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Chris Katje is an investor from Grand Rapids, Michigan who also writes for The Street (http://www.thestreet.com/author/1385017/ChrisKatje/all.html). Chris is the owner of Stocks Under $20 through the Marketfy website. (http://marketfy.com/product/stocks-under-20/)The subscription service... More
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  • Facebook Spends $1 Billion For Instagrams Growing User Base

    While the market was hit with jobs data and the indexes dropped, a rather large acquisition was gaining the attention of the stock markets, Twitter, and private equity websites around the country. The announcement of Instagram's acquisition by Facebook (FB) for $1 billion in cash and stock seemed to set off news of an overpayment by the company. With Facebook set to go public in May, the deal appears set to make sure Facebook is the place to log into and share photos. Facebook Chief Executive Officer and Founder Mark Zuckerberg shared the acquisition with Facebook users. In a letter Zuckerberg discussed how Instagram will create the best photo sharing experience for Facebook users.

    Facebook will keep the Instragram company separate from Facebook and will keep its staff of thirteen people. Zuckerberg already discussed that he will allow Instagram users to share pictures on other social networks including Google's (GOOG) Google+. It will be interesting to see how long this independence lasts and if Facebook can find a way to make others pay for the service if not logged into Facebook.

    Instagram began as an Apple (AAPL) product used on iPhones and iPads. The application quickly shot up the list of top downloads on iTunes. As of today, the application is still in the top ten free applications downloaded.

    In April, Instagram opened its services to Google and the Google Play marketplace. In less than one day, the application has over one million downloads on the Android platform. We will have to wait and see how long it takes the Google Play marketplace to cross the ten million download marks but it appears to be only a matter of time.

    The problem I have with the acquisition is there isn't a real value for Facebook in the acquisition. Instagram currently does not charge for its application or service. The majority of the photos are uploaded on Facebook. Other services used are Twitter, Google+, and FourSquare. I think Facebook overpaid for Instagram and will eventually need to charge money for people to use the service. A billion dollars is a lot of money for any company to pay for an acquirer but Facebook is in a difficult position since they are going public soon. I have read through the Facebook S-1 and it was nice to see that they had some cash going into its IPO but now they have depleted much of their war chest. I have to agree with the writers who say that Facebook was scared and made the acquisition to prevent rivals from taking over Instagram and also to keep its photo sharing market strong.

    Instagram was valued at $500 million in its most recent round of private equity funding. It is rumored that Twitter, Google, and Facebook all had approached the company about a buyout. It appears that Facebook won the race and may have likely paid more than the others were willing to spend on the two year old company.

    Instagram has over 27 million users, according to TechCrunch, and is set to hit 50 million from the Android launch this past week. Twitter was blowing up today with tweets about people saying they would be deleting their photos and Instagram accounts because of Facebook's takeover. The fact of the matter is that the buyout could actually cause a spike in the number of downloads for the application due to an abundance of free advertising in the media.

    The acquisition marked the first of 2012 by Facebook. At a billion dollars it is also the highest price paid by Facebook for another company. The move also breaks away from Facebook's normal strategy of acquiring companies for their employees rather than the intellectual property. Analysts call the move similar to the YouTube acquisition by Google for $1.65 billion. Google has found ways recently to monetize the site's large number of daily views. Perhaps Facebook will find a way to make more money off of the millions of photos uploaded each month using Instagram.

    Facebook will be the hottest IPO in May and the buzz now starts a little earlier with this acquisition. Facebook will likely talk about the purchase in subsequent conference calls as I feel analysts will want answers about the hefty purchase price. The deal likely makes the valuation on Facebook worth over $100 billion and puts the shares out of reach for this small time investor.

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

    Tags: AAPL, GOOG, FB
    Apr 09 8:47 PM | Link | Comment!
  • Can Internet Sensation Dollar Shave Club Cut Into Gillette And Schick's Margins?

    Dollar Shave Club was founded in 2011 but didn't start taking customers until last week. Over a short period of time, the company has popped up all over the internet with articles talking about whether the company can survive and to discuss the hilarious commercial made by the small five employee company.

