Facebook is another company that looks overvalued by standard measures of valuation (P/S of 19.75 and a P/E of 100.64). The stock is clearly priced at a premium, but for good reason: the company's culture/leadership, financial performance, and continued innovation are all top notch. Facebook is another candidate for the Pencils IRA Project, and for now this CAPS pitch gives a basic overview of my feelings about the company.
I think there is a good chance Facebook will be a $300 billion+ company by 2019, in which case the stock would likely outperform the market by a sizable margin. Here are the top four reasons I think Facebook is poised for stellar long-term performance:
1. Mark Zuckerberg is 29 years old. More than a decade younger than Elon Musk. 20 years younger than Jeff Bezos. And yet, Zuckerberg has a 97% employee approval rating and Facebook receives a 4.6/5 rating on Glassdoor. Zuckerberg, who hasn't even been on the planet for three decades, oversees one of the world's premier and innovative company cultures. I think this bodes well for Facebook's long-term outlook.
2. Facebook is a cash machine. The company produced nearly $3 billion in free cash flow in 2013, up from roughly $400 million in 2010. As of December 2013, the balance sheet had $11.45 billion in cash with $476 million in debt.
3. Sales, earnings, and cash flow have both grown at average annual rates over 40% over the past four years. The stock is trading at a premium today, but I would expect nothing less given the growth of the business and its bright long-term prospects.
4. 1.23 billion users. Through internal product development and acquisitions, Facebook is finding ways to reach and monetize current and new customers. In many ways, Facebook has just scratched the surface of what it can accomplish with such a massive (and growing) base of users.
People laughed when Yahoo attempted to buy Facebook for $1 billion in 2006. Many thought Yahoo was nuts, because "social media is just another fad." 8 years later, Facebook is worth $157 billion, more than 4.5 times Yahoo's value today.
As Facebook continues its innovative streak in the realm of social media, virtual reality systems, and helping connect the world, I expect the company's exceptional performance to continue for the next five years and beyond.
David K [more]
RetailMeNot (SALE) is a company that has intrigued me lately and is a candidate for an upcoming addition to the Pencils IRA Project portfolio. I thought I would share some initial research and see if we can get a discussion going on this business.
RetailMeNot is the largest online coupon marketplace in the world, with over 500 million visits to its website over the past year. The company, in short, connects consumers with digital coupons offered from a variety of retailers around the world.
Initially, like others, I was unsure if this gives RetailMeNot much of a competitive moat. However, the company's strategy is similar to Zillow's: advertisers (or, in this case, retailers) follow the views. Retailers want their coupons to go to the widest audience. This is where RetailMeNot has a tremendous advantage, given the ~500 million yearly website visits (and mobile app use) mentioned above.
RetailMeNot's business model, while simple, is validated by the growing number of businesses entering the digital coupon field. Groupon (GRPN launched its "Freebies" coupon service toward the end of 2013 in the U.S. (http://articles.chicagotribune.com/2013-11-20/business/chi-g...) Coupons.com (COUP) is another competitor in the digital coupon space.
RetailMeNot's mobile app has more than 11 million downloads on iPhone and Android devices. This presents a major opportunity for RetailMeNot to empower and engage retailers to deliver a more interactive consumer experience. RetailMeNot's In-Store Solution -- a tool that allows consumers to take advantage of in-store coupons online ("connecting online shoppers to offline sales") -- which has been well received by retailers thus far (probably due to the fact that preliminary research suggests retailers see significant returns on investment when using the In-Store Solution):
Forrester interviewed and surveyed a dozen RetailMeNot retail partners that had used and tested the company's online and mobile promotional channels measuring the impact of those initiatives on the organization's in-store sales. Based on the creation of a composite retailer and their use of the RetailMeNot In-Store Solution over three years, the study found a significant return on investment that provided — at low labor costs — growth in incremental revenue driven by increased transaction volumes and higher average order values....
The following are actual quotes from retailers in the study lauding RetailMeNot's In-Store Solution:
"We want to engage with our customers whenever and wherever they want. The RetailMeNot In-Store Solution helps us connect with customers in the real world while on mobile devices. With the RetailMeNot app, they get a push notification when they are near one of our stores or based on a promotion schedule. That brings many of them into the store. If they choose to visit us online, we are more than happy to convert the customer that way. Regardless, it is a fantastic win for us."
"Adding the ability to measure the impact on in-store sales has been one of the top benefits to the program. We test multiple offer types weekly."
"The In-Store Solution makes it easier for us to interact with the customer on the go. We have a big initiative for omnichannel and mobile. RetailMeNot is very large part of that." - http://www.prnewswire.com/news-releases/study-by-independent...
