As you can see from the chart below, it appears as if the gravity of fundamentals is slowly returning to the markets. Linkedin is trading at nearly half of its IPO high, reference "LinkedIn Shares Debut With A Near 100% Pop In Price, Annualized PE Over 1,000!!! Next Question, Whose Gonna Write Me Those Bubble Puts???" Many believed this to be too high, but BoomBustBlog attempted to meticulously demonstrate how high is too high.
In the post "A Realistic Forensic Valuation of LinkedIn – There Ain’t No Surprises Here…" of Monday, May 23rd, 2011 we offered a full valuation of LNKD, and as you can see we were right on the money - as excerpted:
You see, fundamental analysis still works - and it works well. Double to triple your money simply buy counting the numbers... Click the graphic below to enlarge. This is at least the 2nd time my subscribers have dipped into this well to pull out bearish honey instead of water!
As excerpted from Research in Motion Drops 10% After Hours, Precisely As We Warned Two Months Ago – MARGIN COMPRESSION!!! Thursday, March 24th, 2011 (I also warned again in April - Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute! Friday, April 29th, 2011):
On January 20th, I posted "Blackberries Lost More Market Share Than We Bearishly Anticipated While RIMM’s Share Price Spikes: Is It Time To Revisit the Bear Thesis?". I turned bearish on RIM last summer and made some money on its dip back then. Shortly afterward, its shares did the QE thing, despite the fact Android started sucking up market share everywhere while simultaneously squeezing margins like orange juice. As excerpted from the aforementioned post:
We have updated our mobile OS and handset manufacturer market share model and will make it available to subscribers as an online app by next week. In the meantime, let’s review some of the findings – vendor by vendor. First up is Research in Motion. This was a profitable short in 2010, with the share price hitting our targets within 100 pennies. Since then, the stock has risen appreciably. Let’s take a look to see if the rise was justified.
Page 5 of our Research in Motion forensic analysis (released in the summer of 2010 - RIMM Forensic Analysis and Valuation – Professional & Institutional or RIMM Forensic Analysis and Valuation – Retail) clearly stated that while we expected RIMM’s handset shipments to rise as a result of a rapidly expanding smartphone market, it will lose considerable market share....
Last week I posed the question, "Is The Evidence For An Apple Margin Collapse Now Incontrovertible?". I received some interesting, albeit rather passionate answers, many of which failed to address the core core issue, which is can Apple compete with the rapidly rising technological bar that is simultaneously facing rapidly dropping prices without suffering a hit to margins. Phrased differently, can Apple's brand allow it to charge materially more for less product in the face of over 400 competing devices connected by the fastest growing and most diverse ecosystem in the business? Sounds like a tough sell, doesn't it? This is not about who is better, who is worse, who will win, and who will lose. It is about margins. Apple may not eve be in the race if it doesn't run, and to run may very well mean margin compression.
Well, if margin compression wasn't "Incontrovertible" last week, it certainly should be this week. Let's walk through margin compression as a result of excessive competition step-by-step, starting by solidifying the thesis behind the recommended updates to the Apple Margin Compression Thesis & Google's valuation model. Subscribers, adjust your BoomBustBlog Valuation Models Accordingly:
- Apple – Competition and Cost Structure Forensic Analysis and accompanying Apple iPhone Profit Margin Scenario Analysis Model - suggested use with Apple Earnings Guidance Analysis
- Google Final Report and the accompanying Google Valuation Model (pro/institutional subscribers)
Apple's iPhone launch on Verizon did a lot to boost market share, reference Apple chews away at Nokia, posts best smartphone share growth in Q1 and Android increases smart phone market leadership with 35% share. It's success was enough to push it to 2nd place in terms of US handset vendors and 3rd place globally. Despite this success, it is still losing considerable ground to Google's Android, reference Even With Apple’s Successful Launch On Verizon, Google Continues To Increase It’s Lead In The Smarthphone Space Friday, May 6th, 2011, and Google’s Android Market Share Explodes As It Expands Its Reach To Cars, Toys, Home Automation, Music & Movies – All In The Cloud Wednesday, May 11th, 2011 Verizon’s Earnings Confirm The Economic Impact of Android vs iPhone In Regards To Carrier Profitability Thursday, April 21st, 2011.
Many don't realize why the amassing of significant dominance in market share makes such a difference. Basically, its the reason why Apple has historically been able to charge a premium (although not currently due to Android - high end Android phones are either at par or slightly more expensive than the iPhone yet Android's market share increases at en ever more rapid pace). Apple's key advantage lies in the network effect stemming from majority market share (embedded in its iTunes and app store ecosystems). Wikipedia on the Network Effect:
Summary: I called it the coming RE Depression in 2007! I put MY money where my mouth was and sold off all of my investment real estate. I put YOUR money where my mouth was and shorted all that had to do with real estate (REITs, banks, builders, insurers). I called almost every major bank collapse months in advance. I warned the .gov bubble blowing does not = organic economic recovery. Now I'm saying we need to, and will, continue what's left of the crash of 2009, with ample global company. There will be no RE recovery this year, and there will be a crash. OK, you heard it here!
