Google passes its toothbrush test

Google (GOOG) had one of the largest ever one day gains in terms of market value increasing by $65 billion last Friday. The GOOG co-founders Larry Page and Sergey Brin made more than $4 billion each on Friday. TGIF drinks are on them! The rise was nearly as much as their $70 billion cash balance making GOOG the second largest company in the world behind Apple. Youtube and the new CFO deserve credit for the rise. Wall street loves wall street. The addition of Ruth Porat (ex-CFO of Morgan Stanley) gave analysts the confidence that expenses will be more disciplined going forward (see historic margin declines below). She said exactly what the street wanted to hear balancing growth and investment discipline. The other reason was the reacceleration of growth in the phenomenon that is Youtube.

Youtube TV for the new generation
YouTube growth is re-accelerating. Watch time on Youtube is up 60% year on year the fastest growth in two years. Mobile watch time has more than doubled from a year ago. I personally spend a lot of time on the popular on YouTube Australia channel. The average mobile user is even more committed spending more than 40 minutes per session. The number of Youtuber's earning 6 figures is also up 50% on the year. Don't worry I won't be quitting my dayjob but if you're interested they have production facilities all around the world (see below) no need to bring your cat the facilities give videos are more professional feel. Youtube's user growth has been tremendous they will also have increasing pricing power as TV advertising moves online. GOOG's prices for ads that users don't skip on Youtube is currently lower than GOOG's desktop and mobile ads. It's a big opportunity I have to keep reminding myself that Youtube is still only 10 years old.

Source: https://www.youtube.com/yt/space/

Show me the money
With $70 billion in cash (15% of market cap) the new CFO hinted at a more efficient use of the balance sheet potentially taking on debt to buyback shares. She made it clear the priorities are capex, M&A and then potentially capital return. No clear announcement but the tone was constructive it seems like a similar situation to Apple before their capital return a year or two ago.

There has been concern that the smaller screens on mobile will make it more difficult for GOOG advertising especially as mobile searches now outpace desktop in 10 countries. It's true that there can't be as many ads but mobile ads seem to be more effective. Searches on mobile phones tend to happen when people are out in stores highly influencing in-store sales. GOOG is doing their best to get credit for these sales disclosing that Target found that one third of their paid mobile ads resulted in a user visiting a store.

Google passes its toothbrush test
GOOG CEO Larry Page is famous for conducting a toothbrush test for their investments. An investment has to be meaningful enough to be used once or twice a day like a toothbrush. GOOG has plenty of these investments Google search, Youtube, Android, Chrome and Google Maps I use these every day along with over 1 billion users. They also have up and coming products like Google Play, Nest and their cloud platform which hopefully will join the list. GOOG has been trading at an discount to the Nasdaq all year the rise in the past week means it is trading at 21.5x earnings not as cheap as it was but still attractive for a company that dominates a lot of our time.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a postion in Google (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.

Paying with Paypal

The upcoming spin off of Paypal (PYPL) means the company is single once again splitting up with Ebay on the 20th of July. Being independent will allow PYPL to truly partner with retailers in digital commerce. PYPL is uniquely positioned in digital payments handling one in every six dollars spent in e-commerce. Separated from Ebay PYPL will be able to do more business with other retailers that have been concerned that PYPL is owned by a retail competitor in Ebay. PYPL is highly trusted by consumers over 50% of their transactions involve bank or PYPL balances the rest are credit cards. PYPL is a high growth yet highly profitable technology company with a decent 5% free cash flow yield. Spin-offs are always interesting as unlike IPOs sellers are not maximising the price. It's a rare site a technology company that actually throws off a lot of cash that is growing at a decent price. I doubt we would have this pricing if it was an IPO.

Source: Paypal roadshow

Spin-off pluses
The promise of a separate company has helped attract Dan Schulman ex-Amex, Virgin Money and Priceline as the new CEO. In Silicon Valley the share price is all important employees and management prefer equity in a focused growth entity like PYPL rather than Ebay. The separate listing will give PYPL a more attractive acquisition currency. In PYPL's case there is another reason for the spin-off Ebay was beginning to hold back their business.

