Damodaran: Nr. of users drives pricing of social media companies

In his article Aswath Damodaran correlates key metrics of different listed social media companies.
Strongest correlation of EV/MaCap is with Nr. of users of service.
Value per user in terms of EV also depends of kind of service offered by company. Compare Netflix EV/user  of USD576 for instance with Twitter (USD77).

However he has difficulties of justifying the valuations based on traditional fundamentals (earnings/cashflows, growth and risk). For now however its more a pricing (based on nr of users) than a value view.

I always enjoy Damodarans articles, since his approaches are very resourceful yet always based on data. Furthermore his techniques are seldom rocket-science and can always be understood, an advantage in my point of view since it reduces potential errors being made during the computations. I wished this kind of thinking would also come so easy to me. Until then i will continue reading his blog and trying to learn.


Edit 1/22.02.2014:
Make sure you also read mmi's comment on the Whatsapp takeover.
Very insightful about a) the network effect creating stickiness regarding the user of Whatsapp and b) Whatsapp is not a social media company.
Both points are very much true and ought to be considered.

Links for the last November weekend in 2013

Some links for interested parties:

• Bronte Capital - Google+ will get your children murdered: About the automatic linking of different Google functions. I try to avoid this by: a) Not using too many services b) If yes using, not being logged in with an account c) Not accepting 3rd party cookies d) clear temporary browser files regularly (at least twice a week!)

• Howard Marks (Oaktree Capital): Latest Memo: Rising risk level due to external pressure, however risk level still below pre-financial crises levels. Low financial product "innovations" via derivatives etc. "Orange risk zone".
• Aswath Damodaran on valuations and uncertainty arguing that investors should embrace uncertainty in market and stocks instead of trying for the x-thousand time to value blue chip stocks. I think he is right to some extend but a) Valuation with higher uncertainty requires higher knowledge (micro/macro) and skill b) Small caps are sometimes receive low attention are easy to value and have attractive features, i.e. uncertainty is not always necessary for a seminal valuation exercise.

Blog recommendation: The Grumpy Old Accountants

On The Grumpy Old Accountants readers can regularly read about the quality of auditing an accounting, an important if not the most important issue for all investors.
The latest post  that i found particularly interesting is about Sam E. Antar, cousin of Crazy Eddie, and the effectiveness of "ethic lessons" for auditors and students.
He argues that the capital markets attracts the 10% "of the public is absolutely unethical and incapable of behavioral change". He is skeptical that auditors with the regular middle-class background will be able to detect the true intentions of such highly educated and ruthless scammers as Sam Antar.
I agree with his conclusions and find this a really interesting argument besides the usual stuff, such as conflict of interest, etc.

I also definitely recommend you to read the articles about Groupon and their accounting.
In my opinion investors can learn a lot by trying to stay up to date with accounting regulations and their consequences. I might be biased since I study a lot of accounting myself however sounds knowledge is necessary in order to evaluate the most important documents (financial statements). This holds especially true in times of ever increasing importance of goodwill, deferred taxes and fair value accounting combined with the management approach favored by standard setters.

Herbalife short presentation

This is the link to Ackman's research on possible multi-channel pyramid fraud at Herbalife. 300+ pages.

Will be extremly interesting to see how this develops, i think he has a very strong page. Really good research, must have taken months over months.
Interesting enought that this company got away so long with this, should the accusations be true.

Interesting Reads: End of October

Here some interesting articles I found this week:

FT: Chinese banks flee London to avoid tough regulation of their business, moving to Luxembourg.
WSJ: Spanish region Catalonia has been the engine of the countries economy. Call for independence intensives. A move we can see in different countries as well (Scotland-UK; North Italy-Italy; Flanders-Belgium).

In German (sorry):
BZ: Record high in suspected money laundering in German, esp. in the real estate sector.
FTD: Germans keep their cash very liquid, deleting long-term deposits. Parallels to the dot-com crash?
WSJD: Failed broker MF Global lost total oversight of its financial situation well before  its 700 million disaster.

