Zach Cunningham

Deep value, growth, tech, long only
Zach Cunningham
Deep value, growth, tech, long only
Contributor since: 2013
Company: Ultima Financial
Agree on all counts.
I liked what you said about the Xbox to PS movement because that was the exact same turning point for me. Ironically, prior to the 2013 E3 (Electronic Entertainment Expo), I was bullish on MSFT and bearish on Sony. After watching the entire event (I am a hardcore gamer at heart), I immediately switched stances when I saw the PS4 was going to blow the X1 out of the water. Even wrote a SA article on it. That event marked the day I went long SNE.
Currency movements are next to IMPOSSIBLE to predict accurately & timely.
I share your enthusiasm about PS Plus. It has developed into a huge revenue driver of Sony, especially since the launch of PS4.
Morpheus is certainly not complete -- just like Oculus, it still has several kinks to be worked out. Sony said back in December that the looks and specs of Morpheus are likely to change, and VR has to be near perfect in execution for it to really catch on. It is certainly an exciting prospect, early reviews have been positive, and Morpheus has been called more polished than Oculus and Gear VR, but it still in prototype stages yet and will likely not see a widespread retail release for at least another 10-12 months.
PS Now is another great chance at revenue generation, but they too have a few kinks to work out. As if right now, their library is average at best, and there have been several latency and lag issues that have to be fixed in order for gamers to truly embrace the platform. Lastly, it is pricey -- $20 for a monthly subscription or $15/month for a 3 month subscription. I think we'll see a small price drop in the 2H of this year.
Both prospects are exciting, and with some polish, both could be huge for Sony.
Morpheus is still in development. I'm in the camp that VR will not be a hit right off the bat. It will take years of development and adjustments to user experience before it becomes a mainstream option for movies, games, etc.
Given that, if Sony beats others to the punch, it could have a significant revenue driver on its hands.
Great point, and it is one I make constantly for Apple. To supplement what you said about the low EV/FCF ratio, also take a look at the P/E ratio.
Net of cash, Apple trades at a P/E ratio of ~8x. Google? ~17x.
Your opinion , my opinion, we apparently are not going to agree.
Just because the P/E say's the stock is trading at 1, doesn't mean the stock will be $1.00. You could have a FCF model showing $100 per share for the same company.
No -- if there is 0% earnings growth why would you use a P/E analysis? Same as if you were analyzing a company in the oil and gas industry -- the P/E ratios are all over the place, from very low, to negative, to astronomical. Therefore, you wouldn't use a P/E analysis for that would you? You would use a FCF/DCF, EV/EBITDA or something else to determine price.
Similar to a Dividend Discount Model -- you wouldn't use that valuation for a company with no dividends would you? So why use P/E valuation for a company with no earnings growth?
Look at it from a purely mathematical perspective in this example -- a company today is trading at a P/E ratio of 10x. Consensus estimates 10% per year growth. PEG = 1.
Remember PEG of 1 = "perfect" valuation, meaning it is not undervalued, nor overvalued of a P/E - Growth standpoint.
Now let's say you are trying to calculate for next year. Consensus estimates for per year growth are raised to 12%. If you keep the P/E ratio at 10x, you get a PEG of ~0.83. This is signaling an undervaluation. In strong form EMH, there is no undervaluation (nor overvaluation). Thus, the PEG ratio must be 1, forcing the P/E ratio to rise to 12x.
The reason this is theoretical is because rarely do we see a company trading for an actual PEG of 1. This is because we do not live in a world with strong form EMH, rather we have semi-strong form (probably, maybe weak form depending on how you look at it). Because we do not live in a strong form market, this is purely theoretical. What would the value of the stock be IF we lived in a strong form market where all data was available to everyone? That is the purpose of my theory.
In strong form EMH, yes it does. The reason is that company would early be producing returns in the form of dividend payments.
The logic isn't off -- you're example of a DCF model wouldn't work. We do not exist in a market that displays strong form EMH. We are talking about a valuation based on a purely theoretical environment.
To answer your question on the dot -- the strong form of the EMH does imply a PEG of 1, as a PEG of anything else would imply potential for profit outside of dividend distributions.
Definition of strong form EMH:
"The strongest version of market efficiency. It states all information in a market, whether public or private, is accounted for in a stock price. Not even insider information could give an investor the advantage."
You're probably right. But there is no possible way to predict market sentiment. Not as a science.
I am not that type of investor. At some point, I believe the flip will switch on the consumer perception of Apple.
Maybe, and I made that assumption in my previous analysts (that the 5C would indeed be a low-end iPhone).
It's a high risk / high reward problem for Tim Cook -- does Apple challenge Android on its own turf or keep focus on its own?
Never said 5C was a failure -- it just wasn't what most analysts thought it would be (low-cost iPhone).
I don't think you're following me -- the strong form of the EMH states that all information in available to investors, which effectively makes any possible gains on trading 0 (both long and short trades). This means that the PEG of a stock must effecitvely be 1. Given that PEG = P/E / Growth, P/E and Growth must be equal to have a PEG of one.
Now I think I see where you are confused. The reality is that our world is not based on strong form EMH -- rather it is based on semi-strong (most likely). This is why I say not to take the EMH P/E calculation as an actual valuation, because we do not live with a market that has strong form EMH, which means that there are other factors that make P/E and Growth less than perfectly correlated like you said. I never meant for the EMH P/E to be an actual valuation, but more of a theoretical one based on a theoretical market (a market based on the strong form EMH).
