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Slim Shady

 
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  • Micron Technology: Toxic Convertibles, Part 2 [View article]
    Phred - you are financially naïve when it comes to convertibles and since I've taken the time to read two articles, I will explain why so hopefully there won't be a third.. The company issued convertible debt initially because it wasn't credit worthy enough to issue straight debt. Whether they raised too much convertible debt is another matter entirely. Would you be equally upset had they raised a lower amount of straight debt at a higher interest rate and simultaneously sold an amount of equity instead of doing the convertibles? Would you be harping that they need to do a stock buyback of the equivalent amount of equity they sold as an alternative to doing a convertible offering?

    By saying that it is "costing" them money every day is like saying the company is worse off because they issued equity at a lower price and they didn't buy it back before the stock continued to appreciate. You could argue that they should've done a $1 billion share buyback when the stock was at $20 and they have "lost" $600 million because they didn't. Raising capital through a convertible is simply raising part straight debt and part equity in one security - nothing more, nothing less.

    The GAAP accounting of the treasury method isn't CRAP, it actually represents the impact of retiring the debt obligation in exchange for issuing the equity. It accurately reflects the dilutive nature of the security assuming the company repurchases equity at the current market price for the amount of debt that would be retired. Whether the company actually retires the shares is another matter, but if they don't then that is the equivalent of issuing shares at the current price at that time. There are lots of things wrong with GAAP but the treasury method of accounting isn't one of them.
    Jun 16 11:04 AM | 17 Likes Like |Link to Comment
  • Amazon.com - A Typical Earnings Announcement [View article]
    Once again, an author who believes that "reinvestment" includes getting products to your customers, spending on video content that is not owned but consumed, subsidizing the sale of kindles, and giving away free books. Plain and simple, those are regular expenses of doing business. Wal-Mart doesn't exclude the expenses to operate stores which enables their customers to get their products. Netflix doesn't exclude their video content costs as "investments". Intel does not exclude the expenses required to subsidize the entry into the mobile market. Companies that give away free items to lure customers call that a marketing expense. The notion that Amazon is investing, no less "overinvesting" is simply not supported with any factual evidence.

    If AMZN had a plan to achieve an operating margin of 10% in the medium-to-long term, they have never articulated it, and that is because they can't. They have proven that they are not the low cost producer in what is a commodity business - reselling other people's products. Therefore, they have no long term sustainable competitive advantage to generate outsize returns. They can continue to grow revenues with minimal to no profitably as long as their vendors and capital markets will allow, but they will never be able to drive all of the competition out of business, which is what would be required to drive future outsize profitability. There are no barriers to entry in retail over the internet and Amazon has proven that there are no economies of scale.

    There will be a day when the market values Amazon for what it is...a marginally profitable retailer. At that time, it will command an EV to sales multiple no greater than Wal-Mart. Even if they continue to grow revenues faster than the market for a period of time, which will become ever harder the larger they get, there is still no plausible scenario to justify the current valuation.
    Jan 31 08:03 AM | 17 Likes Like |Link to Comment
  • I Concede Defeat In Amazon.com [View article]
    Akram - I've always respected your opinion - so what are the details behind this so called "reinvestment" that destroys earnings? Investment in expenses are just expenses. Buying video content that isn't covered by revenues is just an expense. Providing free or low cost shipping that isn't covered by revenues is just an expense. What specifically are these magical "investments" that AMZN is making?
    Oct 25 09:30 AM | 16 Likes Like |Link to Comment
  • Amazon's Numbers Continue To Worsen [View article]
    Bill - Great chart showing how expectations have come down over the last year. Only in a parallel universe do revenue estimates come down by $6.75 billion, EPS estimates by 67%, and the stock increases 37% from $220 on 7/26/12 to $303 today.

    As far as your valuation, using P/S currently because they don't have any profits is just a variation of P/E when you factor in a "normalized" profit margin.

    P/E = P/S divided by E/S

    Even if they could attain Wal-Mart's net margin of 3.8%, which they have shown no evidence that they ever will, a 1.7x P/S implies a P/E on "normalized" earnings of 45. Given Amazon's required investment in distribution facilities, they are as "bricks and mortar" as any other retailer, and thus not likely to earn higher margins due to their online presence.

