2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
Hi alphsig55, I'm very open to understanding why I may be wrong, so if there's any data you could share about these new revenue streams, I'd be very eager to take a look at it. If I'm wrong, I'd prefer to know now before the stock runs to $200. Again, I continue to anticipate very rapid growth from LinkedIn, but if it's even more rapid than I expect, I'd like to understand why.
2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
Hey glennvirt, thanks for your comment. I actually agree with you that LinkedIn actually has a quite a bit of growth potential and I expect them to really continue to deliver high growth over the next few years. In my base case scenario, I expect revenue to grow 4x over the next 5yrs to over $2.2b by 2016 (vs $522mm in 2011). But even given this very rapid growth, I struggle to see how the firm can grow into it's valuation. In my bull case scenario, I have revenue grow to almost 8x 2011 revenue by 2016 and even in this very aggressive scenario, I can't justify the firm's current price. In my bull case the stock is only worth $95, not that far off from the current price, but still below it. In my base case the stock is only worth about $30. I've shared my entire analysis here if you're interested - http://bit.ly/KJ9jyO.
2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
Hey Esekla, thanks for the comment. I think you're right in the sense that LNKD mgmt, as net sellers, is very incentivized to prop up the stock while they continue to exit and will do what they can to keep the game going. I do think that 2Q may be the first quarter though that they may have over-estimated their growth. I'm waiting until ITG updates their estimates towards the end of July to really pound the table, but with the data we have so far, it at least looks possible. One thing to look for in the quarter will be did they accelerate top-line growth by cutting price. While I think the street might give them a pass if there's only minor pressure on ARPU, I think it's something to keep an eye on going forward.
2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
Branchout has been gaining traction, but I think it'll take a bit of time before it really impacts LNKD. They're still the leader in the space and will likely continue on their growth trajectory for some time, the catch is just that the amount of growth they need to generate to justify the stock price is quite high. Backchannel checks shows that LNKD is probably still grew users by 16mm this quarter which is about inline with last quarter.
2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
Hey chesskiller, if revenue comes in around $200mm, that would be viewed as a severe disappointment and stock would easily fall 20-30% on the day, but I think if they were poised to miss their own guidance by that much we'd be hearing a pre-announcment from the company soon. We should have an answer in a month or so!
Mega Banks Must Shrink: Great For The Country, Better For Shareholders [View article]
Hey Alex, we may disagree about the accuracy of the bank's books and I'm willing to concede if you disagree with hold to maturity accounting then the bank books may be mis-marked, but I don't quite get your second point. It's true in a sense that a loan increases the money supply, but I don't quite understand your issue with this concept. You are allowed to lend money to a buddy, thus increasing the total money supply. The bond market also lends money to companies thus increasing the money supply. Is your issue that banks are for profit entities doing it? Or is there some level of lending which you believe is too high? Would you prefer that lending by banks is no longer allowed? Do you have a solution you prefer for extending credit to businesses and individuals? If you could clarify your point, I'd appreciate it.
Major Hedge Funds Buying Google For Value, With Or Without A Dividend [View article]
I Google is one of the rare examples of true GARP stock. The firm is generating both good revenue growth and good profit growth and can be purchased at a very attractive multiple. You mentioned a 11.4x forward multiple in your article, but if you adjust the multiple for net cash on the balance sheet (~$27b after excluding the cost of Motorola), the multiple is sub-10x, not bad for a firm that analysts are projecting will grow revenue at a 20% CAGR and EPS at a 25% CAGR over the next three years.
U.S. Bancorp's Greatness Is Priced In [View article]
Great question and very, very hard to answer. Citi has disclosed it's direct exposure pretty clearly in this presentation - http://citi.us/Ng76g4 (check out pg 10 & 28). It's actually pretty small (at least relative the firm's $1.9 trillion B/S)
Exposure to GIIPS Countries (Greece, Italy, Ireland, Portugal, Spain)
But that's not the issue, the issue comes when a major financial institution defaults in a chaotic way and there are a series on knock-on effects which eventually effect all financial institutions in a very unpredictable way. The web of interconnectedness is not very well understood so it's hard to know who would be left standing in another major financial catastrophe. My only caveat is that following the collapse of Lehman and the chaos it unleashed I doubt central banks would allow this to happen without stepping in in a coordinated manner to stop the collapse from spreading.
So all of this is a very long-winded way for me to say this:
1. Their direct exposure is limited 2. If Europe truly implodes, own guns, gold, and medicine not stocks 3. I think central banks will intervene before they allow Europe to actually implode
So while Citi could get cheaper if we get closer to that financial cliff, it's already cheap so I think it makes sense to have a position on now and add to it if you happen to get a better entry point. That's my strategy at least. Hope that helps and thanks for the question.
