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South of Wall Street
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I fit somewhere between Value and GARP.
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South of Wall Street
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  • Tech & Energy Free Cash Flow Screen
    I like to screen for big Free Cash Flow Yields, lots of Cash, and No Debt.
    The conditions for this screen:
    • Free Cash Flow Yield: 6%+
    • Market Cap: $500M+
    • Net Debt: 0 or Less
    • 1 Year EPS Growth: 10%+


    Disclosure: I am long AAPL.
    Tags: AAPL, CVX, ORCL, DELL, UIS, ACIW, EMC
    Dec 04 10:31 PM | Link | Comment!
  • Pandora: Its not going to work
    I'm not the brightest bulb, but I'm fairly certain that Pandora isn't going to work.  The BMO analyst who produced this 'to the moon' growth forecast, says the following about the stock:
    Valuing Pandora is difficult at this time. The company is in the midst of a significant growth phase and continues to aggressively invest in its future, to the detriment of near-term earnings.


    This translates into - to make my target work I have to assume (key word) a 97% CAGR - otherwise it really isn't worth anything.
     

    Investors have been scorched, as my tech-wise brother pointed out, by bs premium subscription models enough to spot a pig. Bottom line. No one is going to pay for Pandora. 
     
    The Pandora story is pretty simple: mobile advertising demand is not sufficient to support their cost structure.
     
    Barrington (research firm), who has an $18 out-of-thin-air price target, says the recent sell off is "due primarily to competitive noise. Google is entering digital music with an “owned music” and active playlist offering, similar to Spotify and ITunes. We do not view it as a direct threat since Pandora offers  a free discovery music streaming service, rather than download-to-own for a fee."
     
    Ok. First, iTunes, Spotify, and Google are more than noise.  The problem is that businesses offering something for free generally don't do to well in the long run - as any community college Economics student could tell you.  Pandora has Content Acquisition Costs (CAC), meaning they have to pay for each time a song is played.  So, more free listeners = more CAC. Do a little research of your own.  If you ask 50 people if they pay for Pandora - I'll bet 50 say no.
     
    Take a look at this Bloomberg article:  Here are the highlights:
    “The sheer level of aggregate advertiser demand for mobile is limited,” said Kennedy, 51. “Pandora is one of the top five players in mobile, so we generate a lot of inventory and are ahead on where aggregate demand is for mobile advertising.”
    It goes on to say that they need small advertisers, but have no sales force:
    Much of the growth from mobile advertising will come from small businesses looking to reach prospective customers when they’re nearby, said Rich Greenfield, an analyst at BTIG LLC in New York. Pandora has more experience selling ads to bigger brands and may not be equipped to reach those smaller, local businesses, he said.
    “They don’t have a sales force to sell local ads the way your local radio station does,” said Greenfield, who recommends selling the stock. “We think it’s one of the biggest problems of the story.”
     And there you are.  A business that, despite lofty subscriber projections, no one is ever going to pay for.

    Here is my valuation:
    • Lets assume '12 Subscription based revenue is $40M, this is ~15% of their total Revenue
    • I'll give them and EV/Sales of 5x on the $40M - given that I don't think the advertising model will work.
    • Using the 160M shares outstanding - I would pay $0.25 for this stock - or about 98% below where it is trading.
    Tags: P
    Nov 27 1:16 PM | Link | Comment!
  • Europe is in a Balance Sheet Recession: Richard Koo
    Richard Koo's latest note points out that Europe has entered a Balance Sheet Recession (ZH primer).

    As he has long argued, adding liqudity during a balance sheet recession is necessary and not inflationary;
    When the private sector as a whole is trying to minimize debt despite ultra-low interest rates, the money multiplier for the private sector turns negative at the margin, which means the money supply will not increase no matter how much quantitative easing the central bank engages in. And without growth in the money supply, there can be no inflation.
    He goes on to suggest that a form of QE is necessary in Europe:
    The ECB should embark on a quantitative easing program similar in scale to those undertaken by Japan, the US, and the UK. Doubling the current supply of liquidity would not trigger inflation and would enable the ECB to buy that much more eurozone government debt.
    The ECB has provided a total of €1.3trn in liquidity thus far. The experience of Japan, the US, and the UK suggests there is no reason why purchasing an additional €1.3trn in eurozone government bonds would lead to inflation.

    Nov 27 1:13 PM | Link | Comment!
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