First, let's go through the headlines for the day then proceed to breadcrumb trail that clearly led us to where we are now and where we will ultimately end (oh yeah, In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011)
Commercial Real Estate
U.S. commercial property prices fell to a post-recession low in March as sales of financially distressed assets weighed on the market, according to Moody’s Investors Service.
The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement today.
The national index has fallen for four straight months as sales of distressed properties hurt real estate values. Investor demand is strongest for well-leased buildings in such major markets as New York and Washington as vacancy rates decline and the economy grows.
The index “continues to bounce along the bottom as a large share of distressed transactions preclude a meaningful recovery of overall market prices,” Tad Philipp, Moody’s director of commercial real estate research, said in the statement. “Indeed, the post-peak low in price has been reached in the same period as a post-peak high in distressed transactions has been recorded.”
So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported. Prices of properties of $10 million or more have risen 23 percent since their July 2009 low, according to a separate report issued today.
No Recovery Signals
The overall index shows “no sign of recovery,” Moody’s said.
Almost a third of all March transactions measured by Moody’s were considered distressed, meaning the properties’ owners faced foreclosure, had difficulty covering their mortgage payments or experienced other financial problems. It was the largest proportion of distressed property sales in the history of the index, Moody’s said.
For all of those wondering how CRE can be doing so bad while REITs are doing so well, well I explained it in explicit detail several times in the past. Once we eliminate rampant fraud and bring back mark to market, all will be good again...
Technology Bubbliciousness Is Back With A Vengeance!
LinkedIn (LNKD) went public with an absolutely unrealistic valuation that illustrates the dangers of ZIRP policy that has carried on for too long. The marketing machinations of investment banks combined with a total lack of respect for risk and the cost of capital has allowed such to happen – and we all know how this is going to end!
In 2010 LinkedIn generated $15m of PAT (profit after taxes) as quoted by the popular financial media. But that’s PAT. What the media and pop media readers are forgetting is what’s available to common share holders, you know the guys holding that stuff trading on the exchanges. LinkedIn has total redeemable convertible preferred stock of 10.8m (4m Series C and 6.8m series D, Convertible preferred stock of 38m (17.2m series A and 17.5m Series B). After accounting $11m for undistributed earnings allocated to preferred stockholders the PAT attributable to common share holders was $3.4m. For those perpetual pessimists who are not well versed in calculating 5 digit PEs… The math already denotes LinkedIn trading at a PE of… well... I’m actually damn near embarrassed to print this… 29,000x.
Several BoomBustBloggers inquired as to my opinion of what apparently was an overpriced acquisition of Skype by Microsoft. At first blush, it appears as if the management of Microsoft has lost their mind. A second look (as well as access to our proprietary research) reveals a more interesting perspective. To make a long story short, Microsoft is trying to replicate Google's cloud services.
If you reference pages 29 to 36 in our the Google valuation report from 8 months back (63 pg Google Forensic Valuation - tutorial, [Google Final Report 10/08/2010 to download] to plug in your own assumptions see Google Valuation Model (pro and institutional), you will find the answer to why Microsoft is willing to pay $8.5B to buy Skype. Skype, like Google Voice which is tightly integrated into Android, will be folded into the mobile operating system to give full mobile VOIP capabilities that will most likely tie in with Microsoft’s server products ex. Exchange server for storing voicemail along email, voice recognition, transcription services, etc.) , just as Google purchased Grand Central (page 55 on, in the report) to turn it into Google Voice to move vast amount of profitable mobile telephony services out of the reach of telcos and totally to Google’s cloud – leaving only data services to the telcos. This is happening now, reference Sprint’s wholesale adoption of Google Voice by offering users to switch transform their Sprint numbers into GV numbers without breaking their contract. As excerpted from the afore-linked source:
Google was already a competitor
Communications services, especially voice services, are rightly seen as the last bastion of clear telecoms operator advantage over alternative means of offering such services, with the telephone number itself being the key enabler.
In many other areas, such as applications and content, telecoms providers are already losing out in terms of service usage and brand loyalty to aggressive, software-driven players such as Google and Apple. Verizon may previously have partnered with Skype for similar-looking services, but Skype is not Google; as an Internet voice specialist, Skype’s ability to impact the telecoms value system is nowhere near as profound as Google’s.
As such, Sprint’s inviting of Google into the telecoms inner sanctum, through this formal partnership to offer Google Voice, might therefore look something like throwing the baby out with the bath water.
But may prove a better friend than foe
So, what does this really mean?