    Also, their expected revenue growth on an absolute dollar basis is approaching that of Wal-Mart. For 2014, estimates for AMZN sales growth estimate is $16 billion, versus only $22 billion for WMT. As a result revenue growth will slow and ultimately their revenue growth will mirror that of Wal-Mart. Wal-Mart's annual dollar growth peaked at around $25- $30 billion per year.

    If next year's estimates are only half as wrong as the last year (say $3.375 billion), next year's growth rate would be only 17%. If they continue to grow at that rate until annual growth is $25 to $30 billion per year and maintain that range of dollar annual growth, revenues would grow from $74 billion this year to $420 billion in 15 years (versus $470 billion for WMT this year and $137 billion 15 years ago). At WMT's current P/S, which implies that AMZN can be just as profitable, the Equity Cap in 2028 would be $219 billion - compared to $139 billion today or a 3% total annual return.

    Discounted at an 8% rate, which is a little under 5% over the 15 year treasury, and is generous given all the uncertainties, assumptions and execution that needs to take place over the next 15 years, the present value would be $69 billion, or $150 per share. At a 10% discount rate the present value would be $115 per share, and at a 12% discount rate it would be $87.50.

    In order to justify a current $285 valuation implies $420 billion of revenues in 15 years, a price to sales of .98 or nearly twice that of Wal-Mart, and a discount rate of only 8%. At a 10% discount rate, the price to sales would have to be 1.3x, implying either significantly higher revenue growth or higher profitability than Wal-Mart currently.
    Aug 1 03:32 PM | 14 Likes Like |Link to Comment
  • Apple's Improbable Math [View article]
    "it's hard to imagine new Apple shareholders being satisfied with a pedestrian gain of 10% in the coming year, but achieving even this would require a Herculean effort. To gain that 10%, Apple would need to add $52 billion in market value."

    Probably as hard to imagine as Apple stock losing $35 billion of market cap in a single day yesterday, which is more than the market cap of all but 83 of the companies in the S&P 500.
    Dec 6 11:41 AM | 14 Likes Like |Link to Comment
  • Amazon.com: The Lack Of Profitability Is Structural [View article]
    VCPNTTP:

    You have inadvertently made the best case NOT to be bullish on Amazon.

    In your model, you have revenues growing at 27% every year for the next 10 years. They aren't even growing at 27% currently, no less being able to grow at that rate for the next 10 years.

    Wal-Mart has the largest sales of any company in the S&P 500 at $473 bln. Their 10 year growth rate after hitting $75 billion in revenues was 13.3% and they are currently growing revenues at 5% per annum. Wal-Mart's Net Margin has consistently been between 2.9% to 3.8% since the early 90's. Your assumption is that Amazon will not only figure out how to earn a profit, but also become more profitable than Wal-Mart while growing revenues at twice the rate Wal-Mart did over the same time period in its history. You then assume a 15 multiple whereas Wal-Mart has traded in a consistent range of 12-16x earnings over the last 5 years. You also failed to account for the dilution of equity due to share awards, which has equaled 1.5% annually for the last 10 years.

    Let's say all your assumptions are true and Amazon finds a way to grow revenues at 27% per year while simultaneously increasing margins higher than the current retail leader Wal-Mart and is awarded a 15 multiple 10 years from now. With the increase in total shares to 548 million using the previous 10 year growth rate, would result in a share price of $876, or an annual increase of just over 9% per year - even a 16 multiple only yields a 10% annual return. If Bezos is able to achieve your "world domination scenario" - which is highly unlikely - you achieve a decent, middle of the road return scenario.

    However, if they are able to grow at Wal-Mart's historical rate of 13% in the 10 years after it hit $75 billion of sales, and are able to achieve the better margins of 4%, that yields $10.2 billion and with a 15 multiple, with the share dilution of 1.5% per year produces a price of $279 10 years from now. If your required rate of return is only 9% (the rate you are willing to accept in your dominate the world scenario), that produces a present value of $118. A 12 multiple would compute to a price of $223 10 years from now or a present value of $94.

    That is why it is not an investment to be long AMZN, but rather it is simply gambling on what the greater fool (Gary J?) is willing to pay for the stock in the short term and hope you get out before they do. Check out a chart of Home Depot from 1999 to present and see if you still want to have a 10% allocation to this name.
    Oct 29 12:41 AM | 12 Likes Like |Link to Comment
  • How A Real Value Investor Evaluates Netflix [View article]
    Positive Equity, this is what you said on July 19th:
    "Netflix is a great company with excellent management. They provide a service that is in high demand. The company generates enough revenues to warrant a stock value of $153 per share."

