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  • A Future For Yahoo Finance ($YHOO) – Financial Information Disruption

    To those of us with an interest in on-line financial information – Yahoo Finance has a pretty special place in our affections. While early on-line services (like Prodigy) provided some financial information – Yahoo Finance was the first service that provided useful “good enough” financial information for free. Good enough that traders and investment bankers use the service along-side paid offerings like Reuters and Bloomberg (I know because I was one of these guys). Why? Because it is available on a work/home PC for free (and not hidden on a paid Reuters or Bloomberg terminal) and the base information needed to feed into models and analysis is accurate.

    So what is the possible future of Yahoo Finance?

    This is our view of the world:

    We have developed a range of scenarios for the market based on Free vs Paid and Individual vs Collaborative approaches.

    Here we are focusing on the Super Commons vs Walled Garden scenarios. The We Live In Public and Rock Stars are in play (and we are watching them) – but we see the current battle being Free vs Paid.

    Where is Yahoo Finance today?

    The Yahoo Finance business model is primarily to license financial information then serve that information up for free and sell advertisers the audience. It is pretty simple – but you are hostage to the data providers (see the bottom of this page).

    So how much reach and revenue does Yahoo Finance have? A number of analysts have tried to pull some numbers together – here is our take (using those analyst numbers as a guide):

    We think that Yahoo Finance does around 17.5 million unique visitors a month in the US and 8.75 million unique visitors a month from the rest of the world (half the US number – guess at our end) – for a total of 26.25 million unique visitors per month. Based on dated statistics of the average of time on the site (just under 30 minutes per unique visitor a month) and page view numbers – we estimate an average of 50 page views per month for each unique visitor. That means a total of 1.3 billion page views per month for Yahoo Finance. We note the $9 effective CPM rate in one piece of analysis ($6 x 1.5 ads per page). However, we think that looks low – we would expect a RPM (revenue per 1,000 impressions) of around $20. That gives monthly revenues for Yahoo Finance of $26.25 million – annual revenues of $315 million. If the RPM number is only $10 that would mean annual revenues of $157.5 million or if it is $30 that means annual revenues of $472.5 million – our guess is between these numbers. That is smaller revenue than I expected – and the data costs will limit the margins.

    What about the competition?

    The competition are the other free financial information website – AOL Money and Finance, MSN Money and Google Finance. But also the traditional financial information providers such as Thomson Reuters and Bloomberg. Both Reuters and Bloomberg have a range of revenue streams – but their core business is selling sophisticated timely information to financial institutions. The larger opportunity for Yahoo Finance is taking on these traditional financial information providers.

    To put our estimates of Yahoo Finance’s revenues in context – Thomson Reuters ($TRI) had revenues of $13.0 billion last year (enterprise value (NYSE:EV) / revenue multiple of 3.0x) and Bloomberg had reported 2008 revenues of $6.1 billion. Prior to the merger with Thomson – Reuters had 2007 revenues of GBP2.6 billion ($3.85 billion at current exchange rates). Yahoo Finance’s revenues are tiny in comparison to the traditional financial information providers.

    Reuters and Bloomberg would state that their services are deeper, richer and more relevant for traders and investment bankers than the free offerings of the on-line financial information sites (such as Yahoo Finance). That view would be correct today – but also potentially dangerous.  We think that these companies recognize the danger posed by the free sites. For example:

    We think these are just a number of examples of the traditional financial information providers preparing for a potential war with the free financial information sites. These moves position the traditional financial information providers brands much more in the retail space.

    Should the traditional financial information providers should be scared?

    The traditional financial information providers are worried that on-line finance sites could do to them what Craigslist did to newspaper classifieds. Take a multi-billion dollar industry and make it a multi-hundred million dollar industry – with the benefits flowing to consumers of financial information. Financial information market disruption.

    What we mean by “disruption” is the Clayton Christensen disruptive innovation framework. This describes the process where a product or service starts as a simple offering at the bottom of a market (but with an advantage – examples: price, size, etc) then improves moving up-market, eventually displacing the traditional incumbents in the industry (based on being “good enough” but retaining the original advantage). Existing examples of disruption in the finance space include: index funds and discount brokers.

    Our take on the potential on-line financial information market disruption:

    The traditional financial information providers (Reuters, Bloomberg, etc) have an offering that is targeted at traders and corporate finance professionals. The services are subscription based and provide a lot of information – historic financials, forecast numbers, analysis tools, etc. The on-line finance sites have less information – but have quickly (on the basis of being free) attracted a sizable audience. If these free sites can improve their offerings (add sustaining innovations) – they will become attractive to more demanding customers. This means some customers stop purchasing expensive financial information products and move to the free offering. More move as the free offering improves and it meets their requirements.

    How could that happen?