Recommendation Update: Expect A 19% IRR For Bank Of America, But With More Downside Risk [View article]
Thanks for your comment Chad. As a value investor I specifically look for situations where my intrinsic value estimate is significantly different than what the market currently expects. I certainly don't always get it right, but my hope is that on average I identify securities where the market may be wrong.
You're also right that I don't know the full extent of the toxic assets that may still be on BAC's B/S, but what I tried to do in my model was model a scenario that was significantly harsher than most people expect and see what kinds of returns I could expect under those scenarios. It's entirely possible that I still wasn't harsh enough, but I at least feel comfortable that my scenarios were reasonably stressful. And under those stressful scenarios I was still able to generate a reasonable return which I think compensates for the risk I'm taking.
One final point is that looking at the long-term chart of both Citi and Bank of America just shows that they both had highly dilutive capital raises which for all intents and purposes, permanently impairs any pre-2007 investment. And while I'm not a technical analysts, I'd caution against using any long-term charts that include that pre-2007 period.
Recommendation Update: Expect A 19% IRR For Bank Of America, But With More Downside Risk [View article]
MexCom, apologies the article was a bit dense and did use a lot of acronyms.
IRR = Internal Rate of Return. Basically just your return on your investment, so for example if you invest $1 today and get a $2 back in 4 years your IRR would be 19% and is calculated as follows:
Recommendation Update: Expect A 19% IRR For Bank Of America, But With More Downside Risk [View article]
Thanks for your comment. I agree that they don't trade in the short-term on this type of analysis, but my belief is that over the long-term the stock should migrate towards its intrinsic value and if that's the case, long-term investors should be able to profit from this type of analysis. Time will tell!
Why Amazon's Worth North Of $200 Per Share [View article]
Hey Paulo, I know you said you were going to be publishing on this shortly, so if you intend to answer this question in the article, by all means ignore this comment. But if capex has been shifted to operating expenses via op leases, shouldn't that still be reflected in the FCF number as operating earnings will be lower and so will capex, but the net affect to FCF should be unchanged. It's been awhile since I dealt with operating leases, so if my accounting is off here, please let me know. Thanks.
Also an interesting secondary implication of shifting capex to opex is that you'd expect op margin to decline, how much of this explains why AMZN's operating margin has been falling lately?
Full disclosure (and I should have mentioned this in my earlier comment), I'm short AMZN.
U.S. Bancorp's Greatness Is Priced In [View article]
Thanks for your comment Toeser. There are two components of risk as I see it, there's the inherent business model risk and the risk that you've overpaid for a stock. I fully agree with you that USB's business model has less risk than both C & JPM. I also agree that this difference in business model risk warrants a premium multiple. However, I think that the market already more than reflects that difference. Just by way of comparison, below is the current P/T1C ratios for all three banks:
P/T1C (using Friday's close) C 0.72x JPM 1.04x USB 2.48x
As you can see USB is trading at a substantial premium currently. I'm also not calling for the gap to close entirely. Again, as I believe USB's business model is lower risk and therefore deserves a premium. Below I show my targeted long-term P/T1C for each of these banks:
Long-term Sustainable Target P/T1C C 1.1x JPM 1.4x USB 2.7x
However, when you look at what that implies in terms of price appreciation even if we assume no growth in Tier 1 common from earnings retention, we'd expect the following appreciation in price:
Price Appreciation from Achieving Tgt P/T1C Ratio Immediately C +53% JPM +35% USB +9%
As I see it, the fact that the stock is trading at a discount to my target multiple is part of what's giving me the margin of safety.
One final point, in one respect since I'm deriving my ROT1C by looking over the last ten years and since Citi faired so poorly in the financial crisis my estimated ROT1C already accounts to some degree the fact that Citi's business model is more risky. It can certainly be argued that maybe my model doesn't reflect the extent to which a Citigroup or JPM would be hurt by a truly calamitous unwinding of the European Union, which may be even worse than the 2008 financial crisis, but I do feel that my 10yr dataset does do a reasonable job of capturing a difficult credit cycle for the banks. Hope that's helpful and thanks for your comment.
2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
Again, thanks for the comment.