Credit Default Spreads (CDS): Portugal, Spain, Italy, China

DB Research has a very interesting Website on Credit Default Spreads, which you can find here.
It features CDS for most countries as well as a calculated annual probabilty of default (PD) rate. The datasets are frequently update and downloadable as .xls files (I had to rename the ending of the files to make them work).
The page also includes a graphic, which you can customize with your own recovery rate assumption to come up with the annual PD rate from 5Y CDS spreads.

This is the PD for Italy, Portugal and Spain with a 40% chance of recovery.

The recent impact on CDS by the actions of the ECB are quite strong, at least for now.


Here we see the Chinese against the US PD, again with 40% chance of recovery:

Interesting to me was the strong and clear downward trend in the Chinese spreads, depite (it even seems a bit contrarian) public worries about slowing growth and missmanagement of state run companies and districts/states and the huge media coverage.

For me the lesson is that its always better to double-check the influence/impact of media coverage on the hard economy, since CDS spreads are a reliable figure at least for me, since they signal that other parties are ready to give me insurance against the default of a specific company.

CDS spreads are esp. important  to contrarian investors, which might be looking for countries in a crises (=high CDS) with companies bearing a low domestic (=high foreign) revenue exposure.

Links of the week: Short MANU, Black Swans, Damodaran Valuation Class

1. Shorting Manchester United (MANU): Good write-up of reasons and risks in shorting MANU, in my opinion a good shorting target. High CapEx, combined with limited growth opportunities, bad track record of listed football clubs. However Soros Fund desclosed a stake in MANU after IPO, what makes me wonder.
2. Latest Oaktree Memo: On Uncertain Ground: 15 page memo on the sluggish recovery, longer term economic outlook and problems, black swans. Best to download as pdf-file.
3. The US fall semester started recently. Prof. Aswath Damodaran started his online valuation class again. There are different ways to follow him, via special learning platform Lore, Youtube, iTunes or his School website. I am taking his class too and its a pleasure to follow and learn. Currently we are in the 3rd lessons, so its still easy to begin and catch up! Contents will cover intrinsic (DCF)/relative/option valuation.

Damodaran follow-up on Groupon, Facebook

Prof. Aswath Damodaran published recently two very interesting articles about Groupon/Facebook, containing among other things revaluation of his initial IPO pricing. As usually he published his spreadsheets, allowing others to follow and customize his assumptions.

His Groupon revaluation:
I go along with his view that Groupon is, despite the huge drop in share price, not a buying opportunity. They have problems in defending their business model, since entrance barriers are very low. To me it seems doubtful whether all the marketing expenses used for acquire merchants and customers will flow back in the end. Merchants seem to be disappointed by the return rate of the deal buyers, also Groupon seems to neglect quality more and more, esp. not checking if merchants are able to provide the quantity that might possible be sold.
Additionally it seems to me that all the daily deal topic was a big hyped and is now slowly getting cold. There is nothing new or exciting more in buying such Coupons, and most people are probably just bugged by all the mail advertising every day containing often a) uninteresting deal-items or b) discounts that in the end turn out to be quite small.
I go in line with  Damodaran conclusion, that Groupon is just about to be fair valued, i would even go further and say that its still overvalued. Also there is considerable momentum downward what might hold potential buyers back.

His Facebook revaluation:
 Damodaran finds Facebook to be undervalued.
I find it hard to judge that, since future development is so uncertain. Much depends on the question, whether a sound business model can be found. When this will be the case, it doesn't take much to say that the upside potential would be very big.
One might see the buying of FB stocks as a bet on this question, however its quite a risky one, since downside is still considerable. The assets FB has are his users and their data, pictures, etc. But if this assets cant be turned into money by FB, it seems unlikely that they will be of much worth to others.
This makes a bet quite risky.