    First - XBRL. XBRL stands for eXtensible Business Reporting Language. XBRL is an open-source standard for communicating financial information. The Securities and Exchange Commission (SEC) is mandating XBRL for US companies (over a three-year roll-out) – which means it is coming for the rest of the world as well. That means that base financial information – the type traditional financial information providers charge for – will become virtually free. This will allow on-line finance players to break free of the current relationships with traditional financial information providers (and allow more innovation). It won’t take all the traditional players revenues – but it will take away an historic advantage and even the playing field.

    Second - innovation from on-line financial sites (especially the major portals like Yahoo Finance). By adding tools and functionality (combined with XBRL data) Yahoo Finance can take market share from the traditional financial information providers. As Yahoo Finance’s functionality improves – current subscribers will migrate to the free service (when the functionality is “good enough”). Yahoo Finance can keep the advertising model – but good ad-targeting can extract more from users of valuation tools than those simply scanning the current Key Statistics page.  This analysis focuses on Yahoo Finance – but it could be for any of the major on-line finance portals. Do any have the ambition to do it?

    There is a big opportunity for the on-line financial sites (such as Yahoo Finance) to disrupt the traditional financial information providers. I hope they can – because it would democratize finance. students and retail investors could have the same information and tools as traders and investment bankers at Wall Street firms. That would be a good thing.

    Will it happen?

    It does appear that the traditional financial information providers are investing more in the threat than the potential disruptors. This means that the traditional players may yet win the market. In Yahoo Finance’s case there may also be issues with management focus (peanut butter) and potentially a dated technology platform. We think there are still some powerful forces in the disruptors favor. We hope Yahoo Finance (or someone) does step up.

    Mark Clare, Valuecruncher CEO

    Disclosure: No Positions

    Full disclosure – we have had a couple of conversations with Yahoo Finance about Valuecruncher. Nothing about big picture strategy – these are our thoughts and estimates alone.



    Disclosure: No positions
    May 18 6:41 AM | Link | Comment!
  • Running The Numbers - Cisco ($CSCO) near a 52-week high but justified

    Cisco ($CSCO) are featured in Barron’s looking at how their revenues could hit the US$100 billion level (2009 revenues US$36.1 billion).  With the $CSCO share price over US$25 - 52-week range US$16.30-26.85 - we decided to have a quick look.

    Valuecruncher Interactive Analysts Report For Cisco ($CSCO)

    We have the comparator group set as Hewlett-Packard ($HPQ), Lexmark ($LXK), Intermec ($IN) and Netezza ($NZ). You can change these peer companies on the site. For example you could add:

    1. Microsoft ($MSFT) - Interactive Analyst Report For $MSFT
    2. IBM ($IBM) - Interactive Analyst Report For $IBM
    3. Hewlett-Packard ($HPQ) - Interactive Analyst Report For $HPQ
    4. Juniper Networks ($JNPR) - Interactive Analyst Report For $JNPR

    So what do we think?

    Discounted Cash Flow Valuation

    We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$27.71 for $CSCO - 6.5% above the current share price. We see $CSCO slightly undervalued at the moment. But how about compared to a peer group?

    Comparison Analysis

    I changed the peer group companies to $MSFT, $IBM, $HPQ and $JNPR as noted above.  I am going to look at only one of the metrics we use at Valuecruncher - EV/EBITDA. Enterprise Value (NYSE:EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

    On an EV/EBITDA basis $CSCO is trading at 13.6x ($CSCO is being valued at 13.6x last year’s profit at the EBITDA line). A dollar of $CSCO EBITDA is worth more a dollar of $MSFT, $IBM or $HPQ EBITDA. $CSCO’s EV/EBITDA is less than $JNPR’s but that relates to greater growth expectations and a poor 2009 financial year for $JNPR.  $CSCO makes more margin at the EBITDA line than any of these comparators except $MSFT. The comparators look about right.

    csco-blog-post-20100404

    Summary

    Based on our DCF valuation - $CSCO looks slightly undervalued. Looking at some comparators - the market is valuing $CSCO in-line with expectations - compared to the peer group. $CSCO is trading close to 52-week highs - but this looks justified.

    Disclosure: no positions.



    Disclosure: No Positions
    Tags: CSCO, HPQ, IBM, IN, JNPR, LXK, MSFT, NZ
    Apr 04 10:28 PM | Link | Comment!
  • Umair Haque: Can Google Take on Wall St — and Win?

    Umair Haque is an on-line strategist - we are big fans of his work. His latest column on the Harvard Business Blog focuses on finance. It is written as a letter to Google ($GOOG). In it he asks if they can build a better global financial architecture. It is his usual great stuff. At the end of the piece he lists three examples of companies on the “leading edge of a revolution“. One of the three examples that he uses is Valuecruncher.

    Tracked, ValueCruncher, StockTwits, and many more are the leading edge of a revolution — a revolution in what finance has been for the last several centuries, and what it must become in the 21st.

    That is really cool.

    Oct 31 11:31 PM | Link | Comment!
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