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Alex Cho is a top contributor on Seeking Alpha in both the long ideas and technology section of the website. Alex Cho's articles have been featured on The Motley Fool, The Street, and Benzinga. Alex Cho has been featured on ValueWalk's throwback Thursday for his analysis on Apple. Furthermore,... More
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  • Facebook Isn't A Normal Conglomerate

    Okay everyone I have to admit, I was not expecting Mark to buyout Oculus for $2 billion. Facebook (NASDAQ:FB) tends to buys companies with its own shares, because it avoids using after tax cash for buy-outs, and instead issue shares. Mark uses this strategy, because Facebook aligns the self-interest of the bought-out company to that of its shareholders. After all, if I was getting paid billions of dollars in Facebook stock, I would try to position my business to build value for the empire as a whole, rather than try to be mutually exclusive, even if I was given the reigns to operate the company without any oversight.

    Salmon Felix believes that Facebook is turning into a holding company:

    Is it too early to declare that Zuckerberg has ambitions to become the Warren Buffett of technology? Look at his big purchases - Instagram, WhatsApp, Oculus. None of them are likely to be integrated into the core Facebook product any time soon; none of them really make it better in any visible way. I'm sure he promised something similar to Snapchat, too.

    I'm not sure I can agree with Salmon. His premise is that Facebook's web properties could quickly turn into a fad. So before becoming "un-cool," Mark is quick to diversify in order to avoid the downside of the product lifecycle. However, no one really knows what the lifecycle of web properties, much less social networks are. For all we know, social networks that exceed a billion users can sustain growth, or maturity for a significantly longer period than whatever timeframe Mark, or Felix are anticipating.

    Source: NetMBA

    After all, I see ads clogged up on standard broadcast television, and yet it can attract a large percentage of American households to the Super Bowl every single year. Why? Cable television/internet companies tend to saturate certain pockets of the United States. Network communication companies have made it impossible for competitors to operate within the same geographic area due to economic constraints, or through other means. Because network operators such as COX Communication and Century Link have limited competition, they get to advertise, and charge a subscription.

    Well guess what? Facebook doesn't have any serious competition in social networking. Furthermore, most of the global mobile advertising growth came from Facebook and Google (one social network, and one search engine). Perhaps, what we need to understand is that Facebook isn't just a well-run investment firm. It's a dominant business that drives productivity growth, and anything that drives productivity is extremely easy to sell.

    Source: Alex Cho

    In my forecast on user growth (back in 2013), I assumed that the upper limit for total users was going to be based on global population. But, it seems Mr. Zuckerberg found a work around. He decided to buy businesses that have hundreds of millions of monthly active users. Well, if you combine the monthly active users of Facebook (1.228 billion), WhatsApp (419 million), and Instagram (200 million) that equates to 1.847 billion monthly active users, which is in-line with my expectation of 1.885 billion monthly active users for 2014. If Facebook can figure out a way to earn 10 dollars on every user in its platform of businesses, it would earn $18.885 billion. If revenue per user and number of users continue to trend higher, Facebook can become a very rich company in a very short period of time.

    While, WhatsApp won't be monetized anytime soon, Wall Street has a tendency of rewarding companies, for having a higher number of active users. Facebook also announced that it will transition messaging to be forwarded to e-mail, which indicates that Facebook's core product (social network) will no longer emphasize private messaging. This role will be taken on by WhatsApp. To scale WhatsApp, Facebook can advertise WhatsApp, for free. Therefore, Facebook can accelerate the growth of any acquisition by taking on the role of being a strategic advertising partner.

    I guess he who has the eyeballs makes all the rules.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: FB, long-ideas
    Mar 26 8:40 AM | Link | 1 Comment
  • Apple's Watch Could Have A Lot Of Potential

    There's been a lot of news about Apple (NASDAQ:AAPL) over the past couple weeks, with spoofs about how Tim said something about new product categories. Granted, Apple could in fact release new product categories this year or next year, but Apple almost never mentions anything about their new product categories unless if it's done at a major Mac conference.

    However, this isn't going to stop me from speculating on Apple's future product roadmap. We know that Apple is going to release an improved version of the iPhone. Perhaps it will be bigger, more power efficient, and maybe it will come with a sapphire screen. Then there's the fact that Apple is put in a weird position with the Time Warner Cable (NYSE:TWX) and Comcast (NASDAQ:CMCSA) merger, which may delay Apple's internal plan to release an actual television rather than another set top box.

