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Adam Levine-Weinberg  

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  •'s (AMZN) Management On Q2 2014 Results - Earnings Call Transcript [View article]
    Amazon isn't generating free cash flow in any meaningful sense of the term. I think this is a mistake that many investors are making.

    Why do investors care about FCF? Because ultimately this is cold hard cash that can be used for acquisitions or returned to shareholders through dividends or share repurchases.

    But Amazon's FCF figure doesn't include non-cash stock compensation, which is currently running at around $1.5 billion a year and steadily increasing. If Amazon paid its incentive compensation in cash rather than in stock, it would have negative FCF.

    To put it another way, if Amazon "returned" all of its FCF to shareholders through buybacks, it would still be diluting shareholders over time. It isn't generating enough cash to cover the cost to shareholders of issuing stock to employees.
    Jul 30, 2014. 04:31 PM | 1 Like Like |Link to Comment
  • Chipotle Mexican Grill: Blurred Quarterly Results And Risks On The Horizon Suggest Overvaluation [View article]
    The flaw in your hypothesis is shown by Chipotle's performance since it went public. It had a very high valuation back then, which was more than borne out by its subsequent earnings growth. Chipotle has far more growth potential than most companies in growth industries.

    In my opinion, the worst case scenario for Chipotle's long-term global unit potential is around 10,000. (About 6 times the current size.) The best case scenario is much higher, comparable to the other top fast food companies like MCD.

    To the author: share repurchases had nothing to do with CMG's earnings beat. The share count was actually higher last quarter than in the year-ago quarter. Furthermore, Chipotle is on pace to produce about $500 million of FCF next year and has more than $1 billion in cash and investments sitting around. It could afford to buy back shares at a much faster rate, and it probably should.

    Additionally, a 2.5% average increase in menu prices for the quarter is not much different than inflation. That rate of menu price inflation is probably sustainable in the long run. In any case, when more than 80% of the comp sales growth came from "organic" growth as you call it, it seems bizarre to point to the price increase as some big red flag.

    FYI, I was very bearish on Chipotle not that long ago. I even shorted it and made some money in 2012. But the recent acceleration in comp sales growth completely changed my mind. I now think Chipotle is destined to be one of the few top fast food companies in the world, not just a niche burrito joint catering to yuppies.
    Jul 22, 2014. 03:15 PM | 2 Likes Like |Link to Comment
  • Netflix: $35 Billion In Revenue Is Attainable By 2024 [View article]
    How do you figure? Reed Hastings is so worried about customer backlash that he isn't willing to impose a 12.5% price increase on customers. Instead, they get at least 2 years at the same price, and then the opportunity to keep the same $7.99 price if they want by dropping down to 1-stream SD.

    It doesn't seem very likely at all after going to the trouble of grandfathering users for 2 years that Netflix will be raising prices again in 2016. And if it raises prices again in 2017 or 2018, ongoing users will probably be grandfathered again at $8.99 (and the current going price in int'l markets). At best, maybe ARPU will be $120 in 2018, so you'd need 150 million subscribers.

    Frankly, that's not a plausible number. 100 million seems very doable based on the recent sub growth pace, and 110 million seems possible but aggressive. Getting to 150 million by 2018 means adding more than 20 million int'l subs per year within a few years. There is nothing in Netflix's history to suggest that is possible.
    Jun 19, 2014. 05:46 PM | 1 Like Like |Link to Comment
  • How Will Apple's Stock Split Impact Its Shareholders? [View article]
    Thanks for the thoughts everybody. I may just roll my options into a strike price that is a multiple of 7 next month rather than deal with these potential liquidity issues.
    Apr 27, 2014. 08:09 AM | Likes Like |Link to Comment
  • How Will Apple's Stock Split Impact Its Shareholders? [View article]
    Anybody know what happens to existing options contracts? E.g. if you own a $500 call option today, would you have 7 $71.43 call options after the split? Would it even be possible to trade such things?
    Apr 26, 2014. 09:47 AM | Likes Like |Link to Comment
  • Amazon Is Wasting Its Time [View article]
    I agree that creating a set-top box doesn't make very much sense -- although perhaps Amazon Instant Video isn't available on every major smart TV?

    However, I don't know where you're getting your information about content. Amazon has been pouring a steadily increasing amount of money into Prime Instant Video. Both of the shows you reference (Downton Abbey and Suits) are still on Prime Instant Video.

    Perhaps you are only looking at the most recent season? Amazon makes new episodes available on a pay-per-view basis right after they air, but the Prime streaming rights generally start something like 6 months after the end of the season. I'm sure the latest season of Downton Abbey will be free for Prime subscribers sometime this summer.
    Apr 3, 2014. 10:05 AM | 1 Like Like |Link to Comment
  • Netflix Is Ready To Buy On Underestimated Market Power [View article]
    I completely agree with the premise that Netflix's ultimate value turns on its ability to raise prices. However, the way that you are running the analysis skews the results in a few ways.