My many warnings on the impending dethroning of Apple by Google has produced more flak and negative response since any proclamation since my warning about Goldman Sachs in the spring of 2008. Of course, fast foward to the spring of 2011 an you will find Reggie was right on point. I am just as confident, or more, about Apple vs Google, and for the same reasons as I was confident about Goldman Sachs. You see, its not about the quality of the company. Both are strong American companies with strong management, but both are (or at least in the case of one of them, "were") also seen as iconic to such a degree that investors and customers failed to look at the actual numbers, outlook and underlying trends beneath said iconic, "spit-shined-to-perfection-through-marketing" patina. Remember, don't look to BoomBustBlog for what you want to hear, look to us for what you need to hear. With that being said, we have released our valuation numbers for Apple to Subscribers (Pro/institutional level subscribers may contact me directly about the analysis) and the reviews of the latest credible competition to Apple's fastest selling products are now out - the Samsung Galaxy Tab 10.1 (Samsung's reworked answer to the iPad) is now taking pre-orders, and the reviews are very positive.
- Engadget's Darren Murph: It's quick, nimble, and easy to hold, and it's both thinner and lighter than the heralded iPad 2. There's no question that we prefer the handling of the Tab 10.1 over Apple's alternative, and with the improvements coming with Android 3.1 (and in time, Ice Cream Sandwich), it's going to be mighty hard to overlook this device come June 8th. The 16GB WiFi model will hit for $499 -- exactly in line with the iPad... There's just no other way to say it: the iPad 2 finally has a real competitor. If Samsung could somehow undercut Apple by even $25 here, the choice would be obvious, but it's going to have a whale of a time convincing the masses that a Samsung device is superior to one Designed in California when prices are equal. That said, we'd still recommend the Tab 10.1 over the iPad 2 for heavy Gmail users and all-around fans of Android."
There are several other reviews around, but Endgadget is, by far, one of the most objective, least unbiased reviewers popularly available. Examples of bias were evident when the reviewer would list how the Samsung pre-release product was faster, shot better pictures, had a better screen, was slimmer, lighter etc., yet in the conclusion states that they prefer the iPad 2 over the Samsung because it is "sexiest", but considers the Samsung the "iPad 2" of Android world. At least from our perspective, this strays from a straightforward comparison, but does exemplify the results of Apple's superior marketing capabilities which should serve it quite well as competition is rapidly ramping up.
As a refresher, here are reviews for the Asus Transformer priced at 80% of the cheapest iPad:
Note: This is a very long post, and would have been longer if I didn't decide to break it up into pieces. I am presenting plenty of background material in it that regular readers have probably seen before because the subject matter is so pertinent to asset values both today, and tomorrow. I suggest those with interest in the real estate and/or banking arena read it in its entirety. The latter portion of the post is all new material that leads into valuations of real CRE properties that are currently on the market and ties in seemingly unrelated issues such Portugal's bailout and Greece's inevitable restructuring.
Last night, I spent an interesting time with the esteemed and world reknown macro economist, entrepreneur, NYU professor and strategist, Dr. Nouriel Roubini. Nouriel is a very, very bright guy. He has to be, he agrees with many of my viewpoints :-). Dr. Roubini had a client reception at his downtown loft in NYC. It was a delightful affair, plenty of heavy thinkers, a bevy of beautiful women, engaging debate of things geopolitical, macro-economic and financial... and of course at least one trouble maker. That would be that tall handsome fella in the middle who had the nerve, after Roubini literally deadened the room with his proclamations of what could come in the case of China crash, European default or US hard landing, to actually burst out and say the esteemed economist was actually being TOO OPTIMISTIC!
Hmmm, and they have the nerve to call Roubini Dr. Doom. Don't they know Dr. Doom wears a mask, a suit of armor, and is truly no joke?.
Yesterday, I bluntly called out the European state of economic affairs as I saw them in "Liar, Liar, European Pants on Fire!" Today, I present the article published by Property EU, one of the leading real estate publications in Europe which illustrates much of my thoughts on the topic of how and why Europe is nowhere near out of its economic malaise, and more importantly how this may pull the value of real estate down. The vast majority of European banks lend against real estate and when the value of said collateral goes down in conjunction with the value of what many are carrying on their books at par as risk free and hold to maturity assets at 30+x leverage... Well, you can use your imagination for the Lehman like results...
This week I will go through several property devaluation scenarios as applied to what looks like very promising cash flow scenarios using real life examples of NYC commercial real estate starting tomorrow, and culminating with a more in depth analysis for subscribers next week. The most interesting part of the analysis will be the application of our real asset protection program to hedge against the risk of property value decline. Stay tuned, it should be exciting, and if you are not a finance nerd like me - at the very least interesting...
As promised, I am presenting historical justification of the logic behind my call of absurdity in the drastic drop in share price after Google announces a redoubled effort in investment and marketing of its nascent businesses. I went into the logic in detail via our Google Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google. The following pages are excerpted the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).
To begin with, Google apparently realized early on that it could better realize returns by investing shareholder capital through acquisitions. It has actually been quite acquisitive, making 88 purchases over the last 13 year. Last year was Google's most acquisitive year, ever!