Google two verbs for the price of one

If you need to know something you Google it, if you want to search for a video you Youtube it. It is no surprise that becoming a verb has helped these two websites become the world's largest and second largest search engines. Fortunately for Google (GOOG) they own both these verbs with the purchase of Youtube for $1.65 billion in 2006.

Still growing faster than the industry
Last week GOOG reported sales growth of 22% outpacing internet advertising market growth of 16% according to Zenith Optimedia. Search, video and social advertising continue to take market share from traditional banner displays helping explain the good performance of GOOG/Youtube and Facebook versus declining revenue at Yahoo. GOOG is expected to take in $53 billion of revenue this year a large number but in the context of a larger market opportunity. According to eMarketer digital ad spend will be $140 billion this year out of a $545 billion global advertising market. This digital opportunity should increase over time as mobile and internet usage increase at the expense of print and TV see below.

Google it

We are expecting growth to pick up for GOOG as it rolls out more mobile advertising including app indexing. GOOG is now able to search across apps so links to apps can appear in search results. Advertisers can find new customers by reaching out to those who have already installed apps from similar categories ie the maker of Candy Crush may want to reach users who have installed apps like Angry Birds. Advertisers can also link parts of their app directly to the ad ie wotif could take you directly to their app to book a hotel deal if you click their ad.

Youtube it

Youtube has more than 1 billion unique users per month with 40% of traffic from mobile devices. According to Youtube over 6 billion hours of videos are watched each month nearly an hour for every person on the planet! We are bullish Youtube as it is beginning to be run like a traditional TV network to attract the big advertisers. Using similar metrics to traditional advertising Youtube is including third party measurement from Comscore and guaranteeing views for the top 5% of content. This is important to brands as they only want to be associated with quality material not cats playing around with balls of string. We are also bullish on GOOG inserting app install ads on Youtube similar to Facebook where users can download the app when the ad is clicked. This is a big opportunity as Youtube keeps 45% of all advertising revenue on its site.

Here are the top five most popular videos on Youtube ever, you should be able to guess no.1.

GOOG seems to be creating a flywheel effect with Google Play and Youtube where users can access free content on Youtube while also being able to watch purchases from Google Play. GOOG is betting on free viewing subsidised by advertising (75% of Youtube ads are skippable) and pay as you go subscription content on Google Play. Apparently only 10% of people always skip Youtube ads. 

Play it?
GOOG's fastest growing division was other which is Google Play. In the March quarter Apple's iTunes/software division recorded $4.6 billion in revenue this compares to Google's $1.6 billion in the June quarter. Android users are now larger than Apple as they continue to increase Google Play sales should eventually overcome iTunes sales giving it a chance to become GOOG's third verb.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a position in GOOG stock

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.

Zulily discovering not searching online

Zulily (ZU) is a website that aims to change the way people shop online. Most online sites solve the problem of searching for a particular product, unlike other sites ZU is tailored for browsing and discovering similar to most offline shopping. ZU displays 6,000 new products a day. To put that into context your average Costco typically displays around 4,000 products. ZU is one of the top ten web only retailers in the US.

Discover not search based
Each site is personalised for each user depending on their demographics. Customers browse the site with no intent to purchase so it is up to ZU to display products interesting to the customer. What a mother with young kids sees is totally different to a single woman. Its products are at a very affordable price point of $18. This discovery niche means it largely does not compete with Amazon.

Being a site for moms they attracted a lot of word of mouth with customers growing 93% during the last quarter. While moms are still their base customer its no longer just about kids clothes which are now 39% of sales down from 55% in 2012. It is becoming more about what mom can buy for herself and her home as they make the majority of purchase decisions. ZU is also very mobile friendly with 47% of sales coming from mobile devices a much higher percentage than Amazon and Ebay which are both around 28%. For ZU its all about low prices. ZU doesn't pay for expensive models but gets parents to bring in kids to model for free in exchange they get to keep the photos. They have nearly 50 photo studios.

ZU still has many more initiatives that it could implement such as private label brands as well as having exclusive products from vendors which would help increase margins and customer retention. They also seem to score well with suppliers. 75% of vendors featured since 2011 have returned to the site suggesting that unlike Groupon vendors are gaining long term value. No single brand is more than 3% of sales.

Cheap prices long shipping times

The main customer complaint is shipping. The cheap prices come at a trade off for customers. Last year ZU took on average 11.5 days to ship a product after customers ordered them. ZU orders items from vendors after the sale ends it doesn't buy in advance. This has lead to poor customer service in some instances when suppliers cannot keep up with demand. 

