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Sunday, June 12, 2011

Ebay an old Friend?

I recently read the 10-K of Ebay and had to take a double take, one number that really caught my eye (this was not a positive thing) was the near $6 billion in Goodwill for the 10-K dated 12-31-10. Wow, that is a lot of overpayment of assets, I'm curious though if this is a buy opportunity. My assumption is that a vast majority of this goodwill will come off the books after the Skype acquisition by MSFT ($8 billion btw is what Microsoft paid for Skype, wow). Yes, it is true that Skype was acquired by a private equity by the name of: Silver Lake Partners. How ever Ebay did retain 35% of the company which was sold off to Microsoft after they acquired the Skype service. This could mean 2.8 Billion could be coming Ebay's way which could either write down some of the goodwill on their books or could boost earnings for the next quarter. The question is what will Ebay do with the extra funds?

We could see some investment into what Ebay believe will be the future of the company. Paypal is the gold standard when it comes to b2b, b2c, c2c payment transactions and Ebay wants to verge more into this toll booth business and away from their auction services. From what I read the it sounds like Ebay wants to make Paypal 60% or their revenues. This is a good move but there is a lot of competition coming from other parties. Ebay could use the funds from the Skype sale and invest more into security, more vendor services, or fend off competition.

Google announced their new service payment service (basically in beta testing) which could eat into Paypal revenues. Granted Google will rely on banking institutions and credit companies (ala Mastercard and Visa) but if this catches on this could spell trouble for Paypal's online payment service. It looks like the big banks are attempting to get their hands on the mobile payment industry by rolling out their own paypal services. Chase quickpay services has been rumored to start rolling out soon which could propose a legitimate competitor to Paypal. Basically because of the fees becoming significantly lower than paypal's interchange fee.

The great concern I have for Paypal in the future is if these payment services catch on it could destroy Paypal. the brightspot about this is that Ebay is well aware and they disclose this on their annual 10-K. I very much appreciated the sincere concerns the 10-K talked about but the one thing I did take from the 10-K is that it will take a long time for the competition to catch up and the nice thing about Paypal is the liability for losses is low. I do believe that the "bill me later" transaction process is a bit of concern but I believe there is more control over the losses of this services amongst management.

I suggest if you do not want to invest a huge amount of cash into Ebay shares buy Oct 10 call options @ premium of $2.00 or less. This will hedge your bet if you do not feel confident about the future of Paypal not so much Ebay.

I do own positions in Ebay calls and stock...

Monday, January 24, 2011

Social Networking, the next hot investment hub

Social Networking, investing in the hot tech sector

Coming into the 2011s a sector will be the next hot bed for stocks, in the 20s it was financials and industry, the 50s it was brands like Ford and IBM that led the economy, in the 90s the tech companies, the early 2000s it was real estate. As we go into the second year of this decade social networking is the industry everyone wants a piece of. Only problem is you have to be either a client of Goldman Sachs (alla Facebook) or on the inside via private/angel investors. I am going to take a look at some very familar companies that are defining the this industry. Companies that potentially could have a future IPO in the making, how ever only one is the safest bet at this stage of the game.

First off I'll start with Facebook, for those of you stuck under a rock the past decade facebook is the queen mother of the social networking industry. Started in 2004 inside the Harvard dorm room of Mark Zuckerberg, the company initially was a way for college co-eds to network within a cleaner version of myspace (I myself was skeptical how ever became addicted very quickly). Initially facebook was exclusive to college co-eds but a year later a high school version was implemented. Today the company has grown to have an estimated 550 million users worldwide, usage of the website is mostly for up to date news about your friends and friends' friends and their friends.

What differs facebook from other websites are its vast data about its users, facebook uses this data to drive ads (which is where their revenue is derived from) to a centralized group. For example, if you are a fan of say, Manny Pacquiao, as you surf through the facebook website advertisements of Manny Pacquiao related items will show from companies that advertise through facebook thus paying facebook each time your click on a related link (the system is called pay per click). It's a very streamlined income stream that works for both the users and the advertisers, it's also available to anyone and everyone for the right price. So companies as big as Apple can advertise to a specific fan base as well as small boutiques like "rps" a local sneaker shop in the Capitol Hill area of Seattle can advertise their goods.

Now to the good stuff, I read in a recent Wall Street Journal article that Goldman Sachs was offering private placement stock in the social networking giant. This raised issues with SEC on whether or not facebook could exist as a private company. So naturally questions came abound if a facebook IPO would be in the near future so I did some digging and found that currently it's estimated Facebook is valued as a 50 Billion dollar company. The growth potential has been staggering, from an initial report of 52 million in revenue in 2006 to most recently 2 Billion in 2010, wow. Did I also mention this company has 0 debt? Wow talk about our value company, and the way the numbers go it's still growing. Financial companies own pretty big stakes in the company, Accel Partners and Digital Sky Tech own a 10% stake each as well as MSFT and Inter-republic Group oh and big Goldman Sachs. Pretty alluring company to invest in eh? Well I disagree, facebook has definately layed the ground work for the industry but let's keep looking.

