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Aerospace engineer who is seeking to learn as much about investing as possible in hopes of one day managing more than just my own money.
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  • Why I'm Still Bullish On Housing

    Low Supply

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    Growing Demand

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    Higher sales and prices

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    Feb 25 1:06 PM | Link | 2 Comments
  • Yelp Is Dirt Cheap At 400 Times Earnings

    Restaurant review site Yelp (NYSE:YELP) posted fourth quarter earnings that beat expectations, yet the stock has sold off on user growth concerns. I think this gives long term investors a good chance to buy the company cheaply before earnings growth really starts to kick in.

    Fourth quarter earnings were a big headline number of 42 cents a share, but this included an income tax benefit that contributed 34 cents of this. Still, excluding this the 8 cents in EPS still beat expectations for the quarter, and while the recognition of the deferred tax asset valuation allowance is really only a bookkeeping detail, it does suggest that the company is becoming consistently profitable if they were able to release it.

    Indeed, the company posted their first full year profit of 48 cents a share, or 14 cents of EPS after again adjusting for the tax benefit. This may not sound like much, especially with the stock trading at close to 400 times this, but the company only just became profitable and should enjoy rapid earnings growth going forward now that revenue growth is outpacing increases in expenses.

    Revenue growth was again outstanding at 56% for the quarter and 62% for the year, resulting in $377.5M in sales for the year. Yelp also has ridiculously high 93% gross margins, as it's nice to have such a low cost of revenue when your users create your product for free. This means $351M in gross profit against only $341M in expenses to give over $10M in net income. Against 76M shares outstanding, this equates to the 14 cents in EPS.

    Using this simplistic formula, we can come up with a spreadsheet to approximate Yelp's financial numbers for the next few years. Since gross margin has stayed relatively constant over the past few years, we just need to know the revenue growth and rate at which expenses will increase.

    Yelp also issued guidance for 2015, including expected revenue growth of 43% for the full year, which seems fairly conservative since first quarter growth is supposed to come in at 51%. However, we will use this 43% for 2015 to remain conservative. Total operating expense increases have slowed steadily and usually come in at about 10% less than the revenue growth rate, but to again give ourselves a margin of safety we will cut this in half and use 5% less. When also factoring in a 5% increase in the number of shares outstanding, we get the following results:

    YearRevenueGross MarginGross ProfitExpensesNet IncomeShares OutstandingEPS

    Note that using these rates ends up with an EPS estimate for next year that is right in line with analyst estimates of 40 cents. This again does not seem like much against a stock price over 50, resulting in a triple digit P/E, but when we carry out the exercise over a longer time period Yelp's operating leverage becomes apparent.

    Again being conservative and ratcheting the revenue growth rate down to 35% in subsequent years, against a 30% annual increase in expenses, we get the following:

    YearRevenueGross MarginGross ProfitExpensesNet IncomeShares OutstandingEPS

    Now we really start to see the earnings growth accelerate, with EPS nearly doubling the first year and increasing more than 10 fold in 5 years. Even if the stock price doubles between now and the end of 2020 for a 12% annual return, this would drive the P/E down to near 20, very reasonable for a company that is still growing earnings by nearly 50%.

    Of course, revenue growth could slow more than expected, or expenses start to increase at a faster rate, so we can also conduct a sensitivity analysis at different rates of each. The following table presents the 2020 EPS estimates at various growth rate combinations:

        Expense Growth Rate  

    The risk-reward certainly seems to be skewed in favor of owning the stock, as long as the revenue growth rate stays ahead, or even just equals the rate at which expenses grow. Of course, if the rates did converge, investors probably wouldn't be too excited over the buck and change with a low earnings growth rate that would result, but taking these as downside cases at a 20-25 multiple would result in the stock being cut roughly in half.

    However, it seems more likely that Yelp can maintain their revenue growth at a pace ahead of expenses as their platform matures and start up costs to move into new markets subside. These cases where revenue growth runs 10-15 percent ahead of cost increases could lead to double digit earnings per share by 2020.

    The stock would likely command a premium multiple as well, and at 30 times earnings you'd be looking at a $300 stock, 6 times where it's currently trading. This may seem absurdly high, but this would still only give Yelp a market cap of $30B, about what Twitter is currently valued at, and I think Yelp's targeted advertising is much easier to monetize than that platform.