    1) You are building in a full year of subscriber growth despite the price increase. Strong sub growth and a simultaneous price increase will obviously lead to massive margin expansion.

    However, if you agree that the net result of a price increase will be stable subscriber numbers, then you should use the prior year's subscriber total when calculating revenue. In the hypothetical scenario that Netflix had raised prices at the beginning of this year, the proper sub base would be at most 33.4 million (the total number of free and paid subscribers at 12/31/13).

    2) You are calculating revenue using the end of year subscriber total. However, that's just the number of paying subscribers on Dec. 31 -- in a 15% growth scenario, there are significantly fewer paying subscribers earlier in the year. This is inflating your revenue estimate by a few hundred million dollars. I also think Netflix's costs are growing faster than your model allows, but it's hard to know for sure.

    3) Lastly, Netflix's costs won't stop growing just because subscriber growth starts to flatten out. Like Apple, Netflix is likely to see margins surge to a peak and then drop back to a more sustainable level -- at least domestically. (This may be offset by ongoing margin improvement outside the U.S.) Content costs are rising dramatically, and so I think Netflix needs to plan on increasing domestic content spend by at least 15% annually for the foreseeable future just to maintain the current quality of the content library, let alone improving it.

    Mar 26, 2014. 10:59 AM | Likes Like |Link to Comment
  • American Airlines: Expanding Network In China And Modifying Its Fleets [View article]
    I didn't say it was a mistake. I said it was necessary to expand the network and win corporate travelers over time. However, it's very normal for new airline routes to take a year or two to reach profitability, and I don't think this one will be any different.

    American's unit cost (CASM) was a little over $0.13 last year, excluding special items. For a long-haul transpacific flight like Hong Kong, the unit cost would be lower: maybe $0.11. (Obviously, that's just an estimate, but I think it's a reasonable one.) This summer, flights are selling for around $1600 roundtrip: that's a little under $0.10 in PRASM. Move forward to September and the fare is around $1200 roundtrip: down to 7.5 cents.

    Obviously there are some people who buy refundable tickets, and some who will buy a business class or first class ticket. And there is some cargo revenue, but that's a small fraction of the total revenue for any flight. (Airline capacity between the U.S. and Asia has been rising rapidly in the last few years, which has pushed down cargo yields significantly. Just look at United's cargo revenue results in the last couple of years.) On the flip side, no route has a 100% load factor.

    The bottom line is that I don't think American is defining success on these routes as having a 15% profit margin in the first year. If they can make some money in the summer and not lose too much more in the winter, while gaining some market share for U.S.-Asia travel, I think Doug Parker and company will be happy. I think your Wal-Mart toothpaste analogy might be closer to the truth than you suspect!
    Mar 14, 2014. 03:25 PM | 1 Like Like |Link to Comment
  • American Airlines: Expanding Network In China And Modifying Its Fleets [View article]
    This idea that any Asian/US market will make money is completely false. It is incredibly expensive to operate these flights (Dallas to Hong Kong is more than 8,000 miles; this flight will likely use over $100K of fuel each way). US-China freight capacity has exploded in recent years and cargo yields have dropped significantly. Cargo is still a source of ancillary revenue, but these flights have to make their money with high yields.

    I see the new Hong Kong and Shanghai flights as network driven -- to win corporate accounts, American needs to have more flights to China. In that sense, they should hopefully contribute to long-term profitability. In the near term, both flights are likely to lose money.
    Mar 12, 2014. 04:12 PM | Likes Like |Link to Comment
  • Best Buy: Target Price $35 For 2014 [View article]
    You're missing the point. Best Buy has a lot more risk than the market as a whole, yet it trades for essentially the same valuation. You're not getting compensated for the risk.

    In late 2012, when Best Buy was trading for $11 or $12, investors were getting richly rewarded for taking on risk. At that point I was recommending the stock.

    Now, even after the stock has corrected sharply lower, Best Buy still doesn't look especially enticing.
    Mar 4, 2014. 11:43 AM | Likes Like |Link to Comment
  • Here's How The Comcast And Netflix Deal Is Structured, With Data And Numbers [View article]
    OK, so the Netflix CEO confirmed that Netflix will be paying more to Comcast than it was paying when sending data over third-party networks. However, he also said that the change does not impact Netflix's guidance for 400 basis points in domestic contribution margin expansion this year. To me that would suggest it will cost millions but not tens of millions of dollars.
    Mar 4, 2014. 11:32 AM | 1 Like Like |Link to Comment
  • Despite The Stock's Rally, HP Should Be Split Up [View article]
    Ink costs as much as it does because printing has always been a razor/razor blades business model, although HP has changed their strategy in most developing countries. In the U.S. and other developed markets, printers still get sold below cost based on the idea of an expected lifetime value. Consumer printers are not worth very much to HP or other OEMs because many people will just buy generic ink, refill cartridges, etc.