RetailMeNot's innovation with services such as the In-Store Solution will help the company continue to develop and expand relationships with retail partners. As we will see with the company's financial performance, RetailMeNot's strategy has paid off thus far.
RetailMeNot's sales have grown at an average annual rate of 87.83% to $209.84 million in 2013 (growing 45.03% in 2013). The company has produced positive free cash flow over the past four years, although operating cash flow (and free cash flow) both fell in 2013. Free cash flow production has increased at an average rate of 80.1% annually to $25.04 million in 2013. This free cash flow production -- along with stock issued two out of the past four years -- has helped the company accumulate $165.88 million in cash with $41.31 million in debt.
While RetailMeNot saw cash flow decrease a bit in 2013, I don't question the ability of the business to generate sufficient cash flow. The company is quickly expanding -- as its insane sales growth suggests -- and I like the steps management is taking to ensure long-term growth.
Net income grew 21.32% to $31.53 million in 2013, making for a profit margin of 15.03%.
RetailMeNot's management team is one of the main factors that continues to spur my interest in the company. Cotter Cunningham founded RetailMeNot in 2009 and continues to serve as CEO, having brought on board executive talent from Austin, TX, tech circles. I encourage anyone interested in learning more about the management team to check out the bios of company's executives: http://www.retailmenot.com/corp/executives
RetailMeNot holds a 4.1/5 rating on Glassdoor, while Cunningham receives an 88% employee approval rating. This is with only roughly 25 reviews, so it should be taken with a grain of salt, but worth noting nonetheless. This compares to 2.9/5 rating for Groupon (with a 60% CEO employee approval rating) and a 3.2/5 rating for Coupons.com with a 61% employee approval rating for the CEO.
RetailMeNot has made several acquisitions since its founding in 2009, which makes the positive employee reviews all the more notable:
Through all of the acquisitions, RetailMeNot has been able to maintain its corporate culture by treating employees the right way, Cunningham said. It got 60 employees through the acquisitions.
“We believe people work hard for us, so we need to work hard for them,” he said. - http://www.siliconhillsnews.com/2013/10/31/persistence-and-c...
In the Q4 2013 conference call, Cunningham and company reiterated their focus on generating long-term growth and results:
"We remain focused on investing for long-term growth by continue to extend our markets, enhance our product offerings and increase consumer engagement. We will continue our investment philosophy of investing for long-term growth while maintaining strong adjusted EBITDA margins as we scale our business....
We continue to see strong positive trends across our business including traffic growth, monetization, consumer engagement and retailer adoption of our mobile solutions. We believe the investments we are making in the business are setting us up to extend our leadership position in the large and growing market for digital marketing solutions." - http://seekingalpha.com/article/2000911-retailmenots-ceo-dis...
Management expects revenue to grow approximately 27% in 2014, so as the company scales its operations revenue growth is diminishing overall. Currently the stock trades at a P/E of 152 and a P/S of 8.92. The stock is certainly priced at a premium, but this doesn't mean that it is automatically a lousy long-term investment. If the company can continue to grow sales (and income) at rates of 20%+ over the next several years, the stock can grow into its valuation while rewarding patient investors with market-beating returns.
Let's start by evaluating RetailMeNot with the P/S ratio. Groupon trades at a P/S of 2.15 and Coupons.com has a P/S of 10.03. Both companies are growing at slower rates than RetailMeNot -- Coupons.com still has negative net income and cash flow production.
Currently RetailMeNot's sales per share is $9.09. If the company can grow sales by 20% annually over the next five years and trade at a P/S of 2.15 in five years, here is where the stock would be in 2019:
9.09*(1.2^5)*2.15 = $48.63
Yikes. Not very appealing considering today the stock trades at $35.16. However, one might argue that RetailMeNot would trade at a higher P/S ratio in five years if the company continues such impressive revenue growth rates. We can use the same scenario above, except let's assume that the company grows sales at22% annually and trades at a P/S ratio of 3 in 2019:
9.09*(1.22^5)*3 = $73.70
In this scenario, the stock would more than double over the next five years and provide investors with ~15% annualized returns. When utilizing the Future Value technique to evaluate stocks, it really comes down to what we think is realistic for a company to attain. There is no way to definitively know how the market will value any given stock down the road, but we can do our best to project realistic scenarios for a company to expand sales/earnings and how the market might value those results in future years.
Of course, this is why it is worthwhile to delve deeper into companies. The more we learn about a company, the deeper our understanding (and ability to make realistic projections) becomes. I still have things to learn about RetailMeNot -- particularly the competitive environment and the company's ability to expand going forward -- but I am generally growing more optimistic about the business as I learn more about its visionary management team, continued innovation, and impressive performance up to this point in time. I don't think it is out of the question for the company to grow sales at 22%+ over the next 3-5 years.
