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"Risk comes from not knowing what you're doing" Warren Buffett I look and sift the world for such misplaced bets. When I occasionally find one, I first exploit it for profit. Then, I write about it for anyone else interested in such ideas. Twitter: @unemon1 Scribd:... More
  • How Insane Is ZU's Valuation (A Different Perspective) ? 6 comments
    Feb 28, 2014 4:47 PM | about stocks: ZU

    Last Week $ZU Announced a total of 3.2m Active Customers in 2013 and Average Revenue per Active Customer of approximately $220.

    The following Table presents a $ZU valuation based on:

    -28% Gross Margins

    -20% Operating Expenses

    -15% Tax Rate

    - 7 year Model

    - Discount rate of 12.50% and Terminal Growth rate of 8%

    (Yellow) If Over the next 7 years ZU does not experience growth in Active Customers and no Growth in Average Revenue per Active Customer, then today's ZU's Fair Value is $5.06 per Share.

    If Over the next 7 years ZU does experience a 600% growth in Active Customers (to 21m) and a 50% Growth in Average Revenue per Active Customer (to $320), then today's ZU's Fair Value is $43.21 per Share.

    To justify the current Market Valuation ($68 PPS), ZU should experience a 1000% growth in Active Customers (to 33m) and a 50% Growth in Average Revenue per Active Customer (to $320).

    These Expectations make no Sense to me! For sure, I would not like to be a buyer at $70 ... for the long term

    Update: Since some investors use EV/ Foward SALES to value e-retail companies ... let's have a look at how this multiple would/should affect ZU's valuation:

    Currently ZU is trading at a EV ($8.04b) / Forward Sales (1.125b) of 7.14.

    This is simply insane: Let's compare it ... to ... AMZN!

    --> Since February 2009, AMZN never traded at a EV/Forward Sales multiple > 7.09! (EV Sales of >11)

    --> Since August 2000, AMZN never traded at a EV/Forward Sales multiple > 4! (EV Sales never >5)

    --> AMZN EV/Forward Sales multiple has been on average 1.7169 over the past 14 years (Median Being 1.4613) (EV/Sales Average = 2.5487 | Median = 2.0817)

    Let's look at how AMZN revenue Evolved over Time:

    In the Spring of 2000, AMZN Revenue was $1.6b ... (probably similar to the Revenue of ZU in 2 years from now).

    If you assume that over the next 5 years ZU revenue is set to growth at the same rate AMZN Revenue grew over the period 2000-2005 (33.9% year over year growth rate) --> You can expect ZU to generate $3.76b in revenue ... by 2019

    and you apply the AMZN average/median EV/Sales Multiple ... you will end up with a ZU EV of $9.70b / $7.82b. (-->Mcap of $9.35b / $7.47b).

    This would result in a Fair Value today of approximately $5.18b / $4.14b

    ---> if you assume a 5% yearly dilution of the Shares basis ... then, the Current Fair Value of ZU's Shares is approximately $31.97 / $25.55

    (you could do the same analysis with the EV/1YF Sales multiple ... and get similar results)

    At Current Prices ... Market is Expecting ZU to be a better Growth story than AMZN!!!!

    btw, do not forget .. than SINCE THE TECH BUBBLE UNTIL 2007, AMZN never had a Mcap > THAN $22b ... and that in 2007 AMZN was already Generating $12b in revenue

    You want another great example on how highly overvalued ZU is? ... You should look at VIPS valuation (another over-hyped flash sales stock).

    Right Now, VIPS is trading at a EV/1YF Sales multiple of 2.541! It was trading at an EV/1YF Sales lower than 1 ... just 7 months AGO (this show your that the entire trendy e-retailers sector is in an overvaluation bubble ... when you see such a multiple expansion across the board)

    ---> ZU management estimates 2014 Revenue to his $1.05b - $1.15b

    ---> if you apply the VIPS EV/1YF Sales Multiple ... you would get a ZU EV of 2.794b

    ----> Right now ... VIPS should be trading at $16 per Share!

