous analysis and questioning of facts can we ultimately arrive at the truth." I agree 100% with you. You are obviously extremely intelligent, but are lacking in "street smarts" if you know what I mean.

[Chungst]

I also welcome intelligent debates but let's be honest, my criticism of your piece was no different than your criticism of Investools -- let's not have double standards shall we?? I asserted your piece was sloppy because it failed to discern cause and effect. I also asserted that your piece came across as hastily assembled. Neither of those constructive criticisms hardly qualifies as a personal attack -- to be clear, I was attacking your piece (which I consider fair game) and not you as an individual since I have no idea who you are.

I am stating that you never showed the readers what the instrinsic value of the firm, and thus at what price Investools should be shorted, much less the margin of safety. Additionally, you never showed the readers the value creation chain at Investools and how parts of this chain is suspect. In contrast to your approach, I focused on facts as well as my actual experience at Investools.

You stated: "my main concern is the product itself" and it very clear from the reader's perspective that the problem is you don't understand Investool's market demographics. If you had understool what customers Investools is targeting then you would never have made your assumption of: "...would assume (me) as an institutional investor." Investools is geared toward individuals (i.e. retail accounts), not institutional clients. Yes, I (like over 100,000 subcribers) pay a monthly fee out of my own pocket for Investool's data feed -- that information is broken out in the press releases and Investool's SEC filings.

Before you response to this post, I strongly recommend you research Investool's latest presentation (can be found on their website) dated 8/29/07 and focus on page 10 where you see how thinkorswim compares with its peers. Then kindly turn your focus on page 18 for the pro forma revenues at thinkorswim and you will notice the rapid year-over-year gains for Q1:07 and Q2:07, respectively. Lastly, if you just read the latest press release, thinkorswim disclosed it had $2.47 billion of client assets and 51,775 funded accounts as of 10/31/07, respectively. Based on those statistics, you would get a number of about $47,700 per account that trades an average of 153 trades (predominately in options) per annum, respectively. I know why this is the case since I interact with numerous Investools students on their community boards/forums; for example, you have no idea what is the most popular option strategy via Investools' education courses and there is a direct linkage, i.e. cause and effect at thinkorswim's commissions via option trades.

In summary, you need to discern what is a personal attack because I did no such thing; in contrast, I provided detailed arguments as to why I believed your piece was sloppy and hastily assembled. It's clear you need to do a better job of due diligence because based on your initial piece and subsequent response, you still have not demonstrated to the reader you understand how Investools as a franchise makes its money, i.e via a value chain analysis or some objective fundamental analysis.

Thank you.

[SpecialSituationInvestor]

I took offense to the following comment: "his analysis comes across as something conceived and written in thirty minutes."

I still see INVESTools as a faddish product, distinct from ThinkOrSwim, which based on recent metrics is an excellent business. I also acknowledged the company's business model in my reply, showing that I do understand how the company makes money.

Thanks for your criticism as it has been helpful. Have a good Thanksgiving.

[Chungst]

Investools updated key financial metrics on its businesses -- please see their 11/29/07 presentation. On page 6, the Company outlined some demographics of both Investools and thinkorswim customers. On page 14 is a "comp" chart of thinkorswim versus some of its peers and it is simply impressive -- if you recall wall street's goal is to get its customers to trade so it can collect commissions. Investools/thinkorswim has done a great job getting its customers to trade at an astounding annual pace; keep in mind, it's hard to distort an average annualize trade statistic given the size of thinkorswim's customer base.

A second point is that Investools released its Q3:07 form 10-Q filing and I wanted to get a good read on Investool's cash flow per FASB #95. Cash flow from operations revealed $30.3MM in positive cash flow and investing activities consumed about $14.6MM for "capex-related activities" for a positive "free cash flow" of under $16MM for the nine-month period ended 9/30/07.

In summary, the ongoing positive trend at thinkorswim along with Investools generating positive "free cash flow" makes SWIM a difficult short candidate.

[SpecialSituationInvestor]

I agree that I was dead wrong on SWIM and appreciate your help.

Prophet.net subscriptions:

Bronze- $35 a month/$350 a year.
Silver- $45 a month/$450 a year.
Gold- $65 a month/$650 a year.

