Michael Fu

Value, growth at reasonable price
Michael Fu
Value, growth at reasonable price
Contributor since: 2012
the problem with rule of 72 is that it assumes your principal remains at par (say 100), at the end of 6 years. So if NLY dividend yield is 12%, then rule of 72 implies (72 / 12 = 6 years), which means (100 + 12%)^6 yr = 200, or your principal doubles in 6 years. the problem is, your principal of 100 is assumed to be 100 still in 6 years. which obviously, it's not for NLY from prior comments on stock price declining from $18 to $10.
any high yielding stock (+10%) is typically too good to be true, and is unlikely its 100% return ON your principal. It's typically both a return OF your principal and a return ON your principal. So for NLY, out of the 12% yield, maybe their real return on capital is say 4%, and the rest of the 8% is a return of your original principal, which is why the stock drops every year.
be careful of high yield stocks, dividend yield is not the same as return ON capital, which is what most people assume.
yes good time to do it while stock is low (cheap). it doesn't have boat load of cash (~$500mm but they need that for working cap, capex, store expansions), which is why they're financing the buybacks with $1bn of long term debt. which is good, since rates are low so good time to lock in low rates and buy back some stock on the cheap.
still, negative comps are not good. WFM use to trade at a premium to say Krogers b/c they had 7-8% positive same store comps. now markets are trying to figure out what they should trade it/be valued at, given no longer growing. it's getting pretty interesting though, at around 0.7x sales vs. Krogers at 0.5x. market psychology matters most though, and the market winds are blowing south. i'd be a buyer around $25, or around 0.5x sales.
i bought recently too, due to market cap of $25mm vs. net cash of $150mm. hopefully, the cash is real and not another longtop financial. i see their products on http://www.tmall.com, so at least there's real products they're selling. if the cash is real, hopefully mgmt doesn't keep siphoning it away and either pay more dividends again, stock buyback, or buyout.
why would Softbank agree to this? what do they gain for selling at a low price point to Chen?
RENN offer is $4.20 per ADS
$4.20 per share looks a bit light, it's probably worth $4.50, just valuing the upside from their SoFi investment. May be more, if there's more upside in their other investments. See details below:
it's a fair point, i'm not a big fan of the core business as it stands today. there's 2 parts to their core business, the gaming side (45% of 2014 rev) and the social media platform side (55% of 2014 rev). they're cutting development costs on the gaming side (will just distribute 3rd party games going forward, instead of developing their own), so that should help. The social media platform side, both renren and weibo (ticker WB) has been losing users to tencent's wechat app for years, renn has lost that battle already (just like they lost the online video battle with their 56.com investment that they acquired for $80mm in 2011 but sold to Sohu.com in 2014 for $13mm).
the only upside i see of RENN keeping that social media platform alive, is that all these investments in the U.S. (ie: online student loan lending, online mortgage lending), they plan on eventually offering /replicating those services in China through their existing platform. if they did that and it was successful, that would be pretty exciting and provide upside to their core business for a change, instead of investors currently only valuing them for their cash and other investments, and no to negative value assigned to their core business.
yes, their core business is not great, as mentioned in the article. current stock price reflects that, with a market cap of $900mm, which is about the value of their $700mm cash and $300mm book value of investments. so no value essentially given to their actual business.
i'm making the argument that their $300mm BOOK value of investments (including SoFi), may be significantly below the MARKET value of those investments. And specifically for SoFi, their recent round at $1.3 billion in Feb 2015, would imply RENN's 50mm book value stake (25% of company) is really worth +$300mm. Just that SoFi data alone would mean another 30% upside to current stock price (and more like 100% upside if IPO is say $3.5bn range).
And the market value of their other investments (besides SoFi, like Motif or YikYak) may be significantly higher than their book value as well.
they did just announce a $50mm dutch tender offer today, so that should signal mgmt thinks their current stock prices are a deal. also in Q414, they bought back $28.9mm worth at $3.10 per share.
even without mgmt buyout, i think if social finance goes public, it will be transparent RENN is a significant investor and the market will hopefully assign proper value to RENN's stock, similar to Yahoo and Alibaba.
Has anyone looked into Social Finance, a similar online lending platform as Lending Club but focused on student loans? It's private for now, recent Series D round done at $1.3bn and potential IPO later this year at discussions of $3.5bn. RenRen (RENN) which is publicly traded, owns 27% of SoFi recorded at cost for now on RENN's balance sheet (they got in at Series B round at a $200mm valuation), so you can play SoFi exposure indirectly through RENN. See recently written article for details:
there's competition (or lack of barriers to entry) in every industry. but i think market leadership, content quality/quantity, and network effect has stickiness. Google tried to enter into Facebook's social media space with Google+, people freaked out for Facebook, but FB still dominates.