Conclusion, for now...
I aim to do some more research into RetailMeNot, but this is an intriguing company worth another look by Foolish investors. Honestly, I don't think any of my friends take advantage of digital coupons through services like RetailMeNot or Groupon (if they do, it certainly isn't a regular occurrence). I think this concept has quite a bit of room to run, particularly as RetailMeNot expands its relationships with retailers around the U.S. and internationally. Given the company's sales growth over the past several years, there has clearly been growing consumer interest in digital coupons.
I also encourage anyone interested in learning more to check out Brian Shaw's (TMFBrewCrew) article on RetailMeNot from February: http://www.fool.com/investing/high-growth/2014/02/18/retailm...
Thoughts on RetailMeNot?
David K [more]
Yesterday SolarCity released its official 4Q 2013 numbers (which had previously been delayed due to accounting reasons). Pretty cut and dry, but one thing I was interested to see was an update on the company's total customer count. CEO Lyndon Rive mentioned this in yesterday's press release:
"Finally, we signed our 100,000th customer earlier this month and expect residential MW booked to surpass 100 MW in Q1 2014, putting us on a clear path to achieve our target of 475 MW - 525 MW Deployed in 2014." - http://investors.solarcity.com/releasedetail.cfm?ReleaseID=8...
We know that SolarCity had 92,998 customers at the end of December 2013. According to Rive, SolarCity hit customer number 100,000 early this month. As reported in the company's preliminary 4Q 2013 press release and conference calls over the several weeks, this January the company signed a record number of energy contracts, and that record was broken the following month in February.
This is important to track, primarily because the Rives have the ambitious goal of obtaining 1 million cumulative SolarCity customers by 2018. The company just reached the 10% milestone of this goal. By my calculations, this leaves 59 remaining months -- between March 2014 and December 2018 -- for SolarCity to reach the Rives' goal of 1 million customers by 2018. This means SolarCity will need to add an average of 15,254 new customers per month between today and December 2018 to reach 1 million customers.
SolarCity added roughly 7,000 customers this January and February combined to push SolarCity to the 100,000 customer mark in early March. We can estimate that SolarCity is currently adding approximately 3,500 new customers each month. Of course, we should expect this monthly customer growth to increase over time as SolarCity improves its internal efficiency and scales the business on a national level. The company does have quite a way to go, understandably, before it is close to bringing on new customers at a quick enough rate to meet the Rives' 2018 goal. This will be a key item for us to follow going forward.
If SolarCity does come close to 1 million customers within the next four years as the Rives are projecting, it is safe to say that utilities will no longer treat SolarCity as a mere inconvenience or very minor competitor. Right now, SolarCity's 100,000 customer count spread over 14 states is probably not turning many heads. If this number comes close to 1 million, though, SolarCity will likely be treated as a serious contender in the energy delivery business.
I hope SolarCity can expand its strategic partnerships to include more traditional utilities. Without utility partnerships, the company will face more roadblocks especially as the business expands and captures a greater percentage of the energy delivery market. In other words, if SolarCity is facing push-back now, you can bet that push-back will increase as the company nears 1 million customers. Partnering with utilities today may help alleviate some of these competitive pressures.
SolarCity tends to have more political and public support than utilities, so I do not expect any regulations to be significantly changed in such a way that prevent the success of SolarCity's business model. Heck, if SolarCity is signing cities up for solar installations and saving city governments thousands of dollars each year (in cash-strapped California, no less), that's got to count for some diplomatic sway: http://www.solarcity.com/pressreleases/231/-SolarCity-Helps-...
Still, if the company continues to face delays or push-back from utilities, SolarCity may have a tough time bringing on new customers at a fast enough rate to justify such a premium to the stock price. This isn't so much an immediate problem as it is something to keep an eye on down the road, but something worth keeping on the radar nonetheless.
Anyway, just a few thoughts running through my head. SolarCity is still a fledgling pioneer in this field and, as I've stated many times before, has hardly scratched the surface of its potential. Between the Rives, Musk, and the leadership team these guys have assembled, I am confident they can find ways to begin collaborating with willing utilities across the country. It will be interesting to watch how this progresses in the coming months and years.
David K [more]
I had the pleasure of teaming up with my buddy and comedic genius/Fool Dan Rubin (BroadwayDan) to write this article for the Fool. In addition to getting me hooked on Shark Tank, Dan is a quality individual with a knack for all things Foolish. I hope we're able to collaborate on more pieces going forward.