Over 100,000 active subscribers to Investools Online, Prophet.net, and Investools FX as per 11/9 press release.

[SpecialSituationInvestor]

Chungst, do you have any thoughts of the impact of possible customers who are dissatisfied with the Investools product and the affect it will have on future growth for Investools going forward? It seems that reviews for the product are mixed based on comments I have read on discussion boards, with some students very satisfied with the company's products, including yourself, while others haven't been as successful. The recurring revenue business model for Investools looks very favorable, and the DART stats are excellent to say the very least, giving management a good handle to manage growth and giving investors some good visibility. I'm trying to figure out what the downside risk is as I like to focus on this before even contemplating the upside. Again, thank you for helping me understand Investools business model.

See the following link to comments to the article published on joecit's website: joecit.com/2007/03/13/...

[Chungst]

Paul Simenauer,

If you aren't going to calculate either SWIM's intrinsic value or value-chain analysis, then giving you more recommendations would be a waste of my time. Had you simply tried to discern the amount of money it would take to replicate SWIM today, it would force you to consider the very same questions you've just asked me, i.e. churn, customer satisfaction, etc.

As for Joseph Citarella's* original editorial piece, I failed to see an investment thesis in that article and it can across as someone sharing his personal opinion (btw, Joe was clueless on key aspects of SWIM like yourself). I've learned in life, one shouldn't get into debates over personal opinions, religion or politics since it's akin to a fool's errand. In contrast, your original piece on SWIM was sloppy and contained an investment thesis that was hastily put together (and you yourself subsequently admitted you were dead wrong).

In the spirit of Charlie Munger, it might be best for you if you tried to figure things out for yourself.

Good luck.

* There is an aphorism on foolishness that I like to share with you: The fool himself or someone who follows that fool. My question to Paul Simenauer is: Why are you basing your decision on message boards from unknown people with questionable and unverifiable motives? Why not do the reasonable thing and get the facts from the source, which is the company?

[SpecialSituationInvestor]

I'm not. I simply was trying to get you to comment, which you did. You crack me up! You need to relax a little.

[SpecialSituationInvestor]

The aphorism you mentioned is an incomplete thought in the English language. I think you meant to put forth the following well quoted aphorism- Who's the more foolish? The fool or the fool who follows him?

Interestingly enough, Obi-Wan also quoted this aphorism in Star Wars Episode IV: A New Hope, right after the Millennium Falcon enters the Death Star. Why this is relevant is beyond me, but I hope you would find this amusing.

[Chungst]

Here's what I find amusing since Paul Simenauer stated: "I welcome any intelligent debate." So much for the intelligent debate; it ceases to be an constructive dialogue debate when Mr. Simenauer comes across as a sore loser.

Mr. Simenauer, I want to thank you for showing the investment community your true disposition as your original analysis and investment thesis of shorting SWIM speaks volumes about you as the next Jim Chanos ... NOT!

[SpecialSituationInvestor]

Mr. Chungst, you may be the most negative person I have come across. It ceases to be a useful debate when Mr. Chungst has nothing positive to say whatsoever and clearly shows a complete lack of skill with the English language. Enjoy your misery!

To highlight more of your subtle writing skills, I came across this comment on Paul Kedrosky's article on Bill Miller:

In the Asset Management industry, rather than speculate if a perticular asset manager beat an index by luck or chance, the industry normal is to look at the fund's performance attribution over time.

Industry normal is incorrect. Industry standard is the correct phase. Go take some English lessons!

[SpecialSituationInvestor]

Also, you can accuse me of being a sore loser all you want, but it can also be said that you're a sore winner. I clearly conceded the argument stating that I was incorrect, asked for positive feedback, and all you had to say was that you were wasting your time. Let's not have double standards, shall we?

[SpecialSituationInvestor]

Instead of arguing over something that really isn't that important in the scheme of things, I will issue an updated article. This article will include a thorough analysis of the discount brokerage industry making use of the Five Forces Model, a value chain analysis, recent industry trends and company news releases, and will make use of a DCF that will incorporate 3 scenarios (Base Case, Bear Case, Bull Case) with sensitivity tables, an LBO model, comparable multiples, and comparable transactions. I will also look to value any imbedded real options within Investool shares to cover all the bases in my valuation framework. If I am missing anything, please let me know.