    Is that your research process?

    You are just like all the other asset allocators in the market: they would rather invest with a guy who wears a suit, shows up on CNBC, has a Harvard MBA, is Chairman of the Value Investing Congress and Value Investor Insight. Don't let facts get in the way of what you want to believe. Have faith and go with your pre-conceptions.

    The audited returns of my hedge fund beat Tilson's returns by 3.4% per year for over 10 years - that is a difference of 71% of total return
    over that time frame. But how could I know what I'm talking about, since I write under the pen name Slim Shady.

    When it comes to investing, Slim Shady is the Real Value Investor, Tilson is just imitating...


    Nov 1 11:28 AM | 12 Likes Like |Link to Comment
  • Ultra-Low Interest Rates Indicate U.S. Stocks Are Expensive [View article]
    Thomas - I agree that the value of a stock is the pv of fcf. However, the risk free rate is only one component of that formula, with growth of cash flows and the risk premium for equities two other components. The author is arguing that the information embedded in the low 10 year treasury rate indicates that a) growth rates of future cash flows will be lower, and b) the risk premium assigned to equities should be higher. There is a logical way mathematically to show that low risk free interest rates would not translate into higher stock values. Japan has had extremely low interest rates for the last 15+ years now and that hasn't translated into higher stock values.
    Jul 26 11:40 AM | 11 Likes Like |Link to Comment
  • Why We Bought Microsoft: Because 2013 Should Determine Whether Ballmer Stays Or Goes [View article]
    I'm not going to defend everything Ballmer has done in his tenure or his management style, but there are few companies out there that have had the level of performance of Microsoft since the beginning of 2000. Under Ballmer for the last 11 complete fiscal years, revenues have grown 11% per year, profits 12%, EPS has increased 13%, the share count from FY 2001 to FY 2012 has decreased by 25%, paid over $70 bln of dividends, while net cash is up $14 Bln. This record was achieved including the failings of the Online business and other missteps. You highlight his failures, but fail to mention the XBox business was a zero when he took over (introduced Nov 2001) and in FY '11 was a $9 bln revenue business with over $1.3 bln of operating income. In the end, in spite of these objective performance measurements, you blame him for the one thing that is not in his control...the stock price. Should he have not accepted the role of CEO because the enterprise value when he took over was $560 billion when revenues were only $23 bln and the company was valued at 46x FY 2000 EBITDA?

    Perhaps you would like to post your performance record since the beginning of 2000 for scrutiny?
    May 8 07:36 PM | 10 Likes Like |Link to Comment
  • Note to Apple Fans: Stop Talking About Value [View article]
    If you are a long-term investor, valuation is the primary determinant of return. Valuation is only irrelevant if you are trading around a security by trying to guess which direction it will go next.

    As long as a company is increasing its value each year, it is irrelevant how long it takes before valuation matters. How does a company increase value? By generating a cash flow return on the capital invested in the business AND using that cash flow prudently, either re-investing in the business at high rates of return, making acquisitions that have high rates of return, or returning cash to shareholders through dividends or share repurchases.

    If you owned a company that generated $1.5 million in cash flow that you paid $10 million, that would be a free cash flow yield of 15%. If cash flow increases 15% a year, in 5 years it will be $3 million. Do you care if someone is only willing to pay you $10 million 5 years from now? If you are an investor, the answer is no, you would be willing to hold onto that company until the time when somebody is willing to pay you the true value. If cash flow increases at 15% over the following 5 years, annual cash flow would now be $6 million. If sentiment changes so that somebody is willing to pay you a price that is only a 10% return on their investment, the price would now be $60 million - which would be a 20% annualized return over that 10 years.

    Sentiment determines the Price of where a company will trade in the market at any given point in time, but a company's operations and cash flows determine the Value. If you can buy a company at a price that is less than the value, and that value is increasing over time, then when sentiment changes, you will benefit both from the increase in value and the revaluation. On the other hand, if you pay significantly more than the value of the business, you must hope that the business continues to do well and sentiment doesn't change for the negative - a more difficult set of hurdles to overcome.