The questions poised in this article are key. I grew extremely frustrated with my investments in 2008 and 2009, partly for political/economic reasons (bummed with the bailouts, stimulus, etc.) as well as being discouraged with my sluggish returns since I started investing in 2005. When you find yourself getting discouraged with stocks, that is usually an indicator that you should especially be investing in stocks at that point in time.
Buffett's adage to be fearful when others are greedy and greedy when others are fearful is a good one to practice. I learned the hard way that if you ignore stocks due to discouragement, you will likely miss the ideal time to be investing in stocks (as evidenced by the market's stellar performance over the past 4-5 years). This is because you are likely not the only investor who is discouraged. A mass exodus from the market due to discouraged and/or shortsighted investors can cause many businesses to fall to discount levels (and, therefore, be exactly the ideal time for us to be investing rather than leaving the market).
By building a portfolio of quality businesses, we can begin to look past the hype and short-term market volatility. The examples provided in this article exemplify why short-term drops alone (even 50% or more) should not phase long-term investors focused on the underlying business behind each stock.
How Fear Kills Your Stock Market Returns: http://www.fool.com/investing/beginning/2014/03/16/how-fear-...
As investors, we're often taught to control our emotions. But this is easier said than done. Why is that?
The reason is that for hundreds of thousands of years, human beings adapted to a world where our immediate survival was threatened daily by predators, bad weather, and opposing clans who would gladly haul off our mates, steal our food, and club us to death. In response to these threats, our bodies have learned to flood our bodies with hormones, priming us to fight or take flight.
The problem is that our brains have evolved to help us survive in a world we no longer live in. Independent educator Josh Kaufman notes in his summary of John Medina's fascinating book Brain Rules: "Since we're trying to run modern software on ancient hardware, our prehistoric brains constantly magnify perceived threats and overlook opportunities. That's why humans often do so many irrational and inefficient things."
What goes up must come down?
With the market rallying for the past several years, many of us are sitting on meaningful gains in popular stocks like Activision Blizzard (ATVI), Netflix (NFLX), and Under Armour (UA). While these gains should instill feelings of joy and inner peace, they often create anxiety. We are hardwired to defend what we've acquired. Ever feel your heart race or your palms sweat as you listen to an expert explain why your investment is massively overvalued and sure to take a 50% to 75% haircut?
You've got kids to put through college, retirements to fund, and plumbing to fix. What if Activision Blizzard's Destiny flops? What if the government kills net neutrality and drives up costs for Netflix, and the company can't pass those costs along to customers? What if men become sensitive to the fact that Under Armour shirts expose their "man boobs"? These worries can quickly paralyze you with fear -- much like saber-toothed tigers once did to our ancestors.
Focus on the fundamentals
"Unless you can watch your stock holding decline by 50% without becoming panic-stricken," says Warren Buffett, "you should not be in the stock market." Long-term investors embrace the inevitable short-term volatility of the stock market.
Activision Blizzard shares were cut by more than half in 2008, yet the stock has still gained more than 1,200% over the past decade. Activision's experienced and innovative leadership -- guided by chairman Brian Kelly and CEO Robert Kotick, both of whom have been with Activision since 1991 -- have rewarded patient long-term investors with astounding market-beating returns.
Netflix investors have been similarly rewarded under the innovative leadership of co-founder, chairman, and CEO Reed Hastings, with the stock returning more than 1,100% since 2004. In 2011, however, Netflix shares fell 60% after the company announced its intentions to split its DVD-by-mail and Internet streaming services (the "Qwikster debacle"). Facing immediate backlash after announcing this decision, Hastings and company quickly changed course and announced that the DVD and instant-streaming services would remain under the same roof. The stock has since increased more than 500%.
Shares of Under Armour have increased more than 800% since the company went public in 2005. However, after three years of trading publicly, the stock was down 50%. Short-term traders and emotional investors would be quick to throw the company under the bus, while patient long-term investors have been rewarded with a market-beating investment under the leadership of founder, chairman, and CEO Kevin Plank.
In all three cases, these businesses continue to be led by experienced and innovative management teams. For patient investors with a long-term outlook -- five to 10 years and beyond -- Activision, Netflix, and Under Armour are prime candidates to continue to deliver market-beating returns over the long haul.
Questions of balance
Before you race to sell your winners, take a moment to calmly consider some questions. What is the time frame of your investment? Has the story behind the stock changed? Has the CEO's vision for the company changed? Do you still trust the integrity of management? Has the world changed so much that your company's products are obsolete?
Ask yourself what exactly will happen if your stock gives up a portion, if not all, of its gains. Will you be financially ruined? Unless you've bet the farm, the answer is no.
