Macro Investor's  Instablog

I cut my teeth in investing in the gogo 90's. Those were heady days indeed. Every day, it seemed, stock prices would go up by another 40%. A 30% up day would be considered a disappointment, and people would hit the bar in after hours bitterly complaining about market manipulation. Millionaires were created every second, and we were all going to quit working and live off the ever increasing market.

OK, I exaggerate a bit, especially about the 30-40%, but that was the spirit of the day.

Since then, the market has crashed. Twice. In a big way. This has led to a generation of investors who are very worried about the downside than focusing the upside. The pendulum, I dare say, have swung too far.

Do you need a little bit of the 1990s in your stock portfolio? As the bard sang:

A little bit of Zynga in my life

A little bit of Zillow by my side

A little bit of Netflix is all I need

A little bit of eyeballs is what I see

Back to the heady 90s, a new metric was created to evaluate stocks. The internet stocks in those days didn't have earnings, and sometimes they didn't even have revenues. It is somewhat difficult to evaluate a stock when you don't have revenues or earnings. The standard financial models like NPV and DCF have technical limitations. They actually need revenues, free cash flow, and earnings - mundane things like that. So, a pioneering group of analysts (aka pumpers) came up with a brilliant idea. What if the worth of a stock is measured by the number of hits on the web site? What if, for example, the worth of a stock is determined by the eyeballs that are attracted to its pages?

This was creative. This, by extension, would mean valuing a retail stock by the number of window shoppers. Of course, no one would do that. They would want some actual shopping done. So this methodology was universally ridiculed - and then accepted as that was the only way to pump these stocks and push their prices to the stratosphere. When fortunes are being made, all methodologies that justify higher prices are welcome.

There is, however, some justification to the eyeball method of valuing companies. To this day, selling advertisements remains the primary means of revenue for internet companies. The more eyeballs you have, the more are your potential advertisement revenues, assuming some of the people browsing do click on the advertisements displayed. It also determines "stickiness". Once users get used to a site, they typically don't move to other sites. This keeps the advertisement revenue high.

With that in mind, what would be some new age internet stocks to gamble on?

One note here. When I say gamble, I truly mean gamble. I do not usually invest in individual securities. It is very hard to value them. Index ETFs are far easier to value and predict. Hence, any money that any reader puts on the stocks that I am just going to write about should be considered as gambling money. You may win big time, or you may lose it all. However, I firmly believe that a part of your portfolio should be for taking massive amount of risk, which you are willing to lose. For me, this share of portfolio is 5%. I am fully prepared to lose 100% on this small part of my portfolio. But I want to hang on to this for a year to two years, keeping my eyes closed to daily price movements. Then I will reevaluate what to do with these securities.

1. Zynga (ZNGA)

I love to gamble, but I hate going to casinos. For one, there's commute time. For another, the whole environment is sleazy at best. I love to gamble from my bedroom, while watching TV and posting on Seeking Alpha. Unfortunately, internet gambling is illegal in the USA. But the tide may be changing. Faced with budget deficits, many states are looking to legalize internet gambling. The changes may come as soon as later this year.

Zynga already has lots of eyeballs when it comes to compulsive gamblers. It plays with fake money, of course. But the Zynga chips have real life value. There is an active underground market for buying and selling Zynga chips. This shows that there is significant traction behind Zynga's gaming platform, especially Zynga Poker. It is available on the iOS and Android, and is almost ubiquitous on smart phones and other handheld devices, which is the future of internet browsing.

Zynga is also planning to get into online gambling.

A little bit of history of online gambling is in order here. Back in the late 90s, a trailblazer in internet poker was Party Poker. It took the online gambling world by storm. At its peak, this company was worth several billions. It was a place where novice US poker players who saw World Series of Poker (WSOP) on TV and thought that they too can become the next Chris Moneymaker could come and lose plenty of money to the professionals. Gambling, as such, is a sticky line of business. With a constant free advertisement stream called WSOP, Party Poker was unstoppable. Till, that is, the USA put a legal stop to internet gambling. Since then it has languished.

Zynga could become the next Party Poker should the USA were to legalize internet gambling. Its poker platform on Facebook and now on all kinds of smart phones is a ripe ground to extract revenue. Hence, what better choice to gamble on online gambling but with Zynga?

2. Zillow (Z)

Let me start by saying that I love Zillow.

I found Zillow when my bank offered it as a way to track my house value, as part of my overall portfolio. Now, Zillow got it completely wrong. It underestimated the total square footage of my house, which it gleaned from some kind of faulty data source, and totally missed an addition of about 50% more square footage that the previous owners had put in. Hence, it totally underestimated the price. But that was not what was interesting to me, as I am not about to sell anytime soon. What I liked were its charts that showed how home prices are moving all over the country. This was absolutely great data that enabled me to buy the DirexionShares Daily Real Estate Bull 3x Shares ETF (DRN) early and realize an obscene amount of paper gains.

Last year, I was contemplating a move to another city. I started using realtor.com (MOVE), but soon realized that the interface for Zillow was much better (at least for me). The US housing market is heating up. Prices are up nearly 10% year over year across the country. This means there will be more buying and even greater price increases as people are afraid of being left behind. The real estate search sites will get a lot of business as a result. It is all about eyeballs.

Zillow has plenty of eyeballs, if my bank is pushing it to all its consumers just as it did to me. So the advertisement revenue will be flowing, and, as I said before, a little bit of eyeballs is what I see. Hence it makes sense to gamble on the nascent housing recovery with Zillow, but it may not be a bad idea to put some money in MOVE as well.

3. Netflix (NFLX)

The Ikeman cometh.

To me, Netflix is a Carl Icahn play. I first bought Netflix in the 2004 timeframe. I lost a lot of money on it. I was one of the very early adopters of Netflix as I hate to get out of the house. Someone mailing me DVDs was heaven. But that left a lot to be desired, as I am into instant gratification as well. When the online movie streaming came into being, I jumped in with both feet. But one thing always nagged at me.

How is Netflix ever going to make any money?

You see, I am still somewhat stuck in the old mode of investing. Revenue, free cash flow, earnings, DCF and NPV models, what have you. Those of course are the reasons why I made a lot of money during the internet crash by shorting the high fliers, but only after they were wounded. But over time I have come to realize that shorting stocks is a hard way to earn a living. A far easier way is to go with the flow, throw caution to the wind, invest in story stocks, hold a basket of them for a while without looking at the market, and then see what life presents to you. Especially in times of froth, like 1998-2000, this is a wonderful approach.

With all the money printing going on, we will soon get rather frothy. Plus we have the Ikeman beating up Netflix's management. If one thing the Ikeman does well, it is to beat up the leadership.

That said, I do realize that there is one potential issue with Netflix. It has Amazon (AMZN) as a rival. If there is one company in the world that knows how to buy market share, that's Amazon. They can lose money indefinitely and keep buying up market share with cash flow. With Amazon Prime they have their target on Netflix. This is never a good thing. Still, Netflix has a lot of legacy eyeballs, and Amazon is not always successful. So, at this point, I am willing to hold my nose and put my bets all on red, aka Netflix.

So there you have it. My gambling money this year is going to Zynga, Zillow and Netflix, with a side bet on Realtor.com. May the most eyeballs win!

Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choices.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in Z, ZNGA, NFLX, MOVE over 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.

I am life.
Heaven is in your eyes.
It's everything around you.
It's the blood and the mud.
I am divine!
I am oblivion.
I am the god...
that comes down from the heavens
to the earth...
and makes of the earth a heaven.
I am love.