    It seems easy these days thanks to Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) that anyone can create an idea of something through the mail to make life easier for consumers. Netflix after all, was founded with convenience of the consumer in mind so they did not have to make trips to the movie store and could save money and time by receiving movies in the mail. Dollar Shave Club has utilized Netflix's model well by offering both convenience and money saving to its customers. If you haven't watched the video go to the company's website and check it out. Dollar Shave Club spent $4500 to make the video, which has over three million views across all sites. The video has over one million views on Youtube alone. The company is beginning to take advantage of social media as it saves its advertising dollars. The company has over 15,000 Facebook fans and 11,000 Twitter followers.

    Three different price tiered plans are offered by Dollar Shave Club:

    -The Humble: Twin Razorblade, $1 a month plus shipping and handling ($2), 5 cartridges a month

    -The 4X: Four Blade Razorblade, $6 a month (shipping included), 4 cartridges a month

    -The Executive: 6 Blade Razorblade, $9 a month (shipping included), 3 cartridges a month

    All three plans come with a free razorblade handle. Customers are allowed to change plans any given month up or down in price.

    The real question is whether Dollar Shave Club can cut into market share of Gillette, owned by Procter and Gamble (NYSE:PG), or Schick, a subsidiary of Energizer Holdings (NYSE:ENR). The 12,000 customers reported recently were all people who shaved before so they likely made the switch from Gillette or Schick razors. The real question is did those customers leave because of the pricing offered or because of clever advertising done by Dollar Shave Club.

    The most recent quarter reported by Procter & Gamble saw the Gillette Fusion grow global market share for the 20th consecutive quarter since the product launch in 2006. Could Dollar Shave Club cut into the streak and prevent Gillette from enjoying more share gains during 2012. Gillette after all was the main target of the Dollar Shave Club video advertisement. In the ad, founder Michael Dubin mocks that $19 of the $20 spent on razor blades goes to Roger Federer. As a Gillette consumer, it does become frustrating that the company pays millions of dollars to Tiger Woods, Roger Federer, Thierry Henry, Derek Jeter, Andre 3000, Gael Garcia Bernal, and Adrien Brody to promote the company's products and star in the commercials. Along with spending millions of dollars on advertising, the company also pays to have the naming rights of Gillette Stadium, where the New England Patriots and New England Revolution play. The entire Dollar Shave Club company is based on the idea of not spending a ton of money on advertising and passing the savings on to the consumer. Perhaps Gillette could scale back on advertising. I find the opposite to be true as I think Gillette will actually spend more on advertising to compete with Dollar Shave Club. In a recent advertisement I saw, Gillette promised that one cartridge would last five weeks. Daily Mail, in the United Kingdom, once claimed that razor blades made by Gillette had a 4,750% markup.

    Energizer Holdings has been adding products to its brand portfolio could be hurt the most if Dollar Shave Club takes off. The company's Schick, Edge, Skintimate, and American Safety Razor brands could all be hurt. Schick is the number two razor brand, behind Gillette, in the United States. Schick, which enjoys a number one position in Japan, should likely keep its dominance in the Asian country due to Dollar Shave Club's single country presence. Edge and Skintimate help Energizer maintain the number one position in shave preparation category. As Dollar Shave Club expands its brand portfolio, the shaving preparation items could lose market share. Energizer also recently paid $301 million to acquire American Safety Razor to help expand its presence in the wet shave category. The cheaper priced razors could be hurt by Dollar Shave Club.

    After the video went viral, 5,000 people signed up for Dollar Shave Club's monthly service. No official numbers have been released but over 12,000 customers are now signed up for the service. Now, $12,000 a month isn't exactly a huge business but this could be just the start. The day the video premiered, many people couldn't access the website due to an overload of people visiting the site. Founder Michael Dubin said it best, "Our servers were not prepared for the bum rush", as he told Business Insider in an interview.

    As a Gillette user, I find myself changing the blades less frequent than I should. Buying a new razor with a few blades seems like a cheaper option, even though the big pack of blades is the better value in the long run. It is frustrating to pay so much for something that is needed for personal hygiene. There is a reason that Gillette used to send out a free razor on your birthday. Razor blades have one of the biggest markups in the entire consumer industry. There is a reason it is called the razor blade model after all for any item that sells something cheaper upfront or at a loss and counts on additional spending. Amazon has used this model with the Kindle after all. Phone companies use this with providing phones for a cheaper price upfront to count on monthly revenue.