As you consider these questions, bear in mind that a failed investment does not make you a failed investor.
Know yourself and move from there
You may ultimately decide that individual stocks cause you too much anxiety. This is a valid reason to take profits and move into an index or mutual fund. But for investors with well thought-out stock picks, diversified holdings, and long-term time horizons, price drops mean only a change in the number on a computer screen -- not the long-term viability of a business or investment thesis. In fact, we would argue that this presents an opportunity to add to a worthy investment at a discounted price.
Thanks for reading! After exploring Under Armour in more depth for this article, I am watching the company very closely. If the stock gets clobbered I will likely start a position.
David K [more]
The Pencils IRA Project is dedicated to building a portfolio of promising businesses that can be followed and replicated by both young and new IRA investors. Each holding of the Pencils IRA Project must meet the five pillars of a "megagrower" business -- purpose-driven business, innovative products, visionary leadership, increasing cash flow production, and strong company culture -- with significant potential to create stakeholder value and substantially beat the market over the long haul. Learn more about the Pencils IRA Project here:http://www.fool.com/retirement/iras/2014/02/15/the-best-ira-...
The second addition to my personal real-money Pencils IRA Project portfolio is LinkedIn (LNKD), the rapidly-growing professional social networking platform that is familiar to many college students and young adults. LinkedIn is quickly proving that its service entails much more than a place to stash a resume, with the company's average monthly number of unique visitors totaling 183 million in 2013, up 45% from 2012. The company stacks up quite well with our five "megagrower pillars" and offers extensive potential to reward patient long-term investors, as we will explore below.
1. Purpose-driven business
"People matter." These are the words Reid Hoffman, LinkedIn's founder and chairman, uses to describe his interest in the social media phenomena and motivation to start LinkedIn.
LinkedIn's purpose, in a nutshell, is to create economic opportunity for every professional in the world (3.3 billion individuals and counting). "I can't think of a more worthwhile purpose than investing in tools that create economic opportunity for people," says LinkedIn CEO Jeff Weiner. So far as purpose-driven businesses are concerned, LinkedIn is at the top of the list with its focus on utilizing social media platforms to empower people economically worldwide.
2. Innovative products and services
LinkedIn has an expanding arsenal of social networking products to serve a growing worldwide base of professionals. LinkedIn ended 2013 with 277 million registered members, adding 75 million members in 2013 alone (70% of those new members coming from outside the U.S.). The company's product offerings fall into three general categories: Talent Solutions, Marketing Solutions, and Premium Subscriptions.
LinkedIn's largest segment -- Talent Solutions -- saw revenue grow 64.19% in 2013 to $859.67 million. Talent Solutions focuses on providing tools (such as Linkedin Recruiter) for professional organizations and enterprises to post jobs and recruit top talent among those in the job seeking pool. Corporate customers under contract with LinkedIn grew 49% year-over-year in the 4Q 2013 to 24,500.
In February, LinkedIn announced its $120 million acquisition of Bright, a company specializing in data insights and developing algorithms to help match prospective employers with job seekers. Eduardo Vivas, founder of Bright, shared his excitement of Bright joining the LinkedIn team:
"Today, employers complain that there are no qualified applicants, yet qualified applicants often have their resumes overlooked. This marketplace inefficiency called for a technological solution and we resolved to heed that call.... We decided to join LinkedIn because of what we lacked – the ability to apply this technology across the entire economy. We share LinkedIn’s passion for connecting talent with opportunity at massive scale. And we agree that the old models for online recruiting are hopelessly broken."
LinkedIn's Marketing Solutions segment's revenue grew 40.3% in 2013 to $362.36 million. This segment generates revenue primarily through outside advertisers and a new option for users to pay for "sponsored posts" similar to Facebook and Twitter. LinkedIn's Premium Subscriptions segment -- built on the monthly and annual premium member subscribers (who receive expanded services on LinkedIn compared to traditional members) -- also saw impressive growth in 2013, with revenue increasing 60.9% to $306.51 million.
2014 will bring the full unveiling of several new offerings from LinkedIn. The company's Sales Solutions segment -- a service for sales professionals to build connections, find leads, and shorten the "sales cycle" -- will become a core component of the business this year. LinkedIn's original content continues to find momentum through its Pulse professional news app (delivering personalized professional news to each user), a new publishing platform for members to publish original content through blogs on LinkedIn, and the company's "Influencers" program, where notable individuals (including Barack Obama, Bill Gates, and Motley Fool co-founder and CEO Tom Gardner) publish original articles on LinkedIn.