Good product and management a winning combination

The company was founded by the same executives that founded online jewelry retailer Blue Nile. The CEO and Chairman created Blue Nile after getting engaged and created ZU after becoming dads. I'm looking forward to seeing what they will come up with next! ZU was backed early on by Maveron Capital which is Howard Schultz's of Starbucks  venture capital firm. The most amazing thing about ZU is its only 4.5 years old they are just getting started. Daily sales is a tough business but ZU has managed to execute and unlike other sites average revenue per customer is increasing, that is users are buying more unlike Groupon. This helps to explain the valuation which is expensive but somewhat reasonable given it is a scalable e-commerce business, this is one business we're keeping on our daily buy list.


Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in ZU stock

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.

Investing alongside Carl Icahn

Many investors follow Buffet's Berkshire stock but not many follow Carl Icahn's investment vehicle Icahn Enterprises (IEP). His returns over the past decade have been one of the best.  Carl Icahn is famous for activist investing. Similar to Buffet he looks for value but instead of waiting for the results to show he actively makes things happen.

Getting active
It is great environment for activist investors. The amount of cash companies hold is higher than what they have held in the past. Scarred by the GFC companies are tending to hoard cash. Low interest rates and the current willingness for institutional investors to back activists to get things done is driving inflows for activist investors. Carl Icahn has been one if not the leading activist investor since 1980. CEOs might not pick up the phone when you call but even Apple the world's largest company picked up the phone when Icahn called. He even got a lunch date with Tim Cook Apple's CEO. He even argues with other activists. (See the classic Ackman vs Icahn fight on CNBC below.)

IEPs invetment segment includes as of April 30th 2014 includes positions in Apple, Forest Labs, eBay, Chesapeake, Herbalife, Transocean, Nuance, Talisman engering, Hologic and Navistar.

IEP stock in the activist fight
Its something we haven't really seen yet but Carl believes he can use his script (IEP) as currency to make acquisitions where appropriate. The stock pays a $6 annual distribution. IEP raised equity three times last year for a total of $581 million after fees. The most recent raise was at $135. He did not really need the money but because IEP is tightly controlled he needs liquidity. The million new shares substantially increase the float of shares available to investors. Though when one of the best investors is selling you do not want to be a buyer! Since the raising shares have fallen to where the stock is now $100 and yields around 6%.

According to IEP's calculations the stock trades at around a 30% premium to its net asset value. As a comparison Buffet would only buy back his Berkshire stock at 1.2x premium to book value (book value likely to understate market value). IEP's smaller size to Berkshire should make it more nimble and possibly produce higher investment returns though this is captured in the current premium to the investment value.

Like father like son?
There has been recent news that Carl's son Brett will launch his own activist fund. IEP will give Brett a billion in capital. IEP has been managing its own money only returning outside money in 2011. If Brett does well IEP will participate as IEP will own 35% of the new fund.

As Icahn quotes on his website "a lot of people die fighting against tyranny. The least I can do is vote against it." The premium to assets is high at the moment but Icahn is definitely someone you want in corner when you want something to get done.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in IEP stock

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.

Seaworld making a splash

Seaworld (SEAS) is famous for its roller coasters, marine animal shows and water rides satisfying both thrill seekers and animal lovers from all around the world. It owns 5 of the top 20 American theme parks and is the 6th largest by attendance in the world. SEAS is not as large as the major destination parks like Disney and Universal (owned by Comcast) but its much larger than regional parks like Six flags and Cedar fair. SEAS is more hedged than both as in boom times destinations parks like Florida do better while in more depressed times the local regional parks outperform.

Don't work with animals
Everyone in media knows not to work with animals however SEAS theme park business is totally reliant on them for their shows. SEAS believes that they have the largest marine group with approximately
86,000 animals, including approximately 8,000 marine and terrestrial animals and 78,000 fish including the 29 infamous killer whales. More than 80% of their marine mammals were born in human care.

SEAS prices tend to be more reasonable than the other big two Florida parks. The stock is also reasonable SEAS estimate the cost to replicate their portfolio of parks would exceed $5 billion while SEAS market value including debt is $4.1 billion. Last year 65% of attendance was from repeat visitors with international guests accounting for 15% of visits. There is room to get busier as capacity utilisation at SEAS branded parks is 24% overall and 54% during peak season.


Not a whale of a deal
Shamu the famous killer whale is one of the key acts. However in 2010 one of the trainers unfortunately drowned leading to a legal and public relations battle over captive performing animals which continues today. The company also has geographic risk with Florida around 55% of revenues.