    Also as a Gillette user and someone who changes their blades infrequently, it's hard to compare the cost savings. I did look around on the Dollar Shave Club website and found the middle $6 pricing to be a good value. Shipping and Handling is included and four blades are provided a week. The ability to change my blade once a week could be a benefit.

    So as investors what does Dollar Shave Club really mean. I think the company will continue to signup users and could gain traction as it expands into other personal care products. I think the margins of Gillette and Schick will start to drop as the company may have to discount products to compete or at least maintain customers thinking of making the switch. I will be watching conference calls for Energizer and Procter and Gamble closely to see if they make note of the impact. Another option would be for one of the companies to buyout Dollar Shave Club. The ultimate death of Dollar Shave Club would come if either Procter and Gamble or Energizer starts their own by mail model.

    What are your thoughts about Dollar Shave Club? How often do you change razor blades? Does the company have a sustainable model? Can the company expand with other products or into women's shaving markets? Share your thoughts on the subject below.

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

    Tags: PG, ENR
    Mar 24 3:27 AM | Link | 2 Comments
  • Can UFC Undisputed 3 Make A Happy Valentine’s Day For THQ?
    In August, I highlighted a list of several companies who could benefit from the new partnership between the Ultimate Fighting Championship and Fox (NASDAQ:NWS). THQ (THQI) appeared on that list as it holds the exclusive rights to create video games with UFC fighters. I recommended shares during that article at a price of $1.76. Since that time they have lost half of their value and are now trading at about a quarter of my then price target of $3.00 per share. The release of the newest UFC video game, "UFC Undisputed 3", puts THQ back onto my investing radar for the month of February, which will see a new game launch, and a reported earnings release.

    "UFC Undisputed 3" will be launched in North America on February 14th and later that week in Europe on the 17th. The game will be available for the Playstation 3 and XBOX 360 platforms. In a fan vote current Middleweight Champion Anderson Silva was picked to be the cover athlete for the game. A demo play of the game was made available on January 24th featuring Rashad Evans and Phil Davis, who fought in a light heavyweight battle Saturday night in UFC on Fox 2. The game features over 150 UFC fighters and offers online play to gamers around the world.

    The game has been offering special deals with pre-orders of the game. Buyers of the game on Gamestop (NYSE:GME) right now will receive The Contenders Bonus Pack, which features four fighters: Brian Stann, Nick Diaz, Phil Davis, and Mayhem Miller. Ordering the game on Amazon (NASDAQ:AMZN) will get buyers the Ultimate Knockout Artist Boost Pack. Pre-ordering the game at Best Buy (NYSE:BBY) will get buyers the Early Access Pack. Wal-Mart (NYSE:WMT) is giving customers who pre-order the game the Ultimate Fights: Knockout Pack. The game itself is also giving downloadable content, including playable fighter Alistair Overeem, to people who like the Facebook page for UFC Undisputed 3. The Facebook page currently has over 800,000 likes.

    The UFC Undisputed 3 game is the current number fifteen bestselling game (XBOX 360) for pre-orders in the United States. Video game site vgchartz.com has the XBOX 360 game listed with 92,210 pre-orders as of January 21st. The Playstation 3 version of the game comes in at number twenty with 81,911 pre-orders. Together the third game in the Undisputed series has 174,121 copies already sold three weeks before release.

    The previous UFC Undisputed games saw mediocre sales around the World and this version of the game should blow those numbers away. The chart below shows sales data (in millions) from previous games. (Sales figures from vgchartz.com)

    GamePlatformNorth AmericaEuropeJapanRest of WorldTotal
    UFC UndisputedXBOX1.40.3700.181.95
    UFC UndisputedPlaystation1.010.410.010.221.66
    UFC Undisputed 2Playstation0.690.350.020.181.25
    UFC Undisputed 2XBOX0.790.2700.111.19
    UFC Undisputed 2PSP0.080.0400.030.15