With an expanding arsenal of tools for professionals around the world LinkedIn is poised, in the words of The Washington Post's Sarah Halzack, "to become the virtual town square for our professional lives." LinkedIn plowed $395.64 million -- or 25.88% of the company's 2013 revenue -- into product development in 2013. Innovation is ingrained in LinkedIn's DNA, as evidenced by the company's global expansion to countries such as China, product development with Sales Solutions and the publishing platform, and ongoing expansion of recruiting services and capabilities.
3. Visionary, experienced, innovative leadership
Reid Hoffman -- who founded LinkedIn in 2003 -- continues to serve as LinkedIn's chairman after serving as executive vice president at PayPal. CEO Jeff Weiner joined LinkedIn in 2008, after spending seven years as an executive at Yahoo. In 2011, Hoffman and Weiner both received the Ernst & Young’s National Entrepreneur of the Year Award.
Weiner offers a refreshing take on what effective leadership entails. "For me, leadership is the ability to inspire others to achieve shared objectives," says Weiner. "Managers tell people what to do. Leaders inspire them to it." This ethos has helped create a world-class company culture at LinkedIn, which will be explored more in our company culture pillar.
4. Consistently increasing cash flow production
LinkedIn's relatively low net income ($26.77 million in 2013) and sky-high P/E ratio (which exceeds 900) -- both caused by LinkedIn's extensive investments into product development -- can cause some investors (including me, initially) to write off LinkedIn as a wildly overvalued business. However, LinkedIn's cash flow production paints a different story and demonstrates the full ability of the business to generate and retain impressive amounts of cash.
Over the past four years, LinkedIn has managed to grow its base of cumulative registered members from 90.43 million in 2010 to 276.84 million in 2013. This increase in registered members has been accompanied by an average annual increase in operating cash flow production of 43.19% to $436.47 million in 2013. Net sales have also increased at an average rate of 58.35% annually since 2010.
Since 2011, LinkedIn's free cash flow has grown at an average annual rate of 55.49% to $139.25 million in 2013. This stellar free cash flow production -- which has helped the company accumulate $2.33 billion in cash with zero debt -- gives LinkedIn sufficient ammo to continue plowing funds into product development, acquire businesses such as Bright, and serve as a cushion should the company or economy fall on tough times. (Although, one could argue that a tough economic environment would actually increase the necessity and overall use of LinkedIn's services.) [more]
I recently opened a starter position in Zillow (Z), the company behind one of the largest online and mobile marketplaces for real estate and homes. This is a company that grew sales 69.05% in 2013 to $197.54 million and has expanded sales at an average annual pace of 59.57% since 2010. Not too shabby, and I think there is more to come.
Some investors are concerned that fellow competitor Trulia (TRLA) will overtake Zillow's market. I just don't see these concerns playing out: either people are biased toward Trulia for whatever reason, or (more likely) people are underestimating Zillow's strategy and moat. Here are some reasons why I think Zillow is slated to deliver market-beating returns over the long haul:
** Leadership. 35 year old Zillow CEO Spencer Rascoff, one of the founding employees of Zillow in 2005, has a 98% employee approval rating on Glassdoor. Zillow as a whole receives a 4.2/5 rating from employees on Glassdoor. Trulia's 38 year old co-founder, chairman, and CEO Pete Flint receives an 80% employee approval rating, and Trulia has a 3.6/5 employee rating on Glassdoor. While Trulia's reviews are hardly dismal, a determined Rascoff is leading the charge with a very enthusiastic base of employees at Zillow. If it really is true that "culture eats strategy for breakfast," Fools ought to prefer Zillow over Trulia.
** Strategy. In the Q4 2013 conference call, Rascoff outlined Zillow's continuing strategy:
"As we turn our focus now to 2014, our strategic priorities remain consistent, and they are: 1) grow our audience and widen our category lead, 2) grow our Premier Agent business, and 3) grow our advancing marketplaces."
Also in the conference call, Rascoff shared just how effective Zillow has been at generating traffic (and, in turn, sales):
"According to comScore, we are now nearly twice the size of our two closest competitors on combined mobile and Web traffic. And, we’re growing faster – on desktop, comScore shows Zillow tripling our category lead in 2013."
The biggest difference between Zillow and its rivals is probably Zillow's focus on reaching a wider consumer audience rather than primarily focusing on appealing to professionals such as real estate agents, landlords, brokers, and lenders. The reasoning behind this strategy is fairly simple: the larger the consumer audience, the bigger draw for advertisers to utilize Zillow's site (generating revenue for Zillow). If comScore's data is any indication, Zillow is crushing the competition in terms of audience reach.