Not a deadliest catch
SEAS is still a US story but nature based animal parks can translate well overseas. SEAS is currently in a 6 month negotiation period with a partner under which they would move forward with multiple parks in the Middle East. Importantly for investors this would not be capital intensive as SEAS will lend their brand and operational experience in return for royalties. SEAS also owns the Bush Gardens and Sesame Place parks.

It is estimated that SEAS will not pay tax until 2017 with $656 million of operating losses. After making back the losses SEAS could eventually qualify as a REIT and be exempt from paying income tax if they distribute no less than 90% of their income as taxable dividends.

SEAS marine focus differentiates it from the other theme parks and unlike other parks SEAS has the opportunity to ride the international growth that is still to come.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in SEAS stock

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.

Blackhawk the gift card network

Ever noticed gift cards at the end of the aisle at your local Woolworths or Safeway? Those gift cards are distributed by Blackhawk (HAWK). They are one of the largest third-party distributors of gift cards and a leading prepaid payment network with over 100,000 retail distribution locations and over 500 leading consumer content providers. HAWK is basically the Visa or Mastercard of gift cards earning money by connecting and activating retailers and gift card providers over their network.

Everyone likes gift cards. The most popular?
Gift cards make for great presents as its much more thoughtful than handing someone cash. Gift cards are also good business for retailers. Retailers like the high margins on cards that take up little selling space. The numbers always differ but for every $100, $92 goes to the content provider, $5-6 goes to the retailer and $2-3 they keep. HAWK collects payments from the retailers and then pays the money to content owners holding on average a weeks float of cash. Agreements with retailers typically last for three to five years. It is big business with recent growth driven by international (growing 3x time faster than domestic) and corporate reward programs. The most popular gift card is iTunes.

HAWKS own gift? A spin off
HAWK was created within Safeway. It has grown so much over the years that Safeway now represents only 16% of sales. HAWK is at the stage where it needs to be independent as many retailers like Wal Mart in the US and ASDA in Europe were not keen to do business with an entity that was owned by a competitor. The spin off also allows HAWK to use its own script for acquisitions. See the spin off benefits below. There is also a massive tax benefit for shareholders as post spin-off Albertsons has bid for Safeway. If the transaction goes through Albertsons will assume the corporate tax of the distribution. HAWK shareholders will receive the present value of $4.50 a share in tax savings.

Much like the Visa and Mastercard networks it is hard to build a network. HAWK has connected 100,000 retail distributors and 600 gift card owners. HAWK estimates that they have spent $100m to build the network. New entrants will need a sales force to connect everyone (HAWK has retailers tied up in contracts) and spend $100 million on a settlement engine and accounting. In addition they have to convince retailers to drop HAWK cards, remove the aisle fittings and right off the remaining cards which is disruptive for the retailer when HAWK is growing the category 20%. Its a tough task for a retailer to commit to. HAWK has only lost one distributor in their top 50 accounts since inception.

Digital gift cards like digital birthday cards
The main question is digital which is 3% of their sales. Will digital gift cards kill the business? It is possible but its most likely physical gift cards will still be important like physical birthday cards. No one sends electronic birthday cards, it does not show much thought or effort as a gift. I know I would prefer a physical gift card than an electronic one.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a long position in HAWKB stock

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.

Go Pro be a hero

GoPro manufactures the world's most versatile personal camera. It is one of the hottest consumer products around helping the world capture and share their passion. GoPro is famous for the footage that its users produce both professional athletes and amateurs post their videos online to services such as Facebook and Youtube.

Known more as a media company than a product
Go Pro was ranked #1 on Youtube's first ever quarterly brand channel leaderboard. It was more popular than well established brands such as Warner Brothers, Sony and Nintendo receiving more than 450 million video views. GoPro does not make any money from media content but they do have plans to develop a GoPro channel on Xbox Live with Microsoft. Going forward GoPro is viewing themselves as more of a media brand than a consumer product.

Not a camera but capture device
GoPro was the #1 selling camcorder in the US in 2013 and according to the NPD Group had 45% market share ahead Sony and Canon. The growth is impressive considering shipments of digital cameras fell from 142.7 million units in 2011 to 76.2 million last year. Its interesting to see that in their prospectus they refer to their product as a capture device rather than a camera. The shipment table below from their prospectus was concerning with year on year units shipped down for the most recent quarter.