Twitter, the brain child of Jack Dorsey's implementation of SMS technology came during a brain storming session involving mexican food at playground. Orginally the technology was used within Dorsey's, company of employment, Odeo. Eventually the company broke off and became its own company and it caught very quickly. Twitter initially started with 52 million in venture capitalist funds, initially it was thought the company would participate in e-commerce how ever a structure similar to google adwords was implemented in early of 2010. Basically it works like, "promoted tweets", big companies such as: Starbucks, Sony, Redbull, and Best Buy are participating.

Revenues for Twitter are not nearly as big as facebook but are respectable. It was reported (but cannot be verified) that close to $6 million in 2009 with projections of 1.54 billion in revenue with 144 million of net income in 2013 the company reports the possibility of an ipo in 2013.

Twitter is great for anyone trying to reach a vast audience and the growing number of users is consistent how ever twitter does not have a specific revenue stream and their un-official numbers are not consistent with what potential this company has. Until they can replicate a consistent and clear cut revenue stream I would be weary about investing in an ipo here. The venture capitalists made their money here and will run.

GroupOn, what an amazing website, in tough times like today people are trying to find value in everything they do for leisure so when you can get a massage for 50% off from this website it's an amazing value. GroupOn hit the social networking scene in 2009 and growth has been white hot for this company. So hot that early in 2010 Google offered 6 billion for the website and what did GroupOn do? Rejected it, I believe GroupOn is still in the pre-mature stages of growth and only realizing its potential for more revenues. How ever let's look at what GroupOn Does for business.

GroupOn derives its income predominately from cutting a part of the revenues from their retailer affiliates. For example, ABC coffee shop will offer a coupon of $30.00 certificate for the price of $15.00. Groupon will take a percentage of the revenues as long as the coupon quota is met for that day. Deals are given out for specific regions, predominately in metro urban areas where mobile devices dominate (you won't find GroupOn deals in the middle of Novascotia). GroupOn employees some very savy creative staff to describe in a marketable fashion the deals given out each day. Companies range from small coffee shops to big retailers like GAP, so the list of companies is potentially endless.

Unfortunately I couldn't find any projection of revenues for this company how ever with the huge valuations given for GroupOn they have to be growing at an accelerating rate. GroupOn faces a major hurdle, copy cats, copy cats are clearly identified in Living Social, BuyWithMe, Groop Swoup, even Google is coming out with their own version of the site.One thing GroupOn does have is a clear dominance in this category of social networking.

Although GroupOn is off to a white hot start I belive there is just too much competition for them to really separate themselves from the pack, as of right now they have a leg up on the competition but so did yahoo.

Linkedin, this is the crown jewel of the crop, El majico, the king of social networking (investments wise) if you're gonna get in an IPO linkedin is my recommendation to put your chips on all the way. First a little bit of background of the company, Linkedin founded in 2002 by an ex Yahoo executive is the facebook of professional social networking. The way the website works is users upload their professional profile. What industries they are a part of, different job titles/careers, etc, from here it's as easy as facebook to professionally network with colleagues and see how professionally close you are to say that Senior Vice President at the new investment firm you would sell your first born to be a part of. It's a very un in your face way to network as well as find potential new employers.

Now let's take a look at the revenue stream, so obviously we're talking banner advertisements and your usual ppc/ppr deals yada yada you all know that. How ever what seperates Linkedin from say facebook, twitter, Groupon, etc is revenue straight from the users. Much like say insider users pay a premium for more precise services. So if you're a recruiter and want more in depth information on that potential job candidate you have to pay a service fee which could cost near $5K. Wow, "the most valuable commodity I know of is information" (Gordon Gecko-WallStreet), also your regular user that desires access to advanced networking has to pay monthly fees ranging from $24.95-$99.95/month. That is a serious revenue stream for the company that members will pay. The closest thing to that is Facebook's virtual currency which has not even come out to the public yet.

Now the valuation at this point is some 1.2 Billion (I found this number on the actual Linkedin website) for 2010, plus estimated revenues of 228 million. This is all estimated and not actual numbers for the company how ever with a growing number of people that are getting used to networking and are in search of work we could see revenues grow very quickly. This company has a solid revenue stream and the good news there is an anticipated 2011 IPO.

Tech may struggle (so far it has been about 50/50) but I believe there needs to be a push from social media and if any of these companies does come public this year I would put a big recommendation to Linkedin.