Free tools for stock screening/look-up/news

Here I want to list some of my favorite tools that i use frequently when assessing/monitoring one stock or a portfolio of stocks. All are free of charge:

Stock screener:
Yahoo Stock Screener: Over 150 different criteria you can combine when screening. Works best for US stocks.
Google Stock Screener: Features a lot of different criteria, maybe a bit less then Yahoo. More graphical interface. As well only US stocks.
For a how-to-screen see Damodarans excellent guide, who also recommends screening tools.

Quotes, (Financial-) Information, Ratios of specific company:
Yahoo Finance: Works quite well for a lot of companies, however most information is available for US stocks and larger European caps.
FT marketsdata: Works well for a lot of companies, very graphic interface. Gives you a lot of information, including institutional investors, background CEO/etc. Has data for 3 annual periods.
MSN Money: Only for stocks from most important markets: US/CAN/GER/FRA/SP/BE/IT/JAP/SW/NL/UK. Features besides the usual stuff a 10 year summary!

News aggregator:
Finanznachrichten.de: After creating an account you can define your personal watch list of stocks and news from 430 international publications. If wished you can also have an Email being send to you at given day and hour with all the relevant news. However most content is in German! Also shows real-time quotes.

Weekly links: Damodaran/China focus

Prof. Damodaran continued his series about value investing:
1. Contrarian Value Investing (must read, extremely interesting!!)
2. Activist Investing (more for informational purpose, since huge funds are needed to play)

And here the China focus:
1. Bronte Capital about Chinese kleptocracy (mostly state owned companies)
2. Research paper about Evergrand Real Estate Group (pdf, Chinese fraud, HK listing, very detailed!)

Its already Thursday, but better later than never!
A nice week!

How online-newspapers make money with advertising

Collecting content for webpages in order to get advertising money through clicks gets increasingly popular.

This is one very good example I discovered this week (Handelsblatt again, they are very active with such things):

This is the picture line. That’s 25 pages of pictures.

Each time one clicks next, it reloads the whole pages, what is good since this generates more clicks. Every fifth image is a whole image full of advertising.

Despite the fact that the presentation method is quite useless, since it doesn’t yield any advantage, I wouldn’t mind so much.

However, on the first page one can see the source, on how what a wonder, there the ranking is presented as a table, what is just way more informational.

So remember this how-(not)-to-make-money-on-the-internet:

Find someone with some kind of content, take it, find some pictures (they don’t have to be related to the content at all, but should be free of charge!), copy some text and combine with not-related image, put one image per page, then advertise your great article.

Quality journalism at its best…

Another example I found today.

Also I read an interesting article (in German) about how the scam the new “output protection act” that has become a law in Germany recently. Very interesting and funny to read.

Interesting reads

So today is the day of the (second) election in Greece, what a lot of journalists are picturing as the final battle for/against the Euro: Good, old pro-EUR party (ND) against greedy, untrustworthy far left newcomers, screaming to get kicked out of the Euro zone.
In my opinion this is exaggerated, at least on the short run I expect Greece to stay with the Euro, since both parties want to -more or less- renegotiate the cuts and the EU (Hollande) will probably be willing to talk too, despite Merkels no-negotiation announcements.
Anyway im exited to see the outcome of the votes and market-reaction on Monday.

Now lets come to the links:
1. After his series of posts on growth (recommendation!)  Aswath Damodaran is following up with a series about Value Investing, starting two weeks ago with Value Investing: An Identity Crisis? and more recently Passive value investing: Screening for bargains. Interesting in the last post are, besides his very good instructions of how screening stocks is actually done, his closing thought on the moat of the investor and his odds of success.
2. The Brooklyn Investor on "the good old times" and todays market environment, with high-frequency trading, volatility, revolving doors and too efficient markets.
3.Value Walk on stocks and the Greek elections, seeing investment opportunities in Greece.

Thats it for now, have a nice sunday!