    So ignoring the rumors surrounding Apple's television, iPhone, and iPad I'm going to turn my attention to the iWatch. At the present moment, Apple can't allow Samsung (OTC:SSNLF) to be the only competitor in the wearable computing space. However, at the same time, Apple won't release a product just to release one. Apple needs to come up with something brilliant in order to adhere to its high standards.

    Interesting development and perhaps speculation on Apple's upcoming product

    So, rumors are rumors guys, and not everything that's been rumored will actually happen. On the other hand, leaks, and the like can be a useful enough of an indicator to get a basic idea of what may actually happen, so I can't help but speculate on future products.

    At the present moment, it's believed that Apple's upcoming watch will come with various sensors that can monitor your health. Maybe Apple can one-up Nike's (NYSE:NKE) sport watch. However, Apple needs to offer much more utility than a device that can just monitor heart rate, or the amount of distance a person has run, or needs to run in order to burn enough carbs.

    So I wondered what Apple could do with a watch that perhaps no other company could. Since I frequent the gym a lot, and lift weights like a maniac, I think it would be awesome if Apple could create watches that can monitor things like body mass index, protein intake, and work-out effectiveness.

    Perhaps, Apple can include a gazillion cameras located all over the watch that could offer more data inputs on the environment a person is in. The cameras could give data on a person's weight lifting form, the frequency of a person's visit to a gym, and the amount of weight he/she lifted in the previous week, and etc. Plus, if a person stands in front of a mirror in his/her boxers, the watch could look at the person, paired with other sensors, and determine the percentage of body fat on that person. Sounds crazy, but that could be the added benefit of a watch that can use a combination of data inputs to monitor your health.

    A watch can also monitor the environment and notify you of suspicious activity nearby. Active notifications of crime levels, and the like could give you an early leg-up on being able to avoid the dangers of a crime scene.

    Contextual environmental information could include data on the amount of food you have consumed (your watch sees it all), which may tell you that you're either falling behind or keeping on track with your dietary plan.

    Maybe the watch can offer information on local statistics, and describe data from another database on traffic conditions. Remember, GPS information on road conditions is only available when you have Google's Navigation app running. I'm thinking of a watch that can notify you based on inputs from GPS and camera that there's a road jam up ahead, and if you're in a crowded parking lot, it can guide you to an open parking space. Hopefully this device will immediately notify you of all the stuff happening around you. I'm also hoping that Apple avoids a watch UI that requires you to slam a bunch of touch commands to find all this data. What's the point, most people are too lazy to open up certain apps, so the information isn't going to be timely enough. Designing a device that acts like a smartphone is pretty redundant. Applications for the device should be designed to notify and take up screen space immediately upon certain visual/sound/sensor inputs. In other words, I hope the GUI isn't based purely on touch screen, touch inputs.

    The camera of the watch may be able to capture an image of the person you're talking to, and link the person to an online database like Facebook, so a name will show up on your watch screen. Or access a data base that can indicate where you're located, and the number of times you visited a store, and even tell you the amount of money you've spent in the past week at the aforementioned store.

    Advertising could go to the next level with ads based on your environment. Perhaps, an event is happening nearby, so the watch could notify you of a 50% discount due to a closeout sale. Maybe, you're walking by a casino, and they're offering beer on tap for half off. Heck, you could be walking by a bar and the watch may notify you that a local celebrity is at that specific bar. Or better yet, you're near downtown, and the watch notifies you of a nearby Lady Gaga concert. Maybe, you're walking into Wal-Mart and today's grocery special will show up on your watch.

    The sound sensors on the watch may monitor the number of times you coughed, or sneezed in the past week. Pulse sensors and temperature monitors may sense the severity of the cold. The sound paired with a temperature sensor could give you a leg-up on cold prevention. If you've been terrible at treating your cold, the camera will tell the watch you've skipped taking your prescription meds. Maybe Siri will say, "sir you forgot to take your meds today."

    Let's go back to the sound sensor. Maybe, you're singing, and voice recognition software could identify that you're off pitch. Or if you're trying to sing along to a song, lyrics of the song could show up on your watch to help you keep up. Maybe, the voice recognition software recognizes the sound of your friend, so when you say hello to them in person, you can get a quick update on your smart watch of all the recent status messages from Twitter, Facebook, Instagram, and LinkedIn your friend had over the past week. You can review the news on your friend by reading his statuses, just because your watch picked up on the sound of his voice. Maybe you'll congratulate him on his birthday even though you completely forget about it.