    The mainstream media loves the term Value Trap for a company with a cheap valuation that doesn't go up in price for whatever reason. However, a better definition of a Value Trap is something that looks cheap based on current valuation metrics, but in reality is not because the cash flows are not sustainable. For instance, Nokia generated $12.6 billion in EBITDA in 2007 and only $5.1 billion in 2010. Had your valuation been based on 2007 results, which were not sustainable, you had a Value Trap. RIMM is potentially in the same situation as the sustainability of the cash flows is currently in question, so the fact that it's P/E this year is 5x is irrelevant if those earnings aren't sustainable. On the other hand, the only way Apple is a Value Trap is if their current level of cash flow is not sustainable, which you have not addressed.

    If you want to Trade based on the "potential, emotion and "the story."", without regard to valuation, that is your prerogative. But to Invest, you must first know the value of the asset you are buying, then purchase that asset at a price that is less than the value.
    Jun 21 10:34 AM | 10 Likes Like |Link to Comment
  • Salesforce.com - Same Story, Solid Top-Line Revenue Growth Combined With Widening Losses [View article]
    Majorious -

    Perhaps you need to actually read the 10K - I'll refer you to footnote 7. The majority of the stock compensation expense doesn't come from Options, as you imply, but from issuing stock to employees under the Restricted Stock program.

    In 2013, they issued 10,884,991 restricted shares at a weighted average grant price of $46.99, or $511 million worth. There is no ambiguity in the value of those shares granted. Shares that vested and converted during the year were 9,397,650 shares.

    How would you account for the share issuance if the company sold 10,884,991 shares to the public, then paid their employees the additional $511 million in cash instead of shares? I'll give you a hint, it would magically become an expense on the income statement and the share issuance would be in the Financing activities rather than an addback to the Operating activities in the cash flow statement.

    It is correct that per the GAAP cash flow statement Operating Cash flow for the 1st quarter showed $473 million of cash flow. It's surprising you are willing to use GAAP statements only when it suits your obvious long agenda. Included in that operating cash flow number was a collection of receivables of $676 million. I've never seen a company prosper simply by having positive changes in working capital (particularly on a quarterly basis - for the full year of 2013 receivables were a use of $424 million of cash).

    Looking at the true cash flows from operations for the first quarter, Operating loss was $55 million and adding back Depreciation and Amortization of $111 million (of which $44 million comes from overpriced acquisitions which are bad capital allocation decisions instead of operations), nets you approximately $56 million of cash flow from operations before changes in working capital. That level of true operating cash flow is insufficient to justify an enterprise value of approximately $33 billion.
    May 21 12:47 PM | 9 Likes Like |Link to Comment
  • Netflix Nukes Itself [View article]
    If the streaming business model was strong enough to stand on its own, there would be no need to gamble. Sure, it could work. But you don't throw a hail mary pass at the end of the game unless you're losing and that is your only option. This reeks of desperation and signals that the business model as currently structured, will not work.

    The "old" business model has been in place for all of 8 months, when they announced the streaming only plan on 11/22/10. Here is what the VP of marketing had to say at the time:

    “You might also wonder why we haven’t introduced a new plan that includes only DVDs by mail. The fact is that Netflix members are already watching more TV episodes and movies streamed instantly over the Internet than on DVDs, and we expect that trend to continue. Creating the best user experience that we can around watching instantly is how we’re spending the vast majority of our time and resources. Because of this, we are not creating any plans that are focused solely on DVDs by mail.”

    At the time, the stock was trading at $173 before jumping $15 points to $188 on the announcement. So now at $290, 67% higher or $6.3 billion in market cap higher, they essentially announce that streaming only does not work at the previous price points. Actually, it might only be economical at price points that are 60% higher and suddenly, the de-emphasis on DVD is completely reversed. In addition, the stock just last week was up $22, or over $1.1 billion, on the announcement that they are transporting this business model that does not work in the U.S. and has not worked in Canada to essentially third world countries with limited broadband capabilities and consumers with limited discretionary spending.

    A company that is throwing a hail mary in order to gamble to create a business model that actually works is not a business that is worth paying a substantial premium for.
    Jul 12 08:29 PM | 9 Likes Like |Link to Comment
  • Amazon: Sales Taxes And Getting Cozy [View article]
    "At first glance, Amazon's collecting sales tax appears to be a disadvantage. However, collecting sales tax enables Amazon to build its distribution centers closer to its customers, having the effect of reducing shipping costs and delivery time."