Independence for Paypal
Retailers have always been cautious about doing business with PYPL because it is owned by a retail competitor in Ebay. The spin off allows PYPL to revisit relationships with retailers that were concerned with funding a competitor and disclosing retail data to Ebay. In Q1 management commented that PYPL is accepted at only 74 of the top 100 internet retailers in the US. The spin off could serve as a catalyst to sign up companies that don't accept PYPL like Amazon, Alibaba, Staples and Macy's. They have also structured the spin-off to keep as many synergies as possible. PYPL and Ebay have a 5 year operating agreement for data sharing and Ebay will be incentivised to grow users and keep their PYPL penetration rates at 80%.

Part of the sharing economy
PYPL strengthened their mobile position acquiring Braintree in 2013. It was great timing as their technology enables commerce apps like Uber and Airbnb helping them to accept multiple types of currencies and different payments such as credit cards, Paypal, Apple pay and even Bitcoin. Braintree also brought in Venmo a peer to peer transaction service useful in splitting bills.

There are plenty of other opportunities PYPL just bought Xoom which competes with Western Union in the remittance market. There is also the opportunity to lend to customers and merchants. PYPL has a tremendous amount of data on their platform yet they only have $3.8 billion in credit receivables a small % of the $238 billion they transact on their platform. Their $6 billion in cash can be used to help fund loans.

Competition is fierce
PYPL's competitors are well known. The entrance of Apple Pay was covered all over the media. Fortunately Apple pay competes at the point of sale not online. Offline or point of sale transactions are only 2% of PYPL's payments PYPL is still mostly an online service. Stripe is more of a competitor online its hard to get information on how they're doing but fraud losses have been an issue. Fraud prevention is what PYPL excels at their loss rate is 0.31%.The average credit card loss rate is 2.98%. This is the key to their business anyone can accept money but having low fraud is what differentiates PYPL for its customers.

Paying with Paypal
I personally like to think about companies in terms of their market cap (see above). In this case PYPL is interesting as the valuation of competitors is high. PYPL's enterprise value is attractive deducting the cash balance of $6 billion (not including Xoom transaction) gets a value of $36 billion with free cash flow generation of $1.8 billion. A 5% free cash flow yield compares favourably to other payment processors like Visa and Mastercard. PYPL also has a real scarcity factor there are plenty of marketplaces Amazon, Alibaba and Mercadolibre but there is no other pure play investment in digital payments.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a postion in Paypal (PYPL) and Ebay (EBAY) 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.

Venture capital is replacing IPOs

As Greece continues to make headlines I thought it might be worthwhile to take a step back and look at other market trends. The venture capital firm Andreesen Horowitz put together a slide pack about technology funding. One slide hit home about the value created in private versus public markets. As a growth investor I'm always looking for the next great company. Finding a company like Apple, Microsoft and Google is much easier said than done! But it is getting harder because of the money in private markets. A company can raise enough money in the private market that they're delaying going public. By the time they do go public its usually at a decent size because of previous private market valuations.

IPO's too late for stock investors

The ride sharing service Uber is worth $50 billion and Airbnb worth $24 billion all these transactions were conducted in the private markets. They are large valuations and we don't have much information on their financials to see if they make sense. But the issue is these companies don't have to go public to receive these investments. By the time a lot of these fast growing technology companies list most of the money has already been made. See below.

When Facebook conducted their IPO it was at a valuation of $104 billion Google at the time of their IPO was worth $23 billion. For Facebook to match Microsoft's public market returns it would need to be worth $45 trillion. Going forward its going to much harder to find the next Apple and Google because the company will have already made large gains due to private market funding.

As you can see above the majority of money is being raised privately rather than through the public IPO market. This is great for VC firms like Andreesen Horowitz (maybe they can list) but for the rest of us it makes it just makes it that little bit harder. You can find their great 53 slide chart pack at http://a16z.com/2015/06/15/u-s-tech-funding-whats-going-on/.

Jason

http://www.decisiveassetmanagement.com/

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.

