Star Wars, another good acquisition it is

Disney (DIS) has announced that it has bought Lucasfilm, the owner of the Star Wars and Indiana Jones franchises for $4 billion. DIS is the world's pre-eminent brand/content owner and has the widest distribution reach with DIS TV, theme parks, games and toys. DIS has a track record of acquiring good content, DIS bought Marvel for a similar price tag in 2009 and bought Pixar for $7.4 billion back in 2006. Stars Wars will continue in the same tradition, its content will benefit greatly from DIS extraordinary reach. As Bob Iger the CEO mentions the Star Wars “universe of more than 17,000 characters inhabiting several thousand plants spanning 20,000 years offers infinite opportunities.”

Opportunities, there are

The acquisition adds content that will benefit all of DIS businesses for years to come. In toys DIS has the opportunity to cut costs and increase revenues. Current Star Wars products are sold through 3rd party representatives, DIS can go direct. They already have strong bargaining power with their brands and with Star Wars this position will only strengthen. Less than 40% of Lucasfilms profits are international, they have historically focused on North America and toys. DIS will be able to increase revenue by adding to the product range ie Darth Vader lunch boxes and by distributing internationally.  

The films division will benefit from the new Star Wars movie to be released in 2015 episode 7, followed by episodes 8 and 9 with long term plans to release a new film every 2-3 years. George Lucas will serve as a creative consultant on the upcoming films. No one will be more excited by this news then this guy, the famous Star wars kid.

 Source: You tube 

On the theme park front DIS can add Stars Wars related attractions in Hong Kong and Shanghai. They already have Star Wars and Indiana Jones rides in the other parks. While on TV DIS will look to incorporate additional Star Wars programming on the Disney channel, it won’t just be kids watching these channels any more!

Valuation, afraid you will not be

The acquisition will be low single digit dilutive for 2 years. Licensing revenue in 2012 was $215m so DIS paid around 18.5x this number. They also disclosed that in 2005, the year in which the most recent Star Wars film was released, Lucasfilm generated $550 million in operating income. DIS has also estimated that the most recent 3 Star War films have averaged $1.5billion in today’s dollars in box office. So while the acquisition is dilutive there seems to be a reasonable balance paid for future potential and past profit.

The force is with you

An interesting comment management made on the call was that they believe DIS shares to still be attractively priced. So while half of the purchase price will paid in DIS shares ($2 billion dollars worth), DIS intends to repurchase these shares within the next 2 years. It’s a good sign when management are reluctant to issue stock and if they do are willing to buy them back.

When DIS announced the Marvel acquisition in 2009 the stock fell 3% to $25, the stock has doubled since. DIS stock will likely trade sideways as investors digest the news providing an opportunity for longer term investors. Long term the news is good as the acquisition of LucasFilms is following the same game plan as set out by DIS’s past acquisitions of Marvel and Pixar. DIS’s track record and reluctance to issue stock suggests that even with a 33% share price increase year to date the stock still offers long term upside for investors.

Star Wars kid, doing well he is
By the way, the Star Wars kid in the video, well he's a lawyer now. Take that Darth Vader! Its great to see him doing well. DIS could make a movie out this, something similar to Cool Runnings? Click here to find out more. (The link has the original video without special effects).

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long DIS

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

 

Amazon great company but not a great stock

I was trawling through the Amazon (AMZN) website this morning (US markets are closed due to hurricane Sandy) and right in the middle of the page was a comparison of the Kindle and iPad mini. What stuck out the most was the quote from Gizmodo, wow that comment was ballsy. Its great to see some corporate pushback! Apple (AAPL) did not mention the Kindle fire at all at the recent iPad mini presentation they mainly referred to Android tablets, so AMZN has come out swinging what about me? Personally for me it’s always been more about the applications rather than price, which as a comparison has conveniently been left out.

Source: Amazon.com

Amazon winning by losing?