Best,

Paul Simenauer

[Soluskro]

"do you have any thoughts of the impact of possible customers who are dissatisfied with the Investools product and the affect it will have on future growth for Investools going forward? It seems that reviews for the product are mixed based on comments I have read on discussion boards, with some students very satisfied with the company's products, including yourself, while others haven't been as successful"

I can comment on this. I have pored through the same comments and observations for over two years. Before I signed with Investools (similar to Chungst, I paid the initial pricetag to get the tools themselves) I wanted to do my own due dili on if this was a shlocky, glorified Amway or "timeshare" sell.

So far the conclusion I have gleaned from the many comments of dissatisfaction come from people who are griping over the price or that they can find various similar tools "for free" scattered across the web. I.E. My anecdotal observation is that the vast majority of comments and posts have never tried the tools at all.

I gave up posting defenses of the tools long ago. I agree with Chungst in that trying to convince people who have no real understanding of what they are commenting on is a fools errand.

I know of at least 6 people personally with Investools and all are satisfied and remain subscribers.

Personally, I can attest to having more than made back my money spent. I consider myself a novice in the big dog eat dog world of investing and I have done quite well with using the tools to verify my stock picks and my option plays.

With Stocks, I am generally a buy and hold type.
Directly attributing the the tools searches for stocks, I have made the following returns (as of Friday 12/21 in cases of holds):
1) 12% (entered 9/06)
2) 19% (entered 9/06)
3) (5%) (entered 10/07)
4) 108% (entered 5/07, sold 9/07)
5) 18% (entered 3/07)

Not to mention the uncalcuable savings from some stocks I liked that the tools convinced me were NOT correct plays. (I always enjoy running Cramer's BUY BUY BUY Bu bu bu BOOYAH stocks through the tools. Heh)

I only recently jumped into options (after papertrading for some time to get comfortable). In the last 45 days I have made 16 option plays and seen total returns of 53%.
I have been trading options for... 45 days.

As for SWIM itself, I have held a long position for over two years (we know how that position has worked out!).
I have studied every piece of information on this company and I won't be selling my stake anytime soon.
I find it almost comical how every negative article focuses on SWIM as an education company. These articles read (to the informed) like they were written in 2004.
I have scores of analyst reports that discounted the education side almost completely for the remainder of 2007 and 2008 (these were from March 07) when making their valuations-- which have since been corrected as even these well known analysts have had to concede that the edu side is back on track and firing on all cylinders.
The TOS side is so hot right now that any article not focused almost entirely on the incredible metrics should be dismissed almost immediately.

Bottom line, Investools students are very faithful and happy. There are a few unhappy students who perhaps aren't cut out for investing or entered into the tools with the wrong mindset (lead into gold types).
I attend the preview seminar occasionally to "watch my own investment" and make sure that they aren't exaggerating or making false claims. I am always amused at what some people *think* they heard (Investools told me I could make 80% in three months!" These are patent lies-- on the part of disgruntled posters.

Hope that sheds some light.

Soluskro

[consultingjoe]

I just attended an Investools seminar and was surprised after reading the many negative reviews on the company and its tactics. They must have modified them (or our instructor did) in that they issue lots of disclaimers and didn't show outlandish 80% returns for people. The sad fact of the seminar was the attendees - I was clearly one of the most highly-paid and highly-educated people in the audience (a simple BS with lots of extra book learning and consulting experience and make a measly buck-50). Also I was one of the only ones who left that day to do some more homework before plunking down my hard-earned $999 on their course and free 6 months of the service, everyone else couldn't pull out their cards fast enough. I hope those blue-collar (or unemployed) people that were there don't get swindled as it always pains me to see the poor/stupid get taken. I know many of them hoped to quit their jobs and get rich day-trading on their system. I truly hope they can make a decent living using their system, however they should realize since they don't have much $ to start with I doubt their money will multiple as fast as they want unless they wager big (their house, broken cars, etc) or dangerously.

Thanks for the interesting reading and I'll probably sign up myself as I spend way too much time combing through the other sites and my own spreadsheets to get to the numbers they give you in a few clicks.

[woo shah]

Chugnst,
Get over it and get on. As they say-- let go--Woo Shah