2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
2Q Earnings Could Be The First Crack In The LinkedIn Growth Story - 50% Downside Risk [View article]
Mega Banks Must Shrink: Great For The Country, Better For Shareholders [View article]
Major Hedge Funds Buying Google For Value, With Or Without A Dividend [View article]
U.S. Bancorp's Greatness Is Priced In [View article]
Exposure to GIIPS Countries (Greece, Italy, Ireland, Portugal, Spain)
$20.5b Gross Funded Credit Exposure
($4.0b) Margin & Collateral
($10.5b) Purchased Credit Protection
----------------------...
$6.0b Net Funded Credit Exposure
+
$8.1b Unfunded Commitments
----------------------...
$14.1b Net funded credit exposure & unfunded commitments
But that's not the issue, the issue comes when a major financial institution defaults in a chaotic way and there are a series on knock-on effects which eventually effect all financial institutions in a very unpredictable way. The web of interconnectedness is not very well understood so it's hard to know who would be left standing in another major financial catastrophe. My only caveat is that following the collapse of Lehman and the chaos it unleashed I doubt central banks would allow this to happen without stepping in in a coordinated manner to stop the collapse from spreading.
So all of this is a very long-winded way for me to say this:
1. Their direct exposure is limited
2. If Europe truly implodes, own guns, gold, and medicine not stocks
3. I think central banks will intervene before they allow Europe to actually implode
So while Citi could get cheaper if we get closer to that financial cliff, it's already cheap so I think it makes sense to have a position on now and add to it if you happen to get a better entry point. That's my strategy at least. Hope that helps and thanks for the question.
Recommendation Update: Expect A 19% IRR For Bank Of America, But With More Downside Risk [View article]
You're also right that I don't know the full extent of the toxic assets that may still be on BAC's B/S, but what I tried to do in my model was model a scenario that was significantly harsher than most people expect and see what kinds of returns I could expect under those scenarios. It's entirely possible that I still wasn't harsh enough, but I at least feel comfortable that my scenarios were reasonably stressful. And under those stressful scenarios I was still able to generate a reasonable return which I think compensates for the risk I'm taking.
One final point is that looking at the long-term chart of both Citi and Bank of America just shows that they both had highly dilutive capital raises which for all intents and purposes, permanently impairs any pre-2007 investment. And while I'm not a technical analysts, I'd caution against using any long-term charts that include that pre-2007 period.
Hope this was helpful. Thanks for the comment.
Recommendation Update: Expect A 19% IRR For Bank Of America, But With More Downside Risk [View article]
IRR = Internal Rate of Return. Basically just your return on your investment, so for example if you invest $1 today and get a $2 back in 4 years your IRR would be 19% and is calculated as follows:
IRR = (Future Value / Initial Investment) ^ (1/4) - 1
Hope that helps clarify things a bit.
Recommendation Update: Expect A 19% IRR For Bank Of America, But With More Downside Risk [View article]
Why Amazon's Worth North Of $200 Per Share [View article]
Why Amazon's Worth North Of $200 Per Share [View article]
Also an interesting secondary implication of shifting capex to opex is that you'd expect op margin to decline, how much of this explains why AMZN's operating margin has been falling lately?
Full disclosure (and I should have mentioned this in my earlier comment), I'm short AMZN.
U.S. Bancorp's Greatness Is Priced In [View article]
U.S. Bancorp's Greatness Is Priced In [View article]
P/T1C (using Friday's close)
C 0.72x
JPM 1.04x
USB 2.48x
As you can see USB is trading at a substantial premium currently. I'm also not calling for the gap to close entirely. Again, as I believe USB's business model is lower risk and therefore deserves a premium. Below I show my targeted long-term P/T1C for each of these banks:
Long-term Sustainable Target P/T1C
C 1.1x
JPM 1.4x
USB 2.7x
However, when you look at what that implies in terms of price appreciation even if we assume no growth in Tier 1 common from earnings retention, we'd expect the following appreciation in price:
Price Appreciation from Achieving Tgt P/T1C Ratio Immediately
C +53%
JPM +35%
USB +9%
As I see it, the fact that the stock is trading at a discount to my target multiple is part of what's giving me the margin of safety.
One final point, in one respect since I'm deriving my ROT1C by looking over the last ten years and since Citi faired so poorly in the financial crisis my estimated ROT1C already accounts to some degree the fact that Citi's business model is more risky. It can certainly be argued that maybe my model doesn't reflect the extent to which a Citigroup or JPM would be hurt by a truly calamitous unwinding of the European Union, which may be even worse than the 2008 financial crisis, but I do feel that my 10yr dataset does do a reasonable job of capturing a difficult credit cycle for the banks.
Hope that's helpful and thanks for your comment.