    I am not claiming to give you the exact ZU valuation ... No one can do that ...

    However ... it can be shown how highly overvalued ZU is:

    1. Even if you assume an AMZN-like growth ... ZU is 50% overvalued

    2. If you Compare ZU to the other Competitor (NYSE:VIPS) operating exactly in the same Market ... then .. ZU is more than 80% overvalued!

    ---> BTW ... VIPS has then Entire China Market ... and not just the U.S. moms niche Market. ... LoL ... --> and As you probably know .. I am not a big VIPS fan!

    Disclosure: I am short ZU.

    Stocks: ZU
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Comments (6)
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  • HFI
    , contributor
    Comments (1767) | Send Message
    Great post. Thanks.
    28 Feb 2014, 05:07 PM Reply Like
  • James Sands
    , contributor
    Comments (2721) | Send Message
    Thanks for the informational scenario.


    My take is as follows:


    Stock doesn't need 33 million active customers to be valued at today's level.


    If for instance the number grew to 6.3 million as a constant example for the year (2014), and rev/active cust grew another 4% to 228, the company would generate near $1.5 billion in revenue.


    That would be 5.8xs today's EV/sales level. With this type of growth, there is no way the stock is going to trade 5.8xs EV sales. Right now it is at 12xs EV sales. At a minimum the stock will probably trade at 7.5xs EV sales. If we diluted shares to 140 million and assumed cash of $350 million, that gives a price at $80/share. At $65/share we hit the 5.8xs EV/sales metric in this scenario.


    The company may get to double active customers by year-end, but this will be averaged, thus the rev est. is near $1.2 billion. If the stock hits/beats this year's targets, it only goes higher. Stock generates strong cash flow and will continue to build cash position. I agree it is overvalued today, but will continue to command a premium for its growth moving forward.


    The stock will definitely be a controversial SA driver, it will be interesting to see how this company progresses.
    28 Feb 2014, 05:38 PM Reply Like
    , contributor
    Comments (421) | Send Message
    Author’s reply » As you said ... it's all about growth! ...The biggest problem I see with ZU ... is that the market is ... over-estimating the growth potential!


    Let's look at the problem from a different perspective:


    1. We both agree (I assume) ... that EV/Sales multiple depends on / is a function of future expected growth.


    2. A 7.5 EV to sales is not realistic IMO.


    For Example, VIPS currently has a EV/S of 4.465 (it increased by 100% over the past 12 months)


    1. Vips does have a "bigger" growth potential (i.e. china and broader business range / products)


    2. Vips is in a similar Company development Phase as ZU.


    How could you justify a 7.5 EV/S ratio ... if ... even now ... during a multiples bubble ... a company such as VIPS does have a EV/S of ... 4.465?


    If you look at AMZN ... the EV/S ratio is 2.124 ... and Only prior April 2000 AMZN had a EV/S ration > than 7.5.


    So, Unless you do believe we are a the starting of a 2000 style bubble, I would not use s 7.5 EV/S on ZU


    You should use a 5x multiple ...


    At a 5x multiple, at the end of 2014 ... the PPS should be at around $50. The presen value of the $50 in 12 months ... would be about $45 ... today!


    So, IMO ... ZU remains overvalued also if you consider it on a EV/Sales base.


    Were the multiples to go back to the pre E-Retail bubble of 2H2013 ... then you would look at a multiple of 3.5-4.5 (4)


    --> implying a Fair Value for ZU ... of ... $35


    Of courser ... as we know ... bubble can go on ... for quite a long time! ...


    FYI .. I do appreciate you input ... the fact that I have a different opinion .. dose not mean I do not respect you. I guess ... that's what allows markets to properly work: ppl with different opinions.
    28 Feb 2014, 06:32 PM Reply Like
  • James Sands
    , contributor
    Comments (2721) | Send Message
    Good points and I always consider contrary views to my holdings....money is made multiple ways. No disrespect at all on that front. I sure do not have all the answers.....maybe just a couple at best.