This is really a "what came first, the chicken or the egg?" sort of question, from what I can gather. Zillow is operating with the understanding that cultivating a larger consumer audience through its mobile and web outlets will attract more professional advertisers. Other companies in this field -- such as Trulia -- are operating under the assumption that first appealing to the professionals will, in turn, lead to a more successful outcome in terms of consumer reach and sales generated. Neither strategy is necessarily right or wrong. However, I think Zillow's financial results reinforce the company's strategy when compared to Trulia's results.
** Cash flow production. While Zillow's cash flow production decreased slightly to $31.30 million in 2013, the company has expanded operating cash flow production at an average annual pace of 92.91% since 2010. This, along with stock issuance in 2012 and 2013, has helped the company build up $295.29 million in cash with no debt.
The most cash flow Trulia has been able to produce was $4.15 million in 2012, and that number turned negative in 2013. Trulia has $225.6 million in cash, but also carries a debt load totaling $230.08 million. Trulia has grown sales at an impressive average pace of 64.16% annually since 2010 to $143.73 million in 2013, but that growth has translated into no meaningful progress in terms of cash flow production. Thus, the company has been forced to issue extensive amounts of stock and debt over the past two years, with no improvement in cash flow production to show for it (thus far).
Zillow will undoubtedly be a volatile stock going forward, with a P/S ratio currently nearing 16. However, the company is guided by a young and innovative leader -- Spencer Rascoff -- who oversees one of the top company cultures in the country. The company's focus on building a service that attracts a wider consumer audience seems like a no-brainer to me, and the company has done a great job translating ever-expanding customer visits into consistent sales growth and cash flow production. As Rascoff explained in the 4Q 2013 conference call:
"55% of new sales bookings in the fourth quarter went to existing agents buying more impressions across mobile and Web, which is higher than recent trends and signifies strong underlying demand." - http://seekingalpha.com/article/2017031-zillows-ceo-discusse...
In other words, Zillow's strategy is working. This isn't to say that Trulia is a bad business or can't succeed, but Zillow has a proven strategy that is already leading to solid financial results. Trulia is yet to prove that it can actually make money or generate cash with its strategy.
My investment in LoopNet -- an online database of sorts for commercial real estate -- several years back didn't turn out all that well, so I was hesitant to take Zillow (or this field) very seriously as an investor. Zillow, though, has an experienced and determined leadership team backed by an innovative company culture with proven (and quickly expanding) financial results which, in my mind, reinforce management's strategy for continued growth.
With that said, I opened a position in Zillow and look forward to following and learning about the company in more depth in the months and years ahead.
David K [more]
"Everything's illegal in New Jersey."
Tesla couldn't catch a break in New Jersey yesterday. The New Jersey legislator voted to ban Tesla's direct-to-consumer sales model. In other words, Tesla will no longer be able to sell its cars directly to consumers in New Jersey (similar to Texas). I've already expressed my opinion on why these sorts of laws are downright absurd. If your product/service depends solely on a government-enforced monopoly, your product/service is probably pretty lousy.
Tesla and SolarCity are both facing significant push-back from competitors not through legitimate competitive means (e.g. actually trying to develop a better product -- what a novel idea -- or offering a better value to consumers), but competitors are instead lobbying the government to add new regulations and laws that impede the ability of disruptive businesses to operate while forcefully protecting outdated and inefficient business models.
Tesla will persevere. I think it is safe to say Tesla has a far more enthusiastic consumer base than any other auto manufacturer or dealership. States who do allow Tesla to continue its model of direct sales to consumers will be rewarded with increased economic activity. If Tesla shares take a hit as a result of this New Jersey setback, I may consider picking up some shares.
Here is Tesla's blog post from early yesterday outlining frustrations with the Christie administration and the decision to bring this issue to the legislature rather suddenly:
Since 2013, Tesla Motors has been working constructively with the New Jersey Motor Vehicle Commission (NJMVC) and members of Governor Christie’s administration to defend against the New Jersey Coalition of Automotive Retailers’ (NJ CAR) attacks on Tesla’s business model and the rights of New Jersey consumers. Until yesterday, we were under the impression that all parties were working in good faith.
Unfortunately, Monday we received news that Governor Christie’s administration has gone back on its word to delay a proposed anti-Tesla regulation so that the matter could be handled through a fair process in the Legislature. The Administration has decided to go outside the legislative process by expediting a rule proposal that would completely change the law in New Jersey. This new rule, if adopted, would curtail Tesla’s sales operations and jeopardize our existing retail licenses in the state. Having previously issued two dealer licenses to Tesla, this regulation would be a complete reversal to the long standing position of NJMVC on Tesla’s stores. Indeed, the Administration and the NJMVC are thwarting the Legislature and going beyond their authority to implement the state’s laws at the behest of a special interest group looking to protect its monopoly at the expense of New Jersey consumers. This is an affront to the very concept of a free market. - http://www.teslamotors.com/blog/defending-innovation-and-con...