Two points to help you understand the EMH in this sense:
1) EMH states that all information ,public and non-public, is known. Therefore, it is reasonable to assume that a stock would be "perfectly" value -- thus a PEG of 1.
2) Given the PEG ratio -- P/E / Growth, if growth is 10%, then according to the EMH, the P/E has to be 10x to give a PEG ratio of 1.
The reality of it is the correlation between P/E and growth. The higher the growth, the higher the valuation investors should give the stock (thus a higher P/E ratio).
Yes, of course. Which is why it is just at theory to show the overvaluation or undervaluation caused by consumer perception. Just in case, I wasn't clear enough in the article, the EMH P/E valuation is not to be taken as my Target Price or Intrinsic Value.
Look at the PEG ratio -- P/E / growth
If PEG = 1 and growth = 1%, P/E = 1.
According to that particular theory. For valuation purposes, there are several other factors to consider, so it's a no in that regard.
Ha! I do appreciate your opinion. After all, bears have to exist to take the other side of my position. I do love being called interesting as well.
As for the opening price in 2015 -- I have no earthly idea. It could be $400 or it could be $1000, there's no way to tell, at least for me. My whole philosophy strives on using fundamentals to determine a stock's value, not necessarily what the price will be at a point in time. This is why I love the Intrinsic Value calculation.
I appreciate the offer though, but I am satisfied with money I made on the Apple rise ; )
"Actually, net income didn't grow at all. EPS grew because of share buybacks, not underlying business growth."
I said in the article: "One note to make on the bottom line growth is that Apple's massive buyback program has inflated those results. However, this is a form of returning value to shareholders, so I am supportive of using this factor in financial analysis."
Perhaps I should have clarified as bottom line / share?
Major product innovations rarely occur in the 1st quarter they come out in. The reason I am long is the long term prospects, not the short term.
On the FCF model, I do not see where you are getting 10% from -- I am seeing ~5% gains in Operating Profit per year. With stabilizing margins, growing revenue and new products, I do estimate strict bottom line growth going forward, not just in EPS.
Oh -- I absolutely agree. I probably should have been a little more clear by stating "..not pursuing size growth but profit growth." One of the great things about the tech sector is that there will never be a limit on top or bottom line growth as the industry will never stay the same over a moderate period of time. I justify my long position the same as you!
I didn't share market say does never matters -- I said for Apple, total global smartphone market share does not matter. Only the market share in where they compete -- the premium segment -- matters.
That's like saying why does Apple not have any market share in the auto industry -- well, they don't compete there do they? You can't use a single metric across every type of company. When I evaluate oil and gas companies, I can't use P/E valuations because the industry has extreme P/E volatility.
If you want to dish an insult, please don't hold back. I really don't think anybody here cares.
I appreciate you comment, but I am still sticking to the two points that I made before:
1) The business environment has not changed. The same factors that have affected Apple before is affecting Apple now. There has been no change in the market share trends in the past 4 months -- the data supports this. Regardless, market share is a moot point in this case, as it depicts a fractured view of the environment.
2) Size isn't always better. As LowRiskValue said in his comment and I state constantly in my articles, Apple is not pursuing size but profit.
Speaking to the market share -- I purposefully stated in the article that there had been no major change to the business environment since I wrote my previous Apple article in the past two quarters, so I would not be writing on that. I even referred to the link (I will post it here again for you).
http://seekingalpha.co...
However, you make a highly intriguing point. People (Apple bears in particular) are so very concerned with Apple's market share for reasons I do not understand. Apple has not, does not, and if Tim Cook sticks to his guns, will not compete in a market share race. They compete in only one segment -- the premium market. It would be much easier if you refer to that segment in the article I just linked as there is a large section explaining the discrepancy.
And you can't compare the auto industry to the tech industry. One is mature and one is constantly evolving -- that would be comparing apples to oranges.
Like I said in the article -- backloaded to 2014Q4!!
The P/E ratio would be 1
On the moat front -- this is the tech sector so Moats are usually never that wide. However, SIMO mainly operates in a fine niche market, which gives them some leeway on that side.
I am not dismissing the Zacks report, but for everyone one of those reports you see, you'll find one with a different opinon -- Merrill Lynch for an example has them at undervalued. Personally I do not place much weight into technical analysis indicators such as RSI, but more into fundamental valuations such as P/S, P/B, and P/E. The fundamental metrics still hold even after the increase.
If you do want to get "technical", I would suggest taking a look at the Moving Averages -- the 20, 50, and 100 days MAs are all suggesting an undervaluation at this point. Also, look at the recent spike that occurred on January 27/28 and then look at the volume associated with the spike.The extremely high level off volume that is associated with the spike suggests that this wasn't just a soft increase, but rather a more confident market sentiment of an undervaluation.
Samsung is only one of 3 major contracts they have right now -- they also have plans to add more this fiscal year with the advancement of their eMMC products.
Indeed -- which is why selling the PC line and spinning off the Home Entertainment division will work wonders!
You are using skewed data -- if you really wish to compare the two, use US PS4 Sales vs. US X1 Sales. That will give an accurate comparison.
You are implying the X1 is either completely price inelastic or Veblen type good. In either case (especially the Veblen), I believe you are incorrect.
I am not sure how you can say X1 is pulling ahead (note I am not comparing companies, just consoles).
Sony has outsold the X1 despite a much smaller launch scale. Not sure how you can say X1 is "winning" given that data.
Also note, this data still includes a worldwide X1 launch vs. a purely US PS4 launch. Now that the EU and Australia has gotten access, let's see what the story becomes. Note that Asia has yet to receive any consoles (legitimately).