AMZN and AAPL are both great companies with the beneficiary being the consumer. As an analyst this got me thinking more about their recent earnings reports and the differing share price reactions. Both companies reported earnings last Friday, both gave lower than expected forecasts but the share price reactions could not have been more different. AMZN posted its first losing quarter in more than 5 years and AAPL guided EPS to be down year on year. Both not great outlooks but very different share price reactions with AMZN up 6.87% and AAPL down 0.91%

Earnings, earnings, earnings

Putting the investment hat on it and considering earnings it turns into a one horse race. Shares typically increase inline with earnings similar to what AAPL shares have done over the past few years. In the five year chart below you can see that the earnings line in pink roughly traces the direction of the share price.

 

Source: Factset

AMZN differs in that its share price is increasing inline with earning promises.  The investment story is that AMZN is the dominant player in e-commerce and is making huge investments now that will pay off later. But wait a second aren’t they already the dominant player, how much longer do we have to wait? Sales have increased rapidly but not the bottom line. It is the right thing to reinvest but after a number of years there should be results. In the five year chart below earnings for AMZN have decreased but shares have continued to rise, increasing the risk for investors as the promise of profitability is pushed out further and further.

Source: Factset

Valuation is a great way to know if a stock is appropriately priced as it shows what assumptions investors use to justify the share price. As we all remember when valuation tools such as eyeballs or metrics other than earnings are used investors should be wary. In AMZNs case it trades on a multiple of 131 times next years profits. Analysts try to make buyers feel better by valuing it on other metrics such as 25x free cash flow or on discounted cash flows.

A great company is not always a great stock

I understand that investing money is very different from losing money. It’s just that AMZN is already the dominant player and after reinvesting money over a period of years has not substantially increased margins or earnings, its losing money. The share price assumes that AMZN will be successful, when AMZN translates this success to profits there will be not much upside left for investors as the success is already priced into the shares. As an investor I’m on the sidelines, I think I will benefit more as a consumer and not investor of the site.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long AAPL and has no position in AMZN

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

 

 

 

Stockmarket Gangnam Style

I have been looking for an excuse to justify uploading the famous Gangnam style video to the site. I have finally found one. According to Bloomberg the Korean rapper Park Jae Sang otherwise known as Psy, has a father who is chairman of a Korean listed firm DI corp, stock ticker 003160 (ticker numbers are so hard to remember). Psy's dad has a 10% stake in the company.

 

Even the stockmarket has caught the craze check out the stock chart below. The company DI Corp went sideways for 5 years until the famous Gangnam video received publicity. The video was uploaded July 15th with the stock starting to move Gangnam style late September. The stock is now up 5x since July. Apparently shares have risen in the hope that due to family ties the company can cut a deal with Psy.

 

Source: Factset

DI corp is in the business of semi-conductor testing equipment and now maybe music? However according to the company no discussions have been made on potential business with the chairmans son.

Too bad, I’ve always wanted to see what a Gangnam semi-conductor testing equipment design would look like!

 

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in DI corp

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Tablets the fastest selling mobile device

A recent article in the WSJ caught my eye. According to HIS iSuppli, PC shipments are projected to decline for the full year the first time in 11 years. Not a great sign for PC manufacturers and Windows owner Microsoft (MSFT). Analysts are expecting a slight pickup in sales once Windows 8 is released, I’m not so sure. Seems the only guys excited about Windows 8 are MSFT themselves this is not 1995 (Windows 95), if you haven’t noticed MSFT you have tablets to compete with!

As the chart above shows tablets have been the fastest ramping mobile device, a major reason in the decline of PC sales. PCs are still needed for work but future growth will be slow as tablets and smartphones take market share.

If this guy can’t pump up MSFT employees who can?

MSFT has totally missed the boat not only in operating systems for tablets but smartphones as well. This has been really unfortunate given MSFT was the first mover releasing a tablet with stylus (pen) back in 2002. According to Walter Isaacson’s book a MSFT employee crowed about their new tablet over dinner and annoyed Steve Jobs so much that Steve thought Apple (AAPL) should go ahead and produce their own better version!

