Category Archives: Stock ideas

capital raising by Tesla (TSLA)

August 17, 2015 By in Autos, battery power, bond market, securities markets, Stock ideas, stock market, Technology Tags: , , , , , , Leave a comment

the offering

Last Friday, TSLA filed a final prospectus with the SEC, indicating that it is selling up to 3.099 million new shares of common stock (including underwriters’ over-allotment) at $242 a share.   This will net the company close to three-quarters of a billion dollars, which it needs to fund ambitious expansion plans–the Gigafactory to make batteries the chief among them.

I presume the precipitous decline of TSLA shares over the past ten days or so was triggered by underwriters soliciting indications of interest in this offering from hedge funds and other institutional investors.  Two bullish signs:  the offering was initially pitched as being 2.1 million shares, but raised to 2.7 million on Friday (not counting the underwriters’ allotment, which will have been bumped up as well).  As I’m writing this prior to Monday’s open, TSLA shares are trading at around $255 each.

my thoughts, (somewhat) randomly presented

  1.  TSLA made what I consider a firm-transforming offering of $3 billion in convertible bonds (at a conversion price of $350 (!!!) a share) last year.  This says something about how professional fixed income investors feel about the attractiveness of straight bonds.  More important for TSLA, the successful offering took talk of building the Gigafactory out of the realm of fantasy and placed it solidly into reality.
  2. The automobile world has changed significantly over the past year, with the plunge in oil prices and the rise of ride-sharing services like Uber.  The former may mess up the economics of electic vehicles; the latter calls into question the highly operationally leveraged corporate structure of traditional car companies (translation into English:  if they need to run at, say, 80% of plant capacity to break even, will that be possible if Millennials en masse use Uber instead of buying a car themselves.  Will the car industry be a replay of the current commodities debacle).
  3. My guess is that these shifts: (i) increase TSLA’s attractiveness to stock market investors vs. conventional car companies, and (ii) make Teslas relatively more attractive abroad, where petroleum products are more expensive than in the US.
  4. It seemed clear to me from the outset that the 2014 bond offering didn’t totally solve TSLA’s need for capital.  Another offering had to happen in 2015.  I’d expected more bonds.  Why stock instead?  Market etiquette says that a new offering should be at a higher price–here meaning a higher conversion price–than previous ones (otherwise last year’s buyers look like idiots).  Also, potential lenders periodically want companies to prove that they still have enthusiastic equity backers.  This is a combination of lenders not wanting financial leverage to be too high, their not wanting to be the only ones holding the bag if things go sour, and their knowledge that bonds are going to be under pressure as interest rates begin to rise.
  5. Last year’s offering signaled a near-term top for TSLA shares.   My instinct is to think that this offering establishes a near-term bottom.  I own a small position in the stock, however, so I may have an interest in thinking this is the case.

 

big day for Amazon (AMZN)–why?

July 24, 2015 By in Amazon, cloud services, Current Market Thoughts, Industry Analysis, internet, operating leverage, Recent Market Action, software, Stock ideas, Technology Tags: , , , , , , Leave a comment

AMZN reported 2Q15 results after the close last night.  They were very good.

Sales were up 20% year-on-year; expenses rose by 17%, three percentage points less.  As a result, the company reported an operating profit of $464 million vs. a loss in the second period of 2014.

More than that, AMZN’s cloud services division, AWS, had revenue growth of 81% yoy and a quintupling of segment profits (basically operating profits less stock option expense) to $391 million.  AWS, broken out as a separate segment for the first time after 1Q15, remained a bit more than a third of the AMZN total.

 

AMZN posted an overall profit of $.19 a share for the quarter, vs. analysts’ expectations of a loss of $.13 a share and a deficit of $.27 per share in the year-ago quarter.

On the announcement, the stock immediately rose by 15% in aftermarket trading.

AMZN opened up by 20% this morning, before drifting down steadily during the day to close +9.8% in a market that was down just more than 1%.

 

Why the strong advance?

I have no good explanation, although I do have some ideas.

1. The obvious factor that changed overnight was the earnings announcement.

It contained a significant positive earnings surprise, one that makes it more likely that the company will earn, say, $1- a share in the current year. It makes the analyst consensus of $2.78 a share for 2016 more believable.   On the other hand, the stock was trading at $482 before the earnings report, or 173x the 2016 consensus.  Looking at the stock price another way, let’s say that at maturity for its businesses (whenever that may be), AMZN shares will be trading at 20x earnings.  To sustain the pre-earnings report price, that would imply a burst of rapid growth that shoots earnings up to around $24 a share.  That would be something like a doubling of earnings each year for the next five or six.

