Jim Brody

Long/short equity, deep value, special situations
Jim Brody
Long/short equity, deep value, special situations
Contributor since: 2013
Company: Brody Lab at University of California, Irvine
ESPN would need to charge about $30/ month to equal what they are getting from cable subscription fees.
Once ESPN transitions to over the internet distribution, the leagues have no use for ESPN. They can do that themselves and cut out the middleman.
The problem is that ESPN content is sports center. The content that people care about is NFL or NBA games, which isn't owned by ESPN.
Right now, ESPN has contracts to that valuable NFLcontent and the NFL finds value in ESPN because they have access to 100 million homes. The NFL tried to make their own channel and they couldn't get in more than 10 million homes.
Once the equation shifts to getting ESPN over the internet, what does the NFL need them for? The NFL can stream the games, they already do internationally.
ESPN's moat is access to basic cable, along with its $6/month carrier fees it collects. No other sports channel has it.
When that most goes away, ESPN's profitability will drop. That's the long term problem.
The short term concern is when subscribers start dropping. ESPN is locked into long term contracts with the NFL and NBA. If subscribers drop, monthly fees drop and advertising revenue will drop.
You're looking at declining revenues and fixed contractual costs for the next decade.
That's the short term concern.
As the speculative positions unwind, won't new factors come into play?
I see several new factors.
First, yahoo will be buying back stock. They (Ken Goldman) have repeatedly said that "at least" 50% of the Alibaba proceeds will be returned to shareholders. Presumably through stock buy backs. Goldman has also stressed the "at least" implying that it could be quite a bit more. 50% of the IPO proceeds, after tax, will be over $5 billion.
Second, arbitrage opportunities. Post IPO, Yahoo will hold about 400 million shares of Alibaba. There will be about 1 billion shares of Yahoo outstanding, before any buy backs. So, you could buy 100 shares of YHOO and sell short 40 shares of Alibaba and lock in the difference.
This is speculative, but Alibaba will probably buy Yahoo in an all stock deal. Ken Goldman has said repeatedly that they are working on ways of minimizing the tax owed on the Alibaba shares that Yahoo will hold on to after the IPO. He says something like "this takes years of planning and working in multiple tax jurisdictions".
If Alibaba is at $100/share and Yahoo sells everything, Yahoo is looking at a $14 billion tax bill. The scenario would be that Alibaba buys Yahoo in an all stock deal. Alibaba gets most of their stock back. Maybe trade some Yahoo Japan shares with Softbank for more Alibaba shares. Then either keep Yahoo or immediately spin it out back to the public for cash. In this scenario, everyone wins, except the US Government, by splitting the $14 billion tax savings.
I would hold onto YHOO for another year to see how this tax problem plays out. There is significant value tied up in YHOO.
If Alibaba wanted to buy Yahoo before the IPO, they would need $40+ billion in cash. They just can't afford it.
The sensible strategy would be to minimize the number of Alibaba shares Yahoo sells at the IPO (which will be taxed) and then buy Yahoo post-IPO with Alibaba shares. It looks like they are following this strategy
Dr. Surgeon_General, try shopping aliexpress.com that is the business to consumer site. alibaba.com is mostly a business to business site.
I agree amazon's software is currently far superior for the consumer. However, when you consider that alot of stuff on Amazon is manufactured in China, then re-labelled/branded for the US, alibaba has an opportunity to cut out the middleman between the chinese manufacturers and the US consumers.
Great article. "Cash furnace" is a perfect description.
Too bad I can't short it and there are no put options. I'll just have to put it on my watch list for entertainment.
I agree with everything you say here.
Every time I read someone worrying about Yahoo core business, I think it's like worrying about what the janitor is doing at Apple. Who cares?
Paul, you make good points.
I think the primary reason Yahoo is currently undervalued is that most analysts are accounting for a 35% tax rate on YHOO's entire Alibaba stake.
On the last conference call, Yahoo management had this to say:
"On this initial [IPO] tranche, we expect the proceeds to be fully taxed. And we are committed to returning at least half of the after-tax IPO proceeds to shareholders."