Things have not gone too well for MSFT since Steve Ballmer became CEO. He is one of the more entertaining CEO’s, making one of my all time favourite CEO entrances, see video below.

 

MSFT is at risk of being left behind in the PC world with no material expsoure to the tablet and smartphone. Their key product to get back on track is Windows 8 which has been designed with tablets in mind.

Tablet growth ramping up, PC growth ramping down

On the 23rd of October AAPL will announce the new mini iPad just days before the Windows 8 launch. This is a major problem. People aren’t asking about Windows 8 they are more interested with the iPhone, iPad and Samsung Galaxy. Admittedly it is hard to build buzz with PC’s as they tend to be work related while tablets tend to be lumped into consumption and entertainment.

Even the Intel CEO does not believe Windows 8 will be ready telling Taiwanese staff that it is being released before its ready. Intel are one of MSFT’s biggest partners. PC makers banking on pent up demand from the upcoming release of Windows 8 will likely be kept waiting. 

Tablet growth off the charts

Tablets have been a major reason for the slowdown in PC sales. As we pointed out in an earlier blog Tim Cook has mentioned "through the last quarter, which is just two years after we shipped the initial iPad, we've sold 67m. And to put that in some context, it took us 24 years to sell that many Macs, and five years for that many iPods and over three years for that many iPhones."

Tablets sell fast, given their price and convenience it is more likely for a family to have multiple tablets than multiple desktops. It is no longer a stretch to say that tablet market sales will eventually overtake the PC market. As investors we are focused on companies that benefit from growth in tablets (AAPL) and will stay away from companies exposed to PC sales (MSFT).

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long AAPL; has no position in MSFT

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Peoplesoft 2.0

There is a hot new IPO that is expected to list tonight and no it is not a consumer or social technology company but a business selling services to other businesses. Workday (WDAY) is the name, they are a provider of enterprise software delivered through the cloud (internet). What makes WDAY different from other software providers is that it is backed by the founder of PeopleSoft Co-CEO David Duffield and half of WDAYs employees are PeopleSoft veterans.

Oracle took over PeopleSoft in 2005 in a bitter takeover for $10.3 billion. Now the team is back together to take them on. The idea is the same to sell human resources software but delivered through a different way. WDAY is taking advantage of the opportunity to deliver their services through the cloud and not through on premise systems. Instead of installing expensive hardware and software on the clients premises WDAY can deliver software through the internet, a cheaper and easier to manage proposition for customers.

Power of one

WDAY takes inspiration from Amazon, Google and Apple which have one version and one system. What these companies excelled at was making their systems intuitive for users and easy to use on mobile, features most business software lacked. WDAY seeks to emulate the consumer experience with what they call the power of one. The power of one is one system, one version. Even though the applications can be configured to meet individual customer needs they all share the same basic system, one version. Everyone is upgraded at the same time, users always have the most up to date version, upgrades can occur more frequently and are managed by the vendor and not by the company. One version makes it much easier for call centers to deal with any inevitable issues.

Can’t solve today’s problems with yesterday’s solutions

The enterprise software industry has seen a major shift before, transitioning from mainframe to client servers on premise and now the cloud (see chart below). 

As WDAY points out the companies that were successful during the last transition were newer companies such as SAP and Oracle which built products from the ground up. Now Oracle and SAP are saddled with legacy software with a foot in each camp. They have the opportunity to sell cloud based software but at cheaper prices which would cannibalize their high margin legacy on premise software.

As the Co-CEO of WDAY Annel Bhusris says you can’t solve today’s problems with yesterdays solutions. According to some case examples in the S1 WDAY can save customers up to 30% over 5 years when compared with traditional on premise HR systems. Also due to ease of use it has empowered employees to take advantage of information to make more timely and effective decisions.

Valuation based on sales?

It’s never a good sign when the valuation is based on sales. Consumer IPOs like Groupon, Facebook and Zynga did not do well. What makes this IPO slightly different is the management team, they have been here before and more importantly technology companies selling to other companies have done well post IPO. Palo Alto Networks is up an additional 17% and Service Now 46% from the first day of their listing, these companies did list on slightly lower sales multiplies of 12-13x.