That’s already baked in the cake.  A buyer of the stock at this level must believe that $24 a share in eventual earnings is way too low.

I find it hard to believe that a $.32  per share earnings surprise during one quarter–when expectations were already sky-high=-would be enough to add 20%, or even 10%, to AMZN’s perceived market value.

2.  A second hypothesis…

What if investors are beginning to separate AMZN into two parts, AWS and everything else, and are doing a sum-of-the-parts evaluation.  To me, this sounds a little more plausible.  What would the numbers look like?

Let’s say that in 2016 AWS will comprise half of AMZN’s earnings and AMZN Retail the remainder.  To make the figures easier, let’s say each half earns $1.50 a share next year.

Let’s assume AMZN retail can grow in earnings at 20% a year for a long time, and that we’d be willing to pay 50x current results–a big number for a retail stock–for that future profit stream.  If so, AMZN Retail is worth $75.  To reach a sum-of-the-parts value of $482, AWS must therefore be worth about $400, or close to 270x its 2016 eps.  Ok, while I personally wouldn’t be willing to pay that much for AWS, I can see how someone else might.  However, I still don’t understand why confirmation that a holder at 270x earnings isn’t insane would cause the multiple to expand.  (Also, before I’d be comfortable valuing AWS as a separate company, I’d want to know more about how AMZN apportions revenues and costs among segments to ensure the published numbers don’t flatter AWS.  I’d also think long and hard about the possible effect of stock options.)

3.  The explanation for AMZN’s rocket ship ride that I’m leaning toward, however, is more technical.  Two factors may be involved.  At what Google Finance reports as 21+ million shares, today’s trading volume in AMZN was 7x normal.  The sharp opening spike suggests to me that algorithmic trading computers were at work reacting to the earnings report, not humans.  Humans, I think (?!?), would have a better sense of valuation.  I also suspect that the report and immediate upward move triggered a lot of short covering.

I’m partial to #3 because I think the whole reaction is a little  crazy.

Why is any of this important?  AMZN is a high-profile, large-cap stock with almost two decades of operating history.  There’s got to be a way to make money from the possibility that something like AMZN’s big move will occur with other similar names.

 

 

thinking about Amazon Prime Day

July 17, 2015 By in Amazon, Industry Analysis, internet, Retail, Stock ideas Tags: , , , , , 1 Comment

Yesterday was the first Prime Day for Amazon (AMZN).  The company’s press release indicates it was a very successful event, one that it will at least repeat in 2016.

My thoughts (I don’t own the stock, except maybe in a sector ETF):

the name  

It’s Amazon Prime Day.  If it sticks, it’s an incredible plus for Amazon.   Unlike Black Friday, which is when we’re all supposed to run amok buying stuff from anyone willing to sell, Prime Day is when you’re supposed to go to AMZN to buy.

sales volume

The company said that it sold “more units” on Prime Day than “the biggest Black Friday ever.”  I read this as meaning that AMZN sold lots of low-priced stuff yesterday.  If dollar volume were through the roof, I suspect AMZN would have said that.

sales composition

We know that a quarter of AMZN’s operating income comes from cloud services.  Let’s say that the company strives to break even overall on things it sells itself, but makes most of the rest of its money by selling for third parties (Fulfillment by Amazon).

–“Hundreds of thousands” of new customers signed up for trials of Prime, making it the biggest day of its kind ever for AMZN.

–It either sold, or sold out of, a lot of AMZN eco-system devices.

–Fulfillment by Amazon had its biggest unit sales day ever, nearly quadrupling worldwide unit volume from July 15, 2014.  Third parties had to commit in advance to having enough inventory in the AMZN distribution system to enable Prime delivery of items bought yesterday.  My guess is that this was a significant limiting factor for FbA sales, implying that 2016 sales could be a lot higher.

where did the sales come from?

Wal-Mart probably knows, but no one else.  The issue is whether AMZN redirected sales that it would have captured on other days of the month to the 15th, or whether AMZN took sales for itself that would have gone to other merchants if not for the Prime Day promotion.  My guess is that it’s primarily the latter.

stockouts and social media

The media focus I’m seeing this morning is on customers who are unhappy because they weren’t able to buy merchandise before deals were sold out. This is being portrayed as bad.   It seems to me, however, that this is free publicity doing two good things for AMZN:  in reinforces the idea that Prime Day is all about AMZN, and it highlights that the sale wasn’t all just random junk but did include a significant amount of desirable merchandise.

