Employment Sectors

Albert Wenger had a good post the other day noting some of the changes in employment in the U.S. over the last couple hundred years.  He uses the chart below to illustrate the massive losses in agriculture and manufacturing jobs. Some might argue that this chart indicates that our economy has weakened as a result of these losses. But Albert also notes that while these sectors have seen massive decreases in employment, overall employment as a percentage of the population has actually increased during this time (from 32% to about 45%).  There is no doubt that this kind of change causes of lots of pain in the short term, but it's also clear that the creation of new companies and entire industries is critical to the long term health of the economy.

User Driven Valuations

I wrote about Facebook's IPO back in May pointing out how unbelievable it was to me that a company that started back in 2003 and really doesn't make anything of substance or have a very compelling revenue model could go public at a $100 billion dollar valuation. I ended the post by saying, "the world has changed".

Well, maybe not. A lot has changed for Facebook since then (see stock price chart above).

Their market cap is now below $40 billion and the consensus seems to be that their stock price is going to continue to fall. That said, their shares are still trading at around 32 times earnings -- so there's still a decent amount of hype around this IPO.

One of the primary reasons for all of the hype is that Facebook is so widely known and widely used. They have hundreds of millions of users; many of them use the product several times a day, every day. And the vast majority of these users know absolutely nothing about investing.  But because they use the product and know the product, they were compelled to buy some shares. As a result, the company was hugely overvalued following its IPO.

Contrast this with Globus Medical, a medical device company that went public on Friday with virtually no hype. It’s unlikely we’ll see this stock nosedive like Facebook. They have a fraction of the customers that Facebook has – they make medical devices used in spinal surgery – so there are far fewer people interested in owning a piece of the company. There’s far less hype.

There have been literally thousands of consumer web services started and funded over the last couple of years. Many of these companies have millions of users and no revenue or compelling revenue model. As a result, I’d expect to see more and more companies go public in the near future with inflated valuations that are propped up by their user base.

The Facebook IPO underscores a good lesson for amateur investors: just because you use a product every day doesn’t mean it should be a part of your portfolio.

SecondMarket & the Tech Bubble

There was a fantastic column the other day on Reuters written by Felix Simon titled, Facebook’s SecondMarket Puppets. The column points out how investors that put their money in Facebook using SecondMarket while Facebook was private have actually lost money since the company went public. This is interesting – and scary – for companies with upcoming IPOs that are allowing their illiquid shares to be traded on a secondary exchange. In theory, the value of SecondMarket was that you could get in on a hot company pre-IPO and make big bucks if/when they went public. But it seems that this isn’t a guarantee. Simon’s key insight is this: 

…it’s increasingly looking as though shares in private tech-companies are a bit like fine art prices: a place for the rich to spend money and feel great about owning something very few other people can have. The minute they become public and democratic, they lose a lot of their cachet.  And a lot of their value.

The level of hype propping up the valuations of some of the hot private and public internet companies is enough to keep me far away from these securities...and SecondMarket.

Mary Meeker's State of the Internet

Nobody is better than Mary Meeker -- now a partner at Kleiner Perkins -- at summarizing the state of the internet. Last week she presented her Internet Trends 2012 presentation at the All Things Digital Conference. This presentation is fantastic, I recommend flipping through it when you get a chance. The most compelling part to me is her summary of how technology has forced almost all industries -- from photography to healthcare -- to reimagine their products and they way the deliver value. That section begins on page 33 and ends on page 84.

[scribd id=95259089 key=key-mv1qbwlvykk5cacr6a7 mode=scroll]

Boomerang

I recently read Michael Lewis' new book, Boomerang.  It's a fascinating book about the recent European Debt Crisis.  Like most of Lewis' books (especially The Big Short, that chronicles the U.S. financial crisis) he's able to take a fairly mundane topic, roll it up into a few hundred pages and make it a page turner.

The book dives into the crises that occurred in the last few years in three countries: Iceland, Greece and Ireland.

It's a fascinating and very well written book.  It gives the inside story on the political, economic and cultural circumstances that led to the unlikely collapse of three different economies.  If you're interested in European economics, politics or culture, I can assure you that you that you'll enjoy reading Boomerang.

The Facebook IPO

Facebook is set to go public today at a $100 billion dollar valuation.  For context, General Electric is worth about $199 billion.

GE was founded by Thomas Edison in 1890, has more than 300,000 employees and is a market leader in appliances, aviation, consumer electronics, electrical distribution, energy, finance, healthcare, lighting, oil & gas, rail, software & services and water treatment.