Risks

Switching costs for companies are immense. Companies have invested substantial personnel and financial resources there is also security risks as company information is kept in the cloud and not on premise. The on premise competition is Oracle a $148 billion company and SAP $84 billion. A company with a similar cloud based approach but focused more on customer relationship than employee management is Sales Force with a $21 billion valuation. Two other cloud based companies have been taken out by the larger players over the past year.Taleo by Oracle for $1.9 billion in February 2012 and SuccessFactors by SAP for $3.4 billion December 2011. These defensive moves by the incumbents suggest that the move to the cloud is real and a major threat to their businesses.

For a $4 billion company WDAY is talked about quite a lot. According to Bloomberg Larry Ellison has mentioned WDAY 8 times on Oracle calls over the past year, a similar number to Salesforce which has turned out to be a great indicator. Larry is giving more and more credibility to WDAY, Larry you are protesting too much!

Time to upgrade

As an investor this is what we like to see no insider selling. All shares sold will be going to WDAY. Not even private equity (Greylock Partners) are selling down shares. WDAY plans to sell 16% of the company to the public. Previous investors include Michael Dell of Dell, Jeff Bezos of Amazon.

WDAY is a compelling story with a seasoned management team back together again to take advantage of technology to better deliver their services. This is an IPO to own.

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in WDAY

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

A Latin American Paypal, eBay, Amazon?

Idea Arbitrage?
A Latin American Paypal, eBay, Amazon? That’s a lot to live up to; fortunately Mercado Libre (MELI) is keeping up with the Joneses as the dominant e-commerce player in Latin America. MELI has copied or in management’s words idea arbitraged the best ideas from the previous mentioned companies and tailored the experience to the Latin American market. eBay has given MELI its vote of confidence owning 18% of MELI, their non-compete agreement expired in 2006.

According to Deutsche Bank MELI has 22% of the online market in Latin America. This market share is larger than Amazon’s (AMZN) in the US at 19% and eBay at 12%, though it should be noted that Amazon does not have a local Latin American site.

Amazon not in the Amazon?
The risk is that AMZN opens a local site in Brazil, MELIs largest market. This rumour has been around for over a year and was recently given as a reason to stay away by Barrons in May earlier this year. As seen in the chart below AMZN is the 3^rd largest e-retailer with no Latin American operations. Investors need to keep this in mind though this risk is somewhat minimised by the availability of infrastructure. In my opinion one of the reasons for AMZN’s success has been logistics, it owns warehouses and with free shipping options has created an integrated and consistent buying/shipping process for the customer. Obviously this strategy will be much harder to implement across Latin America.

Source MELI investor day

I believe the real short term risks are with Argentina and Venezula. They are approximately 33% of MELIs revenue so any currency devaluation will impact MELI sales.  Like I have mentioned before this is all relative, currency risk is a risk all around the world (thought I would never say that) and not just Latin America.

Learning from big brother (eBay)
MELI has been able to take advantage of seeing how the US e-commerce market has evolved through competition between AMZN and eBay. MELI has followed eBay into fashion positioning themselves as the online second store for offline retailers while also adopting AMZNs fixed pricing rather than an auction system.

They also have their own Paypal called “Mercardo Pago” which has been bundled into their merchant services. This is at such an early stage that they are not currently monetising this product but driving adoption for future growth. As can be seen below Mercardo Pago is used to finance 33% of purchases on MELI's main site and if adoption continues to grow like Paypal it can be used to drive transactions on other online sites and eventually offline.

Big brother vs little brother

Source: MELI, EBAY press releases

As you can see above MELI still has a long way to grow and this is compared to eBay which is still showing high mid-teens earnings growth! According to Internet World Stats Latin American internet penetration is only 40% much lower than the US at 78.6%.  EBAY has seen this game play out before that's why they own 18% of MELI, investors would do well to follow their game plan.

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long MELI

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.