China's new stockmarket investors

China's stockmarket is the best performing in the world. The recent volatility has caught everyone's attention. In the months of April and May 24.9 million new stockmarket accounts were opened. As you can see below this increase is accelerating with over 4 million new accounts being opened each week. 

Source: Bloomberg

According to the China Household Finance Survey around 2/3 of new stockmarket investors left school before the age of 15. There was also a great interview on CNBC titled Chinese farmers hope to harvest bumper stock profits. Farmers in China now plough their savings in the market rather than ploughing the field. Apparently most farmers in the village now farm outside of market hours. Many of these accounts appear to be retail investors. The number of share transactions has increased dramatically over the last few months see below. It's a great time to be a Chinese stockbroker.

Source: Bloomberg

In the west we worry when taxi drivers and shoe shiners give share tips. When Chinese farmers lay down tools during market hours its probably time to worry about the Shanghai market.

Jason

http://www.decisiveassetmanagement.com/

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.

Restoration Hardware stores you can live in

Restoration Hardware (RH) is one of the fastest growing retailers in the market famous for having some of the most beautiful stores in the world. They have the largest collection of luxury furniture in a very fragmented market. Unlike other furniture retailers RH builds stores that customers actually want to live in. Not many customers say they want to live in an Ikea or Harvey Norman!

 Restoration Hardware Boston and Tampa stores.

Most plants die in retail stores
Most retail stores have no natural light and according to the RH CEO Gary Friedman are where plants go to die! While most retailers are introducing smaller store formats and pulling back on mail catalogs, RH is doing the exact opposite. Technology is just another sales channel for them like the catalog business but for RH product presentation is key. They continue to buck the trend of smaller stores by opening large galleries. They believe that the best retailers will have the best physical and virtual experiences, it's not one or the other. Half of their sales are from stores the rest are direct. They recently announced the opening of a new concept RH modern. It will expand RH from just retro-classic looks to a more modern feel. In some cities the concept will have its own stores in others it will occupy current stores.

Earnings presentations are just as impressive. Cue the music!
RH has some beautiful stores but they also have an impressive video presentation. He even quotes Steve Jobs. The videos were introduced to help us analysts understand the company visually. See their Q1 presentation below.

They are also infamous for their large catalogs. 3,300 pages or weighing in 7.7 kilograms of photos across 13 catalogs double last years count. They received a lot of free media coverage some positive and some negative (my favourite deforestation hardware) but it got their brand out there. RH Modern will start out with a 300 page catalog.

Best stores and comps in retail
RH just reported a 15% increase in comparable stores sales on top of 18% last year. Over the past five years comps have averaged 24%. RH are targeting $4-$5 billion in future sales up from $2 billion today just in North America. They also have long term targets of mid to high twenties earnings growth. Range extensions are a big driver of growth including apparel accessories, antiques, art and kitchens. RH has 67 stores they have identified an additional 25 locations for 2016 and beyond. They are also in early discussions with international partners. If you can shop at RH you are doing well the company's target is consumers with an annual income over $200,000.

Jason

http://www.decisiveassetmanagement.com/

Decisive has no position in Restoration Hardware (RH) 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.

Fitbit step by step

Fitbit is the leading wearables fitness band helping users sleep, eat and exercise better. It has grown massively over the past 3 years dominating the market with 85% market share by dollars in the first quarter of 2015 (NPD Group). It's a great consumer brand showing tremendous growth (see below) in a rapidly expanding market.

Source: Fitbit roadshow and S1

I've always wondered how long users last with a Fitbit band. As of the end of March Fitbit have sold 20.8 million devices since inception. 19 million have registered with 9.5 million active users. So around 46% of buyers are still using it that's pretty good considering many Fitbit's are gifts. It's starting price range of $59.99 is very giftable.

The only concern is Apple. The Apple watch officially went on sale online in late April. Its sport watch is very likely to impact Fitbit sales. The IPO has been well timed for the Fitbit sellers right before we have any idea how Apple's watch is affecting sales. Even with these concerns I was surprised to see that Fitbit is growing faster than I thought and that it is very profitable.