"Regarding tax efficient structures on the remaining equity holdings, we approach all transactions with the goal of maximizing long-term value for our shareholders. These transactions are complicated, can take multiple years and involve multiple jurisdictions and generally are not disclosed before completion. Please do not mistake our silence as a lack of awareness or effort on this issue."
There are multiple ways to get around YHOO paying tax on the remainding alibaba share.. The simplest is to just give the BABA shares to YHOO shareholdes through a spinout. YHOO couldn't do this with the IPO shares, since they were required to sell them.
Once a reputable Wall Street analyst writes this into a report, you should see significant movement in YHOO stock, because it will immediately lead to a significant (50% or so) increase in the valuation of the Alibaba portion of Yahoo's share price.
Arnold, great article. You really make the point well that Intel excels at getting things working as opposed to talking about it.
The optical interconnect technology is coming on the market now. One of the last technical hurdles was designing the cables and interconnects. You need fiber that can bend much more than typical optical fibers can bend. More details on that are here: http://intel.ly/1zsNafu
The silicon photonics technology will really be making its mark in datacenters. The idea is to disaggregate the server computer. You have separate trays for CPUs, memory, storage, etc. Then to upgrade you can just replace the tray of CPUs and you've upgraded the whole rack.
There was speculation that Intel will have a subscription model for datacenters: every year Intel will send you a new tray of CPUs and you send back the old tray. See http://seekingalpha.co...
Intel Foundry has unannounced mobile customer(s) in the bay area. Hmm, I wonder who they could be?
See this job ad Intel posted last fall: http://linkd.in/1gYXaA9
Some key parts:
"The Mobile Solutions Architect is a new role being formed within the Intel Custom Foundry to lead the development of integrated specifications for our Intel Foundry mobile technology solution (Process, IP, Packaging, etc)."
"Preferred Mobile Solutions Architect location is Santa Clara, California, but may be flexible. Travel is required. Customers are primarily in the San Francisco Bay Area and Foundry design and manufacturing teams are centered in Oregon."
"Position of Trust: This role is a Position of Trust. Should you accept this position, you must consent to and pass an extended Background Investigation"
It looks like the seeking alpha post was deleted. Here is a tweet referring to the post:
Quincy, try rerunning your comparison with earnings numbers rather than revenue numbers.
According to Yahoo's Nov earnings release, Alibaba had net INCOME of $717 million in the April-June 2013 quarter. This was up from $293 million in the April-June 2013 quarter.
EBAY has P/E of about 25.
AMZN has P/E of about 1500, but they aren't really trying to make money yet (although they have been in business for over 15 years).
If you take a $3 billion guesstimate for annual earnings for Alibaba and apply a P/E of 25 (very conservative for a company with explosive growth), you are at $75 billion. That was about a year ago.
Right now, they could easily be at 2 or 3 times that valuation. In another year, they could be another 2 times higher.
I think a $250 billion IPO in 2014 is completely reasonable, with market hysteria it could go as high as $500 billion.
Thanks. That is exactly what i was looking for.l
Quoth the raven, interesting article. I'm new to HLF and thinking of following Ackman.
However, I'm looking at HLF's side of the story to see the other side.
I came across this pdf file http://bit.ly/1a1KG7C
Have you seen that? Has anyone addressed her points?
I was also an Angie's List subscriber for a few years from about 2007-2010. It was also a very useful service for me. I quit renewing because I now know reliable plumbers, painters, carpenters, etc.
I did not know it was a public company until recently. When I looked at their financials I almost fell out of my chair! I thought it was a small time operation with maybe a dozen employees. (That's all they need to maintain the website. People type in their reviews and submit it to a database. ) I thought they survived on the membership fees, like what I was paying them.
To present the long side of ANGI: Angie's list creates significant value for small service providers. I witnessed this. I met an appliance repairman who was getting 4-5 jobs per week from Angie's list subscribers. Each job brings him about $100 for his labor. He is making $25,000/yr because of Angie's List.