    That's teriffic news - now they get to charge customers an effective price that is 6-8.5% higher AND spend money on bricks and mortar infrastructure. If this is such a benefit to them, why didn't they voluntarily build the distribution centers in those states and collect sales taxes before?
    Sep 28 11:33 AM | 8 Likes Like |Link to Comment
  • Netflix Nukes Itself [View article]
    Per their 10Q dated 4/27/11:
    "As of March 31, 2011, approximately 90% of our domestic subscriber base has chosen either the unlimited streaming plan without DVDs at $7.99 per month or a 1 or 2 DVD-out unlimited plan, which are priced at $9.99 and $14.99 per month, respectively"

    Per a Citigroup proprietary survey in a report dated 6/16/11, only 18% of subscribers were streaming only. So 72% of their customer base will have their price increase from either $9.99 to $15.98 per month or from $14.99 to 19.98 per month for exactly the same content. Then, the spin-meisters at Netflix produce this whopper... "By offering our lowest prices ever,...". I'm not sure which alternative reality they are in where $15.98 is a lower price than $9.99. They must be the same people that calculate the Consumer Price Index for the Government where a $999 iPad2 that replaces the $999 iPad has had a 40% price decrease...but I digress.

    Netflix has positioned themselves as a streaming company that provides DVD's, being the wave of the future. However, they are realizing at $7.99 per month, you can only offer inferior content that very few are willing to buy. In fact, their expected decrease in churn from streaming only customers has actually resulted in increasing churn. Adding DVD's for an extra $2 a month was an appealing, although money losing proposition for them, but attracted new subscribers.

    For every 1 person that quits the service altogether as a result of this price increase, they need 1 and 2/3 that are willing to pay 60% more for the same service. For every 3 that decide they can live without DVD's or without streaming, they need 1 to pay 60% more for the same service. Under their normal churn rate of 3.8% to 4% per month, they already need at least 3 million new subscribers per quarter just to maintain their existing customer base. They have stated only about 1/3 of new subscribers have been streaming only. Raising prices 60% on a combination DVD/streaming is not going to help them attract the other 2/3 of new subscribers.

    They have ridden the wave of the demise of Blockbuster and Movie Gallery and they had the ability to attract new customers to streaming at a very low price point based on a deal with Starz that severely underpriced that content. Now that contractual triggers have been broken with Starz, and negotiations on a new contract seem to have bogged down, the true economics of this business are beginning to show. Once customer growth ends, their virtuous cycle will turn into a destructive cycle.
    Jul 12 05:05 PM | 8 Likes Like |Link to Comment
  • I Concede Defeat In Amazon.com [View article]
    Akram - Have you really been mesmerized by the "great" Bezos to believe that expenses are investments? How profitable is the re-selling of content business for Amazon when it is not very profitable for Apple or Netflix? Rackspace is a standalone entity providing cloud services, and they are profitable even though they are growing and investing.

    Do you really believe that competitors like Wal-Mart and E-bay are eventually going to be gone? What is their actual margin potential if they sold less and make a better margin? Amazon is simply a retailer and has not shown the ability to ever earn a profit margin higher than Wal-Mart. They currently "invest" 4.7% of revenues in providing free shipping - Walmart on the other hand charges prices that are high enough to cover all of their costs (which some argue they are at a disadvantage since they are "bricks and mortar"), including the cost of stores where people go and the distribution costs to get the product to the stores, and make a profit after paying taxes. Should we back out those "investments" in product distribution when analyzing the profitability of Walmart? If Amazon sold less to make a better margin, their growth may equal WalMart. If the stock traded at Wal-Mart's multiple of sales, they would have to have $250 billion of sales to justify the current valuation, compared to $75 billion currently. Even if they continue to grow at their current pace (not likely...), it would take 6 years to achieve that level of sales.

    It reminds me of Home Depot in the late 90's which had a valuation of $129 billion in 2000 with $2.3 billion of net income, 6% net profit margins and a revenue growth rate in the mid 20s. A lot of their competition is now "gone", except for a strong competitor in Lowes, and their margins are still 6%. After the peak, it took over 12 years before reaching the same share price. Even though it is currently trading at over 20x earnings this years earnings, the annualized total return since 12/31/99 has been 2.4% per year.

    There is no way to predict when this will end for AMZN, but when it does, the forward returns are likely to be subpar.
    Oct 25 01:55 PM | 7 Likes Like |Link to Comment
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