    THQ also launched a UFC Personal Trainer Game compatible with Nintendo Wii and the XBOX 360 Kinect. The game gives users the ability to train at home like professional Mixed Martial Artists with their virtual video game platforms. The game has sold 360,000 copies for the XBOX 360 and 90,000 copies for the Nintendo Wii. The numbers have not been huge for the game, but it gives the company a starting point in the interactive gaming market. Later in 2012, the company will also be launching Adidas miCoach, compatible with the XBOX 360 Kinect and Playstation 3 Move software. THQ has also started taking advantage of downloadable content with the personal trainer games. The first downloadable workout pack features Urijah Faber. The pack comes with five new workouts and 15 "hit the mitts drills". The download is free for people who already own the game. On January 31st, the company will offer the Cain Velasquez Downloadable Workout Pack for a price of 800 Microsoft (NASDAQ:MSFT) points. On February 21st, the company will offer the Jon Jones Downloadable Workout Pack for 800 Microsoft Points. This strategy has worked well for companies like Activision (NASDAQ:ATVI) who can draw out revenue from games months after their release with new content.

    THQ was founded in 1989 and is home to the UFC games, WWE games, Saint's Row, Red Faction, uDraw, Homefront, and several other franchises. In 2007, the company posted over $1 billion in revenue, which was its highest total in company history. The company's shares have been beaten down over several years as the company restructures and cuts losing franchises. The Red Faction franchise was closed in 2011. Recently, the company also announced it would be closing its kids' gaming unit.

    The 2012 lineup is important for a gaming company like THQ. The current lineup looks like this:

    -Nexuiz (XBOX 360, Playstation 3, PC)

    -Warhammer 40,000: Dawn of War III (PC)

    -UFC Undisputed 3 (XBOX 360, Playstation 3)

    -Metro: last Light (XBOX 360, Playstation 3, PC, Wii)

    -Darksiders II (XBOX 360, Playstation 3, PC, Wii)

    -South Park: The Game (XBOX 360, Playstation 3, PC)

    -WWE Brawl (XBOX 360, Playstation 3, Wii)

    -Brave: The Game (XBOX 360, Playstation 3, Wii, DS, PSP)

    -Adidas miCoach (XBOX 360, Playstation 3)

    Beyond the scheduled upcoming games THQ also has an active backlog. The inSane Trilogy, being created by Academy Award nominated director Guillermo Del Toro, will see its first release in 2013 in the survival game genre. A sequel to Homefront will be released in 2014. The original game sold over 2.2 million copies across the XBOX, Playstation, and PC platforms. Darksiders 2, Devi's Third and Metro Last Light are other games in the works for 2013.

    THQ, like other platform video game companies, is pushing into mobile and social gaming as well. The company's UFC Fight Nation Facebook game is played by 70,000 monthly users. Margaritaville, a Facebook game, is played by 10,000 monthly users. In the last reported quarter, digital revenue for the six months was up 68%.

    The third quarter earnings release is scheduled for February 2nd. Shares will likely see a big swing depending on how the earnings fare. The quarter will include revenue from Saints Row: The Third, uDraw, and WWE '12. THQ will be hoping to improve on the $0.65 earnings per share analysts expect. A year ago the company earned $0.37 per share in the third quarter.

    Back in December of 2011, I predicted the top selling video games for 2012 in an article right here on Seeking Alpha. In my ten predictions and four honorable mentions, there were zero represented games from THQ. A good showing from UFC Undisputed 3 could place the game closer on the bestsellers list than I had originally thought. Between the two consoles, I think the game can sell 3.75 million copies.

    I am actively pursuing buying shares of THQ. I think that this video game company has a lot of positives going for it with the UFC franchise. The negatives of closing the kids' gaming division have already been priced into shares. Shares trade at $0.72 which is close to their fifty two week low of $0.63. The past fifty two weeks have seen shares of THQ trade as high as $6.53. Shares of the gaming company traded above $30 in 2006 and 2007. THQ has $51.06 million in cash, representing $0.75 per share in cash alone. The debt load of $100 million is very manageable and could be cut in half with the company's cash alone. February has two key events with 3rd Quarter earnings coming on the 2nd and the release of UFC Undisputed 3 on the 14th. This could be the perfect time to buy this stock.

    Disclosure: I am long ATVI.

    Additional disclosure: I own shares of Activision Blizzard (ATVI). I may buy shares of THQ (THQI) in the next 72 hours.

    Jan 30 5:33 PM | Link | 1 Comment
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