    I agree 5xs is a much better value level. I do think that VIPS trades with a discount as a Chinese company (it should as there are not regulatory protections in China - my opinion of course). So in the North American market, a company like Zuiliy will trade at a premium to VIPS, that's why I threw out the 7.5xs number (not that I am promoting this level).


    Thanks again for the information.
    28 Feb 2014, 06:48 PM Reply Like
    , contributor
    Comments (421) | Send Message
    Author’s reply » Hi, I added a part on the EV Multipe...
    1 Mar 2014, 03:28 PM Reply Like
  • James Sands
    , contributor
    Comments (2721) | Send Message
    More good info, however, there is one big problem.


    Vipshop is always going to be a poor comparison to Zulily. They do not operate in the same market as stated. And many Chinese stocks trade with much lower valuations, especially in tech than their U.S. counterparts. This is a necessary, and is justified due to risk associated with no IP protection in China.


    Plus if we compare recent filing information, Vipshop has about $227 million in inventory and Zulily has about $13 million. It appears that Vipshop acquires inventory that has not yet been purchased. Zulily's cash conversion generated from sales and inventory is much quicker than Amazon and Vipshop. Again speaks to the difference in models, although Vipshop does utilize discounted flash-sales too.


    For transparency on China a great example is WD-40, as most of us all know the product WD-40. They operate in China and it took them a while to get their business in order. They have the current highest market share (over 50%), but the fake Chinese-generated WD-40 had an equal market share prior to this. To take back some of that market share, WD-40 created their own fake product in addition to the real thing, pretty crazy, just one little piece of insight into that "market".


    Also, while experiencing strong GDP growth, China's rank for ease to develop business has continued to decline and currently ranks 100th in the world.


    This is a complex place to do business, and you better have your connections to deal with the environment. This is not a claim that Vipshop does not have these ducks in a row, but rather this is risk that will always weigh on Chinese stocks.


    If investors were able to be comfortable with this risk, I would argue that we would see similar valuations as U.S. company peers. This would relate to Sina, Sohu, Youku Tudou, Vipshop, among others.


    Zulily's post-IPO stock price below $40 was a great time to buy shares. If the company is successful, the market will not place the EV/sales lower than 5-7xs. There have been some claiming Zulily was highly overvalued in the low $40s already too.


    Zulily is looking to build off of a model that is not common to date. Vipshop is close, but the company does not operate inventory identically. So from a public company perspective, Zulily is unique. When/if Guilt goes public, this would shed more light into the mix.


    There is a possible chance, that Zulily's model will lead to an unanticipated market dynamic (Ebayesque) where more boutique vendors/other merchants evolve over time and Zulily is at the forefront of this progression. It is pretty interesting when you hear of companies starting out with 20 employees and after partnering with Zulily, growing to hundreds of employees. Zulily is looking to partner with vendors, not just access the most in-demand vendor products.


    Everyone knew the Internet was going to provide new commerce opportunities in the late 90s and early 2000, but no one could imagine what Amazon has accomplished, nor the devices used to access the Internet.


    E-commerce, M-commerce, and S-commerce as we know it today will not stay static (overstatement much), and other majors will evolve, especially because Walmart, Target, Costco, etc. all have a big problem - foot traffic. These giants will continue to cater to their brick-n-mortar business models for a while, which will allow for continued opportunity for companies like Zulily.


    I think the biggest tests for Zulily long-term will be can they sustain a commerce model with delivery times around 10 days, and what is the lifecycle for small boutique vendors as they scale to depend on your services? Zulily will really need to grow active customers to remain the leading platform for this model. Not having larger levels of inventory is not the standard for sure in today's commerce world, so Zulily will have to prove that this is sustainable, or adapt accordingly.


    I do not think that competition is going to immediately impact Zulily. Amazon is not going to focus on a model where they do not have inventory on stock to ship immediately. And Groupon's acquisition of Ideeli displays they are not willing to spend on a major threat to Zulily. Zulily has clearly separated itself from a growth perspective from companies like Ideeli.


    Q1 is going to be interesting, especially if Zulily beats again.
    1 Mar 2014, 05:32 PM Reply Like
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