One good angle for Fitbit has been their partnerships with corporate wellness programs. Fitbit can help companies reduce premiums and keep their employees fit and healthy a worthy corporate expense. The success of Lululemon has shown that we all have to look good when we exercise. Don't worry Fitbit has you covered with a collaboration with Tory Burch for Fitbit accessories.

Source: http://www.fitbit.com/toryburch

The hardware bands drive sales but Fitbit has plans to monetise its user base. It can upsell services to their 9.5 million active users with offers like a 24/7 virtual trainer at $49.99 per year. These services are only small 1% of sales but future growth will depend on subscriptions and software. While it is a hardware company it does have attributes of software companies in Fitbit's network effect. When users sign up they can find and engage friends and family keeping users committed to exercising and staying with Fitbit. Exercising is always easier with friends. We don't know the final IPO price (an important detail) but the outlook for fitness wearables is looking strong. As they say commit to be fit(bit).

Jason

http://www.decisiveassetmanagement.com/

Decisive has no position in Fitbit 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.

Kicking goals with Manchester United

This past week English Premier League champions Chelsea played Sydney FC in front of a crowd of nearly 84,000 at ANZ stadium. It was a a big event the Premier league is the biggest football league in the world and its teams are global. It felt like more of a home ground for Chelsea than Sydney! Even though Chelsea are the current champions the most watched Premier league team is Manchester United (MANU) commanding 51% of the League's global TV audience.

Source: http://ir.manutd.com/company-information/about-manchester-united.aspx

Sport is the most valuable media content as we watch events live. There is no watching on demand afterwards you have to watch it live in case someone else spoils the result. Fans will pay nearly anything to watch their favourite team and advertisers love the fact that people will be watching it live and not skipping their ads.

Over 100+ years old

MANU estimate that they have 659 million followers worldwide. It is one of the most popular and recognisable teams in the world. As a company MANU has durability. It was founded in 1878 acquiring the name Manchester United in 1902. There won't be any university drop outs in a garage planning to disrupt and create a company to compete against MANU.

Always sold out

MANU has three businesses all high margin and highly visable. Their commercial division (branding), broadcasting (TV) and matchday. Matchday revenues have the lowest growth potential but they are highly predictable. Their 75,615 Old Trafford stadium has had 99% occupancy since 1998/1999. Another winning streak alongside its 62 trophies that most teams can't compete with.

For shareholders the big growth areas are broadcasting and commercial. On the broadcasting front the English Premier League signed a deal earlier this year with Sky and BT. Resulting in 5.1 billion pounds over 3 years a 70% increase from the previous deal (see below) and this was just a domestic deal. Football is also gaining popularity overseas particularly in Asia and the US. MANU opened an office in Hong Kong and is opening a New York office to pursue future brand deals. Globally they have an official airline, beer, noodle and even marine diesel engine partner. 

Source: http://ir.manutd.com/company-information/about-manchester-united.aspx

Its not just a sports team its a brand
On the commercial front MANU have signed a new kit deal with Adidas for a minimum 75 million pounds per year over 10 years. The previous relationship with Nike was for 23.5 million pounds a year. Adidas will provide training and playing kits and have the exclusive right to distribute dual branded merchandising. The deal is better than it sounds as MANU will also bring retail, e-commerce and mono brand products in house rather than share these revenues as they did with Nike. MANU sold approximately 5 million items of branded licensing including 2 million jerseys.

Source: http://ir.manutd.com/company-information/about-manchester-united.aspx

These increased revenues have allowed MANU to spend more on players creating a virtuous cycle of success. As a team MANU has performed poorly since the retirement of Alex Ferguson but their recent top four finish suggests they are back on track qualifying for the Champions League. The UEFA fair play regulations also reduce the risks of clubs overspending. While players need to take their fair share MANU does a good job of keeping expenses in check with a great training program and a club that everyone wants to play for. Approximately one third of their first team comes from their academy.

Manchester United jerseys are a global phenomenon

MANU broadcasts are must have content for fans. Unlike most teams they are global you see people wearing their jerseys all around the world. As a company MANU has high predictability of future revenues and a durability that most companies can't match making MANU a fan favourite on and off the pitch.

 Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Manchester United (MANU) 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.