The Google Local integration with Google Map is powerful (b/c Google Maps is leader in direction space), but Yelp's integrated with Apple Maps. Pick any restaurant and read the reviews from Yelp and Google, Yelp has way more reviews (like thousands vs. a dozen) along with more food pics. I personally use Yelp to find restaurant recommendation, then switch to Google for directions. Users are sophisticated enough to switch to the best service for source (Yelp for content and Google for directions).
Yes Google Local has potential, but takes a lot of investments to convert customers to your competing site to post reviews. Probably easier for them (or someone like Yahoo) to just buy Yelp, it would be viewed as content and customer acquisition costs. Priceline purchased OpenTable at 10x forward revenue in June 2014, which would imply about a 20% premium to Yelp's current stock price.
you're right, they're not a start up. They're already profitable and have a proven platform/proof of concept. 40-50% sales growth on $400mm of sales is not bad though and probably better than most start-ups that don't generate any sales, burn thru cash from recent financing rounds in 12 months, and at best have some eyeballs that they hope to pitch as a "milestone" for the next lifeline VC funding.
YUM is actually more like $1mm per store per year. MCD is more like $2mm.
YUM and CAKE are two different concepts, two diff price points. YUM is fast food, ave check is $5 USD / customer, CAKE is sit-down, ave check $20 / customer. YUM ave store sales is prob $2mm / store / year, CAKE is $10mm. Also, it's a minimum store commitment. When Maxim did Starbucks in HK, they had some minimum # of stores, and ended up opening 130 stores in 10 years. Prob won't be that high for CAKE obviously, but I can seem them surpassing 14 (maybe 30, which again at $10mm per store sales, that's $300mm, on current $2bn sales, is 15% from HK/China). It really boils down to whether CAKE's concept will be loved in HK (if the 1st store succeeds). If so, plenty additional store openings will follow.
Carfan 79, can you share the link to where TSLA's mgmt states their goal of 700,000 by 2019?
fair P/E multiple is applied to FUTURE earnings growth potential, not historical earnings growth. 25x in 6 years would imply that the markets would continue to believe growth will be ~15-20% beyond 2019. so you're 700,000 units in 2019, becomes 840,000 in 2020, and 1mm in 2021.
the overall auto industry (the overall pie) does not grow by 60% or 20%. prob more like 5% over long run, and is cyclical depending on car replacement cycles (like 7 yrs), economy/confidence (car upgrade is discretionary spending), population growth/household formations, etc. So TSLA bulls are also betting that GM/F/HMC/TM are going to have declining sales growth (their slice of pie get smaller, as TSLA gets bigger).
The $30bn of TSLA market cap creation in past few years, should have lead to decline of $30bn in other auto manufacturers then. can't have bulls in TSLA and bulls in current auto leaders both be correct, the pie's only so big. if you're really bullish on TSLA, go short existing auto manufacturers.
Pete, thanks for at least throwing some numbers out there on the bull case, instead of just qualitative: you don't understand, it's different this time, new technology, creative destruction (sounds like 1999 internet days).
let's assume they do get to $30bn of sales in 10 years, by selling 500,000 cars x $60K per car. let's further assume they do get to 15% net margins, or +3x higher compared to 5% or less for GM/F/HMC. So that gets you to $4.5bn NI. All the growth potential would have been realized by time they get to $30bn sales, so let's apply a fair 15x P/E on the $4.5bn NI = $68 bn market cap in 10 years.
the key question now is what discount rate/risk do you apply to the $68bn in 10 years, to come up with what it should be worth today.
If you think owning TSLA is same risk as owning a bond, then apply a 5% discount rate and you get market cap today is $42bn.
If you think owning TSLA is same risk as other more volatile/big momentum/game changer type stocks, then apply say a 20% discount rate and you get a market cap today of $10bn.
maybe it boils down to that with bulls and bears of TSLA. i'm obviously on the higher risk side is correct discount rate to apply, for fair value of what they're worth today. i like TSLA, they have awesome products, they have disrupted the auto industry, they have created value. I just think the fair price for that value in today's term, is probably closer to $10bn than $30-40bn.
good luck all.
well said tombo
interesting you point to gross margin and not net margin. sure TSLA has about 30% gross margins now, but that's also because they have significant costs allocated into R&D and SG&A instead of COGS. net margin still close to zero at the moment, which explains the really high P/E multiple.
if 5-10 years later, if TSLA still shows 30% gross margins (if they can maintain that margin and $60K price point while selling 1-2mm units instead of 35,000 units), then yes that would be impressive. And if 5-10 years later, their R&D and SG&A actually stops increasing like it has historically and stays flat so you get operating leverage on those fixed costs, then hopefully net income margin will be 10-15% and not 0%. and again that would be impressive.