    You can say that trying to extrapolate out so far into the future is at best an exercise in futility and at worst a fool's errand, but I just sought to run the numbers to demonstrate how Yelp might end up being cheap at today's price even though it might currently appear to be expensive at first glance.

    If this thesis plays out then we should have plenty of time to buy the stock and enjoy the ride up as Yelp's earnings power becomes more apparent, but I think today's earnings related selloff offers an attractive entry point. The only reason the stock seems to be down after hours is that people are caught up on the fact that average monthly unique visitors only increased 13%.

    I think short term investors are being a little myopic in just focusing on this single user growth number. While obviously the platform benefits from more users as it adds to the network effect, the more important thing financially is to begin monetizing these users. Mobile users, which were up more at 37%, are probably more relevant in this regard, since they are more likely to be out actively looking for a restaurant while using Yelp, making them the ideal audience to target.

    Yelp has only just begun tapping into this by selling ads to restaurants, which I think will continue allocating a larger share of their advertising budgets to mobile platforms like Yelp, which offers the ultimate in targeting advertising: an ad for exactly what you're looking for at that very moment. Local business accounts rose 39% and advertising accounts rose even more, by 48%.

    I love Yelp's business model where they benefit from the network effect of each additional user helping to create content while at the same time becoming a desirable captive audience to advertise to. Slowing user growth might be a temporary concern, but it's all about keeping users active and engaged, which I think the platform's functionality will continue to do, which will in turn attract a larger share of restaurants and businesses to begin advertising.

    And now I think Yelp has demonstrated the profitability necessary to show that it will be a financial success as well. I will try to use any weakness in the stock tomorrow to try to accumulate shares in this great business, whose potential I think is dramatically underestimated at a market cap of $4B. I think the company may be a buyout candidate at this valuation since it would probably take more than this to replicate their network.

    However, I would be against a buyout and more interested in owning it long term since I have demonstrated how much long term earnings power it could have, and would hate to see it stolen away from shareholders at only a slight premium before it can realize that potential.

    Tags: YELP, long-ideas
    Feb 06 2:48 PM | Link | 3 Comments
  • Kandi: If You Must Invest, Use Some Common Sense

    I am writing this article as an Instablog post so I'm not accused of trying to bring down Kandi Technologies (NASDAQ:KNDI) through a "short and distort" scheme. While I've never been short, I've long been skeptical of the "Tesla of China" story since it seems to have miraculously transformed itself from a small manufacturer of go-carts and ATVs into an impressive lineup of electric vehicles and the recently anointed title of "undisputed #1 pure electric car manufacturer in China" on almost no R&D spending.

    Perhaps it's really possible to do this in China, whether through a combination of low labor costs or from free patents from their genius Chairman Hu. However, the Kandi corporate structure is becoming so convoluted I can't imagine why any American investor would even consider investing in it, no matter how revolutionary their products and business model are.

    While Kandi's corporate structure was already the typical Byzantine web of subsidiaries shared by many Chinese companies (legitimate ones as well as frauds), the creation of a 50% owned joint venture with Geely Auto (OTCPK:GELYF) last year further obfuscated things, especially since this JV sells exclusively to another entity (ZuoZhongYou, ZZY, or the CarShare Program) that is minority owned (9.5%) by Kandi.

    Since they are basically selling to themselves, or at least a related party, there has to be the temptation to inflate revenues every step of the way, with the company itself supposedly selling value added EV components to the JV, where they are assembled and then sold at a further markup to the CarShare Program.

    This structure is ostensibly a way for Kandi to fund this innovative CarShare Program, which includes a number of smart garages and battery exchange technology that was developed, prototyped, and demonstrated by the company somewhere along the way with their nominal R&D budget. It just seems strange that a company that has come up with what they consider to be a revolutionary business model would willingly give most of it away to anonymous investors to focus on becoming a reseller of commoditized EV components, including batteries.

    According to a recent interview with the CEO, Kandi does not want to raise their stake in the CarShare company since it is "operating at a loss" and "experimental". Yet in the same breath he goes on to say he expects the ZZY company to be listed on a Chinese Stock Exchange, presumably at a higher valuation or it would be difficult to understand how they raised money from outside investors in the first place.