ANGI's story is that they will get a piece of that. How? They want to ultimately serve as an ebay/paypal for the service industry. Instead of calling the appliance repairman, you book and pay him right there on the Angie's list website. Angie keeps a cut and passes the rest onto the appliance repairman. He shows up on time, fixes your dishwasher and leaves. You leave a review/comment on the website. That's the ultimate goal.
Of course, right now they are in growth mode and their financials look horrible. It's really a story stock, like a dot com in 1999. It's a story I find improbable, that's why I'm short ANGI.
This web site does a good job of exposing these frauds
I watch it, but 99% of the time you can't get shares to short.
This is clearly a pump and dump. The question is how to profit from it.
I tried to sell short, but my broker, one of the largest retail brokers, has no shares available. You can't buy any puts either.
I like this article. I think you have two points:
1. Intel needs high margins to sustain the high capital and R&D expenses needed to maintain the Moore's law roadmap for manufacturing.
2. As Intel starts selling into the tablet/mobile markets, they will have lower margins.
It follows from these two points, that Intel will not be able to sustain the high investment needed to maintain the leading edge of semiconductor manufacturing.
I completely agree with point 1 and disagree with point 2. If Intel has a process that is 2-3 years ahead of what TSMC has, Intel's chips will be that much ahead of TSMC's customers.
Instead of a $500 phone with a $20 CPU in it, plenty of people will prefer to pay $520 and get a $40 CPU that is faster/cooler/etc. Many others don't want to pay a premium, that's the market the lower margin manufacturers compete it.
Intel is a premium brand. They have higher margins, because no one else can compete at their level. This is true in PCs and it will soon be true in phones/tablets.
Mike, great article. I wasn't aware of this case and Parkervision.
A few questions and comments:
1. What do you make of Qualcomm's motion for "partial" summary judgement? Does it indicate that this case will go to trial, since there is no way that Qualcomm will win completely on summary judgement?
2. It seems to me that the McKool Smith strategy must be survive summary judgement and work out a settlement. If this goes to trial no one (neither McKool Smith nor Parkervision) will see any cash for years, even if Parkervision wins a judgement, because it will be appealed.
3. Any ideas on how to profit from the eventual collapse of Parkervision? My broker won't let me short PRKR.
I have seen the $5k per wafer number quoted elsewhere. For instance, http://bit.ly/10NegJn
Yield numbers are hard to come by, as I'm sure you know. I found this contract between TSMC and IDT http://1.usa.gov/10RZ7L2 In the contract, there is a minimum yield that TSMC guarantees. The minimum yield is defined this way “the Minimum Yield shall be set to sixty-five percent (65%) of the average Yield of the first three hundred (300) completed Wafers.” So, the 50% is really a guess based off of this contract.
My guess is that they just can't fill it yet. Fab 42 will pretty much double Intel's capacity, if you measure capacity in the number of transistors. This is also probably why they started the foundry business, to fill their fabs.
That's a great summation of the industry. The only point I would add is that Intel's model (design+fab, tick-tock) has a weakness: it's slow.
The story of the past 5 years is that the market suddenly shifted to one where power conservation was the key factor. Intel was not prepared for that shift and it took them too long to get their low power design into production. While, Intel was shifting into low power mode, ARM designs were more desirable. Those days are ending soon.
I agree with Tony on this one. I'd pass on owning a piece of this. The real innovation in glucose monitoring will come when someone builds a good non-invasive glucose monitor. Then, you can skip the lance altogether. Several companies are working on it C8Medisensors has one for sale in Europe, but it costs a fortune.
The upside to these types of companies is limited, because as soon as someone really gets it right Abbott will come in and buy the company out for a small premium.
I think the best option for the Intel foundry is Apple A series. Right now Apple pays Samsung about $20 per die and makes huge margins ($450) on the iphone package.
The question is: would Apple pay Intel $80 per die on the A6 (or A7) and lower their $450 margin to $390 (or raise the price) to get away from Samsung.
Some argue that Intel won't produce an ARM processor in their fab for strategic reasons, but if they can make more money producing A series processors for Apple than they can make producing and selling Atom processors, why not?
Why do you say that Intel's fabs are MUCH smaller than TSMC fabs?
This source has Intel's capacity about 10% greater than TSMC.