i don't have a short position, so doesn't bother me either way. I just think it's priced absolutely to perfection now. that bulls believe TSLA can sell 1-2mm units, and maintain 30% gross margin, and eventually get to 10-15% net margin, and they think this will happen in say next 2-3 years given current prices. if you assume a more realistic say 10 years to get there, and if you discount back the cash flows over a more realistic time frame, then you'll prob get to maybe $10bn market cap and not $28bn.
if you're a real tech investor, wouldn't you be more focused/interested in real tech companies that are highly highly scalable with little capex investment (ie: social media, software, cloud, etc., so FB, Twitter, Salesforce, rocketfuel, etc.)? At least with those companies, they're expensive but i get the argument of scalability/creative destruction/etc. those tech companies have a chance to grow 200-300% a year because they're truly scalable. Tesla is an auto manufacturer. to grow, you need new factory investments, new infrastructure (charging station), new dealerships, etc. all that growth will cost money and take time. yes 50% is impressive (but that's on a tiny base of 20,000-30,000 units sold), but it's not true tech scalability.
porsche sells other brands besides just porsche (just the 100,000 units), including volkswagen, audi, SKODA, bentley, bugati, lamborghini etc. porsch and VW has cross ownership in each other's company. 2013 annual sales was $14 billion USD. here's link to their 2013 10-K:
as mentioned in comment earlier, FCF is $15bn in 2013 (see company press release), implying a 13x FCF multiple.
FCF just like NI has been more or less flat in past 10 years. Which is an issue in itself, as highlighted in my article. But it hasn't declined +35% from $16bn to $11bn, like you are claiming with false numbers.
Um, what bail out did the govt give to Buffett? If anything, Berkshire kept their AA credit rating through the crisis and stepped in along with the U.S. govt as "lender of last resort" when the banking system was on brink of total chaos (with preferred stock investments in Goldman, Bank of America, etc.). And he's been rewarded with taking that risk at a time when everyone else was in panic mode.
IBM's 2013 Free Cash Flow is $15 bn. clearly shown in the Q413 press release link below. FCF of $15 bn compared to NI of $17.5bn (85% of NI is real cash flow) means there's very little gimics in IBM's accounting net income. also, you don't take out acquisitions for FCF, only capex. Acquisitions, Dividends, Stock buybacks are "uses" of FCF. $200bn market cap, on $15bn of FCF is 13x multiple. MATH.
it seems like value play, low P/E companies are back in favor now, versus momentum, high growth, high P/E stocks (CRM, TSLA, etc.). IBM trading at 10-12x would fall into the first category. I'd rather them grow double digit EPS through top line growth as well instead of buybacks, but if they did, they wouldn't be trading at 10-12x, probably closer to 15-20x. You get what you pay for. The flat revenue concern seems to be priced in at current 10-12x P/E, I just need to keep monitoring that issue. If revenues significantly decline, then stock buybacks alone will not be able to offset an eventual decline in EPS. And the 10-12x P/E all of a sudden is more like 15-20x P/E you've paid, because the EPS or denominator just took a big hit. I personally don't think IBM is a falling knife/false value play though.
sorry, yes software is ~50% of pre-tax profits
2014 EPS of $17.00 is GAAP. 2014 non-GAAP is even higher of $18.00. See Q413 press release. http://bit.ly/1iE5zgE
Unclear though if the 2015 EPS of $20.00 is GAAP or non-GAAP. Either way, it's only a 5-6% difference btwn non-GAAP and GAAP ($17 versus $18). They don't have as much non-GAAP gimics as you'll find in many other tech companies.
read my other article that explains how Corning's two joint ventures, have "earnings from equity interests" that flow through to Corning's bottom line.
i finally bought in around $62, hopefully its a short term blip and not a long term trend. good luck all!
actually, if you look at how I calculate market capitalization, you will see that i include fully diluted shares outstanding (which includes options/grants). so the stock comp is penalized up top already in numerator of P/E multiple (the share price in theory would price in for fully diluted options, just like calculating market cap properly by including f.d. shares). so you then compare it to non-GAAP EPS in the denominator, and it's apples to apples.
seems like everyone in smartphone space is getting hit (AAPL, HTC but its rebounded recently, QCOM), except for Samsung and ARMH. Tides may change again but who knows when and who will be next winner. Such a risky, volatile, definitely interesting sector.
i like QCOM, but some of the risks analysts are worried about include: declining margins (17% guidance for equip business for Q32013), lower ASP from developing markets, Samsung building own chip rumor, 3G to 4G transition (lower royalty fees). see article for more details: http://seekingalpha.co...