From the Wall Street Journal, after the vote:
Tesla Motors Inc. TSLA -1.85% will stop selling its luxury electric cars in New Jersey on April 1, after the state said Tuesday it wouldn't license the company to sell vehicles directly to consumers, bypassing franchised dealers.
The defeat for Tesla, which owns its own stores, came despite a furious 11th-hour lobbying effort. A senior Tesla executive had accused New Jersey Gov. Chris Christie of breaking a deal to hold off on a rule change requiring all car retailers in the state to have a franchise agreement with an auto maker. The New Jersey Motor Vehicle Commission approved the rule change Tuesday.
Mr. Christie's spokesman countered that Tesla knew that it was operating outside state laws.
Tesla has been battling in New Jersey and other states to defend its direct-sales model against attacks by franchised dealers representing rival brands.
Tesla's problems have their roots in decades of mistrust between independent car dealers and auto makers. Over the years, dealers have fended off efforts by the auto makers to set up company-run stores that could compete with them. The dealers have pushed for—and won—state legislation to protect their franchises.
Dealers fear Tesla's model could cause directing selling to spread to other manufacturers, ending a century-old system that protects the sales territories and investments of many independent businesspeople. - http://on.wsj.com/1dNZoVX
My frustrations with investments and politics, in these situations, go in an endless loop. The fact that legislative bodies can undo (or block) years of entrepreneurial efforts of a business as brilliant as Tesla frustrates the heck out of me. The ability to offer value to consumers through entrepreneurial means -- not the mandate of self-serving legislators -- should be the primary determinant of entrepreneurial success. Consumers should decide the fate of a business, not legislators.
Believe me, I do not enjoy discussing government policies near as much as I used to years ago. I have no interest in discussing politics. In cases such as these with Tesla and SolarCity, however, it is unfortunately a necessity for us to peel back this layer as investors. I am confident in the ingenuity of the minds at Tesla and SolarCity, but this was a disappointing decision to see come out of the New Jersey legislature.
David K [more]
Peter Lynch says, "The worst thing you can do is invest in companies you know nothing about."
The greatest investments are often right in front of us throughout the course of our daily lives. I became a student at Berea College in 2010, and am approaching graduation in May. Looking back on my experiences over the past four years as a college student, I now realize how many great investments were right in front of me all along. Let me explain.
When I first came to Berea in August 2010, I signed up for Amazon.com's (AMZN) Amazon Student service. This service gives students the opportunity to receive free two-day shipping on a wide variety of products for a dorm rooms, classes, and other college essentials. As it turns out, Amazon's stock has increased 148% since I began using Amazon Student as a college freshman, far and away outpacing the S&P 500's 66% gain over the same period.
Fast-forward to the summer of 2012, in between my sophomore and junior year of college. I was participating in an intensive summer social entrepreneurship program in Appalachia, exploring the thriving towns of Western North Carolina and the comparatively struggling counties of Eastern Kentucky. In particular, my classmates and I focused on how social media customer review websites -- Yelp (YELP), TripAdvisor (TRIP), and Google Reviews -- could put businesses in smaller communities in Eastern Kentucky on the radar of potential tourists in the Appalachian region.
Since the summer of 2012, the S&P 500 has increased a total of 33%. Yelp's stock, it turns out, has increased 319%. TripAdvisor has seen its shares increase 176%. Google has delivered returns of 101%, triple the returns of the S&P 500 over the same period.
In February 2013, I attended a college workshop on how to effectively utilize LinkedIn (LNKD) as a platform to market job skills and boost my chances in the job hunt scramble. I set up my LinkedIn profile, but foolishly (not Foolishly) did not even consider researching the business as a potential investment. Since I started my LinkedIn profile in early 2013, the stock has increased 55%. The S&P 500 increased 21% over the same time frame. Starting to get the idea?
The greatest long-term investment returns will often be generated by the businesses creating and offering the products and services we use in our daily lives. Of course, not every business whose products you use will necessarily be a great investment, but it is a good place to start when considering investment opportunities. Start by researching the businesses behind the products you and your friends know, use, and love. Younger investors -- such as teens and college students -- are in a particularly apt position to spot up-and-coming trends and potentially stellar investments.
Don't take for granted the products and services you utilize on a regular basis. Looking back on my experiences since I started investing in 2005, many of the greatest investments have indeed been businesses whose products I knew and loved. This is all the more reason to be conscious about the products and services we are using, and to focus on evaluating the businesses behind those products as potential investors.
David K [more]