    On the other hand, I do not think there is any evidence that printing is declining in the enterprise. Ink/toner volumes have been stable over the last several years even though printer sales were actually dropping a few years ago. Printer sales have now returned to growth. Why are people buying millions of printers if they aren't going to print?

    The PC business has a negative cash conversion cycle and a very high ROIC for HP. I'm sorry that I don't have an exact figure. My sense from HP's comments is that it may have a higher ROIC than the corporate average simply because there is so little capital invested in PCs.

    I take your point on operating leverage. We are comparing to different things. I think of automakers as companies with high operating leverage. A 20% gain or decline in auto sales is the difference between a 10% operating margin and a -5% operating margin. A 20% gain or decline in PC sales might be the difference between a 5% margin and a 2% margin.

    I am sure that the PC business is holding back HP's valuation. But rather than selling it for pennies on the dollar or spinning it off with huge cost dis-synergies, I would prefer that HP take advantage of its high cash flow and absurdly low stock valuation to buy back shares aggressively. Unfortunately, it seems like the "once bitten twice shy" logic is haunting HP. A few years ago, the company was spending ~$10B a year buying stock at $40 or more while the business was falling apart. Now the business if healing and the stock price is lower, but the buyback pace has been quite slow.

    Mar 3, 2014. 04:33 PM | 2 Likes Like |Link to Comment
  • Despite The Stock's Rally, HP Should Be Split Up [View article]
    There's a huge difference between printing and 3D printing. In any case, I'd be surprised if 3D printing goes as "mainstream" as investors seem to think will happen. It's great for some industrial applications and hobbyists, but I don't think there will ever be a time when 3D printers are common.
    Mar 2, 2014. 09:37 PM | 1 Like Like |Link to Comment
  • Despite The Stock's Rally, HP Should Be Split Up [View article]
    Samuel: Sales of printers were up last quarter, for the third straight quarter. A large portion of the printer value chain is in Japan, and the 25%-30% decline of the yen in the last year and a half has led to price deflation. Lower COGS and lower ASPs, but higher profits. If the exchange rate swung back to 77 yen/dollar, HP would probably be posting high single-digit revenue growth in printing, while operating margin would be plummeting. I'll take the revenue contraction and solid earnings growth every day of the week.

    If by "people" you mean consumers, the answer is of course people are printing less. If you're looking at enterprises, I think the answer is different. There are businesses that have swapped out paper for tablets in some instances, but printing is not declining very rapidly in the enterprise.

    There's not much operational leverage at all in HP's PC business. It's almost all contracted out so the costs are variable. The one area where operational leverage is significant is the enterprise services business, and that's where HP is cutting a lot of fat. If ES revenue stabilizes, the business will see significantly improved profitability in the next 1-2 years. If revenue keeps declining, then you are correct that profit will still be elusive in that business.

    It's very clear that splitting HP would entail at least $1 billion of cost dis-synergies from lost purchasing power. From what I'm seeing, the turnaround is progressing steadily, and I do not think that separate management teams would be able to produce operational improvements that could offset those cost dis-synergies. Hence, better together.

    Mar 2, 2014. 11:13 AM | 3 Likes Like |Link to Comment
  • Best Buy: Target Price $35 For 2014 [View article]
    JCP has $1.5 billion in the bank and burned nearly $3 billion last year. In a best case scenario, it will have $500 million in the bank going into the holiday season. More likely the company will need to sell off more assets to stay solvent through the holiday season.

    Anybody who's paid attention to what's gone on at JCP in the last 2-3 years would recognize that the fact that management said the company has enough cash is meaningless. The last two years have been full of announcement about how JCP is "turning the corner", executives are "encouraged", "no need to raise cash", and all of these statements were eventually exposed as false hopes.

    JCP's recent stock rally is analogous to Rite Aid's big rally in the last year and a half. When your market cap falls so low that your enterprise value is comprised almost entirely of debt, then small revisions to the probability that you'll go bankrupt can lead to huge swings in the stock price. It wouldn't surprise me whatsoever if JCP stock doubles this year. It also wouldn't surprise me if the company files Ch. 11.

    As for BBY, it seems to me that 10% is an unusually low cost of equity. Isn't 12% a more normal figure? I suspect that would chop at least $5 off your target price. I don't particularly object to your FCF estimates, but I wouldn't buy BBY at $26 based on FCF growing 3% annually from current levels. Not much upside considering the risk that the business could collapse due to competition, which I think is a very real risk.
    Mar 2, 2014. 11:03 AM | Likes Like |Link to Comment