They explain away the decrease due to comparable issues from the previous year. In 2012 their new camera was delayed from 4th quarter 2012 to 1st quarter 2013 which resulted in first quarter seasonality that was not normal. It all sounds a little confusing and the decrease is not something you want to see especially in an IPO. Worringly, product costs for their new 'capture device' were 67% greater than previous versions but the average selling price was 19% higher leading to margin compression.

Easy to sell with footage like this
Their strategy of focusing on specialty retailers rather than consumer electronics paid off. As selling in surf, ski and motorsports outlets meant that GoPro was the only camera device in the store. It is now distributed everywhere including Walmart. Their instore advertising is amazing with mounted TVs. The footage below automatically draws everyone to their product stand. At the end of 2013 they had over 25,000 displays. GoPro is already an international company with 44% of revenue overseas inline with most global companies.

Go Pro be a hero not an IPO
While I love the product I think I'll be a hero on the sidelines and watch the great Youtube footage. The media side of the business is interesting but at the end of the day Gopro is a camera (not a capture device) and consumer electronics businesses are very tough to sustain in the long term.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in GoPro stock

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.

Domino's which pizza would you buy

Dominos Pizza is one of the world's largest pizza chains on average selling 1.5 million pizzas a day. Domino's is one of the best known brands in Australia ranking highly in the quick service restaurant category behind only McDonalds in top of mind awareness. Many believe Dominos (DMP) is an Australian brand because it is listed here but it is actually a master franchisee of the US listed Dominos (DPZ). Both companies are benefiting from consolidation in the pizza industry and digital pizza ordering.

Pizza company masquerading as a technology company
Historically pizza has been a nice and stable industry for both independents and large chains. But the introduction of digital ordering has boosted business for the major chains who can afford to spend on technology and mobile applications. Technology has helped Domino's to gain share overall as they sell approx 1 in 4 pizzas but online they sell 1 in 3 (see below). Globally digital sales are on a $3 billion run rate. Domino's has become a major e-commerce company. Online ordering has increased sales as customers are now able to order on the way home with their mobile. Online menus allow customers to browse the entire selection at their own pace and they typically end up ordering more. Digital orders also means more accurate orders leading to less waste and less time workers have to spend answering the phone.

Globally digital orders represent over 40% of sales for DPZ in Q4 2013 lagging Australia at 60%. DMP's goal is for digital orders to represent 80% of sales over the next three years. Smartphones and apps are helping to accelerate digital growth with mobile orders representing half of digital purchases. The largest group of employees (one third of employees) at headquarters is in the IT department.

Pizza a $90 billion market
The pizza category is ripe for consolidation. Unlike other markets a lot of the competition is still local and independent. The major chains have 40% of the pizza market this compares to 96% for hamburgers and 82% for Mexican food.

A slice of every pizza
Both Domino's earn royalties with DPZ receiving a 5.5% sales royalty from franchisees in the US and an average rate of 3% internationally they also make money in North America by selling franchisees their dough, cheese and other food. Australian DMP charges its franchisees a royalty rate of 7%, pay the US their average royalty rate of 3% and keep the spread in between.

Longer term Domino's has one of the best international opportunities in consumer brands. These goals are not even reliant on China which is seen as a massive market for many brands. According to Patrick Doyle DPZ's CEO half the toppings are standard offerings around the world but cheese seems to be an issue in China. Diary has only become a part of the Chinese diet recently. DPZ is taking it slow in China so far opening only in the markets of Shanghai and Beijing.

What pizza provides most value for money? Dominos US (DPZ)
The Dominos model is interesting as the US listed DPZ franchises out to master franchisees in each country which then sub-franchise out stores. The model is very compelling as four of the master franchisees are listed giving them ready access to capital. The equity ownership motivates management to achieve the best possible result as they are directly rewarded for the markets that they control. Dominos is listed in the UK with a market cap of $1.6 billion, Jubilant Foodworks market cap of $1.3, Alsea market cap of $2.4 billion and Dominos Australia with a market cap of $1.8 billion. Note both Jubilant and Alsea operate multiple brands. Because of the fact that franchisees are listed DPZ can grow faster than other food brands. From 2008-2012 DPZ has grown its international store count by 43% compared to 23% growth from Yum Brands and McDonalds at 13%.

The combination of digital growth and market consolidation means both Domino's can do well operationally. But as an investment we prefer the listed DPZ in the US as it is the cheaper stock with global exposure and less penetrated digitally at 40% versus Australia's 60%. For Australian investors DPZ allows you to benefit from the local story (they pay royalties to the US parent) as well as benefiting from the longer term international opportunity at a lower multiple of earnings.

 Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in Dominos stock but DPZ is on our watchlist

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.