    So why exactly wouldn't they want to put additional money into this revolutionary company that will continue to become more valuable? Well, apparently the $71 million they just raised from unsuspecting US investors would be better "utilized by the JV for operations and R&D rather than the purchase of ZZY." Okay, so all the capital just raised will go into the black hole of the JV and shareholders are okay with this?

    Bear in mind that this $71 million is 8 times more than the cumulative total Kandi has spent in R&D in the past three years since entering the electric vehicle market. But even though Geely is supposedly bringing some of their R&D expertise to the table, they have to spend more to come up with new and exciting models?

    I thought the whole point of their business model was to develop low cost EVs that could be rented out cheaply? Yet the latest press release from Kandi says the JV recently sold 1000 cars to the CarShare for $21.5 million. Do the math: this is $21,500 per car, which seems pretty steep for a low performance car in China. Since it's unclear whether ZZY is eligible for a government subsidy since they're not actually reselling the cars, this seems like a terrible deal for the CarShare program.

    It would take them forever to recoup these up-front costs, so they must be counting on a long service life for these assets, yet this would mean less opportunity for Kandi (or technically the JV) to upgrade their fleet as often and sell more cars. No wonder they keep announcing they're going to expand into additional cities, since they need to tap into an expanding pool of buyers.

    This might seem paradoxical because ZZY is currently their only customer, but I assume they'll be able to raise additional money if it looks like they're able to successfully expand geographically. Yes, China is big and supposedly offers unlimited opportunity, but that's still no reason to operate a Ponzi-like business model like this that relies on additional investors to cover up the bad economics of the initial investment.

    Furthermore, the company has given up half its share of the value added assembly of the electric vehicles to the JV, in exchange for a supposedly equal capital infusion from Geely, even though it was never disclosed exactly what that was and there is scant mention of it in any Geely press releases or records of it in any of Geely's financial statements. So far, the JV doesn't seem to have contributed anything meaningful except inflated revenue, which seems to have been achieved lately with wildly increasing average selling prices of cars to the suckers partners at ZZY.

    According to the latest quarterly 10Q filing:

    "During the first nine months of 2014, 99.2% of the JV Company's revenues were derived from the sales of EV products in the PRC with a total of 7,279 units sold during such period, among which, a total of 1,950 units of EV products were sold during the three months ended September 30, 2014."

    Since the JV's net sales over these periods were approximately $127 million and $47 million, respectively, this equates to a baffling increase in ASP from $17,450 to $24,100. This is even skewed higher by the mind-boggling ASP achieved in the last three months; removing it results in an ASP of only $15,000 for the vehicles sold over the first 6 months.

    Is an over 60% increase in ASP in the last 3 months over the first 6 months really believable? What miraculous new model (all that theoretical R&D must be paying off) did they introduce in that time frame to account for this? Or more likely are they taking advantage of selling to a related party to move more inventory at higher prices?

    I'd love to hear an innocuous explanation for all of this, but there are just so many red flags at Kandi that I can't believe any US investor would risk more that a tiny speculative position in it. If you must, please use some common sense and realize that this is a highly complicated venture that relies on many unproven business relationships that may not even benefit US shareholders even if they are successful, and not some no-brainer "Tesla/Zipcar/Uber of China" opportunity that you should put all your money into.

    I may be wrong in my misgivings and miss out on this supposedly great opportunity, and if I am I will admit that I just didn't understand what seems needlessly complicated to me. However, it just doesn't pass my smell test and I reserve the right to say "I told you so" to those that ignore these warnings without being able to refute them all, so I welcome a discourse in the comments section where you can try to enlighten me.

    Dec 17 5:55 PM | Link | 17 Comments
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  • $SPY $QQQ $AAPL Man, all the Chicken Littles from this morning are looking pretty stupid now...
    Aug 24, 2015
  • Just bought puts on $AMZN, $CRM, $NFLX, and $TSLA over the past couple days, we'll see if I look brilliant or like an idiot next week.
    Jul 17, 2015
  • Kandi: If You Must Invest, Use Some Common Sense $KNDI
    Dec 17, 2014
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