    The watch could be the near equivalent of a digital assistant that's even more detailed oriented than the personal secretaries of CEO's at Fortune 500 companies. It doesn't have to communicate with other people; it just needs to communicate with other devices. It's different from a smartphone, because the device isn't intended for finding and consuming information on a screen. It could be a device that's intended to notify you of information that's pertinent to the environment you find yourself in. This is something a smartphone can't do, because a smartphone's camera is blocked from view once you stick the thing in your pocket. Plus, the smartphone won't include sensors that would monitor your health, because it's not strapped around your wrist, it's almost always in your pocket, or it touches your hand.

    Conclusion

    If the rumors of a watch that could monitor health are true, Apple is most likely working on a device that's intended to communicate with other devices rather than other people. If that's the case, the user experience of the device won't be based on interpersonal communication, but based on information pertaining to the user, or the environment.

    Apple could release a device that's mediocre compared to what I had speculated throughout the course of this article. So don't get your hopes too high as this was all speculation. Let's just hope Apple really knows what it's doing when the upcoming iWatch hits shelves.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 23 9:14 PM | Link | Comment!
  • Organovo Could Fall To $2 Per Share

    I will keep this a short discussion on the topic of Organovo (NYSEMKT:ONVO). Earlier in the week, I thought 3D printing companies may have further upside based on buyout potential. However, I don't think I stressed the potential downside in my analysis on Organovo.

    I still believe ExOne (NASDAQ:XONE), Stratasys (NASDAQ:SSYS), and 3D Systems (NYSE:DDD) could have reasonable upside potential given their unique patent collection along with an early start advantage.

    Seeking Alpha contributor, Richard Pearson, thoroughly gut Organovo for the discrepancy in valuation. The stock was grossly over-priced just like any other pump and dump. The stock collapsed in valuation overnight, and sadly I was mistaken on whatever premium Hewlett Packard may have ever had to pay on the company.

    How I feel about the 3D printing industry

    In general, I'm a huge optimist on 3D printing and believe that as the technology advances, the use in industrial applications may pick-up more than expected. However, the future is a very murky place, and while I try to look out from the windshield as far as I possibly can, sometimes I get hit by cloudy rain storms, making it difficult for me to come up with an accurate estimation of what may happen.

    Even so, I believe that 3D Systems, Stratasys, and ExOne have both downside protection and upside potential. The aforementioned companies I mentioned in a previous article offered upside of 25% to over a 100% on the basis of patents, customers, and branding. I still believe that this will hold true for traditional 3D printing companies.

    In 2014 laser sintering technologies will no longer be protected by patents (lowering barrier of entry). However, even if these patents were to expire the three aforementioned players in the space still have a significant technological lead.

    ExOne focuses its R&D on these activities:

    • Chemistry of binder formulation;

    • Mechanics of droplet flight into beds of powder;

    • Metallurgy of thermally processing metals that are printed through AM;

    • Mechanics of spreading powders in a job box;

    • Transfer of digital data through a series of software links, to drive a printhead; and

    • Synchronization of all of the above to print ever-increasing volumes of material per unit time.

    ExOne believes that the expiration of laser sintering technologies in the immediate term will have a low impact on the business:

    As a result of our commitment to research and development, we also hold process patents and have applied for other patents for equipment, processes, materials and 3D printing applications. The expiration dates of our patents range from 2013 to 2029. We believe that the expiration of patents in the near term will not impact our business.

    So in summary, if a company is willing to claim that it has an early start advantage in an S-1 filing that was combed thick and thin by a securities attorney, I'm pretty sure that the recent market sell-off across the basket of 3D printing companies will remain temporary for pure 3-D printing plays.

    Stratasys stresses its strengths in its prospectus:

    We believe that the range of more than 130 3D printing consumable materials that we offer is the widest in the industry. We consider our proprietary technology to be important to the development, manufacture, and sale of our products and seek to protect such technology through a combination of patents, trade secrets, and confidentiality agreements and other contractual arrangements with our employees, consultants, customers and others. All patents and patent applications for rapid prototyping processes and apparatuses associated with our technology were assigned to us by their inventors. We have more than 500 granted or pending patents internationally. The principal granted patents relate to our FDM systems, our PolyJet and PolyJet Matrix technologies, our 3D printing processes and our consumables, with expiration dates ranging from 2013 to 2031.