Facebook was founded in 2003, has about 4,000 employees and is a market leader in, well, display advertisting.  

It's official.  The world has changed. 

The Business Model Test

A simple way to think about the viability of a new business idea is to use the logic test and the economic test:

1. The Logic Test: does the business make sense?  Is it easy to explain the value it will provide and how it will make money?  You can't understand its viability if you can't understand these things.
2. The Economic Test: once you've established that the business idea makes sense, now consider whether it can work profitably.  Space travel is a good example of a business that passes the Logic Test but not the Economic Test.  Certainly there would be a lot of people that would like to travel to space for the weekend, but with the current technology it simply can't be done profitably.  Kozmo.com -- the famous dot-com bust -- that promised free, one-hour delivery of things like CDs, DVDs, candy and magazines is another example.  It's just not possible to deliver a pack of gum to someone within an hour at a profit.

Once these two tests have been passed, there are of course dozens of other factors to consider.  But I've found this framework to be helpful in discussing a new idea's viability.  

The Big 4 Internet Companies

Someone asked me the other day if I could only invest in one of the Big 4 internet companies (Google, Facebook, Amazon and Apple), who would it be?  I didn't even hesitate: my answer was Amazon.

Without doing a true valuation analysis (I plan to do one in the coming days), here's my simple reasoning:

Facebook: overvalued due to the hype and enormous amount of un-monetized users; my sense is that with the lack of a coherent, long term revenue strategy the public markets will bring their valuation down to earth a bit when they IPO.

Google: using Warren Buffet's investment thesis of "only invest in what you know", I'm afraid of Google.  They're in too many businesses where they haven't been successful, and in too many businesses in general for me to wrap my head around.  I don't like to invest in what I don't know.  Google now has such a wide array of products that they have a website titled "what do you love?" where you can search any word -- any word -- and they'll come up with a listing of products that serve that word.  Try it and you'll see it what I mean.  They're in a lot more businesses than many conglomerates (GE is down to thirteen).  I'm not saying there isn't upside for Google, but their business is much too difficult for a casual investor to grasp.

Apple: I haven't read the Steve Jobs biography yet but I've read enough excerpts and heard enough interviews about him and it to know that he was the heart and soul of that company.  The company succeeded when he started it, crashed when he left and came back like wildfire when he returned.  See a post I wrote about his success a while back.  Surely his unfortunate passing is built into their share price at this point, but there are certainly enough reasons to believe that Apple's outrageously impressive growth curve may have peaked.  And without Jobs at the helm, they're tough to bet on.

Amazon: a fantastic management team with a long, long track record of success competing in a variety of synergistic verticals.  Amazon is steadily entering businesses that they are setup perfectly to dominate -- self-publishing being one of the most promising.  They've finally smartened up and have reduced the price of the Kindle massively, setting them up nicely to dominate digital media alongside Apple.  Amazon is so well run and at the early stages of so many fast growing businesses that I think it's a no-brainier to put my money behind that team.

So there's my very amateur, 100,000 foot view of the Big 4.  I'm planning to write a post on valuations (including those of the Big 4) in the coming days so more on this topic soon.

The Financial Crisis

One reason for the lightning fast demise of the remaining investment banks was due to a relatively simple concept -- the "snowball effect." The value of an investment bank's stock is tied very tightly to the value of its "products" -- basically, its debt. That is, when the stock price declines, paying off debt becomes more difficult for the bank. Thus, credit ratings decline, and the stock goes down further. Soon, credit ratings decline again and the stock goes down even further, and on and on. This isn't true for, say, an ice cream shop. The price a customer is willing to pay for an ice cream cone is completely unrelated to the ice cream shop's market valuation. I suppose the above is true for any bank. But the extreme leverage these companies were operating with - 30 to 1, in some cases - made these stocks very risky investments.

Super Bowl Advertisers' Stock Prices

Here a list of Friday's stock prices for the top Super Bowl advertisers as well as the S&P.  As I've written before, because these companies are still embracing broadcast marketing, I'm convinced that, on average, their prices will fall (though I'm not sure about the timing of this -- Super Bowl ads aren't a bad short term strategy.).  Let's start with one year from the game. Pepsi Co. - $69.81 E-Trade - $5.71 Anheuser Busch - $46.83 Coca Cola - $59.25 Bridgestone - 5108 (TYO) FedEx - $144.70 S&P 500 - 1,331.29

Note that these were the public companies responsible for the top 10 most popular advertisements.  See the list here.