 

None of this is enough to make me a buyer of the stock.  Still, the first Prime Day seems to me to be a significant coup for AMZN.

2Q15 earnings for Intel (INTC): back to waiting mode

July 16, 2015 By in cloud services, Current Market Thoughts, earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , , 1 Comment

the results

After the close last night, INTC reported 2Q15 results.  Revenue came in at $13.2 billion, down 5% year-on-year.  Operating profits were down by 25%.  Net was $2.7 billion, however–off by only 3%.  EPS came in at $.55, flat yoy (due to continuing share repurchases shrinking the total shares outstanding).  That figure beat the analyst consensus of $.51.

The main points, as I see them:

–cloud business was stronger than expected

–PC business was weaker, due presumably to overall GDP softness in emerging markets, especially China, and in the EU

–the overall business is shifting to higher-end, more cutting-edge products.  This is resulting in lower than expected volumes.  Higher prices and margins are offsetting this

–even though INTC is expecting a bounceback during the back half of the year from an unusually weak first six months, it is edging down its full-year forecasts slightly to account for continuing weakness is the PC market

–the 2Q tx rate was a miniscule 9.3%, compared with 28.8% in 1Q.  That’s because INTC has decided that some cash balances earned abroad and held overseas are permanently invested there and is asking the IRS for a refund of taxes previously paid on this money.  Eps would have been around $.47 at the 1Q15 tax rate.

waiting for…

–the Altera (ALTR) acquisition to close and new field programmable gate array-based microprocessor products to emerge

–world GDP to accelerate

–the product balance to shift to non-PC products (the cloud, the internet of things…) to a degree that they, not PCs, define the company

–tablets to become profitable

in the meantime

I’ve been surprised by the weakness in INTC shares over the past six weeks or so, as the extent of softness in the 2Q15 PC market has become apparent.

My picture has been that the stock goes sideways, supported by a discount PE multiple and a 3%+ dividend yield, while the company (successfully) transitions into a post-PC world.  I continue to think that this is not so bad for shareholders during a time like the present when the market in general is likely to go sideways.

The key question, for which I have no strong answer (because I’ve been thinking I still have time to formulate one), is what to do as/when economic activity begins to accelerate.  Clearly, in my mind at least, if overall corporate profits begin to rise quickly, being paid 3% to wait for future developments won’t appear to be such a good deal.  I don’t think the current weakness in INTC shares is the first inkling of this sort of shift.  But it’s something I have to consider.

 

Etsy (ETSY)

May 22, 2015 By in internet, Stock ideas, Trading Tags: , , , , , Leave a comment

ETSY debuted on Wall Street on April 16th at an offering price of $16 a share.

The initial trade was at $31.  The stock fluctuated between $28.22 and $35.74 before closing at $30.

Since then, the stock has been steadily drifting back toward the IPO price.

The stock dropped by 18%, to $17.20 on Wednesday, after the company reported a disappointing March 2015 quarter.  The consensus estimate of (three) Wall Street analysts was that the company would report non-GAAP earnings of $.03 a share.  The actual was a loss of $.12.

Revenue for the quarter rose by 44.4%, year on year.  Adjusted EBITDA (earnings before interest, taxes and depreciation/amortization), which is arguably the most flattering possible way of presenting profits, rose by 9.3%.  Also, in ETSY’s case, the adjusting removed both a $20.9 million foreign exchange loss and a $10.5 million yoy increase in income taxes.  On a GAAP basis, ETSY had a loss of $0.5 million in 1Q14 and $36.6 million in 1Q15.

Media comment about the sharp drop in the stock price after the earnings report puts the blame for the decline on the narrow slate of IPO underwriters and on ETSY’s “authentic” counterculture philosophy/image.

I don’t think that’s the case, at least not directly.

To my mind, the central fact is that ETSY’s March quarter ended more than two weeks before the IPO priced.

The stock’s price action since then says to me that on the first day of trading investors weren’t aware of how weak 1Q15 results would be.  The steady decline in following sessions suggests that the bad news was gradually making its way into the market.  The 18% drop on announcement implies the actuals were worse than the rumor mill had been whispering.

Where was ETSY management while all this was happening?

I can only see two possibilities:  either the company has terrible financial controls and was unaware during and after the quarter how weak the quarterly results would be; or it did know and decided–presumably at the urging of the underwriters–not to disclose this plainly to potential investors during the road show.  Neither one makes me want to run out and buy the stock.

Note:  I haven’t studied ETSY carefully and I didn’t see the roadshow.  My picture of what’s happened is based on reading the earnings report and observing the stock’s trading history.