    Stratasys has built up an impressive patent portfolio with patents expiring into 2031. Similar to ExOne, Stratasys has built up more of a durable advantage in its space than what investors are willing to give it credit for.

    3D Systems isn't messing around either:

    We regard our technology platforms and materials as proprietary and seek to protect them through copyrights, patents, trademarks and trade secrets. At December 31, 2012, we held 852 patents worldwide. At that date, we also had 208 pending patent applications worldwide, including applications covering inventions contained in our recently introduced printers. The principal issued patents covering aspects of our various technologies will expire at varying times through 2027.

    3D Systems has many patents and pending patent applications that are expiring well into the future. So in other words, Hewlett Packard's recent announcement of entering into the 3D printing space may involve buyouts. Hewlett Packard will not be able to develop its own processes and technology on time to become market competitive. ExOne, 3D Systems, and Stratasys have a well-established advantage.

    Organovo has significant downside

    A really well thought out research report on Seeking Alpha sparked fears of an overly generous valuation across 3D printer names. This caused investors to sell Organovo, 3D Systems, Stratasys, and etc.

    I largely agree with the negativity in Organovo. Long story short Organovo went public using reverse mergers. In the past reverse mergers have been used for financial fraud. Organovo's executives have been dumping stock at very high valuations.

    In other words, this isn't a Steve Jobs story. The company is nowhere near close to creating a liver out of 3D printed technologies. So we can end the hype here.

    R&D is expensed and does not go onto the balance sheet until the patent is sold and represented in cash. The other alternative is to buy a company outright or buy the patent itself and list the value of the patent as goodwill/intangible asset. Setting aside the discussion on accounting rules, the company does not have significant intellectual property in the space.

    The research and development spending has been underwhelming. Sure, we can argue efficiency is better than wasteful spending. However, Organovo has only spent $1.5 million on research and development for the quarter. Organovo's R&D is slightly better funded than a University Campus research lab. In other words, the cash expenditure on R&D isn't indicative of a company on its way to a breakthrough in biomedical technology. The rate at which Organovo has advanced its technology has been slow; therefore investors shouldn't expect the company to fill its product pipeline with anything new in the foreseeable future.

    The market for 3D liver assays (basically liver cells that can be used to test phase 1 drugs) was grossly overestimated. Richard Peterson mentions that the actual revenue potential of liver assays is approximately $2 million per year. This is based on the company selling liver assays for $1,750 and selling approximately 1,150 of these liver assays in any given year. The market size is limited because there are only so many biotechnology companies in the world that could practically use the technology. Plus, because we're talking liver assays, the market potential may actually be further limited.

    Going to the same exact clinicaltrials.gov, the market for liver testing is small. Approximately, 6821 studies are currently being conducted for livers. Each liver study may use one liver assay tray, offering a market potential of 6,821 times the $1,750 market price for a single tray. This implies that the total addressable market is $12 million in a single year.

    Assuming the company can capture 10% of market share in the first year, the company may generate $1.2 million in annual revenue. Assuming Organovo continues to capture market share, perhaps it can saturate 50% of the liver assay market, generating $6 million in annual revenue.

    I'm still offering a very high premium when compared to the company's revenue. I offer this high premium because it's developing technologies that could further extend its annualized growth. I estimate that the company may be worth $153.96 million in market capitalization (most optimistic scenario). In other words my price target for the stock is $2.00 per share. Currently the stock is trading at $9.15 per share, implying 78% downside from current levels.

    Conclusion

    Investing into biotechnology names requires significant due diligence, and even then it may not necessarily work-out. The most optimistic case scenario is for Organovo to be bought out. But, then one must ask… why? Organovo doesn't have significant resources invested into its 3D printing technologies or its biomedical research. Any of the more well-established players in the biotechnology space may as well spend the hundreds of millions of dollars in R&D to develop their own 3D printed organ than in buying out Organovo.

    Organovo has been pumped by the investment community over the years. The overly generous valuation should concern investors. In fact, investors should step back and thoroughly re-consider other plays in the 3D printing space that offer far better upside.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Nov 27 3:18 PM | Link | Comment!
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